AML risk meets SIBL entities

AML risk meets SIBL entities

October 9, 2018
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If you are licensed under the Securities and Investment Bill (SIBL) in the Cayman Islands, or you are registered as an Excluded Person under SIBL, you can be forgiven for either thinking that much of the anti-money laundering framework doesn’t seem to apply to your business, or being confused about what you need to do to ensure you are fully compliant.

FTS’ experience from directly carrying out and reviewing over 20 AML/CFT audits over the past six months demonstrates that there are some unique challenges for SIBL entities. Below is a summary of several misconceptions and dilemmas which you may face:

The AML/CFT regime doesn’t apply to me.

Small investment advisors and investment managers registered as an Excluded Person often mistakenly interpret their Excluded Persons status to mean they may not be subjected to the Cayman Islands AML regime.

A SIBL Excluded Person is not subject to full day-to-day regulation by the Cayman Islands Monetary Authority (CIMA), but the entities are all fully subjected to the country’s AML framework. Carrying out the business of an investment advisor or investment manager is covered as part of the definition of ‘Relevant Financial Business’ under the Proceeds of Crime Law.

“There is a distinction between prudential and anti money laundering regulation.”

The confusion lies in failure to distinguish between ‘prudential regulation’ and anti money laundering regulation. SIBL Excluded Persons, by nature of their activity, are subjected to less day-to-day prudential regulation by CIMA than fully licensed SIBL entities. However, all SIBL entities (i.e. whether licensed or registered as an Excluded Person) are subjected to regulation by CIMA for the purposes of preventing money laundering. That’s why CIMA has the power to request, among other things, that SIBL Excluded Persons carry out AML/CFT audits (as it has been doing more frequently in recent times) and submits those reports to CIMA.

I don’t handle client funds or cash…so why do I need to do anything?

Another common (and fairly innocent) question posed by some SIBL entities is why they would be subjected to the AML legislation if they don’t handle client funds. It’s a reasonable question as the very definition of money laundering requires the presence of funds which are ‘cleaned’ for the benefit of bad guys. But handling client funds has to be looked at in the broader sense. While your entity may not be directly involved in the movement of client funds, you can easily be caught up in a structure as an advisor for example, where funds are being laundered.

When things go wrong, investigators will be looking at all parties involved to determine whether they directly or indirectly facilitated the money laundering. In other words, your SIBL entity may be exposed to AML risks irrespective of whether it directly handles client funds.

“While your entity may not be directly involved in the movement of client funds, you can easily be caught up in a structure where funds are being laundered.”

AML best practices for the securities and investments sector

There are number of ways in which SIBL entities can better manage their risks, considering their unique operating environments, whether this is due to small size, few staff, absence of cash or client funds or a range of other factors.

FTS is organizing what is likely to be our biggest AML training seminar this year in November focusing on AML/CFT risks for SIBL entities (both Licensed and Excluded Persons). We will announce the date and venue shortly on Facebook and our Events Page.

In addition to presentations on risk management for SIBL entities from industry experts, I will be presenting a summary of key observations stemming from experience carrying out AML audits for SIBL entities and aim to put forward a few industry AML best practices for the sector. Much of the guidance will be relevant for other firms serving in an advisory capacity (for e.g. law firms), so if you operate in that type of sector, keep an eye out for the seminar’s registration details.


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