Cayman Islands: US FATCA And Cayman Funds: Due Diligence

Last Updated: 17 April 2014
Article by Martin Livingston, Jon Fowler, Tim Frawley and Alasdair Robertson

On 29 November 2013, the Cayman Islands government signed a Model 1B (i.e. non- reciprocal) intergovernmental agreement with the United States of America (the "US IGA"). The US IGA provides a framework for the implementation of the US Foreign Account Tax Compliance Act ("FATCA") in the Cayman Islands. Cayman primary enabling legislation is expected to be enacted in early May 2014, with secondary legislation and guidance notes to be implemented in early July 2014.

In our two previous updates, we examined the rules relating to (i) entity classification under the US IGA for Cayman based Investment Entities, and (ii) GIIN registration and the need for a responsible officer for an Investment Entity. These updates can be viewed through the following links:

US FATCA and Cayman Funds: Entity Classification:
http://www.maplesandcalder.com/news/article/us-fatca-and-cayman-funds-entity-classification-674/

US FATCA and Cayman Funds: GIIN Registration:
http://www.maplesandcalder.com/news/article/us-fatca-and-cayman-funds-giin-registration-692/

In this update, we consider the due diligence obligations on Cayman investment funds that are Reporting FIs (each a "Reporting Fund").

Due Diligence - Focus

Annex I of the US IGA sets out the due diligence obligations applicable to a Reporting Fund. The requirements are separated out into pre-existing and new accounts for individuals and pre- existing and new accounts for entities. "Pre- existing" is defined to mean an account maintained as of 30 June 2014.

As a general principle, all Reporting Funds will be required to apply the due diligence procedures (the "Procedures") set out in Annex I to identify not only US Reportable Accounts but also accounts held by Non-participating Financial Institutions (each an "NPFI"). As a reminder, a "US Reportable Account" is defined as a Financial Account maintained by a Reporting FI and held by one or more Specified US Persons or by a Non-US Entity with one or more Controlling Persons that are Specified US Persons. "Controlling Person" is broadly defined as the natural persons who exercise ultimate control over an entity.

Pre-existing Individual Accounts

Small accounts: A Reporting Fund is not required to review, identify or report an account for an individual investor (i.e. natural person) with a balance that does not exceed US$50,000 as of 30 June 2014.

Lower Value Accounts: An individual investor account with a balance over US$50,000 but which does not exceed US$1,000,000 is a "Lower Value Account". These accounts are to be subject to an electronic record search for "US indicia" by no later than 30 June 2016, i.e. evidence of US citizenship or residency, US birthplace, a US address or telephone number, a standing order to remit funds to the US, a power of attorney in favour of a person with a US address, or an "in care of" or "hold mail" address.

If any US indicia are found, the account is to be treated as a US Reportable Account unless one of the listed exceptions apply. If there are no US indicia, nothing further need be done unless the account becomes a High Value Account, or there is a change in circumstance that results in US indicia being associated with the account.

High Value Accounts: An individual investor account with a balance over US$1,000,000 is a "High Value Account". These accounts are also subject to an electronic record search for US indicia. If certain criteria in relation to the electronically held data cannot be met, then a paper record search is also required. Paper records cover documentation received by the Reporting Fund within the last five years and include any AML/KYC documentation.

Inquiry must also be made of any relationship manager who might have actual knowledge of an investor being a Specified US Person (such inquiry is subsequently required to be made on an annual basis).

As with Lower Value Accounts, if any US indicia are found, the account is to be treated as a US Reportable Account unless one of the listed exceptions apply. If there are no US indicia, nothing further need be done unless there is a change of circumstance which reveals US indicia.

For individual investor accounts which are High Value Accounts as at 30 June 2014, due diligence must be completed by 30 June 2015, and for accounts which are not High Value Accounts as at 30 June 2014 but become so by the end of 2015, or any subsequent year, due diligence must be completed within six months.

New Individual Accounts

For all new individual investor accounts opened on or after 1 July 2014, self-certification is required upon account opening to determine the tax residency of the investor. The reasonableness of such self-certification must be confirmed based on documentation collected in opening the account, including any AML/KYC documentation. If US tax residency is established the self-certification must include the US TIN. If there is a change of circumstances that indicates the original self-certification is incorrect or unreliable, a new valid self- certification must be obtained. If unable to obtain a valid and reliable self-certification then the account must be treated as a US Reportable Account. We understand that IRS W8 Forms are recognised as being suitable evidence of self-certification.

Pre-existing Entity Accounts

Small accounts: A Reporting Fund is not required to review, identify or report an entity investor account, the balance of which does not exceed US$250,000 as at 30 June 2014, until the account balance exceeds US$1,000,000.

Accounts requiring review: An investor account with a balance over US$250,000 as at 30 June2014, or which does not exceed US$250,000 at that date but exceeds US$1,000,000 as at 31 December 2015, or any subsequent year must be reviewed. Only accounts held by entities which are Specified US Persons or by Passive NFFEs with Controlling Persons who are US citizens or residents are treated as US Reportable Accounts. Accounts held by NPFIs are not US Reportable Accounts but are subject to aggregate payment reporting.

Accounts need to be reviewed as follows:

First, Reporting Funds need to review all information on file to identify if the accounts are held by US Persons and, if so, they must be treated as US Reportable Accounts unless the account holder certifies that it is not a Specified US Person or there is other evidence to that effect.

Second, the Reporting Fund must identify if the account is held by an FI. If the Reporting Fund identifies the account holder as a Cayman FI or Partner Jurisdiction FI (an FI in another IGA country) and it verifies the GIIN then nothing further is required. If such account holder is not a Cayman FI or Partner Jurisdiction FI then it must be treated as an NPFI unless it obtains self-certification (where a certified deemed compliant FFI or an exempt beneficial owner) or it verifies the GIIN (where a registered deemed compliant FFI or a participating FFI).

Third, if the account holder is not a US Person or an FI, the Reporting Fund must identify if the account holder is a Passive NFFE, if it has any Controlling Persons, and if any such Controlling Person is a US citizen or resident. Passive NFFE status can be self-certified, and for Controlling Persons, the US citizen or residency status is determined based on either KYC documentation or self-certification depending upon size of the account. Where the Controlling Person is a US citizen or resident then the account is a US Reportable Account.

Where the investor account has a balance of over US$250,000 on 30 June 2014 then the review must be completed by 30 June 2016. If the balance does not exceed US$250,000, but exceeds US$1,000,000 on 31 December 2015, or any subsequent year, the review needs to be completed within six months of the relevant year end.

New Entity Accounts

For all new entity investor accounts opened on or after 1 July 2014, the Reporting Fund must identify if the account holder is a Specified US Person, a Cayman or Partner Jurisdiction FI, a participating FFI, a deemed compliant FFI, an exempt beneficial owner, or an Active or Passive NFFE.

As with Pre-existing Entity Accounts, Reporting Funds can rely upon verified GIINs or publicly available information for Cayman or Partner Jurisdiction FIs and Active NFFEs, otherwise self-certification is required. Where the account is held by Specified US Persons then it is a US Reportable Account. Where the account holder is a Passive NFFE, the Controlling Persons must be identified and, if they are US citizens or residents, the account is a US Reportable Account.

Accounts held by US Persons who are not Specified US Persons, Cayman FIs, Partner Jurisdiction FIs, participating FFIs, deemed compliant FFIs, exempt beneficial owners, Active NFFEs or Passive NFFEs with no Controlling Persons who are US citizens or residents are not US Reportable Accounts.

Overriding Rules

Reporting Funds which "know or have reason to know" that information received is incorrect or unreliable cannot rely upon such information. In many cases, multiple accounts held by the same investor are required to be aggregated for the purposes of determining balances.

For the purposes of determining if there is a High Value Account, account balances need to be aggregated where there is a relationship manager who knows or has reason to know that accounts are directly or indirectly owned, controlled or established by the same person.

Reliance upon third parties in relation to due diligence is expressly permitted.

Action Points

  1. Verification procedures need to be in place to deal with any new investor accounts from 1 July 2014. The verification requirements apply immediately to these accounts.
  2. For pre-existing accounts, a review of account balances ought to be conducted to ascertain how soon remediation needs to be undertaken and the extent of that remediation.
  3. Procedures need to identify not just US Reportable Accounts but also NPFIs.
  4. Procedures need to address the situation where a Reporting Fund "knows or has reason to know" information received is unreliable or incorrect.
  5. Procedures need to identify any change in circumstances of an account.

If clients require legal advice or have any concerns about FATCA and the US IGA, Maples and Calder has leading expertise on the relevant provisions having established a FATCA team which has worked closely with the Cayman Islands government over the past two years. MaplesFS also provide client focused solutions to FATCA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Martin Livingston
Tim Frawley
Alasdair Robertson
Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
Maples and Calder
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
Maples and Calder
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions