It used to be commonplace for a voluntary liquidator to receive an urgent email or telephone call from a Cayman fund manager near the end of the calendar year to terminate a Cayman entity prior to the end of the calendar year. Times have now changed and there are many new regulations in the Cayman Islands that managers must take into account in the voluntary liquidation process.
As the deadline is approaching for compliance with the Cayman Islands Economic Substance Law, some Cayman management companies are asking whether they are caught by the definition of “relevant entity” or whether they are carrying out a “relevant activity” under the ES Law, both of which together would trigger the requirement for compliance with the ES Law. In this guide, we discuss a few observations of the foregoing definitions under the ES Law and suggest a few options to consider.
The Cayman Islands appeared on the EU’s list of jurisdictions committed to addressing concerns relating to economic substance. In order to address concerns (and remain on the EU’s grey list), the Cayman Islands passed new Economic Substance legislation and regulations, which came into force on 1 January 2019.
Where a Cayman fund chooses to delegate the performance of AML procedures to a person or rely on another person for the performance of AML procedures, the fund should adopt the relevant policies referred to in the guidance notes to the anti-money laundering regulations.
The Cayman Islands is becoming an increasingly regulated jurisdiction. New rules require additional responsibilities to be undertaken. Some of these functions can be costly to Cayman funds. Where the rules have a wide interpretation as to who can fulfil these functions, some clients endeavour to reduce costs by appointing a friend or colleague who agrees to act gratuitously. This approach has some pros and cons.
Crypto is a rapidly emerging and exciting space. Some service providers in the crypto space offer verification of identity of investors by way of electronic or digital means. Such providers may partner with AML specialists located in different jurisdictions and are increasing the efficiency of the AML process by using sophisticated tools to digitally verify information. The result is that verification can be done in minutes rather than hours or several days or weeks utilizing a manual AML process
Following the launch of a Cayman investment fund, it is not uncommon to suppose that the private placement memorandum is the only important fund document. This is because this is the one document that we spend days mulling over, fine tuning and getting to our liking. However, as a stakeholder, you should always remember that there is more than one type of contract between your Cayman investment fund and an investor.
The Cayman Islands have checked all of the boxes when it comes to the identification, verification and maintenance of beneficial ownership information. This is evidenced by the general culture of compliance by directors, legal counsel, fund administrators and other service providers. It is also confirmed by the implementation of legislation and regulations requiring businesses to conduct due diligence and retain records and to file beneficial owner information with the Cayman Islands competent authority.
CbCR requires multinational enterprises (MNE) which meet certain criteria to file a country-by-country report (CbC Report) with tax administrations or tax authorities. The CbC Report provides a breakdown of the amount of revenue, profits, taxes and other indicators of economic activities for each tax jurisdiction in which the MNE group does business.
AML is a such hot topic. New entrants to the market are gearing up to the provide Cayman funds with this service and existing Cayman fund providers are refamiliarizing themselves with the recent changes
The Companies Law (2018 Revision) (the “Law”) was published in the Cayman Islands Gazette on 16 March 2018. Part XVIIA of the Law deals with the establishment and maintenance of beneficial ownership registers in the Cayman Islands and submission of beneficial ownership information to the Cayman Islands competent authority via a secure, search platform, searchable only by the Cayman Islands competent authority. Part XVIIA includes some amendments, initially passed under previous versions of the Law.
The Non-Profit Organisations Law (the “NPO Law”) came into force in the Cayman Islands on 1 August 2017. Accompanying regulations (the “NPO Regulations”) came into force immediately after the coming into force of the NPO Law. Controllers (persons who own, control or direct a non-profit organisation (“NPO”)) have obligations under the NPO Law. Controllers include directors of a company that is an NPO.
Some of the latest Cayman legislation and regulations are the Proceeds of Crime Law (2017 Revision) (the “Law”) and the Anti-Money Laundering Regulations, 2017 (the “Regulations”). Amended, supplementary guidance notes under the Anti-Money Laundering Regulations, 2017 are also expected to be issued shortly, which may address the AML approach when dealing with specific business sectors (e.g. hedge funds). These changes illustrate the pro-active approach of Cayman Islands’ service providers in combating money laundering. It is also different from the usual, “reactionary” approach taken by other jurisdictions following a crisis situation.
Cayman fund clients often ask how to lower their operating costs. Typically, the question arises during the initial capital raising and track record building stages. It also comes up at other times. Here, some Cayman funds try to minimize ongoing fund administration, custodian and investment management fees to give a better picture of returns. The aim of this is to attract new subscribers or impress existing investors. Whatever the case may be, a few options are available to Cayman funds.
Different scenarios may arise under the Cayman Beneficial Owner Regime where a restrictions notice may be issued by a Cayman company subject to the Cayman Beneficial Owner Regime. Examples of these scenarios and the effect of a restrictions notice are described below.
The Cayman Islands Beneficial Owner Regime requires Cayman companies (that are subject to the Beneficial Owner Regime) to take reasonable steps to identify any individual who is a beneficial owner of the company and all relevant legal entities that exist in relation to the company. In the execution of this process, it is anticipated that the information gathered and the status of confirmations to the company of required particulars may vary depending on the stage of the steps taken or to be taken to identify registrable persons. Cayman companies subject to the Beneficial Owner Regime must record the relevant status of the foregoing in their beneficial ownership registers. A description of how these entries will appear is set out below.
For many years, Cayman Islands service providers have collected and maintained due diligence information on clients in relation to new and ongoing business arrangements. The information includes details on the ultimate beneficial owners of Cayman companies. Cayman Islands service providers gather this information for the purposes of best practice, to comply with domestic legislation and to hold itself out as a leading jurisdiction as it relates to combating money laundering and terrorist financing. Consistent with its proactive approach, the Cayman Islands has now introduced new legislation and regulations (the “Beneficial Owner Regime”) requiring Cayman companies to establish and maintain beneficial ownership registers and to allow access by a competent authority. Below is a description of the nature of this access and the competent authority.
In Part 1 of this two part series, it was mentioned that Cayman’s new Beneficial Owner Regime (comprised of The Companies (Amendment) Law, 2017, the Beneficial Ownership (Companies) Regulations, 2017, The Limited Liability Companies (Amendment) Law, 2017 and the Beneficial Ownership (Limited Liability Companies) Regulations, 2017 which came into effect on 1 July 2017) requires certain Cayman companies to establish and maintain a beneficial ownership register setting out certain required particulars of registrable persons (as defined in the Beneficial Owner Regime). Details of these required particulars are described below.
ESTABLISHING A CAYMAN ISLANDS BENEFICIAL OWNERSHIP REGISTER: PART 1 of 2
The Companies (Amendment) Law, 2017, the Beneficial Ownership (Companies) Regulations, 2017, The Limited Liability Companies (Amendment) Law, 2017 and the Beneficial Ownership (Limited Liability Companies) Regulations, 2017 (all the foregoing taken together, the “Beneficial Owner Regime”) came into effect on 1 July 2017. The Beneficial Owner Regime requires certain Cayman companies to establish and maintain a beneficial ownership register setting out certain required particulars of registrable persons (as defined in the Beneficial Owner Regime). These companies are described below.
CAYMAN FUNDS HIT BY NEW AUDIT FEES
Normally, the investment manager of a Cayman fund would try to beat the calendar year- end deadline to close a Cayman fund which is no longer viable. If registered as a mutual fund with the Cayman Islands Monetary Authority (“CIMA”), this involves the cessation of the business of the Cayman fund, deregistering it as a regulated fund READ MORE
CAYMAN LIQUIDATION COUNTDOWN
If you are a manager of a Cayman corporate fund and you are thinking about terminating the Cayman fund by the upcoming year-end, there are some important things for you to consider.READ MORE
CAYMAN FUND LIQUIDATION: IT’S NOW OR NEVER!
The departure of a key person can lead to mass redemptions from a Cayman corporate fund. At that stage, the operators of the Cayman fund might consider the future of the Cayman fund.READ MORE
ARE INDEPENDENT DIRECTORS AN UNNECESSARY EVIL?
Having served as an independent director on the boards of offshore investment funds for many years, I have come across the viewpoint held by some parties that independent directors are not really necessary. The rational for this position is that the investment manager does all of the groundwork. This leaves all of the fund’s directors, including any independent directors, with bystander or spectator roles.READ MORE
THE CHANGING REGULATORY LANDSCAPE FOR CAYMAN FUND DIRECTORS
For some time, persons available to act as directors to Cayman funds fell into three categories.READ MORE
Within a corporate Cayman fund structure, the board of directors may delegate the day-to-day investment management activities to the Cayman fund’s investment manager. While a Cayman fund director will not normally interfere with the daily tasks of the Cayman fund’s investment manager, it is easy to succumb to thoughts of total abrogation of responsibility.READ MORE
CAYMAN REGULATOR MAKES IMPROVEMENTS TO FUND GOVERNANCE FRAMEWORK
On 13 January 2014, the Cayman Islands Monetary Authority published a statement of guidance on corporate governance for Cayman Islands regulated mutual funds. Affected entities include registered funds, administered funds and licensed funds.READ MORE
EXEMPTION FROM AUDIT REQUIREMENT FOR A CAYMAN ISLANDS REGULATED MUTUAL FUND
The Cayman fund’s investment managers may encourage the Cayman fund’s directors to apply for an exemption from the Cayman fund’s audit requirement. But what are these costs in the first place and why would a Cayman fund seek to avoid them?READ MORE
QUIRKY PROVISIONS IN CAYMAN FUND DOCUMENTS
The launch of a Cayman Islands fund may be completed in a few steps; the longest phase being the time spent by a Cayman director to review and finalise contractual terms between the Cayman Islands fund and its service providers. One should not ignore the role that a Cayman director undertakes in the completion of this phase.READ MORE
POLICING A FUND’S DUE DILIGENCE ENVIRONMENT
All managers have a launch date in mind. When the fund starts trading and begins to make huge returns, everyone wants to get on the money train. Managers do not want anything to hold up this process.READ MORE