Cayman funds legal and regulatory update

1 AIFMD
2 Laws passed to Strengthen Cayman's Financial Services Industry
3 Cayman Islands added to Italian Whitelist
4 Confidential Information Disclosure Law, 2016
5 Data Protection Bill, 2016
6 CRS Update
7 Limited Liability Companies Law, 2016
8 Reform of Intellectual Property Laws
9 Beneficial Ownership
Global Developments
10 Brexit
11 FCA issues consultation papers on MiFID II Implementation
12 Criminal offence for facilitating tax evasion
13 HMRC consults on tackling offshore tax evasion
14 IOSCO paper on good practices for investment funds

1.  AIFMD

1.1   In July 2016 the European Securities and Markets Authority (ESMA) issued further advice relating to extending the European Alternative Investment Fund Managers Directive (AIFMD) marketing passport to non-EU alternative investment fund managers and alternative investment funds established in non-EU third countries (Third Countries) that are assessed as equivalent.  Extension of the “passport” system to Third Countries will allow funds established in such countries to be marketed, and managers established in such countries to provide services, across the European Economic Area (EEA), rather than applying for permission on a country by country basis.  In this advice ESMA noted that there were no significant obstacles regarding competition and market disruption impeding the extension of the AIFMD passport to Cayman.  However, at that time ESMA said that it could not give definitive advice in relation to extending the passport to Cayman as one of the Third Countries until:

(a)   the final version of the proposed Cayman AIFMD-like opt-in regime is available;

(b)   a legislative amendment has been implemented that will give Cayman’s regulator, the Cayman Islands Monetary Authority (CIMA), the power to impose administrative fines for breaches of regulatory laws, regulations, and rules; and

(c)   CIMA’s proposal for implementation of a macro-prudential policy framework (which is expected to enhance its current systemic risk monitoring) is put in place.

1.2   On 16 December 2016 Cayman published The Mutual Funds (EU Connected Fund (Alternative Investment Fund Managers Directive) Regulations, 2016 and The Securities Investment Business (EU Connected Fund (Alternative Investment Fund Managers Directive) Regulations, 2016 (together the Cayman AIFMD Regulations).   The Cayman AIFMD Regulations are not yet in force as they require a separate commencement order, but this is anticipated in the second quarter of 2017.

1.3   The Cayman AIFMD Regulations set out the detailed provisions that the Cayman Islands are implementing to allow managers to opt in to reporting (as referred to at 1.1(a) above) consistent with AIFMD requirements.  These were initially facilitated by amendments to the Cayman Islands Mutual Funds Law and the Securities Investment Business Law in November 2016 introducing the concept of an EU Connected Fund and an EU Connected Manager, respectively. Under those amendment laws an EU Connected Fund is an open or closed ended investment fund that is either managed from, or marketed in, the EEA in accordance with AIFMD and an EU Connected Manager is a manger of an EU Connected Fund electing to be licensed as an EU Connected Manager.

1.4   The new regime will give funds and managers based in the Cayman Islands the ability to market to EU investors either using the existing national private placement regimes or using an AIFMD passport in the future when this is extended to Cayman funds by electing to apply an extra layer of regulation for EU Connected Funds and EU Connected Managers that is consistent with the relevant requirements of AIFMD and as set out in the Cayman AIFMD Regulations.

1.5   See our client briefing Brexit: Article 50 Triggered – Cayman's Response to AIFMD in the EU.

2   Laws passed to Strengthen Cayman’s Financial Services Industry

2.1   In October 2016 the Ministry of Financial Services of the Cayman Islands passed a number of laws to improve Cayman’s regulatory framework in support of the international financial system’s integrity.  These laws are intended to maintain the jurisdiction’s adherence to international standards, and prepare Cayman for the Caribbean Financial Action Task Force’s (CFATF) mutual evaluation process in the second half of 2017.  The CFATF is a regional body that is styled after the Financial Action Task Force (FATF). The FATF sets the global standard for legal, regulatory and operational measures against money laundering, terrorist financing and the proliferation of weapons of mass destruction – collectively and commonly referred to as ‘AML/CFT’.

2.2   Of note amongst these laws was the Monetary Authority (Amendment) Law, 2016 which was passed to address 1.1(b) above.  This gives CIMA the power to impose administrative fines on entities and individuals that are subject to Cayman’s regulatory laws, such as those imposed by CIMA and Cayman’s AML regulations.  These amendments are intended to grant similar powers to CIMA in this regard to those of onshore regulators.  This amendment law is not yet in force pending publication of further rules and guidance regarding the amount of such fines and the exercise of the powers, including the procedures for imposing fines, appeals, payment and enforcement and the application of any discretion.  The fines will be on a sliding scale of between CI$5,000 (approx. US$6,000) for minor breaches to CI$100,000 (approx. US$120,000) for individuals and CI$1,000,000 (approx. US$1,220,000) for entities for very serious breaches.

2.3   Also of note is the Proceeds of Crime Law (2016 Revision), which makes changes necessary for compliance with international standards relating to the prevention of money laundering, terrorist financing, and proliferation financing.  The main amendment is to the widen the activities that fall within the definition of ‘relevant financial business’ in The Proceeds of Crime Law, 2016 to conform with the activities considered to be relevant financial business in accordance with international standards.

3   Cayman Islands added to Italian Whitelist

In September 2016 the Cayman Islands was added to an updated version of the 'whitelist' published by the Italian government by Legislative Decree 239/1996, which lists those countries that Italy recognises as having adequate cooperation and tax information exchange arrangements with the Italian authorities.  This enables investment funds, among other entities, to be able to invest in certain types of Italian assets (including Italian debt securities and be paid gross of withholding tax).  In part this has been achieved through the implementation of a bilateral tax information exchange agreement with the Italian authorities and automatic exchange of information programmes under initiatives such as the OECD's Common Reporting Standard and US FATCA.

4   Confidential Information Disclosure Law, 2016

4.1   The Confidential Information Disclosure Law, 2016 came into effect on 22 July 2016.  This law replaced the Confidential Relationships (Preservation) Law.  Whilst much of the old law has been retained, a significant change in the new law is that criminal penalties for disclosures of confidential information have been removed.

4.2   The new law sets out when disclosure of confidential information is permitted and also includes a ‘whistle blower’ defence where confidential information is disclosed in good faith in relation to wrongdoing, a serious threat to the life, health or safety of a person or a serious threat to the environment.  The new law therefore reflects Cayman’s continued commitment to enhanced principles of transparency and co-operation, including for exchange of tax information and mutual legal assistance.

5   Data Protection Bill, 2016

We understand that that the Data Protection Bill, 2016 was passed at the recent sitting of the Legislative Assembly. The Data Protection Bill seeks to introduce in the Cayman Islands legislation on data protection, which, amongst other things, gives legal rights to individuals who have information stored about them.  A detailed client briefing on the Bill will be published once it has been enacted.

6   CRS Update

6.1   Following a brief period of industry consultation, the Cayman Islands’ Department of International Tax Cooperation published the Cayman Islands Tax Information Authority (International Tax Compliance)(Common Reporting Standard)(Amendment) Regulations, 2016 (CRS Regulations) on 19 December 2016.

6.2   The principal changes under the existing regulations are as follows:

(a)   although there is a distinction between the obligations of Reporting Financial Institutions (RFIs) and Non-Reporting Financial Institutions (NRFIs), all Cayman Islands Financial Institutions have obligations under the CRS Regulations.  NRFIs were initially required to register with the Cayman Tax Information Authority (TIA) by 30 April 2017 (of if later, by 30 April of the year in which they become a Financial Institution), although this date has been recently extended to 30 June 2017 by the TIA as part of a 'soft launch' of the CRS portal.  Unlike RFIs, NRFIs do not have reporting or due diligence obligations;

(b)   RFIs are required to file nil returns if they have no Reportable Accounts in respect of the previous calendar year;

(c)   RFIs are required to have written policies and procedures for the purposes of complying with their CRS obligations.

6.3   In addition, the CRS Regulations set out the penalties and enforcement powers of the TIA for breaches of the CRS Regulations.

6.4   Further amendments to the CRS regulations and an update to the Cayman AEOI Portal User Guide are expected in the second quarter of 2017.  The list of Reportable Jurisdictions was published by the TIA on 31 March 2017, to view the list click here

7   Limited Liability Companies Law, 2016

7.1   On 8 June 2016 the Limited Liability Companies Law, 2016 (LLC Law) was enacted and was commenced on 8 July 2016.  Fees and Regulations were published on 13 July, 2016. Ogier successfully registered the second LLC in the Cayman Islands on 13 July 2016.  Over 350 LLCs have now been registered in the Cayman Islands.

7.2   The LLC Law has created a new class of Cayman Islands entity, the limited liability company (LLC), available for use by clients seeking to establish fund and corporate structures in the Cayman Islands. The introduction of the LLC is a response to demand from the investment funds and financial services industry and will reinforce the position of the Cayman Islands as the leading jurisdiction for offshore investment funds and offshore corporate and SPV structures. An LLC may be an appropriate vehicle for a range of uses in investment funds, joint venture companies, private equity transactions, securitisations and other corporate transactions and international structures.

7.3   Under the LLC Law, in addition to forming and registering new LLCs, it is possible to convert existing exempted companies into LLCs and to migrate US LLCs to Cayman.  For more information regarding LLCs please see our client briefing Cayman Islands Limited Liability Companies.

8   Reform of Intellectual Property Laws

8.1   The Cayman Islands has taken significant steps in the latter half of 2016 to reform and modernise its intellectual property laws.

8.2   The Copyright (Cayman Islands) Order 2015 and the Copyright (Cayman Islands) (Amendment) Order, 2016 (collectively, the New Orders) came into effect in the Cayman Islands on 30 June 2016. These New Orders extend the copyright provisions contained in Part 1 of the UK Copyright, Designs and Patents Act 1988 (as amended and modernised from time to time) to the Cayman Islands, subject to certain exclusions and modifications.. Prior to 30 June 2016, copyright law in the Cayman Islands was based on the UK Copyright, Designs and Patents Act 1956. The extension of the UK Copyright, Designs and Patents Act 1988 into the Cayman Islands marked a significant improvement for those interested in creating, managing and enforcing a copyright portfolio in the Cayman Islands as the new law affords greater protection to more modern categories of work (i.e., computer databases and software).

8.3   The recently published Trade Marks Law, 2016 will, when it comes into effect, which is anticipated in 2017, provide for a new stand-alone Trade Mark System in the Cayman Islands that is not dependent on UK or EU registrations. This is a significant and important development for the Cayman Islands because it means that businesses (both local and foreign) whose interests are more centred in the Americas and the Caribbean will be able to protect their brands without having to first consider registration in the UK or EU.

8.4   The Patents and Trade Marks (Amendment) Law, 2016 which will come into effect upon the commencement of the Trade Marks Law, 2016, provides for anti-patent trolling laws to prevent abuse by Patent Trolls (otherwise called Patent Assertion Entities).  A Patent Troll is a person who holds and enforces patents in an aggressive and opportunistic manner, often with no intention of marketing or promoting the subject of the patent.  In other jurisdictions, particularly in the US, the activities of Patent Trolls have imposed considerable economic burdens on the creative pursuits of others involved in development and commercial exploitation of IP. The experience in those jurisdictions is that software patents are ‘particularly prone’ to such abuse.

8.5   Finally, the new Design Rights Registration Law, 2016 will, once commenced,  enable proprietors of UK and EU Registered Design Rights to automatically extend their Registered Design Rights into the Cayman Islands.  Presently there is no such ability in the Cayman Islands.

8.6   The result of these enhancements will be that the IP laws in the Cayman Islands will be fully modernised and able to serve a thriving, innovative, and entrepreneurial environment.

9   Beneficial Ownership

9.1   In April 2016 the Cayman Islands signed an agreement with the UK Government in relation to the sharing of beneficial ownership information between the law enforcement authorities of both jurisdictions.

9.2   After public consultation, legislation was presented to the Cayman Legislative Assembly and was approved, with amendment, in March 2017.  This will come into effect by 30 June 2017.

9.3   It is important to note that the legislation exempts a number of commonly-used vehicles, notably most types of investment funds.

9.4   Although this legislation facilitates an information exchange arrangement with the UK for beneficial ownership information, in line with other jurisdictions, it does not provide for a public or central register of beneficial ownership information in the Cayman Islands.  Instead it provides that companies which do not fall within an exemption must engage a licensed Cayman corporate services provider to maintain a non-public beneficial ownership register at the Company's registered office in Cayman.  This register will be accessible only by a designated Cayman governmental authority through a secure search platform.  This will allow designated Cayman Islands officials directly to obtain and provide details of beneficial ownership of companies incorporated in Cayman to the UK, as required by law and treaty.  The agreement is reciprocal and holds the UK to the same standards in cases where Cayman law enforcement officials may need information on companies incorporated in the UK.  See our client briefing: Cayman Islands enacts legislation on beneficial ownership information

Global Developments

10   Brexit

10.1   In June 2016 the UK held a referendum where voters indicated that the UK should leave the EU and on 29 March 2017 the UK government notified the European Council of its intention to withdraw from the EU in accordance with Article 50 of the Treaty on European Union.

10.2   Both the timetable for Brexit and the terms of the ongoing relationship between the UK and the EU, including any transitional arrangements during the immediate post-Brexit period, are uncertain as these remain to be negotiated and may be delayed due to the UK general election called for 8 June 2017. This will create a number of challenges for UK-based fund managers, which are discussed in our recent client briefing Brexit: Article 50 triggered – what next for UK-based fund managers.

10.3   However, although the Cayman Islands is an overseas territory of the UK, it is not part of the EU and is not directly affected by EU legislation.  We do not therefore anticipate any direct impact on the Cayman Islands as a result of Brexit. 

11   FCA issues consultation papers on MiFID II Implementation

11.1   In September 2016 the Financial Conduct Authority (FCA) published a third consultation paper on the implementation of MiFID II in the UK. MiFID II, which comes into effect on 3 January 2018, will aim to make financial markets more efficient, transparent and responsible by updating rules governing the way capital markets function, contributing to the reform of derivatives markets and strengthening transparency of trading. 

11.2   Key proposals of the consultation paper, which focuses on conduct of business issues to increase protections for retail investors, include:

(a)   strengthening inducement and research rules to drive better competition and ensure research is only produced and consumed where it adds value to investment decisions;

(b)   implementing requirements of full disclosure of costs and charges;

(c)   guidance on the responsibilities of providers for the fair treatment of customers; and

(d)   extending the requirement of telephone taping to financial advisers, with the aim of providing benefits to both firms and their clients in resolving disputes in a quick and cost effective manner.

11.3   The FCA has previously confirmed it would apply the same conduct rules to third country firms as it does to MiFID investment firms, to ensure they are treated no more favourably than branches of EEA firms. The conduct proposals in this consultation paper for MiFID investment firms should therefore also apply to branches of third-country firms.

11.4   Further consultation papers issued in December 2016 and March 2017 deal with a series of broadly technical Handbook changes not covered in the previous MiFID II consultations, including specialist conduct of business regimes, tied agents and SME growth markets.

12   Criminal offence for facilitating tax evasion

12.1   As considered in our client briefing Facilitation of tax evasion: A new corporate offence, HM Revenue & Customs published a number of Consultation Papers, including a proposal to introduce a new corporate criminal offence of failing to prevent the facilitation of tax evasion. As a result, the UK government has published draft legislation in the Criminal Finances Bill.

12.2   This strict liability offence will seek to extend criminality to corporations where they fail reasonably to prevent their representatives (for example, employees) from facilitating criminal tax evasion during the course of a business (the Proposed Offence). It aims to make it easier for corporations to be found liable for the acts of their representatives, removing some of the previous hurdles that have historically made such liability difficult to prove (for example, showing the requisite level of intent).

12.3   In much the same vein as the defence of 'adequate procedures' under the Bribery Act, there will be a defence to the Proposed Offence where a relevant body had in place reasonable prevention procedures or where it is unreasonable to expect such procedures.  The introduction of the Proposed Offence will require companies and partnerships caught within its scope to revisit and amend policies and procedures to ensure that they have reasonable prevention processes in place. The offence will have extra-territorial effect along the same lines as the Bribery Act 2010, meaning that it is potentially of great importance to offshore financial services businesses.

13   HMRC consults on tackling offshore tax evasion

13.1   In December 2016 HMRC issued a consultation paper entitled "Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures" containing a proposal to require businesses that create certain complex offshore arrangements to notify HMRC of the details of such arrangements, and to provide HMRC with a list of clients using them. Although it is recognised that many such structures are legitimate, the aim is to target those that could easily be used for tax evasion purposes. Businesses would be provided with a notification number that they will in turn provide to their clients to include on their self-assessment tax return/personal tax account. Those that fail to comply with these requirements would incur civil sanctions. The deadline for comments was 27 February 2017.

13.2   Similarly, in December 2016 HMRC published a response document to its consultation paper entitled “Tackling offshore tax evasion: A Requirement to Correct”. The document outlines the final design for the proposed new "Requirement to Correct" legislation that will require taxpayers with undeclared past UK tax liabilities in respect of offshore interests to correct that situation by disclosing the relevant information to HMRC. by 30 September 2018 or face tougher penalties. The draft legislation is contained in the Finance Bill 2017 and was published in March 2017

14   IOSCO paper on good practices for investment funds

14.1   In August 2016 the International Organisation of Securities Commissions (IOSCO) issued a consultation paper seeking feedback on a proposed set of good practices on the voluntary termination process for collective investment funds.  The report recognises the importance for investment funds to have termination procedures in place from an investor protection perspective because the decision to terminate can have a significant impact on investors in terms of cost and their ability to redeem their holdings in a timely manner. The deadline for responses has passed.

14.2   IOSCO also issued a report setting out common examples of good practice that can be applied to collective investment scheme fees and expenses, with the aim of promoting greater fairness and transparency.

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Disclaimer

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

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