The anti-money laundering regime (‘AML Regime’) in the Cayman Islands (‘Cayman’) has been updated and its scope widened, introducing a risk-based regime with enhanced due diligence requirements. Here we look at some of the important changes.
Does the new AML Regime apply to me?
The new AML Regime applies to Cayman domiciled entities (‘Financial Service Providers’ or ‘FSPs’) which conduct ‘relevant financial business ’. That definition has been revised and expanded to include ‘otherwise investing, administering or managing funds or money on behalf of other persons’ and ‘underwriting and placement of life insurance and other investment related insurance’ and now extends to include the following:
Individuals, private or public entities (‘Organisations’) resident in the Cayman Islands (‘Cayman’) which do not comply with the European Union (‘EU’) General Data Protection Regulation (‘GDPR’) after 25 May 2018 may face heavy fines. Although the legislation is not part of Cayman law, it can apply to companies outside the EU, including Cayman funds with EU investors, and those working with or advising them.
What is the GDPR?
GDPR is a binding legislative act whose provisions become enforceable on 25 May 2018. It applies in its entirety across the EU and in certain circumstances applies to Organisations which are established outside the EU. The aim behind it is to protect EU citizens from improper uses of their personal data, such as privacy or data breaches by Organisations within or outside the EU. It lays down rules to protect natural persons with regard to the processing of their personal data. It goes beyond the Directive it replaces in important aspects:
Legislation is currently in force in the Cayman Islands (‘Cayman’) which requires certain companies and limited liability companies (‘LLCs’) (collectively referred to herein in as ‘Company’) to provide information on their beneficial ownership. Amendments made in December 2017 make changes to exemptions from the regime, which means that Companies which have already assessed whether the legislation applies to them must urgently review that decision. It is suggested that all Directors of all Cayman Companies identify whether their Company falls within the scope of the legislation and regulations set out below (collectively hereinafter referred to as ‘the Law’). Where a Company falls within the scope of the Law, there are obligations already in force that the company must meet to prevent penalty under the Law. The ‘grace period’ in which non-compliant entities will not be prosecuted expires on 30 June 2018.
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Update April 2018 - In an Industry Advisory dated 5 April 2018 the Competent Authority provided a link for a new CD which CSPs will need to use the new file format (Version 1.20) which will take effect as of this April 2018 data submission.. This link gives access to the File Guide, the sample file and the CD Image required to validate and encrypt the new format.
As expected, (here) the Cayman Islands (‘Cayman’) Automatic Exchange of Information (‘AEOI’) Portal (‘Portal’) has re-opened and the Cayman Tax Information Authority (‘TIA’) has updated its Portal User Guide and Common Reporting Standard (‘CRS)’ Guidance Notes.
The independent law firm guides Legal 500 and Chambers Global have completed their 2018 reviews of Cayman Islands law firms and attorneys based on independent research among specialist professionals and clients. As in previous years Solomon Harris is recommended as a firm and individual attorneys are recognised as specialists in their field.
The Cayman Islands (‘Cayman’) Ministry of Financial Services has issued an Industry Advisory to the effect that all trust and corporate service providers (‘CSPs’) that have not yet submitted information to the centralised platform for beneficial ownership (‘BO’) are required to submit their currently collated information by close of business on 23 February 2018. Following this filing deadline a new file format will be released in March 2018.
The Cayman Islands (‘Cayman’) Ministry of Finance (‘Ministry’) has published advice on how entities affected by the new Country-by Country Reporting (‘CbCR’) regime (‘Entities’), should prepare for it including information on grace periods in the regime's first year of operation. The advice comes in advance of the Ministry’s formal CbCR Guidance and ahead of the launch by the Cayman Department for International Cooperation (‘DITC’) of the new CbCR Portal (‘Portal’), which is expected in March 2018. For more information on CbCR Reporting generally, see our earlier pieces Application Of The Cayman Islands Country-By-Country Reporting Regulations To Insurance And Captive Insurance Companies and Cayman country-by-country reporting by 31 March 2018 for Multinational Enterprise Groups.
In an Industry Advisory dated 1 February 2018, the Cayman Islands (‘Cayman’) Ministry of Financial Services has advised that the Cayman Automatic Exchange of Information (‘AEOI’) Portal (‘Portal’) will re-open in March 2018. Further, the Cayman Department for International Tax Cooperation (‘DITC’) has published an updated list of Common Reporting Standard (‘CRS’) Participating Jurisdictions and Reportable Jurisdictions. The new list includes Azerbaijan and Pakistan as Participating Jurisdictions. The CRS Guidance Notes are also due to be revised to reflect various changes, as is the Portal User Guide.
As part of the Cayman Islands’ ongoing commitment to international tax transparency, the Tax Information Authority (International Tax Compliance) (Country-By-Country Reporting) Regulations, 2017 (the ‘Regulations’) were issued on 15 December 2017.
The Cayman Islands Grand Court (‘Grand Court’) has made an Order recognising the Joint Receivers (‘Receivers’) of an individual segregated account of a Bermudan segregated accounts company, believed to be the first time such an Order has been made by the Grand Court in respect of receivers of a Bermudan segregated account.
The United Kingdom Court of Appeal (‘UKCA’) has found that once a company has gone into administration (a form of insolvency/restructuring process not available in the Cayman Islands (‘Cayman’)) interest on a creditor's (proven) debt is governed by a statutory regime under s.2.88 of the Insolvency Rules 1986 (‘s.2.88’). The regime provides that in the event that there are still assets left after payment of all the proved debts ('Surplus') at the end of the administration then that Surplus should be used to pay creditors' statutory interest for the period the debt has been outstanding after the commencement of the administration. Although this relates to an administration under UK legislation, the s.2.88 is analogous to the Cayman Companies Winding Up Rules (‘CWR’) Order 16 rules 11 and 12, and this UKCA decision would be considered persuasive authority in Cayman courts as to the treatment of interest in a liquidation.
The Cayman Islands (‘Cayman’) Government has set out its proposals for new legislative measures to be introduced to the Cayman Legislative Assembly in 2018 and 2019. Here are some of the proposals which are likely to affect the Cayman financial services industry and those investing in Cayman developments.The Government has already started on this legislative program by publishing some new Laws and Regulations in the Cayman Islands Gazette in December 2017.
In a bid to strengthen investor protection and make financial markets more efficient, resilient and transparent, the European Union (‘EU’) has put in place, as of 3 January 2018, its updated Markets in Financial Instruments Directive (‘MiFID II’) and Markets in Financial Instruments Regulations (‘MiFIR’).
Will it apply to funds based in the Cayman Islands?
The legislative framework applies not just to the financial services industry in the EU, but also to those buying assets based upon trades with an EU connection. Directors will need to inform themselves on the obligations imposed by the new regime and the information which will need to be stored to meet the demand for transparency. The increased information kept by parties to trades affected by MiFID II and MiFIR may be sought by investors and will be available to regulators and (should the investments fail) liquidators, which will enable scrutiny of the activity of those in charge of the fund’s investments.
In an Industry Advisory dated 20 December 2017 the Cayman Islands (‘Cayman’) the Department of International Tax Cooperation (‘DITC’) published a high level summary of The Tax Information Authority (International Tax Compliance) (Country-By-Country Reporting) Regulations, 2017 (‘the Regulations’) published in the Gazette on 15 December 2017.
What are the regulations about?
The Regulations relate to Country by Country Regulations (‘CbCR’) which apply to Multinational Enterprises (‘MNEs’) and/or their constituent entities (‘CE’s). Cayman is a member of the Inclusive Framework on Base Erosion and Profit Shifting (‘BEPS’)set up by the Organisation for Economic Co-operation and Development (‘OECD’) and the G20 and which is designed to create a single set of consensus-based international tax rules to protect tax bases while offering increased certainty and predictability to taxpayers. All OECD and G20 countries have agreed to CbCR, one of the BEPS minimum standards (‘actions’). (See also the relevant guidance).
The Judicial Committee of the Privy Council in London (JCPC), the highest court of appeal of the Cayman Islands, found that redemption payments to a former shareholder that are made from the share premium account are payments out of capital. It also found that if such payments are made when the company is not solvent then they are unlawful acts by the company.
Case: DD Growth Premium 2X Fund (In Official Liquidation) v RMF Market Neutral Strategies (Master) Limited  UKPC 36
New legislation came into force on 1 July, 2017 in the Cayman Islands (‘Cayman’) requiring all companies and limited liability companies (‘LLCs’) registered in Cayman (and their subsidiaries) to establish and maintain a beneficial ownership register (‘BOR’), unless they are ‘exempted’. The legislation does not apply to Cayman exempted limited partnerships (‘ELPs’). Although Cayman companies and LLC’s are already required to keep and maintain certain beneficial ownership information in line with international standards and commitments to combat tax evasion and money laundering, this new regime agreed between the British Government and other Crown dependencies and overseas territories is aimed at enhancing how this information can be exchanged between government authorities.
In a unanimous decision, the United Kingdom Supreme Court (‘UKSC’) has decided that in future criminal and civil cases the test for dishonesty should be that by the standards of ordinary decent people the person’s conduct was dishonest. Before this decision this objective test was that applied in civil actions, but the test applied in criminal cases had an additional requirement that the defendant had to appreciate that their action would be considered dishonest by the standards of ordinary decent people. The UKSC also decided that in future the same test should be applied in both civil actions and criminal prosecutions. Although a UK case, the Cayman Islands courts would consider the decision persuasive authority.
Reversing earlier decisions, the New York Court (‘NYC’) has found that a plaintiff bringing a derivative action in New York courts on behalf of a Cayman Islands (‘Cayman’) company does not need to obtain leave of the Cayman Grand Court beforehand.
What was the issue?
The matter at issue was whether Order 15 Rule 12A (‘Rule 12A’) of the Cayman Grand Court Rules 1995 (Revised) (‘GCR’), would act to prevent a plaintiff from bringing a derivative action. The NY Court decided the issue by considering if Rule 12A were substantive or procedural in nature. Only substantive law would need to be taken into account by the courts in New York.
A recent case before the Cayman Islands (‘Cayman’) Grand Court is a reminder that the principle of open justice means that applications heard before a judge in chambers, and not in open court, are still public. If you know that confidential information will need to be disclosed in an application to be heard by a judge in chambers then you need to make specific applications to the court to guarantee that access to or use of that information is restricted.
The Cayman Islands (‘Cayman’) Foundation Companies Law (‘the FCLaw’) came into force on 18 October 2017. The FCLaw introduces a new non-profit investment vehicle called the Foundation Company (‘FCo’).
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