Cayman’s grey list tag may hurt foreign flows
Investors from the region will be subjected to greater scrutiny
The Cayman Islands, one of India’s richest routes for foreign investments,
has been put on the grey list of countries/regions for increased monitoring by the Financial Action Task Force (FATF), an intergovernmental body that sets anti-money laundering standards. The grey list tag may impact flows from this British overseas territory as funds may want to redirect investments into India from their home jurisdiction or Fatfcompliant locations.
The Cayman Islands, one of India’s richest routes for foreign investments, has been put on the grey list of countries/regions for increased monitoring by the Financial Action Task Force (FATF), an inter-governmental body that sets anti-money laundering standards.
The British overseas territory is among the 15 most preferred routes for foreign portfolio investments in India, with total assets under custody worth ~70,000-90,000 crore. It is also the third-most preferred source of foreign direct investments into India, based on the data for the first half of FY21.
Burkina Faso, Morocco, and Senegal have also been put on the “grey list”, which requires jurisdictions to resolve identified strategic deficiencies within agreed timeframes. Mauritius (the second-richest route) was included in this list last year. Foreign portfolio investors (FPIS) investing from the Cayman Islands into India will now be subjected to additional know your customer requirements by fund custodians. These funds may also have to furnish updated ultimate beneficial ownership information for investors who hold more than 10 per cent, as opposed to 25 per cent now, said people in the know.
“FPIS from the Cayman Islands will be eligible to register as FPIS but may be subject to increased monitoring and enhanced due diligence,” observed a custodian.
The grey list tag may impact flows from this British overseas territory as funds may want to redirect investments into India from their home jurisdiction or Fatf-compliant locations. It may also create a negative perception among large investors, such as pension, endowment, and sovereign wealth funds, investment charters of which may prohibit investment through such jurisdictions.
Custodians have reached out to the Securities and Exchange Board of India (Sebi) for more clarity on the status of these funds. They have asked the regulator to maintain a status quo on the funds that are currently placed in Category I.
More than 80 per cent of 339 FPIS from the Cayman Islands are currently classified under Category-ii by Sebi. The grey list tag may make it difficult for these funds to move to Category-i. The remaining 20 per cent of funds in Category-i may have to be moved to Category-ii as well, considering the country’s new status, said experts.
“In February 2021, the Cayman Islands made a high-level political commitment to work with the FATF and CFATF (Caribbean Financial Action Task Force) to strengthen the effectiveness of its AML/CFT (antimoney laundering/counter financing of terrorism) regime,” the FATF said in a note last week.
Cayman will now have to update its AML/CFT national strategy; conduct sectoral risk assessments, amend its Anti-money Laundering (Amendment) regulation and Proceeds of Crime (Amendment) law, and impose adequate sanctions on parties that do not file accurate, adequate and up to date beneficial ownership information.
In 2018, Cayman was included among 25 countries that were classified as being high-risk jurisdictions by a group of foreign custodians in India, requiring greater scrutiny. This list was subsequently scrapped and each custodian was told to draw up its own list.
Last year, the European Union had added Cayman Islands and three countries — Palau, Panama and the Seychelles — to its black list of tax havens. The EU said these jurisdictions did not put in place the necessary tax reforms.