By Raymond Hainey From The Royal Gazette

Cayman Islands: its offshore banking sector is shrinking under regulatory pressure

A major sector of the banking industry in the Caymans could be wiped out by tough regulations designed to fight money-laundering.

The number of Class B banks registered with the islands’ regulator has fallen by 14 to 184 over the last year alone.

Class B banks generally offer depository services to international clients only and get access to the US dollar clearing system by establishing correspondent banking services with Class A banks, which operate locally, and which have correspondent relationships with US banks.

Bermuda’s Butterfield Bank, a Class A bank in the Caymans, has operated there since 1967 and employs around 300 in four locations.

A spokesman for Butterfield said: “Butterfield is committed to continued service to and growth in the Cayman market as evidenced by our 2014 acquisition of select personal and corporate banking business from HSBC Cayman.

“Changes in the banking environment for Class B banks in Cayman will not have a material impact on Butterfield’s business.”

At the 1990s peak, there were more than 500 banks registered in the Caymans.

But tougher regulations put in place to fight money-laundering and terrorism have hit the sector, while global consolidation in the banking sector has also hit the industry.

Cayman banks have come under pressure by their US partners, who, under international regulations like the US Financial Action Task Force guidelines, take a risk-based approach on a client-by-client basis.

The regulations require financial institutions to axe client relationships where there is a risk of money-laundering or terrorism financing, banks have opted for a risk-averse approach when examining client relationships, including their relationships with Cayman banks.

A report in the Cayman Compass said that many retail banks in the islands had told their Class B clients that they can no longer offer correspondent services if they involve funds of the bank’s clients — a move that threatens the viability of offshore banks that are not branches or subsidiaries of US banks.

The Caymans, however, is still the sixth-largest financial banking sector on the basis of its cross-border assets of $1.37 trillion.

International assets and liabilities of Cayman banks of $1.39 trillion and $1.44 trillion respectively were unchanged between June 2014 and June last year.

And — according to the Cayman Islands Monetary Authority (Cima) more than 80 per cent of the $1.3 trillion-plus on deposit and booked through the Caymans represents interbank bookings between onshore banks and their Cayman Islands branches or subsidiaries, which Cima said had “a very low risk profile” for money-laundering.

Banking licences in the Caymans are held by a total of 45 countries, with the recent fall represented by Class B banks from Europe, the US, the Middle East and Africa.

The number of Class B licences originating in the Caribbean, Central and South America, Asia and Australia remained stable.

For more on this story go to: http://www.royalgazette.com/article/20160203/BUSINESS02/160209900