The who what why of Cayman’s beneficial ownership regime

A new era started on July 1, 2017, when Cayman’s beneficial ownership legislation came into effect. Both the design and messaging around the regime have aimed for “business as usual”: many commonly used Cayman vehicles will fall outside the headline obligations under the new laws, and in any event for the best part of two decades Cayman financial services providers have had to hold private information on the beneficial owners of their clients.

There are, however, details within the legislation that expand its coverage beyond the primary in-scope entities. Even persons who evidently fall within an exclusion may have proactive obligations to provide information, with criminal sanctions for failure to comply. The directors, managers and shareholders of every Cayman company must take the time to understand the classifications and obligations under the new regime. This is equally the case for all Cayman corporate services providers.

Background

It is worth briefly recollecting the purpose and history of this legislation. A combination of the post-financial crisis deficits in the U.K., the anti-offshore agenda of certain NGOs such as Oxfam, and anger and distrust in the general U.K. population about foreign ownership and the usage of structures by the wealthy to avoid paying their “fair share”, pushed beneficial ownership information to the top of the political agenda in the U.K. in time for David Cameron to make it a central plank of his chairmanship of the G8 in June 2013.

A subsequent G20 communique summarized the intention: “Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information.”

The U.K. enacted legislation in 2015 that created a public register of “Persons with Significant Control” for U.K. companies. There was then a flurry of activity ahead of the Anti-Corruption Summit in London in May 2016 that led to an Exchange of Notes between the U.K. and Cayman governments, in which the Cayman government, alongside other Overseas Territories and the Crown Dependencies, agreed to establish a centralized platform to assist U.K. law enforcement and tax authorities.

At that time, one key element of the debate was whether the details collected would be publicly available or not. The Cayman government successfully held the position that the information should be non-public until such time as public registers became the accepted international standard. A condition was that the Cayman information had to be almost instantaneously available to the U.K. authorities; the authorities had to be able easily to explore legitimate enquiries across multiple vehicles; and corporate services providers must not be alerted to any searches having taken place.

Cayman framework

Fast forward to 2017, and Cayman has delivered on its commitment in the Exchange of Notes to create a centralized platform of beneficial ownership information. The key legislation takes the form of amendments to the Companies Law and the LLC Law, in each case with accompanying regulations. The legislation has been supplemented with guidance notes.

An affected Cayman company must maintain a beneficial ownership register at its registered office. Once a month, each registered office provider is required to upload relevant information via an encrypted USB to a transfer server at the Ministry of Financial Services as the competent authority. This server operates as a secure search platform, accessible only by the ministry upon formal lawful request from a specified list of governmental authorities in the context of financial crime, money laundering, and regulatory or tax matters, including in response to a legitimate request from a jurisdiction which has entered into an agreement with the Cayman Islands government in respect of the sharing of beneficial ownership information. Currently this is limited to the U.K. To enhance the security of the data on the platform and to protect it from cyber-crime and hacking, the server is air-gapped, with no external connectivity.

Partnerships, including exempted limited partnerships, trusts and other bodies that are not legal persons are not covered by the legislation.

For all legal entities, classification is important as the legislation imposes different obligations on different categories of person.

In-scope companies

All Cayman LLCs and all companies incorporated in Cayman or registered by way of continuation in Cayman, including ordinary companies, exempted companies and exempted segregated portfolio companies are in-scope, unless they fall within an out-of-scope category as described below.

The types of companies that are expected to be in-scope include personal holding companies, private trading companies, joint venture companies, TopCos and subsidiaries in private corporate groups, small unregulated funds that are self-administered and managed by a non-regulated manager, some carry vehicles and private unlicensed Cayman businesses.

Foreign companies registered in Cayman are not in-scope companies, although they may be relevant legal entities and registrable persons, as explained below.

Out-of-scope companies

The following legal entities are out-of-scope:

  • companies listed on an approved stock exchange;
  • funds registered with CIMA under the Mutual Funds Law;
  • companies registered with CIMA as excluded persons under the Securities Investment Business Law, such as many Cayman-incorporated investment managers and investment advisers;
  • other licensed companies in Cayman such as banks, trust companies and insurance managers;
  • companies managed, arranged, administered, operated or promoted by an approved person as a special purpose vehicle, private equity fund, collective investment scheme or investment fund (a managed entity);
  • general partners of managed entities; and
  • subsidiaries of companies that fall within the above categories, i.e. companies whose out-of-scope parent(s) hold more than 75 percent of the shares or voting rights of the subsidiary, or the right to appoint and remove a majority of the board of the subsidiary; or companies which are themselves subsidiaries of such a subsidiary.

For the managed entity exemption, an “approved person” is a person or a subsidiary of a person that is (i) regulated, registered or licensed under a Cayman regulatory law or regulated in an approved jurisdiction, or (ii) listed on an approved stock exchange.

It is expected that there will be a lot of attention on the managed entity exemption, as terms such as “managed”, “administered” and “special purpose vehicle” are construed. Cayman investment funds that have delegated discretionary management to SEC registered investment advisers in the U.S. or FCA regulated managers in the U.K. will be exempt as managed entities. Other scenarios may not be so clear-cut. Companies that have appointed directors registered under the Directors Registration and Licensing Law will not, for that reason alone, qualify for the managed entity exemption.

Beneficial owners

Beneficial owners are individuals who, in respect of an in-scope company:

  • hold, directly or indirectly, more than 25 percent of the company’s shares;
  • hold, directly or indirectly, more than 25 percent of the voting rights of the company;
  • hold, directly or indirectly, the right to appoint or remove a majority of the company’s board of directors; or
  • have the absolute and unconditional legal right to exercise, or actually exercise, significant influence or control over the company.

The regulations provide details of what indirect ownership means.

Relevant legal entity

Relevant legal entities are legal entities incorporated, formed or registered, including by way of continuation or as a foreign company, in Cayman that would be beneficial owners if they were individuals.

Registrable person

Registrable persons in respect of a company are (i) beneficial owners, and (ii) relevant legal entities that hold an interest in the company or meet one of the ownership and control conditions directly in respect of the company and through which any beneficial owner or relevant legal entity indirectly owns an interest in the company.

The result is that, in practice, while there may be multiple relevant legal entities in respect of a Cayman company, only the relevant legal entities at the level immediately above the company will be registrable persons. Individuals, on the other hand, will be registrable persons, as beneficial owners, even where their interest in the underlying company is held indirectly through a majority interest in multiple entities.

Obligations

In-scope companies have the most extensive obligations. Each such company must:

  • engage a licensed Cayman corporate services provider (CSP) to maintain an adequate, accurate and current beneficial ownership register for the company at the company’s registered office in Cayman;
  • take reasonable steps to identify individual beneficial owners and relevant legal entities;
  • give notice to all beneficial owners and relevant legal entities requiring such persons to confirm their status as registrable persons and their registration details within one month of the notice;
  • provide to its CSP the required particulars of such registrable persons once those particulars have been confirmed;
  • instruct the CSP to enter the required details of registrable persons into the register, or a nil return; and
  • upon becoming aware of any change to the particulars of a registrable person stated in its register, give notice to the registrable person as soon as reasonably practicable requesting confirmation of the change.

Beneficial owners and relevant legal entities also have their own obligations. They must respond to any notice received from an in-scope company; if they are registrable persons, they must confirm or correct their details; and they must state whether or not they know the identity of a registrable person or any person likely to have that knowledge.

Registrable persons have a proactive obligation to notify an in-scope company that they are registrable persons, even where they have not received a notice from the company.

Similarly, registrable persons must proactively notify an in-scope company if they know of any change in their status or particulars.

So it is not the case that the board of directors of a Cayman company can determine that they are out of scope and automatically proceed as if the law does not apply to them. A regulated feeder fund that invests all of its assets in a regulated master fund, which itself invests in a portfolio of listed securities and financial instruments will be fully removed from the obligations in the legislation.

But if, for example, a Cayman private equity fund managed by a U.S. manager directly acquires a 30 percent stake in a Cayman company that owns a solar panel manufacturing business in China, the Cayman fund will be out of scope and will not itself have to maintain a beneficial ownership register. It will, however, be a registrable person in respect of that underlying Cayman company and must provide it with all necessary information, whether it is asked for such information or not.

Default

Companies and their directors who knowingly and wilfully breach the legislation commit criminal offences and may incur significant fines. Similarly, registrable persons who do not provide timely and complete information or knowingly make false statements commit an offence.

A company is also required to serve a defaulting registrable person with a restrictions notice, copied to the Cayman authorities, the effect of which is to freeze dealings in the relevant interests.

Conclusion

Cayman has a consistent strategy of meeting or exceeding global standards on transparency and international cooperation. Nevertheless, few in Cayman’s financial services industry considered the U.K.’s beneficial ownership drive to be necessary or desirable for Cayman.

Unlike the U.K. itself as well as the U.S. and all other G20 nations, Cayman has since 2001 required financial services providers to verify the identity of beneficial owners of Cayman companies: and at a more onerous 10 percent threshold.

In addition, Cayman’s largely institutional and regulated client base is an improbable harbour for the wrongdoers that the U.K. law enforcement authorities wish to target.

The new beneficial ownership regime therefore attempts to support the central aims of the initiative while safeguarding the privacy of legitimate transactions and seeking to minimise the impact for entities which are subject to alternative regulatory oversight. Clearly, however, the regime will increase the compliance burden in Cayman, even for entities that are ostensibly out of scope. Companies, their directors, individual beneficial owners and corporate services providers will all need to be alert to the new requirements.