Last March we published an advisory on the Cayman Islands inclusion on the Financial Action Task Force’s list of “jurisdictions under increased monitoring” (FATF Monitoring List), noting that the EU Commission maintains a list of “high-risk third countries” (EU AML List), which typically includes the countries on the FATF Monitoring List but may include others. The European Commission now proposes to update the EU AML List (see below for timing).
Proposal to update the EU AML List
On 7 January 2022, the European Commission adopted a delegated regulation proposing to update the existing EU AML List to add the Cayman Islands, along with a number of other jurisdictions. The inclusion of the Cayman Islands on the EU AML List would impact a small subset of securitisation vehicles but otherwise has no direct consequences for investors or clients using Cayman Islands structures.
Timing - Not Yet In Force
The regulation's entry into force remains subject to a one month review period by the European Parliament and Council which commenced on 7 January. If no objections are expressed by the Parliament or Council, there will be a further period of time for the delegated regulation to be published in the Official Journal of the European Union. Once published, the regulation comes into effect on the twentieth day thereafter.
In June 2021, the FATF agreed that the Cayman Islands had made positive progress having already addressed one of three action points, with the remaining two items being actively addressed. Meanwhile, the FATF's Enhanced Follow-Up Report issued in November 2021 confirmed that the Cayman Islands is FATF rated as Largely Compliant or Compliant with all of the FATF's 40 Recommendations. The earliest opportunity to be removed from the FATF’s Monitoring List will be in late 2022, which is expected to result in its removal from the EU AML List.
The inclusion of the Cayman Islands on the EU AML List would require EU financial institutions to apply enhanced due diligence measures, to the extent they do not already, to relationships or transactions involving the Cayman Islands. A number of EU financial institutions already do this in practice.
The inclusion of the Cayman Islands on the EU AML List would also prevent EU financial institutions from establishing new tranched securitisation vehicles in the Cayman Islands. This is because Article 4 of the EU Securitisation Regulation states that securitisation special purpose entities (SSPEs) "shall not be established" in a non-EU jurisdiction which is on the EU AML List by an EU financial institution.
The Securitisation Regulation does not expand further and does not impose restrictions on investors or on already existing SSPEs. It has no impact on the vast majority of Cayman Islands securitisation vehicles without an EU nexus. The EU Securitisation Regulation diverges from UK Securitisation Regulation, which references the FATF list of "high risk jurisdictions", which does not include the Cayman Islands.
There is no immediate or direct impact to private equity or hedge funds formed in the Cayman Islands as a result of the Cayman Islands being added to the EU AML list and it does not otherwise have consequences for investors or clients using Cayman Islands structures. No penalties or sanctions for Cayman Islands entities would arise from the Cayman Islands' placement on the EU AML list. Further, the EU AML List is unrelated to the EU’s tax blacklist.
Walkers has prepared for every outcome and should there be a need to use an alternative jurisdiction to the Cayman Islands, can provide the same level and scope of service in each of its Bermuda, Ireland, Jersey or Guernsey offices. The choice of alternative will obviously be driven by client preference taking into account time-zones, jurisdictional familiarity through other products and rating agency comfort.
The Cayman Islands Ministry of Finance will continue discussions with EU officials. We are monitoring the situation on an ongoing basis and will advise further in the event of any developments or updates.