Quarterly review

Regulation

Government rejects beneficial ownership registry following a public consultation

In December 2014, the Cayman Islands government announced it will not implement a central register of beneficial ownership information, but will continue its current method of providing this type of information to law enforcement, tax and regulatory authorities. At the same time, government proposes to enact new legislation that will improve access to the information and speed up the process.

The decision to maintain the existing regime is in part based on the responses government received to a public consultation on the maintenance of legal and beneficial ownership information which ended on Feb. 28, 2014.

The consultation showed that 81 percent of the respondents, including local and international companies, individuals, and nongovernmental organizations, rejected the idea of central or a public central register of beneficial ownership information.  Respondents said the existing system provides more benefits than a self-reporting system, as corporate service providers undertake due diligence and refresh beneficial ownership information following a risk-based analysis. The consultation raised practical issues of a centralized register for mutual funds for which beneficial ownership changes constantly. 

In addition, a public registry would create not only a financial burden, but also introduce privacy and security risks, respondents to the consultation said.

In an attempt to highlight the true owners of shell companies and other entities, the U.K. has taken steps to consolidate beneficial ownership information in a central register, and Prime Minister David Cameron has called on the U.K.’s Crown Dependencies and Overseas Territories to do the same in their jurisdictions. 

Minister of Financial Services and Commerce Wayne Panton said Cayman has been adhering to global standards for more than a decade by providing this information to law enforcement, tax and regulatory authorities from data collected, verified and maintained by licensed and regulated corporate service providers.

“Both of these methods are acceptable under the FATF Recommendations [governing anti-money laundering],” Panton said. 

Instead, government said it will speed up the information exchange process by aiming to enact legislation that will require corporate service providers to produce beneficial ownership information to tax, regulatory and law enforcement authorities “within a target turnaround time of 24 hours in circumstances where such information is required.” 

In addition, corporate service providers will be required to file legal ownership information of exempted companies annually with the General Registry and to designate a natural person locally who will be accountable to Cayman authorities for the availability and monitoring of ownership information.

Government further aims to enact legislation that will allow government authorities to wind up entities that do not comply with beneficial ownership requirements.

Financial services

Record year for US CLO issuance

Issuance of collateralized loan obligations reached a record high US$123.8 billion from 237 deals in 2014, according to a report by offshore law and fiduciary firm Appleby.

Sales of the debt securities comprised of leveraged loans made to low-rated companies even exceeded the levels during the credit boom before the financial crisis in 2006.  The vast majority of CLOs are estimated to be structured using special purpose vehicles registered in Cayman. 

Issuance of new CLOs surged last year as companies took advantage of low refinancing costs and investors looked for higher yielding assets. The asset class has experienced a remarkable resurgence since 2008, when only eight deals worth $3.2 billion were issued. In 2013, 188 CLO deals were sold for a total value of $89 billion, the CLO Insider Report for the second half of 2014 noted. 

Despite the record issuance, new regulations may slow growth next year. 

“CLO activity continued to gather momentum in the second half of 2014, reaching record levels of issuance,” said Julian Black, Cayman-based partner and global head of structured finance at Appleby.

“However, the regulatory changes brought about by both the risk retention rule and the Volcker Rule, and requirements under Basel III, will likely slow the pace of issuance in 2015-2016.” 

The 2010 Dodd-Frank financial law requires banks and other firms to retain some of the risk from asset-backed securities they structure, manage and sell to investors. The final rules stipulate that CLO managers have to retain a 5 percent interest in the loans underlying the securities. 

Appleby noted changing market dynamics with new types of CLO investors, such as hedge funds, pension funds and insurance companies entering the market, and predicted that the consolidation of smaller managers will continue in 2015 as they will find it harder to comply with risk retention rules. 

 “We anticipate that the combination of a steady credit environment and stable interest rates will maintain investor demand for CLO debt and equity tranches in the first half of 2015,” said George Bashforth, head of directorship services, Appleby Trust (Cayman) Ltd. “By the second half of the year, however, we expect issuance growth to dampen, with analysts predicting that by the end of the year we will see new issuance retreat to 2013 levels.”

RBC exits wealth management in Cayman, Caribbean

In November 2014, RBC Wealth Management announced plans to discontinue its private wealth management business in the Caribbean. Paul French, a spokesperson for RBC Wealth Management, said the changes are not going to impact Royal Bank of Canada’s retail operations in the Cayman Islands. 

“We will be exiting all RBC Wealth Management Caribbean operations, with the exception of our Investment Advisory Operations (DS Global) team, which has a team based in Cayman. We will consider all strategic options for our Caribbean international wealth management businesses, including, where applicable, identifying interested parties to purchase operations or refer our clients.”

RBC has regional wealth management offices in Cayman, Barbados and the Bahamas. The move will also affect certain international advisory groups based in Canada and the U.S. In addition, RBC has started a “strategic review” of its Swiss business.

RBC said it would be premature to estimate the timing of any next steps and the number of employees that will be impacted because the bank is considering a number of options for its wealth management businesses.

RBC said it is implementing a strategy that will enable it “to achieve sustainable, controlled growth and profitable scale in our priority markets.”

“Our long-term vision is a scalable and more focused wealth management business serving high-net-worth and ultra-high-net-worth clients from our key operational hubs in Canada, the U.S., the British Isles and Asia,” the bank said. “Those areas have been selected because they offer the best opportunities and allow the bank to build on the strengths of RBC’s other businesses.”

Private wealth management in the Caribbean is becoming less profitable amid increasing regulation. The Foreign Account Tax Compliance Act, which forces financial institutions worldwide to report U.S. customer assets to the U.S. Internal Revenue Service, and more extensive anti-money laundering controls, for example, impose additional costs on banks.

“As with many other financial institutions, we face increasing costs associated with the controls we need to have in place for cross-border business,” French said.

“In businesses and products for which we do not have sufficient scale, it is difficult to justify the expense necessary to maintain a high level of client service and ensure a strong foundation to serve our clients well for generations to come. Accordingly, we have made the difficult decision to exit these businesses.” 

Only two years ago, RBC Wealth Management bought the private banking business of Coutts in Latin America, the Caribbean, including Cayman, and Africa, with client assets worth more than US$2 billion.

Madoff trustee settles with Cayman feeder funds

The trustee recovering money for thousands of victims of the Bernard Madoff Ponzi scheme reached a $500 million settlement with two funds that invested in Bernard L. Madoff Investment Securities LLC. 

The feeder funds Herald Fund SPC and Primeo Fund, which are undergoing liquidation in the Cayman Islands, will add $497 million to the money raised on behalf of defrauded investors, trustee Irving Picard announced in November 2014. This brings the total amount recovered to $10.3 billion since the fraud was uncovered in December 2008.

The majority of the nearly half-billion dollar settlement will be paid by Herald Fund SPC and concerns withdrawals the fund made in the six years prior to Madoff’s arrest. The agreement settles so-called clawback claims by the trustee who argued that because in a Ponzi scheme no actual investment activity takes place, any profits paid to early investors are fictitious and funded with the investments made by later investors. 

The circumstances under which “fictitious” profits and earlier investments have to be returned by investors to the estate to be redistributed more equitably among all the victims of the fraud are still, in many cases, being contested in court. 

However, Herald Fund and its investors are also victims of the fraud, and as a result of the settlement are now eligible to recover up to $1.6 billion that can be redistributed to investors.

The agreement allows a customer claim for Herald in the BLMIS estate of approximately $1.64 billion free of any subordination or holdback.

It also represents the full resolution of the trustee’s clawback claims against Herald, which were originally as high as $578 million. Herald’s shareholders will not be required to enter into any due diligence procedures with the trustee in order to be eligible for distributions in Herald’s liquidation, the liquidators said. 

“Assuming a 75 percent total recovery on Madoff customer claims, Herald expects to receive approximately $500 million in addition to the money it will receive in catch-up distributions, bringing its ultimate total recovery under this settlement to $760 million in unencumbered cash available to distribute to its investors. This amount does not include the $13 million to $15 million that Herald expects to receive from the JPMorgan class action settlement, nor does it include the value of Herald’s ongoing claim against HSSL in the Luxembourg Courts as well as other potential claims,” the liquidators said.

Jude Scott named new Cayman Finance CEO

Cayman Finance appointed Jude Scott, a former audit partner with Ernst & Young, as chief executive officer. Scott succeeds Gonzalo Jalles, who stepped down in November 20214 as CEO of the association that represents Cayman’s financial services.

Cayman Finance Chairman Ian Wight said the organization is fortunate to have Scott take up the position and help guide its strategic development over the coming years. 

“Jude is well respected in the local community and internationally, having served on various Cayman Islands government and private sector committees, including the Cayman Islands Society of Professional Accountants, the Cayman Islands Financial Services Council, the Education Council, the Insolvency Rules Committee and the Stock Exchange.”

Scott retired in 2008 as Ernst & Young audit partner, where he specialized in the audits of investment funds, banks and insurance companies. As the global chief executive officer of Maples and Calder, he subsequently took an active role in the strategic growth and development of the international law firm. Scott also served as chairman of the board of Cayman Airways and on the Ministerial Council for Tourism and Development.

In the past two years, Cayman Finance called on government to take a more active role in the promotion of Cayman as a jurisdiction for financial services. In November 2013, government and Cayman Finance signed a memorandum of understanding on government-private sector consultation on industry-related issues, such as new legislation, as well as joint initiatives to promote the Cayman Islands. 

As a result, government has for the first time made a small financial contribution to Cayman Finance for promotional activities during the past two budget years of less than $200,000. Given the large contribution the financial services industry is making to the economy, however, Cayman Finance maintains government’s financial support should be larger, in particular compared to its $14.5 million tourism promotion budget. 

“I look forward to ensuring this important industry receives the local and international attention, direction and support that is essential to sustain the growth and development of the Cayman Islands as a premier international financial center,” Scott said.

“Every individual and business within our financial services industry plays a role in the success of the jurisdiction. Moving into 2015, our aim is to focus on the inclusive nature of representation across the industry, ensuring the priorities of all sectors are understood and coordinated.” 

 

Jude-Scott-headshot

Jude Scott, CEO, Cayman Finance
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Michael Klein
Michael Klein Editor Pinnacle Media Group Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: mklein@pinnaclemedialtd.com Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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