Monday, December 21, 2020

This briefing provides a summary of a number of recent changes to laws and regulations which have been enacted in the Cayman Islands over the last quarter which impact, or will impact, Cayman Islands 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.

(i) Cayman Islands removed from EU tax list

As expected, the European Council announced on 6 October 2020 that the Cayman Islands has been removed from the EU’s list of non-cooperative jurisdictions in tax matters (Annex I). Cayman’s original inclusion on Annex I in February 2020 was at odds with the jurisdiction’s long-held commitment to enhancing tax good governance, as evidenced by more than 15 legislative changes since 2018 in line with the EU’s criteria.

Removal from Annex I is therefore a welcome development that corrects this anomaly and ensures that Cayman entities will not be subject to any adverse measures proposed by the EU for Annex I jurisdictions.

The Cayman Islands Government’s statement can be read here

(ii) Anti-Money Laundering changes come into effect

The transition period with respect to changes to the Anti-Money Laundering Regulations (2020 Revision) (AML Regulations) concluded on 5 August 2020, with the effect that funds will no longer be able to rely on the list of countries (Equivalent Jurisdictions List) maintained by the Anti-Money Laundering Steering Group for anti-money laundering purposes, 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. 

Funds, or the service providers upon whom the funds rely for the purposes of anti-money laundering compliance, will 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 is likely to be broadly similar to the existing Equivalent Jurisdictions List). The amended AML 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, subscription documents and AML policies and procedures in order to reflect the removal of reliance upon the Equivalent Jurisdictions List and, where applicable, to refer to an updated list of risk-assessed countries. Further, to the extent that there are any jurisdictions with the fund or its relied upon service provider now consider to have a changed status, updates to the selling restrictions within the offering document may be prudent. 

As part of a review of a fund’s or the fund’s administrator’s or the fund’s other anti-money laundering services providers (where appointed) policies to identify if any changes are required in respect of the fund’s anti-money laundering compliance framework to ensure compliance and ensure they have a robust and well documented risk assessment system in place, it would be prudent to ensure that the fund or service provider (in respect of the fund) is up to date regarding ongoing monitoring and eligible introducer letters, the requirements for which have both seen changes in the last six months.

The Guidance Notes provide a detailed framework for the ongoing monitoring of business relationships. 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.

Any 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) of the customer, as determined by reference to the Cayman Standard (see below). This should be a particular area of focus where service providers have typically relied upon comfort letters from Eligible Introducers based in jurisdictions with lesser requirements – particularly in the United States. Funds should review their Eligible Introducer comfort letters to ensure that the additional information is included or otherwise provided to the fund upon introduction.  Where such information is not available to the fund or service provider, remediation is appropriate.

Finally, 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 a regime and the Cayman Islands regime. However, under the latest AML 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. Funds and their anti-money laundering officers should liaise 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 third-party introducer arrangements to ensure that the nominees and/or introducers are also applying the Cayman Standard in respect of KYC carried out on underlying clients.

(iii) Cayman Islands portal for FATCA and CRS expected to open in Q4 with new guidance

The Department for International Tax Cooperation (DITC) has announced that they anticipate launching their new online portal (DITC Portal) for registration (notification) and reporting purposes in the coming weeks. This will replace the previous Cayman Islands Automatic Exchange of Information (AEOI) Portal (AEOI Portal). The DITC Portal is designed to improve the overall experience for users, including the ability for bulk reporting and bulk user changes and expanding the reporting capabilities beyond reporting under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), to incorporate other regulatory frameworks such as Economic Substance and Country-by-Country reporting.

Cayman Financial Institutions (Cayman FIs) that have been unable to make any notifications, filings or updates while the AEOI Portal was offline are encouraged to make their filings as soon as possible once the DITC Portal is launched. The FATCA and CRS reporting deadline for the 2019 reporting period is currently 16 November 2020, although this may be further extended depending upon the launch date of the DITC Portal. The 2020 deadline for the submission of the new CRS Compliance Form is 31 December 2020. We will issue further guidance regarding the operation of the DITC Portal once it is open.

Entities that are required to meet an economic substance test under Cayman’s economic substance legislation (ES Law) and submit an economic substance return (ES Return) in respect of a financial year commencing on 1 January 2019 are required to do so on or before 31 December 2020, also through the DITC Portal. Investment funds or entities through which investment funds directly or indirectly invest or operate and Cayman exempted limited partnerships and trusts are not relevant entities under the ES Law and are not required to comply with the economic substance test or submit an ES Return.

(iv) New filing requirements for certain Cayman entities

Amendments to the Companies Law (Revised) and the Limited Liability Companies Law (Revised) have come into force requiring the Registrar of Companies (Registrar) to maintain a register which includes certain prescribed information in respect of all Cayman companies and limited liability companies (LLCs). This prescribed information is publicly available online upon payment of a fee of US$61.

In relation to Cayman companies, most of the prescribed information is statutory information which would be found in the company’s memorandum of association, such as details of registered office, authorised share capital and company number. However a company (including LLCs) will now be required to file details of the “nature of business” of the company from a prescribed list of activities (examples include regulated mutual fund or registered private fund), together with details of the company’s year-end. For newly formed companies, this information will be collected upon incorporation and, with respect to the nature of business, updated annually via the annual return submitted to the Registrar. No action is required at this time for existing entities.  

The Exempted Limited Partnership Law (Revised) has long contained a requirement that the registration statement of a Cayman Islands exempted limited partnership (ELP) include information regarding the general nature of the business of an exempted limited partnership and, from 1 September 2020, the Registrar has required that an ELP identify its nature of business by selecting from the same list as is available for Cayman companies and LLCs. Similarly, the Registrar is also currently collecting information on the nature of business of foreign companies registered in the Cayman Islands upon registration (and is expected to request this information in annual returns). 

(v) EU/US Privacy Shield data transfers invalid

In a recent Court of Justice of the European Union (CJEU) judgment, the EU-US agreement for data transfers, known as the Privacy Shield, has been struck down. The Privacy Shield sought to establish a framework for the export of data from the European Union (EU) to the United States notwithstanding that the United States was not a jurisdiction which had obtained an adequacy decision from the EU. 

The Cayman Islands Data Protection Law, 2017 (DPL) imposes restrictions on the transfer of personal data to countries or territories which do not have an adequate level of protection for the rights and freedoms of data subjects in relation to the processing of personal data. For the purposes of these restrictions, members states of the EU, together with those in respect of which the EU has made an “adequacy decision” are automatically deemed to have an adequate level of protection.

While the Privacy Shield did not have direct relevance under the DPL, guidance for data controllers issued by the Cayman Islands Ombudsman noted that self-certification under the Privacy Shield may be taken into consideration as a positive factor when assessing the recipient of personal data under the Ombudsman’s general authorisation for the transfer of personal data. While there has been no formal update to the relevant guidance, it is not yet clear whether this still holds true in the light of the CJEU decision and, accordingly, increased caution may be appropriate for data controllers under the DPL seeking to export data to the United States. In particular, such data controllers should ensure that not only are there standard contractual clauses re cross-border data transfer (SCCs) in place as between exporter and importer which replicate the EUs SCCs (or any SCCs published by the Ombudsman in due course), but that they have carried out an assessment to determine that adequate safeguards have been implemented at the US-based importer to provide an adequate level of protection in respect of the relevant personal data. This may result in the need to upgrade SCCs and/or establish supplementary measures. For further information see our client briefing EU-US Privacy Shield declared invalid – what’s next?


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