Elisabeth Lees, co-founder of Claritas Legal, has set out the scale of the Cayman Islands’ anti-money laundering reforms in an interview with Collared, the weekly financial crime podcast from AML Intelligence.
Host Dee Reddy opened by asking how Cayman came to be seen as a tax haven and a hub for money laundering, “whether fairly or unfairly”, and what historical factors were at play. Lees, who spent more than a decade as an in-house lawyer for the Cayman Islands Government, said the reputation was “rather unfair” and rested on perception rather than the current facts.
She told listeners that Cayman’s tax neutrality dates back centuries. “The Cayman Islands has been tax-neutral since the 1700s. It’s not something that the Cayman Islands developed rapidly in order to gain an advantage,” she said. Tax neutrality, she added, is often confused with tax avoidance. A fund incorporated in Cayman pays no tax locally, but its investors pay tax on their returns in their home jurisdictions in the usual way.
Reddy asked whether the story really began in 1962, when Jamaica gained independence and Cayman chose to remain a British dependency. Lees agreed the moment was formative. Cayman had shared a currency with Jamaica and now had to look after itself, establishing its own currency and shortly afterwards pegging it to the US dollar. Asked why a British territory would peg to the dollar, she pointed to geographic proximity to the United States and the nature of an international financial centre servicing US business, noting that one of Cayman’s first treaties was with the US on drug trafficking and exchange of information.
Pressed on whether the Confidential Relationships (Preservation) Law of 1976 fed the notion of financial secrecy, Lees acknowledged that it carried criminal penalties for breaching confidentiality. “It’s right to say that nobody was ever prosecuted, but the fact that this law existed, and was sometimes referred to as a banking secrecy act, probably didn’t help the reputation of the Cayman Islands,” she said. The law was repealed in 2016 and replaced with legislation that removed the criminal provisions, introduced whistleblower protections, and set out clear gateways for sharing information with law enforcement, regulators, and tax authorities.
She pointed to three areas where Cayman has strengthened its framework: FATF compliance, tax information exchange and beneficial ownership.
On tax cooperation, Lees described an automatic exchange regime that began with the United States under FATCA and expanded under the OECD’s Common Reporting Standard. Service providers must identify the tax residency of their clients and file that information with the Department for International Tax Cooperation, with penalties for late or inaccurate filing. The regime is reinforced by economic substance requirements, country-by-country reporting for large multinationals, and exchange of information on request for jurisdictions investigating suspected tax evasion. The OECD has assessed Cayman as compliant on both the CRS and Economic Substance.
Reddy then asked how well-equipped local authorities are to police complex fund structures, institutional fraud and digital assets, challenges she noted would test far larger jurisdictions. Lees said the misuse of corporate structures is a growing global problem, which is why beneficial ownership has become such a central theme for FATF. Cayman takes a two-pronged approach. Corporate service providers must identify owners at a 10 per cent threshold, “much more stringent than the FATF 25 per cent”, with supervision and inspections by the Cayman Islands Monetary Authority. The Beneficial Ownership Transparency Act adds a second layer, requiring registers to be kept and filed with the Registrar of Companies. This enables investigators and regulators to access and identify the beneficial owners of corporate structures and obtain accurate information swiftly.
On Cayman’s period on the FATF grey list from 2021 to 2023, Lees noted that the action plan contained only three items, all relating to enforcement rather than the legal framework or the operational structures. “The supervisory framework was sound, the investigations were sound, the beneficial ownership was sound,” she said. Therefore the remaining three actions relating to enforcement (prosecution, CIMA enforcment and beneficial ownership enforcement for incomplete or inaccurate filings) were chronologically the final pieces to complete the effectiveness of the framework and this was done swiftly. Additionally, Cayman was one of the first jurisdictions in the world at that time to have met all 40 FATF recommendations for technical compliance.
Reddy closed by asking whether larger economies use Cayman’s historical reputation as a convenient political scapegoat to distract from their own money laundering vulnerabilities. Lees said the answer lay in education, outreach and evidence. “Challenges and questions are welcome,” she said. “It strengthens the reputation of the jurisdiction when it can demonstrate through these independent processes that, in fact, it is a very well-regulated, well-functioning jurisdiction.”
Listen to the full episode of Collared here.
