Caribbean Financial Action Task Force Reports Grim Findings

The latest report from the Caribbean Financial Action Task Force (CFATF) is grim reading. Money laundering, human and drug trafficking, illegal gambling, tax evasion – Caribbean financial services providers are playing host to a range of evils, many of which are able to slip through the cracks of insecure, insufficient and inefficient regulatory structures.

While the islands have cleaned up their act considerably, bowing to pressure from international bodies, the results of the CFATF investigations show that criminal activity continues to dog the sector, sullying the reputation of the regional industry and further driving the de-risking trend as international banks sever their correspondent banking relationships (CBRs). 

It’s not all bad news, however. The organisation highlights strides made in investigating and prosecuting money-laundering cases and suggests that greater focus on these achievements can help mitigate the reputational damage inflicted by financial fraudsters.

Legal loopholes

The CFATF is an anti-money laundering/combatting the financing of terrorism (AML/CFT) group comprised of 25 Caribbean countries, including Saint Lucia. Its latest activities uncovered corruption and fraud around the region, aided by weaknesses in legislative frameworks.

According to the CFATF, several jurisdictions, failing to recognise trust structures in their domestic law, are providing trusts to clients under foreign laws. This limits the ability of local authorities to provide the kind of stringent oversight that is necessary, making these financial vehicles vulnerable to corruption.

In addition, trust companies are leaving themselves open by taking on complex structures that may mean more profit, but are more difficult to police. The greater the complexity, the higher the bar for comprehensive due diligence. The CFATF suggests that some member countries are failing to create and communicate minimum due diligence standards for the industry – something that is especially vital in jurisdictions where authorities are lax in tracking and updating beneficial ownership of trust vehicles.

Cash concerns

The majority of the CFATF member states are cash-based economies, leaving them open to a myriad of abuses as criminals find ever more innovative ways of concealing and moving cash. While all jurisdictions require cash and currency declarations at their borders, the system is far from invulnerable. 

Given the fluidity of movement within the region, cross-border co-operation is crucial and the CFATF says member states need to do more to share information and harmonise specific laws. In particular, a real-time sharing database could help strengthen AML procedures – something that poses a challenge given that most jurisdictions still rely on the physical filing of declaration forms. Of the countries surveyed by the CFATF, just over half voiced support for a Memorandum of Understanding with other jurisdictions prior to information sharing. However, there was little agreement over exactly how that sharing could take place.

The CFATF investigation found that most criminal cash seizures are in US dollars and are predominantly coming from, or going to, the United States. Most couriers are male, aged 26-40, and prefer airports to other modes of transport. Seized cash is often linked to drug, weapons or human trafficking. Between 2007 and 2011, there were 508 investigations relating to human trafficking among CFATF member states. Of these cases, a mere 95 resulted in convictions. 

Reputational damage

Given the capacity for fraud in the Caribbean’s cash-reliant and legislatively lax environment, it’s unsurprising that international banks are wary. As big-name providers such as RBC, CIBC and Bank of America abandon or retrench from the market, regional banks are losing business, credibility and profits.

However, the CFATF indicates that the present situation is not quite as dire as it was when de-risking first began impacting the market in 2015. The task force surveyed 227 financial institutions between June 2018 and April 2019 and found that around 68 per cent of financial institutions said that their operations had been negatively affected by de-risking, but only 55 banks (24 per cent of those surveyed) had lost CBRs within the past 3 years. Of those banks, 44 lost between one and three relationships and 8 banks lost between 4 and 10. The reasons given by the retrenching banks included low profits, heavy compliance costs, fear of regulatory sanctions in their home country and the perceived risk of the jurisdiction.

Cracking down

While most CFATF members are now compliant, or largely compliant, with FATF standards on AML/CFT, the perception remains that the Caribbean is a high-risk region comprised of high-risk jurisdictions. The report, however, highlights that progress is being made in terms of investigations and prosecutions of money-laundering and corruption cases. The problem is that, because of inadequate records and communication, the good news about these high-profile collars is not getting through. 

Several such cases derive from the Cayman Islands. Examples include an incident where investigators discovered a Cayman-based firm was receiving high-value wire transfers from an overseas company with ties to state-level corruption in its home jurisdiction. The Financial Reporting Authority flagged the activity and alerted overseas financial intelligence units. In another instance, the Cayman authorities uncovered a cross-border currency exchange scheme with links to a large drug trafficking ring.

Recent cases concerning identity fraud and ATM fraud have been successfully prosecuted in Grenada, with the latter involving an East Asian national who had been cloning card holders’ information onto dummy cards and using these to withdraw large amounts of cash from ATMs in Grenada.

Another inventive criminal in Montserrat was arrested for cheque kiting – where cheques are written for a series of accounts, all with insufficient funds, and the criminal relies on the time it takes each cheque to clear to falsely inflate his balance.

One of the biggest, and most alarming, frauds examined by the CFATF concerns government salaries in Trinidad and Tobago. A large criminal network, encompassing government employees and their friends and relatives, conspired to move funds from a government agency to personal accounts and shell companies under the guise of salary payments. Orchestrating the activities was a payroll officer at the agency who helped siphon off the funds by falsifying the payroll documentation. The scheme was years in the making and involved multiple personal and loan accounts; one participant laundered over TT$ 3mn (almost US$ 0.5mn) before being caught. When the case was brought to court, over 100 money laundering charges were laid against 11 defendants for US $3.5mn.