Cayman’s regulatory framework

Sidebar: Ridley reflects on CIMA 

Although not very
important in the early days, Cayman’s regulatory regime has become increasingly
relevant as external pressures concerning money laundering and the proceeds of
crime have come to bear. Going into the 1990s, regulation of much of Cayman’s
financial services industry was relatively loose and the government realised
that needed to change. 
 

The first step
combined the two regulatory bodies that existed in Cayman at the time – the
Inspector of Banks and Trust Companies and the Superintendent of Insurance –
into one regulatory body. That combined entity, called the Financial Services
Supervision Department, was formed in 1993 and came under the government’s
Portfolio of Finance. Although considered an improvement, it had limitations as
a regulator, and as a result, the Cayman Islands Monetary Authority was
established in 1997. 

Langston Sibblies,
the general counsel and deputy managing director of CIMA, said the impetus for
CIMA came from the United Kingdom’s concern about the absence of an autonomous
or independent regulator.  

“The UK wanted to
bring Cayman and the overseas territories in line with modern regulatory
standards… and hence they pushed to establish this independent body.”
Langston-Sibblies-QC,-JP

Langston Sibblies QC, JP
Deputy Managing Director, General Counsel
 

CIMA was formed
through a merger of the Financial Services Supervision Department of government
and the Currency Board. Even though it was technically an autonomous authority,
Sibblies said it wasn’t initially independent because its chairman was
Financial Secretary George McCarthy at the time, and Cabinet still made all the
enforcement decisions. 

“That changed in
2001,” he said. “Between 2001 and 2003 there was a transition period. Part of
the transition was that the financial secretary would no longer be the chairman
of the Monetary Authority because he was a member of Cabinet at that time. But
there were some other consequential amendments as well relating to CIMA’s
decision making powers – licensing applications and enforcement decisions were
now made at the level of management and the board, and Cabinet relinquished
those powers.” 

Mike Austin became
the first non-civil servant head of CIMA, serving as chairman from 2002 to
2004. He was followed by Tim Ridley from 2004 through 2008. Carlyle McLaughlin
served as chairman from 2008 to 2009, at which point McCarthy – now retired
from the civil service – took over again. 

 Mike Austin
Mike Austin
Former Chairman
 

Expanding
role
 

Over the years,
CIMA’s role has expanded from the oversight mainly of the banking, insurance
and funds industries, Sibblies said. 

“When we started
there were really three supervisory divisions, banking, insurance and
investments,” he said. “Since that time it has evolved quite a bit because we
now have a fiduciary division which oversees trust and company management. 

“Then
we also expanded into oversight of the credit union, building society, money
service business and the more recently securities business in terms of the
Securities and Investment Business Law. And there are now… plans to have CIMA
involved in the oversight of pensions [service providers], which is still
evolving.” 

As
CIMA has taken on more responsibility, its staff has grown correspondingly and
the Authority had 157 employees as of the end of May 2011. 

“When
I joined in 2000 we had about 65 employees, so you can see we’ve more than
doubled the numbers,” Sibblies said, adding that there is often debate about
CIMA’s size both locally and internationally. “Locally, a lot of people think
that CIMA is too big and [they say] ‘what is CIMA doing with all these
employees’; whereas internationally from the international standards set and
review bodies, they question how is it that CIMA can regulate an industry the
size we have here with the relatively small numbers, from their perspective.” 

The
basic answer to that question CIMA gives internationally is that they have to
look at the nature of the business in Cayman. 

“A
lot of companies are actively located offshore in jurisdictions that are
well-regulated,” he said. “But also, we’ve enhanced our technology and we’ve
also adopted a risk-based approach to supervision, which means we don’t
actually inspect every single licensee every year, but we do a risk analysis to
determine the high, medium and low-risks.” 

Sibblies
said the risk-based supervision approach has been accepted by its reviewers
such as the International Monetary Fund and the Caribbean Financial Action Task
Force as an acceptable way of carrying out supervision. 

“In
fact, all of the major regulators, if the truth be told, take this approach
because there’s no way the SEC [in the United States] or the FSA in the UK can
physically inspect – even with the thousands of their staff – every regulated
business.” 

Regulation
approach
 

There are two aspects to CIMA’s approach
to the regulation of the financial industry, Sibblies said. 

“One is the on-site
inspection programme and one is off-site monitoring, which is the effective
process of monitoring licensees here within the jurisdiction,” he said.
“Statutory reports, which are required to be filed with CIMA, and the analysis
of those [reports] basically drive the risk analysis of on-site inspection
programme.” 

The results of the
risk assessment determine how often an entity is inspected, Sibblies said. 

“Based on that, we
might do an inspection annually if they’re high risk, and if they’re medium
risk, once every two or three years – that sort of thing,” he said. “But it’s
all about whether there is information that suggests there is a problem.” 

Patrick Bodden,
CIMA’s deputy managing director – operations, explained how the inspection
process works. 

“What we do is…
approach the licensee and request that certain material be
provided to us prior to the on-site inspection,” he said. “Therefore we can
structure the on-site inspection based on criteria we receive and what we
really need to look at. Once we’re on site though, we look at the practical
application of their KYC [regime] and also their other processes, financial and
otherwise. Based on that, we provide them with a report, which commences at the
end of the inspection. If there are any issues or any processes or procedure
that we request or require to be put in place and complied with, then we basically
look at a follow-up programme.” 

 Patrick Bodden
Patrick Bodden

Deputy Managing Director, Operation
 

Rather than being
punitive, the approach seeks to bring licensees up to standard, Sibblies said. 

“There’s no benefit
in us simply punishing our licensees,” he said. “We want to ensure all our
licensees are well regulated, well capitalised and carry on business in a fit
and proper manner.” 

Information
requests
 

CIMA’s regulatory
side is largely based on requests from overseas regulators, Sibblies said. 

“If they have a
problem in their jurisdiction with an entity that is regulated in Cayman or has
a presence in Cayman, they can, and do, make requests of us.” 

Those requests have
increased in number in recent years, but are still relatively low, with 171
requests between July 2009 and June 2010. 

“There are pretty
much two types of information… requests that we get,” Sibblies said, noting
that one stream is due diligence requests on entities licensed in Cayman that
are attempting to become licensed in another jurisdiction. These requests
generally entail confirming the names of the principals involved and whether
they are in good standing in the Cayman Islands. 

“That’s the vast
majority of the requests that we get,” Sibblies said. “We do have a small
number of requests that would be regarded as more non-routine requests, where there’s
an investigation ongoing, typically in the US or elsewhere, where there’s some
suspected breach of law or regulations… and there’s an investigation with a
view to administrative sanctions or criminal action.” 

A
transparency balance
 

Although CIMA will
cooperate in giving what information it can, there are limitations, especially
when it comes to the media, Sibblies said. 

“There’s always some
misunderstanding about CIMA’s ability to provide information to the press,” he
said. “While we’re quite happy to talk about what we do in terms of regulation
and so on… we are restricted by law in terms of the information we can provide
on our licensees and their underlying clients, or even on details of request
from overseas regulators,” he said. “ We have to be very careful we don’t
violate these requirements… because it’s against the law and we could
theoretically be prosecuted, but also it undermines the confidence that
investors and service providers and their clients have in the jurisdiction if
the regulator were to speak freely about their affairs.” 

CIMA tries to achieve
a balance in its level of transparency. 

“We do recognise that
it’s important to be accountable for one, and ultimately we have to be
accountable to the public, but within our legal mandate, and internationally,
it’s important for us to respond to… questions that are raised about Cayman
entities or Cayman’s regulations on these entities,” he said. “What we do is
take it on a case-by-case basis… because there are certain circumstances which,
in very extreme situations, it would be in the interests of the Island for us
to disclose information that is in the public domain. If you have a major
fraud, for example, that’s being prosecuted and everyone knows about it… it
would be in the interests of the jurisdiction for us to speak. 

 

 “But in the ordinary
case where there is some perceived… failure in a business, CIMA has to be very
careful what information it puts out there… that may actually worsen the
situation and… breach financial confidence. “

George-McCarthy,-OBE,-JP
George McCarthy, OBE, JP
Chairma
n

 Carlyle McLaughlin 1
Carlyle McLaughlin
Former Chairman
 

Old
challenges
 

CIMA has already
faced a couple of serious challenges, particularly when Cayman Islands landed
on the Financial Action Task Force’s blacklist as a non-cooperative country or
territory in 2000. 

The first
blacklisting forced Cayman to look at areas where it could improve its
regulatory regime. 

“One of the key
areas that was identified… was our ability to exchange information with other
regulators,” Sibblies said, noting that some of the concerns dealt with the
beneficial ownership of financial entities and the underlying clients of the
service providers in the Cayman Islands. 

“What it did was to
force us to implement a number of changes, including an enhanced regime for
information exchange under the Monetary Authority Law and included the
introduction of the money laundering regulations under the Proceeds of Criminal
Conduct Law.” 

Those regulations
brought about sweeping changes to Cayman’s anti-money
laundering/Know-Your-Customer regimes, to the point where Cayman did
retroactive KYC. 

“That was one of the
things that was strongly recommended to us as a requirement and we put our
industry through the paces… and the industry did it,” Sibblies noted. “We’re
not aware of another jurisdiction that did a thorough retrospective review. The
UK subsequently determined it was not cost effective to do it. One could argue
or say that while it was negative and unfair appraisal of Cayman at the time,
it did allow us to look very closely at some areas that needed improvement and
allows us now to be able to say that we have one of the highest standards of
anti-money laundering regulation anywhere in the world.” 

When the Cayman
Islands found itself on the FATF’s so-called grey list in 2008, the government
scrambled to sign Tax Information Exchange Agreements with other countries
before once again coming into the FATF’s good graces in 2009. 

New
challenges
 

Sibblies knows there
are still more challenges ahead and that battle lines are already being drawn
on the issues of hedge funds and taxation. 

“We have the
Alternative Investment Fund Managers Directive in Europe, which is going to
affect our hedge fund industry,” he said. “We’re working very closely with key
EU regulators to see how we can meet their requirements to ensure the hedge
fund business from Cayman is not adversely affected.” 

There’s also the
Dodd-Frank Wall Street Reform and Consumer Protection Act and the Foreign
Account Tax Compliance Act in the United States, which Sibblies said would
affect the hedge fund industry as well as more generally Cayman entities that
conduct business with the United States. 

The FATCA legislation
underscores the way taxation issues are now being interwoven now with
regulatory issues, Sibblies said. 

“It is going to be
something we are going to be challenged with in the coming time,” he said. 

“While taxation
issues are not at the forefront of what we’re involved in, the fact is there is
a greater interconnection now that we’ll have to deal with,” he continued.
“These are issues that we’ll have to deal with on a case-by-case basis, but there’s
clearly a convergence of regulation and taxation matters that are relevant to
what we do.” 

In general, Sibblies
thinks now is an era of greater transparency, both in the standpoint of what
CIMA does as regulators, but also from the standpoint of the business CIMA
regulates. 

“Investors expect more information, they expect more transparency and
also the international bodies and standard setters expect more transparency,”
he said. “So this is something that we’re looking at across the board in terms
of what entities are required to report to us.” 

 

Cayman’s regulatory framework