Report says law firms pose ‘medium-high’ money laundering risk

The Cayman National Money Laundering and Terrorist Financing Risk Assessment (dated March 2022) indicated that the inherent money laundering and terrorist financing risk for law firms conducting financial activities relevant to the Cayman Islands is considered medium to high.

The overall risk rating, medium to high, was achieved after assessing the nature, size, complexity, types of clients, transactions, products, services and delivery channels of law firms international and national. The risk ratings for each of these categories are presented in the table below.

Inherent Risk Assessment Factors

Given that the National Risk Assessment highlights the legal sector as “a key part of the jurisdiction’s financial services product”, a “major export” and as “essential to the economy”, it is important that the assessment of medium to high risks for law firms and their activities is not taken lightly.

On this, the National Risk Assessment said:

The inherent vulnerabilities of the legal profession must be considered in the context of the jurisdictional vulnerabilities facing the Cayman Islands. These have been identified as the risk that the Cayman Islands financial system could be used as a conduit for the proceeds of financial crime generally, and fraud, bribery and corruption, tax evasion and drug trafficking in particular. These threats are generally based on the commission of crimes abroad and the decision to channel these proceeds through structures, transactions and accounts in the Cayman Islands. The most significant danger for the legal community is the direct participation of companies in this movement of funds through their involvement in such transactions and/or the use of their accounts.

Given that the National Risk Assessment also notes that a “relatively small number of these firms control much of the international legal activity as they are multi-jurisdictional and have a wide reach in bringing business to the islands” , common sense dictates that regulation, the anti-money laundering scope should not only focus on local activities, but also international activities related to local businesses. According to the National Risk Assessment, these activities include a “significant volume of complex cross-border transactions, involvement with unregulated products and entities.”

By adopting this approach, the regulator will have a more complete understanding of the risks that global activities could pose to the local AML/CFT regime, including whether those risks are exacerbated by certain individuals advising on Cayman Islands law abroad. without ever having been admitted to practice Cayman Islands law in the Cayman Islands and without ever having possessed certificates of legal practice in the Cayman Islands.

Resolutions to money laundering and terrorist financing issues could also be simpler if the situation were not further complicated by existing cases in the courts of the Cayman Islands challenging the structure of the regulator, the Cayman Attorneys Regulation Authority (CARA), which was not established as a separate legal entity, but as a sub-committee of the board of the Cayman Islands Legal Practitioners Association (CILPA), a private association.

The problem is further compounded by the provisions of the Legal Services Act which, if enacted by the Cabinet “as is” and without amendments, will establish the Cayman Islands Legal Services Board, consisting of the Attorney General, Chief Justice and political appointees. Unfortunately, some members of the public view this structure as problematic due to perceived issues of independence and potential conflicts of interest.

Regarding these perceptions, one audience member said, “IIf the head of the country’s judiciary and a person who heads the government prosecutor’s office both sit on the Council, issues of separation of powers and ability to receive a fair trial arise if a lawyer decides to challenge a decision of the Board regarding the proposed functions of the Board to regulate the practice of law or to act as a supervisory authority for lawyers under the Cayman Anti-Money Laundering Regime. »

From an objective point of view, it seems preferable for the jurisdiction to resolve the problems relating to the regulatory structure, the fight against money laundering and the financing of terrorism now, rather than for the Cabinet to decide now to implement the Legal Services Act into force, without modification. , with unresolved concerns. Objectively speaking, the approach here should be careful and thoughtful, as perceived actions or omissions within the framework of “doing the right thing” can also impact the trust that the Financial Action Task Force, the European Union and others have in the local anti-money system. system for combating money laundering and the financing of terrorism.

Whatever the Cabinet decides to do, it is likely that the Financial Action Task Force, the European Union and others will pay particular attention over the coming months to the concerns raised in the national risk assessment regarding international transactions. cross-border, how they relate to local businesses and what this means in terms of increasing or reducing money laundering and terrorist financing threats to the jurisdiction.

About Charles D. Goolsby

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