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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: -
- 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.
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