FINANCIAL CRIME IN FOCUS – Edition 4
Published Date: 12th April 2019
As the clocks go forward, the days draw out and our daily dose of sunshine gets longer, our thoughts naturally turn to summer and, in turn, holidays. But where to go? Perhaps the Cayman Islands and some Caribbean sunshine? Well the FATF team are ahead of us, having published their Mutual Evaluation Report (MER) on the state of AML/CFT processes in the large, international financial services hub. As a British Overseas Territory that takes its lead from the UK on many things, and a location where so many UK offshore entities are registered, the findings of the MER are insightful.
In a slightly more temperate holiday-spot, we’ve seen developments relating to the transparency of property ownership. In British Colombia, Canada, the local government is creating the first public register of property ownership in the country.
A little further south and it's reported that the US authorities have a touch of sanctions fatigue – given the complexities of the sanctions landscape, they could be forgiven…
Across the Atlantic, the laundromat scandal in northern Europe continues on its long cycle; we’ll briefly touch on the latest news.
And finally, back home, news this week from the BBC on modern slavery and a new app from the Clewer Initiative, which is helping to uncover instances of modern slavery in car washes.
As a British Overseas Territory, the Cayman Islands can appear to be more British than Great Britain itself (bar the climate). In fact, many old colonial traditions are upheld vigorously and it takes its lead from the UK on many matters that impact the financial services sector such as sanctions.
However, its international reputation as a tax haven can’t be denied, exemplified by the fact that one building on Cayman is home to 20,000 registered companies, and there are 100,000 companies in Cayman as a whole. They include ones linked – or that have been linked in the past – to a bewildering array of British household names. In total, Cayman is home to nearly twice as many companies as it is people. And, according to the Bank of International Settlements, the island’s banking sector is the sixth largest in the world.
With this perspective in mind, it was interesting to see that the FATF have just completed their mutual evaluation report (MER) on the Cayman Islands a few short months after the UK MER. For a jurisdiction so closely linked to the UK both historically and through the financial services sector, it’s interesting to see how it’s performing.
A high level summary would be very similar to the famous headmasters report that says ‘whilst some good progress has been made since the last report, they can do better’. On one hand there is clearly a solid grasp of AML controls and Customer Due Diligence procedures across most sectors. Yet on the other hand, there are deficiencies in the area of supervision. The accountancy sector self regulates and the legal, property and high value goods sectors currently have no supervision. (However, a supervisory body is planned for the property and high value goods industries.)
Given that many UK businesses have close ties with the Cayman Islands, they may wish to review the MER to better understand some of the wider financial crime and tax evasion risks that they could be exposed to. The old expression that a ‘chain is only as strong as its weakest link’ likely applies for all businesses with close connections to the region.
Meanwhile the Laundromat scandal in the Baltics rumbles on. More high level heads rolling, regulators criticised, questions being asked of how countries among the lowest category of risk on the Transparency International Corruption Index could be so far off the mark.
As we reported in a previous edition of Financial Crime in Focus, and highlighted in this Financial Post article, Canada is facing a huge money laundering issue, and the regional government in British Colombia (B.C.) is taking steps to address it.
Recognising how easy it is for criminals to hide true property ownership behind companies registered in offshore secrecy havens, the province is mandating the disclosure of the true owners of any property within its jurisdiction. Through the Landowner Transparency Act, the B.C. government is creating Canada’s first public register of property ownership. In addition, they have also amended their Business Corporations Act, forcing businesses to disclose their ultimate beneficial owners, driving further transparency.
Although slow, it is encouraging to see a global trend to legislate for the disclosure of beneficial ownership information in company formation. In the US a bill is being prepared which will become the Corporate Transparency Act. This article from Ballard Spahr LLP charts the history of this bill from 2017 to the present day and considers some of the related legislative changes including to the Bank Secrecy Act. In Europe of course, the additional requirements of the 5th Money Laundering Directive will drive creation of national registers of beneficial owners.
I’ve noticed a growing debate in the financial crime media calling into question the effectiveness of sanctions. Nothing new in that and as we highlighted last week, effective targeting of sanctions is difficult when countries and sectors are so adept at navigating around them. Screening against a list of designated and black listed parties is no guarantee of safeguarding from exposure to sanctioned entities. Digital technology, VPNs, fake IDs, SPVs and shell companies, just some of the tools used to disguise the true identity of who you are doing business with. This report from Bloomberg offers insight into the state of mind in Washington as the Senate reflects on whether further Russian sanctions, in response to alleged meddling in US internal affairs, will have any effect.
I doubt we shall see movement away from sanctions being the principal tool of government foreign policy when it comes to corruption and human rights abuses, however it will be prudent to monitor the sanctions landscape very closely in the future.
In what’s been an international edition of Financial Crime in Focus, we close on a positive story from the UK, reported by the BBC. In summer 2018, the Clewer Initiative launched the Safe Car Wash app, which enables members of the public to report potential instances of modern slavery in hand car washes, an industry where this abhorrent crime is prevalent. It’s heartening to read that over 1,000 reports were made in the five months since launch, vindicating the strategy of raising public awareness and providing a powerful tool in the fight against modern slavery and human trafficking.
You can download the app from the Clewer Initiative website and submit your own reports. Together we can take the fight to the financial criminals whose real crimes often go under the radar, but in reality always create human victims.
Author: Michael Harris
Director, Financial Crime Compliance and Reputational Risk
LexisNexis® Risk Solutions
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