Cayman Islands removed from FATF grey list

The removal of the Cayman Islands from the Financial Action Task Force (FATF) grey list is anticipated to have a favourable impact on global private equity funds seeking to invest in India, according to experts. The Cayman Islands had been placed on the grey list by the FATF, a global organisation focused on combating money laundering and terrorist financing, in February 2021, leading to increased scrutiny of the region.

The FATF, an inter-governmental agency, recently removed the Cayman Islands, along with Panama, Jordan, and Albania, from the grey list. Experts note that several US and European funds prefer to establish holding companies and funds in the Cayman Islands for their investments in India. However, the Reserve Bank of India (RBI) has imposed restrictions on approvals for shareholding in Non-Banking Financial Companies (NBFCs) from jurisdictions on the grey list. The removal of the Cayman Islands from the grey list is expected to encourage the RBI to consider favourably and approve shareholders from the Cayman Islands, which is seen as a positive development for global private equity funds based there.

Manoj Purohit, Partner & Leader – Financial Services Tax, Tax & Regulatory Services, pointed out that the Cayman Islands has been one of the preferred jurisdictions for foreign investors, with about 400 foreign portfolio investors (FPIs) domiciled there. The removal of the Cayman Islands from the FATF grey list is expected to reduce the compliance burden for these funds, leading to a reduction in the cost of funding and compliance costs. Funds from FATF non-compliant countries are typically subject to additional documentation requirements and lower limits for disclosing beneficial ownership.

Yashesh Ashar, Partner at Illume Advisory, suggested that with the Cayman Islands no longer on the grey list, investments in India could increase not only in the financial services sector, such as Non-Banking Financial Companies (NBFCs) and Alternative Investment Funds (AIFs), but also in other sectors. According to the Department for Promotion of Industries and Internal Trade (DPIIT), the Cayman Islands is the 8th largest contributor of foreign direct investment in India, with over $15 billion in investments coming since 2000.