United States: 7 Deadly Myths Of FATCA: Cayman Islands Investment Funds


It is quite a human trait to live in a state of suspended disbelief – when the news is just too bad to absorb, or when the consequences of an action are too much to contemplate.

Response to the Foreign Account Tax Compliance Act (FATCA), it seems, is one of suspended disbelief by some in the Cayman funds industry. Many opinions have been expressed – yet few facts presented – despite the explicit details being freely available in the FATCA regulations and the Cayman Islands Model 1 Intergovernmental Agreement with the U.S. (IGA). There are even those eagerly promoting half-truths and fanciful thinking about the legislation and peddling them to the unsuspecting.

As the rest of the world marches inexorably towards the implementation of FATCA on July 1 this year, these widely circulated myths are interfering with the timely preparation that Cayman Reporting Financial Institutions (CRFIs) should be making on their own behalf, for the benefit of their investors, to avoid the severe penalties for non-compliance that FATCA dictates.

We refer to them as the Seven Deadly Myths and those who subscribe to them could find themselves facing potentially crippling circumstances after July 1. For safety's sake, we get down to brass tacks and present the facts below – in plain language – to debunk these myths.

Myth 1: No action required now.

This is false. In fact, critical action is required before July 1, when all CRFIs must have implemented a FATCA Compliance Program to comply with Annex I of the IGA. CRFIs must self-certify their FATCA status [Chapter 4 of the U.S. Internal Revenue Code] to their withholding agents by either providing a Global Intermediary Identification Number (GIIN) or new IRS Form W-8BEN-E/W-8IMY prior to this date. This is the commercial reality facing all CRFIs using withholding agents (counterparties) subject to FATCA.

Two types of FATCA status are available to CRFIs when filing new W-8s: (1) registered deemed-compliant or (2) reporting Model 1 FFI. Registered deemed-compliant status is fast, final and foolproof. The other is temporary (for six months) and requires explanation, negotiation and monitoring with counterparties. It will be evident to those experienced in dealing with withholding agents on a daily basis, which FATCA status is most prudent, easier, and in the best interests of the CRFI to mitigate its counterparty and operational risk.

Myth 2: Best to "wait and see" for Cayman Islands enabling legislation.

This is false. Wishing this to be the case does not make this so. To be clear, registration and reporting are distinct functions under FATCA. All FATCA registration is directly with the IRS and is occurring now through the end of 2014. FATCA Reporting will be made to the Cayman Islands Tax Information Authority (TIA) beginning in 2015 and beyond.

Registration with the IRS is free of cost and mandatory for any CRFI to become registered deemed-compliant under the IGA. Only the IRS has the power to register a CRFI and issue a GIIN. Cayman Islands enabling legislation is irrelevant to FATCA registration for CRFIs as no Cayman Islands authority has – or will ever have – the power to register a CRFI and issue a GIIN. Again, we emphasize, this must be done directly with and by the IRS.

There are no credible commercial reasons to delay FATCA preparation and registration as it is never too early for CRFIs to identify any gaps or risks in their ability to comply with the vast requirements of FATCA. Preparing for registration only eliminates risk – without creating any – and brinkmanship with the IRS and U.S. withholding agents is never sound commercial advice.

The truth is, the Cayman Islands enabling legislation is simply intended to provide the legal framework for compliance with, not avoidance of FATCA (and other automatic tax information exchange agreements), and the development of the regulatory framework for operating the TIA. It's binary legislation for the Cayman Islands. Either the Cayman Islands comply with its obligations under the IGA or not, but Cayman Islands legislation cannot change the IGA or the FATCA regulations. Don't expect any miracles. High hopes and promises that the Cayman Islands are masters of the FATCA universe and can change the course of U.S. tax legislation are grandiose and unwarranted.

The scope of the Cayman Islands legislation, when passed, is determinable by reference to the IGA. The objects of the Cayman Islands legislation under the IGA are clear and are: "to provide for the implementation of FATCA" and "address legal impediments" to "coordinate the reporting obligations under FATCA with other U.S. tax reporting obligations of Cayman Islands financial institutions to avoid duplicative reporting" i.e. meet existing obligations under the Tax Information Exchange Agreement (TIEA). That's it.

Cayman Islands enabling legislation is also required "to implement as necessary requirements to prevent Financial Institutions from adopting practices intended to circumvent the reporting required under this Agreement." [Article 5.4, IGA]

Myth 3: IRS registration may breach confidentiality.

This is false. Withholding agents already require W-8s from all CRFIs to avoid withholding liability. This is a long-established practice and the Form W-8 has simply now been revised to include FATCA status. A CRFI must self-certify, under penalty of perjury, its FATCA status to withholding agents using the new W-8 before July 1. To obtain a GIIN, a CRFI must file Form 8957 via the IRS Foreign Financial Institution Registration System (FRS) (or manually). Once the GIIN is obtained, it can be verified by withholding agents via FRS or submitted via Form W-8. There are no material differences between the information disclosed, or commitments made, under Form W-8 and Form 8957. Both forms are complementary and require basic identifying information about the CRFI. Specific investor information is never disclosed.

Myth 4: Cayman Islands funds may be exempted.

There is speculation that typical Cayman Islands investment funds can claim exemptions under Annex II of the IGA as sponsored entities or collective investment vehicles.

Sponsored entity exemption.

This is false for typical CRFIs. Sponsored entity exemption would require all the sponsored CRFIs of the sponsor to use a single GIIN. If any CRFI using the sponsored GIIN becomes FATCA non-compliant – for any reason – all CRFIs using the same GIIN would also become non-compliant. This is impractical for most sponsors, because it exposes their investors to significant cross-liability (withholding) risks. The sponsored entity exemption is also temporary, expiring after 2015 for all entities, and was intended for narrow, brief application for certain other entities, not CRFIs. Additionally, the sponsored entity exemption is impractical for complying with the U.K. IGA because that agreement requires the sponsor to be based in the Cayman Islands.

Collective Investment Vehicle.

This is false for typical CRFIs. Collective Investment Vehicles (CIV) would generally not meet the definition of "regulated" under the U.S. Treasury regulations and Internal Revenue Bulletin 2013-15, that requires either the CIV, or its manager, to be regulated in every country wherever the CIV is registered and operating.

Myth 5: Model 1 IGA displaces U.S. Treasury Regulations.

This is false. They both work in tandem. A CRFI is treated as FATCA-compliant, and not subject to FATCA withholding tax, to the extent it complies with its obligations under the IGA. The U.S. Treasury regulations are incorporated by reference into the IGA. Under Article 4(7) of the IGA, the Cayman Islands are bound to use U.S. Treasury definitions to the extent those definitions are not defined by the IGA, and importantly, the Cayman Islands are not permitted to use any other definition in local legislation that would "frustrate the purposes" of the IGA. As mentioned above, it is noteworthy to reiterate that the Cayman Islands has agreed in the IGA to prevent CRFIs from adopting practices intended to circumvent their reporting obligations.

Myth 6: FRO is not required by a Model 1 IGA.

This is false. The key points to know about the role and responsibilities of the FATCA Responsible Officer (FRO) under the IGA are:

  • U.S. Treasury Regulations define the FRO as an "officer" of the registered deemed-compliant FFI with "sufficient authority to ensure that the FFI meets the applicable [registration] requirements of §1.1471-5(f)". [§1.1471-5(f)" [§1.1471-1(b)(108)]
  • The IGA binds the U.S. Treasury Regulations. [IGA, Article 4, 7.]
  • The IGA requires that CRFIs must "comply with the applicable registration requirements on the IRS FATCA registration website." [IGA, Article 4, 1(c)]
  • IRS requires the appointment of an FRO who certifies that the CRFI will comply with its FATCA obligations in accordance with the regulations and IGA.

Myth 7: FRO's obligations under the Model 1 IGA are "lite".

This is false. FROs have serious compliance responsibilities under FATCA. In fact, FATCA compliance revolves around the FRO, like Sarbanes Oxley compliance revolves around the CFO. Especially in the context of a CRFI that does not typically have any staff, the role is even more essential. It's a fallacy and wishful thinking that FROs can be lax or "lite" under the IGA. While certain FRO procedures differ between IGA 1 and IGA 2, the net results are the same – and the IRS has consistently expressed its expectations that FROs deliver robust FATCA compliance and high-quality FATCA information from either procedure. Whoever says otherwise has not been paying attention and we all know how this story ended for Switzerland. Key considerations for a FRO under the IGA include:

  • Willfully submitting any fraudulent or materially false document to the IRS is a Federal offence. [IRC, §7206(2) & 7207]
  • CRFI's self-certification as a Reporting Financial Institution to withholding agents will entail signing the IRS Form W-8 under penalties of perjury.
  • Compliance Program requires application of the due diligence procedures in Annex I to all Financial Accounts. [IGA, Article 1, 1.(y)]
  • CRFI must report any change in circumstances that results in discovery of U.S. indicia. [IGA, Annex I, I. B.2 et. al.]

The truth about FATCA

Whether out of lack of knowledge, preparedness or self-interest, those who are propagating these myths are not doing themselves or the investors in Cayman Islands fund industry any favors. Fortunately, many CRFIs are already well advanced in preparing and registering for FATCA, but the laggards need to get their act together – fast.

The last time the Cayman Islands tried to play cute and clever with our international tax obligations (i.e. TIEAs), our jurisdiction ended up on the OECD "gray list" and the stakes are much higher this time around. We should have all learned and been chastened from that experience as the direct penalties under FATCA for our CRFIs are far more severe.

Facts, they say, are stubborn things. And the ones about FATCA are particularly obstinate. Everyone is entitled to their opinions of course, but not their own facts. The truth is – FATCA is not going away – despite the denial, tortured logic and aimless speculation to the contrary. Nor can it be wished away, however unpalatable some may think it is. Naturally, the U.S. Congress could pass a new law tomorrow, the Cayman Islands could renege on its agreement, and the sky may fall. But we have been hearing that for the past four years now and wouldn't bet the interests of investors on it.

While promoting these myths maybe convenient, and in the self-interest of those seeking to distract attention away from their own lack of preparedness and resources to effectively serve the interests of CRFIs in complying with FATCA, prudence would dictate putting the interests of the CRFIs and their investors first. It's time for all CRFIs to be actively consulting with their U.S. tax advisors and counterparties on the known, concrete facts and risks of FATCA – as they exist today – to prepare for inevitable FATCA registration.

The plain truth is nobody knows what happens beyond July 1 if a CRFI does not register with the IRS, but there is no logical reason why any CRFI should tempt fate and assume this operational risk when - absolutely nothing – prevents the CRFI from simply registering with the IRS before July 1 to remove this uncertainty.

DMS FATCA Task Force

DMS FATCA Task Force is a specialist group of attorneys, CPAs, and U.S. compliance experts dedicated to serving Cayman Islands investment funds in complying with the Foreign Account Tax Compliance Act. To learn more about FATCA and the DMS FATCA SolutionSM, please contact the DMS FATCA Task Force.

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.

Events from this Firm
18 Jan 2018, Conference, New York, United States

At this event, exclusive to our clients, we will be bringing together high caliber industry experts to challenge us all via structured debates on industry hot topics.

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 Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.