By Angele Paris – The past year has been far from straightforward, with a shifting business landscape, sustained fallout from the Covid-19 pandemic plus global uncertainty and volatility causing upheavals. But despite the challenges, the Cayman Islands financial services industry has continued to prove its resilience and flexibility – weathering the storms.
“As of December 2021, there were 27,398 regulated funds, compared to 24,591 the previous year. This increase included a growth in the number of both regulated mutual and private funds of 6.9 per cent and 15.6 per cent, respectively,” noted Cindy Scotland, managing director of the Cayman Islands Monetary Authority in her review of last year.
Further, the 2020 Investments Statistical Digest, shows total assets increased 9 per cent between 2019 and 2020 from USD8.104 trillion to USD$8.869 trillion. In addition, net income was USD639 billion compared to USD451 billion the previous year, reflecting another consecutive growth in overall assets managed by Cayman-based funds, thus maintaining its position as a leading jurisdiction in offshore investment funds.
Growth in tough times
This growth however, should be considered against a potentially challenging backdrop which sees the Cayman Islands earmarked for inclusion on the European Union’s list of high-risk countries for money laundering.
The Cayman Islands is no stranger to additional scrutiny, having been listed by the FATF in February 2021 for discrepancies in its AML framework. Therefore, operators, and even the Cayman Islands government, had been expecting the inclusion in the EU’s list given it usually mirrors that of the FATF.
Following the FATF listing earlier last year, the Cayman Islands government committed to addressing the issues and in October 2021, the FATF acknowledged progress made in this regard.
Although this development might seem ominous, the funds industry is anticipated to be unaffected. “There is no immediate or direct impact to private equity or hedge funds formed in the Cayman Islands as a result of the Cayman Islands being added to the EU AML list and it does not otherwise have consequences for investors or clients using Cayman Islands structures. No penalties or sanctions for Cayman Islands entities would arise from the Cayman Islands’ placement on the EU AML list,” highlights law firm Walkers.
Scotland adds: “CIMA will also continue its vigorous oversight of AML/CFT obligations to promote and safeguard the integrity of the Cayman Islands’ financial services industry, thus demonstrating the robustness of our regulatory framework. In the coming months, all regulated entities will be asked to provide various information that will help to inform CIMA’s AML/CFT institutional and sectoral risk assessments.”
In terms of other developments planned within the jurisdiction, Scotland says future initiatives will include the implementation of measures governing the liquidity framework of banks, continued work on building issuance and sandbox frameworks, revisions to the way that re-insurance arrangements and investments strategies are undertaken as well as preliminary research into the enhancement of the securities sector. “A key focus will also include the assessment of cybersecurity frameworks which will be conducted through a series of thematic reviews in addition to being assessed through the regular onsite inspections,” she continues.
Virtual asset focus
Despite these operational challenges, the jurisdiction is firmly focused on supporting growth in new and exciting sectors.
Commenting on the release of an EY report following the firm’s global alternative fund survey, Jeff Short, partner at EY Cayman Ltd and regional wealth & asset management leader said: “Alternative fund managers have partnered with their investors to nimbly embrace opportunities during the market turbulence of the pandemic. The industry is undergoing proactive transformation on several fronts, enhancing its value proposition.”
The EY report noted that digital assets have become mainstream and this is an area in which the Cayman Islands has sharpened its focus.
According to the third annual Global Crypto Hedge Fund report by PwC and Elwood Asset Management, Cayman is the most popular domicile for crypto hedge funds as 34 per cent are based here, after the United States.
This ranking could be considered the result of legislative changes introduced in 2020, when Cayman issued the Virtual Asset (Service Providers) Act. In February this year, CIMA launched a consultation on draft rules and guidance for the provision of services by virtual-asset custodians and virtual-asset trading platforms.
In its consultation document CIMA notes: “Due to the nascent nature of the VA industry, there are currently no harmonised international standards for the prudential regulation and supervision of virtual assets service providers.”
The proposed rule supports the regulatory requirements in the VASP Act by setting out obligations for both custodians and trading platforms in areas such as governance, conduct of business, prudential requirements, risk management as well as IT and cybersecurity. It also separately ascribes obligations to trading platforms and persons providing virtual asset custody services as appropriate to the nature of their business.
The additional work being done to refine the services provided to those managing virtual assets show the jurisdictions dedication to this nascent sector.
“Despite the relentless changes of the financial landscape, CIMA remains committed to playing its part in contributing to the ongoing success of the jurisdiction, while upholding our position as a globally respected financial services centre of excellence for the next 25 years and beyond,” concluded Scotland.
