Cayman added to the EU’s AML blacklist – what are the consequences?

On 21 February 2022, following the European Commission’s proposal in January, a Commission Delegated Regulation was published in the OJ, which places the Cayman Islands on the EU’s Anti-Money Laundering (AML) ‘blacklist’, along with eight other jurisdictions.

The Delegated Regulation comes into force on 13 March 2022.

Although, clearly, being put on a blacklist is better avoided if possible, the inclusion of Cayman had been widely expected, is likely to be short lived and, while in place, does not bring with it especially adverse consequences from the point of view of most fund managers.

What is the blacklist?

The EU’s AML blacklist is a list of countries deemed ‘high risk’ under the AML Directive – ie, those whose AML/CFT regimes have strategic deficiencies which pose a significant threat to the EU’s financial system.

The AML blacklist is highly aligned with, but not identical to, FATF’s Ongoing Monitoring (or ‘Grey’) List.

Note, though, that the AML blacklist is different from the EU’s non-cooperative tax jurisdictions blacklist, which Cayman was placed on in February 2020 and taken off in October 2020.

Why has Cayman been added?

In 2007, FATF conducted an evaluation of Cayman’s AML regime. This was a largely technical assessment to confirm relevant measures were in place in Cayman law and was followed, in 2017, by a routine FATF evaluation which focussed more on the effectiveness of the measures in place.

The 2017 evaluation led to a report, published in 2019, which set out 63 recommendations where it was felt action was needed to address identified deficiencies in Cayman’s effectiveness criteria. Cayman was given one year (extended to two because of COVID) in which to address these.

At its February 2021 plenary, FATF concluded that Cayman

• had satisfied 60 of the 63 recommendations in the 2019 report and
• should be placed on the FATF Ongoing Monitoring (or Grey) List.

It followed from the second of these points that Cayman was highly likely to appear on the EU’s AML blacklist in due course.

Since then, work to remedy the remaining deficiencies has continued and, in October 2021, FATF concluded that

• Cayman is making positive progress on satisfying the final outstanding recommendations arising from the effectiveness assessment
• Cayman is also either 'compliant' or 'largely compliant' with all 40 FATF technical recommendations.

Assuming positive progress continues, most expect Cayman to be removed from the FATF Grey List in the relatively near future. Its removal from the AML blacklist would then be expected to follow on from that.

The issues still to be resolved are

• effectively implementing Cayman’s beneficial ownership regime and
• demonstrating that money laundering cases are being prosecuted and resulting in effective and proportionate sanctions

What are the consequences of this?

(a) Marketing under AIFMD

Put broadly, Article 42 of AIFMD allows a non-EU AIFM to market non-EU AIFs into the EU through a Member State’s NPPR provided neither the jurisdiction of the AIFM nor that of the AIF is on the FATF’s (defunct) list of Non-Cooperative Countries and Territories (NCCT). Article 36 has a similar provision in respect of the jurisdiction of the non-EU AIF.

As the FATF NCCT list is different from the EU’s AML blacklist, Cayman’s inclusion on the latter will not prevent Cayman AIFs from being marketed into the EU under the AIFMD.

That said, changes to the AIFMD proposed by the Commission would, if accepted, mean that Articles 36 and 42 would no longer refer to the NCCT list but, instead, to the AML blacklist. If Cayman was still on the AML blacklist when these changes came into effect, it would most likely restrict the ability to market Cayman AIFs into the EU under the NPPRs.

However, the changes to AIFMD are not expected to apply until 2024 at the earliest and the current expectation is that Cayman should, by then, be long off the AML blacklist.

(Note, though, the proposed changes to the EU’s AML Directive – see below)

(b) Tax

There do not appear to be any immediate tax implications as a result of Cayman’s inclusion on the AML blacklist.

As mentioned above, the AML blacklist is different from the EU’s list of non-cooperative tax jurisdictions, which Cayman was placed on and then removed from in 2020. Accordingly, tax measures which are linked to a jurisdiction’s presence on the EU list of non-cooperative tax jurisdictions should not be triggered by Cayman’s inclusion on the AML list.

(c) Securitisations

Article 4 of the EU’s Securitisation Regulation provides that securitisation special purpose entities (SSPEs) ‘shall not be established’ in a country on the EU’s AML blacklist. The construction of Article 4 has caused some uncertainty as regards the consequences of the blacklisting. Of particular concern is the question of whether the prohibition affects Cayman SSPEs established before the blacklisting and, similarly, whether EU investors would be expected to divest from securitisation positions in Cayman SSPEs that were purchased before the blacklisting.

Please contact our securitisation team for further details.

(d) Enhanced due diligence (DD)

Where a customer is established or resident in a jurisdiction on the AML blacklist, any entity which is subject to the EU’s AML laws must apply enhanced DD for that customer and put in place ongoing monitoring processes.

Changes to the EU’s AML rules

There are currently moves to amend the EU’s AML Directives which would include a move to have not one list of high-risk countries but two.

These would differentiate between

• third countries where significant deficiencies have been identified in their legal AML framework and
• those where compliance weaknesses have been identified.

The new framework is likely to be in force by 2024. We will be keeping an eye on developments in case these changes have knock on effects to, for example, the changes proposed to the AIFMD referred to above.

What next?

As the cycle between FATF evaluations is fairly lengthy, once Cayman has satisfied the shortcomings pointed out by FATF and has been removed from the EU’s AML blacklist, it can anticipate a period of relative peace and quiet on this front, while some of its competitors prepare for their own FATF assessments.