Alfred Lord Tennyson, Poet Laureate of Great Britain and Ireland, once wrote “Hope smiles from the threshold of the year to come, whispering ‘it will be happier….” While 2017 was a somewhat tumultuous year both locally and globally, it ended on a positive note for the Cayman Islands with, among other things, the European Union recognizing it as a cooperative jurisdiction for tax transparency and anti-avoidance purposes, and the newly established government making great headway in the implementation of a suite of new legislation intended to maintain the Cayman Islands’ adherence to international standards for combating threats to the integrity of the international financial system. These developments, combined with the specific initiatives summarized below, indicate that the Cayman Islands financial services industry and the jurisdiction as a whole has entered 2018 on solid footing.
Regulations and legislation
Beneficial ownership regime
The beneficial ownership register regime (the “BOR Regime”), which was passed into law on July 1, 2017, has been revised by amending legislation that came into force on Dec. 13, 2017. The amendments affect a wide range of entities in a number of different ways.
Those already familiar with the BOR Regime will be aware that it requires certain companies (including limited liability companies, or LLCs) to maintain a beneficial ownership register at their Cayman office, recording details of the individuals who own or control more than 25 percent of the equity interests or voting rights in the company, or who have rights to appoint or remove a majority of the company’s directors (or in the case of LLCs, the managers).
Originally, large groups of companies were excluded from the BOR Regime; the amendments have modified certain of the original exemptions to capture a wider range of entities. By way of example, a company or LLC registered as an “excluded person” under the Securities Investment Business Law (2015 Revision) is no longer exempt from the primary obligations to maintain a beneficial ownership register, and is no longer considered an “approved person.” However, the amendments also contain three further exemptions, being any company or LLC that is (a) regulated in a jurisdiction approved as having an AML/CFT framework equivalent to that of the Cayman Islands; (b) a general partner of any special purpose vehicle, private equity fund, collective investment scheme, or investment fund that is registered or licensed under Cayman regulatory laws; or (c) directly holds a legal or beneficial interest in the shares of a legal entity that is licenced in the Cayman Islands where the conditions of such license include full disclosure of the legal and beneficial owners of the licensee.
The amendments clarify that merely appointing an approved person to provide its registered office in the Cayman Islands, or appointing an individual who is an employee of an entity licenced under a regulatory law as a director of manager, is not enough of itself to meet the “approved person” exemption mentioned above. A company that is exempted from the regime must provide its CSP with written confirmation that identifies the grounds for its exemption and certain additional information regarding any regulated entity or approved person on which the exemption is based. All CSPs must ensure that beneficial ownership registers are updated regularly, and that declarations of exemptions are filed. Helpfully, a “grace period” for compliance with these changes is running until June 30, 2018.
New powers for CIMA
New information is also available in relation to legislative amendments connected to the operation of the Cayman Islands Monetary Authority (CIMA). By way of background, the Monetary Authority (Amendment) Law, 2016 was passed into law in October 2016. However, it did not commence until Dec. 15, 2017, alongside the Monetary Authority (Administrative Fines) Regulations, 2017.
The Monetary Authority Amendment Law gives CIMA the power to impose administrative fines for non-compliance on individuals and entities who are subject to Cayman’s regulatory laws (including those relating to money laundering). The Monetary Authority regulations set out the rules and guidance regarding categories of breaches, the amount of fines and the exercise of power (and application of any discretion), and include procedures for imposing fines, appeals, payment and enforcement. Breaches under the Amendment Law are categorized as “minor,” “serious” or “very serious,” with fines ranging from CI$5,000 for a minor breach, up to CI$100,000 for individuals and up to CI$1,000,000 for entities for a very serious breach (with the amount to be determined at the discretion of CIMA).
New AML Regulations
The Anti-Money Laundering Regulations, 2017 are also now in force, and are aimed at strengthening the Cayman anti-money laundering framework (which includes the Proceeds of Crime Law (2017 Revision), and related Guidance Notes prepared by CIMA). The AML Regulations are designed to directly address the recommendations made by the Financial Action Task Force, the inter-governmental body that sets the standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The AML Regulations, among other things, adopt the the definition of “relevant financial business” now contained in the Proceeds of Crime Law and operate to introduce a new risk-based approach to AML in the Cayman Islands, including enhancements for addressing high-risk situations and tougher sanctions for any breach.
CIMA has recently published an updated Statement of Guidance on the Nature, Accessibility and Retention of Records, which sets out the minimum standard for record keeping that CIMA expects of persons and entities that are licensed under Cayman Islands regulatory laws. The Guidance sets a minimum time period of five years after a transaction date, during which relevant entities should maintain records in their “original format,” including electronic copies of paper-based records. Electronic records, such as accounting records and client due diligence, should be easily accessible and should be provided within one to three business days from the time that they are requested by CIMA, irrespective of the jurisdiction within which the records are stored. Records must also be kept in such a way as to enable CIMA to identify a particular transaction and track the transaction through the accounting systems of the relevant entity.
Foundation Companies Law
Legislative innovations in the jurisdiction have not been limited to the introduction of new regulatory requirements: new statutory provisions allowing for the incorporation of the newest and most modern of the structuring tools offered by the Cayman Islands are also now in full effect. The Foundation Companies Law, which was passed by the Legislative Assembly in March 2017, formally commenced on 18 October 2017. The Foundation Companies Law allows for the creation of a new form of company, incorporated in the same way as a standard Cayman exempted company, which will be known as a “foundation company.” Importantly, the Law is not a new standalone statute: effectively, it operates as an addition to the Companies Law (2016 Revision), which will apply to all foundation company with necessary modifications. This means that the structure of a foundation company will be a familiar one, and all jurisprudence on Cayman companies will, to the extent it is relevant, apply to a foundation company.
Key features of a foundation company include that it may be formed by any person for any lawful object, which need not be beneficial to other persons, it may be limited by shares, or by guarantee with or without share capital, and it is incorporated with one or more members, whose liability is limited. Once formed, a foundation company can cease to have members at any time, provided that it continues to have one or more “supervisors” and it must at all times have a secretary who is “a Qualified Person,” being someone who is licensed or permitted by Cayman’s Companies Management Law (2003 Revision) (as amended) to provide company management services in the Cayman Islands. A foundation company can have one or more beneficiaries who may benefit from the foundation company carrying out its objects – but may also have no beneficiaries at all. Already, the vehicle is proving a popular one, both in the wealth and succession planning context, and in securitization transactions.
Section 37 Redemptions
Finally, it is worth noting that it is not just the legislature that has been busy providing guidance and clarification as to local regulations and structures: local legal practitioners have continued to engage in fierce debate as to the proper interpretation of our laws. The clawing back of redemption funds by the liquidators of a Cayman company pursuant to local laws was a particular issue of note, and the main issue under the spotlight of the Privy Council, in the last quarter of 2017.
In DD Growth Premium 2X Fund (In Official Liquidation) v RMF Market Neutral Strategies (Master) Limited , a number of hotly contested issues arose out of the insolvency of DD Growth Premium 2X Fund, (“the Company”), a feeder fund incorporated in the Cayman Islands. The defendant, RMF Market Neutral Strategies (Master Limited), had received US$23 million from the Company by way of redemption proceeds before the Company ran out of money and was wound up. In long-running litigation, the liquidator of the Company sought to claw back the payments made to RMF on various grounds, including that the payments were illegal returns of capital; there was an automatic restitutionary right to recover the illegal payments; the payments were fraudulent preferences; and there was a constructive trust/knowing receipt claim. The claw-back action had failed both in the Grand Court at first instance and also in the Court of Appeal.
The Privy Council, in a split 3/2 decision, held that the redemption payments were unlawful in that they had been made in breach of section 37(6)(a) of the Companies Law (2007 Revision) – a provision that restricted payments out of capital by a company that is insolvent. In effect, the payments were considered to be an illegal return of capital which caused the Company to fail the solvency test provided for in the Law. The Privy Council unanimously held that the liquidator had no automatic restitutionary right to the return of the payments and that the knowing receipt claim must be remitted to the Grand Court.
Essentially, the redemption payments had been received by RMF for lawful consideration, but were authorized by the Company’s directors in breach of their duties. The rejection by the Grand Court of the fraudulent preference claim was not appealed. The result was that the liquidator did not make the recovery sought and the matter is to be remitted to the Grand Court for further trial on the knowing receipt claim: meaning one final chapter in this lengthy saga remains to be written.
Other new legislation
As 2018 progresses, the financial services industry can expect further improvements to local legislation, as well as the release of other important judgments from the local courts. At the time of print, the Companies Law (2016 Revision) (As Amended) Companies Winding Up Rules, 2018, the Foreign Bankruptcy Proceedings (International Co-Operation) Rules, 2018, and the Insolvency Practitioners’ Regulations 2018 were all due to come into force on Feb. 1, 2018, and new draft legislation and regulations concerning local trusts laws were waiting in the wings for further review and debate. The judgment of the Chief Justice arising out of litigation commenced by Ahmad Hamad Algosaibi & Brothers (AHAB) against Maan Al-Sanea and the Saad Group of companies (among others) is expected within the coming months, while important judgments are also pending in many of the “dissenting shareholder” fair value appraisal actions that flooded the courts in 2017. All in all, and just a few weeks in, the financial services industry can certainly hope for a prosperous and industrious year ahead.