Besides the Data Protection Law, 2017, which was gazetted on 5 June 2017 and is expected to come into force in January 2019, the main regulatory development, in terms of its impact on Cayman regulated hedge funds, is The Monetary Authority (Amendment) Law, 2016.
The law was passed on 24 October 2016 and came into force on 15 December 2017, the same date as The Monetary Authority (Administrative Fines) Regulations, 2017 were published and came into force.
The new rules allow the Cayman Islands Monetary Authority (‘CIMA’) to impose a range of penalties from non-discretionary fines of CI$5,000 for minor breaches to discretionary fines of up to CI$100,000 on individuals and CI$1 million on entities for very serious breaches. CIMA can impose cumulative fines of up to CI$20,000 for ongoing occurrences of the same minor breach.
So far, the new rules only encompass breaches of The Anti-Money Laundering Regulations, 2017, but other regulatory laws are expected to be added shortly. The regulatory laws of most interest to hedge funds will be the Mutual Funds Law (as revised), the Securities Investment Business Law (as revised) and The Directors Registration and Licensing Law, 2014.
“CIMA has been consulting with the financial services industry on an administrative fines regime for some time and draft regulations have been in circulation for a while,” comments Jarrod Farley, Partner, Carey Olsen.
“I think because of the CFATF inspection in December 2017, CIMA felt the need to prioritise their enforcement powers in relation to the AML Regulations, but I would expect the other regulatory laws to be added in the next few months. It’s quite a sea change on the enforcement side. Up until now, CIMA had the ability to impose certain penalties but they were mostly for low-level breaches, such as being late paying annual fees on time.
“Most serious breaches of the regulatory laws are offences that until now have only had criminal sanctions. This meant that enforcement has required a criminal prosecution, which takes it outside CIMA’s immediate control and is generally a slower, more costly process with a need to meet the criminal burden of proof (i.e. proof beyond a reasonable doubt). An administrative fines regime will definitely make it quicker and easier for CIMA to enforce Cayman’s regulatory laws.”
The introduction of the new enforcement regime complements the new Anti-Money Laundering Regulations, 2017, which have been strengthened and which replace the Money Laundering Regulations (2015 Revision). Both were introduced ahead of the CFATF inspection that took place in December 2017. CIMA will now have the ways and means to sanction those who breach the AML regulations. This is important within an OECD context, as it demonstrates that Cayman’s regulatory regime is effective and that CIMA has the ability to properly enforce the rules.
“Typically, a lot of the things that hedge funds trip on every year will largely be characterised as non-serious breaches, but these now have a fixed CI$5,000 penalty. For regulated hedge funds, their annual fees don’t even come to that amount. Even though it’s a modest offence, it will come as somewhat of a financial jolt to some investment managers.
“One example of a non-serious breach would be a fund filings its audited accounts late, without having obtained prior permission from CIMA, which a substantial number of hedge funds are quite bad on. CIMA understands that there can be delays, especially if it’s a fund-of-hedge-funds that needs to wait for the underlying funds to report before they can finalise their audited accounts, and it is willing to give waivers to extend the filing deadline by one or two months. But funds are supposed to go and ask for that extension. They can’t just not file on time and expect there to be no consequences.
“In the past, CIMA simply did not have a big stick to enforce the rules; now they will, going forward. And I expect them to do so quite quickly. I think CIMA will be keen in the first 12 months to show that they are using those enforcement powers,” explains Farley.
One important point that Farley makes is that following a consultation between CIMA and the Cayman Islands’ service provider community, CIMA agreed to include a 30 day rectification period for non-serious breaches, which demonstrates that the purpose of the new enforcement regime is to encourage compliance, rather than simply raising revenue.
Most of the regulatory changes that have happened in Cayman over the last 12 months by and large involved tightening up rules ahead of the recent CFATF inspection. For example, unregulated hedge funds and PE funds are now subject to the requirements of the AML Regulations.
Most hedge funds won’t need to worry too much because for the most part they will be outsourcing AML compliance to their administrator; who in turn will have in place a Money Laundering Reporting Officer and Compliance Officer, now referred to as an Anti-Money Laundering Compliance Officer. In addition, the entity conducting AML and KYC activities will need to appoint a Deputy Money Laundering Reporting Officer under the new regulations.
“The provisions around delegation are such that as long as the fund is delegating to an administrator that is subject to AML regulation in Cayman or an equivalent jurisdiction (as set out in a list approved by the AML Steering Group), or is directly complying with the AML regulations, there’s no real change and basically business as usual.
“It looked for a while as though every Cayman hedge fund might need to appoint its own MLRO but CIMA has since clarified this and the role can still be outsourced on a delegated basis,” confirms Farley. He says that the AML changes are more focused on encouraging a risk-based approach than on adding more prescriptive requirements.
“The big change is for unregulated funds such as hedge funds that fall within the section 4(4) exemption. These are funds that have no more than 15 investors where the investors can appoint and remove the operators by majority vote. They fall outside the requirement to register with CIMA, and weren’t automatically subject to the previous AML regulations. These investment vehicles do now have to comply with the updated AML regulations,” adds Farley.
One of the natural upsides to any jurisdiction that works hard to strengthen its regulatory regime is that it gives greater confidence to investment managers and, importantly, their end investors.
In that regard, Cayman is no exception. Confidence in the jurisdiction remains as high as ever.
“What you can see in the numbers is that they have pretty much stabilised at around 7,500 registered funds. We’ve seen considerable growth in fintech funds over the past year, most recently in those focused on crypto assets, and we expect that trend to continue.
“The recent enhancements to Cayman’s AML regime and CIMA’s enforcement powers continue Cayman’s tradition of complying appropriately with international standards in a market-sensitive way, and will continue to support Cayman’s reputation as the pre-eminent hedge fund jurisdiction.”
