The Cayman Islands has recently taken a number of measures to reinforce its position in the global financial services market.
It has overhauled its anti-money laundering and counter terrorist financing legislation, which includes explicitly bringing unregistered (ie not registered with CIMA) hedge funds and private equity funds, under its revised AML regulatory regime.
The complete legislation and regulations (which have been updated over the last 12 months) came into force in December 2017.
Specifically talking about the impact on investment funds, Matthew Taber, Partner, Harneys comments: “Previously there was a lacuna in the legislation and regulations, which meant that only those funds registered with CIMA were explicitly caught by the AML regulations. That gap, to the extent that it wasn’t plugged voluntarily, has now been closed by the updated legislation. It’s now explicit, that if you are investing, managing or administering funds or money on behalf of other people, you must have a comprehensive AML compliance programme in place either being operated by the fund itself or, more usually, being delegated to a third party such as a fund administrator”.
In practice, investment funds were already operating on the basis that they needed proper AML checks and controls in place anyway; now the legislation simply codifies this.
This is important in respect to Cayman’s latest Caribbean Financial Action Task Force inspection in December, and in respect of the Paradise Papers leak in November, which threw offshore financial jurisdictions under the spotlight of mainstream media. The more Cayman ensures that its AML legislation is up to date, says Taber, the more it “demonstrates that the jurisdiction is operating in line with global best practices”.
With technology advancing so rapidly, financial services providers could potentially use blockchain technology (or broader distributed ledger technology) to further reinforce investor transparency and guard against nefarious activity.
“The way in which AML/KYC processes will potentially overlap with DLT is very interesting. Rather than being a check-the-box regime, the updated Cayman AML regime emphasises that AML compliance should be risk based. If you look at the ability of technology to enhance transparency and certainty in relation to, for example, identity confirmation, the financial services industry could greatly benefit from digital identity solutions which combine modern solutions (eg facial recognition or biometrics such as fingerprint scanning) with something like DLT.
“If a certified or verified digital ID were to exist within a globally accepted blockchain ecosystem that takes things to yet another level. Then you’ve got a certified digital ID approved by a bank that can be used in Cayman, or globally, and this could significantly enhance AML capabilities and reduce compliance costs. In part, the changes to our AML regime will allow us to explore these new technologies using risk as a guiding factor,” explains Taber.
The Paradise Papers leak/cyber attack reflects a wider data protection and cyber security challenge that offshore jurisdictions must contend with. The Cayman Islands has a laser focus on this, recently passing new Data Protection Law (‘DPL’) with a view to putting Cayman in a position to allow it to be confirmed by the European Commission as having adequate data protection safeguards, enforceable rights and legal remedies as part of the introduction of the GDPR in Europe. It is currently expected that the DPL will come into force with necessary amendments after the GDPR comes into force in Europe.
“As a leading offshore jurisdiction with a focus on financial services, ensuring that there are no restrictions to global data flow through Cayman is important. The intention of passing the DPL and when they are available, the associated regulations, is to allow Cayman to have equivalency to European standards with respect to data protection,” comments Taber.
He further adds: “As a result, much as happened in the late 1990s in the UK when the original Data Protection Act was passed, the Cayman financial services industry will need to ensure that systems and procedures are compliant. That said, many Cayman financial service providers are already operating to very high standards in this regard and compliance should be straightforward for most.”
In addition to these other regulatory changes, the Monetary Authority (Amendment) Law 2016 and associated regulations are now in force, which allow CIMA to impose a range of penalties from non-discretionary fines of KYD5,000 for a minor breach up to KYD1 million for a serious breach of regulatory laws.
“CIMA needed to change its legislative regime to give it more ability to impose financial penalties and to put it on a level playing field with onshore regulates. For example, it can now properly deal with funds and investment managers who ignore their regulatory obligations.
“It is right that regulators have the power to impose appropriate fines for bad behaviour in offshore jurisdictions to ensure compliance with laws and regulations and this is being seen as a welcome move in the industry,” concludes Taber.
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