Cayman Islands: Regulatory Law Update - March 2017

Welcome to our first update for 2017 on legal and regulatory developments in the Cayman Islands.

COMMON REPORTING STANDARD

On 19 December 2016, the Cayman Islands Government adopted new regulations1 amending The Tax Information Authority (International Tax Compliance)(Common Reporting Standard) Regulations, 2015 (the Amended Regulations).The Amended Regulations ensure the effective implementation of the Common Reporting Standard (CRS) in the Cayman Islands2. The key changes under the Amended Regulations are discussed below. We note, however, that on 3 March 2017 the Cayman Islands Department of International Tax Co-operation (the DITC) published an Industry Advisory wherein the 2017 registration and reporting deadlines applicable to CRS were extended. Where a deadline has been extended, the updated deadline is indicated below.

Notification requirement

The Amended Regulations now provide that all Cayman Financial Institutions3 (CFIs), including Non-Reporting Financial Institutions, must file an information notice with the Cayman Islands Tax Information Authority (TIA), the deadline for which has been extended to 30 June 2017 or, if an entity becomes a CFI after that date, then on or before 30 April of the following year. The information notice must provide certain required information, including the name and CRS classification of the entity, together with comprehensive details of the person authorised to be that entity's principal point of contact for CRS purposes. Any changes to the required information must be notified to the TIA and all notifications must be completed electronically.

Return and nil return requirement

All Cayman Reporting Financial Institutions (CRFI) must file an annual return with the TIA by 31 May of each year relating to the entity's Reportable Accounts (for 2017 only the deadline has been extended to 31 July 2017). In addition, the Amended Regulations now require the mandatory filing of nil returns, where a CRFI did not maintain any Reportable Account in any Reportable Jurisdiction during the relevant year. Our advice, and the intended approach of most clients, is to prepare and file nil returns in any event, so this new requirement is not anticipated to result in a significant change in practice.

Written policies and procedures

The policies and procedures4 required to be established by each in order to identify Reportable Accounts must now be in writing. Such policies and procedures must be implemented by each CRFI and complied with.

Offences

The Amended Regulations now include various offences and corresponding defences. The offences include making false self-certifications, intentionally providing inaccurate information, tampering with (altering, destroying, mutilating, defacing, hiding or removing) information, or hindering the TIA from performing its functions concerning CRS. Where a CFI has committed an offence, the Amended Regulations also provide for the imputed criminal liability of the directors, managers, secretaries, trustees, general partner and other similar officers of that CFI.

Penalties

Fines may be imposed where a person has been found guilty of an offence under the Amended Regulations. The Amended Regulations also provide for the imposition of continuing penalties by the TIA, including where a contravention has not been remedied or a fine relating to an offence has not been paid. The financial penalties under the Amended Regulations are harsher than those under the US Foreign Account Tax Compliance Act, with fines of up to USD60,975 for an offence by a body corporate, with the possibility of additional continuing penalties and interest thereon.

The Amended Regulations also provide the criteria to be considered by the TIA in imposing any penalty, limitation periods and an appeals procedure.

Guidance

This month the DITC also published draft revised CRS Guidance Notes. It is anticipated that following a brief period of industry consultation, the revised CRS Guidance Notes will be finalised by the end of March 2017.

What actions are required now?

  • CRFIs must establish written policies and procedures for ensuring compliance with the requirements of CRS, if they have not already done so.
  • All CFIs (reporting and non-reporting) must file their initial information notices with the TIA by 30 June 2017.
  • CRFIs must file their initial returns (including nil returns) with the TIA by 31 July 2017.

US FATCA

The notification and reporting deadlines for US FATCA are 30 April 2017 and 31 May 2017 respectively. No extensions to these deadlines have been announced by the DITC.

UK CDOT

The DITC has confirmed that Cayman Islands Reporting Financial Institutions will not have notification or reporting obligations regarding UK CDOT this year onwards because those obligations are superseded by the corresponding obligations under the CRS.

THE MONETARY AUTHORITY (AMENDMENT) LAW, 2016

It is anticipated that The Monetary Authority (Amendment) Law, 2016 (the Amendment Law) will come into force during 2017. The Amendment Law introduces new enforcement powers, allowing the Cayman Islands Monetary Authority (CIMA) to impose substantial administrative fines upon individuals and entities licensed and regulated in the Cayman Islands. Importantly, the Amendment Law brings directors licensed or registered in the Cayman Islands within the scope of this regime, whether or not they are resident in the Cayman Islands. However, additional legislation in the form of regulations will be required in order to flesh-out the operation and administration of the new regime.

New fines

Prior to the adoption of the Amendment Law, CIMA had power under the Monetary Authority Law (2016 Revision) (the Monetary Authority Law) to impose fines for breaches of rules or guidance relating to the conduct of licensees under the regulatory laws for which CIMA has regulatory and supervisory power. Such fines were capped at USD6,000.

The Amendment Law has removed the USD6,000 cap on fines, introducing three categories of breach (minor, serious and very serious) with new administrative fines and limitation periods as follows.

Breach Fine(s) Limitation period5
Minor 'Initial' fine of USD6,000.

CIMA will also have a discretion to impose one or more additional fines of USD6,000 each, up to a cumulative cap of USD24,000 for a single minor breach.
Six months
Serious A single fine up to a maximum of USD60,000 for individuals or USD120,000 for corporate bodies. Two years
Very serious A single fine up to a maximum of USD120,000 for individuals or USD1.2 million for corporate bodies. Two years

Regulatory laws

The Directors Registration and Licensing Law, 2014 (the DRLL) is now included within the definition of "regulatory laws", which also includes the Mutual Funds Law (2015 Revision) and the Securities Investment Business Law (2015 Revision) (SIBL)6. The DRLL provides for the registration and, in certain cases, licensing of individuals appointed as directors of (a) regulated Cayman Islands mutual funds and (b) 'excluded persons' under SIBL, whether or not they are resident in the Cayman Islands7. Accordingly, CIMA will be able to impose the administrative fines on individual directors resident outside the Cayman Islands.

A comprehensive briefing on the Amendment Law will be distributed when the new Law comes into force.

NEW BENEFICIAL OWNERSHIP REGISTER FOR COMPANIES

The Cayman Islands' government recently approved amendments to the Companies Law (2016 Revision), the Limited Liability Companies Law 2016 and the Companies Management Law (2003 Revision) (together the Laws) which, once formally enacted, will require all Cayman Islands companies (save for specifically exempted companies identified below) to maintain a beneficial ownership register. The Laws provide that such companies shall be required to engage either its corporate services provider or the Registrar of Companies to establish and maintain the register (the Administrator). The information contained in such register will be automatically accessible only to the Cayman Islands Minister with responsibility for financial services (the Competent Authority) through a centralised electronic beneficial ownership platform (the Platform), but will otherwise be private.

Which companies will have to maintain a register?

The companies which shall be exempted from the obligation to maintain a register are companies that are:

  1. listed on the Cayman Islands' stock exchange or an approved stock exchange;
  2. registered or licensed under a regulatory law as defined, including regulated funds under the Mutual Funds Law and excluded persons under SIBL; or
  3. managed, arranged, administered or promoted by a regulated/listed person in Cayman or in an approved jurisdiction listed in Schedule 3 of the Money Laundering Regulations (2015 Revision) where the company is a special purpose company, a private equity or collective investment scheme or an investment fund (or the general partner of the fund, if the fund is an exempted limited partnership) or if it is exempted by the applicable Regulations.

All other companies will be required to take reasonable steps to identify its beneficial owners and provide notice to any person that it knows or reasonably believes to be a beneficial owner.

Access and non-compliance

The Platform may only be inspected by the Competent Authority or his assigns, in relation to any matters incidental or connected to the company, following a request from government authorities. All search requests must be certified by a senior official of the relevant body as being proper, lawful and in compliance with the legislation governing the affairs or responsibilities of the requesting body; or that it is made in response to a request from a jurisdiction which the Cayman Islands' government has entered into an agreement with for the sharing of beneficial ownership information. Currently this is limited to the UK.

A company which fails to take steps to identify a beneficial owner, or to issue a notice, or fails to establish or maintain a register, is liable to various penalties. A beneficial owner who fails to comply with a notice or who makes a false statement may also be liable to various penalties, including a custodial sentence for non- compliance. A restrictions notice may be issued by the Administrator where there has been non-compliance with a notice requesting the details of beneficial owners.

Conclusion

The Platform is expected to be implemented by 30 June 2017. While there will be a transition period of one year from the date the amendments to the Law are enacted, (during which companies will not be prosecuted for failing to comply with the Laws), companies should take immediate steps to ensure compliance with the Laws. It enables global authorities to obtain information about beneficial owners, whilst ensuring that the privacy of those with proper commercial interests is maintained.

For a comprehensive briefing on the beneficial ownership register and how it affects you, please click here.

SUBJECT ACCESS REQUESTS AND A BENEFICIARY'S RIGHT TO TRUST INFORMATION

In April 2016, the Cayman Islands' government published the Data Protection Bill, 2016 (the Bill) which seeks to introduce legislation that provides for the protection of "personal data". The Bill is the first of its kind in the Cayman Islands and is substantially modelled on the UK's Data Protection Act, 1998 (the Act).

Importantly, a recent (and perhaps crucially timed) decision of the English Court of Appeal (Dawson-Damer v Taylor Wessing LLP [2017] EWCA Civ 74) demonstrates that beneficiaries of trusts may be able to circumvent common law limitations on their right to trust documents, by making a subject access request under the Act.

Given the similarities between the Act and the Bill, and in particular their respective provisions concerning rights of access to data, this decision may have a significant impact on trust professionals in the Cayman Islands.

Some offshore jurisdictions (Guernsey and Jersey, for example) have enacted a legislative framework which limits certain trust documents from being disclosed pursuant to a subject access request, for example documents evidencing decisions made by a trustee. However, the Bill and the Cayman Islands Trusts Law (2011 Revision) do not contain similar provisions.

It is possible that the Legislative Assembly will amend the Bill to preserve the existing limitations on disclosure of trust documents, before it is enacted. However, if the Bill is enacted as-is, there is a real risk that it will entitle beneficiaries to access trust documentation which they were not previously entitled to. It potentially draws a line through entrenched common law principles which have applied for in excess of 50 years.

No doubt the Legislative Assembly has taken note. We will keep you informed of any developments.

Footnotes

1 The Tax Information Authority (International Tax Compliance)(Common Reporting Standard) (Amendment) Regulations, 2016

2 See our briefing Cayman Islands Issues OECD Common Reporting Standard Regulations (the Previous Briefing) for further information

3 Terms in italics are defined terms in the Amended Regulations

4 See the Previous Briefing for more detail on the policies and procedures required.

5 These limitation periods will run from the date on which CIMA became aware of the commission of the breach. CIMA will be deemed to have become aware of a breach when it first received information from which the breach can reasonably be inferred.

6 In addition to the Banks and Trust Companies Law (2013 Revision), the Building Societies Law (2014 Revision), the Companies Management Law (2003 Revision), the Cooperative Societies Law (2001 Revision), the development Bank Law (2004 Revision), the Insurance Law, 2010 and the Money Services Law (2010 Revision).

7 See CIMA's director registration and licensing regime briefing from December 2015 for more information on this law.

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.

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