Grand Court judge criticises AML Regulator for its overzealous approach and interpretation of the rules.

Introduction

• In 2020, following an on-site inspection at both Maples Corporate Services Ltd and MaplesFS Ltd, CIMA issued a report in which it concluded that the two entities had failed to properly meet their AML obligations in some areas.
• But the Maples Group sought a judicial review of how the new rules were being interpreted, clarifying the application of Regulation 12 of the Anti-Money Laundering Regulations (2020 Revision).

Ruling

• In a complex legal ruling, a Grand Court judge, Justice Ian Kawaley, found largely in favour of financial services group, Maples,
• In the more than 100-page technical ruling, the judge Justice Kawaley sided with Maples on five out of the seven issues that formed part of the judicial review, as he hinted at
• The overzealous approach and interpretation the regulator had taken over the amount of information it said it needed for Maples to meet its regulatory obligations in relation to all their clients.
• Read the judgement here:-
• https://cnslibrary.com/wp-content/uploads/Cause-No-GC-20-of-2021-Maples-v-CIMA.pdf
• The ruling comes against the backdrop of Cayman’s battle to get off the FATF grey list, and government officials have said an appeal is being considered.

WHAT WAS SAID AND BY WHOM [SOME KEY REPORTED REFERENCE POINTS]

Maples argued that.

• CIMA had gone beyond the basic legislation relating to anti-money laundering and had misinterpreted the regulation, which was disproportionate and commercially onerous.

Justice Ian Kawaley, who heard the case, said.

• the regulator should have been more flexible over disagreements that arose during the inspection process.
• “In my judgment flexibility ought ideally to be the norm because the statutory framework is clearly based on the notion that FSPs will primarily regulate themselves on an individual basis and/or through the Supervisory Authorities of DNFBPs designated under Regulation 55B of the AMLRs, with enforcement action a last resort,”

• “The Guidance Notes themselves clearly suggest that FSPs are expected to exercise their own judgment in relation to both risk assessment and CDD measures deployed.”

The arguments

• Maples argued/contended that.
• The amount of information, such as independent confirmation about the business dealings of all their clients, that CIMA expected it to collect and retain went beyond the actual requirements of the regulations.
• That CIMA went too far over the need for it to verify that people purporting to act on behalf of its client were properly authorised, as this was based on an erroneous construction of the rules.
• CIMA’s claim that.
• The two Maples firms had not checked all their clients’ transactions was also overstepping the regulations, and
• The rules did not, as CIMA had argued, require it to establish the source of wealth of all its clients in every case, the claim stated.
• Maples also submitted that.
• The regulations do not “create a duty to scrutinize their customers’ third-party transactions”, among other issues.
• However, the judge found that.
• The literal meaning of “obtain information on” as written in the regulations doesn’t necessarily include an obligation to maintain a record of the information obtained or independent documentary evidence to substantiate that information in every case.
• The judge indicated that.
• CIMA had adopted a construction removed from the literal meaning of the statutory words without any compelling justification.
• This, the court found, risked creating uncertainty in the marketplace over how the rules were being applied, as he quashed the regulator’s findings.
• He found that CIMA had also taken an “overly prescriptive and rigid construction” of provisions intended to be sufficiently malleable and adapted to the circumstances of the business relationships they related to.

CIMA and the government.

• The decision by the judge to largely quash most of the content of CIMA’s report on the Maples firms and the claimed compliance failings has caused concern for CIMA and the government.
• CIMA had applied to the court to keep the judgment under wraps because of the potential impact on the current efforts to remove this jurisdiction from the FATF grey list.
• But as CIMA did not give a specific reason as to why publishing the judgment would cause further damage to Cayman’s delicate international regulatory position, the judge ruled in favour of open justice and allowed the publication of his decision.
• In a statement following the release of the ruling, the Ministry of Financial Services and Commerce said that the judicial review challenged.
• “The way in which decisions by public bodies have been made” but not necessarily the decisions themselves.
• “[T]He judicial review process demonstrates the Cayman Islands’ respect for the rule of law,” officials said.
• “CIMA is considering its options, including the option of appeal, in response to the ruling.”
• the ministry also said:-
• The judgment was confined to specific AMLR provisions,
• And while it was awaiting further outcomes in relation to the judicial review, it thanked the regulators and industry for supporting compliance in the jurisdiction.
• CIMA Response to Court Decision on Maples Group’s Judicial Review
• The Cayman Islands Monetary Authority (“CIMA”) acknowledges the recent Court ruling following Maples Group’s judicial review of CIMA’s interpretation and application of provisions within the Anti-Money Laundering Regulations.
• Results of these proceedings emphasise the importance of the rule of law under which the Cayman Islands and CIMA are proudly governed.
• As such, CIMA stands committed to its robust regulation of the entire financial services industry in line with international standards and ensuring that Cayman Islands’ financial service providers and designated non-financial service businesses and persons are in compliance with the required rules and regulations.
• To further this objective, CIMA is currently reviewing the judgment along with our legal advisers and is considering all available options.
• in its fight against money laundering and the preservation of financial stability, CIMA looks forward to continuing to work with all industry stakeholders, the Cayman Islands Government, and other competent authorities to ensure that the jurisdiction remains a stable, secure and well-regulated environment in which to do financial business now and for many years to come.
• https://www.cima.ky/response-to-court-decision-on-maples-groups-judicial-review

A spokesperson for Maples told CNS that:-

• The case was about clarification, and they were grateful to the court for its assistance with the interpretation and application of the regulations.
• “The Maples Group takes regulatory compliance matters very seriously with Group entities regulated in a number of jurisdictions,”
• “The Group is fully supportive of the work of the Cayman Islands Government and the Cayman Islands Monetary Authority in protecting and enhancing the integrity of the financial services industry of the Cayman Islands.”

Sources

• https://caymannewsservice.com/2023/04/maples-wins-legal-battle-over-cimas-aml-rules/
• The judgement here:- https://cnslibrary.com/wp-content/uploads/Cause-No-GC-20-of-2021-Maples-v-CIMA.pdf
• https://www.cima.ky/response-to-court-decision-on-maples-groups-judicial-review