The Cayman Government is currently proposing legislative changes which would give CIMA additional powers to impose administrative fines on licensed and regulated individuals and entities. The Monetary Authority (Amendment) Bill 2016 seeks to amend the Monetary Authority Law and if passed will enable CIMA to impose a range of penalties from non-discretionary fines of USD5,000 for a minor breach up to USD1 million for a serious breach. CIMA would be able to impose cumulative fines of up to USD20,000 for a single minor breach.
These would include breaches of prescribed provisions of regulatory laws and money laundering regulations as pertaining to the Monetary Authority Law. As global law firm Walkers explained in an advisory note on 27 October 2016, the "regulatory laws" will include the Banks and Trust Companies Law, the Building Societies Law, the Companies Management Law, the Cooperative Societies Law, the Insurance Law, the Money Services Law, the Mutual Funds Law, the Securities Investment Business Law, the Development Bank Law and the Directors Registration and Licensing Law. The Bill inserts the new definitions of "breach", "fine", "prescribed provision" and "rules". A breach is defined broadly and includes not only positive actions but also failing to act or allowing a state of affairs to exist.
This is a positive step forward for Cayman at a time when further alleged insider trading cases in the US hedge funds industry have been revealed and the risks of cybersecurity and criminal activity directed willingly on hedge funds continue to rise.
In a wider context, James Melen, Partner at Walkers (Cayman Islands) believes that the health of the industry depends upon balanced and effective regulation; as well as regulators – be they the SEC, the FCA or CIMA – that function effectively in identifying wrongdoing, and also in imposing and enforcing the legal and regulatory consequences.
"There should be a firm market expectation that those engaged in breaches of regulatory laws operate illegitimately in an environment designed to find them out and sanction them accordingly.
"Observers of the fund industry have questioned the point of numerous rules and regulations without a clear and consistent trend of wrongdoings actually being prosecuted and justice being served. Regulators and legislators are responsive to that commentary," notes Melen.
Empowering CIMA by virtue of a robust enforcement regime is a reflection of the wider industry where national regulators are focusing harder than ever before on uncovering nefarious activities. The Cayman Islands remain ever watchful of onshore regulatory developments in key markets such as the US and regard this aspect of the industry as critical in remaining at its leading edge offshore.
"In recognition of its own place as a leading player in the funds service industry, Walkers recently recruited a regulatory specialist, Lucy Frew, who joined the Cayman Islands in 2016. Lucy and her growing team is onboard to advise and steer clients in the right direction on all aspects of Cayman Islands regulation, and its integration with their business models and fund products," adds Melen.
Rayal Bodden is Director, Apex Fund Services (Cayman Islands) Ltd. Speaking to Hedgeweek about Cayman's governance framework, he says that the system is improving each year as experienced professional fund directors and service providers drive the governance agenda in tandem with investors.
"Cayman has worked hard for decades to establish a reputation as a leading international financial offshore jurisdiction and has been rewarded with good legitimate business seeking to domicile in Cayman. A cornerstone of building this reputation is based on compliance with international standards to AML and cooperating with the international community to combat cross-border crime. Cayman has continually met or exceeded these standards over the years. Good governance thinks outside the box, it doesn't just tick the box," comments Bodden.
The ability to impose fines of up to USD1 million for the most serious breaches shows that Cayman is taking fund fraud extremely seriously.
Considering the complexity of criminal activity today, knowing how to investigate internal suspicious activities, properly reporting to the Reporting Authority (failing to report is a criminal offense) and ongoing liaison, maintaining registers and maintaining confidentiality to avoid tipping off (which is a criminal offense) are all key components to protect a fund from fraud, criminal activity and, of equal importance, reputational damage.
"In looking around the globe, we see other jurisdictions that have implemented administrative fines systems and note that these are increasingly being used by authorities. Money Laundering Reporting Officers therefore may have a personal liability if charged with an administrative fine caused by their failure to ensure required reporting and compliance standards are met," warns Bodden.
As part of Cayman's drive to enhance its corporate governance environment, the Directors Registration and Licensing Law (2014) was introduced. Part of the rationale for doing this was to provide CIMA with greater transparency in respect of directors of Cayman funds. Although this has not made any significant change to how funds operate or who may act for funds, CIMA is increasingly proactive in its collation of information and active regulation of funds.
"They do conduct inspections and it is all part of the Cayman Islands adopting a more hands-on approach to the regulation of funds," says Maree Martin, Counsel at Conyers Dill & Pearman. "They review funds' annual returns to collate information to get a better idea of the funds they are regulating in terms of AUM, service providers, investment strategies, etc. The information is not publicly available but it is collated and does allow CIMA to be a more effective regulator."
One clear manifestation of how much more seriously Cayman managers are taking corporate governance is the increased adoption of not just independent boards of directors, but split boards composed of directors from more than one directorship provider. This is adding more ballast to a fund board and demonstrates to institutional investors that the board has a mix of complementary skill sets being applied to the fund's day-to-day operations.
To help put together split boards, Martin confirms that Conyers will provide a list of Cayman directorship providers for clients to choose from.
"One of the drivers will inevitably be cost, depending on the size of the fund. If it is a small start-up there are certain directorship providers in a certain fee range that would be a more obvious fit compared to other more expensive service providers. Accordingly, cost is one filter; another filter could be based on the proposed assets and strategy of the fund and whether the proposed directors have the relevant prior experience," says Martin.
Managers can get a better feel for the appropriateness of directors by reading their biographies to see who they are impressed with and make a decision accordingly: a PERE fund manager, for example, will be looking for completely different expertise in a director compared to a basic equity long/short manager.
Not everyone is entirely convinced by the split board concept, however.
Geoff Ruddick is Head of Funds at International Management Services, Ltd (IMS). In his view, split boards unquestionably have their place depending upon the circumstances. "However, the industry needs to ensure the focus goes beyond the sales pitch and focuses on the underlying fundamentals of good governance and the right board composition and not simply retaining directors from different fiduciary firms.
"Where the main consideration or key focus is only to engage independent directors from different fiduciary firms, this narrow focus, for the most part, misses the fundamental objective of establishing an effective and diverse board. In particular, for existing funds where the incumbent directors have history and knowledge of the funds, are all engaged, work well collectively and have complimentary skillsets, there should be no good reason for a change. The benefits of going to someone new without this embedded knowledge, simply because they are from a different shop, will not necessarily enhance governance," explains Ruddick.
Discussing governance trends, Ruddick thinks that many have lost perspective that the underpinning of fundamental good governance is about substance, not solely form.
With respect to board meetings, if they are held just to tick a box where the constitutional documents, regulatory guidance notes, or institutional policies and procedures dictate, then they are of limited benefit.
"That said, well thought out, planned and attended discretionary (versus mandated) meetings that are timely and properly minuted (i.e. substance over form) are incredibly important," says Ruddick. "Meetings certainly have their place and should be encouraged as appropriate. It could, however, be argued that some matters can be more timely documented and with better detail by emails and written resolutions than they would by verbal phone conversations, meetings, and corresponding minutes.
"Regardless of the form of governance, it is important that there is always sufficient evidence documented to support the decisions taken by a board."
The continuing increase in global fund regulation makes fund governance more challenging.
"It's not only the AIFMD, FATCA and CRS that are driving change," says Martin. "Best standards in fund governance are expected by investors, managers and regulators. We are also seeing independent directors joining the board of GP entities in private equity structures. Given the importance of verifying the value of private equity fund assets, there can be value in having independent directors with experience at evaluating liquid and illiquid assets."
Martin agrees that increased regulation is something that funds have spent a lot of time considering in terms of their own internal procedures, documents and determining which service provider needs to deal with compliance matters from a practical perspective. "This has added time and cost to fund operations, which is an ongoing issue for start-up funds. It is increasing the barriers to entry and the cost of running a fund over the first few years," she says.
Away from fund governance and looking at the wider picture, the Cayman Islands is further enhancing its reputation on the global stage through industry events that indirectly allow the jurisdiction to show its capabilities to visiting delegates.
One great example of this is the Cayman Alternative Investment Summit, organised by Dart Enterprises, a leading property developer that employs hundreds of people. This year's summit, which takes place between 15th and 17th February, will be the fourth year it has run. Each year it keeps getting bigger.
Chris Duggan is Director of CAIS and VP of Community Development, Dart Enterprises. With Cayman still regarded as the industry's leading offshore fund jurisdiction, Duggan says it is important for Dart, as the host sponsor, to help promote the industry even further.
"So often we hear about how important the industry is to the Cayman Islands but the Cayman Islands is equally important to the alternatives industry. The hedge fund industry is not a core part of our business but we recognise it is a core part of the Cayman Islands' business. And we want to do whatever we can to continue to promote the jurisdiction and the alternatives industry that it supports.
"The Cayman Islands are an exceptionally well regulated, politically stable jurisdiction. It's important that CAIS showcases how Cayman is a great place to do business," comments Duggan.
CAIS and Dart Enterprises both actively promote social and economic development on the Cayman Islands. For example, Minds Inspired is a Dart-funded series of educational initiatives that provide scholarship and learning opportunities to on-island high school and university students. Dart is also the founder of Growing Communities, a park initiative to build and improve public community parks in the Cayman Islands. CAIS, meanwhile, is structured as a not-for-profit.
"Unlike many industry summits, CAIS is a not-for-profit and we really like to focus on how businesses can positively impact society through our ever-popular philanthropic panel on the final day," says Duggan.
In their own unique way, events like CAIS, regulatory developments that help give CIMA teeth to properly enforce good corporate governance, and the growing acceptance of independent boards are helping the Cayman Islands present a unified front to the world: one that demonstrates its commitment to transparency and trust.
