Cayman Islands’ exit from the FATF grey list

  • October 30, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Cayman Islands’ exit from the FATF grey list

Subject :Economy

Section: External Sector

In News: FATF removes offshore tax haven Cayman Islands from its ‘grey list’.

Key Points:

  • The Financial Action Task Force (FATF), an inter-governmental body that sets anti-money laundering standards, has removed offshore tax haven Cayman Islands from its ‘grey list’.
  • The region was put on the grey list for increased monitoring by the FATF, or the Financial Action Task Force, a global money laundering and terrorist financing watchdog, in February 2021.
  • FATF said last week Cayman Islands had met the commitments in its action plan regarding the strategic deficiencies identified in 2021.
  • Besides Cayman, Panama, Jordan, and Albania have been removed from the list, which requires jurisdictions to be placed under increased monitoring until the identified deficiencies are resolved in their framework. FATF has added Bulgaria in the grey list.
  • In 2020, the European Union had added Cayman to its black list of tax havens, citing lack of necessary tax reforms.

Why does FATF add countries to the  ‘grey list?

  • ’Such steps are taken to ensure that countries strengthen their anti-money laundering (AML), counter terrorism financing (CFT) and proliferation of financing systems.
  • This includes applying sanctions that are effective on those that do not file accurate beneficial ownership information and prosecuting all types of money laundering in line with the jurisdiction’s risk profile.

Significance of the change for India?

  • The removal of Cayman Islands from the FATF grey list would bring relief to NBFCs, payment system operators and alternative investment funds that face restrictions in giving significant stakes to investors from FATF non-compliant jurisdictions
  • Cayman Islands’ exit from the FATF grey list last week will bolster global private equity funds looking to invest into non-banking financial companies (NBFCs) based in India.
  • Cayman is among the top 15 jurisdictions for foreign portfolio investments into India. Several US and European funds prefer setting up holding companies and funds in Cayman Islands for investments into India.

Why are NBFCs likely to benefit?

  • RBI does not grant approval for shareholding in NBFCs from grey list jurisdictions.
  • RBI had issued a circular in February 2021 imposing restrictions on investments in NBFCs by investors from non-compliant FATF jurisdictions.
  • New investors from non-compliant regions were prohibited from directly or indirectly acquiring ‘significant influence’ in the existing investee NBFCs as well as companies seeking Certification of Registration.
  • The term ‘significant influence’ was defined as having more than20 per cent of actual and potential voting power.
What happens to countries on the Grey List

  • FPIs investing from grey list jurisdictions are typically subject to additional know your customer requirements, increased monitoring and enhanced due diligence by fund custodians.
  • These funds may also have to furnish updated ultimate beneficial ownership information for investors at a lower threshold than what is required from FPIs coming from FATF-compliant regions.
  • The grey list tag creates a negative perception for countries like Cayman among pension, endowment, and sovereign wealth funds, investment charters of which may prohibit investment through such jurisdictions.
  • Being on the grey list increases compliance burden for such funds and enhances the overall costs.
Cayman Islands’ exit from the FATF grey list economy