During 2018 a number of significant changes to the Cayman Islands regulatory regime occurred. As a result, fund vehicles now have significantly increased obligations as regards obligations in relation to Anti-Money Laundering (“AML”) including appointing compliance officers and potentially making additional filings. Further, the deadline for compliance with the regime relating to the disclosure of beneficial ownership means that certain Cayman entities now are required to make certain disclosures regarding their controlling parties or otherwise identify an applicable exemption from the regime and report that exemption. Finally, on 1 January 2019 the framework for a new economic substance regime was introduced to address the concerns of the EU Code of Conduct Group and recent OECD guidance on the economic substance of certain entities in jurisdictions with low or zero corporation tax. The roll-out of this last development is still underway and the exact manner of its implementation and its impact of differing industry sectors is still being assessed as the regime, as implemented to date, remains under review by the EU.
Anti-Money Laundering Regulatory Regime
The Cayman Islands updated its regime applicable to AML in a manner that has direct impact on the operational framework that needs to be implemented for funds established in the Cayman Islands whether or not they are registered with the Cayman Islands Monetary Authority (“CIMA”). The changes therefore apply to closed-ended structures (which are not required to be registered with CIMA) as well as open-ended structures (which are generally required to be registered with CIMA). Open-ended structures which are not registered with CIMA by reason of reliance on an exemption under the Cayman Islands Mutual Funds Law are also subject to the new regime. Therefore, all funds are within the ambit of the new requirements.
AML Officer Appointments and Procedures: The new requirements were introduced in 2017 and are now set out under the Anti-Money Laundering Regulations (2018 Revision) (the “New AML Regulations”). Under the New AML Regulations, all funds must now appoint natural persons to the roles of Anti-Money Laundering Compliance Officer (“AMLCO”), Money Laundering Reporting Officer (“MLRO”) and Deputy Money Laundering Reporting Officer (“DMLRO”). The New AML Regulations are now in force as regards all funds and accordingly all funds established in the Cayman Islands (including those that have a foreign-registered (e.g. Delaware) general partner) are now required to have appointed a natural person as AMLCO, MLRO and DMLRO (together “AML Officers”). In addition to making these appointments funds are also required to have in place policies and procedures (“Procedures”) to monitor and ensure internal compliance with the New AML Regulations and associated Guidance Notes issued by CIMA (“Guidance Notes”). The New AML Regulations and the Guidance Notes provide that, having designated the MLRO, DMLRO and AMLCO, a fund may meet its obligations in relation to the Procedures by relying on another person to perform AML compliance functions and this is commonly achieved by a delegation to fund administrators (see below). The AML Officers must, in the assessment of the fund boards appointing them, be of sufficient management seniority and possess sufficient expertise to perform their respective roles. The functions of the MLRO and the DMLRO include assessing suspicious activity reports in relation to money laundering or terrorist financing activities and determining whether to report these activities to the Cayman Islands Financial Reporting Authority. The AMLCO has a general compliance oversight function in relation to the relevant fund’s AML and counter-terrorist financing compliance and should have direct access to the board of such fund. Details of the precise scope of the roles have been promulgated by CIMA.
Persons Undertaking Roles: Although practices currently vary as to whether three separate persons fulfill these roles, it is a nevertheless a requirement that the MLRO and DMLRO (which is in place to deputize for the MLRO if required) cannot be the same person. To date, some funds are appointing two natural persons to fulfill the roles with the AMLCO sometimes also acting as the DMLRO. All or some of the roles of the AML Officers may (although are not required to be) be undertaken by persons outside the management structure of the fund. The key issue is that the persons undertaking the functions have sufficient seniority and expertise to perform their functions. Fund administrators are accordingly now commonly providing individuals to perform these functions or partnering with other outsourced providers to offer solutions to funds that they administer and funds are relying on the Procedures of such service providers in connection with discharging their obligations under the New AML Regulations and the Guidance Notes. Certain registered office providers in the Cayman Islands are also offering this service to their clients in the event that the AML Officers are not supplied internally by the funds or through fund administrators.
CIMA Filings: For funds registered with CIMA details of each of the AMLCO, MLRO, and DMLRO must be filed with CIMA. Such filings are generally undertaken by the registered office of the fund in the Cayman Islands although certain fund administrators may also be able to make such filings if they have access to the system. Funds which are not registered with CIMA must also be able to demonstrate their appointment of AML Officers under appropriate board resolutions and service provider contracts even though as things currently stand they are not required to make filings in connection with the appointments.
Offering Document Disclosure: For funds registered with CIMA their offering materials should confirm that AML Officers have been appointed and contact details for the person (generally the fund administrator) from which further information on these appointments can be obtained by investors. In practice these statements are now also being included in offering documents for funds that are not registered with CIMA too.
Current Compliance Requirements: The grandfathering periods permitted by CIMA have now elapsed so all funds are required to have now made AML Officer appointments (and, for funds registered with CIMA, to have made filings with CIMA). Penalties for non-compliance include fines and potential imprisonment for up to two years.
Excluded Persons: Cayman entities that act as investment managers (and like roles) as “Excluded Persons” under the Securities Investment Business Law (Revised) of the Cayman Islands are also subject to equivalent obligations as those set out above and are required to file applicable information with CIMA. Separately, the general filing regime for such entities has also become more complex and the information disclosure requirements more onerous. The registered office of such entities which makes the filings should have been in touch with applicable entities in this regard as part of the annual filings that they make.
Compliance Deadline for Beneficial Ownership Regime
The compliance deadline for the Cayman Islands beneficial ownership regime which was first introduced in 2017 (the “Cayman BOR”) fell on 30 June 2018 and all relevant entities should now have established applicable beneficial ownership registers or identified with their counsel/required office provider the basis on which they are exempt from doing so.
Application to Funds: In practice most fund vehicles are likely to be exempt from the requirements of making disclosures under the Cayman BOR as (i) exempted limited partnerships, (ii) funds registered with CIMA and/or (iii) funds which have key service providers (administrators, managers) regulated in a jurisdiction approved by CIMA (which includes a majority of jurisdictions with sophisticated finance industries) are currently exempt from reporting obligations under the Cayman BOR.
Exempt Entities: Companies that are not caught by the Cayman BOR do not need to prepare a beneficial ownership register but are nevertheless required to file prescribed details of the exemption applicable to them. In practice the registered office of a company in the Cayman Islands will make this filing and will collect applicable information in this regard or, as the case may be, establish a beneficial ownership register.
Entities Within Scope: Entities which are not exempt from the Cayman BOR are required to maintain a beneficial ownership register disclosing details of key controlling parties with interests in 25% or more in the entities in question. This information will generally be collected by the registered office of the entity in Cayman and in turn disclosed to the regulatory authorities in the Cayman Islands. This information is not publicly available in the Cayman Islands but may be disclosed on an inter-governmental basis by the Cayman authorities pursuant to inter-governmental treaties to which the Cayman Islands is party.
Introduction of Economic Substance Regime
The Cayman Islands has passed legislation requiring certain legal entities carrying on relevant activities to demonstrate adequate economic substance in the Cayman Islands. The International Tax Co-operation (Economic Substance) Law, 2018 and associated regulations and consequential amendments to existing laws of the Cayman Islands (together, the “Cayman Economic Substance Laws”) came into force on 1 January 2019 to address the concerns of the EU Code of Conduct Group and recent OECD guidance on the economic substance of certain entities in jurisdictions with low or (like the Cayman Islands) zero corporation tax. The Cayman Economic Substance Laws demonstrate the continued commitment of the Cayman Islands to international best practice, including Cayman’s implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) framework and related EU initiatives.
The Cayman Economic Substance Laws follow closely the approach taken to address the same issue by the “Crown Dependencies” of the United Kingdom (Jersey, Guernsey and the Isle of Man) and the other United Kingdom Overseas Territories including the British Virgin Islands and Bermuda. Further detail, in the form of principles-based guidance notes, is expected to be finalized soon with sector specific guidance being developed during 2019. Relevant entities that existed before 1 January 2019 and that are conducting relevant activities on that date must comply with the economic substance requirements from 1 July 2019. Relevant entities that are established from 1 January 2019 onwards will have to comply with the requirements from the date they commence the relevant activity.
Relevant Entities: The Cayman Economic Substance Laws impose certain economic substance requirements on Cayman Islands relevant entities which carry on a relevant activity. Any Cayman Islands company, LLC or LLP and any foreign company which is registered in the Cayman Islands as a foreign company may be a relevant entity, in each case unless the entity is tax resident outside of the Cayman Islands.
Relevant Activities: The relevant activities listed in the Cayman Economic Substance Laws are as follows: (i) banking business; (ii) distribution and service centre business; (iii) financing and leasing business; (iv) fund management business; (v)headquarters business; (vi) holding company business; (vii) insurance business; (viii) intellectual property business; and (ix) shipping business.
Compliance Requirements: Relevant entities that are conducting relevant activities will need to make an assessment regarding their activities and may be required to put in place measures to allow them to comply with the requirements of the Cayman Economic Substance Laws regarding economic substance in the Cayman Islands for each relevant activity they conduct. It may be possible for relevant entities to outsource certain functions to other service providers in the Cayman Islands.
Reporting Obligations: From 2020, all relevant entities must include a declaration in their annual return as to whether or not they are conducting a relevant activity and what their financial year is. Relevant entities that are conducting relevant activities and which must demonstrate economic substance will need to make annual filings with the Cayman Tax Information Authority (“TIA”) from 2020 on a portal which is currently being developed.
Access to Reported Information: Information about entities in breach of the economic substance requirements will be disclosed by the TIA to tax authorities in the jurisdiction where the parent/beneficial owner resides and the tax authority of the country of incorporation of the relevant entity, if the relevant entity is incorporated outside the Cayman Islands. Penalties will be imposed for non-compliant entities.
It is still early days as regards assessing the required manner of implementation of the regime; however, the guidance notes, when issued, will provide further detail and a clearer picture.