Steven Manning, director at Walkers Professional Services (WPS) and Dorothy Scott, managing director of compliance and regulatory services, and previously a partner in the Investment Funds group at Walkers, examine the evolution of regulatory compliance in the Cayman Islands.

Thirty years ago, the Cayman Islands financial sector was in a very different position. The island population was a little over 27,000 – less than half its current size – and the concerns of the day were the potential effects of the Gulf War and the ongoing recession in America. While total assets were up, the number of banks and trust companies had declined marginally, the first decline in numbers since the early '70s. The seminal Mutual Funds Law was still only in its early stages of consultation and there were worries about the potential effect on banks by the recent decision by the US Federal Reserve Board to reduce its reserve requirements to zero.

Fast-forward to the present day and there has been an impressive evolution of Cayman's financial services. The early history of the Cayman Islands finance sector has already been well documented; centuries of English common law and tax neutrality were updated in the 1960s with the enactment of a series of laws that laid out the basis for modern financial operations. The late 20th century marked the ascent of globalisation, when international trade in goods, services and financial capital became more widespread than ever before. Bolstered by its political, economic and social stability, the Cayman Islands was able to embrace these changes and write its own success story to become one of the top financial centres of the world. To this day, it remains a leading private equity and hedge fund jurisdiction, and continues to excel globally in banking, capital markets, trusts and fiduciary services.

While there were important milestones along the way, such as the introduction of the Sarbanes-Oxley Act and Basel II regime, the financial crisis of 2008 marked a significant change, with a notable increase in regulatory compliance obligations.

Maintain a leading position

To maintain and improve on its position as a leading financial centre in an increasingly competitive and sophisticated marketplace, the Cayman Islands has been swift to comply with the ever more stringent requirements of clients, banks, international organisations and regulators.

For the most part, compliance with new regulations falls to Cayman's trust and corporate services providers (TCSPs), which have had to rapidly adapt to this ever more sophisticated environment. TCSPs provide a wide range of administrative and compliance services to local and international clients. As a sector, it has shown healthy growth in recent years, buoyed by rising household wealth, strong demand for international structuring and more outsourcing of increasingly complex administrative services by fund managers.

As a result, TCSPs find themselves facing a wide range of obligations, including new Anti-Money Laundering (AML) Regulations, the introduction of beneficial ownership registration and economic substance legislation on top of existing requirements to comply with Fatca/CRS and other related international tax transparency laws.

Many of these are relevant to Cayman Islands entities and require extensive analysis to categorise each entity to ensure that filings are correct and made in a timely fashion to a range of competent authorities.


The typical TCSP

With the increase in professionalism and complex demands, the typical make-up of TCSPs has also been changing rapidly, both in size and skillset. The single-jurisdiction operators, niche providers and ad-hoc approach of yesteryear are no longer applicable. Differentiators in brand, reputation and service have become more clearly identifiable. Risk has grown at an exponential rate and incorrect or late filings can lead to penalties, including fines for the registered office provider, directors or the entity itself.

Juggling complex legal, financial and regulatory demands requires the services of a large and dedicated workforce. AML officers, for example, now must be named individuals expected to maintain close supervision of all the structures under their remit. The type of employee is also changing and a modern full-service TCSP utilises a team of accountants, lawyers, chartered secretaries and tax experts, sometimes all at once. Information technology (IT) has grown far beyond basic systems maintenance, and IT specialists providing technical innovation, robust operational ability and data security are a necessity, and one that requires significant and ongoing investment. There increasingly needs to be international always-on service coverage to respond to international clients.

The local TCSP sector itself has seen a flight to quality benefitting those with the ability to offer integrated legal and compliance services together with the traditional registered office and fiduciary offerings.

Loosely speaking, the sector is falling into four service lines: registered office services, company secretarial services, the provision of experienced independent directors, and compliance and regulatory assistance (including AEOI obligations), while the revamped AML regulations have created a whole new professional sub-industry: the practice of AML standards. Together, these services provide the complete suite of options for the sophisticated, modern client.

As these service lines have developed, so too has the use of supporting technology, and this marks the next phase in industry development. Off-the-shelf technology is being replaced by bespoke systems built from a deeper understanding of client needs. These systems in turn need to interact smoothly with each other and combine with parallel developments in back-office automation. Along with clear and accessible online interfaces for clients, the goal is to remove inefficiencies, create more pricing flexibility and improve both internal operations and the client experience.

TCSPs in the Cayman Islands have made great strides in terms of their expertise and flexibility and are well positioned to continue to do so in the future. Combined with the advantages that the Cayman Islands continues to offer – its expertise, professionalism and a modern legal system – they will continue to be of systemic importance in the global financial services industry, with organisations ranging from publicly listed companies to major pension funds continuing to utilise them for their varied investment and asset protection needs.

Originally published by HFM Global.

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.