Cayman Islands Policy Change Regarding the Classification of Countries vis-à-vis the Anti-Money-Laundering Laws

Israeli investors have recently been asking questions about the increased demands for KYC (know your customer) and AML (anti-money laundering) documents from Cayman Islands investment funds.

The Previous KYC/AML Arrangement – the List of Equivalent Jurisdictions

Until August 5, 2020, the Cayman Islands’ AML laws included a list of countries considered “equivalent jurisdictions” by the Cayman Islands authorities. Israel was included on this list. Pursuant to the Cayman Islands’ AML laws, Israel posed a low risk of violating the AML laws.

The list of equivalent jurisdictions enabled Cayman Islands investment funds to rely on the AML laws of those investors’ home countries to perform due diligence examinations. Consequently, institutional and private Israeli investors in these funds “benefitted” from the fact that Israel was classified as a country at low risk of violating AML laws. Therefore, Israeli investors were required to provide only basic KYC and AML documents as part of the procedures for investing in Cayman Islands’ investment funds.

The Current KYC/AML Arrangement – Under Administrators’ Responsibility

In August 2020, the Cayman Islands Monetary Authority (CIMA) canceled the “equivalent jurisdictions” list. It transferred the responsibility for and the discretion regarding classifying the risk level of the home countries of investors in Cayman Islands investment funds to the funds’ administrators. These administrators are largely subsidiaries of central banks, which provide administrative services to investment funds, including management of the technical relations with investors. As an outcome of the delegation of this authority, decision-making about the classification of a country’s risk level, and, consequently, the determination of the volume of requests for KYC and AML documents, have been at the administrators’ discretion ever since.

Recently, we have witnessed a recurring pattern among administrators of classifying Israel as a country posing “moderate risk.” This is as opposed to the “low risk” ranking it had prior to the policy change.

The administrators classify countries as posing low, moderate, or high risk according to several criteria:

1. Level of corruption in the country
2. Membership in the OECD
3. Membership in the European Union and/or inclusion in the European Economic Area
4. Membership in the Financial Action Task Force (FATF), or assessment by the FATF as a country with AML deficiencies or as a country with inadequate AML laws
5. If a general embargo has been imposed on the country
6. Membership in the international Egmont organization (the Egmont Group of Financial Intelligence Units)

For reasons known only to the administrators, some have decided to classify Israel as a “moderately risky” country. This has increased the volume of these administrators’ requests for KYC/AML documents about Israeli investors. How should we handle this increased volume when it is obvious there is no point in trying to convince the administrators to change Israel’s new classification?

From our experience, the solution, at least for Israeli institutional investors, may be in “adjusting” the funds’ expectations about the volume of KYC/AML document requirements Israeli institutional investors are willing to bear. To achieve this, it is important to contact the officer responsible for recruiting investors and investor relations in the fund during the initial communications between the institutional investor and the fund. This correspondence should clarify to the fund that, notwithstanding the fund administrator’s rigid policy, (1) the institutional investor is a highly supervised entity that itself implements a policy complying with the requirements of Israeli AML laws, and (2) there is a limit to the resources an institutional investor is willing to spend on issuing volumes of KYC/AML documents to the administrators. This may be the way to reduce or even eliminate the KYC/AML document requests.

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Barnea Jaffa Lande is at your service if you have any questions in this regard.