As anyone familiar with the securitisation market will know, particularly with regard to US CLOs, it is common for issuers to be established as a single purpose vehicle in the Cayman Islands. This is the case for both "on-balance sheet structures" or "off balance sheet structures" (or orphan structures) where the shares of the issuer are held by a charitable trust. There are many well documented advantages for establishing such entities in the Cayman Islands ranging from its sophisticated legislation in facilitating bankruptcy remote structures (for example, the statutory recognition of non-petition covenants) to more general factors, such as its reputation as a well-established jurisdiction offering legal and political certainty in a tax neutral environment.
It was therefore to the dismay of market participants that the Cayman Islands found itself being categorised as a "high risk third country" on the 13 March 2022 (EU AML List) and the resultant consequence under the EU Securitisation Regulation discussed below. Cayman's addition to the EU AML List was a consequence of it being added to the list of "jurisdictions under increased monitoring" by the FATF (commonly known as the FATF Grey List). The addition of the Cayman Islands to the FATF Grey List came despite Cayman being considered as compliant or largely compliant in 39 of the FATF's 40 recommendations and having completed 60 out of 63 FATF Recommended Actions. In both instances, these scores placed Cayman among the most compliant jurisdictions globally. Since that date, the FATF has further upgraded Cayman, recognising Cayman as now compliant or largely compliant with all 40 recommendations and having already addressed one of the three action points, with the remaining two items being actively addressed.
Although the inclusion of the Cayman Islands on the EU AML List did not have any immediate or direct consequence to the Cayman Island's globally renowned investment fund market, its inclusion on the EU AML List did have a consequence to the securitisation market under the EU Securitisation Regulation. Inclusion on the EU AML List does prohibit EU financial institutions from establishing tranched securitisation vehicles in the Cayman Islands. Article 4 of the EU Securitisation Regulations provides that securitisation special purpose entities (SSPEs) "shall not be established" non-EU jurisdiction which is on the EU AML List. Significantly, however, the EU Securitisation Regulation has no impact on the significant majority of Cayman Islands securitisation vehicles where there is no EU nexus, particularly where there are no EU investors.
Notwithstanding this limited impact, the recent news from the Cayman Islands Government that the European Union has confirmed that it does not require further measures beyond the FATF action plan, in order to remove the Cayman Islands from the EU AML List, has been very much welcomed and provides a clear road map for the removal of the Cayman Islands from the EU AML List.
This is encouraging news. As mentioned above, the Cayman Islands has already addressed one of the three FATF action points. The two other points relate to beneficial ownership filings and sanctions; and money laundering prosecutions and Cayman will be able to demonstrate its progress on these points as soon as October 2022 at the next FATF plenary. Once the FATF removes the Cayman Islands from the FATF Grey List, the EU will initiate its steps to delist the Cayman Islands. Accordingly, a "business as usual" approach with regard to the use of Cayman Islands securitisation vehicles is anticipated in the not-too-distant future.
In the interim, for those deals that are considered impacted by Cayman's inclusion on the EU AML List, Jersey remains an attractive jurisdiction for those seeking alternative solutions and our Jersey team would be happy to discuss potential structures.
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