The Cayman Islands has had outside pressure to adopt additional rules and regulations to assist in regulating offshore activity. The European Union, the G-20, the Organization for Economic Cooperation and Development, the Financial Action Task Force, as well as individual countries like the U.S. and the U.K., among others, have made requests and demands for additional regulations to comply with their expectations.
During 2019, the Cayman Islands' Ministry of Financial Services (the Ministry) issued approximately two dozen draft bills and legal amendments relating primarily to anti-money laundering, tax transparency, beneficial ownership transparency and collective investment vehicles. Most pertained to anti-money laundering and the countering of terrorism financing. The government of the Cayman Islands recognized that they, similar to all international finance centers, must be assessed for compliance with financial service regulatory standards that are continually evolving. As such, they know that they must continue to evolve with these standards as well.
In relation to collective investment vehicles, in 2019 the Cayman Islands Monetary Authority (CIMA) circulated two draft bills for consultation in the financial services industry that may result in non-mutual funds requiring authorization by the CIMA. This would mark the first time that CIMA would bring any Cayman investment fund (other than mutual funds and EU-connected funds regulated by the Mutual Fund Law) under their scope of authorization.
These two bills are officially known as the Draft Investment Funds (Private Funds) Bill 2019 and the Mutual Funds (Amendment) (No. 2) Bill 2019. The target of these bills, according to the Ministry, is to “modernize fund regulation in the Cayman Islands in line with international standards and best practices, enabling the Ministry to ensure compliance with anti-money laundering principles and other key regulatory standards.” This would result in the CIMA requiring that applicable investment funds provide them with specific information about the fund as part of the authorization process. It would likely include such things as legal structure, type of fund, and the category of assets that the funds will invest in.
To keep track and supervise these funds on an annual basis, the draft bills propose that annual filings would be required to be provided to the regulator. The regulators are also given a wide range of enforcement powers and a sanctions regime within the draft bills. The proposed legislation also would include requirements for custody arrangements, valuation procedures and fund administration, among others.
Audit firms based in the Cayman Islands have formed a working group made up of senior representatives to discuss the key issues and impacts that these draft regulations could have. There are estimates that these proposed changes could impact an excess of 100,000 private funds domiciled in the Cayman Islands that are not currently regulated by the CIMA. At this stage, it is difficult to pinpoint an exact number.
In the current form of the bills, there is no Cayman Island signoff required, meaning auditors could be selected from anywhere in the world and not just within the Cayman Islands. This would result in a lack of CIMA oversight over these foreign auditors. Additionally, some concern in the working group is held over the definition of “accountant,” which is seen as vague and broad. This could result in assurance services being provided by certain high risk jurisdictions which lack the requisite knowledge and expertise.
The expectation is that in early 2020 the draft bills will be refined based on feedback that the Ministry receives. All industry feedback was asked to be provided by the end of 2019. As these drafts are refined and finalized, additional clarity will be given to all parties impacted and the date the impact would occur.
Information included in this article was primarily derived from the Cayman Compass.
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