Cayman Islands Monetary Authority Issues Ultimatum To Shell Banks

Robert Lee, Tax-news.com, London

02 March 2001

Following the KPMG independent report of its financial regulatory system, published last autumn along with a set of reports on other Overseas Territories, the Cayman Islands promised to initiate its own full review of KMPG's findings. The Cayman Islands Monetary Authority said last month that it welcomed the KPMG report and would implement its recommendations after extensive consultation with the financial services industry and legislators.

The first significant change was instigated this week, with the Cayman Islands ordering so-called shell banks associated with the jurisdiction to either set up shop "properly" or risk losing thier licenses.

This move by the Cayman Islands comes just as a US Senate subcommittee holds a series of three hearings in Washington to investigate further the role of correspondent banking in money laundering, following the publication of a report in early February into the practice of US banks using shell or brass-plate banks in offshore financial centres such as the Cayman Islands and the Bahamas.

The Cayman Islands new ruling on shell banks comes from the Cayman Islands Monetary Authority (CIMA), and it affects 62 private banks that have no real supervision because they are not units of established international banks, which are on the whole subject to stringent regulation.

Although the Cayman Islands did stop issuing licences for shell banks nearly a decade ago (1992), there are still a number of banks in existence which have no offices and employees to speak of and do not offer accounts locally. Under the terms laid down by the CIMA this week, the 62 banks still licenced in the Cayman Islands have just nine months to open offices in the Cayman Islands, employ staff and give Cayman financial regulators regular access to their operations. If they do not comply, the CIMA will quite simply revoke their licences.

Up until now, Cayman Islands regulators have only had access to limited financial statements from these banks. Quoted in Florida's Sun-Sentinel newspaper this week, Anna McLean, Head of Banking at the CIMA, said: 'In line with evolving international standards, we felt that more was needed in order to provide the oversight expected by the Basel Committee guidelines.' She added that 16 of the 62 banks targeted have already met the new rules.

Cayman Islands Finance Secretary, George McCarthy, said recent reviews of the jurisdiction's financial sector identified shell banks as "a potential risk to our system." He said: 'As a major international financial centre, it is our responsibility to maintain high standards, and we only wish to accept responsibility for banks which share this commitment'.

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