* Updated 31 July 2019 *
Entities registered with the Cayman Islands Monetary Authority (CIMA) as excluded persons under the Securities Investment Business Law (2019 Revision) (SIB Law), such as Cayman-incorporated investment managers and investment advisers, should note two recent regulatory changes that require action.
AML/CFT reporting forms due by 15 August 2019
Excluded persons are required to file two forms with CIMA, via their registered offices, by 15 August 2019:
(i) AML/CFT Inherent Risks – Securities - AIR-157-75
(ii) AML/CFT Risk Controls – Securities - ARC-158-75
These filings are required pursuant to recently enacted legislative changes to the Anti-Money Laundering Regulations (2018 Revision) (AML Regulations).
The forms request detailed information in relation to excluded persons' activities, including:
AML/CFT Inherent Risks – Securities - AIR-157-75
- Categorisation of clients by type (financial institutions, non-profits, government agencies, corporates etc), geography and sophistication (HNWs, sophisticated investors, PEPs)
- Organisational structure and geography of the excluded person and its owners and controllers
- Distribution channels, ie, means through which the excluded person acquired its clients (direct engagement, through eligible introducers etc)
- Types of securities traded for clients (shares, debt instruments, options, futures etc) and jurisdictions in which those securities are traded
- For investment managers, whether they have a physical presence in Cayman
AML/CFT Risk Controls – Securities - ARC-158-75
- Details of the excluded person's AML programme, including details of board-level oversight, submission of a copy of AML policies and procedures, details of ongoing risk assessments and AML audits and details of AML training
- Frequency and manner of ongoing monitoring of high-risk clients and transactions
- Monitoring procedures for eligible introducers
- Sanctions screening procedures
Although Form AIR-157-75 seeks extensive data on each excluded person's "clients", entities managing or advising one or more investment funds do not appear to be required to look through these investment funds to their ultimate investors. Entities operating managed accounts for their clients or undertaking other types of business may find the forms more onerous to complete.
The forms must be submitted through CIMA's Regulatory Enhanced Electronic Forms Submission (REEFS) platform. Ogier has created editable copies of the forms so that affected entities can start the process of gathering the data required.
Failure to file
Failure to complete and submit the forms by the 15 August 2019 deadline could result in deregistration of the excluded person.
CIMA has also made it clear that filing of these forms is a prerequisite for re-registration of excluded persons, as discussed below.
Excluded persons must pay immediate attention to their AML programme and how it is documented and implemented. All excluded persons should already have in place existing policies and procedures, but form ARC-158-75 requires that a copy be submitted to CIMA together with granular details about the date that such policies were last updated, dates and results of risk assessments (a copy of which must be submitted) and board involvement in AML matters. This is the time to ensure that all policies are up to date and consistent with the AML Regulations and that all requirements relating to reporting, AML audit and officer functions have been complied with.
This data will then need to be sent to the excluded person's registered office in Cayman at least one week before the 15 August 2019 deadline, in time for it to be input and uploaded.
We anticipate that many excluded persons will need assistance in order to confirm that they have provided AML/CFT training as anticipated in form ARC-158-75. Ogier is able to provide training appropriate to the business undertaken. Please let us know if you would like to discuss this.
Amendments to SIB Law
On 5 June 2019, the Securities Investment Business (Amendment) Law, 2019 was passed (SIB Amendment Law). This amends the SIB Law in certain important respects for excluded persons. The amendments stem from a review conducted by CIMA which identified certain regulatory and reputational risks in the excluded person regime.
A key driver for the amendments was to give discretionary powers to CIMA in respect of an applicant for registration as an excluded person, including the power to refuse registration and to make an assessment as to whether the applicant's shareholders, directors and senior officers are fit and proper persons.
To achieve this, the SIB Amendment Law requires that all existing excluded persons re-register as "registered persons". The scope of the excluded activities has not changed, so an entity eligible to be an excluded person will be eligible to re-register as a registered person on the same basis. However, CIMA will consider such re-registration application on its merits in accordance with its new powers.
To re-register, excluded persons must, among other things, be in good standing with CIMA and complete a re-registration form. The re-registration must be completed by 15 January 2020.
A registered person will be required to have a minimum of two individual directors registered under the Directors Registration and Licensing Law, 2014 or a corporate director licensed under that law. Corresponding requirements apply to the general partner of a partnership and managers of an LLC or a registered foreign company.
Registered persons will be required to notify CIMA within 21 days of:
- any changes in the information filed by the registered person in its application or annual declaration;
- the issue, transfer or disposal of shares or interests in the registered person; and
- ceasing to carry on securities investment business (and shall thereupon deregister).
A registered person will be required to account separately for the funds and property of each client and for its own funds and property.
Examination and enforcement powers
CIMA has the power to direct a registered person to cease or refrain from the performance of acts that CIMA considers to be unsafe or unsound practices. There are material penalties for failure to comply with CIMA's directions.
Whenever it considers it necessary, CIMA may examine, by way of the receipt of regular returns, on-site inspections, auditor's reports or in such other manner as it may determine, the affairs or business of any registered person.
If CIMA knows or has reasonable grounds to believe that a registered person –
- is unable or appears likely to become unable to meet its obligations as they fall due;
- is carrying on business fraudulently or otherwise in a manner detrimental to the public interest, to the interest of its clients or to the interest of its creditors;
- has contravened any provision of the SIB Law or AML Regulations;
- has failed to comply with a condition of its registration;
- has not conducted the direction and management of its business in a fit and proper manner or has directors, senior officers, managers or persons who have acquired ownership or control who are not fit and proper persons; or
- has failed to comply with any lawful direction from CIMA,
then CIMA may take certain steps, including:
- cancelling the registration;
- imposing conditions upon the registration;
- applying to the court for any order which is necessary to protect the interests of clients or creditors of the registered person;
- at the expense of the registered person, requiring that an auditor's report be submitted to CIMA on the registered person's anti-money laundering systems and procedures for compliance with the AML Regulations;
- requiring the substitution of any director or officer of the registered person or the divestment of ownership or control;
- at the expense of the registered person, appointing a person to advise or assume control of the registered person; or
- requiring such action to be taken by the registered person as CIMA reasonably believes necessary.
The re-registration form is now available on the CIMA's REEFS platform.
Excluded persons should consider the re-registration requirements, including the need to be in good standing and the requirement for a minimum of two duly registered directors, to ensure that they can re-register by the deadline and remain in compliance thereafter.
Economic substance legislation
The SIB Amendment Law re-registration process for excluded persons will not affect the applicability of Cayman's economic substance legislation, except with respect to those excluded persons carrying on the business of managing securities (investment management).
Under Cayman's economic substance legislation, such investment management entities may fall within the category of relevant entities carrying on the relevant activity of fund management business. However, this will only be the case from the deadline for such entities to re-register under the SIB Amendment Law. Therefore such entities will be regarded as in scope for Cayman's economic substance legislation from 15 January 2020, regardless of whether the entity registers in advance of that date.
We can provide separate advice as to the options available to investment managers and other entities that are or will be subject to Cayman's economic substance legislation.