A number of laws and regulations have been enacted over the past quarter which impact, or will impact, Cayman Islands investment funds. This briefing provides a summary of these developments, and is intended as a handy reference guide with respect to the recent changes and updates.
The Key Takeaways
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All unregistered closed-ended funds that fall within the definition of "private fund" must be registered with the Cayman Islands Monetary Authority (CIMA) by 7 August 2020. |
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All unregistered funds that are currently operating under the exemption in section 4(4) of the Mutual Funds Law (Revised) must be registered with CIMA by 7 August 2020. |
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From 5 August 2020 funds will no longer be able to rely on the list of countries maintained by the Anti-Money Laundering Steering Group for anti-money laundering purposes, and instead must conduct a separate country-risk assessment. Funds should check their / their administrator's policies to ensure compliance and ensure they have a robust and well documented risk assessment system in place. |
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For the purposes of AML/KYC checks, beneficial owners must be identified using a 10% threshold, even if an administrator or third-party intermediary conducting the checks is based in a different jurisdiction which permits a higher threshold. Funds should check their / their administrator's policies to ensure compliance. This should include a review of all Eligible Introducer and Nominee letters which may have been relied upon in the past. |
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The deadline for filing reports in respect of the 2019 reporting period for FATCA and CRS is 16 November 2020. For CRS, the Cayman Islands Tax Information Authority has published a new form which will need to be filed annually – the deadline for this year is 31 December 2020. |
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Reporting Financial Institutions can now appoint corporate entities as their Principal Point of Contact and change notifier. The AEOI Portal is currently offline and it is not possible to make new notifications, file reports or remediations or deregister entities. A new portal is expected to be launched by end of June 2020. |
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From 15 May 2020, all in-scope entities will need to include all holders of 25% or more (rather than in excess of 25%) of the shares and/or voting rights on the beneficial ownership register of the entity. In-scope entities are advised to review their filings and to get in touch with their registered office if there are any amendments required. |
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A number of regulatory filing deadlines have been extended in light of the COVID-19 restrictions including annual return and economic substance notifications. In addition, all Cayman government agencies, including ROC and CIMA, have implemented their business continuity plans and, secured and fully tested, virtual and operations platforms have been put in place. |
New regulation for unregulated funds
On 7 February 2020, the Cayman Islands Government enacted the Private Funds Law, 2020 (PF Law) and the Mutual Funds (Amendment) Law, 2020 (MFL Amendment Law) which is an amendment to the existing Mutual Funds Law (2020 Revision) (MF Law). This legislation is a result of certain European Union and other international recommendations, and has been developed to align the investment fund regulatory regime of the Cayman Islands with other jurisdictions. Both the PF Law and the MFL Amendment Law include a six month transition period which ends on 7 August 2020.
The PF Law applies to any Cayman Islands closed-ended fund that falls within the definition of a "private fund", and provides for its registration with, and its regulation by, CIMA. Private funds covered by the legislation must be registered by 7 August 2020. This applies both to private funds which were carrying on business 7 February 2020 and private funds which commence business within the six month transitional period from 7 February 2020 to 7 August 2020. Private funds that launch on or after 7 August 2020 will need to comply with the registration timing requirements contained in the PF Law.
Key points of the PF Law include a requirement that audited financial statements, signed off by a Cayman Islands auditor, must be submitted to CIMA within six months of a private fund's financial year end. Further, the legislation sets out valuation, custody, cash monitoring and securities identification requirements, designed to provide transparency and proper papering of a private fund's core operations and processes.
"Mutual funds" such as open-ended hedge funds are not caught by the PF Law and continue to be regulated by the MF Law.
Mutual Funds (Amendment) Law
The MFL Amendment Law applies to open-ended funds carrying on business in or from the Cayman Islands that were previously exempt from registration with, and regulation by, CIMA under section 4(4) of the MF Law (s4(4) Funds) by virtue of the fact that the equity interests of such a s4(4) Fund are held by not more than fifteen investors, a majority of whom are capable of appointing or removing the operator of the fund.
Such s4(4) Funds will be required to register under the MF Law; we can advise on the most suitable basis for registration under the MF Law based on the particular facts of a fund's offering. Once registered such Funds will be subject to the oversight of CIMA and the ongoing requirements of a registered fund in the Cayman Islands: see our Briefing Note Operating a Cayman Islands Open-Ended Fund. S4(4) Funds in existence on 7 February 2020 are required to register by 7 August 2020 while any new s4(4) Funds will be required to register at launch.
For more information on this new legislation, please see our client briefing New registration requirements for unregulated investment funds.
Anti-Money Laundering (Amendment) Regulations, 2020
Country risk assessments
Amendments to the Anti-Money Laundering Regulations (2020 Revision) were published on 5 February 2020 (AML Amended Regulations) with a transition period of 6 months. The principal amendment was in relation to the list of countries deemed to have an equivalent AML regime to the Cayman Islands (Equivalent Jurisdictions List) as currently published by the Anti-Money Laundering Steering Group. From 5 August 2020, the Equivalent Jurisdictions List will cease to be included in the AML Amended Regulations, and instead any person carrying out relevant financial business will be required to carry out their own risk assessment of every country or geographic area in which their customer(s) or applicant(s) for business reside or operate.
The effect of this is that funds will no longer be able to rely by default on the Equivalent Jurisdictions List for the purposes of simplified due diligence or other actions involving lower risk of money laundering or terrorist financing, as permitted under the AML Amended Regulations. Funds, or the service providers upon whom the Funds rely for the purposes of anti-money laundering compliance, will instead have to ensure that they have their own list of relevant jurisdictions which have been assessed and documented as having a "low degree of risk of money laundering and terrorist financing" (which are likely to be broadly similar to the existing Equivalent Jurisdictions List).
In practice this will mean working with the fund's administrator and other anti-money laundering service providers (where appointed) to identify if any changes are required in respect of the fund's anti-money laundering compliance framework. As a minimum, the fund's anti-money laundering compliance officers will need to ensure that a risk assessment has been completed by the administrator (or by the fund itself, if an administrator or similar service provider is not appointed) of the relevant jurisdictions where customers reside or operate. The AML Amended Regulations set out the criteria which should be taken into account when making a risk assessment of a country or geographic area. Additional guidance can be found in the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (as amended) (Guidance Notes). It may also be necessary to update the fund's offering documents and subscription documents to reflect the removal of the Equivalent Jurisdictions List and, where applicable, an updated list of risk-assessed countries.
Ongoing monitoring
Recent amendments to the Guidance Notes published by CIMA on 5 February 2020 provided a detailed framework for the ongoing monitoring of business relationships. Ongoing monitoring is a key component of anti-money laundering systems and processes that a fund must have in place in accordance with the AML Amended Regulations. In particular, CIMA has clarified that ongoing monitoring must be transaction driven rather than customer driven. The two central elements of ongoing monitoring are: (i) ensuring that documents, data or information collected under the customer due diligence process remains current and relevant to the customer, and (ii) reviewing the transactions conducted to ensure that they are consistent with the fund's knowledge of the customer. As a practical measure funds should review their / their administrators' policies to ensure that they are compliant with all of the requirements in respect of ongoing monitoring.
Eligible Introducers
The AML Amended Regulations now require that anti-money laundering comfort letters provided by third-party introducers of business (Eligible Introducers) must state, in addition to the name of customer being introduced, the name of the beneficial owner(s) (see further on this below) of the customer. Funds should review their Eligible Introducer comfort letters to ensure that the additional information is included or otherwise provided to the fund upon introduction.
Beneficial Ownership Threshold
A number of Cayman Islands funds rely on service providers outside of the Cayman Islands for anti-money laundering compliance procedures. It is important that where the service provider implements AML procedures in accordance with the anti-money laundering regime of a different jurisdiction, the fund has properly considered and documented the risks associated with such reliance. The fund must keep a clear record of how it has become comfortable with such reliance, including by taking into account the aforementioned country risk assessment criteria. CIMA had previously indicated that when applying the anti-money laundering regime of a different jurisdiction, it was not always necessary to undertake a granular assessment of the differences between specific requirements of such regime and the Cayman Islands regime.
However, under the AML Amended Regulations and Guidance Notes, CIMA requires that for the purposes of identifying the beneficial owners of customers or applicants for business, a 10% threshold (Cayman Standard) must be applied, even if an overseas service provider is subject to a different anti-money laundering regime which may permit a higher threshold.
While there is no specific remediation deadline in this respect, in practice this will mean that funds and their anti-money laundering officers should, in due course, work with overseas service providers to ensure that the Cayman Standard is applied in all cases when carrying out identification and verification of beneficial owners. It is advisable to review nominee and Eligible Introducer arrangements to ensure that the nominees and/or Eligible Introducers are also applying the Cayman Standard in respect of KYC carried out on underlying clients.
Due to these changes it is becoming more common to see fund administrators (whether based in the Cayman Islands or not) contractually agree to implement the Cayman AML Regime rather than implement a foreign regime which needs to be subject to a detailed 'gap analysis' with any deficiencies remedied before a fund can rely on the administrator's policy.
FATCA/CRS reporting date extension
The Cayman Islands Department for International Tax Cooperation (DITC) has formally extended the reporting date for Cayman financial institutions (CFIs) to complete reporting obligations under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) from 31 May to 31 July of each year. However in recent notifications the DITC has advised that the reporting deadlines for the 2019 reporting periods for both FATCA returns and CRS returns are extended to 16 November 2020.
The DITC is developing a new online Portal (DITC Portal) to replace the current AEOI portal (which is currently offline pending the launch of the new DITC Portal) for notification and reporting purposes, which will also feature bulk reporting and bulk user changes in order to streamline and improve the overall experience for users. It is expected that the DITC Portal will launch towards the end of June 2020. The DITC Portal will also incorporate reporting for AEOI as well as other regulatory frameworks such as Economic Substance and Country-by-Country Reporting later in the year.
Amendments to FATCA and CRS Regulations also now permit CFIs to designate either legal entities or natural persons as the principal point of contact and change notification person on the DITC Portal. This will be beneficial to CFIs who wish to appoint corporate service providers or other institutional users to provide these services as it will avoid the need to make a change notification where there is a change of personnel in these roles. The DITC has issued Institutional User Guidance which expands on the amendments. Technical guidance on how to make these changes, including how to utilise the bulk user change functionality, will be published in advance of the launch of the upgraded DITC Portal.
The list of CRS Reportable Jurisdictions for the Cayman Islands has also been updated to include six additional countries; Ecuador, Kazakhstan, Maldives, Nigeria, Oman and Peru. These countries are Reportable Jurisdictions for the 2019 reporting year.
On 15 April 2020, the DITC provided industry with advance release of a new CRS Compliance Form. The 2020 deadline for submission of this form is 31 December 2020, and in the following years the deadline is expected to be 15 September of each year. The form is required to be submitted via the DITC Portal. The DITC has published Notes for Users on the CRS Compliance Form, on its website, which provide a high-level overview of the requirements. A detailed user guide will be published in due course.
Amendments to the Beneficial Ownership regime
Amendments to the Companies Law (Revised) and the Limited Liability Companies Law (Revised) were published in February 2020 which have clarified the role of the corporate services provider (CSP), where one has been engaged, to maintain the beneficial ownership register on behalf of an entity. Further, the amendments have limited the search of the beneficial ownership register that a competent authority may perform to only verifying the accuracy of the information provided by the entity, while providing such competent authority with the power to make a request to the CSP for further information and consequential penalties for non-compliance.
A further amendment which comes into effect on 15 May 2020 adjusts the definition of 'beneficial owner' such that it will include all holders of 25% or more of the shares and/or voting rights of a company rather than in excess of 25% of such shares or voting rights. A similar threshold will also come into effect on such date for limited liability companies. Corporate entities should consider their reporting obligations under the legislation in the light of this change, and should contact their CSP to ensure compliance if necessary.
From 20 April 2020, all beneficial ownership filings will be made by a CSP directly through ROC's electronic filing system (CAPS).
Changes to Cayman's Economic Substance legislation and filing extension
An amendment to Cayman's economic substance legislation (ES Law) was enacted on 12 February 2020 (ES Amendment) which requires all Cayman companies (including limited liability companies) to file an economic substance notification (ES Notification) with the ROC for onward transmission to the Cayman Tax Information Authority (TIA) prior to the filing of the company's annual return. The ES notification must contain confirmation of certain prescribed information as to whether the entity is exempt from the ES law and if not whether it is carrying on any Relevant Activity (as defined in the ES Law). Although the ES Notification remains a prerequisite in the case of corporate entities being able to file their annual return, the filing date for annual returns, and hence ES Notifications, has been extended to 30 June 2020 as a COVID-19 related concession referred to below.
Under the ES Amendment a Cayman entity that is tax resident outside of Cayman must provide the name and address of its immediate parent, ultimate parent and ultimate beneficial owner of the entity. An immediate parent means a person that owns directly twenty-five percent or more of the ownership interest or voting rights in the entity. Details of the jurisdiction in which the entity is claiming to be tax resident, and any supporting information, are also required.
The ES Amendment also makes provision for the TIA to share information provided to it under the ES Laws with the competent authority in the jurisdiction in which an entity is tax resident and/or incorporated as well as to the competent authority of the jurisdiction of such entity's ultimate beneficial owner.
In relation to an entity's compliance with the ES Law and in particular its ability to satisfy the economic substance test (ES Test) under that law, the TIA has stated that it is aware that COVID-19 may impact travel in 2020, which in turn may affect the ability of some entities to hold their board of directors meetings in Cayman during the year. However, the 'directed and managed' requirement is only one element of the ES Test as the entity is also required to conduct core income generating activities in relation to any relevant activities specified in the ES Law. Where the board of directors meeting is required to be held virtually during this period of uncertainty, the TIA will take that into consideration on a case-by-case basis when determining whether an entity has passed or failed the ES Test in its reporting which will be due in 2021. This should not affect the reporting requirements due this year which are for the 2019 year-end.
Register of Members
The Companies (Amendment) Law 2019, the Limited Liability Companies (Amendment) Law, 2019 and the Limited Liability Partnerships Law (Amendment) Law, 2019 each amend their respective principal laws to enact changes to the filing, maintenance and availability of information in respect of such Cayman entities. A particularly key change was that from 7 February 2020 (for all entities incorporated prior to 8 August 2019) and from 7 November 2019 for all entities incorporated after 8 August 2019, it is necessary to record voting rights in respect of each shareholder, in the register of members of the entity. For further information please see our client briefing Enhanced Information for Cayman Entities.
Temporary filing extensions and other concessions
Following instructions received from the Cayman Islands Government regarding the ongoing threat from the COVID-19 pandemic, all Cayman government agencies, including ROC and CIMA, have implemented their business continuity plans and secured and fully tested virtual and operations platforms have been put in place. Such agencies are confident that there will be minimal disruptions to the services provided to their licensees, customers and industry stakeholders. In addition to those concessions mentioned above, there have, been a number of other filing extensions, concessions and operational changes which have been granted, recognising the disruption that the financial services industry may be experiencing in their regular operations and therefore the difficulties that clients may have in fulfilling such obligations in the wake of the pandemic.
Filing extensions, including Annual Return and ES Notification extension
ROC and the Cayman TIA have extended the deadline for entities to complete their annual return and ES Notifications until 30 June 2020. In the case of annual returns this includes all exempted limited partnerships as well as companies, limited liability companies and foundation companies and includes deferral of the associated annual fees in addition to the annual return filing.
In addition, persons have until 31 May 2020 to submit late filings, without incurring penalties, for director and officer changes, and for registered offices changes and amended memorandum and articles of association (including increases in share capital). These extensions to file pertain to changes which occurred on or after 1 March 2020.
CIMA Moves to Complete Mandatory Remote Working
CIMA is now operating under a mandatory remote work protocol. Submission of all documents including financial statement filings, submission of new licensee applications and legal documents should be by email directly to the relevant division or via the use of CIMA's Regulatory Enhanced Electronic Forms Submission (REEFS) portal. CIMA will accept affidavits or other documents that have been notarised/certified via the DocuSign process or utilising audio-video technology. In relation to new fund submissions, in lieu of a notarised affidavit, CIMA will accept written confirmation from an operator of a fund, applying to be registered/licensed pursuant to the MF Law or PF Law, authorising the registered office or other service provider to file the fund's registration/application on behalf of the operator. CIMA will also accept uncertified resolutions that confirm the de-registration of cancellation of a fund.
Although there have been extensions of certain CIMA filing deadlines, these are limited to one month extensions and currently do not apply to the funds sector.
Digital contracts and electronic signatures
In light of the COVID-19 pandemic and with many people around the world working remotely, we have received a number of queries from clients who are increasingly considering the use of digital contracts and electronic signatures. To help minimise disruptions and ensure that your business continues to run smoothly over the coming weeks, please see below a summary of the legal position in the Cayman Islands and some practical advice on implementation.
The enforceability of digital contracts and electronic signatures is governed by the Electronic Transactions Law (2003 Revision) (ETL). In summary:
(a) communication of a contract through electronic means, including acceptance by way of a reliable electronic signature, is permitted under Cayman law, provided that such contract meets other requirements of a legal contract generally; and
(b) electronic signatures are acceptable and enforceable under Cayman law provided that they meet the "reliability" criteria set out in the ETL.
For additional detail on the signing of documents electronically in Cayman, please see our briefing Use of digital contracts and electronic signatures in the Cayman Islands.
Essential considerations for Cayman funds in challenging times
The current market conditions have raised a number of issues for Cayman funds, for their directors and for their fund managers, particularly around their operational procedures, liquidity issues and possible termination and communication and reporting considerations.
Please see our briefing on the Essential considerations for Cayman funds in challenging times.
How can Ogier assist?
As part of Ogier's commitment to innovation as a core pillar of our service delivery, Ogier has invested heavily in technology over the past few years to enhance the way we do business and deliver our services to clients. This places us in a position of strength in these challenging times.
Originally Published 22 April, 2020
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.
