Latest National Risk Assessment shows higher risk rating in key sectors

The Cayman Islands has released its 2021 National Risk Assessment, with an outline of the key risks in respect of money laundering, terrorism financing and proliferation financing, showing an increased risk rating across key sectors of the economy.

This report gives an overall sector risk rating for the key sectors, most of which are designated as ‘Medium High’. The sectors with a ‘Medium High’ classification were Mutual Fund Administrators, Securities Businesses, Trust and Corporate Services Providers, Banks, Real Estate Agents, Lawyers, Money Services Businesses and Virtual Asset Service Providers (VASPs). The Sectors with a ‘Medium Low’ Overall Inherent Risk were Insurance, Accountants and Auditors, Financial Leasing, DPMS and High Value Dealers such as jewellery stores.
In addition to the overall rating, the risk analysis for each sector is broken down by (i) Nature, Size and Complexity, as well as by (ii) Customers, (iii) Products, Services and Transactions and (iv) Delivery Channels.

Customer risk ratings

For risks rated towards Customers, which is such a key part of the risk landscape, the Banking sector was seen as the most vulnerable with a ‘High’ risk rating. Industries with a ‘Medium High’ rating for Customers were Securities, Trust and Corporate Service Providers, VASPs, Lawyers, Real Estate Agents and Money Services Businesses.

The overall risk scores in the Banking sector is seen as being concentrated in Category B banks, due to their large number and vulnerability due to the international nature of their business. Potential exposure is high here as banks serve a broad customer base, including High Net Worth Individuals, Politically Exposed Persons (PEPs), Trusts, Not for Profit Organisations and different types of legal entities.

For Securities Businesses, the Medium High rating for Customer Risks is a reflection of its cross border nature, its very high value and the presence of a growing proportion of customers from higher risk jurisdictions.

Risks surrounding the Real Estate sector on the customer side are elevated due to its ease of ownership for international investors and the way criminals try to use their services to create an impression of normality in transactions. The prevalence of overseas buyers, which may involve PEPs or companies is another factor, along with challenges in identifying the true beneficial owner or effective controller of the customer.

Key customer risks for Law Firms in the Cayman Islands are centered around their location all around the world, including high risk countries, and the offering of a diverse and complex range of services.

Key changes since the last assessment

The AML/CFT/CPF legislative framework in the Cayman Islands has been significantly enhanced since the last National Risk Assessment and the new report goes into much greater depth than the 2017 report, with the broad range of sectors being rated. In the previous report, financial sector vulnerabilities were concentrated in the Securities and Banking sectors, which were both given a Vulnerability Level of ‘Medium High’. Insurance and Other Financial Institutions were classed at a Vulnerability Level of ‘Medium’ in 2017.

The other key change has been the introduction of Virtual Assets into the analysis, which has been growingly particularly fast in recent years. While VASPs are required to register with CIMA, the sector is seen as vulnerable to abuse in terms of disguising the origin of illegally obtained funds or being used to fund terrorist activities. With the majority of the customers for VASPs concentrated in virtual asset trading platforms, the perceived risks are considerable in this area. Due to significant daily transaction volumes and the potential for rapid transfer from fiat currency to virtual asset, the risks are assessed as ‘High’ on the Products, Services and Transactions measure for Virtual Assets.