The Cayman Islands is actively preparing for the Financial Action Task Force’s (“FATF”) 5th Round Mutual Evaluation.  The onsite assessment, which will be conducted by the Caribbean Financial Action Task Force (“CFATF”), is expected to take place in late 2027, with technical compliance information due earlier that year.

What changes will the Fifth Round bring?

Effectiveness

The fifth-round mutual evaluations reinforce the focus on effectiveness to measure how well countries are implementing laws, regulations and policies in line with the standards. There will be a stronger emphasis on risk and context to allow both the assessed country and the assessment team to direct their focus on the areas of higher risk. The DNFBPs and financial sectors will be assessed separately to determine the level of effectiveness for each area, which will allow for targeted recommendations for improvement.

Proliferation Financing

Following revisions of Recommendation 1 in October 2020 on assessing risk and the application of a risk-based approach, countries and private sector entities are now mandated to identify, assess, understand and mitigate their proliferation financing risks (“PF”). In the context of recommendation 1, PF risks refer strictly to the potential breach, non-implementation or evasion of targeted financial sanctions obligations, of which will be assessed in the fifth round.

Beneficial Ownership

The findings of the fourth round evidenced that there is much improvement needed globally around the transparency of beneficial ownership information for both legal persons and arrangements. In response, the FATF has revised recommendations 24 and 25, and so particular emphasis will be placed on evaluating countries’ adherence to these provisions.

Asset Recovery

It is estimated that less than one percent of global illicit financial flows is recovered. Given that one of the core aims of the FATF is to deprive criminals of their illicit assets, in November 2023 the FATF released amendments to Recommendations 4 and 38 to strengthen the confiscation of criminal assets and to make recovery a priority at both the domestic and international level.  

How can Financial Service Providers prepare?

Since there will be a greater emphasis on effectiveness, financial service providers (“FSPs”) should ensure that they have documented internal policies, procedures and controls for anti-money laundering (“AML”), countering the financing of terrorism (“CFT”), countering proliferation financing (“CPF”) and targeted financial sanctions (“Sanctions”)compliance, but more importantly they should be able to demonstrate how effective these mechanisms are in achieving the intended outcome. It is also imperative that there is Board level awareness of the upcoming process to ensure support for any necessary enhancements to compliance programmes considering revised FATF standards, as well as for participation in national pre-evaluation initiatives and risk assessments.   

• FSPs should ensure that they have available information, data, statistics and case studies usually up to five years preceding the onsite inspection which can validate practices in place. It is worth noting that even information on deficiencies or system failures identified and subsequently rectified is useful, as it shows progress made in the attainment of efficiency.
• FSPs must evidence that an entity-wide PF risk assessment has been conducted which has guided their implemented CPF framework. This should include mechanisms for accessing real-time data feeds of global and sanctions watchlists and the conduct of adequate, regular and routine sanction screening procedures of customers on an ongoing basis and at the point of onboarding. As with all risk assessments, the PF risk assessment must remain up to date considering current and evolving threats and sanction requirements.
• FSPs should ensure that there are adequate mechanisms in place for the collection, verification and retention of accurate beneficial ownership information of legal persons and arrangements, which can be easily accessible when requested by competent authorities.
• FSPs should refer to the Guidance Notes on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in the Cayman Islands and to the Anti-Money Laundering Regulations, and ensure all staff are aware of recent amendments to legislation and trained on any subsequent revised policies, procedures and controls.
• FSPs are encouraged to refer to FATF issued guidance on Proliferation Financing Risk Assessment and Mitigation, Beneficial Ownership of Legal Persons, and Beneficial Ownership and Transparency of Legal Arrangements.
• FSPs are further encouraged to take a proactive approach in the upcoming national risk assessment (“NRA”) of ML/TF/PF risks that will be conducted prior to the onsite assessment, as the findings of the NRA will assist FSPs in conducting their own entity-wide risk assessments.