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11 June 2020
New regulation for unregulated funds
Anti-money Laundering (Amendment) Regulations 2020
FATCA and CRS reporting date extension
Beneficial ownership regime amendments
Virtual assets legislative framework
Changes to economic substance legislation and filing extension
Register of members
Temporary filing extensions and other concessions
Digital contracts and electronic signatures
Essential considerations for Cayman funds in challenging times
Over the past quarter, numerous laws and regulations have been enacted which affect, or will affect, Cayman investment funds. This article is intended as a handy reference guide with respect to the recent developments.
Private Funds Law 2020
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.
Mutual Funds (Amendment) Law 2020
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.
Anti-money Laundering Regulations (2020 Revision)
From 5 August 2020 funds will no longer be able to rely on the list of countries maintained by the Anti-money Laundering (AML) Steering Group for AML purposes; instead, they must conduct a separate country-risk assessment. Funds should check their administrator's policies comply and ensure they have a robust and well-documented risk assessment system in place.
Beneficial ownership threshold for AML purposes
For the purposes of AML and know-your-customer (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 administrator's policies to ensure compliance. This should include a review of all eligible introducer and nominee letters which may have been relied on previously.
FATCA and CRS filings
The deadline for filing reports in respect of the 2019 reporting period for the Foreign Account Tax Compliance Act (FATCA) and the Common Standard on Reporting and Due Diligence for Financial Account Information (CRS) is 16 November 2020. For CRS, the Cayman Islands Tax Information Authority (TIA) has published a new form which must be filed annually; the deadline for 2020 is 31 December.
Reporting financial institutions can now appoint corporate entities as their principal point of contact and change notifier. The Automatic Exchange of Information (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 the end of June 2020.
Beneficial ownership registers
From 15 May 2020 all in-scope entities will need to include all holders of 25% or more (rather than more than 25%) of the shares or voting rights on the beneficial ownership register of the entity. In-scope entities should review their filings and get in touch with their registered office if any amendments are required.
Regulatory framework for virtual asset services
The introduction of the Virtual Asset (Service Providers) Law 2020 and other legislative changes will, once commenced, provide a regulatory framework for the issue and transfer of digital assets.
Filing extensions and other COVID-19-related measures
Numerous 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 the Registrar of Companies and CIMA, have implemented their business continuity plans, and secured and fully tested virtual and operations platforms have been put in place.
On 7 February 2020 the government enacted the Private Funds Law 2020 and the Mutual Funds (Amendment) Law 2020 (MFL Amendment Law), which is an amendment to the existing Mutual Funds Law (2020 Revision). This legislation is a result of certain EU and other international recommendations and was developed to align the Cayman investment fund regulatory regime with that of other jurisdictions. Both the Private Funds Law and the MFL Amendment Law include a six-month transition period which ends on 7 August 2020.
Private Funds Law
The Private Funds Law applies to all Cayman closed-ended funds that fall within the definition of 'private fund' and provides for their registration with, and regulation by, CIMA. Private funds covered by the legislation must be registered by 7 August 2020. This applies to both private funds which were carrying on business on 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 must comply with the registration timing requirements contained in the Private Funds Law.
Key points of the Private Funds Law include a requirement that audited financial statements, signed off by a Cayman 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 which are designed to provide transparency and proper papering of a private fund's core operations and processes. In addition CIMA has published Rules on the Segregation of Assets and the Contents of Marketing Materials.
Mutual funds, such as open-ended hedge funds, are not caught by the Private Funds Law and continue to be regulated by the Mutual Funds Law.
MFL Amendment Law
The MFL Amendment Law applies to open-ended funds which carry 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 Mutual Funds Law (Section 4(4) funds) by virtue of the fact that the equity interests of such funds are held by no more than 15 investors, a majority of whom are capable of appointing or removing the fund's operator.
Section 4(4) funds must register under the Mutual Funds Law; legal advice should be sought with respect to the most suitable basis for registration under the Mutual Funds Law based on the particular facts of a fund's offering. Once registered, Section 4(4) funds will be subject to oversight by CIMA and the ongoing requirements of a registered fund in the Cayman Islands.(1) Section 4(4) funds which existed on 7 February 2020 must register by 7 August 2020, while any new Section 4(4) funds must register at launch (for further details please see "New registration requirements for unregulated investment funds").
In addition CIMA has published Rules on the Segregation of Assets and the Contents of Marketing Materials relating to regulated mutual funds. New funds and existing regulated funds should review their offering documents to ensure compliance with these new rules.
Country risk assessments
Amendments to the Anti-money Laundering Regulations (2020 Revision) (AML Amended Regulations) were published on 5 February 2020, with a transition period of six months. The principal amendment concerned the list of countries deemed to have an AML regime equivalent to that of the Cayman Islands (Equivalent Jurisdictions List, as currently published by the AML Steering Group). From 5 August 2020 the Equivalent Jurisdictions List will cease to be included in the AML Amended Regulations; 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 customers or applicants for business reside or operate.
As a result, 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 a lower risk of money laundering or terrorist financing, as permitted under the AML Amended Regulations. Funds or service providers on which funds rely for the purposes of AML 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 (likely to be broadly similar to those on the existing Equivalent Jurisdictions List).
In practice, this will mean working with a fund's administrator and other AML service providers (where appointed) to identify whether any changes are required in respect of the fund's AML compliance framework. As a minimum, the fund's AML compliance officers will need to ensure that a risk assessment has been completed by the administrator (or 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 considered 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). It may also be necessary to update the fund's offering and subscription documents to reflect the removal of the Equivalent Jurisdictions List and, where applicable, an updated list of risk-assessed countries.
Recent amendments to the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands published by CIMA on 5 February 2020 provide a detailed framework for the ongoing monitoring of business relationships. Ongoing monitoring is a key component of AML 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:
As a practical measure, funds should review their administrator's policies to ensure that they are compliant with all of the ongoing monitoring requirements.
The AML Amended Regulations now require that AML comfort letters provided by third-party introducers of business (eligible introducers) state, in addition to the name of the customer being introduced, the name of the customer's beneficial owners (see below). Funds should review their eligible introducer comfort letters to ensure that the additional information is included or otherwise provided to the fund on introduction.
Beneficial ownership threshold
Numerous Cayman funds rely on service providers outside the Cayman Islands for AML compliance procedures. Where a service provider implements AML procedures in accordance with the AML regime of a different jurisdiction, the fund must properly consider and document 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 previously indicated that when applying the AML regime of a different jurisdiction, it was not always necessary to undertake a granular assessment of the differences between the specific requirements of such regime and the Cayman regime.
However, under the AML Amended Regulations and Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands, 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 AML 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 AML officers should, in due course, work with overseas service providers to ensure that the Cayman standard is applied in all cases when identifying and verifying beneficial owners. Nominee and eligible introducer arrangements should be reviewed to ensure that the nominees and 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 a foreign regime which must be subject to a detailed gap analysis with any deficiencies remedied before a fund can rely on the administrator's policy.
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 FATCA and the 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 and CRS returns are extended to 16 November 2020.
The DITC is developing a new online portal to replace the 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 users' overall experience. The DITC portal is expected to 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 2020.
Amendments to FATCA and CRS regulations also now permit CFIs to designate 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 which 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 use the bulk user change functionality, will be published in advance of the upgraded DITC portal's launch.
The list of CRS reportable jurisdictions for the Cayman Islands has also been updated to include Ecuador, Kazakhstan, the Maldives, Nigeria, Oman and Peru. These countries are reportable jurisdictions for the 2019 reporting year.
On 15 April 2020 the DITC provided industry with an advance release of a new CRS Compliance Form. The 2020 deadline to submit this form is 31 December; in future, the deadline is expected to be 15 September of each year. The form must 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.
In February 2020 amendments to the Companies Law (Revised) and the Limited Liability Companies Law (Revised) were published, clarifying the role of corporate services providers (CSPs), 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 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 came into effect on 15 May 2020 has adjusted the definition of 'beneficial owner' to include all holders of 25% or more of the shares or voting rights of a company rather than more than 25% of such shares or voting rights. A similar threshold also came into effect on such date for limited liability companies. Corporate entities should consider their reporting obligations under the legislation in light of this change and contact their CSP to ensure compliance if necessary.
From 20 April 2020, all beneficial ownership filings will be made by a CSP directly through the Registrar of Company's electronic filing system.
In May 2020 the government passed a series of legislative amendments and introduced the Virtual Asset (Service Providers) Law 2020 as the central piece of legislation in the new regulatory framework dealing with virtual assets. 'Virtual assets' are defined as a representation of value that can be digitally traded or transferred and used for payment or investment purposes, such as bitcoin or ethereum. Virtual asset services include the exchange, safekeeping and issuance of virtual assets and virtual asset service providers will be required to be licensed with CIMA.
As part of the legislative changes, the definition of 'equity interest' under the Mutual Funds Law has been amended to include "any other representation of an interest". This amendment is broad enough to capture digital tokens and other virtual assets. Therefore, open-ended funds issuing redeemable tokens instead of shares or other equity interests are now covered by the Mutual Funds Law and will need to be registered or licensed under that law. The Securities Investment Business Law (SIB Law) has also been amended to extend to virtual assets. In particular, the definition of 'securities' now includes virtual assets which can be sold, traded or exchanged immediately or at any time in the future and:
Therefore, persons dealing in, arranging deals in, managing or advising on virtual assets that are securities may also be required to register or be licensed under the SIB Law.
However, the legislation is not yet in force pending the passing of a commencement order.
On 12 February 2020 an amendment to the Cayman economic substance legislation was enacted, requiring all Cayman companies (including limited liability companies) to file an economic substance notification with the Registrar of Companies for onward transmission to the TIA before the filing of the company's annual return. The economic substance notification must confirm certain prescribed information as to whether the entity is exempt from the economic substance law and, if not, whether it is carrying on any 'relevant activity' (as defined in the economic substance legislation). Although the economic substance 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 economic substance notifications, has been extended to 30 June 2020 as a COVID-19-related concession referred to below.
Under the economic substance amendment, a Cayman entity that is tax resident outside the Cayman Islands must provide the name and address of its immediate parent, ultimate parent and ultimate beneficial owner of the entity. An 'immediate parent' is a person that directly owns 25% 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 economic substance amendment also provides for the TIA to share information provided to it under the economic substance legislation with the competent authority in the jurisdiction in which an entity is tax resident 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 economic substance legislation and in particular its ability to satisfy the economic substance test under that law, the TIA has stated that it is aware that COVID-19 may affect travel in 2020, which in turn may affect some entities' ability to hold their board meetings in the Cayman Islands during 2020. However, the directed and managed requirement is only one element of the economic substance test as the entity must also conduct core income generating activities in relation to any relevant activities specified in the economic substance legislation. Where the board of directors meeting must 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 economic substance test in its reporting due in 2021. This should not affect the reporting requirements for the 2019 year end which are due in 2020.
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. One key change is that from 7 February 2020 for all entities incorporated before 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.(2)
The Companies (Amendment) (No 2) Law 2020 and the Limited Liability Companies (Amendment) (No 2) Law 2020 passed in May 2020 will, once brought into effect by a commencement order, require the Registrar of Companies to maintain a register for every company and limited liability company containing certain prescribed information such as name, details of share capital (where relevant), initial subscribers, nature of business and date of financial year-end. The registers will be open for inspection on payment of a small fee.
Following instructions from the government regarding the ongoing threat from the COVID-19 pandemic, all Cayman government agencies, including the Registrar of Companies 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 the abovementioned concessions, numerous other filing extensions, concessions and operational changes have been granted, recognising the disruption that the financial services industry may be experiencing in its regular operations and therefore the difficulties that clients may have in fulfilling such obligations in the wake of the pandemic.
The Registrar of Companies and the TIA have extended the deadline for entities to complete their annual return and economic substance 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 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, new licensee applications and legal documents – should be by email directly to the relevant division or via CIMA's Regulatory Enhanced Electronic Forms Submission portal. CIMA will accept affidavits or other documents that have been notarised or certified via the DocuSign process or using audiovisual technology. In relation to new fund submissions, in lieu of a notarised affidavit, CIMA will accept written confirmation from a fund operator applying to be registered or licensed pursuant to the Mutual Funds Law or the Private Funds Law which authorises the registered office or another service provider to file the fund's registration or application on the operator's behalf. CIMA will also accept uncertified resolutions that confirm the deregistration or cancellation of a fund.
Although certain CIMA filing deadlines have been extended, these are limited to one-month extensions and do not currently apply to the funds sector.
In light of the COVID-19 pandemic and with many people around the world working remotely, companies are increasingly considering the use of digital contracts and electronic signatures. Below is some practical advice which can help to minimise disruptions and ensure that businesses continue to run smoothly over the coming weeks.
The enforceability of digital contracts and electronic signatures is governed by the Electronic Transactions Law (2003 Revision) (for further details please see "Use of digital contracts and electronic signatures"). In summary:
The current market conditions have raised numerous issues for Cayman funds and their directors and fund managers, particularly around operational procedures, liquidity issues and possible termination and communication and reporting considerations (for further details please see "Essential considerations for Cayman funds in challenging times").
For further information on this topic please contact Praajakta Pargaonkar, Joanne Huckle or Justin Savage at Ogier by telephone (+1 345 949 9876) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Ogier website can be accessed at www.ogier.com.
(1) For further details please see "Operating a Cayman Islands Open-Ended Fund".
(2) For further details please see "Enhanced Information for Cayman Entities".
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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