In this update, we provide a round-up of various Cayman legal and regulatory developments that occurred since the start of 2023, together with details of a number of consultations and proposed amendments that are likely to come into force shortly. In addition, we are pleased to provide an interactive compliance calendar for Cayman funds setting out key dates to note for 2023.
Enhancement of Caymans' corporate governance framework for regulated funds
In April 2023, further to a review of international standards, jurisdictional comparisons as well as regulatory and supervisory needs, the Cayman Islands Monetary Authority (CIMA) issued the following new regulatory measures for regulated entities, including investment funds:
- Rule and Statement of Guidance on Internal Controls for Regulated Entities
- Rule on Corporate Governance for Regulated Entities
- Statement of Guidance on Corporate Governance for Mutual Funds and Private Funds (SOG)
- Amendment to certain Regulatory Measures for Applicability to Virtual Asset Service Providers and Other Regulated Entities:
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- Statement of Guidance - Outsourcing Regulated Entities
- Rule - Cybersecurity for Regulated Entities
- Statement of Guidance - Cybersecurity for Regulated Entities
- Statement of Guidance - Nature, Accessibility and Retention of Records
The SOG came into effect on 14 April 2023 and although it does not fundamentally deviate from the key corporate governance principles already set out under and/or guided by the previous corporate governance framework of the Cayman Islands, including the Statement of Guidance on Corporate Governance for Regulated Mutual Funds (2013) (2013 SOG) which the new SOG replaces and which applied to funds regulated under the Mutual Funds Act (Revised), significantly the SOG now extends the guidance to all private funds regulated under the Private Funds Act (Revised).
There are a number of key enhancements to the 2013 SOG made by the newly issued SOG which are set out in detail in Ogier's client briefing Enhancement of Cayman's corporate governance framework for regulated funds which operators (i.e. the directors, general partner, manager or trustee, as the case may be) and sponsors of Cayman regulated funds are encouraged to make themselves familiar with. Although the SOG does not create new law and is not intended as a prescriptive or exhaustive guide regarding the governance of a Cayman regulated fund, CIMA has indicated, as it does with statements of guidance more generally, that the purpose of the SOG is to provide: (i) the operators of a regulated fund with guidance on the minimum expectations for the sound and prudent governance of any regulated funds that they operate; and (ii) that the adequacy and suitability of the governance structure of a particular regulated fund should be appropriate for, and proportionate to, the size, complexity, structure, nature of business and risk profile of such regulated fund's operations. CIMA has additionally stated that factors determining the size, complexity, structure, nature of business and risk profile of the operations of a regulated fund could include, but are not limited to: assets under management, number of investors, complexity of the structure, nature of investment strategy, or nature of the operations.
CIMA has confirmed that the new Rule on Corporate Governance for Regulated Entities will not come into effect until 14 October 2023 and that the SOG and the new Rule on Corporate Governance (once effective) will replace and consolidate CIMA's previous regulatory measures on corporate governance (namely the Statement of Guidance on Corporate Governance for Regulated Mutual Funds (2013), the Statement of Guidance on Corporate Governance (2016) (which was specific to the banking and insurance sector) and the Rule on Corporate Governance for Insurers (2016)). We will provide a further update on the timing, the effect on Cayman Islands regulated funds and any action which may be required once these points have been resolved.
Beneficial ownership consultation update
The Cayman Islands Ministry of Financial Services and Commerce (Ministry) has circulated to a wide cross section of the financial services industry for comment, the second iteration of the Beneficial Ownership Transparency Bill (BOR Bill), together with a further consultation paper on the enhancement of Cayman's beneficial ownership framework. The Ministry has stated that the BOR Bill primarily seeks to enhance the transparency framework for legal persons and has been drafted to provide clarity to all users of the beneficial ownership legislation, to ensure greater efficiency of the framework, and to allow the overall effectiveness of the framework to be more easily improved.
Since the first consultation in October 2022, the Ministry has incorporated feedback from industry members into the initial BOR Bill published with that consultation, and has made amendments based on recent international developments. Such developments include the adopted amendments to Recommendation 24 of the Financial Action Task Force (FATF) Recommendations in relation to providing access to beneficial ownership information to financial institutions and designated non-financial business and professions in March 2022, and associated amendments to the FATF Guidance agreed in February 2023. A further development is the ruling handed down by the EU Court of Justice (ECJ Ruling) regarding business registers in Luxembourg, which may have an impact on public access to information on the beneficial owners of companies and certain other entities. There was a component of the draft legislation that sets out a proposed approach to introduce public beneficial ownership registers in line with the request of the United Kingdom. However, the ECJ Ruling has given the Ministry appropriate pause to analyse, in conjunction with UK counsel, the constitutionality of implementing a public register of beneficial ownership information, the implications of which is still under view by the Ministry and the public access provision in the BOR Bill has been amended.
The BOR Bill has been drafted to consolidate Parts XVIIA and XVIIB of the Companies Act; Parts 10A and 12 of the Limited Liability Companies Act; and Parts 8 and 9 of the Limited Liability Partnership Act, bringing it all under a single piece of legislation. This will make it easier for the users of the framework to identify and understand their obligations, as well as highlight the importance of transparency in the jurisdiction.
Changes to the framework include bringing limited partnerships and exempted limited partnerships into scope of the reporting requirements; amendments to the definition of beneficial owner; and updates to the information that is required to be reported to the relevant authorities for beneficial ownership in the Cayman Islands.
The Ministry has stated that the obligations under the existing legislation, will remain in force until commencement of the BOR Bill, which has been drafted to allow the commencement by Cabinet Order of different provisions at different times, as part of a phased approach. In addition, the provision within the BOR Bill relating to public access will now be made via Cabinet regulations subject to affirmative resolution, which means it cannot be commenced until affirmed by a future resolution of the Parliament. This provides an additional safeguard to allow for analysis to be completed and for additional considerations and consultations (including with the UK Government as needed) to be completed before the commencement of any public access.
Consultation on the second iteration of the BOR Bill has now closed and we will provide a further update once the Ministry has published the outcome of the consultation feedback.
Consolidation of AML Regulations and consultation on 2023 AMLR amendments
A revised version of the Cayman Islands Anti-Money Laundering Regulations (AMLR) was published in January 2023 (AMLR 2023 Revision), which consolidates three sets of prior amendments to the AMLR that were made throughout 2020, namely, the Anti-Money Laundering (Amendment) Regulations, 2020, the Anti-Money Laundering (Amendment) (No. 2) Regulations, 2020 and the Anti-Money Laundering (Amendment) (No. 3) Regulations, 2020. Key amendments include the removal of the Anti-Money Laundering Steering Group list of countries, the introduction of specific requirements for assessing the risk of money laundering or terrorist financing in a particular country or geographic area and identification and record-keeping requirements relating to transfers of virtual assets. A fuller description of these amendments is set out in our briefing Cayman Islands Anti-Money Laundering Regulations 2023.
Prior to this consolidation of the AMLR, persons carrying on relevant financial business in the Cayman Islands will have had to refer to each of the above discrete amendment regulations in order to interpret certain regulatory requirements applicable under the AMLR. The AMLR 2023 Revision now consolidates all amendments made to the AMLR to date into one document.
The Cayman Government's Anti-Money Laundering unit (AMLU) has issued an industry consultation on proposed amendments to the AMLRs arising as a result of its review of the existing AMLRs following changes to international AML/CFT standards and the need to align the AMLRs more closely with these standards and other best practices.
As mentioned above, the AMLRs were amended in 2020 to ensure compliance with international AML/CFT standards promulgated with the FATF and to address compliance and supervisory issues faced by both industry and regulators. The AMLU's review and revisions of the FATF standards have identified the need for further amendment, specifically in relation to the FATF's updated requirements on assessing proliferation financing risks. Most of the amendments build on previous regulations and ensure that the AMLRs align more closely with the FATF requirements and expectations on practical implementation.
Once finalised and published, Cayman financial institutions should consider if any changes are required in relation to their proliferation financing risks and controls, noting that these are not always the same as their money laundering and terrorist financing risks and controls due to the geographical and industry factors of their business.
CIMA has also reminded all persons conducting relevant financial services business in or from within the Cayman Islands to take note of the FATF's Public Statements on jurisdictions with strategic anti-money laundering and combating the AML/CFT deficiencies, and to apply enhanced due diligence and/or countermeasures, as appropriate.
CIMA consultation on amendments to the AML Guidance Notes
Cayman's AML regime requires verification of a customer's identity to be done using "reliable, independent, source documents, data or information", but does not prescribe the manner in which this should be done. The increase in digital identification methods, permitted as alternative methods of verifying information (both at the time of establishing relationships and/or as part of ongoing customer due diligence) whilst observing Covid-19 restrictions, has prompted CIMA to propose amendments to the AML Guidance Notes in order to provide guidance on digital verification. The proposed amendments to the Guidance Notes support the FATF-issued guidance on digital identification (ID) which was published in March 2020. The key points are as follows:
- Countries should consider revising policies that automatically classify non-face-to-face business as high risk to the extent that digital ID may be used reliably to identify and verify the identities of customers
- Financial services providers (FSPs) may consider assigning a standard or low-level risk rating when utilising digital ID systems or e-KYC technology with appropriate assurance levels or have been tested and approved by government or an approved expert body
- FSPs must ensure that the level of assurance is adequate to the jurisdiction, product, customer and assessed money laundering/terrorist financing risks of the scenarios to which the system is being applied
- FSPs should understand the basic components of digital ID systems and technological solutions and take an informed risk-based approach to relying on these for remote onboarding/ongoing monitoring
- FSPs should carry out formal risk assessments of new e-KYC/digital ID technology which include documented consideration of how the proposed system works, the level of assurance it provides, and any risks associated with it
CIMA has circulated the proposed amendments to the financial services industry for review and comment.
Amendment Bills to strengthen CIMA's AML enforcement and information sharing passed
During the latest meeting of the Cayman Parliament, which took place on 26-28 April 2023, seven amendment Bills that strengthen CIMA's powers to apply proportionate and dissuasive sanctions to all entities within its supervision were passed by the Cayman Parliament, namely:
- Monetary Authority (Amendment) Bill, 2023
- Companies Management (Amendment) Bill, 2023
- Directors Registration and Licensing (Amendment) Bill, 2023
- Insurance (Amendment) Bill, 2023
- Money Services (Amendment) Bill, 2023
- Securities Investment Business (Amendment) Bill, 2023
- Virtual Asset (Service Providers) (Amendment) Bill, 2023
These Bills extend CIMA's current sanctions regime to cover partnerships, limited liability partnerships, exempted limited partnerships and unincorporated associations within its supervision and to persons concerned in the management or control of any of such partnerships or associations.
In addition, other amendments to the Monetary Authority Act (Revised) allow CIMA to spontaneously share non-public information of criminal conduct uncovered during the carrying on of its duties with an overseas regulatory authority.
FATCA/CRS reporting deadlines and CRS reportable jurisdictions and AEOI rating
Almost every Cayman mutual fund will be a Reporting Cayman Islands Financial Institution for the purposes of the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard issued by the OECD (CRS). As a result, all new funds are required to register with, and provide certain prescribed details to, the Department for International Tax Co-Operation (DITC). Funds which launched in 2022 must file their FATCA/CRS reports for the 2022 reporting period on or prior to 31 July 2023.
The DITC has published an updated list of CRS Participating Jurisdictions and CRS Reportable Jurisdictions.
For further information on upcoming compliance deadlines, including DITC filings, see our Cayman Islands funds compliance calendar.
Also of note, the Cayman Islands has been given highest possible rating by the OECD for the effectiveness of its AEOI regime. The relevant OECD report containing the results of the Peer Review of the Automatic Exchange of Financial Account Information 2022 for the Cayman Islands was released on 9 November 2022. This report analyses legal frameworks put in place to implement the AEOI standard and the effectiveness of the implementation of the AEOI standard in practice. The Cayman Islands was given the highest possible ranking on both assessments.
Private Fund SP fees to be returned
CIMA has issued a notice advising financial service providers that with immediate effect, it will not be collecting annual registration fees on behalf of segregated portfolios for private fund segregated portfolio companies.
In addition, CIMA will be seeking to refund any such fees paid from 2020 to date, prior to the date of the notice.
CIMA is currently in discussion with the Ministry and it is anticipated that the Private Funds Act (Revised) and the associated regulations will be amended, following a broader stakeholder consultation. A statutory based registration fee will be implemented thereafter. We will provide a further update when further information is available.
Grand Court judgment delivered on interpretation and application of AMLRs
A recent Grand Court judgment, in Maples Corporate Services Ltd and MaplesFS Ltd v Cayman Islands Monetary Authority, has seen the Grand Court review certain findings made by CIMA following an on-site inspection, carried out in 2020, of the businesses operated by Maples Corporate Services Limited and MaplesFS Limited (Plaintiffs), which are, respectively, a trust and corporate service provider and a financial services provider, in the Cayman Islands.
Following an on-site inspection of the Plaintiffs' businesses, CIMA found that the Plaintiffs had breached a number of provisions of the AMLRs. The Plaintiffs applied to the Grand Court for judicial review of such findings and were successful in the majority of their application(s) for judicial review.
The judgment provides useful guidance as to the Grand Court's interpretation, and application of certain provisions, of Regulation 12 of the AMLRs as they were in force at the time - and, in particular, in relation to: due diligence requirements in respect of business relationships and authorised signatories; and certain requirements relating to the establishment of a client's source of funds and/or source of wealth.
Cayman court makes first restoration order in respect of fraudulently dissolved Cayman company
While companies struck off the Register of Companies may be restored in certain circumstances pursuant to section 159 of the Companies Act (Revised), there is no equivalent statutory jurisdiction for companies which have been dissolved. In the absence of a statutory provision to set aside the dissolution of a company following its winding up, a party seeking to restore a company in the Cayman Islands must rely on common law principles and the inherent jurisdiction of the Court.
In Re Real Estate and Finance Fund, the Grand Court, for the first time, acceded to an application to set aside the dissolution of an exempted company incorporated in the Cayman Islands, having found that a fraud had occurred in the voluntary liquidation which undermined the statutory purpose of the voluntary liquidation regime.
The case represents a significant jurisprudential development of the principles that the Grand Court will consider when determining an application to set aside a dissolution. It also sets an important precedent for liquidators and creditors of insolvent Cayman Islands companies who are victims of fraud and may be seeking to recover assets which have been misappropriated through now-dissolved entities. While the Court was clearly mindful to emphasise that the jurisdiction will only be exercised in exceptional cases, it demonstrates that that the Court will in appropriate circumstances grant practical relief to assist with unwinding fraudulent winding up proceedings, and thereby facilitate the recovery of assets which are alleged to have been fraudulently misappropriated.
For further information, please see our client briefing: The Grand Court makes first restoration order in respect of fraudulently dissolved Cayman company.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
