Cayman Islands bank regulatory update - June 2020

Cayman Islands Bank Regulatory Update - June 2020

The COVID-19 pandemic has triggered a number of operational and administrative challenges across the global legal and economic landscape. This regulatory update summarises some of latest developments and the key issues relevant to financial institutions with legal and regulatory links to the Cayman Islands.

Electronic Signatures Under Cayman Islands Law

In recent weeks we have fielded a lot of questions from clients on the validity and enforceability of electronic signatures under Cayman Islands law. Generally, electronic signatures are acceptable and enforceable under Cayman law provided that the electronic signatures and the method of creating such electronic signatures:

(a) are reliable in light of their purpose and the circumstances; and

(b) otherwise meet the requirements of all relevant legislation, regulation, contract or deed with respect to such signatures.

For further guidance on the validity and enforceability of electronic signatures under Cayman Islands law please see our full briefing note available here.

Cayman Islands Monetary Authority Advisory Regarding AML/CFT Compliance During COVID-19

The Cayman Islands Monetary Authority (CIMA) remains fully operational and continues to operate on a remote working basis.

CIMA recently issued an advisory to all regulated entities concerning anti-money laundering and countering the financing of terrorism compliance during COVID-19. This advisory covers issues relevant to regulated entities in the current environment, such as remote and electronic verification of customer identity, risk assessments, updating policies, procedures and documentation and staff training. A copy of the advisory is available here.

Cayman Apostille Services

Unfortunately the Cayman Islands Passport and Corporate Services Office, which administers apostille services in the Cayman Islands, is currently unable to accept documents for apostilling. As an alternative the Passport and Corporate Services Office has set up a process where anyone seeking to rely on the signatory of a Cayman licensed notary is able to contact them to confirm the authenticity of the notary's signature.

Registered Persons Under The Securities Investment Business Law

As of January 2020, the regulation of securities investment business in the Cayman Islands evolved. The changes were a significant development in the securities investment business regime. The core change was the abolition of the "excluded person" concept and adoption of the "registered person" regime. We understand that CIMA is still continuing to process applications for re-registration by entities that were previously excluded persons but some financial institutions will now have received confirmation that their applications have been successful.  

The registered person regime places certain additional obligations on registered persons (which were not placed on excluded persons). Some of these new obligations on registered persons include:

• A registered person is required to notify CIMA within 21 days after any material change in the information filed by the registered person in its application or annual declaration (that is due on 15 January each year).
• A registered person must notify CIMA within 21 days of the issue, transfer or disposal of shares or ownership interest in the registered person or any parent entity of the registered person.
• A registered person shall separately account for the funds and property of each client and for the registered person’s own funds and property.
• A registered person shall have a minimum of two directors (or one corporate director if the registered person is a Cayman company), managers, partners or equivalent officers, as applicable. 
• A registered person shall remove or replace a senior officer who is convicted in any country of an offence involving dishonesty upon conviction.
• A registered person is required to notify CIMA within 21 days of any alteration in the composition of its senior officers. 

Please note that these obligations are in addition to any obligations that a registered person may have under any other Cayman regulatory law (such as the Banks and Trust Companies Law, which will be relevant to those registered persons who are also class B bank licensees) and are also outside the scope of any relevant exemptions granted under such other regulatory laws.

In addition, CIMA's enforcement powers under the Securities Investment Business Law have been expanded, such that CIMA now has a full range of enforcement powers available to it in respect of registered persons (which were previously only available to CIMA in respect of licensees). As a result it is important that registered persons are aware of, and comply with, their new obligations under the Securities Investment Business Law.

Economic Substance

The Cayman Islands adopted legislation in January 2019 requiring certain legal persons carrying on certain activities to have demonstrable economic substance in the Cayman Islands (Economic Substance Law). Institutions should be familiar with their requirements under the Economic Substance Law and should have undertaken the analysis required to complete the requisite filings by 31 January 2020 (the first filing deadline). An amendment passed in February 2020 to the Economic Substance Law now clarifies that all legal persons, not just those that the Economic Substance Law applies to, are required to make a filing with the Registrar of Companies prior to the filing of such person's annual return with the Registrar (normally required by 31 January annually). In particular, where a legal person is relying on an exemption under the Economic Substance Law, certain information must still be filed, including for example filing evidence of foreign tax residency where an entity is relying on the tax resident exemption.

Recently the Department for International Tax Cooperation published a form for those entities that are relying on an exemption from the Economic Substance Law on the basis of tax residency in another jurisdiction. This form (titled, Form for an Entity Tax Resident in Another Jurisdiction) is the means through which an entity can evidence to the Tax Information Authority that it is tax resident outside of the Cayman Islands. The 2020 deadline for submission of the form is 31 December 2020.

CIMA On-site Inspections

CIMA recently published a short summary of the on-site inspections it had conducted at licensees during 2019 (available here).

Some observations of note are:

• On-site inspections at class B banks made up nearly 25% of the total number of inspections that CIMA carried out in 2019 (43 class B banks were inspected out of the 200 inspections that CIMA carried out).
• Anti-money laundering / counter-terrorist financing (AML/CTF) and sanctions risk was the compliance area where most deficiencies were found. Common areas of non-compliance were: deficient policies and procedures; inadequate periodic reviews and on-going monitoring; incomplete customer due diligence and know-your-customer documentation; and an inappropriate risk-based approach.  
• Risk and operation management was the compliance area where the second most deficiencies were found. Common areas of non-compliance were: inadequate internal measures and policies relating to operational risk; and inadequate policies, procedures and documentation concerning outsourcing arrangements.  

CIMA are continuing to conduct on-site inspections albeit, at this current time, the inspections are being carried out remotely via teleconference. In our view, licensees should expect CIMA to continue to place an emphasis on AML/CFT and sanctions risk as part of the on-site inspections and licensees ought to ensure that they are compliant with these obligations and other applicable obligations arising under Cayman law and regulations.

Administrative Fines

The Banks and Trust Companies Law was amended in May to provide CIMA with the ability to impose administrative fines on bank and trust company licensees as part of CIMA's enforcement powers.

If we can be helpful in any way or if you would like more information please get in touch with one of our team or your usual Ogier contact.