Transformation of the way in which investment managers and advisors are regulated in the Cayman Islands

On 19 June 2019 the Cayman Islands government brought into force its anticipated changes to the Securities Investment Business Law (SIBL).

The changes affect Cayman Islands investment managers and advisors registered as excluded persons under SIBL in the following ways:

• New AML/CFT filings by 15 August 2019: all existing excluded persons must complete 2 detailed anti-money laundering and countering financing of terrorism (AML/CFT) reporting forms and file them (via their registered office provider in the Cayman Islands) on the Cayman Islands Monetary Authority’s (CIMA) online REEFS system by 15 August 2019.
• New registered person regime: replacing the excluded person regime with a new regulated category of registered person.
• Re-registration by 15 January 2020: existing excluded persons must re-register as a registered person by 15 January 2020 if they wish to continue carrying on securities investment business.
• Minimum of two individual directors or one corporate director: each registered person structured as a company must have at least two individuals as directors or one corporate director and there are equivalent requirements for registered persons that are not companies.
• Fit and Proper Tests: an applicant for registration must satisfy CIMA that the applicant’s shareholders, directors and senior officers are fit and proper persons.
• Implementing economic substance in the Cayman Islands: Cayman Islands investment managers and advisors carrying on fund management business will likely be required to implement economic substance in the Cayman Islands upon re-registration.

All excluded persons must take action as a result of these recent changes as further outlined in this alert.

1. AML/CFT filings required by all excluded persons by 15 August 2019

What AML/CFT information has to be provided by excluded persons by 15 August 2019?

Excluded persons must provide detailed information to CIMA about:

• its organisational structure, its principal place of business and whether it has any presence in the Cayman Islands;
• client composition, location and level of sophistication of its clients;
• the distribution channels that it utilises;
• products and services that it offers and jurisdictions where they are offered;
• its AML/CFT program including details about its corporate governance, policies and procedures, risk assessment process and audits;
• its AML/CFT training, controls, record keeping, ongoing monitoring, transaction monitoring, staffing, use of eligible introducers and sanctions screening methods; and
• AML officers and directors and any related politically exposed persons.

How is the AML/CFT information filed?

The detailed information must be submitted by us by uploading an AML/CFT risk control form and an AML inherent risk form, received from you, on CIMA’s online regulatory filing portal “REEFS” by 15 August 2019.

We will be contacting all those excluded persons for which we provide registered office services in relation to the completion of these forms. CIMA has published guidance notes on how to complete the forms, which are available on its website.

What are the consequences of not making the filing by the deadline?

An excluded person that does not make the AML/CFT filings by 15 August 2019 will not be able to re-register with CIMA under the new regime, until it has made these AML/CFT filings.

The excluded person may also be de-registered if it fails to make the filing by the deadline.

I am an excluded person, what are the next steps I need to take?

An excluded person should now review the forms and start to compile the information required. As access to the REEFS system is only available to Cayman Islands law firms and registered office providers excluded persons need to compile the information required and then provide it to us to complete the filings by the deadline.

Harneys’ Compliance Consultancy team

Harneys’ Fiduciary has a dedicated compliance consultancy team that can assist with AML/CFT audits and risk assessments. If you would like help meeting SIBL excluded persons regulatory requirements please contact us through harneysfiduciary.com.

2. New registered person regime

Who has to re-register as a registered person?

Any entity that is currently registered with CIMA as an excluded person must re-register with CIMA by 15 January 2020.

What are the requirements for re-registration?

Re-registration is subject to the excluded person applicant being in good standing with CIMA and being controlled by shareholders, directors and senior officers who are deemed by CIMA to be fit and proper persons.

The applicant must also have in place at least the minimum directorship requirements and the AML/CFT reporting forms must have been filed, as noted above.

Under this new regime CIMA will assess each application on its merits.

What are the minimum director requirements?

A registered person that is structured as a company must have a minimum of two individual persons as directors, or one corporate director. The directors must be in good standing and must be registered or licensed under the Directors Registration and Licensing Law.

This alert focuses on those registered persons that are structured as companies. Equivalent provisions apply for vehicles that are not companies and your usual Harneys contact is able to advise you of those provisions.

How do I re-register my excluded person as a registered person?

Re-registration will be made by way of submission of a form on REEFS, which is expected to be available shortly.

As noted above, access to the REEFS system is only available to Cayman Islands law firms and registered office providers, so excluded persons will need to liaise with us to compile and file your application to re-register.

Does CIMA have the power to reject my application for re-registration?

Yes, CIMA has discretion to approve or deny an application for registration as a registered person, unlike the prior registration process that existed for excluded persons.

What happens if I do not make the necessary application by the deadline?

Any excluded person that has not re-registered with CIMA by the deadline of 15 January 2020 may be de-registered.

What are the ongoing requirements as a registered person?

Under the new registered person regime further ongoing compliance obligations apply to registered persons and CIMA has a number of supervisory and enforcement powers over registered persons. There are significant penalties for failure to comply with any direction from CIMA.

As an excluded person, what do I do next?

An excluded person should review the SIBL re-registration and ongoing requirements and its ability to meet them, including any possible economic substance requirements set out below. Once the re-registration forms are released the excluded person should then prepare to re-register by the deadline of 15 January 2020.

3. Economic substance and Cayman Islands investment managers and advisors

How does the economic substance legislation now apply to Cayman Island investment managers and advisors?

When a Cayman Islands investment manager or advisor re-registers with CIMA as a registered person under SIBL they may come within the scope of the Cayman Islands economic substance law if they are conducting ‘fund management business’. A registered person conducts fund management business if it has discretionary investment powers for an investment fund.

Any relevant entity that conducts fund management business is required to satisfy the economic substance test.

As an investment manager or advisor, what do I do next?

Investment managers and advisors should firstly consider whether they are a relevant entity and whether they are conducting fund management business for the purpose of the economic substance law.

Investment managers and advisors who are relevant entities conducting fund management business and who wish to continue their current business will therefore need to review their timing of re-registration and their ability to comply with the economic substance law as part of the re-registration process.

Please see our client guide to economic substance in the Cayman Islands which we recently published that sets out further details about the new economic substance regime. Your usual Harneys contact is able to advise you with respect to the Cayman Islands new economic substance requirements.

Why are these changes and filing requirements being introduced?

The changes to the SIBL regime and new filing requirements are part of a raft of new measures being introduced to enhance the Cayman Islands’ regulatory regime. The AML/CFT filings are specifically required by CIMA to enable CIMA to assess the AML/CFT risks associated with SIBL registrants’ current operations, in line with the Caribbean Financial Action Task Force standard.

The changes further demonstrate the Cayman Islands government’s commitment to having a regulated securities investment and AML/CFT regime that continuously seeks to employ best practice and ensure effective supervision of the financial services industry in the Cayman Islands.

We recently issued a client alert regarding other changes to the supervisory powers that CIMA can exercise.

Harneys’ Investment Funds and Regulatory team

Harneys’ Investment Funds and Regulatory team is well versed in all aspects of the SIBL and AML requirements, so please contact your usual Harneys contact if you would like advice on compliance with the new SIBL and economic substance regimes in the Cayman Islands. If you have any other questions, visit www.harneys.com/Cayman.