This year has been a busy year, not only for legislators, but also for trusts and private client practitioners. While a great deal has already been written about our Trusts Law (2017 Revision), the Confidential Information (Disclosure) Law and last, but by no means least, our new Foundation Companies Law, this year has also seen the introduction of the first charities legislation to have reached the statute books in the Cayman Islands.
Although the Attorney General has always had supervisory responsibility for the administration of charities here in the Cayman Islands and indeed, had and still has the right to enforce charitable trusts on behalf of charity, the Non-Profit Organisations Law 2017 (NPO Law) for the first time introduces a system by which certain NPOs should be registered.
Registration has been introduced with a view to easing oversight and regulation of NPOs, consistent with the Cayman Islands’ obligations in the fight against international crime and terrorism. This law came into effect on Aug. 1.
So, what exactly is an NPO for the purposes of the NPO Law? An NPO is defined as a company or body of persons, whether incorporated or unincorporated, or a trust:
(a) Established, or which identifies itself as established, primarily for the promotion of charitable, philanthropic, religious, cultural, educational, social or fraternal purposes, or other activities or programs for the public benefit or a section of the public within the Cayman Islands or elsewhere; and
(b) That solicits contributions from the public or a section of the public within the Cayman Islands or elsewhere.
This definition covers ordinary companies, exempted companies and foreign company branch offices registered under Part IX of the Companies Law (2016 Revision) if they are established for these purposes and solicit contributions from the public. It will also cover foundation companies, STAR trusts and charitable purpose trusts if similarly established and administered.
It is important to remember that the NPO Law does not simply relate to NPOs; it must also solicit contributions from the public or a section of the public for it to fall within the ambit of the new law. For wealthy philanthropists, therefore, who settle their own funds in a foundation company or on a STAR trust or charitable trust and fund their charity or philanthropy from either the capital or the income generated by its investment, the NPO Law will not apply.
All NPOs that were in operation on Aug. 1, 2017 are required to register within six months of that date, so the registration period is already well under way. Any NPOs that came into existence after that date will need to register within six months of establishment. An application for registration should be made in prescribed form by the controller of the NPO. A controller for these purposes includes:
(a) A trustee of a trust, where the NPO is established as a trust;
(b) A director of a company, where the NPO is established as a company;
(c) A general partner of a partnership, where the NPO is established as a partnership;
(d) A person responsible for the management and administration of an unincorporated association, if relevant;
(e) A member of a corporation established under the Churches Incorporation Law (2007 Revision); or
(f) A person not specified in sub-clauses (a), (b), (c), (d) or (e) where the NPO is established by that person.
The registration application must contain the following information:
(a) The purposes of the NPO;
(b) The identity, address and other contact information of the controller and other senior officers or members of the management of the NPO;
(c) Copies or particulars of the trust, trust deed and any other organizational documents or if a company or foundation company, copies of the constitution, or the memorandum and articles of association;
(d) Information with respect to the location of the money and other property of the NPO and its banking arrangements;
(e) The source or anticipated source of contributions;
(f) How contributions are to be applied;(g) Certified copies of Government-issued photo identification of controllers and senior officers; and
(h) Any other evidence that reflects the organizational structure and functions of the NPO.
As will be clear from the nature of the information being sought, the application process is very much geared towards obtaining what is essentially due diligence and KYC information from the NPO.
The Attorney General retains his powers in relation to NPOs and indeed has wide powers under the NPO Law to institute his own investigation or enquiry into the operation of an NPO if it is suspected of breaching the Terrorism Law or the Proceeds of Crime Law or similar. The AG also has wide powers under the NPO law to obtain information and documentation in relation to an NPO.
As mentioned earlier, the NPO Law provides for a Registrar who has various powers conferred on him or her by the NPO Law, including responsibility for the processing of applications for registration, the collection of fees, annual returns and annual financial statements. These largely supervisory administrative functions are more notably supplemented by powers to investigate or authorize the investigation of NPOs who are suspected of operating illegally and to impose financial penalties for breach of the NPO law.
The Registrar is empowered to ensure that appropriate internal AML systems and controls are in place to identify criminal conduct, including the financing of terrorism and to offer guidance to NPOs with regard to best practice. Similarly, the Registrar has power to suspend or even cancel the registration of an NPO if, after the conclusion of an investigation into wrongdoing, it is proved that it was in fact engaged in wrongdoing, or failed to maintain proper accounts, pay its fees and / or submit annual returns. There is a right to appeal to the Cabinet if the NPO does not agree with the Registrar’s decision and if dissatisfied with that decision, there is an onward right of appeal to the Grand Court.
The Registrar can decline to register an applicant if:
(a) The applicant does not fall within the definition of NPO;
(b) If the NPO is established for an illegal purpose or has no connection with the Cayman Islands;
(c) There are manifest errors in the application, it contains profanity, or if the name of the NPO is identical to that of an NPO which is already registered;
(d) If the name includes the word ‘Royal’ or ‘Imperial’ or ‘Empire,’ or is described in a way that infers the patronage of the Queen or a member of the Royal Family or a member of H.M. Government;
(e) If the name of the NPO includes the words ‘gaming,’ ‘lottery,’ ‘bank’ or ‘insurance’ or any other word calculated to suggest related activities; or
(f) If it is different from the name by which the entity was known if it was already established as a company, trust, foundation or partnership in the Cayman Islands, so it must maintain the name that it started out life with.
The controller of an NPO will be responsible for ensuring that proper financial statements are maintained in respect of all money received and spent, all sales and purchases of property, all sums of money raised through fundraising, all non-monetary transactions, assets and liabilities. The aim is for the NPO to be able to demonstrate at any time with reasonable accuracy, its financial position. There are financial penalties for controllers who fail to comply.
There are exemptions set out at s21 of the NPO Law. There were a number of concerns raised about the concept of an NPO law when it first came under consideration, one of those concerns being the unnecessary duplication of a regulatory regime already in place for some NPOs. Accordingly, the NPO law does not apply to:
(a) An NPO that has a government entity as its principal regulator;
(b) An NPO that is a trust, the trusteeship of which comprises or includes a trust company licenced under the Banks and Trust Companies Law, or a controlled subsidiary of that trust company; and
(c) Any other entity that the Cabinet exempts.
Importantly, notwithstanding these exemptions, the Registrar does retain the power to request documentation from exempt NPOs to evidence compliance with various requirements under the law that governs their operations. For trust companies this will of course mean complying with the Banks and Trust Companies Law as well as the Trusts Law.
Two concerns have been voiced about the NPO Law: one is the financial and administrative burden the NPO Law may place on smaller NPOs, and the other is whether the financial statements will be required to contain a level of detail which might stray into sensitive information, in particular, to whom charitable donations and gifts have been directed.
Whether those concerns are well founded remains to be seen. It is clear however that the NPO Law is designed to try and prevent the use of NPOs for money laundering or from diverting their funds to support international crime or terrorism. Hopefully this will help to prevent misuse of funds and fraud as well as ensure that the Cayman Islands are not troubled by the sort of scandals which have attached to certain charities in the U.K. and U.S. which were allegedly used as a front to fund terrorism.