Cayman Islands Funds Update: Q1 2020Publication - 22/04/2020

Last updated 9 June 2020

A number of laws and regulations have been enacted over the past quarter which impact, orwill impact, Cayman Islands investment funds. This briefing provides a summary of thesedevelopments, and is intended as a handy reference guide with respect to the recent changesand updates. 

The Key Takeaways

Private FundsLaw, 2020

All unregistered closed-ended funds that fall within thedefinition of "private fund" must be registered with theCayman Islands Monetary Authority (CIMA) by 7 August2020.

Mutual Funds(Amendment)Law, 2020

All unregistered funds that are currently operating underthe exemption in section 4(4) of the Mutual Funds Law(Revised) must be registered with CIMA by 7 August 2020.

Anti-MoneyLaunderingRegulations (2020Revision)

From 5 August 2020 funds will no longer be able to rely onthe list of countries maintained by the Anti-MoneyLaundering Steering Group for anti-money launderingpurposes, and instead must conduct a separatecountry-risk assessment. Funds should check their / theiradministrator's policies to ensure compliance and ensurethey have a robust and well documented risk assessmentsystem in place.

Beneficialownershipthreshold for AMLpurposes

For the purposes of AML/KYC checks, beneficial ownersmust be identified using a 10% threshold, even if anadministrator or third-party intermediary conducting thechecks is based in a different jurisdiction which permits ahigher threshold. Funds should check their / theiradministrator's policies to ensure compliance. This shouldinclude a review of all Eligible Introducer and Nomineeletters which may have been relied upon in the past.

FATCA / CRSfilings

The deadline for filing reports in respect of the 2019reporting period for FATCA and CRS is 16 November2020. For CRS, the Cayman Islands Tax InformationAuthority has published a new form which will need to befiled annually – the deadline for this year is 31 December2020.

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AEOI Portal

Reporting Financial Institutions can now appoint corporateentities as their Principal Point of Contact and changenotifier. The AEOI Portal is currently offline and it is notpossible to make new notifications, file reports orremediations or deregister entities. A new portal isexpected to be launched by end of June 2020.

BeneficialOwnershipRegisters

From 15 May 2020, all in-scope entities will need to includeall holders of 25% or more (rather than in excess of 25%) ofthe shares and/or voting rights on the beneficial ownershipregister of the entity. In-scope entities are advised to reviewtheir filings and to get in touch with their registered office ifthere are any amendments required.

Regulatoryframework forvirtual assetservices

The introduction of the Virtual Asset (Service Providers)Law, 2020 and other legislative changes will, oncecommenced, provide a regulatory framework for the issueand transfer of digital assets.

Filing Extensionsother COVID-19related measures

A number of regulatory filing deadlines have been extendedin light of the COVID-19 restrictions including annual returnand economic substance notifications. In addition, allCayman government agencies, including ROC and CIMA,have implemented their business continuity plans and,secured and fully tested, virtual and operations platformshave been put in place.

 

New regulation for unregulated funds

On 7 February 2020, the Cayman Islands Government enacted the Private Funds Law, 2020(PF Law) and the Mutual Funds (Amendment) Law, 2020 (MFL Amendment Law) which is anamendment to the existing Mutual Funds Law (2020 Revision) (MF Law). This legislation is aresult of certain European Union and other international recommendations, and has beendeveloped to align the investment fund regulatory regime of the Cayman Islands with otherjurisdictions. Both the PF Law and the MFL Amendment Law include a six month transitionperiod which ends on 7 August 2020.

Private Funds Law

The PF Law applies to any Cayman Islands closed-ended fund that falls within the definition ofa "private fund", and provides for its registration with, and its regulation by, CIMA. Privatefunds covered by the legislation must be registered by 7 August 2020. This applies both toprivate funds which were carrying on business 7 February 2020 and private funds whichcommence business within the six month transitional period from 7 February 2020 to 7 August2020. Private funds that launch on or after 7 August 2020 will need to comply with theregistration timing requirements contained in the PF Law.

Key points of the PF Law include a requirement that audited financial statements, signed off

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by a Cayman Islands auditor, must be submitted to CIMA within six months of a private fund'sfinancial year end.  Further, the legislation sets out valuation, custody, cash monitoring andsecurities identification requirements, designed to provide transparency and proper paperingof a private fund's core operations and processes. In addition CIMA has published Rules on theSegregation of Assets and the Contents of Marketing Materials.

"Mutual funds" such as open-ended hedge funds are not caught by the PF Law and continueto be regulated by the MF Law.

Mutual Funds (Amendment) Law

The MFL Amendment Law applies to open-ended funds carrying on business in or from theCayman Islands that were previously exempt from registration with, and regulation by, CIMAunder section 4(4) of the MF Law (s4(4) Funds) by virtue of the fact that the equity interestsof such a s4(4) Fund are held by not more than fifteen investors, a majority of whom arecapable of appointing or removing the operator of the fund.

Such s4(4) Funds will be required to register under the MF Law; we can advise on the mostsuitable basis for registration under the MF Law based on the particular facts of a fund'soffering. Once registered such Funds will be subject to the oversight of CIMA and the ongoingrequirements of a registered fund in the Cayman Islands: see our Briefing Note Operating aCayman Islands Open-Ended Fund. S4(4) Funds in existence on 7 February 2020 are requiredto register by 7 August 2020 while any new s4(4) Funds will be required to register at launch.

For more information on this new legislation, please see our client briefing New registrationrequirements for unregulated investment funds.

In addition CIMA has published Rules on the Segregation of Assets and the Contents ofMarketing Materials relating to regulated mutual funds. New funds and existing regulatedfunds should review their offering documents to ensure compliance with these new Rules.

Anti-Money Laundering (Amendment) Regulations, 2020

Country risk assessments

Amendments to the Anti-Money Laundering Regulations (2020 Revision) were published on 5February 2020 (AML Amended Regulations) with a transition period of 6 months. Theprincipal amendment was in relation to the list of countries deemed to have an equivalentAML regime to the Cayman Islands (Equivalent Jurisdictions List) as currently published bythe Anti-Money Laundering Steering Group. From 5 August 2020, the Equivalent JurisdictionsList will cease to be included in the AML Amended Regulations, and instead any personcarrying out relevant financial business will be required to carry out their own risk assessmentof every country or geographic area in which their customer(s) or applicant(s) for businessreside or operate. 

The effect of this is that funds will no longer be able to rely by default on the EquivalentJurisdictions List for the purposes of simplified due diligence or other actions involving lower riskof money laundering or terrorist financing, as permitted under the AML Amended Regulations.Funds, or the service providers upon whom the Funds rely for the purposes of anti-moneylaundering compliance, will instead have to ensure that they have their own list of relevantjurisdictions which have been assessed and documented as having a "low degree of risk ofmoney laundering and terrorist financing" (which are likely to be broadly similar to the existingEquivalent Jurisdictions List). 

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In practice this will mean working with the fund's administrator and other anti-moneylaundering service providers (where appointed) to identify if any changes are required inrespect of the fund's anti-money laundering compliance framework. As a minimum, the fund'santi-money laundering compliance officers will need to ensure that a risk assessment has beencompleted by the administrator (or by the fund itself, if an administrator or similar serviceprovider is not appointed) of the relevant jurisdictions where customers reside or operate. TheAML Amended Regulations set out the criteria which should be taken into account whenmaking a risk assessment of a country or geographic area. Additional guidance can be foundin the Guidance Notes on the Prevention and Detection of Money Laundering and TerroristFinancing in the Cayman Islands (as amended) ( Guidance Notes). It may also be necessaryto update the fund's offering documents and subscription documents to reflect the removal ofthe Equivalent Jurisdictions List and, where applicable, an updated list of risk-assessedcountries. 

Ongoing monitoring

Recent amendments to the Guidance Notes published by CIMA on 5 February 2020 provided adetailed framework for the ongoing monitoring of business relationships. Ongoing monitoringis a key component of anti-money laundering systems and processes that a fund must have inplace in accordance with the AML Amended Regulations. In particular, CIMA has clarified thatongoing monitoring must be transaction driven rather than customer driven.  The two centralelements of ongoing monitoring are: (i) ensuring that documents, data or informationcollected under the customer due diligence process remains current and relevant to thecustomer, and (ii) reviewing the transactions conducted to ensure that they are consistentwith the fund's knowledge of the customer. As a practical measure funds should review their /their administrators' policies to ensure that they are compliant with all of the requirements inrespect of ongoing monitoring.

Eligible Introducers

The AML Amended Regulations now require that anti-money laundering comfort lettersprovided by third-party introducers of business (Eligible Introducers) must state, in additionto the name of customer being introduced, the name of the beneficial owner(s) (see furtheron this below) of the customer. Funds should review their Eligible Introducer comfort letters toensure that the additional information is included or otherwise provided to the fund uponintroduction.

Beneficial Ownership Threshold

A number of Cayman Islands funds rely on service providers outside of the Cayman Islands foranti-money laundering compliance procedures. It is important that where the service providerimplements AML procedures in accordance with the anti-money laundering regime of adifferent jurisdiction, the fund has properly considered and documented the risks associatedwith such reliance. The fund must keep a clear record of how it has become comfortable withsuch reliance, including by taking into account the aforementioned country risk assessmentcriteria. CIMA had previously indicated that when applying the anti-money laundering regimeof a different jurisdiction, it was not always necessary to undertake a granular assessment ofthe differences between specific requirements of such regime and the Cayman Islands regime. 

However, under the AML Amended Regulations and Guidance Notes, CIMA requires that forthe purposes of identifying the beneficial owners of customers or applicants for business, a 10%threshold (Cayman Standard) must be applied, even if an overseas service provider is subjectto a different anti-money laundering regime which may permit a higher threshold. 

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While there is no specific remediation deadline in this respect, in practice this will mean thatfunds and their anti-money laundering officers should, in due course, work with overseasservice providers to ensure that the Cayman Standard is applied in all cases when carrying outidentification and verification of beneficial owners. It is advisable to review nominee andEligible Introducer arrangements to ensure that the nominees and/or Eligible Introducers arealso applying the Cayman Standard in respect of KYC carried out on underlying clients.

Due to these changes it is becoming more common to see fund administrators (whetherbased in the Cayman Islands or not) contractually agree to implement the Cayman AMLRegime rather than implement a foreign regime which needs to be subject to a detailed 'gapanalysis' with any deficiencies remedied before a fund can rely on the administrator's policy.

FATCA/CRS reporting date extension

The Cayman Islands Department for International Tax Cooperation (DITC) has formallyextended the reporting date for Cayman financial institutions (CFIs) to complete reportingobligations under the Foreign Account Tax Compliance Act (FATCA) and the CommonReporting Standard (CRS) from 31 May to 31 July of each year. However in recent notificationsthe DITC has advised that the reporting deadlines for the 2019 reporting periods for bothFATCA returns and CRS returns are extended to 16 November 2020.

The DITC is developing a new online Portal (DITC Portal) to replace the current AEOI portal(which is currently offline pending the launch of the new DITC Portal) for notification andreporting purposes, which will also feature bulk reporting and bulk user changes in order tostreamline and improve the overall experience for users. It is expected that the DITC Portal willlaunch towards the end of June 2020. The DITC Portal will also incorporate reporting for AEOIas well as other regulatory frameworks such as Economic Substance and Country-by-CountryReporting later in the year.

Amendments to FATCA and CRS Regulations also now permit CFIs to designate either legalentities or natural persons as the principal point of contact and change notification person onthe DITC Portal. This will be beneficial to CFIs who wish to appoint corporate service providersor other institutional users to provide these services as it will avoid the need to make a changenotification where there is a change of personnel in these roles. The DITC has issuedInstitutional User Guidance which expands on the amendments. Technical guidance on how tomake these changes, including how to utilise the bulk user change functionality, will bepublished in advance of the launch of the upgraded DITC Portal.

The list of CRS Reportable Jurisdictions for the Cayman Islands has also been updated toinclude six additional countries; Ecuador, Kazakhstan, Maldives, Nigeria, Oman and Peru.These countries are Reportable Jurisdictions for the 2019 reporting year.

On 15 April 2020, the DITC provided industry with advance release of a new CRS ComplianceForm. The 2020 deadline for submission of this form is 31 December 2020, and in the followingyears the deadline is expected to be 15 September of each year. The form is required to besubmitted via the DITC Portal. The DITC has published Notes for Users on the CRS ComplianceForm, on its website, which provide a high-level overview of the requirements. A detailed userguide will be published in due course. 

Amendments to the Beneficial Ownership regime

Amendments to the Companies Law (Revised) and the Limited Liability Companies Law

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Amendments to the Companies Law (Revised) and the Limited Liability Companies Law(Revised) were published in February 2020 which have clarified the role of the corporateservices provider ( CSP), where one has been engaged, to maintain the beneficial ownershipregister on behalf of an entity. Further, the amendments have limited the search of thebeneficial ownership register that a competent authority may perform to only verifying theaccuracy of the information provided by the entity, while providing such competent authoritywith the power to make a request to the CSP for further information and consequentialpenalties for non-compliance.

A further amendment which comes into effect on 15 May 2020 adjusts the definition of'beneficial owner' such that it will include all holders of 25% or more of the shares and/orvoting rights of a company rather than in excess of 25% of such shares or voting rights. Asimilar threshold will also come into effect on such date for limited liability companies.Corporate entities should consider their reporting obligations under the legislation in the lightof this change, and should contact their CSP to ensure compliance if necessary.

From 20 April 2020, all beneficial ownership filings will be made by a CSP directly throughROC's electronic filing system (CAPS).

Virtual assets legislative framework

In May 2020, the government passed a series of legislative amendments and introduced theVirtual Asset (Service Providers) Law, 2020 as the central piece of legislation in the newregulatory framework dealing with virtual assets. Virtual assets are defined as a representationof value that can be digitally traded or transferred and used for payment or investmentpurposes, such as Bitcoin or Ethereum. Virtual asset services include the exchange, safekeepingand issuance of virtual assets and virtual asset service providers will be required to be licencedwith CIMA.

As part of the legislative changes, the definition of 'equity interest' under the Mutual FundsLaw has been amended to include "any other representation of an interest". This amendmentis broad enough to capture digital tokens or other virtual assets. Therefore, open-ended fundsissuing redeemable tokens instead of shares or other equity interests are now covered by theMutual Funds Law and will need to be registered or licensed under that law. The SecuritiesInvestment Business Law (SIB Law) has also been amended to extend to virtual assets. Inparticular, the definition of "securities" now includes virtual assets which can be sold, traded orexchanged immediately or at any time in the future that (a) represent or can be convertedinto any of the securities listed in the SIB Law or (b) represent a derivative of any of thesecurities listed in the SIB Law. Therefore, persons dealing in, arranging deals in, managing oradvising on virtual assets that are securities may also be required to register or be licensedunder the SIB Law. 

The legislation is, however,  not yet in force pending the passing of a commencement order.

Changes to Cayman's Economic Substance legislation and filingextension

An amendment to Cayman's economic substance legislation (ES Law) was enacted on 12February 2020 (ES Amendment) which requires all Cayman companies (including limitedliability companies) to file an economic substance notification (ES Notification) with the ROCfor onward transmission to the Cayman Tax Information Authority (TIA) prior to the filing ofthe company's annual return. The ES notification must contain confirmation of certainprescribed information as to whether the entity is exempt from the ES law and if not whether it

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prescribed information as to whether the entity is exempt from the ES law and if not whether itis carrying on any Relevant Activity (as defined in the ES Law). Although the ES Notificationremains a prerequisite in the case of corporate entities being able to file their annual return,the filing date for annual returns, and hence ES Notifications, has been extended to 30 June2020 as a COVID-19 related concession referred to below.

Under the ES Amendment a Cayman entity that is tax resident outside of Cayman mustprovide the name and address of its immediate parent, ultimate parent and ultimatebeneficial owner of the entity. An immediate parent means a person that owns directlytwenty-five percent or more of the ownership interest or voting rights in the entity. Details ofthe jurisdiction in which the entity is claiming to be tax resident, and any supportinginformation, are also required.

The ES Amendment also makes provision for the TIA to share information provided to it underthe ES Laws with the competent authority in the jurisdiction in which an entity is tax residentand/or incorporated as well as to the competent authority of the jurisdiction of such entity'sultimate beneficial owner.

In relation to an entity's compliance with the ES Law and in particular its ability to satisfy theeconomic substance test (ES Test) under that law, the TIA has stated that it is aware thatCOVID-19 may impact travel in 2020, which in turn may affect the ability of some entities tohold their board of directors meetings in Cayman during the year. However, the 'directed andmanaged' requirement is only one element of the ES Test as the entity is also required toconduct core income generating activities in relation to any relevant activities specified in theES Law. Where the board of directors meeting is required to be held virtually during this periodof uncertainty, the TIA will take that into consideration on a case-by-case basis whendetermining whether an entity has passed or failed the ES Test in its reporting which will be duein 2021. This should not affect the reporting requirements due this year which are for the 2019year-end.

Register of Members

The Companies (Amendment) Law 2019, the Limited Liability Companies (Amendment) Law,2019 and the Limited Liability Partnerships Law (Amendment) Law, 2019 each amend theirrespective principal laws to enact changes to the filing, maintenance and availability ofinformation in respect of such Cayman entities. A particularly key change was that from 7February 2020 (for all entities incorporated prior to 8 August 2019) and from 7 November 2019for all entities incorporated after 8 August 2019, it is necessary to record voting rights inrespect of each shareholder, in the register of members of the entity. For further informationplease see our client briefing Enhanced Information for Cayman Entities.

The Companies (Amendment)(No. 2) Law, 2020 and the Limited Liability Companies(Amendment)(No. 2 ) Law, 2020 passed in May 2020 will, once brought into effect by acommencement order, require the Registrar of Companies to maintain a register for everycompany and limited liability company containing certain prescribed information such asname, details of share capital (where relevant), initial subscribers, nature of business and dateof financial year end. The registers will be open for inspection on payment of a small fee.

Temporary filing extensions and other concessions

Following instructions received from the Cayman Islands Government regarding the ongoingthreat from the COVID-19 pandemic, all Cayman government agencies, including ROC andCIMA, have implemented their business continuity plans and secured and fully tested virtual

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CIMA, have implemented their business continuity plans and secured and fully tested virtualand operations platforms have been put in place. Such agencies are confident that there willbe minimal disruptions to the services provided to their licensees, customers and industrystakeholders. In addition to those concessions mentioned above, there have, been a number ofother filing extensions, concessions and operational changes which have been granted,recognising the disruption that the financial services industry may be experiencing in theirregular operations and therefore the difficulties that clients may have in fulfilling suchobligations in the wake of the pandemic.

Filing extensions, including Annual Return and ES Notification extension

ROC and the Cayman TIA have extended the deadline for entities to complete their annualreturn and ES Notifications until 30 June 2020. In the case of annual returns this includes allexempted limited partnerships as well as companies, limited liability companies andfoundation companies and includes deferral of the associated annual fees in addition to theannual return filing. 

In addition, persons have until 31 May 2020 to submit late filings, without incurring penalties,for director and officer changes, and for registered offices changes and amendedmemorandum and articles of association (including increases in share capital). Theseextensions to file pertain to changes which occurred on or after 1 March 2020.

CIMA Moves to Complete Mandatory Remote Working

CIMA is now operating under a mandatory remote work protocol.  Submission of all documentsincluding financial statement filings, submission of new licensee applications and legaldocuments should be by email directly to the relevant division or via the use of CIMA'sRegulatory Enhanced Electronic Forms Submission ( REEFS) portal. CIMA will accept affidavitsor other documents that have been notarised/certified via the DocuSign process or utilisingaudio-video technology. In relation to new fund submissions, in lieu of a notarised affidavit,CIMA will accept written confirmation from an operator of a fund, applying to beregistered/licensed pursuant to the MF Law or PF Law, authorising the registered office orother service provider to file the fund’s registration/application on behalf of the operator. CIMAwill also accept uncertified resolutions that confirm the de-registration of cancellation of afund.

Although there have been extensions of certain CIMA filing deadlines, these are limited to onemonth extensions and currently do not apply to the funds sector. 

Digital contracts and electronic signatures

In light of the COVID-19 pandemic and with many people around the world working remotely,we have received a number of queries from clients who are increasingly considering the use ofdigital contracts and electronic signatures. To help minimise disruptions and ensure that yourbusiness continues to run smoothly over the coming weeks, please see below a summary of thelegal position in the Cayman Islands and some practical advice on implementation.

The enforceability of digital contracts and electronic signatures is governed by the ElectronicTransactions Law (2003 Revision) (ETL). In summary:

(a) communication of a contract through electronic means, including acceptance byway of a reliable electronic signature, is permitted under Cayman law, provided thatsuch contract meets other requirements of a legal contract generally; and

(b) electronic signatures are acceptable and enforceable under Cayman law provided

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that they meet the "reliability" criteria set out in the ETL.

For additional detail on the signing of documents electronically in Cayman, please see ourbriefing Use of digital contracts and electronic signatures in the Cayman Islands.

Essential considerations for Cayman funds in challenging times

The current market conditions have raised a number of issues for Cayman funds, for theirdirectors and for their fund managers, particularly around their operational procedures,liquidity issues and possible termination and communication and reporting considerations. 

Please see our briefing on the Essential considerations for Cayman funds in challenging times. 

How can Ogier assist?

As part of Ogier's commitment to innovation as a core pillar of our service delivery, Ogier hasinvested heavily in technology over the past few years to enhance the way we do business anddeliver our services to clients. This places us in a position of strength in these challenging times.

Please contact your usual Ogier attorney or any of the contacts listed here for furtherinformation or advice concerning the above changes.

About Ogier

Ogier provides practical advice on BVI, Cayman Islands, Guernsey, Jersey and Luxembourg lawthrough its global network of offices. Ours is the only firm to advise on these five laws. Weregularly win awards for the quality of our client service, our work and our people.

Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. Theinformation and expressions of opinion which it contains are not intended to be acomprehensive study or to provide legal advice and should not be treated as a substitute forspecific advice concerning individual situations.

Regulatory information can be found at www.ogier.com

ogier.com

Joanne Huckle

Justin Savage

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Meet the Authors

Key Contacts

Cayman Islands

Joanne HucklePartnerCayman Islandsjoanne.huckle@ogier.com T+1 345 815 1895 M+1 345 326 3071

Justin SavagePartnerCayman Islandsjustin.savage@ogier.com T+1 345 815 1816 M+1 345 324 0880

James BergstromPartnerCayman Islandsjames.bergstrom@ogier.com T+1 345 815 1855 M+1 345 516 9077

Angus DavisonPartnerCayman Islandsangus.davison@ogier.com T+1 345 815 1788 M+1 345 525 1110

Bradley KrugerPartnerCayman Islandsbradley.kruger@ogier.com T+1 345 815 1877 M+1 345 516 2198

Nick RogersPartnerCayman Islandsnick.rogers@ogier.com T+1 345 815 1844 M+1 345 925 8833

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Giorgio Subiotto

Kate Hodson 凯特 ·赫臣

Nicholas Plowman 包乐文

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Hong Kong

Related services

Investment FundsRegulatory

Giorgio SubiottoPartnerCayman Islandsgiorgio.subiotto@ogier.com T+1 345 815 1872 M+1 345 516 9071

Kate Hodson 凯特 ·赫臣Partner and Head of ESG (Legal)合伙人Hong Kongkate.hodson@ogier.com T+852 3656 6049 M+852 9199 5699

Nicholas Plowman 包乐文Partner 合伙人Hong Kongnicholas.plowman@ogier.com T+852 3656 6014 M+852 6390 5664

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