01 Dec 2020

IMS 2020 Roundup

2020 – What was that?

“What a year it’s been” is an expression that feels somewhat overused at the best of times and yet as we near the end of 2020, it’s hard to put into words the sentiments we’ve all felt this past year!

Here in Cayman we seem to have had it all – earthquakes, fires at the rubbish dump, one of the most active hurricane seasons on record (29 named storms). And of course, the COVID-19 pandemic that introduced working from home, closed borders and global travel bans, lockdowns, quarantines, social distancing, mask wearing, and unsurprisingly decimated Cayman’s tourism sector. 

Despite all of this, Cayman has fared extremely well, to an extent we have been lucky. Certainly, that is true with respect to the passing hurricanes that severely damaged Central America and the Southern US. Equally when it came to COVID prevention protocols, the Cayman Islands Government’s swift action and hard line approach to lockdown put us in the top percentile globally, with zero active community cases and only two COVID related-deaths from high risk overseas travellers. Considering what the rest of the world is facing, we are very fortunate to find ourselves in such a good position – even if it involved many challenging weeks of homeschooling!

2020 has seen substantial impact on the Cayman Alternatives market. The global effects of the pandemic, a US presidential race and a whole host of new regulation have kept us on our toes. The increased volatility has created both opportunity and turmoil within the alternatives market. Flexibility and speed to rebalance investment portfolios and to adapt to new working arrangements seemed to be a large generator of alpha, leaving strategies with tighter investment restrictions struggling. New managers looking to raise capital have run into difficulties as allocators try to adjust to satisfy due diligence requirements.

Cayman has, moreover, undertaken some major regulatory changes which we will highlight below. These topics have been widely covered throughout the year, so this is a brief summary with links to further information. If you have any queries, please feel free to reach out to your IMS contact.

 

EU Blacklist

On 18 February 2020 Cayman was added to the EU’s list of non-cooperative jurisdictions for tax purposes (aka the EU Blacklist). This decision disappointed lawmakers and industry members since regulation to comply with EU demands had already been passed into legislation. However, the overall effect was little felt across the industry. The US took no notice and the EU’s subsequent review resulted in Cayman’s removal from the Blacklist on 6 October 2020. Read more here.

Private Funds Law and Mutual Funds Law

On 7 February 2020 the Private Funds Law, 2020 was passed into legislation. Largely aimed at meeting demands from the EU, this law brought more than 7,000 closed-ended entities under the scope of the Cayman Islands Monetary Authority (CIMA). Requirements for an annual audit and rules around the safe keeping and valuation of assets are intended to provide better overall governance and protection for investors. More info on these rules can be found here.

At the same time the Mutual Funds Law was amended to bring previously exempt limited investor (<15 investors) mutual funds under the scope of CIMA. The reporting requirements are in line with other regulated open-ended funds.

A six-month transitional period was granted for both new pieces of legislation and since the 7 August 2020 registration deadline, CIMA have been quite busy handling the volume of applications – if you are still waiting to hear from CIMA in relation to your fund don’t be too alarmed.

As a result, most Cayman Islands funds will now have to be registered with and regulated by CIMA. While this does add some regulatory burden, such as the requirement for an annual audit, the vast majority of funds already met the imposed criteria, and the extra oversight provides greater comfort for investors. Many asset managers are seeing these pieces of legislation aid fundraising efforts with larger investors. For further details click here.

And so much more

There have been significant updates to the Companies Law including the introduction of filing requirements for the Register of Members (must now include whether shares hold voting rights or not), Register of Directors (changes must be filed within 30 days) and a refresh of the fines applied to breaches of the regulations.  More info on fines can be found here.

Version 3.0 of the Guidance to the Economic Substance Law was issued in July and included sector specific guidance as well as re-defining certain terms. Our clients should remember that an annual Economic Substance Report is due 31 December for “Relevant Entities” conducting “Relevant Activities”. More information can be found on the Department for International Tax Cooperation’s website here.

CIMA has introduced a Rule on Cybersecurity. While still to be finalized, this rule gives guidance for financial services companies and the alternative investments industry on developing robust and rigorous cybersecurity frameworks. The Rule covers many areas including the specifics of the framework, the introduction of an internal governing body, staff training, data protection and what to do when breaches of cybersecurity are detected. CIMA’s Statement of Guidance on Cybersecurity can be found here.

Anti-Money Laundering Regulations were also updated earlier this year - the key change being the removal of an approved list of jurisdictions with equivalent standards, instead transferring the onus onto individual entities to make their own assessments as part of their AML procedures. Fresh guidance notes were issued and these can be found here.

Up Next

FATCA & CRS - DITC Portal

The Department for International Tax Cooperation (DITC) has now launched their new online portal. This replaces the AEOI Portal previously used for FATCA and CRS reporting.  16 December 2020 is both the FATCA/CRS reporting deadline and the CRS filing declaration deadline. DITC Portal - DITC Portal User Guide
Furthermore, a new CRS compliance form has been released and all Cayman FIs will need to complete this annually. For the 2019 reporting year, the filing deadline for this form is 31 March 2021.

Liquidations

As always at this time of the year, managers should consider the wind-up process for any unnecessary structures. This year, with the added regulatory measures and CIMA filing fees, more managers may seek such action. Anyone considering this option will have to move fast. The process can be relatively straightforward but there are some key timelines that must be met to avoid 2021 CIMA and Companies Registrar fees. 

Any entity still registered with CIMA on 31 December 2020 will incur 2021 fees. Similarly, any company that has not held its final general meeting and submitted the relevant documents to the Registrar by 31 January 2021 will incur 2021 annual fees. 

Even if these timelines have been met you should be aware that FATCA and CRS reporting for 2020 should still be filed at the appropriate time. More info on liquidations can be found here.

Audits

Finally, with 2020 being the year it was, it is understandable that the audit firms will be approaching 2020 year-end audits with extra caution. 

It can be expected that any breakdown in controls procedures, e.g. due to working from home arrangements, will lead to a shift towards a fully substantive testing approach. Furthermore, auditors will likely pay particular attention to management’s assessment of ongoing concern. For any entities with large holdings in underlying investments it can be assumed the same level of attention will be paid to these investments.

While there is unlikely to be dramatic change to the prior year’s procedures and audit approach, be prepared for enhanced scrutiny during the audit period.

FAR Form 4.0

FAR Form Completion Guide


About the Author
James Macfee is an independent fund director at IMS in the Cayman Islands and can be contacted at: jmacfee@ims.ky.

IMS is one of the longest established company management firms in the Cayman Islands. IMS is licensed by the Cayman Islands Monetary Authority to provide independent directors, company management and incorporation, mutual fund administration, captive insurance and trust services. For more information about our services, please contact us.

Disclaimer: this publication does not constitute legal or professional advice and should not be relied on as such.