There have been several regulatory developments in recent years, most of which have been brought in to meet the evolving global standards that provide greater investor transparency and inter-governmental and regulatory cooperation. The Cayman Islands has embraced these initiatives and has maintained a stable and robust legal and regulatory framework by legislating and regulating for such developments in a considered and practical manner to ensure global best practice standards are satisfied while also introducing new, and refining existing products to guarantee that the dynamic requirements of financial industry participants are met.
This year has been particularly noteworthy with regards to this evolution, with several regulatory and legal initiatives implemented in the Cayman Islands, including (i) consummation of a beneficial ownership register regime, (ii) the first reporting deadline for the OECD’s Standard for Automatic Exchange of Financial Account Information in Tax Matters – the Common Reporting Standard (CRS) and (iii) enactment of legislation for the establishment and registration of a new Cayman Islands vehicle: the limited liability partnership (an LLP), which further supplements the range of structuring options subsequent to the successful introduction of the Cayman Islands limited liability company vehicle in July 2016.
The Beneficial Ownership Register
From 1 July 2017, certain Cayman Islands companies and Cayman Islands limited liability companies (LLCs) are required to maintain a beneficial ownership register that records details of the individuals who ultimately own or control more than 25 per cent of the equity interests, voting rights or rights to appoint or remove a majority of the company directors, or LLC managers, together with details of certain intermediate holding companies through which such interests are held (the ‘Regime’).
The Regime codifies commitments agreed with the UK Government in 2016 by the Cayman Islands and other Crown dependencies and overseas territories on the exchange of beneficial ownership information to assist UK law enforcement agencies combat tax evasion and money laundering.
Each company or LLC that falls within the Regime’s ambit (an ‘In-Scope Entity’) is required to complete and maintain a beneficial ownership register at its Cayman Islands registered office with a licensed corporate service provider.
The register is not public and the information is only accessible by specified Cayman Islands competent authorities, principally on proper request made by UK law enforcement agencies.
The Regime does not apply directly to foreign companies or foreign limited liability companies that are registered in the Cayman Islands, nor does it apply directly to Cayman Islands exempted limited partnerships.
There are specified exceptions that exempt certain types of companies and LLCs from the requirement to maintain relevant registers, notably those that are listed or subject to direct or indirect regulatory oversight. Broadly, these exceptions will apply to companies or LLCs, either where they are, or where they are substantively owned by one or more other legal entities. The specified exemptions apply if the company is:
(a) listed on the Cayman Islands Stock Exchange or another approved stock exchange (e.g. NYSE, NASDAQ, London or Hong Kong Stock Exchanges);
(b) registered or licensed under one of the Cayman Islands regulatory laws (e.g. a hedge fund registered under the Mutual Funds Law (2015 Revision) or a management vehicle registered under the Securities Investment Business Law (2015 Revision));
(c) managed, arranged, administered, operated or promoted by certain ‘approved persons’ as a special purpose vehicle, private equity fund, collective investment scheme or investment fund or is a general partner of any such vehicle, fund or scheme. Such approved persons must either be (i) regulated, registered or licensed under a Cayman Islands regulatory law or regulated in an approved jurisdiction (e.g. investment advisors or managers registered with the Securities and Exchange Commission (SEC) or the Financial Services Register (FCA) would fall within this area), or (ii) listed on the Cayman Islands Stock Exchange or another approved stock exchange; or
(d) otherwise exempted by regulations.
Cayman Islands companies and LLCs are obliged to take proactive steps to determine whether they are In-Scope Entities or whether they fall outside the scope of the Regime. The directors or managers (as applicable) of companies or LLCs which are outside the scope of the Regime should document such status as a matter of good corporate governance.
An In-Scope Entity, once it has determined its status, needs to commence taking various steps set out in the Regime to identify, obtain and hold information about their beneficial owners and any relevant intermediate legal entities.
The Common Reporting Standard
This year marks the first year in which all Cayman Islands financial institutions are required to register and report for Common Reporting Standard (CRS) purposes. By the time of publication, the extended registration (31 July 2017) and reporting (31 August 2017) deadlines will have passed.
There are, however, several key points of a general nature worth noting, including the below:
(a) The CRS is broader in scope than FATCA.
(b) Notably, a number of the non-reporting exemptions available under FATCA are not available under CRS, so certain investment entities generally out of scope for FATCA (such as Cayman Islands domiciled investment manager / general partner entities, or sponsored investment entities) will need to register with, and may need to report to, the Cayman Islands Department for International Tax Cooperation (DITC).
(c) There is a requirement for all Cayman Islands investment entities with reporting obligations to have appropriate CRS written policies and procedures in place. The CRS Guidance Notes provide some assistance on how Cayman Islands investment entities should document their policies and procedures. An investment entity, generally, can look to rely on policies and procedures of a third party service provider to whom responsibility for CRS obligations has been delegated although there are additional compliance measures which should be taken to comply with CRS guidance notes and on which advice should be sought in a timely manner.
(d) The DITC published revised forms of self-certification, which include additional fields for widely held trust type collective investment vehicles and pension trusts in CRS non-participating countries (such as the United States). Sponsors should look to update those forms which are typically incorporated into subscription documents.
(e) It is a strict liability offence under the CRS regulations for a Cayman Islands investment entity to contravene any of its obligations under CRS regulations. It is important that directors, officers, managers and other relevant persons ensure that CRS obligations are complied with to avoid potential criminal liability.
Limited Liability Partnerships
Legislation allowing for the establishment and registration of LLPs came into effect in June 2017. At the time of writing, it is anticipated that the Registrar of LLPs in the Cayman Islands will start accepting applications to register LLPs in late 2017.
An LLP combines the flexible features of a general partnership with the benefit of a separate legal personality and affords limited liability status to all its partners.
As such, an LLP is likely to become the preferred manner by which professional firms operating in the Cayman Islands structure their businesses and the legislation specifies an express regime by which a Cayman Islands general partnership may convert into and continue with the benefits afforded to an LLP.
An LLP’s features and flexibility, however, will also provide an additional structuring option for other purposes, including in the financial services industry as, by way of example, a general partner or management vehicle or as a holding or fund of funds partnership.
An LLP is distinct and different from other Cayman Islands partnership vehicles; notably the general partnership and exempted limited partnership variants. Some of an LLP’s key features and obligations are as follows:
(a) An LLP is a separate legal person distinct from its partners and may contract, hold assets and sue and be sued in its own name. An LLP is not a body corporate and, in this respect, differs from a UK LLP that structurally is more akin to a corporate rather than partnership vehicle;
(b) An LLP affords limited liability to all its partners. The LLP, rather than the partners, is liable for such LLP’s debts and losses. A partner may be liable for his or her own negligent acts or omissions where such partner has assumed an express duty of care and acted in breach of that duty (i.e.in the context of providing professional services advice).
(c) An LLP must be established by at least two persons who may carry on a business in common for any lawful purpose. Any person, including natural persons, a body corporate or other partnerships, may be a partner in an LLP. As there is no requirement for an LLP to undertake its business ‘with a view to profit’, an LLP may be a helpful structuring option for not-for-profit organisations and other social enterprises.
(d) The registration of an LLP is simple and straight-forward and involves filing a registration statement with the Registrar of LLPs in the Cayman Islands (similar to the filing required when registering a Cayman Islands exempted limited partnership) and payment of the appropriate fee.
(e) Partners may agree among themselves the internal workings and management arrangements of an LLP, which may be recorded in a partnership agreement (which is not filed with the Cayman Islands Government). Partners are agents of the LLP only and, unlike a general partnership, the partners are not agents of each other.
(f) Each partner’s interest represents its rights (including economic, profit sharing and voting rights) and obligations as set out in the partnership agreement or, otherwise, in the LLP Law.
(g) A partner my assign or transfer a partnership interest and such assignee or transferee may, if permitted by the partnership agreement or by unanimous consent of other partners, be admitted as a partner with the attendant rights, benefits and obligations of such assigned or transferred interest.
(h) The LLP Law preserves certain rules of equity and common law, providing a foundation and guide to interpretation which the Cayman Islands courts may draw upon, to the extent necessary; and (i) Consistent with the Cayman Islands’ OECD commitments, an LLP will be required to maintain certain statutory registers, notably a register of partners and register of mortgages. The name and address of each partner must be filed with the Registrar of LLPs in the Cayman Islands.
Each of these recent initiatives is indicative of the Cayman Islands’ ongoing commitment, both at Government and at an industry level, to address and adopt evolving global initiatives and to continue to develop new vehicles responsive to the needs of stakeholders. The Cayman Islands seeks to thoughtfully meet transparency and cooperation standards while looking to provide certainty and mitigate implementation costs to the financial services industry. In the midst of an ocean of evolving regulatory developments, Cayman’s light is destined to continue to burn brightly.