2018 ISSUE 4
CAYMAN ISLANDS THE PREMIER GLOBAL FINANCIAL HUB
CE INNOVATION BALANCE EXCELLENCE INNO-
EXCELLENCE INNOVATION BALANCE EXCEL-
N BALANCE EXCELLENCE INNOVATION BALANCE
OVATION BALANCE EXCELLENCE INNOVATION BAL-
E INNOVATION BALANCE EXCELLENCE INNOVATION
ENCE INNOVATION BALANCE EXCELLENCE INNOVATION
LENCE INNOVATION BALANCE EXCELLENCE INNOVATION BAL-
CE INNOVATION BALANCE EXCELLENCE INNOVATION BALANCE
OVATION BALANCE EXCELLENCE INNOVATION BALANCE EXCEL-
ON BALANCE EXCELLENCE INNOVATION BALANCE EXCELLENCE INEXCELLENCE ANCE EXCELLENCE INNOVAT ANCE EXCELLENCE INNOVATION BALANCE LLENC INNOVATION BALANCE EXCELLENCE IN-
OVATION BALANCE EXCELLENCE INNOVATION BALLENCE INNOVATION BALANCE EXCELLENCE INX-
VATION BALANCE EXCELLENCE INNOVATION BALANCE
We like to take a different path. Yours.
Entrepreneurial thinking meets wealth management.
efginternational.com
EFG International’s global private banking network operates in around 40 locations worldwide, including Zurich, Geneva, Lugano, London, Madrid, Milan, Monaco, Luxembourg, Hong Kong, Singapore, Cayman Islands, Nassau, Miami, Bogotå and Montevideo. In the Cayman Islands, EFG Bank (Cayman), 9 Forum Lane, Camana Bay, P.O. Box 10360, Grand Cayman KY1-1003, Cayman Islands, Tel +1 345 943 3350.
MESSAGE FROM THE CHAIRMAN
I am pleased to present the fourth annual Cayman Finance magazine. This year’s magazine reflects the major events and trends we have seen in our industry, our jurisdiction and our organisation in 2017 – and what those events may mean for the year ahead. Whether in times of global uncertainty or tremendous growth, the importance of Cayman as a top international financial centre shines through. Because we are home to over 70% of the world’s hedge funds and thousands of private equity and venture capital funds, the Cayman Islands is well positioned to provide inward investing, financing, and liquidity into economies of both developed and developing countries during times of need or uncertainty. As an industry, financial services in Cayman and around the world experienced more of the change, dynamism and growth that makes it such an exciting and productive sector. Innovations in financial technology (FinTech) continued their path of disruption at a breath-taking pace, with new developments in areas such as blockchain, artificial intelligence, robo-advisors and more. Cayman Finance’s FinTech Working Group continues to assess how Cayman can stay at the forefront of these changes. As we were reminded by the illegal data hack in late 2017, cyber security and data protection continue to be critical for our industry, even as we invest in new and innovative measures and practices. Cayman Finance continues to coordinate efforts by firms in our jurisdiction to employ the best possible practices, updating and adjusting to ensure we meet the highest global standards. As a jurisdiction, meeting the highest global standards is an area in which the Cayman Islands have excelled for decades and 2017 saw a continuation of that commitment. Cayman received a ‘largely compliant’ rating in a peer review report by the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes. This is the same rating received by top rated G20 member countries Canada, Germany and Australia and further establishes Cayman’s place among the G20 Plus jurisdictions. Cayman was also rated as ‘cooperative’ by the EU in its assessment of non-cooperative tax jurisdictions. These ratings reflect decades worth of hard work by government and industry to meet or exceed globally-
accepted standards for transparency and cross border cooperation on exchange of tax information. That hard work continued in 2017 when Cayman joined the OECD’s Inclusive Framework on Base Erosion and Profit Shifting (BEPS). Cayman also began development of a technology platform to enhance our world class verified beneficial ownership regime to support even faster information sharing. New Anti-Money Laundering Regulations also introduced this year sought to formalise the anti-money laundering practices the industry has already been following. In addition to regulatory enhancements, industry innovations continued in 2017 as well. New laws such as the Limited Liability Partnership Law and the Foundation Companies Law and the Trusts (Amendment) Law have ensured the jurisdiction remains competitive in the marketplace. This progress highlights Cayman’s continued focus on balancing regulatory and commercial priorities with its adherence to the highest global standards. Finally, as an organisation Cayman Finance had one of its most productive years ever. Cayman Finance was a significant presence at many key events such as the Cayman Alternative Investments Seminar, STEP Caribbean Conference 2017, Fidelity CEO Conference and more. Internationally, CEO Jude Scott travelled extensively to promote and support our jurisdiction and our industry, including several trips to London and New York as well as Milan and Paris. During those trips, he engaged key stakeholders and media with positive messaging and materials about Cayman and its key role as a premier global financial hub and transparent, cooperative jurisdiction. These visits resulted in positive media coverage and new connections that will benefit Cayman Finance members in 2018 and beyond. Throughout the magazine you will find more detailed updates on all these topics and more. Thank you to our incredible editors, authors, designers and everyone else behind the scenes responsible for pulling together the magazine you now hold in your hands.
Conor O’Dea is the Chairman of Cayman Finance
Rising to the occasion every day, year after year
PROUD TO BE THE BANKER’S BANK OF THE YEAR IN THE CAYMAN ISLANDS. At Butterfield, we know that when we exceed expectations in every way, every day, we rise. That’s why we’ve spent more than 50 years, in the Cayman Islands, honing our banking and wealth management skills to help clients achieve their goals. Our commitment to excellence in serving our clients, and supporting our employees and the communities where we live and work has once again been recognised with the prestigious Bank of the Year award in the Cayman Islands. Visit us online to find out more about Butterfield’s award-winning services.
www.butterfieldgroup.com
Butterfield Bank (Cayman) Limited is licensed to conduct banking and investment business by the Cayman Islands Monetary Authority. Address: 12 Albert Panton Street, George Town, Grand Cayman, Cayman Islands.
Produced on behalf of Cayman Finance and the Ministry of Financial Services and Home Affairs. CAYMAN FINANCE Fidelity Financial Centre Unit 20, 1 Gecko Link, West Bay Road PO Box 11048 Grand Cayman, KY1-1007 caymanfinance.ky | enquiries@caymanfinance.ky PRODUCED BY TOWER Fidelity Financial Centre, Unit 20, 1 Gecko Link, West Bay Road PO Box 11048, Grand Cayman, KY1-1007 tower.com.ky | info@tower.com.ky CONTRIBUTING WRITERS Conor O’Dea, Hon. Tara Rivers, Hon. Roy McTaggart, Jude Scott, Cindy Scotland, Julian Ashworth, Chris Capewell, Marco Calleja, Peter Colegate, Sheryl Dean, Jim Edmondson, Sandra-Edun-Watler, Shaun Folpp, Lucy Frew, Jonathan Green, Christopher Harlowe, Dara Keogh, Chris Larkin, Jessica Lee, Adrian Lynch, Scott Macdonald, Chris Maiato, Clayton Price, Stephen Price, Tristan Relly, Micho Schumann, Cora Schwendtke, P.H. Richard Smith, Alexandra Simonova, Bob Stanier, Wendy Stenning, Derek Stenson. CONTRIBUTING PHOTOGRAPHERS David Bowerman, Amy Strzalko, Chalmers Gibbs Architects THANKS TO Cayman Finance would like to thank the following organisations for their contribution to this publication: Alternative Investment Management Association (AIMA) Cayman Islands Bankers’ Association (CIBA) Cayman Islands Institute of Professional Accountants (CIIPA) Insurance Managers Association of Cayman (IMAC) Society of Trust and Estate Practitioners (STEP) All rights reserved. No part of this publication may be reproduced in any form of advertising without permission in writing from Cayman Finance. No responsibility for loss occasioned to any person acting or refraining from acting as a result of material in this publication can be accepted. The views and opinions of the writers of articles in this supplement are those of the authors and do not necessarily represent the views and opinions of any organisation that they are employed by, or otherwise associated with.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
TABLE OF CONTENTS
PREFACE 10 Minister of Financial Services & Home Affairs Hon. Tara Rivers ABOUT THE FINANCIAL SERVICES INDUSTRY 12 INDUSTRY OVERVIEW 14 Jude Scott,Cayman Finance ECONOMIC OVERVIEW 22 Minister of Finance & Economic Development, Hon. Roy McTaggart CAYMAN ISLANDS ECONOMY: A SNAPSHOT 26 POLICY UPDATE 28 Minister of Financial Services & Home Affairs Hon. Tara Rivers REGULATORY UPDATE 31 Cindy Scotland, Cayman Islands Monetary Authority THE NEW ANTI-MONEY LAUNDERING REGULATIONS 34 Sandra Edun-Watler ANTI-MONEY LAUNDERING: IT’S NO LONGER IF, BUT 37 WHEN YOU’LL BE INSPECTED Bob Stanier and Cora Schwendtke THE CAYMAN BENEFICIAL OWNERSHIP REGIME 39 Jim Edmondson CAYMAN MARITIME AND AVIATION SERVICES PARK 42 P.H. Richard Smith NOCLAR: A NEW ERA FOR PROFESSIONAL ETHICS 47 TAKE PRIVATES IN ASIA BY WAY OF CAYMAN 50 STATUTORY MERGER Shaun Folpp, Jessica Lee, Christopher Harlowe A TIME ZONE DIFFERENCE OF 13 HOURS 56 Clayton Price CRISIS MANAGEMENT: LESSONS LEARNED FROM 60 NATURAL DISASTERS Alexandra Simonova
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
TABLE OF CONTENTS
64
PROTECTING PERSONAL DATA Peter Colegate
68
CAYMAN MAINTAINS A PRIVATE EQUITY PRE-EMINENCE Sheryl Dean
71
CAYMAN LLCS Jonathan Green & Julian Ashworth
74
G-20 PEER REVIEW REPORT: AN ANALYSIS
76
G-20 PLUS GLOBAL FINANCIAL AGREEMENTS
78
THE CAYMAN MODEL Jude Scott
82
MIFID II AND THE CAYMAN ISLANDS Lucy Frew
84
INFRASTRUCTURE & FINANCIAL SERVICES: CAYMAN’S ROLE
86
AT A GLANCE: BANKING
88
BEYOND FINTECH Tristan Relly
92
IS MANAGEMENT DOING ITS JOB WITH REGARD TO CYBER SECURITY? Micho Schumann
96
PARADIGM SHIFT: DISRUPTION & THE FINTECH EFFECT Marco Calleja & Chris Maiato
100
AT A GLANCE: REINSURANCE
102
THE NEW FINANCIAL REINSURANCE FRONTIER Derek Stenson, Adrian Lynch & Dara Keogh
106
AT A GLANCE: TRUSTS
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
TABLE OF CONTENTS
FAMILY OFFICE LANDSCAPE Chris Larkin
110
WEALTH STRUCTURING Wendy Stenning
116
AT A GLANCE: INVESTMENT FUNDS
120
MONEY MARKEY REFORM MEASURES Chris Capewell
122
RESPONSIBLE INVESTING Stephen Price
126
AT A GLANCE: CAPITAL MARKETS
128
CAYMAN ISLANDS STOCK EXCHANGE Scott Macdonald
130
AT A GLANCE: INSURANCE
132
ABOUT CAYMAN FINANCE: VOICE OF THE FINANCIAL SERVICES INDUSTRY
134
CAYMAN FINANCE: A YEAR IN REVIEW
136
A SNAPSHOT OF OUR YEAR
138
CAYMAN FINANCE BOARD MEMBERS
142
MEMBER FIRMS & INDUSTRY PARTNERS
148
USEFUL RESOURCES
156
LIST OF ADVERTISERS
159
GLOBAL BUSINESS. CARIBBEAN COMMUNITY. Camana Bay is the Caribbean’s only mixed-use, master-planned community where residents, tenants and visitors gather to live, work and play. When you have a business address at Camana Bay, you join a community of global professional services firms, which enjoy the benefits of world-class sustainable development and thoughtful design, all within reach of valued clients.
IRONSHORE PHARMACEUTICALS & DEVELOPMENT INC.
For leasing availability: DANIEL PURDY | +1.345.640.3600 | Daniel.Purdy@DartRealEstate.com
CAMANABAY.COM
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
PREFACE FROM THE MINISTER OF FINANCIAL SERVICES & HOME AFFAIRS HON. TARA RIVERS The Cayman Islands has a strong reputation as a leading international financial centre that attracts sound business, founded upon Government’s commitment to enacting legislation that fosters a commercially vibrant, well-regulated industry. Providing invaluable input into this framework is Cayman Finance which, in representing the breadth of our industry during important consultations with Government, lends cohesion to this process. Also providing input is the Cayman Islands Monetary Authority (“CIMA”), with a strong reputation based upon its deep experience in financial services regulation. By respecting the value of our distinct roles, yet while working collaboratively where appropriate, Cayman is able to fully commit to further strengthening our commercial and regulatory financial services framework in the face of an ever-changing global landscape. Government, Cayman Finance and CIMA all share the intent of continually 10
improving Cayman’s model so that our jurisdiction maintains our position as a leading international financial centre, and continues to add value and stability to the local and global economy. In recognition and fulfilment of our jurisdictional responsibility for setting and directing policy and legislation for financial services, the Government and I (as Minister) remain ready and able to provide these Islands with strong, adroit, and visionary leadership. The Ministry for Financial Services may still be relatively new – having been formally established in May 2013 – but it has accomplished much in a short period of time. I encourage you to read the policy update in this publication, which details recent commercial and regulatory legislative achievements, as well as the Government’s and the Ministry’s international engagement efforts.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
I also bring to your attention Government’s funding increases for the industry, including for Cayman Finance; for our regulator, the Cayman Islands Monetary Authority (CIMA); and for the Ministry itself. Increasing funding across the board represents Government’s commitment and investment into financial services. It demonstrates the clear recognition that Cayman’s financial services industry is central to our own socioeconomic wellbeing and stability, and that we also have an important role as an international financial centre that supports the global industry and economy. In consideration of the above, then, cooperation and cohesion is essential to Cayman’s future position as a premier international financial centre. The hallmarks of Cayman being a successful jurisdiction for our people and for our clients are a Government that analyses, understands and localises global developments; a robust regulator that provides the level of oversight that instils confidence in our country; and a professional industry, being keenly aware of market and regulatory developments, that maintains its commercial edge. On behalf of the Ministry and Government, I have all confidence that this publication will give readers greater insight into Cayman’s place as a leading international financial centre, and confirm that our jurisdiction is a top choice for clients across all sectors of the global financial services industry.
ABOUT THE AUTHOR Prior to her first election, the Hon. Tara Rivers, JP, MLA, Minister of Financial Services and Home Affairs, was a structured finance and corporate lawyer, having practiced law at a Magic Circle firm in the city of London (UK) as well as at a leading local law firm. Agencies under her remit are the Department of Financial Services Policy and Legislation; General Registry; and the Tax Information Authority. Minister Rivers also has responsibility for the jurisdiction’s financial services regulator, the Cayman Islands Monetary Authority (CIMA), as well as the Auditors Oversight Authority; the Cayman Islands Stock Exchange; and the Maritime Authority of the Cayman Islands. Minister Rivers is a qualified attorney eligible to practice law in multiple jurisdictions. She holds a Bachelor of Arts degree in psychology from Brandeis University in Boston, Massachusetts, and a law degree from Osgoode Hall Law School, and an MBA from the Schulich School of Business, both at York University in Toronto, Canada. 11
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ABOUT THE
FINANCIAL SERVICES INDUSTRY OF THE CAYMAN ISLANDS
Investment Funds & Asset Management
Banking
Insurance
Capital Markets
Reinsurance
Trusts
CIM A
nce ina F an m y a
y
gal Services, P ub s, Le e lic c vi r Ac e S c ing nt ou
Fid uc iar
of Financial Serv istry ice n i s M
C Updated Apr.13.15
Clients are at the centre of the Cayman Islands financial services industry. They are at the core of everything we do, and this approach has been central to our success as a leading international financial centre. Our industry is led by first rate service providers within our investment funds and asset management, banking, insurance, reinsurance, capital markets and trust
12
sectors and world class fiduciary, legal and accounting service providers across the industry. The combined efforts of Cayman Finance, the Government and the Cayman Islands Monetary Authority (CIMA) ensure that the financial products and services are consistently delivered to meet or exceed our international clients’ expectations through excellence, innovation and balance.
RBC Dominion Securities Global Limited
The power of a team The Price Team at RBC Dominion Securities
Front L-R: Steve Evans, Jessica Jablonowski, Stephen Price, Senia Ebanks, Helen Georgakopoulos Wood, Back L-R: Alison Shirlaw, Christian Gollnick, Filip Nikic
“Great things in business are never done by one person. They’re done by a team of people.” – Steve Jobs At the Price Team, we have a long history of consistent success managing investments in a changing world. Providing prudent investment management, protecting what’s important to you and delivering the best client service is our business. The power in our top performing team is an unrivalled breadth and depth of international experience backed by the strength of our parent company, Royal Bank of Canada. It could be the most beneficial partnership you’ll ever have. Together, we’re stronger.
To find out how our team can work with you, contact us at
+1-345-814-8141 | stephen.price@rbc.com | www.rbcds.com/stephen.price
This document is not an offer to sell or a solicitation of an offer to buy any financial instruments. RBC Dominion Securities Global Limited is a foreign affiliate of RBC Dominion Securities Inc. RBC Dominion Securities Global Limited is regulated by the Cayman Islands Monetary Authority. RBC Dominion Securities Global Limited is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under license. © 2017 RBC Dominion Securities Inc. All rights reserved. 17_93097_006 (07/17)
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
INDUSTRY OVERVIEW OF THE FINANCIAL SERVICES SECTOR The Cayman Islands has long been regarded a world’s premier global financial hub through client-centric market leadership in prominent financial services sectors, and long-standing relationships with sophisticated international clients. The Cayman Islands financial services industry plays an important role in the global financial market by efficiently connecting law abiding users and providers of investment capital and financing around the world - benefitting both developed and developing countries. In the face of constant change and pressure on the global regulatory landscape, the Cayman Islands financial services industry has continued to enhance its reputation as a leading international financial centre. The jurisdiction’s success has been cemented by its ability to strike the right balance between effective oversight and minimising unnecessary impediments to legitimate business. Recognising its importance in the global financial economy, the Cayman Islands constantly looks to evolve, anticipate and meet the ever changing needs of its global clients.
AWARD WINNING JURISDICTION In 2017 Cayman’s financial services industry was the recipient of a number of prestigious international awards, including a rating of Top Specialised Financial Centre in The Banker Magazine for the ninth consecutive year. These prestigious industry awards reflect the recognition from our clients, peers and the industry, of our high quality and experienced service providers, innovative capabilities, and legislative and regulatory balance. OUR INDUSTRY
Integral to the international financial economy, Cayman provides significant benefits to countries around the world and to the smooth operation of global capital markets.
The Cayman Islands is consistently recognised for its client centric focus and for delivering excellence in service. Clients are at the centre of the Cayman Islands financial services industry. They are at the core of everything we do, and this approach has been central to our success as a leading international financial centre.
In particular, Cayman benefits onshore jurisdictions by facilitating more competitive international trade and enabling effective inward investment to help grow their economies.
Our industry is led by first rate service providers within our investment funds and asset management, banking, insurance, capital markets, and trust sectors and world class fiduciary, legal and accounting service providers across the industry.
14
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The combined efforts of industry represented by Cayman Finance, government and the Cayman Islands Monetary Authority ensure that the financial products and services are consistently delivered to meet or exceed our international clients’ expectations through excellence, innovation and balance. WHY CAYMAN? There are many factors that determine Cayman’s world class reputation as leading international financial centre. Among these our strengths include: The quality and experience of our professional service providers One of the most influential factors in the Cayman Islands’ success is the presence of service providers that are among the best in the world in the areas of legal, accounting, advisory, management, administration and fiduciary services. Our appropriate legislative and regulatory framework Striking the right balance in regulation remains one of our greatest advantages
as a jurisdiction. We have a reputation for being able to respond quickly with legislation to meet client needs. We have a demonstrably strong track record for thinking globally and acting locally in response to international financial services initiatives. The country’s financial services industry is very well regulated and the Cayman Islands has adopted the highest global standards for transparency and crossborder exchange of information with tax and law enforcement authorities. Indeed, several independent reviews of the country’s financial services industry by the CFATF, IMF and OECD Global Forum on Taxation demonstrate that it has a level of regulation that meets or exceeds that of most of the major OECD economies. Our success in the financial services arena would not have been possible without strict adherence to global standards in the areas of financial regulation and cross border cooperation. The Cayman Islands Monetary Authority (CIMA) is represented in various global bodies such as the Group of International Financial Centre Supervisors (GIFCS),
15
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Caribbean Group of Banking Supervisors (CGBS); International Association of Insurance Supervisors (IAIS); and International Organisation of Securities Commissions (IOSCO); among others.
automatically share tax data as part of the US FATCA and the Common Reporting Standard and have signed onto the country-by-country reporting principles under the BEPS process.
Companies legislation that will create a multitude of options at the fund level for holding investments, among other uses.
Leading the way in tax transparency and cross border cooperation
The commitment of the Cayman Islands Government and the Cayman Islands Monetary Authority (CIMA)
The Cayman Islands enables parties from around the world who are domiciled in countries that may have differing laws, regulations, tax structures and customs to benefit from doing business with each other using Cayman as an efficient and effective global financial hub. There are no direct taxes (income, property or corporate) in the Cayman Islands. This has been the case for the country’s entire modern history. The absence of any direct taxes provides a tax neutral domicile, which is an added benefit to many clients. Clients in turn are responsible for complying with their tax regimes in their home country in accordance with the respective rules.
The Cayman Islands is a strong partner in combatting global financial crime. Leading the way for tax transparency and information exchange, the Cayman Islands has consistently maintained its practices to meet robust, balanced and globally implemented standards for regulation and cross border cooperation. The Cayman Islands government, its regulator, the Cayman Islands Monetary Authority, and private industry, have worked continuously with overseas governments and international authorities to ensure Cayman is trusted as a well regulated, cooperative and transparent jurisdiction. The Cayman Islands cooperates with many cross border initiatives to assist in the fight against tax evasion. Cayman has signed agreements which allow tax information exchange with more than 90 countries. We now also
16
As an industry, the relationship between Cayman Finance, the Cayman Islands Government and CIMA, the country’s financial services regulator, has been a hallmark of the jurisdiction’s success as it has allowed us to respond swiftly to changes in the marketplace. Working together, Cayman Finance, the Cayman Islands Government and CIMA provide insight into Cayman’s current endeavors, as well as into the future services that will increase our commercial appeal and our reputation as a well regulated jurisdiction. Our innovative approach to developing products and services that benefit the global market We have a strong innovative approach that sees client feedback turned swiftly into legislative changes and new products, such as the recent Limited Liability
Neutral Platform
Stability The Cayman Islands is a British overseas territory that has maintained a very stable economic and political climate throughout its history. The country has its own democratically elected Parliament, which has consistently maintained responsibility for domestic affairs including fiscal
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
17
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
matters. Cayman also operates its own judicial system, including a separate division within the Grand Court to deal with commercial disputes, which is based on English common law principles. The Cayman Islands Government prudently manages its affairs and operates with a budget surplus. INDUSTRY OVERVIEW The Cayman Islands is the leading jurisdiction for international hedge funds, the second largest domicile in the world for captives, the number one domicile for healthcare captives, and a leading jurisdiction for banking, trusts, capital markets and fiduciary services. Funds The Cayman Islands is home to over 10,000 regulated investment funds, many thousands of private equity funds, with the world’s top managers using Cayman Islands vehicles in their structures. As the leading domicile for hedge funds, statistics show Managers in the United States manage approximately 76% of net assets from Cayman domiciled regulated funds. Cayman provides a cost effective, neutral platform to allow international investment to be made into economies that need that investment, while at the same time giving pension funds and other international institutional investors an opportunity to invest in a diversified portfolio of securities. This inward investment from Cayman will ultimately help stimulate economic activity, create much needed jobs and generate taxable revenue in those countries.
18
Insurance and reinsurance As the world’s second largest captive insurance company domicile and the leading jurisdiction for healthcare captives, Cayman is also a leader in the Insurance Linked Securities space, meshing expertise in securitisation, insurance and capital markets to create the most innovative structures, addressing the most complex risk scenarios. The Cayman Islands is also developing into a premier choice for domiciling non-traditional reinsurance companies. Our insurance service providers are known for their responsive, inclusive and collaborative approach to developing and supporting new client driven products, including captives, ILS and Hedge Fund and PE backed re/ insurance companies. Cayman Islands registered companies For 2016, the Cayman Islands company registry showed 11,174 companies registered throughout the year, with 96,248 active companies registered at the end of the year. Despite challenges that the industry faced over the last year, regulatory or otherwise, the strength of our company register, along with the overall growth we are seeing across the industry, demonstrates the confidence our clients have in the Cayman Islands. International banking Cayman has a well-established, robust, banking regime supported by world class anti-money laundering regulation and appropriate and effective cross border cooperation.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Capital markets
ABOUT THE AUTHOR
We are a preferred jurisdiction for issuers and borrowers in the capital markets as a result of our exceptional professional infrastructure, creditor friendly insolvency regime, and a robust legal system that upholds the rule of law and provides certainty.
Jude Scott, Cayman Finance CEO, is well respected locally and globally having spoken internationally on financial services topics and featured on a number of occasions in international media.
Trust and fiduciary services On the trusts side we recognise the importance of continued reinvestment into new products, growth and innovations in order to continue to meet the needs of global clients and increasing global regulatory requirements. Our clients continue to demand a jurisdiction that will operate efficiently to meet their needs, not only with respect to traditional operating companies, financing needs, ownership continuity, and private wealth structures but also a growing focus on philanthropy and charitable efforts, as well as research and development. Positioned for growth Overall, Cayman’s financial services industry is strong and firmly positioned for growth. With the industry’s representative body, Cayman Finance, working closely with the Government, the Regulator and other key stakeholders, the jurisdiction will continue to thrive commercially while simultaneously maintaining its leadership role in the observerance of global regulatory standards.
He retired as an Audit Partner in 2008 after spending over 23 years with Ernst & Young. As the Global CEO of Maples and Calder, he took an active role in the strategic growth and development of the firm. Having served on various Cayman Islands Government and private sector committees, including the Cayman Islands Financial Services Council, the Cayman Islands Society of Professional Accountants, the Education Council, the Insolvency Rules Committee and the Stock Exchange, Jude has attained extensive experience within the Cayman Islands’ financial services industry. He has served as the CEO of Cayman Finance since 2014, and is committed to protecting, promoting, developing and growing the financial services industry of the Cayman Islands.
19
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Tax Transparency & Cooperation
Regulatory Compliance & Cooperation
Financial Reporting Unit (FRU)
Companies Law Banks & Trust Companies Regulations Law The Trusts Law
Banking Inspectorate
Implemented International Agreed Tax Standards
Audit Office (Independent of Executive & Legislature)
CIMA granted operational independence
Mutual Legal Assistance Treaty with the US
Member, Global forum EOI Working
OECD Working Group: Produced Model TIEA
Cayman Islands Monetary Authority (CIMA)
AML/CFT (Beneficial Ownership)
Money Laundering Regulations, including Beneficial Ownership Data Collection Advance Commitment, International Transparency & EOI Standards
1960s 1970s 1980s 1990s
Insurance Law
Anti-Corruption
2000
First tax information agreement with the US
2001
2002
Guidance Notes, Prevention & Detection of Money Laundering
Cayman Islands Stock Exchange
Terrorism Law
Proceeds of Criminal Conduct Law
Criminal Justice (international Cooperation) Law
2003
FRU becomes Financial Reporting Authority
2004
IMF Review Tax Information Authority Law
2005
Basel II implementation Began
Restructured Global Forum, Steering Group & PRG Membership
Freedom of Information Law
IMF Report
CFATF Third-round Evaluation Completed
Grand Court Opens Financial Services Division
2007
OECD Anti-Bribery Convention Anti-Corruption Law
EUSD Implementated
For more than 50 years, the Cayman Islands has taken definitive actions to build and maintain a globally compliant financial services regime. This timeline demonstrates all the legislative and regulatory measures taken by the Cayman Islands in its continuous cooperative efforts to adhere to all agreed international standards. These actions allow the Cayman Islands to be self-supporting, and to provide economic value to other jurisdictions worldwide.
20
2008
2009
First Phase of Basel II completed Global Forum Phase 1 Report
2010
Audito
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
AML/CFT (Beneficial Ownership)
Significant Enhancements in Financial Services
Implemented International Agreed Tax Standards
ecomes ial Reporting rity
2005
Mutual Administrative Assistance Convention in Force MMOU Signed with IOSCO
Basel II implementation Began
Restructured Global Forum, Steering Group & PRG Membership
Freedom of Information Law
IMF Report
Global Forum Supplementary Report
CFATF Third-round Evaluation Completed
Grand Court Opens Financial Services Division
UK Bribery Act Extended to Cayman
2007
OECD Anti-Bribery Convention Anti-Corruption Law
ild and maintain
Cayman Islands s.
2008
2009
First Phase of Basel II completed Global Forum Phase 1 Report
2010
2011
Auditor Oversight Authority
2012
Global Forum Rating: Largely Compliant
CRS Early Adopter Multilateral Competent Authority Agreement Signed
MOUs with ESMA members FSB: Cayman Strongly Adheres to International Standards
2013
Vice-Chair, Global Forum’s Peer Review Group
2014
1st OT to support UK’s G8 Agenda on tax and transparency 1st OT to sign UK FATCA Mutual Administrative Assistance Convention Extended to Cayman 1st OT to Announce Model 1 IGAs for US, UK FATCA 31 Tax Agreements Global Forum Phase 2 Report
2015
Revamped Accountants Law 36 Tax Information Exchange Agreements 2nd Bilateral AEOI, UK IGA Bearer Shares Abolished
2016
2017
1st Bilateral AEOI, US FATCA
Joined BEPS Inclusive Framework
CRS Regulations in Place
BEPS Country-by-Country Reporting by 2017
Cayman AEOI Portal Opens
112 EOI Partners
Amended Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing
Global Forum Rating: Largely Compliant First CRS Exchanges Enhanced Beneficial Ownership Legislation Commenced Revamped Anti-Money Laundering Regulations Non-Profit Organisations Law Commenced
omic value to © 2017 Cayman Islands Ministry of Financial Services
21
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ECONOMIC OVERVIEW FROM THE MINISTER OF FINANCE & ECONOMIC DEVELOPMENT HON. ROY MCTAGGART GROWTH AMIDST SLOW GLOBAL RECOVERY In view of heightened socio-economic and political uncertainties in 2016, global economic activity during the year experienced a decline in the overall growth rate, from 3.4% in 2015 to 3.1%. As reported by the International Monetary Fund, most major economies recorded a deceleration in growth, except Canada.
Looking forward, an improved growth of 2.4% is forecast for 2018 as a number of domestic industries are expected to benefit from the completion of ongoing infrastructure projects while new ones are scheduled to start such as the George Town cruise berthing facility and a cargo port. PERFORMANCE OF KEY DOMESTIC SECTORS
The advanced economies grew by 1.7%, compared to 2.1% in 2015. The US posted a lackluster growth of 1.6% relative to the 2.6% achieved in 2015, as weakness in non-residential investment weighed on growth. The Caribbean region had an estimated economic growth of 3.4% in 2016, a deceleration compared to the 4.0% of the previous year. Against this global backdrop, the Cayman Islands marked another year of economic resilience in 2016. Gross Domestic Product (GDP) is estimated to have improved by 2.7% during the year, albeit it represents a slight moderation from the 2.8% growth in 2015. In 2017, global economic activity is expected to recover modestly with 3.5% growth forecast in 2017, and 3.6% in 2018. Advanced economies are anticipated to improve by 2.0% in both years. The US is expected to have a sharp rebound of 2.1% in 2017, although this is expected to level off in 2018 given the lack of a fiscal expansion policy. For the Cayman Islands, growth in the first quarter of 2017 was estimated at 2.0%, consistent with the overall forecast for the year of 2.1%. The slower forecast growth relative to 2016 is associated with the expected softening of growth in capital investments compared to the peak-level construction activities which started in 2015. See Figure 1. FIGURE 1: REAL GDP GROWTH (%) 3.0
2.8
2.7
2.4 2.5
2.4
2.4 2.2
2.0
2.0
2.0
2.1 2.1 1.6
2.0
2.1 1.9
1.7
1.5 1.0 .5
2014 Cayman Islands
22
2015
2016 United States
2017
2018 Advanced Economies
In 2016, all domestic industrial sectors showed expansion in output with the exception of hotels and restaurants which had a stable level of economic activity. In the first quarter of 2017, GDP growth continued to be broad-based, led by construction, electricity and water supply, wholesale and retail trade and transport, storage and communication. For the rest of 2017, all sectors are forecasted to contribute to GDP growth. The financial and insurance services sector which accounted for approximately 40.5% of GDP was estimated to have expanded by 1.5% in 20161. Despite relatively depressed demand from external markets, evidenced by declines in registrations across most financial segments, growth in the banking sector was boosted by continued expansion in domestic credit. Insurance services grew by 0.4% as a rise in health insurance claims subdued the growth in premiums. In the first quarter of 2017, the financial and insurance sector is estimated to have grown by 1.4%, as domestic credit to households for property and motor vehicles outweighed a decline in credit to businesses. Credit to households expanded by 2.1% while lending to businesses fell by 1.4%. Overall growth for the sector in 2017 is forecast at 1.5%. See Figure 2a. Economic activity in the real estate, renting and business activities sector, Figure 2b, was estimated to have increased by 4.6% in 2016. In the real estate industry, the value of traded properties trended up by 4.5% while volume increased by 3.0%. Indicators of business service activities (mainly legal and accounting) supported an expansion in 2016, such as partnerships which increased by 11.5%. For the first quarter of 2017, growth in the sector moderated to 0.5% as both real estate and business activities slowed. The construction sector, Figure 2c reported another year of robust growth in 2016 of 4.5%, driven by major infrastructure, property development and hotel projects. Construction activity in the first quarter of 2017 accelerated, registering a growth rate of 7.3% as indicated by the importation of building materials. The overall growth forecast for the sector in 2017 is 4.1%.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
FIGURE 2: SELECTED INDUSTRIES’ GROWTH RATES (%) A: FINANCIAL AND INSURANCE SERVICES 2.1 1.5
1.5 0.8
0.5
2011
sector comprise the largest group of goods and services influencing the headline inflation rate. Their combined price index dipped by 2.9% in 2016 before recovering to 3.4% in the first half of 2017. Removing the impact of this group from the headline inflation shows that changes in the prices of other goods and services have remained relatively small as seen from Figure 3.
0.4
2012
2013
2014
2015
2016
B: REAL ESTATE, RENTING & BUSINESS ACTIVITIES
Prices are anticipated to remain elevated for the rest of 2017 with the average inflation rate forecasted at 1.8%. Average inflation is forecasted at 2.3% for 2018, mainly in tandem with the consumer price forecast for the US, as well as the impact of higher domestic demand. EMPLOYMENT GROWTH
4.5 3.1 2.1
1.8
2012
2013
3.0
1.0
2011
2014
2015
2016
6.1
C: CONSTRUCTION
The increase in economic activity has led to sustained growth in local employment, contributing to further growth of the domestic market for goods and services including housing. In 2016, total employment rose by 5% to reach 41,093; by the first half of 2017, this further grew to 41,764. Consequently, the total unemployment rate continued to decline from 4.3% in 2016 to 4.1%. The unemployment rate among Caymanians slid from 7.0% as of the end of 2016 to 6.2% in the second half of 2017. Given the projected GDP growth in 2017, the unemployment rate by the end of the year is forecasted at 4.3%.
4.5 2.8
FISCAL POLICY
2.1
1.1
-2.9
2012
2013
2014
2015
2016
The hotels and restaurants sector was hampered in 2016 by a decline in cruise visitors which offset a marginal increase in stay-over arrivals. The sector also weakened in the first quarter of 2017 as tourist arrivals fell; however, a revival is foreseen for the rest of the year as the US economy picks up. The opening in late 2016 of a new high-end hotel is also expected to boost demand. DOMESTIC INFLATION The robust economic growth in recent years was largely supported by a low inflationary environment where lower global oil prices pushed down fuel-related costs, and a slowdown in the expansion of government spending tempered inflation-inducing growth in domestic demand. The latter continued to be driven by government fiscal policy which is committed to curtailing government debt without further introducing new tax measures. However, a general recovery in domestic demand and higher international commodity prices, including fuel prices, contributed to the 1.9% Consumer Price Index (CPI) inflation rate in the first half of 2017, coming from -0.6% in 2016 and -2.3% in 2015. The housing and utilities
The government supported domestic growth directly by the granting of concessions to development projects, and by reducing tax rates such as those for the importation of building materials. More importantly, it created a stable macroeconomic environment by achieving its commitment to a debt-reduction strategy in the context of the Framework for Fiscal Responsibility (FFR). As at the end of 2016, the core government’s fiscal surplus stood at $101 million while its outstanding debt declined by 5.3% to settle at $483.9 million (or 16.5% of GDP). See Figure 4. The core government’s outstanding debt is expected to be reduced further to $451.1 million by the end of 2017. Since the majority of debt is payable to the domestic banking sector, the central government’s debt reduction eased down the pressure for higher domestic interest rates, particularly those for local industries that rely on bank financing. The government has also given its commitment to reduce its debt burden by half over the next two years consequent on the partial repayment of the bullet bond which matures in 2019 and a refinancing of the remainder.
1. The contribution of 40.5% of GDP by the financial and insurance services sector does not include contributions by legal and accounting services, as these are grouped together with other services outside of the financial industry. The actual percentage contributed by the financial services industry, including legal and accounting, is over 50%.
23
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ABOUT THE AUTHOR Hon. Minister Roy McTaggart, Minister of Finance and Economic Development is a former chairman of the Board of Cayman Airways, a member of the Commission for Standards in Public Life and is chairman of the Young Caymanian Leadership Foundation. He has been active in many roles in the community including serving in several posts with the Cayman Islands Chamber of Commerce, with two years as president. He has also been the treasurer of the Church
FIGURE 3: AVERAGE INFLATION RATES (%) CPI
of Christ and enjoys mentoring Caymanian students in need of positive role models. He was a member of the Board of the Cayman Islands Stock Exchange. Minister McTaggart joined KPMG in the Cayman Islands in 1985, transferred to its Orlando office in 1986, and returned to the Cayman Islands in 1988. He was admitted to the partnership in 1991, became joint Managing Partner in 2003 and appointed Managing Partner in 2007. He was Managing Director of KMPG in the British Virgin Islands from 2007-2012. He served as Councillor to the Ministry of Health and served as interim Minister at times from 2013-2017. For the 2017-2021 term he is serving as Minister for Public Finance and Economic Development. FIGURE 4: CENTRAL GOVERNMENT’S DEBT-TO-GDP (%)
CPI Excluding Housing & Utilities 24.3 22.8
4.0
21.1 19.4
2.7
2.2
2011
1.3
1.2
2012
2013
2014
0.0
1.3
2015
2017 -0.6
-2.3
24
16.5
0.5
2.2 1.3
18.0
1.9
1.8
2011
2012
2013
2014
2015
2016
ey.com/consulting
Are today’s businesses prepared for what doesn’t exist yet? © 2017 EYGM Limited. All Rights Reserved. 17092426654 ED 0418.
Navigate the Transformative Age with the better-connected consultants.
25
Cayman Islands Economy: a snapshot The Cayman Islands economy has continued to grow at a steady pace since its economic recovery began in 2011. Unemployment Rate
Inflation Imported Labour
-0.6%
50%
4.2% 4.2 2016
Goods and Prices
Labour and Employment
The vast majority of the country’s locally consumed goods are imported and most of this comes from the US as the primary trading partner. As a result of this and the nature of the country’s monetary system, inflation rates in the Cayman Islands tend to track closely with that of the US. Similar to many countries around the world in the recent global economic climate, the Cayman Islands has experienced a slight increase in prices over the past year and experienced deflation in 2015.
The Cayman Islands economy is labour intensive. Due to its relatively small population and the impressive economic growth over the past four decades, the Cayman Islands relies heavily on imported labour to meet the skilled and unskilled human capital requirements for sustaining the economy. Imported labour comprises just over 50% of the entire labour force. This is likely to remain a key feature of the economy for the foreseeable future given the relatively small population. The unemployment rate in the country has declined significantly from 6.1% in 2013 to 4.2% in 2016, reflecting a steady improvement in economic conditions over the past few years.
2.2
2012
2013
2014
4.7 2014 6.1 2013
6.2 2012 Steady: Unemployment in the Cayman Islands* 2012–2016
Taxes and Fiscal Stability
1.3
1.2
4.2 2015
2015
2016
-0.6 -2.3 Inflation of the Cayman Islands* (2012–2016)
There are no direct personal income, corporate or property taxes in the Cayman Islands. The government relies on a system of indirect taxation focused primarily in the following areas: • Banks, trust, insurance, company and mutual funds fees • Land or property transfer fees • Work permits
• Travel and cruise ship taxes • Tourist accommodations taxes • Business licences • Customs and import duties
Financial Services
50-60% of GDP
Real GDP grew by 2.8% in 2016, which is a slight increase compared to the 2% growth in 2015. The government expects growth in the medium term to be driven by the construction and tourism sectors, as well as stable growth in financial services.
2.8 2.4
12
INDUSTRIES
2.0
1.5
1.3
13
KEY
The main economic sectors are financial services and tourism. Various economic impact studies puts the financial services sector at approximately 50 to 60% of GDP, while the tourism sector contributes between 25 to 30% of GDP. Other sectors include construction, real estate and other business activities.
14
15
16
Real GDP Growth in the Cayman Islands* (2012-2016)
*Source: Cayman Islands Economic and Statistics Office
Like many of the smaller islands in the Caribbean, the Cayman Islands economy is a service based economy. The natural resources of the Cayman Islands have not enabled it to pursue traditional industrial development. Historically the economy was relatively small until four decades ago when the country began to pursue tourism and financial services as a path to economic development.
Population
61,361 The country’s population is estimated at around 61,361 according to the last census. The country is very cosmopolitan and it is estimated that there are over 100 different nationalities represented in the Cayman Islands.
Money Matters
55% Caymanian
45%
Non Caymanian
Diversity: Estimated Cayman Islands Population as at 2016*
The Cayman Islands uses the Cayman Islands dollar and the local currency is backed by US dollar denominated securities. This system is managed via a full currency board system and there is no equivalent of a central bank in the country.
27
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
POLICY UPDATE FROM THE MINISTER OF FINANCIAL SERVICES & HOME AFFAIRS HON. TARA RIVERS When I consider the body of work accomplished by the Ministry of Financial Services (“the Ministry”), and the full slate of activity that we are preparing for the coming fiscal years, three words repeatedly come to mind: Energy. Vision. Results. This is exactly what’s needed in today’s context of global financial services, and this is exactly what the Government, through the work of my Ministry, intends to continue delivering for our financial services industry, and for our jurisdiction. Cayman Finance, as a leading industry association in our Islands, has an important role in this success as it provides valuable input to the Ministry via an appropriate, robust consultative process. When prudent to do so our industry regulator – the Cayman Islands Monetary Authority (CIMA) – also participates in this process. THE VALUE OF THIS APPROACH IS EVIDENT IN RECENT COMMERCIAL AND REGULATORY LEGISLATION Commercially, the Ministry oversaw the passage of The Limited Liability Partnership Law; The Foundation Companies Law; and The Trusts (Amendment) Law, all of which are important to retaining this jurisdiction’s competitive edge in financial services. The Limited Liability Partnership Law (LLP), which is a new corporate vehicle for conducting business, is anticipated to commence in Q1 2018. The LLP is the equivalent of a partnership with separate legal personality that provides limited liability for its partners. While the LLP may be used for a range of purposes, it is particularly attractive to professional providers such as legal and accounting firms. The law permits registration of new entities, conversion of existing general partnerships into LLPs and the continuation of foreign LLPs into Cayman. The Trusts (Amendment) Law resolves technical issues in the current legislation, while also 28
extending certain statutory powers of trustees that would normally be granted under the terms of a trust deed. The Foundation Companies Law is a welcome complement to legal structures available in Cayman. Similar to how a Cayman Islands limited liability company (which is a variant of a company) is infused with features of a partnership; a foundation company is a variant of a company that blends certain key advantages of a trust in one vehicle. Foundation companies can therefore be used in a wide variety of situations; including commercial and philanthropic. Foundation companies are, of course, subject to the same transparency, and anti-money laundering and combating the financing of terrorism provisions, as a company. This law has recently come into force and has already generated a fair amount of interest by some industry professionals. Speaking of Cayman limited liability companies (LLCs), it is worth noting that this product, which was introduced under The Limited Liability Company Law in July 2016, continues to be very successful. As of 30 September 2017, 652 LLCs were registered, which translates to almost two LLCs being formed per business day since commencement. Turning to regulatory legislation, the Ministry and other Government entities, including those who participate in Cayman’s Anti-Money Laundering Steering Group, have been steadily preparing our Islands for the Caribbean Financial Action Task Force (CFATF) evaluation, which is to be held in December 2017. Key legislation that was in place prior to the evaluation includes the updated Anti-Money Laundering
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Regulations, which better aligned Cayman’s regime with the FATF’s 40 Recommendations and best practices. The Monetary Authority (Amendment) Law, which is another central component to our regime, gives CIMA the power to impose administrative fines for noncompliance on persons (entities and individuals) subject to Cayman’s regulatory laws (including CIMA rules) and the Anti-Money Laundering Regulations. It is also important to note that other legislative enhancements have been and will be brought forward by the Attorney General in relation to the upcoming CFATF assessment. Importantly, Cayman also passed several pieces of beneficial ownership-related legislation, as significant accomplishments in our CFATF preparations. The legislation allowed Cayman to develop a system that further reduces the timeframe in which government, through legal mechanisms, shares information with competent authorities in other jurisdictions. The new system complements and enhances our already robust regime, which is based upon corporate service providers collecting, verifying, updating and maintaining beneficial ownership information. While a number of proposals were advanced, the option selected was one developed in consultation with Cayman Finance. I therefore particularly thank Cayman Finance for its participation in this process.
We are particularly pleased that we maintained this rating in light of the Global Forum’s strengthened terms of reference. Countries including Australia, Canada and Germany also received largely compliant ratings. We received this rating while engaging with the European Union in relation to their intention to develop a list of non-cooperative tax jurisdictions. Earlier this year the EU contacted more than 90 jurisdictions, including the Cayman Islands, and requested information on their respective tax regimes. Our engagement with the EU has included written responses to their questionnaires; and the Premier, the Hon. Alden McLaughlin, and I led a Government delegation to Brussels in September 2017 to speak with EU officials and Permanent Representatives of EU Member States. During those discussions the EU decision makers recognised Cayman’s commitment to tax transparency and our overall track record on international regulatory standards, including our commitment to the OECD’s BEPS (base erosion and profit shifting) tax initiative, which the EU will consider as a factor in its listing process. They also considered our largely compliant Global Forum rating as a positive result.
In all likelihood, Cayman’s CFATF evaluation will be underway or just completed at the time this magazine is published. While our CFATF rating won’t be publicly available until December 2018, the Ministry will continue
We believe our engagement – which includes two previous visits to Brussels – will help the EU have a greater understanding of the Cayman Islands, especially ahead of their decision in relation to their list. However, while providing technical input regarding our regime was necessary as part of the EU’s process, we are aware that the ultimate decision will be political. We trust that the decision makers will draw on this information and understanding
throughout 2017 to develop policy, legislation and regulation that ensures our industry is founded upon and operates under a strong, effective, balanced regime. Strong jurisdictional ratings from global regulatory bodies undoubtedly bolster reputations, which in turn draws sound business and builds socioeconomic resiliency. For this reason, Cayman is proud of the largely compliant rating that we received this year from the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes.
in making their determination. Engagement has also improved understanding in the US. While I was in Brussels, other members of the Ministry team were in Washington, DC, to discuss US tax and financial services reform with key Congressional staff members and advisors. Both tax and financial services reform are of great importance to the Cayman Islands, again from a reputational and business development standpoint. Based upon feedback, our message that Cayman is a tax-neutral, well-regulated financial services centre with world-class professional 29
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
services firms is resonating in the US. Assisting us with our engagement efforts are two venerable law firms: Pillsbury Winthrop Shaw Pittman LLP, and Baker Botts LLP. Based on all of the above, clearly the Government and the Ministry have demonstrated energy and vision in fulfilling our responsibilities for the financial services industry, and we recognise that our ability to fulfil this responsibility is supported by the energy and vision that also characterises our financial services industry. As Minister I thank the members of industry, as well as CIMA, for your valuable participation and input that helps to shape Government’s actions. I noted that results also characterise the Ministry’s body of work, and I am proud of financial services’ longstanding contribution to the positive results of Cayman’s overall economic performance. For example, according to Government’s 2016 annual economic report
normal. Recognising this fact, Government has indicated its support of our financial services industry through funding increases to key financial services pillars, namely the Ministry’s policy department, CIMA as regulator, and Cayman Finance as the coordinating industry association. The increase allows Cayman Finance to improve its core efforts around business development and promotion of the jurisdiction; and also allows CIMA and the Ministry to strengthen their policy, legislative and regulatory functions. For the Cayman Islands, this again translates into results. As a jurisdiction, our position is that we will be both proactive and responsive, as the circumstances require, thereby ensuring that Cayman remains a top international financial centre. ABOUT THE AUTHOR the ‘financing and insurance services’ sector accounted for approximately 40.5 percent of the country’s Gross Domestic Product.1 To provide other economic statistics, it’s noteworthy that Cayman’s central government debt fell from about $559.9 million three years ago, to $483.9 million as at the end of 2016. By December 31, 2020, under current plans, debt will be further reduced to $221 million. The unemployment rate, meanwhile, fell from 6.2% in 2012 to 4.1% in spring 2017. It is forecast that unemployment will remain below 4.0% over the next three years. Moreover, based upon projections, Cayman’s economy will continue to expand; since 2014, Cayman’s GDP has grown on average by 2% annually, and is expected to continue that trend over the next three years. Capital projects are also planned, which is another indicator of our stability. Government’s 2018 Strategic Policy Statement includes commitments to complete the Owen Roberts International Airport renovations, and to construct a modern cruise pier and cargo dock. In the past decade the pace of change has continuously increased and going forward, we must accept that this is the new
Prior to her first election, the Hon. Tara Rivers, JP, MLA, Minister of Financial Services and Home Affairs, was a structured finance and corporate lawyer, having practiced law at a Magic Circle firm in the city of London (UK) as well as at a leading local law firm. Agencies under her remit are the Department of Financial Services Policy and Legislation; General Registry; and the Tax Information Authority. Minister Rivers also has responsibility for the jurisdiction’s financial services regulator, the Cayman Islands Monetary Authority (CIMA), as well as the Auditors Oversight Authority; the Cayman Islands Stock Exchange; and the Maritime Authority of the Cayman Islands. Minister Rivers is a qualified attorney eligible to practice law in multiple jurisdictions. She holds a Bachelor of Arts degree in psychology from Brandeis University in Boston, Massachusetts, and a law degree from Osgoode Hall Law School, and an MBA from the Schulich School of Business, both at York University in Toronto, Canada.
1 The contribution of 40.5% of GDP by the financial and insurance services sector does not include contributions by legal and accounting services, as these are grouped together with other services outside of the financial industry. The actual percentage contributed by the financial services industry, including legal and accounting, is over 50%.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
REGULATORY UPDATE FROM THE MANAGING DIRECTOR OF THE CAYMAN ISLANDS MONETARY AUTHORITY, CINDY SCOTLAND Bolstered by transparency, and a robust regulatory framework, the Cayman Islands continues to be a leading jurisdiction in the financial services world. As the principal regulator, the Cayman Islands Monetary Authority (“CIMA” or “the Authority”) is committed to developing and maintaining a regulatory structure which emphasises adherence to international standards through contemporary legislation, rules, procedures, guidance and other legal mechanisms in order to stay abreast with the ever evolving dynamic nature of the global financial industry. INDUSTRY UPDATE Overall, the industry remains highly competitive in several areas, as of 30 September 2017:
also continues to contribute to the overall success of the industry.
Boasting 10,630 funds, the Cayman Islands maintains its position as the top domicile for hedge funds, compared to 10,831 on 30 September 2016. The number of new fund registrations with the Authority continues to experience the effects of global trends whereby lack of start-up capital and post-crisis regulatory barriers are cited as two of the main reasons for the decline in new fund launches. Additionally, although the number of legal fund structures has dropped, there has been an increase in the number of multi-fund structures, such as segregated portfolio companies.
As at June 2017, total international banking assets and liabilities were reported as US$1.028 trillion and US$1.029 trillion, respectively. The Cayman Islands is also home to 40 of the top banks worldwide. As the trend in increasing global compliance costs continues, international banks have become increasingly cautious, reducing their risk
The Cayman Islands is also a top international location for the provision of trust and corporate services, with 149 Trust companies, 116 Company Managers and 26 Corporate Service Providers licensed to provide these services in and from the jurisdiction. The Authority has not experienced a significant increase or decrease in the number of licensed Trust companies in recent years. However, since 2012, there has been a consistent growth in the number of licenses issued under the Companies Management Law. With 705 international insurance licensees, including captive insurance companies, the Cayman Islands remains the second largest domicile of international reinsurers. Part of this success is due to the new formations and expansion of existing companies. As of 30 September 2017, the industry gained 24 new reinsurers. In addition to reinsurance companies, there are 31 insurance brokers and 46 insurance agents operating within the domestic market, and 29 insurance managers operating within the international market. The Cayman Islands is also home to nearly ten Portfolio Insurance companies, which are standalone entities within a Segregated Portfolio Structure. As a leading jurisdiction for healthcare captives, the market currently attracts over 40% of the companies with writing medical malpractice and professional indemnity as their primary line of business. With 155 licensed banks, the banking sector
profile by withdrawing from certain markets, product lines, customers and customer segments. This has been most discernible in the net decrease of European and US bank branches. To date, the domestic retail banking sector has not undergone any changes in the composition or services offered. However, the importance of access to international markets through correspondent banking relationships continues to be emphasised. The jurisdiction’s money service businesses and smaller private banks continue to endure challenges as a result of de-risking exercises by US correspondent banks in recent years. CIMA, in partnership with other local, regional and international stakeholders, remains actively engaged in dialogue to identify a long-term solution. 31
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
THE REGULATORY FRAMEWORK In preparation for the recent assessment by the Caribbean Financial Action Task Force (CFATF), which took place in December 2017, the Authority took several steps to implement measures and recommendations that help combat terrorist financing and money laundering. In conjunction with the preparations of the assessment, the Authority held several stakeholder dialogue sessions to ensure that regulated entities and interested parties understood the expectations of the CFATF and their role throughout the process. Several chosen topics include riskbased approach, administrative fines and guidance notes. NEW LEGISLATION Recent legislation changes such as the Monetary Authority (Amendment) Law, when it comes into effect, will grant CIMA the ability to impose administrative fines to natural and legal persons for breaches of the regulatory and anti-money laundering laws. This supervisory tool helps the jurisdiction achieve technical compliance with FATF standards and other supervisory core principles issued by the international standard organisations, such as the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors. The Terrorism Law, the Proceeds of Crime Law and the Money Laundering Regulations were also revised to more closely align with the FATF 40 recommendations. Additionally, the Companies Law and the Companies Management Law saw recent amendments and both now capture provisions that enable the establishment and maintenance of beneficial ownership information. Under the Companies Management (Amendment) Law 2017, CIMA has been granted the power to revoke licenses and/ or impose other licensing and supervisory sanctions for infringement of the Companies Law and Limited Liability Company Law.
Another measure that has undergone revision is the Statement of Guidance on Responsibilities of Insurance Managers, who are now required to highlight their obligations to CIMA and emphasise their role as service providers. Earlier this year, the Authority also published a revised Statement of Guidance on the nature, accessibility and retention of records. This Statement of Guidance applies to all entities which fall under CIMA’s regulatory umbrella. Such changes include guidance on the maintenance of electronic records including related information outside of the Cayman Islands. Furthermore, an amendment was made to the Regulatory Handbook to highlight the principal objectives of CIMA’s onsite inspection. The handbook highlights expectations of licensees in addressing deficiencies and matters requiring immediate attention. The revision also clearly outlines the classifications of deficiencies: high, medium or low priority. INCREASED USE OF SUPERVISORY TOOLS The Authority continues to produce its biannual publication – Supervisory Issues & Information Circular, with the aim of providing insight to the financial industry on current regulatory activities. The circular discusses the trends of the regulated sectors. It also highlights supervisory developments and offers guidance to improve any related compliance standards. BASEL II AND BASEL III
NEW MEASURES The Authority has issued and revised several measures which had an impact on the various regulated sectors throughout the past year. The Statement of Guidance on Professional Indemnity Insurance was issued for Trust, Insurance, Mutual Fund Administrators, Securities Investment Business and Company Management Licensees and Directors. This measure sets out the minimum criteria licensees should follow when obtaining and maintaining professional indemnity insurance.
32
Through various consultations, the Authority continues its efforts to implement the Basel II and Basel III capital standards. Basel II Pillar II focuses on the Supervisory Review Process which is intended to not only ensure that banks have adequate capital to support their risks, but to also encourage banks to develop and use better techniques in monitoring and managing these risks. Basel II Pillar III is centred on Market Discipline whereby disclosure requirements seeks to allow market participants to assess key pieces of information, capital, risk exposure,
Experienced legal specialists in Cayman Islands investment funds, litigation, insolvency, trusts and corporate transactions. Bermuda British Virgin Islands Cayman Islands Cyprus
Hong Kong London Montevideo Sao Paulo
www.harneys.com | www.harneysfid.com
Shanghai Singapore Tokyo Vancouver
Bermuda legal services are provided through an exclusive association with Zuill & Co which is an independently owned and controlled Bermudian law firm.
risk assessment processes and the capital adequacy of the banks with which they do business. Following a quantitative impact study conducted at the beginning of the year, the Authority is assessing the potential implementation of Basel III compliant standards within the Cayman Islands. CONCLUSION While much if its work ahead will still revolve around the recent CFATF assessment, CIMA will continue to promote strength and stability within the financial sector. Key partnerships with the government, the regulated sectors and other stakeholders play a part in developing a regulatory infrastructure that promotes a stable and prosperous financial sector. Given its proven track record, the Cayman Islands will continue to thrive as a leading financial centre, and CIMA remains devoted to contributing to the ongoing success of this industry.
ABOUT THE AUTHOR Cindy Scotland is the Managing Director of the Cayman Islands Monetary Authority. She oversees the implementation of policies to ensure the sound management of the Cayman Islands’ currency and the effective supervision of various regulated entities operating in and from the Cayman Islands. She also has responsibility for the development and maintenance of strong working relationships between the Authority and other international regulatory bodies including the Group of International Financial Centres Supervisors, the International Organisation of Securities Commissions, the International Association of Insurance, and the Financial Stability Board Regional Consultative Group.
33
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
THE NEW
ANTI-MONEY LAUNDERING REGULATIONS
The Cayman Islands’ new Anti-Money Laundering Regulations (“the Regulations”) replace the Money Laundering Regulations and while there is a noticeable difference with the name, the Regulations mainly seek to formalise the anti-money laundering practices of the jurisdiction which have been followed by industry through the Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (“the Guidance Notes”). The Guidance Notes were not considered an enforceable method to assess compliance with the 40 Recommendations on Money Laundering and Terrorist Financing by the Financial Action Task Force, and as a result the measures followed by industry were not considered met as they had no real means to ensure people followed suit. However, considering the importance of the reputation of the jurisdiction and of the businesses that operate within it, compliance with the Guidance Notes was adhered to in spite of it not being enforceable.This means little change has occurred in how businesses operate as the recommendations were adhered to for several years through the Guidance Notes. 34
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The AML Regulations are the overarching regulations that cover all people conducting relevant financial services business. It is essential to note that these capture not only regulated and unregulated financial services businesses but also designated non-financial businesses and professionals. The definition of relevant financial business resided in the Money Laundering Regulations but was last year moved from those regulations to the principal law, The Proceeds of Crime Law, as it was forseen that there would be an additional regulator to capture some of the designated nonfinancial businesses and professions. The Regulations are therefore not solely specific to the Cayman Islands Monetary Authority (CIMA) as the financial regulator. It now refers to Supervisory Authorities which, according to the definition in the interpretive section of the Regulations, refers to CIMA or other bodies that may be assigned the responsibility of monitoring compliance with money laundering regulations made under the law in relation to persons conducting ‘relevant financial business’ who are not otherwise subject to such monitoring by CIMA. The Regulations also now outline all the regulatory laws that it applies to, including the Securities Investment Business Law which was not specifically referred to by name
New AML Regulations
previously in the Money Laundering Regulations, and also includes the Directors Registration and Licensing Law and the Development Bank Law. The risk based approach is tantamount to any AML regime, and while this has been the approach of the Cayman Islands with guidance on to how to assess risk already outlined in the Guidance Notes, the key provisions for a risk based approach to AML/CFT has now been set out in the Regulations. The use of more consistent wording, such as simplified due diligence and enhanced due diligence, has been adopted in the Regulations and relies on the basis that a risk assessment must first be undertaken on each client to determine their rating before deciding the due diligence documentation required. The Regulations also now contain the definition of PEP, which was listed in the Guidance Notes and is now amended to also expressly include domestic persons as well as politically exposed persons in general for the avoidance of any doubt. Another major factor in the AML Regime is the disposal of the Schedule 3 list of countries with equivalent AML legislation from the Regulations. This Schedule is now referred to as the list of equivalent countries and is issued by the Anti-Money Laundering Steering Group. The movement of this list means countries can be added and removed in a timely fashion. The list that has since been published has seen the removal of three countries that were previously in the Schedule 3 list. New products and business practices, 35
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
delivery mechanisms and new or developing technologies have now been included in the Regulations and removed from the Guidance Notes. This regulation deals with the ability of the AML regime to handle new products as they come on the market. The AML world straddles so many different sectors in the financial industry that it is important to stay abreast of with all the latest offerings in the industry and find means to properly vet and onboard potential clients, an issue Compliance Officers have to deal with daily. In addition to the above, it is also important to mention that the Eligible Introducer Regime will still continue to be used in accordance with FATF 40 Recommendation on Money Laundering and Terrorist Financing with the provision that information be forthcoming upon request and as soon as possible. The same holds true for the Nominee arrangements where when requested, information on the underlying client shall be made available. The old reference to the “Reg 8” Regime (now Regulation 23) which allowed for reliance on CDD from clients where monies were remitted through regulated bank accounts in approved countries has
been clarified to ensure that CDD is received before funds are repaid. The revised Guidance Notes will provide additional guidance to the Regulations and clarify any issues arising within them. ABOUT THE AUTHOR Sandra Edun-Watler is a lawyer in the Walkers’ Regulatory & Risk Advisory Practice Group and is the former Head of Compliance (Americas) with responsibility for the Cayman, Bermuda and BVI offices. She is also the President of the Cayman Islands Compliance Association and sits on various working groups and advises in relation to AML/CFT and Compliance issues. Sandra was previously Legal Counsel at the Cayman Islands Monetary Authority and was the legal examiner for the Third Round of Mutual Evaluations by the Caribbean Financial Action Task Force of the BVI.
Building better business
TOGETHER With a vast wealth of industry focused expertise, our team of professionals will look after all your fiduciary needs, including:
www.caymanmanagement.com 36 949-4018 (345) Grand Cayman, Cayman Islands
• Independent Director Services • Specialist corporate services for Funds and Investment Managers, including registration and management • Full corporate registration and representation services for all business undertakings Working closely with clients and industry professionals in the Cayman Islands and internationally we provide you with the utmost professional service, delivered with that extra personal touch.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ANTI-MONEY LAUNDERING:
IT’S NO LONGER IF, BUT WHEN YOU’LL BE INSPECTED
In December 2017, the Cayman Islands Government, with support from industry groups recently underwent a review of its Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulatory regime by the Caribbean Financial Action Task-Force (CFATF), which will be followed by an International Monetary Fund (IMF) review in 2018. NEW AML REGULATIONS AND REQUIREMENTS In Cayman, AML regulatory regimes are in place for both financial services and non-financial services entities registered in the jurisdiction. As a result, companies must implement formal AML/CTF programmes and can expect to face inspections and examinations, focusing on governance, roles and responsibilities (ie. Money Laundering Reporting Officer – MLRO), policies and procedures, KYC documentation, reporting activities (ie. suspicious activity reporting – SAR) and controls that ensure the entities programme is designed and operating effectively.
In addition, new AML regulations and requirements are proliferating around the world, including the Cayman Islands. The Anti-Money Laundering Regulations (2017) were gazetted on September 20, 2017, in response to recommendations previously made by the CFATF to ensure Cayman remains in line with global AML standards. In particular, these regulations now consider effectiveness: not only must regulations be in place, but it must be demonstrated that they are operational. As a result, there is increased collaboration between law enforcement and other supporting agencies to enable the legislation to work effectively. Enhanced regulation and inspection activity is a response to the growing threat and sophistication of criminal and money laundering activity world-wide. THE COST OF CONTROL FAILURES Recently, the Commonwealth Bank of Australia (CBA) experienced AML control failures that were driven by coding
FIGURE 1 POLICIES & PROCEDURES
MONITORING, CONTROLS & INFRASTRUCTURE
ASSESSMENT FRAMEWORK ELEMENTS 37
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
errors within its Intelligent Deposit Machines between 2012 and 2015. These control failures permitted KYC and SAR control circumnavigation for cash deposits to be made to CBA accounts, resulting in more than 50,000 potential AML events. Events represent both direct and indirect cost to institutions as illustrated by recent fines of USD435m levied by New York State’s Department of Financial Services (NYDFS) against Deutsche Bank AG and its New York branch. These fines were in connection with violations of AML laws associated with a Russian mirror-trading scheme that went undetected among the bank’s Moscow, London and New York offices. NYDFS worked with the United Kingdom’s Financial Conduct Authority (FCA), which issued a parallel penalty of GBP168m. Beyond the direct cost to the institution associated with incident response, remediation and regulatory penalties, reputation impacts frequently represent even greater indirect costs to institutions and their valuable brands. As an industry leading practice, companies should take steps to ensure their AML programmes are designed and operating effectively by periodically assessing their capabilities in the context of new and current regulatory requirements. It is important to conduct this type of assessment prior to being inspected, to gain an understanding of how your company is positioned to manage an inspection and demonstrate compliance with applicable regulatory requirements. FORMAL FRAMEWORK AND PERIODIC ASSESSMENTS Developing a formal framework to conduct a pre-inspection assessment will enable you to comprehensively assess the design and effectiveness of your programme. A robust assessment framework will include the elements shown in Figure 1 on the previous page. Conducting periodic assessments will help you validate that AML/CTF capabilities are both designed and operating effectively, as well as ensuring readiness for inspection activity. Where items are identified during any type of periodic inspection or review, a remediation exercise should follow, with additional subsequent reviews, post remediation. Equally important is continuous employee training and awareness of business, product and client risks that may impact a business’ AML risk profile. Management should harbour a culture that encourages staff to speak up, and implement anonymous mechanisms such as whistleblower hotlines that enable a culture of compliance and risk management. SO, WHAT IS NEXT? As one can see, the financial and management burden of AML/CTF programmes for institutions is growing. Currently, 38
most AML programmes are highly manual in nature. We are beginning to see innovation to address the challenge in the form of advanced technologies to help manage money laundering risk, including FinTech and blockchain solutions, machine learning and Artificial Intelligence (AI), and Robotic Process Automation (RPA). Innovation is often viewed as an industry disruptor, however, recently, the trend has shifted to a more collaborative approach that can help alleviate some of the challenges. Over the last decade, governments, regulators, journalists, and whistleblowers have placed an enhanced focus on AML/ CTF across numerous industries to combat the increasing sophistication and on-going proliferation of financial crime. We continue to see increasing cross-border cooperation and higher customer due diligence standards propagate globally. Simultaneously, changes in legislation, regulation and guidance represent both challenges and opportunities for businesses to strengthen programmes, collaborate and innovate. In conclusion, focus should be placed on having formal programmes and systems supported by well-trained people that ensure appropriate oversight, execution, intervention and control to fight financial crime, including money laundering. ABOUT THE AUTHORS Bob Stanier is a Partner with PwC in the Cayman Islands and serves as the offshore banking sector leader for the PwC firms in the Caribbean region and Bermuda. He brings global experience to the region and leads a team that provides a comprehensive suite of risk advisory and assurance service offerings. Bob has more than 15 years of executive level experience leading enterprise risk and compliance organisations and engagements for some of the largest and most complex global companies in the financial services, development finance and consumer and industrial products industries. Cora Schwendtke is a Manager with PwC in the Cayman Islands. She is a chartered accountant and certified anti-money laundering specialist with over six years of experience on financial services audits and advisory related projects. Cora has been involved in a number of AML KYC reviews and remediation exercises, regulatory investigations and compliance reviews in the UK and across the Caribbean region. Both through internal and external projects, Cora has developed a strong background of the local regulatory requirements across the AML/CTF space in the Caribbean region.
THE CAYMAN
BENEFICIAL OWNERSHIP REGIME
The Fourth Anti-Money Laundering Directive (4AMLD), published on 5th June 2015, gave EU Member States (including the UK) two years to transpose the requirements of the Directive into national law. The leak of the "Panama Papers" and terrorist attacks in Europe led to proposed amendments to the 4AMLD published in July 2016 and was loosely referred to as the Fifth Anti-Money Laundering Directive (5AMLD). These changes came into effect in June 2017. The 4AMLD (as amended) affects a wide range of businesses involved in the provision of financial services. These include banks, the legal profession, accountancy profession and trust or company service providers.
The move to establish registers of beneficial ownership in the Crown Dependencies and Overseas Territories (CDOTs) is in accordance with a commitment following an Exchange of Notes with the UK in April 2016. The 5AMLD amendments include a proposal that the registers be open to public access. So far as the UK is concerned, implementation of EU legislation continues despite Brexit. The objective of these registers is to tackle money laundering and terrorist financing, recognising an overlap between the two given that both criminals and terrorists use similar methods to move funds, albeit with different motives. Information is gathered by way of increasingly detailed customer due diligence and know your client enquiries, resulting in a demand for disclosure of the "real" ownership of
corporate vehicles, trusts and real estate. The impact upon jurisdictions such as the Cayman Islands, to which the financial services industry is enormously important, is potentially very significant. Information in the right hands is a powerful tool for those fighting crime. In the wrong hands, it has the potential to create very real problems for individuals to whom privacy is important for legitimate reasons. With effect from 1 July 2017, the Cayman Islands introduced legislation establishing its own beneficial ownership register requirements for certain companies. This is by way of two 2017 statutes amending, respectively, the Companies Law (2016 Revision) and the Limited Liability Companies Law and by equivalent sets of Regulations. The legislation lists a range of companies excepted from the rules, to be expanded by further amending 39
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
legislation currently in the form of The Companies (Amendment) (No.2) Bill, 2017. The exceptions include: i.
companies listed either in Cayman or on an approved stock exchange (as listed in Schedule 4 of the 2016 Law) or appropriately regulated or licensed,
person (essentially a person registered, regulated or licensed in Cayman). The primary responsibility for compliance is with the company, which is obliged to engage a corporate service provider (CSP) to assist in establishing and maintaining the register, but the corporate service provider and the beneficial owner may also have obligations.
ii.
a company which has solely corporate directors themselves duly licensed, and
If a company is "in scope", then it has to maintain a register of beneficial owners who may be individuals or legal entities.
iii.
private equity or collective investment schemes or investment funds, or a company which is a special purpose vehicle, in each case managed, arranged or administered, operated or promoted by an "approved person".
The definition of beneficial owner focuses upon the right to exercise control, so the following qualify:
The meaning of "special purpose vehicle" is not clear but in practice any "legal entity" which is licensed and/or regulated in Cayman is going to be out of scope. It seems that a company wholly owned by a trust will be treated as a subsidiary of the trustee. On that basis, if the trustee holds a trust license in Cayman, the subsidiary company will not be in scope. The new regime will not apply to hedge funds regulated or licensed in Cayman or to hedge funds and private equity funds managed or administered by an approved
40
•
Holding directly or indirectly more than 25% of the shares or voting rights or the right to appoint or remove a majority of the board.
•
Being able, absolutely and unconditionally, to exercise "significant influence or control" other than as director, professional advisor or professional manager, or having that ability through a trust or similar structure.
The information required includes full name, address, date of birth and ID. The company will request this information by notice in writing to the beneficial owner, who is obliged to provide the required information unless it is protected by professional privilege or otherwise by Cayman law.
If a CSP has reason to believe that a company has failed to comply with obligations, it must notify the company, which must then correct the situation. There is a transitional period of 12 months designed to allow companies that are in scope to organise their register. During that period no company will be prosecuted for failing to comply. Thereafter there are penalties for a company which fails to comply or a beneficial owner who fails to provide information or provides false information. In the latter case the company may serve a "restrictions notice" on the person concerned, the effect of which is potentially serious, preventing the shares or other interest from being dealt with other than in a liquidation. Unlike the equivalent UK register, and despite the proposals in the 5AMLD, the Cayman register will not be open to public search. In fact it is not accessible via any direct network such as the Internet, but is hosted offline as a centralised encrypted registration platform. Each provider maintains a register which is uploaded to a dedicated government terminal via an encrypted flash drive which is taken physically to the government office. It is difficult to make a sensible argument against rules designed to assist with the prevention of crime.
It is easier to make the case for personal privacy and safety. There is, as always, a need to compromise and also to recognise that the scope for misuse of personal information available on a public register is considerable. International financial centres are resisting the call for public access on the basis the information will always be available to those agencies involved in fighting the crime and terrorist financing with which these initiatives are concerned, namely those with an actual legitimate interest. It is likely that they will continue to do so until such time as there is global agreement on appropriate exemptions and safeguards. ABOUT THE AUTHOR Jim Edmondson is Head of International Trusts and Private Client and is based in Cayman office of Mourant Ozannes. Prior to joining Mourant Ozannes, Jim was joint Senior Partner and head of the private client practice at Farrer & Co. He has over forty years’ experience advising high net worth individuals on a range of non-litigious private client matters and is particularly recognised for his advice on offshore holding structures. He is recommended in Chambers Global 2014 for both Private Client and International Private Client work.
41
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
CAYMAN MARITIME AND AVIATION SERVICES PARK
42
The Cayman Islands Government has recently granted legislation allowing the addition of offshore aviation services to the Cayman Enterprise City (CEC) special economic zone. The Aviation Services Park joins the maritime sector within CEC to create the Cayman Maritime & Aviation Services Park (CMASP). It is envisioned that CMASP will create the largest transportation services group in the region which will attract international maritime and aviation service businesses to set up a physical presence in Cayman. With this expansion, the CMASP can now include aircraft owners and brokers, technology companies and startups focused on aviation research and development, aircraft manufacturing and repair businesses, head offices of aviation industry businesses, companies that provide management consultancy and any other specialised services relating to the aviation industry.
43
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The CEC Special Economic Zone consists of six business parks, together creating a dynamic and innovative environment based on the best special economic zones in the world. The addition of the aviation park is expected to be instrumental in further diversifying Cayman’s economy and will assist in growing our client base. The Civil Aviation Authority of the Cayman Islands has a wellestablished reputation as a credible aviation regulator and custodian of a world-class aircraft register. The creation of the CMASP further enhances opportunities for commercial air transport operations to be established in the Cayman Islands, as it provides alternative means for Air Operator’s Certificate (AOC) holders to have their principal place of business in the territory. With aircraft registration and other services becoming increasingly competitive around the globe, the opportunity for aviation service providers to be licensed into the CEC Special Economic Zone allows Cayman to compete with other aircraft registries seeking to attract quality clientele that operate globally. The objective is to attract the following specific types of aviation companies to the islands: businesses involved in the transport of passengers by air over regular routes and on regular schedules, charter flights for passengers, scenic and sightseeing flights, general aviation activities, such as the transport of passengers by aero clubs for instruction or pleasure, the transport of freight by air over regular routes and on regular schedules, non-scheduled transport of freight by air, launching of satellites and space vehicles, space transport, logistics planning and aircraft management and management consulting and other specialised services to the aviation sector. This is a very positive development for the Cayman Islands, as it presents the opportunity for multi-faceted international aviation industries to be established here. It is envisioned that the aviation park will host a dynamic international community of maritime and aviation services businesses.
44
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Additionally, it also presents a basis for operators of Cayman Islands registered aircraft to establish their principal place of business within the jurisdiction to obtain an Air Operator’s Certificate for offshore commercial air transport. “The creation of the CMASP is an example of how a Government Authority and private enterprise can collaborate and innovate for the benefit of the jurisdiction. This will bring the Cayman Islands opportunities that didn’t previously exist, and CEC will put the weight of our marketing and business development team behind the effort to promote the Registry, the CMASP and the country generally,” said Charlie Kirkconnell, CEO of CEC. Sherice Arman, a Partner with significant aviation finance and registration expertise and experience at leading international law firm, Maples and Calder, said, “The addition of the aviation services park provides an efficient solution from a cost and timing perspective for aviation companies wishing to set up a physical presence in the Cayman Islands. This is particularly helpful to companies wishing to obtain a Cayman Islands’ Air Operator’s Certificate, who need to establish a principal place of business within the jurisdiction.” The primary advantage for companies setting up in CMASP is that it allows them to quickly and easily take advantage of Cayman’s jurisdictional benefits such as 100% exemption from the following taxes: Corporate Tax, Capital Gains Tax, Income Tax, Payroll Tax and Sales Tax. Additional government concessions include enabling companies to be fully operational in their Cayman office within CMASP in 4-6 weeks and obtain work permits within five days. The Park’s rich networking opportunities and core location allows businesses to tap into resources, partnerships and ideas in a business environment that helps them develop, innovate and grow. The CMASP provides Class A office accommodation, a global on-demand data centre and hosting services.
45
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ABOUT THE AUTHOR The Civil Aviation Authority of the Cayman Islands (CAACI) which is the custodian of the Cayman Islands Aircraft Registry is headed by the Director-General, Mr. P.H. Richard Smith. With over 40 years in the aviation industry, Mr. Smith has experience in both the private and public sectors of the industry, and is a venerable veteran who is well known through the Caribbean region and internationally. His career has been spent working with Civil Aviation Authority of the Cayman Islands (CAACI) with attachments and secondments to international training organisations and a stint with the national flag carrier - Cayman Airways, Ltd., as a pilot. Mr. Smith is the country’s foremost aviation official with authority delegated by Her Excellency the Governor.
46
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
NOCLAR
A NEW ERA FOR PROFESSIONAL ETHICS While many may envision accountants sitting behind computers with spreadsheets and pencils, their unique position often places them as guardians of the public interest. Professional accountants may be the first to find evidence of possible fraud, health and safety violations, or corruption, which brings us to the latest buzz word in the profession - NOCLAR. Quite simply it stands for non-compliance with laws and regulations. The International Ethics Standards Board for Accountants (IESBA) defines NOCLAR as, “any act of omission or commission, intentional or unintentional, committed by a client or employer, including by management or by others working for or under the direction of the client or employer, which is contrary to prevailing laws or regulations.” So, why the buzz? In 2016, following a 6-year project, the IESBA released a new framework for professional accountants in cases of suspected NOCLAR. Essentially, it is a guide for accountants to follow when they suspect something is amiss – protecting both the accountant and the public interest. The new standard came into effect in July 2017, which means professional accountants need to understand their role and duty in reporting NOCLAR, and the international standards available for guidance. BACKGROUND Two International Federation of Accountants (IFAC) boards were responsible for establishing professional standards in relation to NOCLAR. The
NOCLAR project started with the IESBA and was closely followed by the International Auditing and Assurance Standards Board (IAASB) which would need to make adjustments as necessary to ensure International Standards on Auditing (ISAs) were in-line with any new ethics standards created. IFAC describes the IESBA as, “an independent standard-setting board that develops and issues high-quality ethical standards and other pronouncements for professional accountants worldwide,” and IAASB as, “setting high-quality international standards for auditing, assurance, and other related areas, and by facilitating their adoption and implementation.” The IESBA’s NOCLAR project started in 2010 based on concerns over the lack of standards for determining and reporting suspected
47
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
NOCLAR. The IAASB officially launched its project in June 2015 to, “address actual or perceived inconsistencies of the approach to identifying and dealing with instances of identified or suspected NOCLAR in complying with ISA 250 and other International Standards when the IESBA Code also applies.” Both projects included a number of exposure drafts, comment periods and collation of feedback from IFAC members before final pronouncements were made.
the professional accountant in business as well as the responsibilities of the employing organisation’s management and governance teams. While key determinations are left to the accountant’s professional judgement, the sections do provide factors to consider to assist in determining what action, if any, needs to be taken. The key areas addressed in both sections include: •
Obtaining an understanding of the matter
•
Addressing the matter
•
Determining whether further action is needed
•
Communicating the matter to the entity’s external auditor (where applicable)
•
Documentation.
THE NEW CODE The new framework is found in the Code of Ethics for Professional Accountants (the Code) 2016 edition. At a high level, the Code covers five fundamental principles: integrity, objectivity, professional competence and due care, confidentiality, and professional behaviour (IESBA Fact Sheet). The specific sections of the code addressing NOCLAR are 225 and 360, with additional changes made to sections 100, 140, 150, 210 and 270. Section 225 speaks specifically to professional accountants in public practice and is broken into two main areas: the first in relation to audits on financial statements, the second in relation to professional services other than audits on financial statements. Both areas outline responsibilities of the professional accountant as well as the client’s management team. Section 360 speaks to professional accountants in business, and outlines responsibilities of
48
CHANGES TO ISAs As already discussed, the IAASB project looked specifically at ISA 250 and any other international standards potentially impacted by changes to the IESBA Code. Changes to ISA 250 include adopting some of the language in section 225 of the Code, and changing references to “implications of” or “instances of noncompliance” to include “identified or suspected non-compliance”. Additional ISAs amended include 210, 240, and 220, with revisions also being made to ISAE 3000, ISRS 4410, ISRE 2400, and ISAE 3402.
Why is the Cayman Islands one of the world’s leading international finance centres?
Innovative legislation. Practical regulation. Robust legal system. Tax neutral. Strong Government involvement. Quality and experienced professionals in the area of fiduciary services, legal services, public accounting, investment funds & asset management, trusts, capital markets, banking, insurance and reinsurance. For more information on Cayman Finance or the Cayman Islands financial services industry, visit our website or connect with us on social media.
Excellence. Innovation. Balance. www.caymanfinance.ky
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
TAKE PRIVATES IN
ASIA CAYMAN BY WAY OF
STATUTORY MERGER
The general trend of Chinese businesses
decoupling from the Nasdaq Stock Market (NASDAQ), the New York Stock Exchange (NYSE) and the London
Stock
Exchange
(LSE)
over recent years has seen a parallel movement in the Hong Kong market
with the recent privatisations of Hong Kong-listed companies incorporated
in the Cayman Islands, such as Nirvana Asia Ltd, Chinalco Mining
Corporation International and Belle 50
International Holdings Limited.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The purposes of these privatisations are manifold and have included a desire for reduced public scrutiny, reduced compliance costs, additional corporate governance flexibility and the prospect of a relisting. Whilst listed companies in the United States and the United Kingdom have increasingly utilised the statutory merger procedure available for take-private transactions under the Cayman Companies Law (as amended) (the Law) for this decoupling process, eligible companies listed on the Hong Kong Stock Exchange (HKSE) have traditionally used a scheme of arrangement in order to implement such privatisations, as in the three examples listed above. Companies, investors and practitioners alike await an opportunity to utilise a Cayman statutory merger for the privatisation of Hong Kong-listed companies, historically challenging due to the Hong Kong Securities and Futures Commission’s interpretation of the Hong Kong Takeovers Code which primarily affords fair treatment for shareholders who are affected by change of control transactions.
This article seeks to outline the process of a Cayman statutory merger and consider the advantages and disadvantages of using this as a mechanism for effecting take-privates in Asia, and also explores the right of dissenting shareholders to obtain fair value for their shares. THE CAYMAN STATUTORY MERGER - WHAT IS IT? A Cayman statutory merger is the process by which two or more companies (each, a constituent company) merge into one of the constituent companies (the surviving company) and the legal existence of each constituent company other than the surviving company ceases. The Law defines a merger as “the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company.� As such, the legal effect of a merger is that the surviving company assumes all of the undertakings, property, assets, rights obligations and liabilities of every non-surviving entity. Although perhaps not a use intended
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
by the legislature, the statutory merger process is commonly now the preferred route by which a take private transaction is effected (including by way of a management led buyout) by Chinese businesses operating through a Cayman Islands company whose shares are listed on one of the aforementioned exchanges.
(v) The merger is effective on either: (a) the date the Plan of Merger is registered by the Registrar (the Registration Date); or (b) such date or the occurrence of an event subsequent to the Registration Date as specified in the Plan of Merger (which must not be more than 90 days after the Registration Date).
SUMMARY OF PROCESS – HOW IS IT DONE?
Subject to certain limitations, a shareholder of a constituent Cayman company who dissents from a merger is entitled to be paid the fair value for his shares. A shareholder who intends to exercise his right to be paid fair value must provide the constituent company with a written objection to the merger before the other shareholders vote on the merger.
The Law allows two or more companies (comprising at least one Cayman company limited by shares, not being a segregated portfolio company) to merge quickly and simply. Companies and investors intending to use a statutory merger to take a listed company private (usually comprising a combination of the founders or managers of the listed company, its parent and potentially private equity investors) will as an initial step typically form a new company in the Cayman Islands which can be used as the offeror vehicle, recipient of finance and ultimately merger with the target company. In order to implement a statutory merger, the following steps must be taken:
DOCUMENTATION REQUIRED The documents needed to carry out a merger are listed below. (i) Plan of merger: The content of the Plan of Merger is prescribed by the Law and comprises the following information:
(i) The directors of each constituent company must approve a written plan of merger, which includes certain specific information regarding each constituent company and the terms of the merger (the Plan of Merger).
a.
the name of each constituent company and the surviving company;
b.
the registered office of each constituent company;
(ii) The Plan of Merger must be approved by:
c.
for each constituent company, the designation and number of each class of shares;
d.
the date which it is intended that the merger take effect;
e.
the terms and conditions of the proposed merger including, the manner and basis of converting shares in each constituent company into shares in the surviving company or into other property (consisting of shares, debt obligations or other securities in the surviving company or a combination of these);
f.
the rights and restrictions attaching to shares in the surviving company;
g.
any proposed amendments to the memorandum or articles of association of the surviving company or, if none are proposed, a statement that the memorandum of association and articles of association of the surviving company immediately prior to merger shall be its memorandum and articles of association after the merger;
Register the plan of merger and any amendment to the memorandum or articles of association of the surviving company;
h.
any amount or benefit paid or payable to any director of a constituent or surviving company consequent upon the merger;
Issue a certificate of merger within 24 to 48 hours, on an express filing basis, or, around five working days on a normal filing basis; and
i.
the name and address of any secured creditor of a constituent company and the nature of the secured interest held; and
Strike-off each constituent company other than the surviving company once the merger becomes effective.
j.
the names and addresses of the directors of the surviving company.
•
•
a special resolution of members of each constituent company, being at least a two-thirds majority of shareholders who have the right to receive notice of, attend and vote at the general shareholders’ meeting, voting as one class; and such other authorisation, if any, specified in the constituent company’s articles of association. The Plan of Merger can be pre-cleared with the Registrar.
(iii) The consent of each holder of fixed or floating security interests of a constituent company must be obtained. (iv) The Plan of Merger (accompanied by other specified documentation as set out below) must then be filed with the Cayman Islands Registrar of Companies (the Registrar) for approval and upon payment of the applicable fee and assuming that the Registrar is satisfied that the requirements of the Law (including any change in name of the surviving company) relating to the merger have been met, the Registrar will: •
•
•
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
(ii) Accompanying documents: The following documents are required to be filed with the Plan of Merger: a.
a certificate of good standing of each constituent company;
b.
a written director’s declaration of each constituent company (signed by and including the full name and address of the director making the declaration); i.
that the constituent company is, and the surviving company will be, immediately after the merger, able to pay its debts as they fall due;
ii.
that the merger is bona fide and not intended to defraud unsecured creditors of the constituent companies;
iii.
that no petition or other similar proceeding has been filed and remains outstanding, and that no order has been made or resolution adopted to wind up that constituent company in any jurisdiction;
iv.
that no receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of that constituent company or all or any part of its affairs or its property;
v.
vi.
that no scheme, order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of that constituent company are, and continue to be, suspended or restricted; of the assets and liabilities of the constituent company made up to the latest practicable date before the making of the declaration;
vii. in the case of a constituent company that is not the surviving company, that that constituent company has retired from any fiduciary office held or will do so immediately prior to the merger; and viii. where relevant, that the constituent company has complied with any applicable requirements under all Cayman Islands regulatory laws; and c.
an undertaking by each constituent company that a copy of the certificate of merger will be given to the members and creditors of that constituent company and that notification of the merger will be published in the Cayman Islands Gazette.
ADVANTAGES – WHY USE IT? The statutory merger process provides a straightforward and relatively inexpensive mechanism by which two or more companies can merge, with all rights and property of each of the merging companies vesting in a surviving company that also assumes all of their obligations. This can also involve a capital reorganisation so that some or all of the shares (of the
same or different classes) may be converted into, or exchanged for, different types of property (such as shares, debt obligations or other securities in the surviving company or any other corporate entity or money or other property, or a combination of these). The fact that only one of the merging companies has to be incorporated in the Cayman Islands (provided that the overseas constituent company’s jurisdiction permits the merger) provides flexibility of deal structure given that the process of establishing a Cayman Islands limited company is simple and efficient. In contrast to typical schemes of arrangement or general offers used for the privatisation of HKSE-listed companies, companies or investors wishing to acquire 100% control of a target company incorporated in the Cayman Islands by way of statutory merger enjoy a lower shareholder approval threshold, being a two-thirds majority compared to the majority in 4 number of shareholders who vote (the headcount test) that collectively represent at least three-fourths of the value of the shares voted in the case of a scheme and the 90% acceptances required for a ‘squeeze-out’ in the case of a general offer. In addition, a statutory merger entitles all shareholders to vote on the proposed transaction, including a controlling shareholder who is proposing to acquire overall control of the target, typically excluded from a vote to approve a scheme or discounted from the ‘disinterested’ acceptances required to effect a squeeze-out following a general offer. Perhaps most significantly, a statutory merger does not involve a court process which forms an integral part of a scheme of arrangement and therefore a statutory merger benefits from substantial time and cost savings. The statutory merger also avoids the need to grapple with the uncertainty and practical difficulties which have historically plagued the approval process for schemes of arrangement owing to the fact that the majority of shareholders of listed companies hold shares through a nominee (such as the HKSCC Nominees Limited for Hong Kong-listed companies). DISADVANTAGES – WHY NOT? The potential disadvantage of using a statutory merger over a scheme of arrangement is the ability of any dissenting minorities to object to the merger and demand the fair value of their shares where they believe that this ought to be more than what was offered to them. This is a right afforded to shareholders of a Cayman company at Law although it is worth noting that their dissent does not affect the merger taking effect. As such, this is effectively a separate process which runs post-merger which is examined in further detail below. For companies or investors evaluating the cost-benefit of a privatisation, the possibility of dissenting shareholders can be a significant concern where the success of even one or two dissenting shareholders can impact the financial viability of the deal. In contrast, a scheme of arrangement, once sanctioned
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
and approved by the Cayman court, binds all shareholders (including any dissenting minority) and therefore provides the offeror with certainty. DISSENTER’S RIGHTS – WHAT SHOULD A POTENTIAL OFFEROR BE AWARE OF? Shareholders of Cayman companies which have voted to merge are entitled, pursuant to section 238 of the Law, to dissent from the merger and receive payment of the fair value for their shares. Whilst such dissenting member will not necessarily impact on the timing and effect of a merger, it is prudent to identify dissenting members as early as possible as this may impact on the economics of the merger. Fair value is determined by agreement of the parties. Where parties are not able to agree the value to be attributed to the shares, within a certain prescribed timeframe, either party may petition the court for a determination of the fair value of the company’s shares. The right to dissent under the Law is restricted and will not apply to members who receive in exchange for their shares: (i) shares of a surviving company (or depositary receipts in respect thereof); (ii) shares of any other company (or depositary receipt in respect thereof) that are either listed on a national securities exchange or designated as a national market system security on a recognised interdealer quotation system or held of record by more than two thousand holders; or (iii) cash in lieu of fractional shares or fractional depository receipts as described above. Upon giving formal notice of dissent, in accordance with the procedure set out under the Law, a dissenting shareholder shall cease to have any of the rights of a member except the right to be paid fair value, the right to petition the court where an agreement as to fair value cannot be reached, and the right to institute proceedings to obtain relief on the ground that the merger is void or unlawful. In line with the increasing use of statutory mergers as the favoured mechanism for take-privates, claims by dissenting shareholders demanding fair value for their shares are no longer a rarity as they were two years ago when the landmark ruling of Integra in 2015 made headlines for its important guidance on how the ‘fair value’ of a dissenting shareholder’s shares is to be determined. Indeed, there now exists a rapidly evolving area of jurisprudence in the Cayman Islands concerning the dissent process, and the rights afforded to shareholders who seek the payment of fair value for their shares. Given the continued use of the statutory merger process by Chinese (and other) business to effect a take-private transactions, and the perception among some investors that those transactions are being undertaken at prices which are undervalue, it is expected that this body of case law will continue to expand.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ABOUT THE AUTHORS Shaun Folpp is a Partner at Mourant Ozannes, Hong Kong, and head of its Litigation and Restructuring & Insolvency practices in Asia. Prior to relocating to Hong Kong in 2015, Shaun spent almost a decade practising in the Cayman Islands and the British Virgin Islands. Shaun has extensive experience acting both for and against insolvency practitioners in all forms of external administrations, as well as acting for parties involved in general commercial, financial services and trust disputes. He also has considerable experience advising on corporate governance matters, including in relation to directors’ duties. He is consistently ranked as a leading lawyer by all of the leading legal journals.
Christopher Harlowe, is a Partner at Mourant Ozannes. He joined the firm in 2014. He previously worked at Speechly Bircham, where he was a Partner and head of the Corporate Recovery and Insolvency group in London. Christopher is a recognised expert in contentious and noncontentious insolvency, restructuring and recovery work.
Jessica Lee is a Senior Associate in Mourant Ozannes’ Hong Kong finance & corporate practice. Jessica trained with and previously worked as an associate at Linklaters. She was also seconded to the in-house legal team of a UK financial institution as well as a British insurance company. Jessica’s experience includes advising various local and multinational companies on cross-border corporate law transactions, including mergers and acquisitions, financings, corporate restructurings, general corporate advisory and pro bono matters.
55
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
A TIME ZONE DIFFERENCE OF
13
HOURS One would think having a difference of 13 hours
in time zones might be a barrier to transacting
business, however, in the digital world the time difference between most Asian countries and the
Cayman Islands has proven not to be an inhibitor.
Cayman, being a premier financial hub, has already established itself as a key provider of financial services for many jurisdictions, most notably the United States, Canada, Europe, and Latin American countries. Asian companies have also long been familiar with Cayman’s fund presence being home to more than 11,000 regulated investment funds and several thousand equity funds. This success can be attributed to Cayman providing an effective, neutral platform and being a leader in trust and fiduciary services addressing the needs of ownership continuity and wealth structures, including family offices. Additionally, some companies have established Variable Interest Entities (VIEs) to facilitate stock offerings. A significant uptick in interest for these types of offerings has been realised over the past few years in the reinsurance and captive insurance sector. Cayman has a long established and robust regulatory environment overseen by the Cayman Islands Monetary Authority (CIMA). CIMA subscribes to several international regulatory bodies
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
MINIMUM PRESCRIBED CAPITAL REQUIREMENTS CLASS OF INSURANCE
MINIMUM CAPITAL REQUIREMENT (MCR)
CLASS B (I)
GENERAL: US$100,000 LONG TERM: US$200,000 COMPOSITE: US$300,000
CLASS B (II)
GENERAL: US$150,000 LONG TERM: US$300,000 COMPOSITE: US$450,000
GENERAL: 10% NEP (Net Earned Premium), NEP to first million, $5 Million, 5% Of additional NEP up to $20 million, 2.5% of additional NEP in excess of $20 million LONG TERM: PCR = MCR COMPOSITE: Amount required to support the general business plus MCR
CLASS B (III)
GENERAL: US$200,000 LONG TERM: US4200,000 COMPOSITE: US$600,000
GENERAL: 10% NEP (Net Earned Premium), NEP TO FIRST $5 Million, 5% Of additional NEP up to $20 million, 2.5% of additional NEP in excess of $20 million LONG TERM: PCR = MCR COMPOSITE: Amount required to support the general business plus MCR
PRESCRIBED CAPITAL REQUIREMENT (PCR)
GENERAL: PCR = MCR LONG TERM: PCR = MCR COMPOSITE: PCR = MCR
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
and has received reviews from the Caribbean Financial Action Task Force (CFATF), International Monetary Fund (IMF), and Organisation for Economic Co-operation and Development (OECD) to cite a few and is also a long standing member of the International Association of Insurance Supervisors. As of June 30, 2017, CIMA disclosed annual premiums from the international insurance sector of US$12.4 billion, with assets of US$62 billion for 701 licensees making it the world’s second largest domicile for international insurers by count. In addition, some 146 of the 701 licensees are incorporated as Segregated Cell Companies (SPCs) which number in excess of 600 individual cells. At this time, CIMA has not opted for Cayman to become a Solvency II equivalent domicile. The domicile provides the flexibility to embrace capital models that are appropriate based upon the captive’s risks. In addition to a sound regulatory environment, Cayman boasts a best-in-class repertoire of service providers ranging from each of the Big Four accounting firms and several others auditors, lawyers, banks, and insurance managers. Asia
has approximately 148 captives domiciled within its region according to Captive Review. While no specifics were provided on the number of captives located in other jurisdictions further afield with Asian parents, one can speculate as many again if not more. Historically, it has been large corporations with an international presence, especially from the manufacturing sector, that have sought to establish a captive to cover their overseas operations since commercial insurance within the Asian region has been relatively inexpensive in comparison to other jurisdictions (perhaps due to different tort systems in those regions). Asian companies are realising that a captive can serve as an innovative facility to address their overseas operations’ regulatory obligations while providing a sensible facility to efficiently address their cash flow objectives and to deploy their internal models. While Cayman is known for its leadership in healthcare captives, it is also known within the insurance industry as the leading domicile for the formation of group/member owned captives.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The Cayman domicile is gaining traction with the parents of Asian companies seeking to establish captive insurance subsidiaries, particularly in the Life Sector. The following are some of the steps that are needed to have a smooth and successful application process and secure an insurance license to write Life/Annuity products: •
A robust business plan containing a thorough description of the product to be underwritten by the captive including: details of the pricing model, including actuarial support on the reserving methodology as well as a detailed description of the investment products.
•
Details on the distribution process, including any thirdparty sales force, the territories where the product will be sold, and how the captive will comply with the target territories insurance and consumer protection laws.
•
Due diligence measures that will be implemented to screen policyholders and the third parties selling the product for Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF) procedures.
•
Description of the claims handling process, including credential details on parties handling the claims and the AML/CTF measures.
•
Description of handling procedures for complaints, including details on the process for resolution.
Additionally, as part of the applications process for a Class B (iii) insurance license, the business plan should contain at a minimum a description of the Corporate Governance documentation including a Risk Management Framework, an Outsourcing Policy (and functions), a Data Retention Policy, a Succession Policy, and the Fitness & Probity of the Directors & Officers will need to be addressed in their Personal Questionnaire.
These captives are licensed as a Class B (i) which is considered a wholly owned pure captive insuring the member shareholders risks (up to 5% of unrelated business). Group captives are typically associated with a homogenous class of exposures as in the initial stages of formation they are usually supported by industry associations. However, heterogeneous group captives have also provided an opportunity for companies from different industries to participate in a group programme which typically offers them lower premium costs as the members are best-inclass and diligent in their management of loss control measures. Group captives are typically structured into two (sometimes more) funding levels where the membership pools their losses in the expected loss layers while transferring their excess losses to the commercial insurance market. The group captive concept has proven to be a successful model mostly for US small to midsize companies. This could offer new opportunities for Asian companies that have not yet adopted the group captive approach.
The items above should serve as a starting point for the thought process in preparing to secure a Class B insurance license in the Cayman Islands, whether the company is based in Asia or seeking to establish a captive to target Asian Life Insurance business. As more Asian companies show interest in the Cayman insurance sector, the domicile, having successfully served the interests of captive owners in other jurisdictions for more than 40 years, stands ready to assist those who are 13 time zones away. ABOUT THE AUTHOR Clayton Price is Managing Director and Office Head at Marsh Management Services Cayman. Clayton has more than 30 years of expertise in the industry, working in Atlanta, New York and Bermuda. He has responsibility for 30 employees in Cayman with over 110 captive and insurance companies under management.
1 Attitudes towards captive insurance in Asia. Survey conducted by Captive Review in partnership with Labuan International Business and Financial Centre 2017.
60
CRISIS MANAGEMENT LESSONS LEARNED FROM NATURAL DISASTERS
From an accident that disrupts your supply chain to a firestorm on social media, companies manage minor crises all the time. However, dealing with a major crisis is a different matter. A single mega-event - or a combination of them - can trigger crises that threaten the very survival of the business. These kind of crises lay bare the readiness and responsiveness of an organisation. They test a company’s values, leadership, and character at a time when there is no room for error. The Caribbean is the location of choice for many organisations. However, the risk of devastating weather events as well as other natural and man-made threats require organisations to protect their most important assets. Natural disasters,
financial crimes, cyberattacks and other potential disasters present a clear and rising danger for all organisations. The impact of such events hugely depends on an organisation’s crisis management plans as well as its readiness in respect to exercising those plans effectively. As the Caribbean was reminded again during the hurricane season in 2017, natural disasters with long lasting impact are an inherent risk for many islands in the region and, when such a crisis strikes, seconds count. According to Taron Jackman, Deloitte Risk Advisory leader for the Caribbean and Bermuda countries: “It is paramount to accept the possibility of the threats. Crises demand the very best our clients can muster, testing their strength of character.” When crises are managed well, stakeholder value can actually increase .And, of course, the opposite is also true. There is no surer way to destroy value than in failing to manage a major crisis effectively. Thus, executive management should consider key crisis management lessons
learned in the aftermath of global and Caribbean disasters, such as recent Hurricanes Harvey, Irma and Maria as well as many recent cyber incidents. FIVE KEY CRISIS MANAGEMENT LESSONS Waiting until a crisis hits is too late. Monitoring, preparation, and rehearsal are the most effective ways to prepare for a catastrophic event. Businesses need to undertake a Business Impact Analysis regularly to help determine priority areas in the event of a disaster. In addition, organisations that regularly plan and rehearse potential crisis scenarios greatly improve their ability to respond effectively when a real crisis hits. Every decision during a crisis can affect stakeholder value. Threats to an organisation’s reputation can destroy value much more rapidly than operational risks. In today’s world, technology and social media have dramatically increased the visibility of crises, which can lead to even greater reputational risk. Response times should be in minutes, not hours or days. When a real crisis emerges, a traditional business continuity plan may be insufficient, especially if it has not been tested. To mitigate the risks, your crisis
61
management team must take control quickly, lead decisively, communicate fluently, and inspire confidence in everyone both inside and outside your organisation. This will require expansive thinking and innovative approaches to solving problems. Playbooks to address “common” catastrophes are a critical starting point at these times.
organisation to be prepared to navigate the entire lifecycle of a crisis, from readiness, to response, to recovery.
You can emerge stronger. Crisis can be an opportunity, not just a threat. Almost every crisis creates opportunities for organisations to rebound, however you must be looking for them and be able to swiftly recognise them and act effectively.
Response: Responding to crises effectively and in real-time to bring stability and preserve reputation and stakeholder value.
Even when you think a crisis is over, it probably isn’t. The work continues long after you breathe a sigh of relief. The way you capture and manage data, log decisions, manage finances, handle insurance claims, and meet legal and regulatory requirements on the road back to normal can determine the strength of your recovery.
Readiness: Preparing for crises using advanced simulation, monitoring, strategy, testing, and planning techniques to anticipate existing, new, or previously unforeseen threats.
Recovery: Helping uncover and exploit opportunities to rebound from crises and emerge stronger than ever. Because crisis is unpredictable in the magnitude of chaos and distress that it can cause organisations, executives need a documented crisis management plan in addition to their more conventional risk management strategies LESSONS LEARNED FROM DELOITTE’S EXPERIENCE WITH CRISIS MANAGEMENT
ARE YOU PREPARED? Certainly, there are unique elements to every crisis, but having a systematised approach is key. It is critical for an
The mistake many organisations make is to focus their crisis planning on reactive measures. While the actual recovery is important, with a broad lifecycle approach to risk awareness, scenario planning and simulation, an organisation can retain control of the process even when it does not have control of events.
Resilience Center in the Cayman Islands, organisations can build resiliency that has the potential to turn unforeseen events into unforeseen advantages. The Deloitte Resilience Centre’s Citrus Grove location was constructed to withstand hurricanes and other catastrophic conditions. The building was tested during Hurricane Ivan and all post-mortem improvements were successfully executed, which made the Deloitte Resilience Center a location of choice not just for Deloitte, but also for other tenants, including both public and private sector organisations. The Deloitte Resilience Centre facility is designed to protect people, secure critical systems and data, and maintain the continuity of business operations. Mr Jackman said, “We understand the importance of readiness and offer our clients annual pre-hurricane simulations.” Through this exercise, the Deloitte staff and clients alike become better acquainted with each other and with the DRC invocation procedures, and their respective organisation’s recovery procedures. Based on the lessons learned from helping clients and establishing the Deloitte Centre for Crisis Management, we would like to highlight the importance of several key components: •
As Deloitte learned through assisting their clients and operating the Deloitte
62
Business continuity planning is critical for organisations to understand the threats and potential impact to the business functions.
•
Crisis simulation is the only way to know if your “model” will work when crisis strikes. During a crisis simulation, an organisation stress-tests crisis response plans in a simulated environment to evaluate crisis preparedness. An immersive experience helps executives identify potential gaps in their overall crisis readiness.
•
Real-time response includes establishing rapid-action teams operating under a Crisis Management Office. The teams should have demonstrated experience in the relevant functions, sectors and event types.
•
24/7 monitoring is necessary in order to track all the relevant sources of data for potential business disruptions and to follow post-crisis developments.
• Deloitte and other organisations offer solutions to constantly track and monitor sources of internal and external data to provide realtime situational awareness and identify leading indicators for potential crises. Crisis communications should be a part of the plan and the response. It is critically important during a crisis to not only manage the inflow and outflow of pertinent details to all stakeholders but to also control your message and to
protect your company’s reputation. Typically, the established Crisis Management Office works with clients to help them navigate critical messages across social and traditional media channels to inform stakeholders while pre-empting reputational threats. ABOUT THE AUTHOR Alexandra Simonova is a Senior Manager in the Deloitte Cayman Islands practice. She has over 11 years of experience in IT management and over 7 years of performing Cyber Risk, Strategic Risk and Operational Risk services for Deloitte’s clients. This includes work in the financial services, private and public sector on various projects including advising on cybersecurity strategy and governance, cyber resilience programmes for business continuity and cyber incident response. Alexandra manages security programmes for clients including security assessments and cyber simulations and also is a frequent speaker at information security conferences in Cayman and the Caribbean. Alexandra graduated with a Masters Degree in Computer Science and is working on her PhD in Information Assurance and Security. Alexandra is a Certified Information Systems Security Professional (CISSP) and a Certified Project Management Professional (PMP).
63
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
PROTECTING PERSONAL DATA IS THE FINANCIAL INDUSTRY PREPARED?
The new Cayman Islands Data Protection Law (“DPL”) is due to come into effect in January 2019 and will regulate the future processing of all personal data in the Cayman Islands. Drafted around a set of internationally recognised privacy principles, the new law provides a framework of rights and duties designed to give individuals greater control over their personal data, and will stand as the most comprehensive data protection law in the region.
Personal data holdings should not be excessive in relation to the purposes for which they are collected and should be securely purged once those purposes have been fulfilled. If personal data is processed for any new purposes, this processing can only be undertaken if fresh consent is obtained. Data subjects must also be informed of any countries or territories outside the Cayman Islands to which their personal data may be transferred. THE GROWING THREAT OF CYBER-CRIME
Financial institutions should take steps now to ensure they understand their obligations under the new law, have in place policies and procedures to ensure the proper protection of all personal data under their control and create an effective governance regime for approving, overseeing, implementing and reviewing those policies. Organisations in Cayman need to get it right - reputations and criminal liability will soon be at stake.
Offshore financial centres represent an attractive target for cyber criminals because of the large and often highly sensitive data holdings being collectively managed by those centres. As financial institutions increasingly outsource a significant part of their day-to-day operations to external service providers, these transfers also leave them vulnerable to attack. Cyber criminals can easily identify and exploit weak links in the flow of information between the organisation and its external providers.
IMPACT ON THE FINANCIAL SERVICES INDUSTRY The DPL provides a framework of rights and duties designed to give individuals greater control over their personal data. Importantly, the new law supports a growing expectation from international businesses and their clients that organisations operating in offshore jurisdictions have comprehensive data protection compliance requirements backed up by robust data privacy legislation. Personal data is defined widely to include any data relating to a living individual. Under the DPL, the personal data held by the data controller must be processed fairly and lawfully and used for a legitimate purpose that has been notified to the data subject in advance.
64
There is no substitute for proper due diligence on the systems, policies and procedures of third party providers to ensure that personal data is handled appropriately and securely. Regular physical audits and independent testing of a service provider’s controls are advisable. Contractual provisions should also be put in place with third party service providers to ensure any personal data is processed only for authorised purposes, all data is stored and transmitted securely and disaster recovery practices are in place in the event of a data breach. Use of unauthorised subcontractors by the service provider should be prohibited
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ATTENTION TO DATA PROTECTION ISSUES Investors in offshore financial centres increasingly require and demand data privacy. As obligations to collect personal data increase with new international data sharing regimes, financial institutions need to pay close attention to data protection issues. These international obligations, together with cybersecurity concerns and innovative technology deployments, are making the regulation of personal data more complex than ever before. 65
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
without the prior approval of the transferor. Data that may have been anonymised or aggregated by an organisation will still require careful handling. The rise of social media and the increase in online public data sources means cyber criminals are now easily able to “re-identify” individuals by combining that information with the anonymised or aggregated datasets. DATA PROTECTION, BLOCKCHAIN AND FINTECH Financial technologies or “FinTech” are emerging technologies that have the potential to supplement or disrupt the financial services industry. As Cayman presses forward with its ambition to be a leading regional technology hub, FinTech will soon become a key point of focus, both for market participants and for regulators. FinTech solutions also raise data protection concerns that need to be carefully considered before they are adopted.
In the financial services industry, blockchain, or distributed ledger technology, is starting to be used to centralise a number of back-office and compliance functions. One of the major benefits of blockchain technology is its immutability, meaning the data stored on the chain cannot be altered or deleted. This could also create a data protection problem, because in theory there could be no "right to be forgotten" in the context of blockchain. However, personal data can be kept
66
off blockchain ledgers altogether by replacing the data with an encrypted reference to the data – a “hash”. These hashes or digital fingerprints prove that data did exist at a certain date, but without the data itself appearing on the chain. Encryption controls limiting the accessibility of personal data hashed in the blockchain could be a viable solution for data protection compliance under the DPL. Encrypted personal data may still qualify as personal data under the new law as long as the holder of the data possesses the encryption key. However, if the keys will only be made available in circumstances dictated by a smart contract or by the individual data subject, then it is difficult to see the objection from a data protection perspective. ACHIEVING COMPLIANCE The DPL gives individuals the right to access personal data held about them and to request that any inaccurate data is corrected or deleted. Organisations will need to have policies and procedures in place to manage these requests. The law also obliges businesses to cease processing personal data once the purposes for which that data has been collected have been exhausted. Prescribed data retention periods are not set out in the DPL but an analysis will need to be undertaken to determine how
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
long data should be kept for. Similarly, it will be important to evaluate how personal data can be securely deleted once the purposes for holding it have been fulfilled. Implementing a data protection compliance programme involves engaging with the right stakeholders across the organisation and creating an effective governance regime for approving, overseeing, implementing and reviewing the various policies.
imprisonment for a term of up to 5 years, or both. Monetary penalties of up to CI$250,000 are also possible. Protecting personal data is now business critical for financial institutions in Cayman. Even if monetary losses are not sustained as a result of personal data being mishandled, the reputational damage following a breach could be devastating. ABOUT THE AUTHOR
A coordinated chain of command should be developed, together with written reporting procedures, authority levels and protocols including seeking and complying with legal advice. The appointment of official roles such as a Data Protection Officer is also recommended. The Information Commissioner will be responsible for overseeing the DPL. The Commissioner will be able to issue guidance as to compliance requirements, investigate complaints of breaches of the DPL as well as initiate investigations on its own motion. The approach to enforcement is expected to be administrative and consultative in nature but criminal sanctions are also available. Refusal or failure to comply with an order issued by the Commissioner is an offence and the data controller is liable on conviction to a fine of CI$100,000 per breach,
Peter Colegate is a Senior Associate within the corporate practice group of Appleby in the Cayman Islands where his practice is focused on privacy, data protection, intellectual property and strategic corporate-commercial and regulatory work in the technology and financial technology (FinTech) sectors. A privacy and data protection specialist, Peter is a member of the International Association of Privacy Professionals. Prior to joining Appleby, Peter helped build Hogan Lovells’ privacy practice in Hong Kong and worked with some of the world's largest technology companies and global banks across the Asia-Pacific region. Peter is admitted as an attorney-at-law in the Cayman Islands and as a solicitor in England and Wales.
67
Intelligent and insightful offshore legal advice and services. Delivered with perspective.
applebyglobal.com
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
CAYMAN MAINTAINS A
PRIVATE EQUITY
PRE-EMINENCE 68
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Private equity continues to enjoy a buoyant fundraising environment. Investor satisfaction is high, with key allocators maintaining or increasing allocations to private equity. Driven by strong performance and resulting investor demand, private equity funds continue to meet or exceed their fundraising targets and we are seeing new and bespoke products offered by fund managers, including funds of one, managed accounts and direct and co-investment opportunities.
Over the past few years we have seen an increasing trend in fund managers establishing their main fund vehicle in the Cayman Islands, compared with their earlier vintage funds that were often established in the US, with Cayman domiciled alternative investment vehicles formed on a deal by deal basis to address particular tax and/or regulatory concerns. This change is, no doubt, largely due to the increasingly global nature of private equity, with fund managers often fundraising in global markets and targeting global investment strategies. In this positive and changing environment, Cayman domiciled entities play a wellestablished and growing role in private equity fund structures. This role is evidenced by the growing number of exempted limited partnership registrations we are seeing (the exempted limited partnership being the overwhelming vehicle of choice for private equity funds in Cayman). The years since the 2008 financial crisis have seen a consistent increase in the number of annual partnership registrations. In 2016 the number of active exempted limited partnerships stood at 19,937, compared with 17,896 in 2015 and 15,455 in 2014. 69
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
So, why Cayman? For many years, Cayman has been a popular offshore domicile for private equity funds, in no small part due to the global distribution appeal of Cayman vehicles, their ease of use, speed to market and low cost. Cayman's tax neutral status ensures the fund vehicle itself does not create an additional layer of tax, creating efficiencies in raising funds from a potentially global investor base. Cayman is a well-known and trusted centre of excellence for its established and experienced financial services sector and professional service providers. However, one of Cayman's key strengths has been its ability to complement robust laws with a pragmatic commercial approach to business. Cayman continues to refine its laws and regulatory framework to ensure it meets the ever-increasing demands of the private equity industry and has proven its ability to respond and adapt to demands from around the world. This ability to respond and adapt is clearly demonstrated by two recent legal developments, the update of the Cayman Islands Exempted Limited Partnership Law (the "ELP Law") and the enactment of the Limited Liability Companies Law ("LLC Law"), as well as by Cayman's ongoing response to global initiatives on transparency. Through the ELP Law, Cayman has demonstrated a desire and ability to complement the onshore fund structures used by, and familiar to, US fund managers. While founded on Cayman common law principles, which in turn are derived from English law, the ELP Law (first enacted in 1991) was drafted to provide symmetry with the corresponding Delaware statute. The ELP Law has subsequently been amended, but always with a view to dovetailing with the US market. This policy was, and is, simple in design: it is intended, within the context of Cayman law, to enable a manager’s offshore fund to operate and be governed consistently with its domestic offering. Following a detailed consultation, the ELP Law received a comprehensive review and update in 2014. While the new law did not make fundamental alterations to the nature, formation or operation of exempted limited partnerships, it promotes freedom of contract and includes provisions to deal specifically with issues and concerns raised, and suggestions made by, the industry to bring the ELP Law even further into line with the corresponding Delaware statute. The LLC Law, enacted in 2016, provides for the formation of a new Cayman vehicle: the limited liability company. The limited liability company represents a response from Cayman to requests from the industry for a new vehicle closely aligned with the Delaware limited liability company. We have seen a sharp uptake in use of the limited liability company in private equity structures, particularly as GP governance vehicles, aggregator vehicles (where multiple related funds are investing in the same portfolio investment) and holding companies in portfolio acquisition structures. Cayman's willingness to revamp the ELP Law, and to establish a new limited liability company vehicle in response to feedback from the industry, demonstrates a flexible, dynamic 70
and responsive jurisdiction, quick to implement change in order to position itself for new and ongoing opportunities and to meet the needs of the market. Cayman remains committed to transparency, and has worked with governments and international authorities over many years to ensure that Cayman is trusted as a well-regulated, cooperative and transparent jurisdiction. Cayman was an early introducer of comprehensive and strict anti-money laundering laws and know your client rules and regulations, which are at least equivalent to those of established OECD member states. The Financial Action Task Force sets the global standard for fighting money laundering and terrorist financing, and Cayman has been assessed as 'highly compliant' with its recommendations and more compliant than many OECD member jurisdictions. Cayman was an early adopter of legislation to comply with the Foreign Account Tax Compliance Act (FATCA) and the OECD's Common Reporting Standard (CRS), with the result that certain financial account information of investors is exchanged with over 100 other countries to assist with the fight against tax evasion. Furthermore, Cayman has recently implemented a beneficial ownership regime, which requires certain entities that are not affiliated with a regulated manager and are not otherwise exempt to establish beneficial ownership registers so that certain specific information can be made available to the UK's law enforcement agencies upon an appropriate request. As a result of these legislative changes, Cayman is rated by the OECD as "largely compliant" regarding transparency and information exchange - the same rating as given to the US, UK and Germany - giving comfort to investors and managers alike that Cayman is viewed as transparent globally. Cayman has strategically and thoughtfully developed and maintained a position as the pre-eminent offshore jurisdiction for private equity. As discussed in this article, this success can be attributed in large part to commercial and industry specific laws, transparency and global compliance. Cayman's flexibility to implement change and adapt to new opportunities and challenges looks set to continue with ongoing discussions and consultation on matters as diverse as separate personality for partnerships, a partnership merger regime and conversion of different types of legal entities, to name a few. With its demonstrated ability to meet the evolving needs of the industry, we look forward to seeing the continued growth of Cayman's role in private equity. ABOUT THE AUTHOR Sheryl Dean is a Partner at Maples and Calder in the Cayman Islands. Sheryl specialises in the structuring, establishment and operation of private equity funds and advising on their downstream transactions, as well as the formation and ongoing operation of hedge funds. She represents large sponsors as well as boutique and start up investment managers. Sheryl also advises on a wide range of corporate transactions, with particular expertise in M&A transactions, restructurings and joint venture arrangements.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
CAYMAN LLCS: ONE YEAR OLD AND BOLDLY STRIDING FORWARD Arguably the most prominent non-regulatory legal development in the Cayman Islands in recent times has been the introduction of limited liability companies ("LLCs"). LLCs became available after the corresponding enabling legislation, the Limited Liability Companies Law ("LLC Law"), came into effect in July 2016. In the intervening period, LLCs have been newly formed and otherwise come into existence by way of mergers, conversions and inward migrations. There were in excess of 600 LLCs registered in the Cayman Islands as at the end of August 2017. The registration statistics, together with a detailed analysis of the purposes for which the over 300 LLCs that we have registered have been employed, support our initial expectations when drafting the
LLC Law; namely that LLCs would be a helpful additional structuring option that would complement traditional Cayman vehicles, notably the exempted company and exempted limited partnership. The popularity of exempted companies and exempted limited partnerships has been unaffected with formation levels for both exempted companies and exempted limited partnerships also increasing during the period since LLCs were introduced. FAMILIARITY AND FLEXIBILITY A key rationale for introducing LLCs was to provide a hybrid vehicle that was familiar, flexible, easy to administer and able to provide greater symmetry with onshore vehicles, particularly the Delaware limited liability company, from which the LLC Law, in part, takes its inspiration.
71
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Consequently, an LLC is substantially similar to the Delaware equivalent (although not identical). The primary differences arise from the LLC Law having been drafted to: (i) ensure symmetry and consistency, where appropriate, with existing Cayman limited partnership and company regimes; (ii) leverage off existing Cayman jurisprudence; and (iii) address OECD and other international obligations to which the Cayman Islands Government adheres. This broad approach, coupled with an LLC's key features, has resulted in LLCs being well-suited for a variety of purposes. KEY FEATURES In summary, the key features of a Cayman LLC are that it is a legal entity with separate legal personality (like a company) and each member's liability is limited to the amount, if any, that the member has agreed to contribute contractually to the LLC (whether in cash, in kind or by way of other services). An LLC, however, does not have a share capital. Each member
has a membership interest representing such member's rights (including economic and voting rights) and obligations that are set out in the LLC agreement. Members are able to agree amongst themselves when and how assets, liabilities, profits and losses are allocated, and distributions are made by the LLC with such arrangements recorded in the LLC agreement in a manner more akin to a limited partnership (with such allocations and any contributions or distributions credited or debited to a member's corresponding capital account). This can permit more efficient internal accounting and record keeping processes than might apply for an exempted company. There is also great scope to determine the manner in which an LLC is managed. It is possible to appoint one or more managing members or non-member managers to assume responsibility for supervising and managing an LLC. In the absence of such arrangements, an LLC is managed by members acting by a majority in number. A person managing an LLC, in such capacity, has a statutory duty to act in good faith. This standard of care may be expanded or restricted, but not
eliminated, by the express provisions of the LLC agreement. Additionally, any person who is appointed to an LLC committee or other board may act in the best interests of such person's appointing member even though it may not be in the best interests of the LLC or any other member. The net result is that, subject to minimum statutory safeguards, parties have considerable contractual freedom to legislate their own affairs. The LLC's hybrid nature can also provide some tax related benefits although tax treatment may differ in various onshore jurisdictions. In most jurisdictions, an LLC is likely to be treated in the same manner as other hybrid vehicles, such as Delaware limited liability companies, unless the relevant taxing authorities permit an entity to elect its tax classification. USES Against this context, LLCs have been well-suited to a wide range
Striving to enhance your performance. We will continuously innovate and adapt to respond to your changing needs. At KPMG, our Learning & Development team can support you in a number of areas: •
Cybersecurity awareness training
•
Compliance training (anti-money laundering and fraud awareness)
•
Personal effectiveness and leadership training
All courses are face-to-face and are customized based on your needs. KPMG is a trusted adviser, supporting our clients every step of the way, sharing insights, and providing support in a timely and cost-effective manner. We are committed to assisting clients throughout their developmental journey. To learn more about our services, contact us at: KY-FMLearningDev@kpmg.com. kpmg.ky
© 2017 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. “The KPMG name and logo are registered trademarks or trademarks of KPMG International.” The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of thedate it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
of applications. For funds industry purposes, the ability to provide greater symmetry with onshore vehicles in onshore-offshore fund structures can lead to greater ease and cost efficiency of fund administration and has helped to better align the rights of investors between the different vehicles in the structure. LLCs have been employed quite extensively in private equity and other closed-ended structures. For such structures, LLCs have not impacted the manner in which Cayman primary fund vehicles are organised, which are typically formed as exempted limited partnerships, although in some instances an LLC has been used in lieu of a corporate vehicle. More typically, the LLC has been an appealing alternative for general partner, manager and co-investment vehicles. The absence of share capital (and the absence of the need to maintain a share register), combined with the ability to intuitively track and record the capitalisation of an LLC and its distributions, has led to LLCs also being attractive for blocker, aggregator and holding vehicle applications. LLCs have also been used in certain hedge fund structures, albeit generally for 'funds of one' or where there are economic terms or allocations among investors that are more naturally reflected in a capital account mechanic set out in an LLC agreement as opposed to a share capital construct that is supported by various provisions in a company's constitutional and subscription documentation. The governance arrangements for an LLC that is to be registered as a 'mutual fund' with the Cayman Islands Monetary Authority, however, are likely to closely mirror those for a company with directors given that LLCs are deemed under the LLC Law to be akin to exempted companies for regulatory purposes. For general corporate and commercial applications, such as joint venture companies, management holding vehicles, carried interest distribution vehicles or general partner entities,
the flexibility of the vehicle has been appreciated given that managers may act in the best interests of their appointing member.
centre - ensuring that the jurisdiction will continue to stride boldly forward in a rapidly evolving global environment. ABOUT THE AUTHORS
Further, as a member is not required to make a contribution but may benefit from profit allocations, the LLC has been adopted for certain employee award and grant schemes. LLCs have also been engaged in the context of certain structured finance / securitisation and financing transactions, where the statutory framework and contractual freedom for parties to legislate their own affairs, including the capacity to make provision for a springing member, has been advantageous. STABILITY AND PROGRESS THROUGH INNOVATION The LLC has been a welcome additional structuring solution and highlights the commitment of the Cayman Islands Government and private sector to refine existing, and introduce new, products to ensure the dynamic requirements of financial industry participants are met. This commitment is further evidenced by the introduction of limited liability partnerships ("LLPs") that are anticipated to be available for registration in early 2018. An LLP will combine the flexible features of a general partnership but have the benefit of separate legal personality and afford limited liability status to all its partners. As such, LLPs are likely to become the preferred manner by which professional firms operating in the Cayman Islands structure their businesses, although it will also be an option for use in other contexts, such as a general partner, management or holding vehicle or as a fund of funds partnership.
Jonathan Green is a Partner at Maples and Calder where he is head of the Cayman Islands Investment Funds team. He advises on all aspects of investment funds, specialising in private equity and hedge fund formation. Jonathan has extensive experience of corporate, partnership and trust structures, establishing and operating fund platforms, advising on fund regulatory matters, structuring downstream transactions and advising funds on matters arising throughout their life cycle. Jonathan was the chairman of the legislative sub-committee that helped to draft the Limited Liability Companies Law, 2016. Julian Ashworth is a Partner at Maples and Calder in the Cayman Islands where he specialises in private equity and hedge fund structures and investments. He has worked with sponsors and institutional investors advising on the structuring and formation of private equity, hedge and hybrid funds, portfolio investments, security arrangements, secondary transactions and fund restructurings. He advises sponsors and management companies on profit sharing and funding arrangements and Cayman Islands regulatory matters. Julian is also involved in corporate finance matters, including leveraged buyouts, joint ventures, co-investments and restructuring matters. He served on the legislative sub-committee that helped to draft the Limited Liability Companies Law, 2016.
These initiatives, in conjunction with implementing global best standard regulatory developments intended to provide greater investor transparency and inter-governmental and regulator cooperation, further enhance the Cayman Islands' reputation and attractiveness as the pre-eminent offshore financial 73
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
G20 PEER REVIEW REPORT: AN ANALYSIS John W. Gardner, the former US cabinet secretary, educator
and activist once wrote that “Excellence implies striving
for the highest standards in every phase of life.” Striving for and meeting the highest global standards has been a top
priority for the Cayman Islands financial services industry
for decades and the success of those efforts was recognised once again late last year.
In September 2017, the Organisation for Economic Cooperation and Development (‘OECD’)’s Global Forum on Transparency and Exchange of Information for Tax Purposes released the ratings from its second round of peer reviews of individual jurisdictions’ development of tax Exchange of Information Regimes (EOIR). The Global Forum peer reviews assessed the Cayman Islands to be “Largely Compliant” with international standards of transparency and exchange of information – the second highest designation and the same one given to Australia, Canada, Germany, Denmark and Bermuda, among others. This is critical recognition of Cayman’s status as a transparent jurisdiction. No other organisation has greater credibility and influence on global transparency standards than the OECD’s Global Forum. Established almost a decade ago in response to calls for better implementation of global standards, the Global Forum now includes 147-member jurisdictions including the Cayman Islands. The Global Forum not only works to establish fair, high standards applicable to all jurisdictions, but it also oversees a rigorous peer review process to assess their implementation. Global Forum assessments carry the full weight of their global reach. The assessment released last year was not the first time Cayman had gone through the peer review process. Between 2010 and 2016, the Global Forum conducted an initial round of reviews to assess adherence to global transparency and tax information exchange standards. As a result of that assessment, the Cayman Islands was also rated as “Largely Compliant.” The second round of assessments was launched in 2016 with Cayman being among the first countries to be reviewed and the Global Forum raised the bar substantially for ratings. As a starting point, second round peer reviews looked at recommendations from the first round to see if they had been implemented. In its first round assessment, the OECD had recommended that Cayman eliminate the use of bearer shares. Subsequently, the Cayman Islands Government passed legislation that outlawed the use of bearer shares which, when combined
74
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
with Cayman’s lack of numbered accounts and lack of shell companies, demonstrated the jurisdiction’s commitment to transparency. The peer reviewers in the second round took note. In addition to checking on progress from first round recommendations, second round peer reviews measured jurisdictions against a much higher standard, including greater emphasis on each jurisdiction’s beneficial ownership regime. Fortunately, Cayman has devoted more than 15 years to developing a verified beneficial ownership regime that is a world class system. Unlike most other systems which are self-reporting, the Cayman Islands regime requires information to be collected and verified by licensed Cayman Islands corporate service providers under existing anti-money laundering and knowyour-customer regulations. The Global Forum’s evaluation of this regime and how closely it is followed played a key role in the jurisdiction’s successful rating.
is also living up to them. In fact, Cayman actually received “Compliant” ratings – the highest possible - on seven of the ten elements that make up the overall assessment. Cayman’s assessment as “Largely Compliant” on the remaining three kept the jurisdiction’s rating the same, even though the criteria to achieve such a rating had become even stricter for second round reviews. The Global Forum’s second round peer review results offer independent and highly credible proof that the Cayman Islands is a transparent jurisdiction. Cayman meets none of the definitions for a tax haven used by leading transparency organisations, including the OECD itself. Instead, the Cayman Islands continues to demonstrate the same ongoing commitment to global standards for transparency and exchange of tax information as G20 countries like Canada, Australia and Germany. Recognition of that commitment is something of which everyone in the Cayman Islands financial services industry and government can be proud.
The Global Forum also assessed exchange of information arrangements, how the jurisdiction handled requests under those agreements and information provided both by the Cayman Islands Government as well as other jurisdictions with which we cooperate. Here again, Cayman’s longstanding leadership on transparency and cross-border sharing of information made a significant contribution to the successful outcome of the peer review process. The Cayman Islands has signed Tax Information Exchange Agreements with 36 jurisdictions. Cayman has also adopted the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which allows tax information exchange with more than 90 countries. Cayman became an early adopter of automatic data exchange, signing onto agreements such as the European Union Savings Directive, the OECD’s Common Reporting Standard and the US FATCA. Most recently, Cayman signed onto the country-by-country reporting principles under the BEPS process. As the Global Forum’s assessment of Cayman shows, the jurisdiction not only has these transparency commitments in place but it
75
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
“G20 PLUS” GLOBAL FINANCIAL AGREEMENTS
The Cayman Islands is a premier global financial hub, connecting law-abiding users and providers of capital and financing around the world - benefitting both developed and developing countries. Both the jurisdiction, and our financial services industry, have been recognised for decades as a strong international partner in combatting corruption, money-laundering, terrorism financing and tax evasion. The Cayman Islands has gained the reputation of a transparent jurisdiction by
76
meeting or exceeding all globally-accepted standards for transparency and cross border cooperation with law enforcement. The chart below shows Cayman’s adherence to the highest global standards compared with those of G20 members and other top IFCs (together the “G20 Plus”). G20 Plus includes G20 countries plus the top international financial centres (The Cayman Islands, Bermuda, Jersey and
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Guernsey) that adhere to the highest globally implemented standards for transparency and cross border cooperation. They are pivotal in benefitting the global economy by being tremendous extenders of value for G20 economies across the world. Cayman has adopted at least as many global standards as any G20 country – and more, when agreements specific to International Financial Centers (IFCs) and UK Overseas Territories are included. But in a global financial system, a single jurisdiction’s leadership on transparency is
not enough. Combatting global financial crime requires a unified legal, social and law enforcement approach by all G20 countries and IFCs together. Cayman Finance hopes all jurisdictions will adopt the full range of globally-accepted standards for transparency and cross border cooperation with law enforcement. As new standards are considered, it is critical that they apply to all jurisdictions as well.
77
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
THE
CAYMAN MODEL The last year has seen a significant increase in attention to the role international financial centres play in driving global economic investment and growth as well as deterring, identifying, and combatting economic crimes like tax evasion, moneylaundering, and corruption. While every IFC brings unique attributes to those efforts, certain characteristics stand out for their impact on the global marketplace. Taken as a whole, those characteristics could be considered as The Cayman Model.
The Cayman Model demonstrates how an international financial centre (IFC) can make the greatest contribution to the global economy by supporting efficient free trade, capital, investing, financing and services while also helping to fight global financial crime. Over the last 50 years, The Cayman Model has developed to not only define the jurisdiction as a responsible financial centre, but also to provide a roadmap other financial centres can follow. Every jurisdiction, regardless of size, can contribute to the fight against global financial crime, but the greater the role a jurisdiction plays in the global economy, the more significant its contribution to the fight can be. That is why Cayman’s role as a premier global financial hub, efficiently connecting law abiding users and providers of investment capital and financing around the world, is such an important component of the Cayman Model.
78
Approximately two-thirds of the world’s hedge funds are domiciled in Cayman. Recent reporting has estimated the
assets under management in these structures alone to be US$2.3tn. Cayman is also home to a growing private equity sector as well, with more than 20,000 vehicles in our jurisdiction. An even broader look at Cayman’s role as a premier global financial hub was included in a report issued late in 2017 by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. Their report estimated that in 2014, Cayman attracted at least US$4.1tn in banking assets, direct investment and portfolio investment. These substantial figures represent Cayman’s ability to enable parties from around the world who are domiciled in countries with differing laws, regulations, tax rules and customs to do business together in our neutral jurisdiction. Global investment capital is pooled in Cayman and then is invested into opportunities around the world, putting Cayman at the centre of the global financial system. Because Cayman serves as a premier global
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
financial hub, its adherence to the highest global financial standards has established the jurisdiction as a strong partner in combatting international financial crime. Cayman and its financial services industry have been recognised for decades as a strong international partner in combatting corruption, money-laundering, terrorism financing and tax evasion. Cayman has adopted more of the nearly twenty global financial standards than any other jurisdiction, including the European Union Savings Directive, US FATCA and the OECD Common Reporting Standard. Cayman also has signed onto the country-bycountry reporting principles under BEPS. Adopting and implementing these standards is a key part of how Cayman contributes to global efforts to combat financial crimes while providing economic value to other jurisdictions worldwide. As Cayman meets or exceeds the full range of globally-accepted standards for transparency and cross-border
cooperation with law enforcement and tax authorities, as noted above, it is a transparent jurisdiction. Cayman does not meet any widely accepted definition of a tax haven. In fact, Cayman was rated by the OECD’s Global Forum as “largely compliant” with the international standard for transparency and exchange of information, the same rating the OCED gave to other G20 Plus countries like Germany, Canada and Australia. A foundational element of Cayman’s commitment to transparency is our verified beneficial ownership regime. The Cayman Islands is a leader in beneficial ownership standards, having had a world class verified beneficial ownership regime in place for more than 15 years. What distinguishes the Cayman Islands regime apart from most others around the world is that the information in our system is collected and verified by licensed Cayman Islands corporate service providers under existing antimoney laundering and know-yourcustomer regulations. Many beneficial ownership registries – including central public registers – rely on self-reported information, which can be less complete and accurate. The information Cayman requires to be collected is available to the authorities making proper requests through existing information sharing channels between the Cayman Islands Government and other countries. Cayman has adopted automatic exchange of tax information to authorities in other countries. Under the CRS and FACTA agreements, Cayman proactively shares tax information with
79
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
other governments, which assists them in the collection of their own taxes. When it comes to taxes, Cayman has its own regime which collects the right taxes from the right people at the right time within its jurisdiction. Unlike other jurisdictions, Cayman has chosen to use fees and other taxes instead of an across-the-board corporate income tax. Cayman’s tax regime meets or exceeds the revenue targets used by other leading countries around the world, generating government taxation revenue equal to approximately 23% of our GDP (2016). It’s a taxation revenue raising system that works well for the jurisdiction and very adequately funds government operations while keeping the debt-to-GDP ratio modest. The Cayman Islands also meets none of the descriptions used by entities like the OECD or Transparency International to define a tax haven. The Cayman Islands purposefully lacks any laws or agreements to support the shifting of tax base by foreign entities to avoid corporate taxes in their home jurisdictions. This responsible approach to taxation is central to the Cayman Model and a distinguishing feature of the jurisdiction among IFCs. Another distinguishing, oftenundervalued element in developing a responsible international financial centre is the quality of the professionals working in the industry. However, under the Cayman Model extraordinary value is placed on business culture and professionals maintaining it. Cayman is home to the world’s top professionals in areas such as corporate and
80
director services, legal services, public accounting, banking, wealth and asset management, insurance, reinsurance and captive markets. They are vital to the success of the industry and the culture of compliance. The growth in Cayman’s financial services industry is a reflection of the quality of the jurisdiction’s professionals. In addition to attracting investment, the jurisdiction has also attracted the praise of its peers, ranking as the Top Specialised Financial Centre by The Banker for 9 years in a row. Cayman has also been voted Best Hedge Fund Services Jurisdiction and top Offshore Captive Domicile. To attract and retain the highest quality professionals, Cayman invests in them. The Cayman Islands provides outstanding quality of life for professionals and their families through world-class infrastructure, health care, education and culture. These investments pay off with a knowledgeable and committed workforce that shares the vision of the Cayman Model. The quality of the Cayman Islands financial services industry professionals is not limited to their leadership and business culture, but extends to the levels of professional diversity in Cayman. Not being reliant on a single sector within financial services enhances the ability to draw in a wide range of talented professionals, which helps Cayman maintain an exceptional world-class business culture. It also strengthens Cayman’s ability to enforce the highest standards of transparency and information sharing without fear of alienating a critical contributor to the economy. The Cayman Islands is not
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
only the leading jurisdiction for international hedge funds, but the second largest domicile in the world for captives, the number one domicile for healthcare captives and group captives, and a leading jurisdiction for banking, trusts, capital markets and governance services. As a leading jurisdiction for captives and healthcare captives, Cayman is also a leader in the Insurance Linked Securities space, meshing expertise in securitisation, insurance and capital markets to create the most innovative structures, addressing complex risk scenarios. The Cayman Islands is also developing into a premier choice for domiciling non-traditional reinsurance companies. Cayman’s insurance service providers are known for their responsive, inclusive and collaborative approach to developing and supporting new client driven products. Diversification has been key to both Cayman’s economic success and its success in establishing itself as a globally-recognised leader in combatting financial crime. From investors like Her Majesty to pensioners and university students, a very wide range of people benefit from investments in Cayman. Individuals as well as institutions such as government and state pension plans, regular pension funds and university endowments invest together in Cayman funds to access investment opportunities from around the world in a neutral location. Finally, the Cayman Model is strengthened by effective cooperation between industry and government. The Cayman Islands Government, and especially the Ministry of Financial Services, is very accessible and receptive to input from the industry. Industry and government work collaboratively to develop innovative and effectively regulated new financial services products and services, such as the Cayman Islands LLC established last year, to help grow the industry in a sustainable manner that effectively balances opportunity and risk mitigation. Industry and government also work on immigration
laws that allow the Cayman Islands to have a strong blend of local and international professional talent that is class leading and further attracts clients. While some aspects of the Cayman Model may be challenging for other jurisdictions to replicate, encouraging industry-government collaboration is an element of the approach that other jurisdictions can consider. The Cayman Model shows how an emphasis on individual jurisdictional leadership and multilateral cooperation can make the greatest contribution both to the global economy and international efforts to combat financial crime. It provides an exceptional road map for other jurisdictions to follow to meet the highest global standards. ABOUT THE AUTHOR Jude Scott, Cayman Finance CEO, is well respected locally and globally having spoken internationally on financial services topics and featured on a number of occasions in international media. He retired as an Audit Partner in 2008 after spending over 23 years with Ernst & Young. As the Global CEO of Maples and Calder, he took an active role in the strategic growth and development of the firm. Having served on various Cayman Islands Government and private sector committees, including the Cayman Islands Financial Services Council, the Cayman Islands Society of Professional Accountants, the Education Council, the Insolvency Rules Committee and the Stock Exchange, Jude has attained extensive experience within the Cayman Islands’ financial services industry. He has served as the CEO of Cayman Finance since 2014, and is committed to protecting, promoting, developing and growing the financial services industry of the Cayman Islands.
81
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The second EU Markets in Financial Instruments Directive and the EU Markets in Financial Instruments Regulation (together “MiFID II”) are in force from 3 January 2018. There has been much comment on the extra-territorial reach of MiFID II generally. However, this piece is written from the perspective of the Cayman Islands. WHAT IS MIFID II? The scope of MiFID II is rivalled only by the US DoddFrank Wall Street Reform and Consumer Protection Act. Together with its EU secondary measures, MiFID II is very many thousands of pages long. While the EU Alternative Investment Fund Managers Directive (“AIFMD”) provides the legislative framework for alternative investment fund management, MiFID II covers virtually all other investment services and activities. MiFID II also encompasses market structural reforms and trading obligations, enhanced transparency requirements both pre- and post-trade and numerous investor protection-type requirements which extend to product design and governance to conflicts of interest and inducements. SHOULD A CAYMAN ISLANDS ENTITY CARE ABOUT MIFID II?
MiFID investment firms must submit transaction reports to the latter’s EU regulator. CONTRACTUAL EXTRA-TERRITORIAL IMPACT There are areas where MiFID II compliance is exported contractually to a non-EU entity by an EU MiFID investment firm in order that the latter can comply with its own MiFID II obligations. Cayman Islands entities may be required to amend various agreements and offering documents. This means gaining a sufficient understanding of MiFID II to understand what amendments are genuinely required and whether there may be scope to push back. For example, EU MiFID investment firms, which include distributors, are now required to ensure that financial “products”, such as Cayman Islands funds, are directed at the appropriate target market and suit the needs of clients. Thus a distributor which wishes to sell a Cayman Islands fund, not “manufactured” under the MiFID II product governance regime because the “manufacturer”, for example a US manager, is outside the EU, will likely seek to amend its distribution agreements to enable the EU distributor to fulfil its obligations under MiFID II and also require MiFID II compliant “product” information in respect of a Cayman Islands fund.
MIFID II AND THE CAYMAN ISLANDS
The Cayman Islands is not part of the EU and has not implemented MiFID II. Nevertheless, MiFID II has extra-territorial reach beyond the EU and does impact some non-EU entities, largely dependent on business model and extent of nexus with the EU. Taking the example of a typical fund structure, the impact is likely to be more at the level of the US manager than the Cayman Islands fund. However, Cayman Islands entities, or more likely their managers or parents, may be reviewing their EU connections to, perhaps, avoid some of implications of MiFID II. DIRECT EXTRA-TERRITORIAL IMPACT?
In contrast to, for example, the EU Market Abuse Directive or UK Bribery Act, MiFID II is not explicitly intended to have direct extra-territorial reach to non-EU entities. Nevertheless, certain MiFID II requirements do so. In particular, any EU or non-EU person, including for example a Cayman Islands fund, that transacts in commodity derivatives traded on an EU trading venue or economicallyequivalent OTC contracts must comply with new MiFID II position limits restricting the size of positions held, potentially at aggregate group level, and position reporting regimes. Another example, albeit unlikely to affect typical Cayman Islands entities, is that even non-EU branches of EU
EU MiFID investment firms, which include broker-dealers, are obliged to comply with MiFID II requirements such as best execution, inducements and the “unbundling” of research in relation to all clients globally, not just those in the EU. MiFID II will make changes to the current method of bundling research in with transaction costs, which is regarded as constituting a material inducement to trade. The prospect of EU MiFID investment firms being obliged to make direct separately accounted for payments for research in hard dollars presented potential issues for US research providers because payment in hard dollars could cause the US research provider to be deemed an investment adviser. However, recent announcements by the European Commission and the US Securities and Exchange Commission have gone some way to respond to concerns, which are in any case unlikely to be faced at the level of Cayman Islands entities. With regard to transaction reporting under MiFID II, EU MiFID investment firms are required to obtain a global Legal Entity Identifier (“LEI”) from each of their clients, wherever located, before providing services which would
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
trigger reporting obligations in respect of transactions carried out on behalf of those clients. Failure to obtain an LEI in respect of, say, a Cayman Islands fund, prevents the EU MiFID investment firm from being able to comply with its own transaction reporting obligations in respect of that Cayman Islands fund. The process to obtain an LEI (by either the EU MiFID investment firm or its client) is straightforward.
financial institutions (or “eligible counterparties”) in other EU jurisdictions, something not currently possible under the current MiFID passport regime.
ACCESS TO TRADING
A non-EU entity may also provide cross-border services to professional clients and eligible counterparties clients in the EU without the need to establish a branch and without being subject to supervision of an EU regulator, provided that it registers with the European Securities and Markets Authority.
MiFID II extends the scope of trading activities potentially requiring authorisation as an EU MiFID investment firm, which is only possible for an entity with a head or regulated office in the EU. In particular, this could impact an entity which uses a high frequency algorithm trading technique or which is provided with direct electronic access to an EU trading venue. In practice these rules restrict access by nonEU entities, so may be regarded more accurately as barriers than extra-territorial. A new mandatory trade execution obligation means that when entering into OTC derivatives contracts with certain EU counterparties, non-EU entities may be required to execute these trades on an EU trading venue. There are certain circumstances in which even two non-EU counterparties may be required to execute OTC derivatives transactions on an EU trading venue. However, affected nonEU entities may consider restructuring their trading activities to avoid any need for authorisation or execution on EU trading venues. ACCESS TO CLIENTS MiFID II introduces a new regime which goes some way in harmonising access by non-EU entities to EU clients for the first time, by either establishing a physical branch in the EU or by providing cross-border services. In due course this will be very useful for Cayman Islands entities which wish to provide investment services, such as advice, arranging, dealing or management of individual portfolios, to EU clients. As regards branches, an EU member state may opt to require a non-EU entity to establish a branch in its jurisdiction if the entity wishes to provide investment services to retail and elective professional (in other words, less sophisticated) clients in that state. If the EU member state applies this requirement, the branch must be authorised by that member state and will be subject to similar requirements as if it were an EU investment firm. The branch will then be eligible for a passport to provide its services to per se professional clients and regulated
If the EU member state does not exercise its option to impose these MiFID II requirements, the member state’s national law will apply.
However, firms will not be eligible for registration unless the European Commission has determined that the relevant third country has rules that are equivalent to key EU regulations and has an effective equivalent system for recognition of investment firms authorised under thirdcountry laws. In practice, the process to open this route would likely require the Cayman Islands to enact “opt-in” MiFID II equivalent provisions similar to its approach to AIFMD. The determination of whether any non-EU member state is deemed “equivalent” for MiFID II purposes is likely to be similarly political. Finally, MiFID II also allows reverse solicitation by a non-EU entity without authorisation but defines this narrowly as being at the “exclusive initiative” of the client. ABOUT THE AUTHOR Lucy Frew is a Partner based in Walkers’ Cayman Islands office and heads the Regulatory & Risk Advisory Group. She joined in 2016 and brings more than 16 years’ experience as a specialist financial regulatory and risk management advisory lawyer. Prior to joining Walkers, Lucy headed the financial regulatory practice at her former firm in London. As well as having advised financial institutions in private practice in international law firms in London since 2001, she also brings in-house experience as legal counsel at UBS and was also seconded for ten months to the UK Financial Conduct Authority. 83
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
INFRASTRUCTURE & FINANCIAL SERVICES:
CAYMAN’S ROLE Most people driving over a bridge, filling a tea kettle or turning on their lights don’t think of those activities as having a connection to the global financial services industry. However modern infrastructure projects like roads, water systems and power plants are frequently paid for by raising capital from investors around the world - capital that is often pooled and invested through the Cayman Islands. Infrastructure is capital intensive. The costs for modern projects such as electricity generation, telecommunications and transportation can easily run into the billions of dollars. That can overwhelm the financial resources of companies, municipalities or even smaller countries, and in developing markets there may be limited access to credit markets at all. Fortunately, large infrastructure projects also represent stable, longterm opportunities for investors who want to diversify their portfolios. The Cayman Islands financial services industry is the link between those investors and the opportunities represented by new infrastructure projects, which benefit people and countries around the world. Cayman facilitates that kind of international investment because it is recognised as a premier global financial hub, efficiently connecting law abiding users and providers of investment capital and financing around the world. Institutional investors, regulators, lenders and other stakeholders have done years of due diligence on Cayman as a jurisdiction. It is a tried, tested and trusted jurisdiction that is seen as a transparent and compliant centre of excellence by major respected international entities such as banks and other financial institutions as well as those seeming to raise investment capital. These users and providers come from a range of different jurisdictions, each with its own tax laws, legal frameworks, regulations and culture. What Cayman offers them is a neutral platform in which to pool their investment capital. The Cayman Islands is viewed as a fair and reliable jurisdiction with a robust and trusted legal system and appropriate regulations, where no particular investor, stakeholder or investment manager has a perceived “home field” advantage. Cayman also offers investors access to a market known for transparency. The Cayman Islands has been consistently assessed as upholding the highest global standards for cross-border information sharing with tax and law enforcement authorities. Investors 84
considering participating in Cayman funds understand that their identity will be registered and checked under Anti-Money Laundering and “Know Your Customer” regulations. They also know their investment activity will be automatically reported to their home jurisdiction tax authorities under the OECD Common Reporting Standard and US FATCA. Major institutional investors are attracted by that kind of investment environment. That’s why they seek out joint ventures based in the Cayman Islands with international investors to raise capital to build ports, hospitals, solar power facilities or other infrastructure projects around the world. In the post-Panama Papers era, that “Flight to Quality” has only accelerated. Cayman funds are the vehicles through which capital is provided to develop these infrastructure projects, which then generate income or profits for the investors. Cayman’s status as a tax neutral jurisdiction, with no corporate or withholding taxes, helps investors maximise those returns which are still subject to taxation in the investor’s home jurisdiction. Unlike many other countries, the Cayman Islands is not party to any double taxation treaties so there is no sheltering or offsetting a Cayman tax liability against one that might be payable in other jurisdictions. Many investors in infrastructure funds based in the Cayman Islands are private and government pension funds, charities or university endowments who are exempt from taxes in their home countries. By investing in infrastructure funds in tax neutral Cayman, they avoid paying a duplicative or unnecessary additional layer of tax which would only reduce the returns payable ultimately to their beneficiaries. This is similar to a US partnership which operates as a pass-through and does not pay any tax as an entity in the United States. In some cases, given the scale of infrastructure projects Cayman funds invest in, initial investment capital may need to
ogier.com
9 locations. 5 laws. 1 firm.
be supplemented with additional borrowing. Here again, Cayman’s jurisdictional reputation, rated Aa3 Stable by Moody’s, offers an advantage to investors in Cayman domiciled funds. Lenders are very familiar with the Cayman Islands’ legal system and consistently demonstrate their comfort with its protections for lenders. Cayman Islands law respects foreign law governed security interests, which helps certain Cayman investment funds get additional financing which provides even more capital for infrastructure investments. As noted above, in some developing countries where the investment projects might be located, there may be limited access to credit, the legal framework might be less well established or there might be political or other risks for investors and lenders. So, assembling the capital in Cayman is a more attractive proposition for potential investors and lenders. Development agencies such as the US Overseas Private Investment Corporation (OPIC) and the World Bank’s International Finance Corporation (IFC) often invest through Cayman funds to provide capital for these important projects. They do so, in part, because they have a duty to protect taxpayer and member country resources and Cayman’s legal system has an excellent reputation for respecting investors’ rights. In 2015 alone, the IFC invested $400 million through Cayman-domiciled funds in conjunction with investors from around the world to support projects in developing countries in Latin America, Africa and Asia. Cayman companies have also been used to fund micro-financing loan programmes which helps small businesses get started. The benefits of infrastructure investments through Cayman domiciled funds isn’t limited to the location of the projects, the home jurisdictions of the investors or the Cayman Islands. The investment professionals who manage these funds are almost entirely based in the world’s leading financial centres, in the US, EU and Asia. The fees they earn from managing Cayman funds are subject to tax in their home jurisdictions. They are also employers, generating additional jobs, economic activity and taxable revenues in those countries. The Cayman Islands financial services industry plays a pivotal role in supporting infrastructure development and investment opportunities around the world. By creating a stable legal framework, embracing global transparency standards, attracting talented professionals and adopting neutral tax policy, Cayman has established itself as the leading marketplace for global infrastructure investment – and it is committed to maintaining that leadership.
We act for leading global financial institutions, international law firms, investment managers and corporate entities, as well as providing expert services to businesses in the Cayman Islands. Active in Cayman for more than 25 years, the services offered by our market-leading and experienced team include: • • • • • • •
Legal services in British Virgin Islands Cayman Islands Guernsey Hong Kong Jersey London Luxembourg Shanghai Tokyo
Banking and Finance Corporate and Commercial Dispute Resolution Investment Funds Private Client and Trust Restructuring and Insolvency Cayman Islands Local Legal Services
AT A GLANCE
BANKING The Cayman Islands is recognised as a premier international financial centre and the banking sector is a vital support mechanism for financial services. Banking in Cayman provides a dual functioning role within the financial services industry. Retail banks provide a full range of products and services to residents and local commercial entities and at the same time act as a service provider to other financial services, such as the fund and captive insurance sectors.
86
The Cayman Islands Monetary Authority is the governing body with responsibility for supervision and regulation of the banking industry. The jurisdiction is recognised by the IMF (International Monetary Fund) and other global agencies as having a comprehensive regulatory and compliance framework and is underpinned by a well developed banking infrastructure and internationally experienced workforce.
Cayman offers a breadth of banking services that is on par with the major financial centres of the world. As at June 30, 2017, there were 158 licensed banks in Cayman, six of which are Retail Category ‘A’ banks licensed to conduct business with domestic and international clients. There are five non-retail Category ‘A’ banks and 147 Category ‘B’ banks, servicing international clients and carrying out limited domestic activity.
Today both local and international clients can expect a full range of banking products and services, including personal, corporate and wealth management. Specific offerings include foreign exchange, deposit products, residential and commercial mortgages. Retail banks also offer robust electronic delivery channels including on-line banking, as well as local and international ATM and POS networks. Banks in Cayman also manage and administer a variety of corporate structures, which cover aspects of the industry such as trust companies, custodial and treasury services.
The Category ‘A’ banks in Cayman are: Butterfield Bank (Cayman) Limited, Cayman National Bank Limited, Fidelity Bank (Cayman) Limited, CIBC First Caribbean International Bank (Cayman) Limited, RBC Royal Bank (Cayman) Limited and Scotiabank & Trust (Cayman) Limited. At the end of 2016, the retail banks reported total assets of US$14.33 billion. They are well capitalised and maintain a sound financial position as highlighted in Tables 1 and 2.
Cayman, as a global financial centre, plays an integral role in the management of capital flows worldwide. Cayman continues to be ranked eighth internationally in terms of cross-border assets of US$1.13 trillion and fifth based on banking liabilities of US$1.14 trillion, as shown in Table 3, highlighting its role as a key financial intermediary. The banking industry in Cayman remains multi-faceted and is extremely effective at servicing the needs of residents and international clients alike.
BANKING
TABLE 1: CAYMAN RETAIL BANKING FIGURES All currencies in US$ billion
TOTAL ASSETS
TOTAL LOANS
OF WHICH RESIDENT LOANS
TOTAL DEPOSIT
OF WHICH RESIDENT DEPOSITS
2014
12.9
7.5
3.87
11.37
6.18
2015
14.07
7.2
3.86
12.30
6.80
2016
14.33
10.0
4.00
12.00
7.00
TABLE 2: FINANCIAL SOUNDNESS INDICATORS FOR CAYMAN RETAIL BANKS (in%)
2014
2015
2016
CAPITAL ADEQUACY: REGULATORY CAPITAL TO RISK WEIGHTED ASSETS
17.6%
18.9%
18.4%
ASSET QUALITY: NON-PERFORMING LOANS TO TOTAL LOANS
2.7%
2.5%
2.3%
24.2%
25.7%
23.7%
LIQUIDITY: LIQUID ASSETS TO TOTAL ASSETS
TABLE 3: CROSS-BORDER ASSETS & LIABILITIES All currencies combined in US$ trillion
ASSETS
LIABILITIES
JUNE 2014
1.42
1.44
JUNE 2015
1.39
1.44
JUNE 2016
1.13
1.14
Source: Cayman Islands Monetary Authority (CIMA)
87
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
In just a few short years, FinTech companies have defined the direction, shape, and pace of change across almost every financial services subsector. Customers now expect seamless digital onboarding, rapid loan approvals, and free person-to-person payments — all innovations that FinTechs made popular. Although not yet dominant in the industry, FinTechs have succeeded as both standalone businesses and vital links in the financial services value chain. They have laid the foundation for future disruption. FinTechs represent a great opportunity for smart incumbents. They provide a chance to see which new offerings show promise. The FinTech ecosystem is also a veritable supermarket of capabilities, allowing incumbents to rapidly deploy new offerings via acquisitions and partnerships. However, accelerating change could be a serious threat. It means that an incumbent’s success is predicated on business model agility and the ability to rapidly deploy partnerships. Neither of these is a mainstay of established financial institutions. What’s more, upstart firms can shop the FinTech landscape too - and they face significantly lower barriers to entry. Since 2014, Deloitte has partnered with the World Economic Forum (the Forum) to study disruptive innovation in financial services (the Study). Bob Contri, Deloitte’s Global Leader of Financial Services, sat on the Steering Committee and Rob Galaski, Deloitte leader for The Forum Future of FSI, formed a part of the working group. The most recent publication of the Study in August 2017 distilled eight insightful disruptive forces that have the potential to shift the landscape of financial services.
BEYOND
FINTECH The financial services’ ecosystem is changing rapidly. A collaborative multi-year study by the World Economic Forum and Deloitte looks at how these changes are manifesting, and the implications for Incumbents, FinTechs, and Regulators.
Recognised as the world’s premier financial hub, the Cayman Islands has a unique blend of international institutional and local retail services. As such, these forces affect the jurisdiction as a whole and its many independent financial service providers uniquely and likely on slightly different timeframes than the rest of the world. These forces and their implications are touched on briefly here. DISRUPTIVE FORCE #1: COST COMMODITISATION Facing enormous pressure to reduce their cost base, incumbent financial institutions are embracing new technologies, as well as working with long-time competitors and new entrants alike, to commodify cost drivers that do not provide competitive differentiation. One approach is to create a new utility that standardises processes and avoids duplication of work among the companies it serves. Other approaches include expanding the range of outsourced activities and increasing automation to streamline processes such as loan origination, audit compliance, and account reconciliation. 88
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
DISRUPTIVE FORCE #2: PROFIT REDISTRIBUTION Technology is shaking up the financial services value chain. Investment firms are using exchange-traded funds (ETFs) to entice customers away from savings deposits. Online sellers are accepting payments via web applications, leading to the dominance of online, cashless solutions for transactions and precluding the need for a traditional merchant bank account. Incumbent institutions are pairing with startups in ways that put them in competition with their traditional partners. The result of all this activity? An industry-wide redistribution of profits. Intermediaries will feel the pinch from both sides. As technology reduces the cost of bypassing them to reach the end customer, intermediaries will need to find other opportunities to profitably add value. Meanwhile, FinTech companies will gain an expanding pool of potential partners that offer scale and customer reach. Upand-coming technologies will encourage both incumbents and FinTechs to bypass traditional value chains, creating vigorous competition for both adjacent and new areas of profit. Insurers and reinsurers increasingly partner with outside organisations (such as insurtech and large technology firms) to acquire expertise and hedge against disruption. At least one large reinsurer is partnering with product start-ups – including Bought By Many and Trōv – to directly compete with its traditional insurance partners. The challenge for regulators will be to understand how shifting fortunes are reshaping the value chain, with longregulated companies giving ground to new ones. In digital banking, banks are increasingly working in concert with regulators to set up trials of utilities focusing on missioncritical but non-core tasks such as KYC (Know Your Customer) and AML (Anti-Money Laundering). For example, the Monetary Authority of Singapore is working with several banks to build a national KYC utility, which will reduce duplication and lower costs for all financial institutions operating in the jurisdiction. At the time of writing, Cayman clearing banks are collaborating to establish an electronic automated clearinghouse that will reduce local transaction times and related costs. As a result of Cost Commoditisation, the financial services value chain will flatten and firms will step up their protection of user data as they share more information with external organisations. Incumbent firms will be freed (or forced) to focus on differentiating their customer-facing processes as their middle and back offices become indistinguishable from those of competitors. Regulators will stay busy tracking utilities and business service providers for potential risk.
DISRUPTIVE FORCE #3: EXPERIENCE OWNERSHIP The rise of distribution platforms allows product distributors to leverage control of their customer experience and place pressure on manufacturers. This means incumbents can no longer rely on controlling both product manufacturing and distribution. Power will transfer to the owner of the customer experience. Pure manufacturers must therefore become hyper-scaled, or hyper-focused. Current examples offer an early glimpse of this postintegrated world. Customers buy ETFs from a wide range of companies that offer robo-advisory services. They download apps from providers that stringently control which products to display. If trends like these take hold, customers will interact with increasingly fewer distributors as the market consolidates. Large technology firms and incumbent financial institutions have the advantage, the former due to their rich customer data and the latter because of their brand and existing customer base.
89
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
DISRUPTIVE FORCE #4: PLATFORMS RISING In close tandem with the force of Experience Ownership, customers are demanding more choices in financial services— and, increasingly, they expect one-stop shopping. True to capitalist principles, this provides opportunities, and the shift to multipleprovider platforms as a channel to distribute and trade is gradually emerging across geographies and throughout a wide range of financial products. The Study predicts that platforms offering the ability to engage with different financial institutions from a single channel will become the dominant model for the delivery of financial services. Business and retail customers, for example, will be able to purchase credit and asset management services from an online storefront of competing vendors. Buyers and sellers in the capital markets will be matched through platforms that accommodate a wide range of trades. This trends toward fewer, bigger winners in the long term. Platforms will offer customers far more choice around what they are buying, significantly increasing the advantage for the best products, which might otherwise have limited reach. We expect first movers to take the early advantage, and are watching with interest to see how adoption plays out on the Cayman economy among banks, insurers, fund administrators and other financial service players.
will have to decide whether it is worth keeping data in legacy systems as opposed to new systems where it can be easier and possibly safer to maintain. As for regulators, the concerns will include not only hacking, but also the ways banks use the additional data and how well customers understand the implications of sharing it. DISRUPTIVE FORCE #6: BIONIC WORKFORCE Artificial intelligence (AI) isn’t coming. It’s already here, and it’s not simply a smart chatbot. People are working alongside AI to boost their efforts, greatly reducing the time and personnel required to complete major projects that involve welldefined, repetitive tasks. Don’t read that to mean simple tasks only. Machine intelligence firm Ayasdi worked with a major bank to improve its stress testing, from a nine-month process requiring hundreds of employees to a three-month process using less than 100 specialists. AI is a scalable product that is becoming commercially viable for smaller institutions as it matures. Going forward, AI risk management will become an industry-wide priority. For regulators, AI will require new strategies, including ones for enforcement and punishment of non-compliant actions. The intersection of AI and human resources has been the subject of much discussion, but so far, the debate has raised more questions than answers. One clear take away: AI will remove friction from front and back office processes, sending people into roles that emphasise innovation, engagement, and emotional intelligence.
DISRUPTIVE FORCE #5: DATA MONETISATION Financial institutions know a lot about their customers. However, when it comes to monetising this knowledge — or, more precisely, the data beneath it — technology companies have the lead. The reason? They’ve moved beyond static datasets to combine rich, differentiated data from multiple sources - and they use it in real time. The potential of this approach is not lost on the financial services industry. Facing a future where data is increasingly important, firms are starting to collect it in flows rather than in snapshots - for instance Visa Mobile Location Confirmation, which is optional and offered through participating financial institutions’ mobile banking apps, uses real-time mobile geolocation information as an addition to Visa’s predictive fraud analytics. Firms are also looking to expand their customer datasets using a more engaging digital experience as a platform, or teaming up with other companies, offering customers additional value as a market differentiator in exchange for their data. Naturally, ownership and control of data are a key issue for all stakeholders. Data security will be crucial to establishing and maintaining customer trust. New partnerships will be evaluated for the data they can provide. Incumbent institutions
DISRUPTIVE FORCE #7: SYSTEMICALLY IMPORTANT TECHS Financial institutions increasingly resemble, and are dependent on, large tech firms to acquire critical infrastructure and differentiating technologies. For example, Amazon Web Services (AWS) is forming the backbone of the financial services ecosystem, with a diverse set of firms – from JP Morgan to start-ups such as Xignite – adopting AWS for data storage and processing. Financial institutions have also used the example of large techs successfully unlocking data and revenues from customer platforms to guide and shape their own efforts. JP Morgan is investing in the collection and analysis of its customers’ data with a new customer management and analytics tool, enabling cross-selling – “a little bit like how Amazon suggests what you might like to buy next.” So far, major technology companies have shown little interest in offering financial services. However, the implication is that financial services faces a balancing act: On one hand, they risk becoming dependent on large techs, but on the other, they risk falling behind their competitors. To avoid either outcome, financial institutions will need to find ways to partner with technology companies and potentially each
Footnote This article is adapted from the World Economic Forum report, Beyond FinTech: A pragmatic assessment of disruptive potential in financial services and the Deloitte publication, Beyond FinTech: Eight forces that are shifting the competitive landscape, available for download at www.deloitte.com. 90
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
other without losing their core value proposition, and accept some loss of control over their costs and data. They’ll also have to compete with large techs for talent, forcing them to redefine their talent model. Regulators will have to figure out how to treat large techs under a traditional regulatory framework. DISRUPTIVE FORCE #8: FINANCIAL REGIONALISATION Differing regulatory priorities, technological capabilities and customer conditions are challenging the narrative of increasing financial globalisation. In Europe, for instance, regulations to bolster data transparency and consumer protection is driving the development of platform ecosystems and putting pressure on incumbents. In China, the popularity of mobile solutions – combined with an absence of major consumer-focused bank offerings and a largely innovation-friendly regulator – has left significant market share in the hands of large technology companies. In the United States, unclear regulatory direction plus a mature financial services industry means that any change is likely to be incremental. The US Automated Clearing House Network, for example, is moving to same-day payments, but progress remains slow compared to other countries (such as the United Kingdom, which adopted real-time payments over a decade ago).
Under these conditions, regional FinTech hubs could crop up, creating breeding grounds for companies with geographicspecific offerings. For incumbent firms, even global ones, financial regionalisation will mean cultivating locally competitive advantages and integrating with local economies. FinTech companies may prove eager partners as they seek opportunities to scale and enter new markets. For their part, FinTechs will be challenged to establish themselves in multiple jurisdictions, despite the potential of technology to lower barriers to entry. In a climate of regulatory uncertainty, financial institutions will have to develop an ability to swiftly adapt to large-scale regulatory changes as well as to regionally disparate regulatory treatment of emerging market infrastructure technologies. As large incumbents push for global convergence and their smaller rivals campaign for localised regulations, regulators will have to find the right balance for their jurisdictions. In conclusion, disruption has become the norm in a traditionally stable industry. For incumbents to face the mire of competition and rapid change, some helpful themes have emerged: Proactively seek change. This includes finding ways to innovate and create different value, especially as intermediaries lose their customary place in the value chain. A sense of urgency must be present at the top of the organisation. Prepare to be agile. Regulatory jurisdictions are moving apart, and technology is upending processes in both front and back offices. In some cases, the only way forward may be with a partner, requiring firms to develop skills in managing peer-topeer business relationships. Choose a strategy and pursue it aggressively. Institutions may not be able to own both product manufacturing and product distribution. Rich datasets will be required to stand out either way – and there will be fewer, bigger wins. ABOUT THE AUTHOR Tristan Relly is a Director in the Financial Advisory team at Deloitte with over seventeen years’ experience in business analytics, business modelling, strategy, liquidations, and financial and forensic audits. Tristan has provided a leadership role on a number of significant projects across the financial services industry for both mid-size and large financial institutions domiciled in the Cayman Islands and internationally. Tristan is regarded as an innovative and versatile leader in the Deloitte team. Deloitte in the Cayman Island boasts a Technology Consulting squad of over 18 specialists.
91
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
IS MANAGEMENT DOING ITS JOB WITH RESPECT TO
CYBER SECURITY?
When reading news and statistics about Cyber Security incidents, it is easy for executives to become immune to the information overload. We have all seen the headlines such as “Billions of dollars in losses” However, how those incidents may affect your specifc organisation is often unclear.
92
What is clear, is that Cyber Security incidents can affect all organisations; from the large hedge fund administrator to small businesses with few employees. Caribbean nations are not immune and incidents are happening at a startling rate.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Cyber Security has become an executive level issue. Gone are the days when the responsibility lay solely with Information Systems personnel or on the third party IT firm. Customers, business partners and investors are asking management tough questions and seeking comfort that their data is secure. Will you be able to answer those questions the next time a customer or shareholder asks?
Caribbean, only 11% of them had any mention of Cyber Security in their annual reports. In the Cayman Islands, the result was sadly 0%. Does this mean that organisations in the Caribbean and in the Cayman Islands pay no attention to Cyber Security? Of course not! However, it shows that management does not seem to make securing confidential data a priority. One must remember that Cyber Security budgets and staffing levels start with senior management.
THE GAP AT THE TOP In the spring of 2017, KPMG offices in 28 countries (mainly in Europe and the Caribbean) conducted a survey of over 800 annual reports of publicly traded companies. The goal of the survey was to evaluate the presence of Cyber Security information within the annual reports. The overall results, especially in the Caribbean, were quite disappointing. Across the organisations surveyed within the
One thing that will get management’s attention is regulators. In 2016, the Cayman Islands Monetary Authority (CIMA), issued a Cyber Security circular. CIMA stated that they will be performing reviews of licensees’ approaches to data security. More specifically, they said that “…the Authority will also consider licensees’ ability to protect the Confidentiality, Integrity and Availability of sensitive customer and other information.” 93
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
In a nutshell, these principles ensure that data is protected from unauthorised use (confidentiality); is complete and accurate (integrity); and available for use and processing (availability). Have you told your technology personnel that these elements are critical and that any regulatory inspection must be passed with flying colors? Although CIMA Cyber Security inspections will only affect Cayman Islands entities, readers should expect other regulators to follow this global trend, which was initiated by the United States Securities and Exchange Commission (SEC) in 2014. Organisations with European Union (EU) operations also need to be ready for the General Data Protection Regulation (GDPR), which becomes enforceable in 2018. Fines for non-compliance to GDPR are nothing short of breathtaking. EMPLOYEES ARE A KEY PART OF YOUR DEFENSES As part of any Cyber Security programme, Employee Awareness training is an essential component. Employees need to be trained to recognise, and more importantly to thwart some of the most common Cyber-attacks. Cyberattacks are often enabled by ill-informed employees who
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
the consequences were obviously devastating since they generally involved large sums. The main vulnerability needed for this type of scam to be successful is weak or inefficient control mechanisms. Typical deficiencies are: accepting client wire requests via email; accepting management approvals for wire transfers via email; lack of validation of wire instructions and accounts; and lack of segregation of duties and/or dual approval mechanisms. If your organisation processes any kind of bank transfers, I highly recommend that the entire process be reviewed as soon as possible. COVER THE BASICS Once the employees are trained, technology remains a critical component of your organisation’s defenses. Assuming basic network protection has been implemented, one area where organisations have failed a lot recently is with system updates. Case in point: the May 2017 WannaCry global Ransomware attack to which thousands of organisations fell victim. Why? All of them neglected to update (patch) a Microsoft Windows vulnerability. Sadly, the update had been available for a full month before the attack, thus the attack was preventable. Further, organisations should have their systems tested periodically; both inside and outside networks, so any weakness can be detected before an attacker finds them. THE BOTTOM LINE
unbeknownst to them, facilitate the compromise of critical data. For example, in a 2016 study, researchers at the University of Illinois dropped 297 USB sticks around campus; 48% of the devices were inserted into a computer by individuals who were unaware of the risks. Had this been a targeted attack against a company, the hacker would have likely succeeded in achieving the goal, which may have been to infect the systems with a Ransomware or to gain access to systems. Employee IT Security Awareness training has become a key component of Cyber Security. It takes many different forms; classroom or online training, periodic educational communications, etc. Further, simulated phishing attacks, where employees receive a suspicious (yet harmless) email, is often an eye opening exercise for management when the results are obtained as to the number of employees who fell for the ruse. DO YOU WIRE TRANSFER? In the last few months, we have witnessed a flurry of attacks which resulted in fraudulent wire transfers being sent;
With major hacking incidents and data breaches being reported almost weekly, organisations and their executives need to ensure they are prepared for the onslaught of attacks affecting organisations large and small. Also, executives need to understand that a failure to properly address regulatory requirements may result in fines as well as publically available records indicating lax Cyber Security. Simply relying on the traditional controls such as a firewall is no longer sufficient. Companies should regularly test their internal and external networks for vulnerabilities and ensure proper updates are applied. Employee Awareness training is a key element of data protection – employees play a vital part in protecting your confidential data. ABOUT THE AUTHOR Micho Schumann is a Principal with KPMG in the Cayman Islands and leads KPMG’s Cyber Security practice. He holds a Master’s degree in Information Systems, is a Certified Information Systems Security Professional (CISSP), a Certified Information Systems Auditor (CISA) and Certified Cloud Security Professional (CCSP). He has over fifteen years of Cyber Security experience and has been working for KPMG in the Cayman Islands since 2007. 95
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
PARADIGM SHIFT
DISRUPTION & THE FINTECH EFFECT Disruption, innovation and change are rapidly impacting the financial services industry across the globe, and the Cayman Islands will need to adapt to ensure the industry is poised for success in response to this paradigm shift. Not only will we face dramatic change but financial service providers in Cayman can also expect to embrace exciting new opportunities.
of FinTech products and services is higher among younger consumers. Those with the highest use are 25 to 34 year old consumers who are tech-savvy “digital natives.” As these consumers amass more wealth through inheritance or personal wealth generation, the need for FinTech services will be even more prevalent.
INNOVATION
Technology will redefine the future of investment advice and investing. With robo-advisors, blockchain, advanced analytics and artificial intelligence acting as key accelerators in the industry, there are multiple opportunities to innovate ahead of the competition. FinTech investment is expected to accelerate rapidly and focus primarily on client interface, increased automation both in the front and back office and greater transparency.
There is no question that technology will break tradition as digital technologies outperform in effectiveness and cost. This change will be more than just a temporary one. We see FinTech as one of the most disruptive opportunities — or threats. According to the EY FinTech Adoption Index, FinTech has achieved initial mass adoption in most markets. The average percentage of digitally active consumers using FinTech services has now reached 33% across the 20 markets. Benchmarked to academic theory on innovation adoption, it suggests that FinTech services have reached a milestone in being adopted by the “early majority” of the population. Unsurprisingly, use
96
In addition, robo-advisor platforms are enhancing, supplementing and, in some cases, replacing advisorclient interaction. This has resulted in more value, services and efficiency to customers through a digital costeffective channel.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The trend toward automated delivery of advice is changing expectations for the entire investor group — not just the mass affluent. The entire wealth and asset management (WAM) industry must change and meet new expectations to survive.
and insights related to their investment strategy. Global firms will find that data is their greatest opportunity and their greatest challenge. Firms must no longer confine technology to the back office for cost-saving purposes.
The investing landscape is also changing significantly with investment strategies, which relied upon high human capital, being disrupted by quantitative strategies wagering on algorithmic performance derived from sweeping advancements in the analytics and use of big data.
By aggressively leveraging technology in the front office as well, winning firms can grow distribution through big data techniques using client analytics. Asset servicers that can aggregate, normalise, transform and deliver data to and from financial institutions, including custodians, investment managers, managed accounts, third-party administrators and banks will be poised for success.
Blockchain is another emerging driver impacting the industry. Asset servicers will be forced to evolve their business models and fully integrate distributed ledger technology, rather than be disrupted by it.
Skillfully and innovatively leveraging data will undoubtedly drive growth for financial institutions in the long term.
Moreover, just as your smartphone has absorbed other products like camera, GPS, video, maps, etc, this same “dematerialisation” using blockchain and distributed ledger technology in our industry will present opportunities to radically transform, consolidate, modernise and streamline the way asset management firms handle payments, custody, clearing and settlements for most financial transactions. Furthermore, the traditional value chain will be disrupted with access to digital distribution. Digital distribution platforms not only streamline investor reporting but also connect advisors directly with investors. Robotics are also being widely adopted and implemented, especially in operations. The result has been to increase productivity and scale, streamline and automate processes, replace manual actions, and manage costs and better allocate human capital to higher-value tasks enterprise-wide. Examples of this include automation in AR, AP, reconciliation processes, processing of capital transactions and compliance and reporting.
DIGITAL INTERACTION AND THE CLIENT EXPERIENCE Social media has changed how we interact and the number of people we interact with. The generation of high-net-worth individuals who are growing up using social media platforms such as LinkedIn, Facebook and Twitter will select which bank to deposit their savings with or which investment strategy and advisor they will trust based on their digital interaction. This increases potential investor discovery rates; however, the new investor is accustomed to sharing information and is tech savvy. It is essential for wealth and asset management firms to shift from a focus on simply promoting products to building and leveraging a core business model based primarily on knowing their investor/customer and enhancing their experience. For firms to win new business, their investors and clients must feel that a trusted lifetime financial coach is advising them to reach their long-term personal goals.
Financial services institutions that want to stay in the game will need to make the right investments in technology not only to stay ahead of client demands but also to defend existing client business and seek out new clients who will look for an institution with the latest technology solutions.
The most innovative firms in wealth and asset management, although operating in an intensely competitive sector, can find ways to add value by improving the personalised client experience. Value will depend heavily on the customer experience, as well as the firm’s ability to seamlessly fit into a customer’s digitised, connected life and address his or her personal core values and preferences. The trend of portfolio transparency and accessibility is likely to continue, and having the right systems in place to meet that need is essential. Value creation begins well before an account is even opened as the result of developing a fresh brand identity in the market, enhancing the firm’s reputation and clearly communicating a compelling purpose.
DATA AS AN ASSET: GENERATING GROWTH NOT JUST STRATEGIC EFFICIENCY
CYBERSECURITY: SENSING, RESISTING, REACTING
There has been a lot of focus on data analytics. The future financial institution or asset servicer that will be successful will be the one that can aggregate, analyse and interpret large volumes of data from multiple services for better predictions
With this paradigm shift and adoption of FinTech, cyber risk is increasing dramatically. Given the abundance of client and investor data, it is crucial to protect data and provide the confidentiality that investors or clients expect and demand.
In Cayman, we expect there will be a rebalancing of client assets to existing banks and asset managers as well as new entrants that are able to deliver services more cost effectively while enhancing the customer experience through digital and personal channels. Consumers will demand more, so the expectation bar will be raised significantly.
97
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
This has become more important with the increase in webaccessible digital client interfaces and the proliferation of managed service solutions, online platforms for product distribution, transaction and data storage. As reported in the EY Global Information Security Survey, we expect institutions to adopt three steps to achieve cyber resilience: (1) Sense: using cyber threat intelligence and active monitoring to predict threats and detect when they happen, (2) Resist: understanding how much risk is acceptable and establish lines of defense and (3) React: ensure there are incident response capabilities in place to manage the crisis. Our survey reveals that 86% of respondents stated that their cybersecurity function does not fully meet their organisation’s needs, and 57% have had a recent significant cybersecurity incident, showing there is still more work to do to strengthen the corporate shield. The greatest asset any firm has is trust, so it is critically important for institutions to do everything in their power to
uphold and maintain this trust. However, this is no easy task as there are three types of institutions: those that have been hacked, those that don’t know they have been hacked and the criminal hackers themselves. Companies struggle with admitting vulnerability to themselves. Understanding that it will happen and having a policy in place to respond quickly and appropriately are key and will go a long way toward restoring trust and order once a breach occurs. It is increasingly vital to safeguard the trust of clients and regulators by investing aggressively and strategically in cybersecurity to prepare for cyber attacks. High-profile instances involving cybercrime have shaken several financial institutions. Many institutions are engaging specialists to address data security by reviewing with whom they are sharing sensitive data and subjecting these data users to due diligence and monitoring or simulated pen tests executed by an external IT specialist who plays the part of a highly skilled and determined hacker. CONCLUSION Innovation is rife throughout the entire value chain of the global WAM industry, which is leading to disruption in every aspect of the industry. Clients are first turning to robo-advisors for easy, fast and ondemand access to investment advice that is tailored to their specific needs. Asset servicers are adopting blockchain and smart contract technology, which is resulting in investment and process optimisation. Portfolio managers are increasingly establishing more sophisticated computer models to supplement fundamental research, and investors are demanding more exposure to quant trading strategies. The opportunities for distribution are also increasing thanks to the dramatic increase in available investor information and the introduction of digital channels. Firms that seize disruption and FinTech and use them to identify new ways to increase productivity, ways for technology to partner with finance, ways to innovate to
98
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
enhance the client experience and creatively deliver more value in their service offerings will ultimately grow their business and emerge as winners in the changing market. ABOUT THE AUTHORS Marco Calleja is a Partner in the Financial Services Organisation of EY in the Bahamas, Bermuda, British Virgin Islands and Cayman Islands region. He has over 15 years of experience, including 8 years in the Cayman Islands, 2 years in Bermuda and over 5 years in Australia. Marco is dedicated to serving asset managers, banks, hedge funds, private equity funds and fund administrators. His clients encompass st art-ups to global multibillion dollar complexes. Marco is an executive committee member of CAIA Cayman.
YOUR
Chris Maiato is a Principal in the Financial Services Organisation of EY in the Bahamas, Bermuda, British Virgin Islands and Cayman Islands region and is the leader of the BBC Advisory practice. Chris has over 17 years of industry experience serving clients in various industry sectors with a strong focus on the financial services sector. Chris is a Certified Information Systems Security Professional (CISSP), a Certified information Systems Auditor (CISA) and a Certified Risk and Information System Control (CRISC) professional. Chris is a past board member and VP of Information Systems Audit and Control Association (ISACA) in Bermuda. He has been a member of the Bermuda Chamber of Commerce Technology Division Board and past member of the E-commerce Advisory Board.
LEGAL
EXPERTS
Your business is our priority. Learn more at conyersdill.com BERMUDA BRITISH VIRGIN ISLANDS CAYMAN ISLANDS DUBAI HONG KONG LONDON MAURITIUS SINGAPORE
Legal Advice | Corporate & Trust Services Global Experience | Local Knowledge | Proven Results Speak to our experts: KEVIN C. BUTLER
99
RICHARD D. FEAR
PARTNER, HEAD OF CAYMAN ISLANDS OFFICE
PARTNER
kevin.butler@conyersdill.com +1 345 814 7374
richard.fear@conyersdill.com +1 345 814 7759
AT A GLANCE
REINSURANCE As an international financial centre, the Cayman Islands is constantly seeking to maintain its competitive edge with innovative transformations and additions that keep the financial services industry fresh and progressive. The most recent addition, and a strategic area of growth to Cayman’s financial services industry, is reinsurance. Cayman Finance officially launched reinsurance as one of its main recognised sectors of the financial services industry, now featured alongside banking, investment funds, trusts, insurance and capital markets, at its annual New York Breakfast Briefing in January 2017.
100
While still in its growth period in the Cayman Islands, the reinsurance entities established to date have already become a significant portion of all insurance related assets under management in the jurisdiction. The previous administration of government voted in favour of a private members’ motion focused on giving incentives to reinsurance businesses and to ensure there was sufficient investment in the Cayman Islands Monetary Authority (CIMA) that would allow for a reduction of obstacles to doing business. This reduction would in turn attract more reinsurance business to Cayman,
REINSURANCE
which the government, CIMA and Cayman Finance all recognised as a necessity. The growth at which new reinsurance firms have opened on the island confirm the thoughts of Cayman Finance, the government and CIMA that it is an industry that is here to stay. The increase of regulatory expertise in the area, with the recruitment of reinsurance specialists Cayman has seen firms such as Greenlight Re, Knighthead, OxbridgeRe, Aureum Re and more either open on island or expand and grow their businesses in recent years. When looking at the benefits of conducting and nurturing reinsurance business in Cayman, there are of course the obvious benefits: reinsurance businesses bring
physical presence, typically employing at least 10-15 people and they provide a new field for Caymanians to pursue careers in, with many roles to fill including brokers, actuaries and other ancillary services, and finally add to the revenue contributed by financial services to government every year, which most recently has been over 50% of the total revenue. In order to ensure that this growth continues and is well sustained into the future, the Cayman Finance reinsurance sector sub-committee is working closely with the Cayman Islands Government and CIMA to make Cayman as attractive as possible to potential reinsurance businesses.
​
101
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
THE NEW FINANCIAL
REINSURANCE FRONTIER GROWING TREND IN THE CAYMAN ISLANDS The Cayman Islands has recently experienced tremendous growth in the financial reinsurance (“FinRe�) sector. Within the last 12-18 months a number of FinRe carriers have been licensed and, with word spreading fast, there are a significant number of additional startups in the pipeline. Having identified the opportunity in this sector some time ago, the Cayman Islands is now embracing real growth on the ground. There are a variety of reasons for this increased activity in the Cayman Islands, which we will touch on in this article, but a general propensity to facilitate a more NAIC focused model (US model) as opposed to Solvency II (European model) is certainly high among the primary drivers. GLOBAL DRIVERS FinRe transactions are underwritten with financial management rather than risk transfer as the primary driver. Traditionally, primary insurers have entered into such transactions to either improve solvency ratios, strengthen their rating or boost return on capital. Recent global changes in the regulatory landscape have caused a capital strain on many international pension, life and annuity insurance companies. FinRe is becoming a more popular way to access capital relief for these strains which has stimulated growth in the formation
102
of FinRe companies both globally and locally in the Cayman Islands. As an example, the US retirement market has grown from $11tn from 2000 to over $25tn in 2016. Similar pressures from US pension regulators have caused a growth in pension risk transfer transactions in the United States. INVESTORS Investment returns from pension, life and annuity reinsurance companies range from moderate to high as a result of the favourable economics involved. Liabilities are high in persistency and have long average durations. A well matched highgrade investment portfolio can produce higher yields because of longer duration. Though the net spread of yield over cost of liabilities can range from 1.0%-1.5%, the asset-to-capital requirements of between 12x-15x results in a high teen or low twenty return for investors, thus making FinRe companies very attractive to the capital markets. With initial capitalisation for FinRe entities starting in excess of $250m, and billion dollar books of business being reinsured, the returns are not immaterial. SOLVENCY AND CAPITAL FRAMEWORKS To achieve appropriate capital levels and yet sustain credibility, it is critical to the reinsurer to reside in a jurisdiction where there is a high quality but sensible
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
regulatory regime. For example, the EU Solvency II framework requires higher risk weights for longer duration assets and therefore can be punitive, even if the reinsurance company has well-matched liability to asset durations. The NAIC model in contrast is more favourable. There is little appetite in the Cayman Islands to pursue Solvency II equivalency. Across all areas of the Cayman Islands financial services sector the jurisdiction is predominantly US facing, indeed 90% of all risks insured by the Cayman Islands international insurance industry are North America based. Accordingly, Solvency II would simply not be a match for the jurisdiction. It is no surprise therefore that the Cayman Islands Monetary Authority has shown a willingness to facilitate a more NAIC focused model which, for potential startups with prospective US cedants, has been a significant factor in determining that the Cayman Islands is the most appropriate jurisdiction for their new platform. CAYMAN BUSINESS ENVIRONMENT The Cayman Islands is one of the world’s most efficient and well-recognised international financial centres. Given the breadth of its financial services sector and expansive net of stakeholders it is a familiar, trusted and respected domicile. Its infrastructure supports high-calibre
international finance transactions, a commitment to stability, integrity and professionalism, and highly talented industry professionals. For executives of FinRe carriers, a number of softer benefits in the Cayman Islands have also been broadly welcomed. These include: (i) the ability to secure a 25 year work permit which means immediate security of tenure in the Cayman Islands; (ii) the ability to acquire or build a home without restriction; (iii) the ability to own a number of vehicles if required; (iv) lower on-going operating costs when compared to competitor jurisdictions; and (v) no income or payroll taxes. David Towriss, CEO of Aureum Re which primarily reinsures fixed annuities from US carriers, commented: “We are seeing significant opportunities in the asset-intensive reinsurance space and a continued demand for offshore reinsurance solutions. Our shareholders recognised several advantages in choosing to license Aureum Re in Cayman including the strength of the local infrastructure, a deep and talented employee pool, as well as a strong regulatory authority with a vision to grow Cayman’s reinsurance market.
103
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Our target market is US annuity writers and there are material benefits from Cayman not seeking Solvency II equivalency given that our clients are more aligned with the NAIC regulatory regime and risk based capital. This has helped us offer a compelling reinsurance solution which is flexible in its approach and seeks to increase capital, reduce concentration of risk and reduce volatility of financial results for our clients. We are delighted to have all of our management team and operations based in Cayman and appreciate the support which our local stakeholders have provided as we seek to grow our business.” REGULATION The Cayman Islands operates a business friendly and well-regulated financial system reinforced by the philosophy of integrity and transparency, and a belief that appropriate regulation and international cooperation drive commercial success. The Cayman Islands is a strong proponent of proportionate, risk-based regulation. LEGAL FRAMEWORK The Cayman Islands has a sophisticated legal regime that is based on English
104
Common Law, with the final court of appeal being the Privy Council in London. In addition, a highly efficient and respected court system upholds the jurisdiction’s framework of legislation. Cayman Islands law maintains a legitimate right to privacy, but its confidentiality statute provides a clear gateway for tax transparency and there are no inhibitors for the effective operation of its many international cooperation agreements. SERVICE PROVIDERS The Cayman Islands also has a global client base of major international companies, financial institutions and governments. This success is due to the insurance managers, lawyers, auditors, actuaries and investment service providers who choose to work in the Cayman Islands because of the high quality of work and lifestyle. CONTINUED GROWTH The aforementioned reasons, coupled with the Cayman Islands government’s firm commitment and support to grow the reinsurance sector, have firmly established the Cayman Islands as an attractive domicile for FinRe carriers. Given the global drivers we anticipate this growth to continue its upward trajectory and that the Cayman Islands will remain at the forefront of the FinRe frontier.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
ABOUT THE AUTHORS Derek Stenson is based in Walkers’ Cayman Islands office where he specialises in insurance and structured products, he has extensive experience advising a wide range of international financial and insurance institutions on all aspects of insurance and reinsurance law and regulation. Adrian Lynch has overall management responsibilities for Aon’s captive insurance operations in the Caribbean including offices in the Cayman Islands, and Puerto Rico. Prior to joining Aon Cayman, Adrian spent seven years as the CEO of a Private Client Advisory group, offering Private Placement Life Insurance structures.
Dara Keogh is a Managing Partner at Grant Thornton in the Cayman Islands. He moved to Grant Thornton earlier in 2017 because of the opportunity to use his vast re/insurance experience and entrepreneurial passion to grow the business, and avail of the opportunity to help his clients, particularly in the re/insurance sector. Dara has prior experience as CFO of a reinsurance company, Corporate Risk Manager for a public life and pensions company.
CAYMAN
RE, INC.
105
AT A GLANCE
TRUSTS LAW In the Cayman Islands, as in England, the law of trusts is not statute-based but primarily grounded in rules of common law and equity.
TRUSTS The Cayman Islands is one of the leading international centres for the creation and administration of trust structures, and its continued development and growth is due to a number of important factors. The Cayman Islands has a comprehensive Trusts Law, is well known for its innovative Special Trusts Alternative Regime (‘STAR’), provides for the registration and licensing of Private Trust Companies (“PTCs”), and offers a range of innovative wealth structuring vehicles. The jurisdiction is also home to some of the most talented and forward thinking trust professionals and advisors.
These are supplemented by local statutes including the Trusts Law (2017 Revision), which incorporates the previously separate statutes the Trusts (Foreign Element) Law, STAR Law and the Trusts (Amendment) (Immediate Effect and Reserved Powers) Law. Other local statutes such as the Fraudulent Dispositions Law and the Perpetuities Law also have a role to play in the administration of trusts. Cayman Islands' trust law continues to evolve through robust judicial decisions relating to issues that are at the forefront of legal development in this field. The jurisdiction’s long-established trust legislation is supported by a strong and independent local judiciary. Private and public sectors are continuously working collaboratively to review and update legislation so it remains current and viable. TAX NEUTRALITY The Cayman Islands is a tax neutral jurisdiction. There has never been any direct taxation in the Cayman Islands, the only fiscal impositions being stamp duty and import duty. A trust can be registered as an "Exempted Trust" and obtain an undertaking from the Governor in Cabinet which exempts the trust from risk to future taxation for 50 years. CATEGORIES OF TRUSTS The discretionary trust is the most common trust vehicle used in the Cayman Islands, but strict settlements and charitable trusts are also widely used. In addition to traditional wealth planning, where exempted trusts, reserved powers trusts, and forced heirship planning trusts are often used, Cayman Islands’ trusts are used extensively in capital markets transactions and structured finance deals.
106
TRUSTS
STAR TRUSTS
REGULATION
A STAR Trust can be established for any purpose, provided it is lawful and not against public policy. It can create innovative trust planning opportunities, and advocates of STAR continue to find new uses for this regime in their planning. There are a number of features that distinguish the STAR provisions from the purpose trust legislation of other jurisdictions.
Trust Companies in the Cayman Islands are regulated by the Cayman Islands Monetary Authority (“CIMA”) through the various licenses granted and registrations required. Generally, there are two types of licenses granted to trustees carrying on a trust business in Cayman: •
A full trust license entitles the holder to provide trustee services to the public generally.
•
A restricted trust license is issued subject to the condition that the trust business is limited to certain named clients. All directors and senior officers of a trustee holding such a licence (including any changes after licensing) must be approved by CIMA.
FEATURES The objects of a STAR trust may be persons or purposes, the persons may be of any number and the purposes may be of any number or kind, charitable or non-charitable, provided they are lawful and not contrary to public policy. The rule against perpetuities, which limits other types of trusts in the Cayman Islands to the statutory perpetuity period of 150 years, does not apply to a STAR trust and therefore a STAR trust can have perpetual existence. The STAR provisions stipulate that a STAR trust is not rendered void by uncertainty as to its objects or mode of execution. It allows the trust deed to give the trustee or any other person power to resolve an uncertainty as to its objects or mode of execution. The STAR provisions deal comprehensively with the issue of enforcers. They provide that the only persons who have standing to enforce a STAR trust are such persons, whether or not beneficiaries, as are appointed to be enforcers by the terms of the trust deed, or in certain circumstances by order of the court. Therefore beneficiaries who are not enforcers have no right to enforce the trust or to obtain information regarding the trust.
Trustees and protectors of Cayman Islands trusts must also adhere to the registration requirements of beneficial ownership legislation now in force, and with the reporting requirements provided for in local legislation as part of the international tax information exchange framework established by virtue of FATCA and CRS. The Cayman Islands has a record of enacting innovative and far-sighted legislation in the wealth management sector, and a wide offering of expert service providers in the Cayman Islands who can assist stakeholders with an efficient and effective strategy to establish or move structures to the jurisdiction. Contributing to the ongoing evolution of the jurisdiction, new laws providing for the creation of foundation companies were passed in early 2017 and new legislation guiding and regulating non-profit organisations is now in place. The government continues to demonstrate responsiveness to the needs of the financial services industry, and there is a broad on-going commitment to enact further legislation as needed in the trust arena including in consultation with local professionals.
107
AT A GLANCE
LICENSEES/REGISTRATIONS UNDER THE FIDUCIARY SERVICES DIVISION LICENSEES UNDER THE COMPANIES
TRUST COMPANIES Restricted
Nominee
Total Number of Trust Companies
Registered Controlled Subsidiaries
Registered Private Trust Companies
Company Managers
Corporate Services Providers
54 53 49 51 48 51 51
62 67 74 74 78 83 87
31 28 26 22 20 27 21
147 148 149 147 146 161 159
– – – – – – –
– – – – – – –
51 81 73 69 68 70 69
0 1 5 5 5 5 7
54
87
18
159
4
–
74
6
55 53 53 53
86 85 85 83
22 22 22 21
163 160 160 157
8 9 13 15
7 9 18 24
75 77 82 77
6 6 7 7
52 50 51 51
78 78 78 76
21 21 22 23
151 149 151 150
13 14 18 20
29 37 40 44
77 77 79 80
7 7 7 9
QTR. I QTR. II QTR. III QTR. IV 2012 QTR. I QTR. II QTR. III
53 53 52 54
72 71 71 69
23 23 23 24
148 147 146 147
21 23 28 29
50 56 60 65
81 82 82 83
9 9 10 9
53 53 53
71 71 69
24 24 24
148 148 146
32 34 34
65 70 77
84 86 87
10 11 12
QTR. IV 2013 QTR. I QTR. II QTR. III QTR. IV 2014 QTR. I QTR. II QTR. III QTR. IV 2015 QTR. I QTR. II QTR. III QTR. IV 2016
52
66
24
142
30
77
86
12
52 51 51 50
67 67 67 67
23 22 22 22
142 140 140 139
32 35 34 34
83 85 87 88
91 93 92 93
14 15 17 17
49 49 49 47
65 65 64 63
27 27 27 27
141 141 140 137
38 38 38 36
88 91 93 95
90 97 98 96
18 16 16 16
50 56 58 57
63 62 62 61
27 26 31 31
140 144 151 149
32 34 35 36
100 107 113 121
98 99 98 102
17 20 20 21
QTR. I QTR. II
57 59
62 62
31 31
150 152
34 37
116 121
105 111
22 22
QTR. III QTR. IV
60 57
62 60
30 28
152 145
38 37
123 123
112 113
22 23
2017 QTR. I
57
61
28
146
37
119
113
23
QTR. II QTR. III QTR. IV
57 58 59
61 62 61
28 31 29
146 151 149
37 35 42
124 113 128
118 98 116
25 20 26
Period
2001 2002 2003 2004 2005 2006 2007
2008 2009 QTR. I QTR. II QTR. III QTR. IV 2010 QTR. I QTR. II QTR. III QTR. IV 2011
Unrestricted
Source: Cayman Islands Monetary Authority (CIMA)
108
Stay connected with Cayman Finance Sign up for our weekly MediaWatch e-newsletter for local and industry news on our website www.caymanfinance.ky
Like us on Facebook | Follow us on Twitter | Follow us on LinkedIn |
/CaymanFinance /caymanfinance
/company/cayman-finance
www.caymanfinance.ky | 345-623-6725 | enquiries@caymanfinance.ky
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
110
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
FAMILY OFFICE LANDSCAPE There’s an industry adage that says “when you’ve seen one family office ... you’ve seen one family office.” This is especially true in the current environment where many group structures either avoid the label “family office” or have grown complex so quickly that they don’t realise this is what they’ve become.
The vision of an original wealth-creator may have allowed for a streamlined management process in the initial period of asset accumulation, however this becomes challenging when there are transitions of leadership to the next generation. As wealth increases and younger generations become decision makers, there is often an increased push for the business operations to become more institutionalised and professionally managed. This transfer of responsibilities, management and governance to outside service providers, directors, and board members is a primary indicator that a group structure has truly become a “family office.” Family offices have unique challenges compared to other entities. The up-front decisions made when creating a family office structure have important consequences, but every day decisions and oversight can be just as impactful. Whether it’s creating a new family office, structuring the family office to be separate from the family business, or shepherding an existing family office, it is important to consider if the right policies and procedures are in place to help secure the financial future and legacy for the next generations. We see five key areas of focus that can mean the difference between merely existing in the current state and truly achieving future success. These are: family office design and setup, risk review, strategic planning, technology and leading-practice review.
FAMILY OFFICE DESIGN AND SETUP The reasons for setting up a family office vary, some common considerations being: •
Both the family and business are growing and the business staff is not able to meet the family needs, or is significantly distracted from the business by doing so.
•
There is a liquidity event, such as sale of the business or segment, and a significant portfolio of non-business assets to be managed.
Whatever the reason for contemplating setting up a family office it’s important to consider the advantages as well as the concerns when making this decision. RISK REVIEW Risk can arise from various sources such as business, investment, technology or operations. Making certain that the family office is protected from damage or loss, whether financial, physical and reputational is a key objective. A family office can assess and prioritise its risks through the use of a comprehensive risk model tailored to the family office - categories of focus include vision and legacy, management, operations, technology, succession, investments and tax and
111
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
regulatory. Within each category the key strengths and weaknesses should be determined to highlight areas requiring investment or focus. Risks are also categorised according to how the family office addresses them: •
•
Transfer — risks with high potential impact but limited ability for family control are generally financed, ie. transferred to an insurance policy (ie. natural hazard or liability) Management — risks with high impact and complex control requirements should be addressed at the executive level and through a well-designed governance process (ie. succession planning)
•
Monitoring — risks with lower impact and limited opportunities for control should be watched and monitored (ie. external regulation)
•
Process - risks with high impact that are readily controlled should be staffed and subject to policy and procedure (ie. wire transfer policy). By conducting a risk analysis a family office can look to address specific areas in order to minimise the potential impact.
•
Managing information and applications both inside and outside the office
•
Differing types of investment holdings
•
Differing stability, complexity and purpose of legal structures, including jurisdictional issues
•
Limited staff size with varying levels of skill
•
Varying complexity of offices and privacy concerns about outsourcing and cloud tools.
Family offices often must take a “system of systems” approach to meet their needs — the priority then is that these systems interface with one another to allow for seamless integration, and limited duplication of data. This requires finding the correct balance from robust technology, efficient processes and ease of use through the latest electronic tools and devices, well-trained and qualified staff. In determining what technology is best suited for a particular family office the following issues should be considered: •
What types of investments do you have?
•
What types of accounting management and compliance systems do you need?
•
What are the reporting needs of the family, external advisors, trustees, etc?
Having a single technology platform to support their accounting, reporting and operational needs is often described by family offices as the Holy Grail, but in practice this is often not practical.
•
Are you properly staffed to manage your operations now?
•
What about five years from now?
Technology solutions for a family office are fragmented, both due to the limited scale of the market, and to the fact that family offices are not a one size fits all type of structure.
•
Are you prepared to respond to cybersecurity intrusions or other breach or loss?
TECHNOLOGY
The challenges can include the following:
112
Having the answers to these questions will allow a family office to better determine the technology tools best suited for their specific needs.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
113
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
STRATEGIC PLANNING A consistent theme with most family offices is that they are diligent about strategic planning for their business, yet the family office, being stretched with daily demands, often finds little time to focus on longer-term planning. This planning must be intentional, especially given the complexity and size of many families, if the desired legacy is to be achieved. We feel there are three key items to address in this area:
•
Business plans — this is a 1-5 year plan which serves to support the strategic plan. This would detail any key initiatives for meeting the family’s short-term goals as well as the 10 year plan.
Another key component of strategic planning is succession planning and we see four dimensions of focus in this area: leadership, ownership, legacy and value, and wealth transition.
•
Family charter — this is the foundation of your strategy and should be a 100-year plan outlining the family’s purpose, values, vision for governance, and how wealth will support its legacy. Even if a charter is currently in place, it should be reviewed periodically to see that it remains relevant and viable.
These form the basis of any successful succession plan, and are the key considerations for the three primary stakeholder groups — owners, families, and the business and investments. Timely implementation and adherence to a family office’s strategic plan can not only help unlock the potential of a family and its future, but support its legacy for generations to come.
•
Strategic plans — this is a 5-10 year plan which outlines a strategy to train the next generation so that the family is prepared for business, technology, and long-term business changes, as well as investment and development opportunities.
Leading practice review — businesses around the world typically look to benchmark their practices to peers in effort to see how they compare to the industry leaders. Given the private nature of family offices this type of comparison can be difficult at best.
ADVANTAGES
CONCERNS
Service lifestyle, passion, assets, family houses & other holdings
Cost of family office setup and operations
Maximise privacy and control over assets
Complexity of market, legal and tax infrastructures
Manage family risks
Difficulties in identifying and managing staff
Support family entities & investments
Obtaining leading advice across a wide range of topics
Maintain family cohesion
FREQUENTLY STATED ADVANTAGES AND CONCERNS OF FAMILY OFFICES
114
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Larger service providers are often able to utilise their client base of global family offices to create a database of leading practices which can then be used to perform leading practice reviews. These types of reviews can provide valuable insights to family offices on: 1.
Recommendations for operating strategy and process enhancements,
2.
Organisational and management structuring,
3.
Talent and resource alignment, and
4.
Functionality of processes and controls.
along with a gap analysis and suggested actions for achieving the change and improvement. In the current environment the suggested threshold where setting up a family office becomes truly viable is $200 million in net assets. For families at this wealth level priorities should be set, around confidentiality, security and preservation of assets for future generations. Today’s plans for your family office can mean the difference between surviving and thriving in the future. ABOUT THE AUTHOR
This kind of review can go even further into more detailed service areas such as financial planning, strategy, governance, and advisory. Ultimately a leading practice review can highlight for the family office its present status and what should be considered to achieve the desired future position,
Chris Larkin is a Executive Director in the Financial Services Organisation of EY in the Bahamas, Bermuda, British Virgin Islands and Cayman Islands region. He has 18 years of experience with the firm including with EY Philadelphia, USA; EY Bermuda and over 7 years with EY Cayman.
115
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
WEALTH STRUCTURING A N D T H E C AY M A N I S L A N D S F O U N DAT I O N In March 2017, the Cayman Islands Legislature passed the Foundation Companies Law, 2017 (the "Law"). The Law came into force on October 18th 2017, and provides yet another addition to the comprehensive and innovative wealth planning vehicles for which the Cayman Islands has come to be known. The Law allows for the creation of a new form of company that allows the founder maximum flexibility to provide for its objects, management and supervision. While a foundation company is prohibited from paying dividends or other distributions of profits or assets to its members, the Law expressly provides that a member who is a beneficiary of the company and receives benefits as such is not regarded as receiving a dividend or distribution as a member. A Cayman Islands foundation company would be an ideal structure for one wishing to manage investments or other property, provide financial assistance to family members, fund a philanthropic project or to provide for any lawful object whose goal is not solely to make money for its members.
116
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
COMPARING THE "NOT FOR PROFIT" COMPANY A "not for profit" (“NPC”) company may work well from a wealth-structuring perspective in some situations, especially where the objective is solely charitable or can be achieved while the founder is alive. In other cases an NPC company has certain drawbacks which the Law overcomes by modifying provisions of the Companies Law (in relation to foundation companies) that put members in the driving seat of a foundation company. For example: The constitution of a foundation company may entrench its objects, or impose conditions for amending them. This means that the founder can put in place safeguards to prevent members from derailing his plans in the future. If the memorandum of association of a foundation company does not expressly authorise change then there will be no right to amend. The founder may also prevent amendment to other provisions of the constitution and provide for powers of amendment or consent to be given to non-members.Once incorporated a foundation company can cease to
have members at any time provided it continues to have one or more "supervisors". A supervisor is defined in the Law as a person other than a member who has the unconditional right to attend and vote at general meetings under the foundation company's constitution. The founder may provide for the supervisors to exercise any of the functions normally performed by members. The founder has complete flexibility to grant rights, powers and duties of any description to the founder, the directors, the officers, the supervisors, the members or whomever else the founder wants. COMPARING THE TRUST A foundation company is a separate legal entity, so no trustee is required. This means there are no complications inherent in a change of trustees and any task or power given to a trustee can be given to the foundation company: a potentially attractive proposition to consider as part of the wealth structuring exercise. If the objects of a foundation company include the giving of benefits to family or others, it is up to the founder to say in the
constitution of the foundation company whether the beneficiaries are to have rights. The default rule is that they have none. Section 7 (5) of the Law provides that a company has a duty to carry out the objects set out in its memorandum, only if, the memorandum - (a) expressly so declares; and (b) designates, or provides for the designation of, persons with standing to enforce the duty by action against the foundation company. Subject to any contrary provision in its constitution, a foundation company with enforceable duties under section 7 (5) has a right to apply to the Court for an opinion or advice or directions. Section 48 of the Trusts Law applies for any such application as if a reference in the section - (a) to a trustee were a reference to the foundation company; (b) to trust assets were a reference to the foundation company's assets; and (c) to a person interested in an application were a reference to an interested person for the foundation company. An “interested person” is defined in the Law as any member or supervisor or anyone who has the right to become a member or supervisor, and someone declared under the company’s constitution to be an interested person. Sections 92 and 93
117
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
of the Trusts Law (which operate to deny heirship rights to the property of a living person) are also of general application, and apply to property contributed to a foundation company. OTHER FEATURES The Law requires that a foundation company must have a secretary who is a "qualified person", being someone who is licensed or permitted to conduct company management services in the Cayman Islands. The secretary's office will be the registered office of the foundation company where its statutory records must be kept. If the objects of a foundation company become wholly or partly impossible, impracticable, unlawful or obsolete and there is no power under the constitution to resolve the difficulty or a power exists but has not been exercised then the company, its secretary (subject to any contrary provision in the constitution), an interested person, a person authorised under the constitution or the company’s liquidator may apply to the Court to resolve the difficulty.
118
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
The constitution of a foundation company may provide for the resolution of disputes, differences or difficulties with or among its directors, officers, interested persons or beneficiaries (to the extent they have rights) concerning the foundation company and its operations or affairs, or the duties, powers or rights of persons under the constitution, by arbitration or by any other lawful method. If a foundation company ceases to have enough directors, members or supervisors, or there is difficulty in or they are not performing their roles and there is no power under the constitution to resolve the difficulty, or such a power exists but has not been exercised, then a member, supervisor, director, officer, interested person, the company’s secretary (subject to any contrary provision), or anyone else authorised under the constitution may apply to the court to resolve either difficulty. COMPARING THE COMMON LAW FOUNDATION Rather than seeking to emulate a civil law foundation as many other common
law offshore centres have done, the Cayman Islands modified its well-known and tested company legislation. This avoids a number of drawbacks which most of the common law offshore foundations legislation seem to suffer from such as restrictions on the activities of the foundation; inflexibility as to whom duties are owed and who has access to the Court; and remaining uncertainty in foreign courts and with tax authorities as to whether it may be classed as a trust.
ABOUT THE AUTHOR Wendy Stenning is an Associate in the Fiduciary Department of Collas Crill in the Cayman Islands. She specialises in advising in relation to private client work including trusts and estates and on regulatory matters. She is a member of the Society of Trust and Estate Practitioners.
Clients and their advisers from both civil law and common law jurisdictions will already understand the structure of a company but will appreciate the modifications made to the Companies Law that set a foundation company apart from the existing company regime. The flexibility to provide for the objects and administration of the foundation company and who has access to the Court will serve as major selling points. The Cayman Islands foundation company will provide a modern, flexible and sound vehicle for wealth structuring and will likely be of great interest to a wide variety of clients.
119
AT A GLANCE
INVESTMENT FUNDS When the board of the International Organisation of Securities Commissions (IOSCO) published its Report on the Fourth IOSCO Hedge Fund Survey in November 2017, the findings confirmed the continuing strength and widespread appeal of the alternative investment industry to investors. It also confirmed that the Cayman Islands remains the pre-eminent jurisdiction for domiciling of alternative investment structures. The biannual report, which is based on data as of September 30, 2016, highlights that assets under management of the survey participants grew in the preceding 24 months by 24% to $3.2 trillion and that Cayman domiciled structures accounted for 53% of those assets, a percentage which is largely unchanged over that 2 year period. The sample size reflected in the survey is sufficiently material for the growth rates and domicile concentrations to serve as reliable proxies for the industry as a whole, reflecting the capital aggregation and performance returns which continue to attract a diverse range of investors to alternative funds. The survey also highlights the dominance of US based investment managers in net asset value terms with over 76% of assets managed by them, as compared to relatively limited capital aggregation by European and Asian based asset managers. The popularity of hedge funds can also be seen in the statistics published by the Cayman Islands Monetary Authority which continue to show the number of hedge funds registered in the Cayman Islands above the 10,000 mark, with overall growth in the first three quarters of 2017. The consistency of registrations over recent years is all the more significant given the maturing of the industry and the year on year replacement of
120
older structures with more traditionally focused investment strategies with more progressive strategies seeking investment returns in more imaginative investment styles and combinations. The economic influences driving capital deployment into funds and the performance returns on invested assets include the anticipated tax reforms in the US leading to lower corporate tax rates and increased corporate value for investors, continued progress in key developing markets, asset class expansion, the emergence of digital currencies for mainstream investing and other such matters. As the options expand, the industry continues to face challenges in terms of ever increasing demands for greater transparency, international cooperation and regulation. Cayman has been and remains at the vanguard of international initiatives to increase government to government and regulator to regulator cooperation and transparency. A leader in this area since 1990 when it entered into its first information exchange treaty with the US, Cayman continues to engage constructively and cooperatively with governments around the world to support global initiatives on the exchange of tax information, beneficial ownership and
INVESTMENT FUNDS
MUTUAL FUNDS ADMINISTRATORS
MUTUAL FUNDS
Registered
Master
Administrated
Licensed
Full
Total
Restricted
Exempted
Total
2010
8,870
-
435
133
9,438
2010
94
38
2
134
2011
8,714
-
424
120
9,258
2011
92
35
2
129
2012
8,421
1,891
408
121
10,841
2012
90
32
2
124
2013
8,235
2,635
398
111
11,379
2013
88
31
2
121
2014
7,835
2,685
386
104
11,010
2014
84
29
2
115
2015
7,654
2,805
380
101
10,940
2015
82
24
2
108
2016
7,465
2,899
370
96
10,830
2016
84
21
1
106
2017
7,374
2,834
337
85
10,630
2017
79
20
1
100
2017
anti-money laundering. By doing so, Cayman continues to receive favourable assessments from globally respected organisations such as the OECD, FATF and IMF who recognise that the drivers for domiciling in Cayman lie in expertise, familiarity and tax neutrality.
the last 40 years. Cooperation between industry, the government and the regulator to introduce new, or improve existing, statutory or regulatory regimes is carried out collaboratively to ensure that the legislation or regulation once in effect is both operable and effective.
While these may not play to the populist mythology, numerous respected economic studies continue to show that capital aggregation in the neutral setting provided by Cayman structures increases deployed capital in underlying investments and therefore increases gross returns to investors with the higher resultant tax yields in their home jurisdictions than would otherwise be the case. Over the course of 2017, local initiatives have sought to improve the robustness of our anti-money laundering legislation and associated guidance notes, introduced new structuring concepts in LLCs and foundations, created a legal framework for the reporting to government of the beneficial ownership of companies and upgraded the Cayman Islands Monetary Authority's interface with the industry to an enhanced electronic reporting platform.
The cooperation will continue in 2018 as international demand for additional measures appears unlikely to reduce. With Britain's exit from the EU still to take shape and the future of EU based banking and finance yet to be resolved, it is reasonable to expect that additional regulation and requirements for trading in or aggregating capital from the EU will increase.
Each of these initiatives has been preceded by the public/private consultation partnership which has been a hallmark of the development of Cayman over
While the EU influence on alternatives is, according to the IOSCO survey, relatively limited, it is reasonable to assume that the next evolutionary phase for the industry will take those considerations into account and adapt as it has done in the past. No jurisdiction acquires 53% market share of any global industry and maintains that proportion year on year without adapting and evolving to meet current and future needs.
121
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
MONEY MARKET REFORM MEASURES WHY CAYMAN MAY BE THE BEST FIT At their most basic level, money market funds (“MMFs” and each an “MMF”) are funds that invest in high quality, low-risk, short term debt securities, with the aim of providing a greater return to investors than the interest (if any) that might be paid on their surplus cash balances. MMFs are considered by many investors to be a relatively safe and highly liquid investment alternative to simply holding surplus cash in a bank account. MMFs aim to maintain a constant net asset value (“CNAV”) of USD1.00 while generating a low rate of return, eg. through dividends. MMFs attract an extraordinary amount of investor capital, with some funds holding tens of billions in assets - in aggregate regulated MMFs in the US and MMFs in Europe currently hold around USD4 trillion in assets.
Partly as a result of the 2007-2008 financial crisis, and the importance of the liquidity provided by MMFs to the global financial economy, both the United States and Europe recently proposed reform measures with the intent of making MMFs better equipped to address a run on the funds (ie. a large amount of capital being withdrawn by investors in a short period of time). The proposed reforms became law in the United States 122
on 14 October 2016 and are expected to come into force for newly established European MMFs on 21 July 2018 (with existing European MMFs having until 21 January 2019 to comply). The detail of, and rationale for, the reform measures are beyond the scope of this article, but some of the key amendments (hereafter, the “Amendments”) broadly include the following: 1.
certain MMFs must move away from a CNAV to a floating / variable NAV;
2.
the imposition of a default liquidity fee on redemptions if an MMFs’ liquidity levels fall below a prescribed threshold; and
3.
the power of the MMFs board
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
to temporarily impose a redemption gate. In response to the Amendments, asset managers and sponsors in the US and Europe are reassessing the most suitable jurisdiction to domicile their MMFs as well as related structuring vehicles (eg. feeder funds). While some investors may welcome the Amendments and, for example, the move to a floating/variable NAV, other investors may instead be more familiar with the attributes of the traditional CNAV MMFs. As the Cayman Islands can facilitate both the CNAV MMFs and the floating/variable NAV MMFs (ie. both forms of MMFs, pre and post the Amendments), the jurisdiction is proving a popular choice for promoters looking to launch new MMFs. In addition to being able to accommodate both the traditional form of MMF and the newer form, there are a number of other compelling reasons why MMF managers and sponsors might consider domiciling their MMFs in the Cayman Islands, including the following: SPONSOR, MANAGER AND INVESTOR FAMILIARITY The Cayman Islands is a popular offshore jurisdiction for establishing investment funds of all types and, as a result, it will be familiar to a significant number of MMFs managers, sponsors and investors. As an illustration of the jurisdiction’s popularity one need only look at the total number of Cayman Islands ‘financial institutions’ that are registered with the US Internal Revenue Service (the “IRS”) for FATCA purposes this would include hedge funds, private equity funds and non-CIMA registered mutual funds. According to the IRS Global Intermediary Identification Number (“GIIN”) list, as at 18 October 2017, there were 52,777 Cayman Islands financial institutions that had registered with the IRS for a GIIN. This number is significant, especially when
compared to other jurisdictions with strong financial services industries such as Luxembourg (12,693), Hong Kong (6,719), Ireland (6,202) and Singapore (3,047). In addition, as at 30 June 2017 there were 10,621 open-ended mutual funds registered with the Cayman Islands Monetary Authority and 103 registered mutual fund administrators. TAX NEUTRALITY The Cayman Islands is a tax neutral jurisdiction, which represents a significant benefit to asset managers looking to structure vehicles that are attractive to investors. As a tax neutral jurisdiction, there would be no domestic Cayman Islands income or corporations tax that would apply to the MMFs nor any Cayman Islands tax that would apply to investors, whether directly, eg. income tax, capital gains tax or inheritance tax or indirectly, eg. dividend withholding tax. This keeps things simple from the investors’ perspective. Investors continue to be subject to tax in their own home jurisdictions in the normal way on the proceeds received from the MMFs, but they do not have to obtain Cayman Islands tax advice or tangle with the complexities of another jurisdiction’s tax filings. An MMF would, of course, be subject to tax in the relevant jurisdictions where it makes its investments and the investment manager would arrange for the MMF to attend to any such taxes.
SIMPLE AND FLEXIBLE The process for forming Cayman Islands MMFs is simple and can be done in short order (as quickly as 24 hours if required), at relatively low cost and without the requirement for prior governmental approval. There would be no requirement for directors of MMFs to be resident in the Cayman Islands or for shareholder meetings to be held on an annual basis. The Cayman Islands law underpinning investment funds is aimed at sophisticated investors and has a framework 123
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
that enables documents to be tailored to many different situations, including, if necessary, the types of changes contemplated in the Amendments, eg. floating/variable NAV’s, redemption gates and liquidity fees. SOPHISTICATION AS A JURISDICTION The Cayman Islands is a British Overseas Territory. It is a stable jurisdiction with no exchange controls and a Moody’s credit rating of a Aa3. The jurisdiction makes its own laws through a democratically elected legislature and has an independent legal and judicial system. The substantive law of the Cayman Islands is based on the English common law with well-recognised legal concepts, such as separate legal personality applying to corporate fund vehicles. It is a trusted centre of excellence in the global investment funds industry and is home to thousands of experienced and highly qualified professional service providers. INTERNATIONALLY FRIENDLY AND WELL REGARDED TRANSPARENT JURISDICTION It is a well-regulated, co-operative and transparent jurisdiction. By way of illustration, the Cayman Islands was one of the early adopter countries to both the US Foreign Account Tax Compliance Act and the OECD’s Common Reporting Standard (“CRS”). The jurisdiction has a beneficial ownership regime requiring certain companies to establish a non-public register of their beneficial owners. As a result of its efforts, the Cayman Islands has been rated by the OECD as ‘largely compliant’ with respect to transparency and information exchange – the same rating as the United Kingdom, the United States and Luxembourg. GEOGRAPHICAL LOCATION The Cayman Islands is conveniently located, geographically, with a large 124
number of direct flights operating daily to the United Kingdom, Canada and the USA. The jurisdiction operates on Eastern Standard Time. There are a number of compelling reasons why the Cayman Islands is particularly well-placed to become the jurisdiction of choice for MMFs formations and, potentially, re-domiciliations. ABOUT THE AUTHOR Chris Capewell is a Partner at Maples and Calder in the Cayman Islands. Christopher advises on all aspects of Cayman Islands offshore investment funds as well as general corporate restructurings. He specialises in hedge fund and private equity transactions and works regularly with a number of the world’s leading financial institutions, fund managers and law firms.
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
Blockchain The future of Value Blockchain is to value what the Internet is to information Cryptocurrencies, digital identities, asset management, cross-border payments, direct lending, KYC processes, trade settlement, and document digitization. All key areas of financial services are being revolutionized by Blockchain, a technology that could change the future of the financial industry. Is your business ready for Blockchain? Deloitte’s global network of over 500 Blockchain specialists can support you on the innovation journey, from strategic planning, through Proof of Concept, to taking it live. With three Blockchain Labs, covering the Americas, EMEA, and Asia-Pacific, Deloitte can assist you to develop and accelerate your Blockchain capabilities. Contact us to learn more about how we can help you unlock your digital potential. Nick Kedney Partner, Financial Advisory nkedney@deloitte.com
www.deloitte.com/ky Š 2017 DCB Holding Ltd. and its affiliates.
Alexandra Simonova Senior Manager, Risk Advisory asimonova@deloitte.com
125
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
RESPONSIBLE
INVESTING
ESG investing – the consideration of environmental, social and governance (ESG) factors and how they impact an investment – has been gaining traction with investors over the last few years. Even as capital pours into ESG investing, data and understanding in this area remain incomplete and opaque, which is good news for investors seeking competitive market returns. Many investors living in Cayman tend to define themselves as conservative – they own real estate and keep liquidity at the bank. An ESG overlay in your portfolio may complement the conservative nature of your overall investments as it will increase diversification, mitigate risk and may improve the portfolio’s risk-adjusted returns. These are the key conclusions drawn from RBC Global Asset Management’s (GAM) recent survey of ESG asset owners, wealth managers and consultants. The survey reveals lingering uncertainty about responsible investing’s ability to drive financial performance and mitigate portfolio risk. It also indicates frustration with the lack of corporate ESG disclosures and points to evolving expectations for both investing strategies and portfolio managers. ALPHA UNCERTAINTIES AND DATA DISSATISFACTION In perhaps the survey’s most surprising revelation, less than onethird (30%) of respondents considered ESG investing a source of alpha, despite a growing body of research concluding that various responsible-investing factors actually improve financial returns. In a 2015 study, MSCI found that portfolios with an ESG bias outperformed a world stock index, made up of over 1,500 large-cap equities, over an eight-year period. Specific factors valued by ESG investors have also been proven to correlate with higher long-term returns. Investors’ uncertainty about ESG as an alpha source may derive from their dissatisfaction with the amount of accessible, relevant data. Just 17% of survey participants were satisfied with the quality and quantity of ESG-related data companies are making available. Conversely, 43% of participants were somewhat or completely dissatisfied. While multiple efforts are underway to close this information gap, the divergence between the empirical data and the marketplace perception represents an opportunity that can be exploited for enhanced returns. It points to the need for thorough fundamental
The consideration of environmental, social and governance factors and how they impact an investment has been gaining traction with investors over the last few years. This represents more than a change in investing style. Rather, it is recognition that engagement is more powerful than divestment.
analysis in ESG investment decisions, especially for investors seeking both alpha and impact in the long term. Because ESG factors are not yet fully incorporated into valuations, we believe that investors who understand how to identify and properly consider these factors will have an advantage. FROM DIVESTMENT TO ENGAGEMENT Qualitative, ESG integrated buy-and-hold investing remains a relatively new development in responsible investment, which consisted almost exclusively of negative screens deployed to weed out companies with particularly objectionable social or environmental practices a few decades ago. Today, a majority (52%) of responsible investors and professionals consider negative screens a niche tactic to be used only by mission-specific investors. This represents more than a change in investing style. Rather, it is recognition that engagement is more powerful than divestment. Many of today’s responsible investors believe they can encourage and enact greater positive change — and increase shareholder value — by engaging with companies on ESG issues rather than by divesting. An asset manager, who is a significant shareholder, gains access to company senior management and boards of directors,
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
so much capital pouring into ESG-related investing, even as asset owners and financial professionals alike remain broadly uncertain about those investments’ ability to provide alpha and mitigate risk. The largest group of respondents (40%) do not consider ESG a risk mitigator. But, for the one out of three respondents who do see ESG as a risk mitigator, it will be crucial to ensure they engage with investment managers who share that belief. For those living in Cayman who are interested in taking advantage of this approach, you can employ an ESG overlay to provide risk mitigation and potentially increase your risk-adjusted returns. The value proposition inherent in ESG investing is becoming more apparent all the time. Even as data remain imperfect, investors can see and feel the impact on their portfolio values. There are examples of value that is spectacularly destroyed by companies with poor ESG standards, particularly those with high-profile scandals or environmental catastrophes. There are many reasons why people choose to live in the Cayman Islands, but a Cayman culture that incorporates strong environmental, social and governance factors is a reason why many of us call Cayman home. For similar reasons, we see the importance of investing in companies with an approach that is better for the environment and for society. Seeing value created by ESG investing requires commitment to an ESG approach as well as to skilled, knowledgeable analysis and long-term ownership. As ESG integration becomes more prevalent in investment, those commitments will continue to spread across the industry and asset owners will be all the better for it. ABOUT THE AUTHOR developing a voice to advocate for positive change. These investors view change as a powerful driver of shareholder value. To be sure, negative screens remain in widespread use and divestiture campaigns can still generate enormous momentum. In recent years, the fossil fuel-free movement not only captured headlines, but prompted commitments to divest totalling in the trillions of dollars, largely driven by institutional titans including the world’s largest sovereigninvestment fund. According to RBC GAM’s survey of ESG asset owners, wealth managers and consultants, investors are taking the fossil fuel-free movement seriously. Only 26% of respondents consider fossil fuel free to be a fad and a full 62% consider it a lasting investment issue. Whether this is driven by true philosophical alignment or merely reflects investors following a popular trend remains to be seen.
Stephen Price is the driving force behind The Price Team of RBC Dominion Securities. He has been with the firm since September 2001 and began his financial services career as an analyst with a leading global investment banking, securities and investment management firm. While he has lived primarily in the Cayman Islands, Stephen has studied and worked in several other countries, including South Africa and Spain. He obtained a Bachelor of Science degree at Cornell University in New York in 1995, and a Master of Business Administration degree with a specialization in finance from the University of London in 1999.
RISK MITIGATION There is an opportunity to exploit a market that remains inefficient, but this may not be the case for long. Growing realisation that ESG can drive compelling returns will draw more interest and more capital, which will drive out some or most inefficiencies. Opportunities will be harder to come by; however, this survey portrayed an investment approach only beginning to come into its own. It’s encouraging to see
He holds a Master of Philosophy in management studies from Cambridge University in the UK and received his Chartered Investment Manager (CIM) designation from the Canadian Securities Institute.
127
AT A GLANCE
CAPITAL MARKETS 2017 has been a surprisingly good year for the Cayman Islands in terms of capital markets activity with year on year issuance levels in several key sectors of this market significantly up on prior years. This increase in activity has been somewhat of a surprise given major headwinds on the regulatory front, both in Europe and the US. The US market in particular continues to see the Cayman Islands as the jurisdiction of choice for most types of non-domestic US securitisation, be it in the collateralised loan obligation (“CLO”), commercial real estate (“CRE”), aircraft portfolio securitisation or cat bond space. There also continues to be activity in several sectors out of parts of Europe and Asia, mostly in the form of repackaging transactions that issue notes into the capital markets. As at the end of October 2017, US CLOs, the largest securitisation sector that consistently uses Cayman Islands special purpose vehicles (“SPVs”) to securitise US corporate and middle market loans, mainly to non-investment grade US corporates such as Sealy Tempurpedic, American Airlines and Sprint Communications, had issued or priced of over US$95 billion of paper. At this pace, aggregate issuance volume for 2017 is on track to significantly exceed 2016 levels of US$97 billion which itself is the second highest issuance level, bettered only by the US$127 billion issued in 2015. What makes this number even more astonishing is that 2017 has been the single busiest year on record by some margin for refinancing and resetting of existing CLO transactions. These ‘refis’ and ‘resets’ alone have been responsible for an additional US$140 billion of issuance in the US CLO space through the end of October. The principal driver for the continued refi/reset activity is the significant reduction on the CLO debt coupon during the course of 2017 which, in turn, helps increase equity returns and has attracted new investors into the space. 128
At the start of the year, the average spread reduction on AAA tranches being refinanced was around 24 bps, but by July that reduction had increased to 33 bps and continues to increase as we head towards the end of 2017. The uncertainty around the CLO space in 2016 was driven, in large part, by the introduction of the risk retention regime in the US on 24 December 2016. Although not an ‘originate-to-distribute’ product, CLOs were tarnished with the same brush as CDOs, their infamous cousins that caused many of the losses during the credit crunch. All this in spite of the fact that CLOs performed through the credit cycle and historic losses on securities issued by these entities is far lower than any equivalent rated assets other than Treasury securities (which have much lower returns). The US Dodd Frank legislation introduced a requirement for US CLO managers to have ‘skin in the game’ and to hold a 5% interest in the CLOs that they manage (in one form or another). In 2016, the market was pessimistic about the regulatory burden of complying with this regime and pundits predicted that many managers would face consolidation or be driven out of business or simply unable to set up to facilitate risk retention. One year on, however, and the reality is entirely different. Managers and their legal advisers have come up with efficient risk retention structures, such as capitalised majority owned affiliate vehicles, that often utilise Cayman Islands funds somewhere in their structuring, and capitalised manager vehicles, that have enabled managers to bring third party funds into the equation to some extent and reduce the actual amount managers have to deploy. Interestingly, this also appears to have given the CLO market more credibility in the wider capital markets and, coupled with consistently attractive and safe returns, this has led to a large influx of new investors as well as a raft of new CLO managers. Other sectors of the capital markets where Cayman Islands SPVs have continued to see
CAPITAL MARKETS
activity in 2017 include various types of repackaging programmes. Diversified payment rights transactions (“DPRs”), which are typically set up as programme vehicles to securitise bank remittances for emerging country banks, have continued to see solid issuance in 2017 as have traditional Euro medium-term note (“EMTN”) programmes, although not at such high levels as in 2016. Turkey is popular for DPR deals and Japan continues to be the most active market for EMTN issuance and that held true this year. We have seen a big uptick in companies being set up to repackage AAA notes issued by US CLOs. Typically, these repack vehicles purchase US dollar denominated AAA notes and issue JPY Yen notes to Japanese domestic banks. The issuer will typically enter into a swap to hedge any currency risk. These enable Japanese regional banks, which cannot otherwise purchase US dollar denominated securities, to participate in the US CLO market. Furthermore, CLO structures were used in 2017 to securitise commercial real estate loans in the US in the form of CRE CLOs, with a reasonably active issuance level, and also to fund infrastructure projects with that sector set to see growth in the future. There is even talk of trying to use CLO technology in the aircraft securitisation space, an area which has seen huge growth over the past couple of years and which is set to continue growing given projected aircraft deliveries over the next 5 to 10 year time horizon. As previously mentioned, the aircraft securitisation sector is worthy of note for its performance in 2017. A trend that has really picked up momentum in the aircraft finance space is the increased use of alternative sources of funding to traditional bank debt, particularly transaction structures that allow airlines and lessors to access the capital markets. Since 2014, there have been a substantial number of asset-backed securitisation (“ABS”) platforms structured
using Cayman Islands-incorporated, Irish tax resident issuers to issue notes, the proceeds of which are used to acquire an underlying portfolio of aircraft. Even where these aircraft ABS issuer vehicles are not incorporated in the Cayman Islands, issuers are taking advantage of the flexible and user-friendly listing regime of the Cayman Islands Stock Exchange (the “CSX”) to list the notes and other securities. ABS deals are usually structured by lessor companies, as opposed to airlines. Airlines, however, are also accessing the capital markets by issuing enhanced equipment trust certificates (“EETCs”) to finance the acquisition of new aircraft. Historically, these have been US domestic airline deals, but recently non-US airlines have launched EETCs, a number of which have featured Cayman Islands SPVs. Development of these non-US EETC structures has been assisted by the widespread adoption of Alternative A of the Cape Town Convention (also adopted by the Cayman Islands), that closely resembles section 1110 of the United States Bankruptcy Code. Furthermore, a number of airlines have also established airline ticket and cargo sales securitisation platforms featuring Cayman Islands issuers. In summary, 2017 has been an excellent year for the Cayman Islands capital markets product with record breaking activity in a number of areas. Leading the way is the CLO market with activity on multiple fronts including new issuance, refis and resets, repacks, and risk retention compliance, not to mention increasing listing work on the CSX as a result of the introduction of revised market abuse regulations in Europe (see article “Cayman Islands Stock Exchange – The Impact of the European Market Abuse Regulation” by Scott Macdonald for further details). Other areas of note include aircraft securitisation and commercial real estate securitisation transactions. Given that the US is looking to roll back some of the Dodd Frank legislation including, by all indications, some of the risk retention provisions affecting the CLO market, 2018 looks set to be another solid year. 129
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
CAYMAN ISLANDS STOCK EXCHANGE: THE IMPACT OF THE EUROPEAN MARKET ABUSE
The Cayman Islands Stock Exchange (the “CSX”), which has listed more than 4,000 securities with a combined market capitalisation in excess of US$190 billion, has firmly established itself as one of the leading international specialist exchanges. An affiliate member of the International Organisation of Securities Commissions, the CSX is also an affiliate member of the World Federation of Exchanges and the only offshore exchange that is a member of the Inter-market Surveillance Group. However, key to the success of the CSX was the grant by the UK HM Revenue & Customs in 2004 of its status as a ‘recognised stock exchange’. This recognition permits debt securities listed on the CSX to satisfy the ‘quoted eurobond exemption’, that allows interest payments to be made gross without deduction of UK withholding tax. The CSX is not resting on its laurels, however, and continues to develop the range of products for which it provides listing services. As part of the revision of its listing rules in April 2017, the CSX published a new Chapter 14 in connection with listing debt or equity securities issued by ‘specialist companies’, which is intended to attract listings of securities offered to qualified investors by companies that may be newly incorporated or pass-through SPVs with no specific revenue earning business or companies raising funding for a new project or line of business. This new regime compliments what is already a strong line-up of products that can be listed on the CSX. These now include: (i) Chapter 6 (Equity Securities); (ii) Chapter 8 (Specialist Debt Securities); (iii) Chapter 9 (Investment Funds); (iv) Chapter 12 (Corporate and Sovereign Debt Securities); and (v) Chapter 14 (Specialist Companies).
the Irish Stock Exchange (“ISE”). We estimate that in excess of 700 CLO issuers are currently listed on the ISE. CLO notes were originally listed on the ISE to satisfy the internal investment requirements of various institutional EU investors and, more latterly, Asian investors who require a listing on an EU regulated exchange. Initially, at least, the ISE listing provided liquidity in both the primary and secondary markets with regards to such investors. For this reason, and as a preferred stock exchange for certain Japanese investors, it subsequently became market convention to list CLOs on the ISE. However, the introduction of the European Market Abuse Regulation (“MAR”) in July 2016 is causing many market participants to question that convention and to actively consider a listing on the CSX as a viable alternative. As the CSX is a non-EU exchange, any CLO issuer listed on the CSX is not subject to the obligations of MAR. THE IMPACT OF MAR MAR replaced and extended the existing EU market abuse regime, which prohibits insider dealing, market manipulation and unlawful disclosure of ‘inside information’ in respect of securities listed on an EU stock exchange. MAR still carries significant penalties for non-compliance, including criminal sanctions in the form of fines and/or imprisonment. Importantly, MAR extended the application of the regime beyond the Main Securities Market of the ISE and now includes the GEM, the predominant exchange for listing CLOs. As a result, each CLO issuer listed on the ISE is required to take the following MAR compliance steps: •
Adopt policies and procedures relating to the treatment of inside information, including to ensure the immediate publication of inside information, and to ensure that any delay in the publication of inside information is in accordance with MAR;
THE CLO OPPORTUNITY
•
The CSX has not historically been the exchange of choice for the significant number of Collateralised Loan Obligation (“CLO”) notes issued by Cayman Islands issuers each year, which could be listed on the CSX under the Specialist Debt rules.
Draw up and maintain a list of persons within the issuer and Co-issuer discharging managerial responsibilities and of persons closely associated with them (“PDMRs”);
•
Ensure PDMRs are aware of, and acknowledge in writing, their obligations relating to dealing in the issuers’ financial instruments;
•
Draw up and maintain, in the prescribed form, a permanent insider list (the “Insider List”) of persons with access to inside information relating to the issuer or its financial instruments; and
The vast majority of such CLOs, which predominantly invest in US corporate leveraged loans and are managed by US collateral managers, have listed on either the Main Securities Market or the Global Exchange Market (“GEM”) of 130
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
•
Ensure persons on Insider Lists are aware of, and have acknowledged in writing, their obligations under MAR and the sanctions for insider dealing and unlawful disclosure of inside information.
‘Inside information’ is defined as information that: (i) is precise; (ii) has not been made public; (iii) relates directly or indirectly to the CLO issuer or its notes; and (iv) if made public, would be likely to have a significant effect on the price of those notes or on the price of related derivative financial instruments. In the context of a CLO, we expect the occurrence of events leading to the existence of inside information to be relatively rare. To the best of our knowledge, no CLO issuer has yet published an announcement on the ISE (or other publicly available source) for the purposes of disclosing inside information. The adoption of MAR policies and procedures, and the maintenance PDMR lists are steps that can be undertaken by the Cayman Islands administrator providing services to the relevant CLO issuer. In addition, the MAR compliance obligations apply directly to the CLO issuer and there is no obligation on the CLO collateral manager to adopt specific MAR policies and procedures. Despite all of this, many CLO managers are concerned about the implications of MAR. Like all compliance obligations, MAR requires an investment of time in raising awareness and continual monitoring to be in a position to identify an event that may lead to the existence of inside information. The listing of a CLO issuer makes no difference to the investment strategy or performance of a CLO manager, who would much prefer to focus on management of the CLO portfolio without the distraction of additional compliance issues. The form of the Insider List is also a significant concern.
The LEI is a 20-digit alphanumeric code, which uniquely identifies each legal entity that engages in a financial transaction, regardless of their jurisdiction. LEIs are valid for one year and must be updated by way of annual reapplication to the relevant LEI issuance agency, of which only a few are authorised to issue LEIs to Cayman Islands entities (including the ISE, the London Stock Exchange and Bloomberg). The CSX does not require an LEI from listing applicants. CLO LISTING – THE CURRENT POSITION Despite some initial concerns regarding the compliance obligations of MAR, a majority of CLO issuers that do list are continuing to list on the ISE GEM. Many investors continue to require, or at least prefer, that the CLO notes are listed. While we have seen several draft offering documents circulated without ISE listing disclosures, such disclosures are generally re-inserted following investor review. However, it is unclear whether the listing is a real investor stipulation or simply that a comparison against a prior offering document highlights the removal of the ISE listing and it is this alone that triggers the request to reinstate the ISE listing. Encouragingly for the CSX, ten CLO issuers have listed on the CSX over the past few months and we are aware of at least another 18 CLO issuers having made initial submissions to the CSX. We continue to field enquiries about listing CLO issuers on the CSX and this trend looks set to continue. With a generally positive outlook for the CLO market, the CSX looks well positioned to benefit from the introduction of MAR in Europe.
INSIDER LISTS
ABOUT THE AUTHOR
While we are of the view that an Insider List is only required upon the occurrence of inside information, which (as previously noted) is expected to be a rare event for a CLO issuer, the form of permanent Insider List requires a significant amount of personal information about each insider, including: (i) date of birth; (ii) national identification number (in the US, this would be a social security number); (iii) home telephone number; and (iv) home address. Most CLO managers are understandably reticent to provide such personal information in respect of their personnel. Even if you take a pragmatic view to limit the scope of potential ‘insiders’ to those personnel with day-to-day responsibility for the CLO, you still catch a number of portfolio managers (who tend to be senior employees or even the owners of the business) and senior staff at the collateral manager.
Scott Macdonald is a Partner at Maples and Calder in the Cayman Islands. Scott has extensive experience in structured finance transactions, including CLOs, repackagings, structured funds and fund derivative products, and segregated portfolio companies. He also advises on fund financing, and is head of the CSX listing group in Cayman. Scott is a lead partner on the FATCA/Tax Information Exchange team focusing specifically on the structured finance sector.
LEI REGISTRATION The ISE recently advised that, with effect from 6 November 2017, every entity seeking a listing on the ISE must provide the ISE with a Legal Entity Identifier (“LEI”) as part of its application.
He advises clients on legal issues under US FATCA, UK FATCA and the OECD Common Reporting Standard ranging from entity classification, availability of exemptions, reportable accounts, application of the account due diligence rules, and notification and reporting obligations. Scott acts for a significant number of CDO/CLO issuers and structured finance entities on the delegation of FATCA due diligence and reporting services to leading institutional paying agents. 131
AT A GLANCE
INSURANCE In 1976 a breaking point for the insurance industry was reached. After a time of political movement and economic upheaval, liability insurance pay-outs in the US had reached an unsustainable rate, seeing several major insurers withdrawing completely from the market. Needing to secure adequate coverage for their physicians, Harvard Medical Institutions took matters into their own hands and formed the first offshore captive insurance company in Cayman: Controlled Risk Insurance Company Ltd (CRICO).
The word ‘captive’ refers to the relationship between the insurance company and its owner. Companies use captive insurance as a risk management and cost reduction tool; they are effectively a form of self-insurance, where an insurance company is created and owned by one or more companies, providing coverage for themselves, and taking responsibility for insuring their own risks.
and comprehensive legal system and the highest quality of professionalism and experience from its service providers, all of which are supported and promoted by the Insurance Manager’s Association of Cayman (IMAC). Today, the Cayman Islands is home to over 700 captive insurance companies and is the second-largest captive domicile in the world after Bermuda.
The benefits? If there are no claims, they keep the profit; they avoid the expensive overheads of using a traditional commercial insurance company which sets prices based on broad industry averages; they use their company intelligence to customise their insurance programmes accordingly and avoid paying for risks that don’t apply to them; the list goes on.
The recent release of Q3 2017 statistics from the Cayman Islands Monetary Authority (CIMA) showed Cayman’s captive industry generated annual insurance premiums of US$12.4 billion, with assets under management of nearly US$62bn - enormous figures for an industry that employs fewer than 300 people in Cayman.
Over the past 40 years, Cayman has cemented its reputation as a world leader in the captive market. This reputation is built on robust regulation, a sophisticated
The industry’s largest line of business is in the healthcare space - with 32% of licenses being for ‘medical malpractice liability’ and a further 22% in ‘accident and health’ bringing
132
INSURANCE
the total AUM in the healthcare space to nearly $14bn. Ninety per cent of the captive business comes from North America, but the near 30 insurance management companies on island cover clients from around the globe, making it a truly global insurance centre. IMAC’s own studies have calculated the captive industry’s contribution to the local Cayman economy to be around $85m annually. This amount is broken into three main categories: government fees (insurance licence & registry office), $11m; service fees to insurance managers, lawyers, accountants etc, $62m; transport, hotels, restaurants and leisure, $12m. This is understandable when you consider the constant flow of the 700+ insurance company owners visiting the Cayman Islands to hold board of director meetings and to meet with the Insurance Supervision Division at CIMA.
Every year, the Cayman Captive Forum alone attracts over 1,400 captive insurance professionals to the island. In 2017 it celebrated its 25th anniversary, and goes from strength to strength each year in bringing people together to network, learn and discuss the issues most pressing to the captive insurance industry. In addition to helping Cayman’s general economy and promoting Cayman as a quality domicile for captive insurance companies, IMAC - thus the captive industry of Cayman - has a number of specific charitable projects. One of these is the IMAC Education and Scholarship Foundation which was started in 1994. Since then it has raised US$3.4m which has been used to assist 42 young Caymanians attending university overseas. For more about Cayman’s captive industry, you can visit IMAC’s website at www.caymancaptive.ky
INTERNATIONAL INSURANCE COMPANY STATISTICS BY PRIMARY CLASS OF BUSINESS
BUSINESS CLASS
LICENSE COUNT LICENSE COUNT YTD % YTD
TOTAL PREMIUMS PERIOD
TOTAL ASSETS PERIOD
Accident & Health
13
1.84%
105,984,236
734,680,567
Automobile P.D. & Liability
21
2.96%
564,696,223
2,390,779,776
Credit Life
13
1.84%
224,244,707
1,649,164,669
Deferred Variable Annuities
8
1.13%
311,320,010
3,937,855,288
General Liability
81
11.49%
760,512,726
2,887,987,070
Life
27
3.83%
1,398,634,747
14,970,713,079
Marine and Aviation
11
1.56%
Medical Malpractice Liability
226
32.06%
32,148,646
435,543,249
3,349,546,847
13,805,639,560
Products Liability
16
2.27%
117,791,952
940,271,037
Professional Liability
64
9.08%
536,318,628
2,566,450,085
Property
67
9.50%
1,272,355,221
6,846,271,384
Surety Bonds
6
0.85%
13,549,676
Workers’ Compensation
152
21.56%
3,652,621,728
10,360,974,406
TOTAL
705
100.00%
12,339,725,347
61,568,096,386
41,766,216
Source: Cayman Islands Monetary Authority (CIMA) / Updated as at 30 June 2016
133
VOICE OF THE FINANCIAL SERVICES INDUSTRY
CAYMAN FINANCE Originally known as the Cayman Islands Financial Services Association, Cayman Finance was established in 2003, with the vision of a broader organisation representing the country’s financial services industry. The Cayman Islands is a premier global financial hub, efficiently connecting law-abiding users and providers of investment capital and financing around the world. Cayman Finance plays a vital role within our financial services industry, charged with protecting and upholding the reputation of the industry, both at home and overseas. As well as contributing to the debate about the role of International Financial Centres, Cayman Finance corrects misinformed perceptions that fail to appreciate how IFCs operate in and contribute to the global economy. The Cayman Islands is a strong partner
134
in combating global financial crime and possesses a highly respected legal framework and a robust legal system which underpins the laws. Through cooperation and engagement with domestic and international political leaders, regulators, organisations and media, Cayman Finance plays a pivotal role in the defence of our jurisdiction by promoting the integrity and transparency of Cayman’s financial services through legislative and regulatory enactment and encouraging the sustainable growth of the industry through excellence, innovation and balance. Cayman Finance members include some of the leading names in the
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
financial services industry, including many law firms, accounting firms and organisations, as well as the jurisdiction’s major financial services associations, covering sectors such as investment funds and asset management, banking, insurance, reinsurance, capital markets, trusts and governance. Within Cayman Finance there are a number of specific working groups that provide specialised information and insight to the organisation. Among these working groups are specific groups for International Relations in Europe, Asia, Latin America and China, multiple groups focused on different areas of FinTech, IT and many more. Cayman Finance also works closely with its partners in the Ministry of Financial Services to promote and safeguard our industry in the international arena. The far reach of Cayman Finance’s partnerships ensure that Cayman’s financial services industry speaks with a single cohesive voice, allowing the jurisdiction to remain at the forefront of international business.
At the end of 2017, Conor O’Dea was elected to Chairman of Cayman Finance. Mr O’Dea worked for Butterfield Bank (Cayman) Limited in various capacities since 1989, including Managing Director and Senior Executive VP, International Banking for 18 years, and Managing Director Cayman, and President & Chief Operating Officer, BNTB Group. In April 2016, he retired from executive responsibilities with Butterfield Group and assumed a non-executive role as Director of BNTB Board and Chairman of Butterfield Bank (Cayman) Ltd Board. Jude Scott has been at the helm as Cayman Finance’s CEO for over three years now. Mr Scott has served the financial services in industry in Cayman for over 25 years spending much of his career as a Partner at Ernst & Young, before moving to Maples and Calder as Global Chief Executive Officer. With over sixty Ordinary and Associate members and fourteen Honorary (Associations) members, Cayman Finance is truly the representative voice of the Cayman Island financial services industry.
135
CAYMAN FINANCE
A YEAR IN REVIEW It has been a busy year for Cayman Finance as it continues to work towards its remit of protecting, promoting, developing and growing the Cayman Islands financial services industry. This year has seen the 4th annual New York breakfast briefing, speeches and panels at many local and international conferences, interviews with prominent news organisations such as the BBC and Bloomberg, joint efforts with the Cayman Islands Government and much more. Cayman Finance will continue to ensure the Cayman Islands retains its position as a world-class, premier global financial hub.
AIMA, The CityUK, HMRC and IFC Forum, as well as media such as Financial Times, Wall Street Journal and International Accounting Bulletin and NGOs such as Transparency UK and Tax Justice Network. The trip in July was Mr Scott’s first joint international trip with the new Minister of Financial Services and Home Affairs, Hon. Tara Rivers. During Mr Scott’s last trip to London in November, he spoke on a panel at the 6th Annual OffshoreAlert Europe Conference about the recent illegal data hack of a prominent law firm. On the panel, Mr Scott reinforced the fact that, unsurprisingly, no illegal activity relating to Cayman was reported within the acquired documents. Cayman meets or exceeds globally-accepted standards for transparency and cross border cooperation on exchange of tax information, and is therefore at the forefront of regulatory and tax compliance and information exchange. These facts were further reinforced by Cayman’s ‘largely compliant’ rating from the OECD and its inclusion as a ‘cooperative’ jurisdiction on the EU’s list of cooperative and non-cooperative tax jurisdictions. The detailed findings of the OECD report show the vital role Cayman’s financial services industry plays as a strong international partner in combatting corruption, moneylaundering, terrorist financing and tax evasion.
We are extremely proud of the work that the Cayman Islands does both locally and worldwide, and will always seize the opportunity to spread our message around the globe.
Mr Scott traveled to New York for a media roadshow in January, where he met and interviewed with The Wall Street Journal, Bloomberg Radio and Reuters. The focus of the trip to New York was Cayman Finance’s fourth annual New York Breakfast Briefing held at the Harvard Club of New York City. Over 150 attendees from New York and Cayman met to hear the latest developments within the industry. Speakers were Mr Scott, the Hon. Wayne Panton, then Minister of Financial Services, Commerce and Environment, Heather Smith, Head of Investments and Securities Division at Cayman Islands Monetary Association, and Carlos Arena, Director for Business Development for R3, a FinTech development company.
In an effort to strengthen the relationship between the Cayman Islands and China, Cayman Finance hosted the Chinese Ambassador to the United Kingdom in January for a high level discussion on the industry along with the Ministry of Financial Services and the Governor’s Office. A strong focus on the United Kingdom continued this year as the ramifications of Brexit continue to loom, preparations for the EU’s ‘blacklist’ culminated in Cayman being listed as a cooperative jurisdiction and new beneficial ownership laws came into effect in July that introduced technology-based system enhancements to Cayman’s existing 15 year old beneficial ownership regime. Cayman Finance CEO, Jude Scott, visited London in July and twice in November to maintain existing relationships and discuss these important issues with key stakeholders including 136
In addition, Cayman topped the Paris MoU White Flag list in June, along with 41 other countries. The white list was a representation of quality flags with a consistently low detention record. Cayman also was rated the #1 Specialised Financial Centre for the ninth consecutive year in The Banker Magazine’s 2017 survey. Mr Scott participated in a wide range of local and global conference’s this year. Aside from the already mentioned Offshore Alert Europe Conference, Mr Scott also spoke at the PwC Alternative Investments Seminar, Cayman Alternative Investments Summit, Fidelity CEO Conference, the Ministry of Financial Services’ Tax Transparency in the Global Financial Services Ecosystem conference, STEP Caribbean Conference, Mare Forum Shipping and Yachting Summit, Campbells’ Fund
Focus Conference, Mourant Ozannes’ International Trusts & Private Client Conference and the Hedge Fund Association’s 2017 Global Regulatory Briefing.
awareness about what the industry does and its impact on the local community, economy and general wellbeing of Cayman’s population.
Cayman Finance also had an exhibitor presence at numerous other events. Cayman Finance hosted its own joint information seminar on the UK’s Criminal Finance Bill, in partnership with UK HM Revenue and Customs (HMRC), in March. The seminar was opened by Her Excellency the Governor, Helen Kilpatrick and had over 110 attendees.
As part of the campaign, PAC members gave presentations to various organisations, associations and businesses within many different sectors. Key messaging was also spread across print, radio, TV and cinema advertisements, as well as a social media campaign on Facebook and Twitter and a dedicated website just for the campaign.
Our Public Awareness Committee (PAC) was busy this year, especially with organising the third annual Cayman Finance Student Education Programme. This year, 62 students successfully completed all three aspects of the programme: classroom workshops, mentorship training from a senior member of the industry and a one month work experience position at Cayman Finance member firms and select Government organisations across the island.
Leading up to this year’s national political election, Cayman Finance met with election candidates to ensure they understood the importance of the financial services industry and the need to protect and properly fund it so it can continue to serve our country. Cayman Finance once again congratulates all elected members and looks forward to working together in the future.
In total, there were 66 mentors trained from 17 organisations, and 27 organisations volunteered work experience positions. Thirty-five workshop facilitators from 12 organisations came on board to present, organise and host the workshops. The 8 participating schools were Cayman Academy, Cayman Prep and High School, Grace Christian Academy, Hope Academy, Layman E. Scott High School, St. Ignatius Catholic School, Triple C School and the University College of the Cayman Islands. The programme was developed in partnership with the now Ministry of Education, Youth, Sports, Agriculture and Lands and the Ministry of Financial Services and Home Affairs. It is just one of the ways Cayman Finance seeks to connect with young talented Caymanians who may have future careers in the industry. Another way Cayman Finance pursues this goal is through presence at career fairs across the islands. This year, Cayman Finance had a booth at the Layman E. Scott High School Career Fair, the Chamber of Commerce Career Expo and the Cayman Academy Career Fair. At each fair, a quiz on the financial services industry was distributed to students, with three lucky students randomly winning prizes for answering all questions correctly. Cayman Finance also gave presentations to legal interns at both Walkers and Maples and Calder on the financial services industry, presenting the University age students with information they could take back to school with them and allowing them the chance to ask any questions they may have about the industry. PAC’s final main commitment this year was a domestic awareness campaign. The campaign ran for about four months and was started in an effort to raise general
Cayman Finance was also busy on internal development, welcoming 19 new members and participating in a number of consultations, including: Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (“Guidance Notes”), the Electronic Transactions Law and The Monetary Authority (Administrative Fines) Regulations, 2017. Following the fact that FinTech is a key area of innovation for Cayman and in particular Cayman Finance, the Fintech Innovation Lab Working Group was founded this year, tasked with focusing on specific aspects of FinTech that fit synergistically within the Cayman business model, specifically smart FinTech regulation. Smart FinTech regulation will be the unlocking mechanism that allows the new technology to be successfully utilised within the financial services industry. The group’s main focus has been creating a Cayman led Certified Digital Identity Platform to create identity ecosystem and a new digital industry. Cayman Finance also developed a new logo, “Team Cayman” that represents the positive relationship between the financial services industry and the Cayman Islands. The logo incorporates elements of the traditional Cayman Finance logo combined with a traditional Cayman catboat. As a whole, Cayman’s financial services industry continued to focus on finding a balance between regulatory and commercial priorities while always adhering to the highest global standards. New legislation this year includes the Limited Liability Partnership Law, the Trusts (Amendment) Law and the Foundation Companies Law. Cayman Finance is proud to serve as the industry voice for the largest pillar of the Cayman Islands economy and looks forward to continuing our work in 2017 to fortify the Cayman brand and the brand of our financial services industry, both internationally and domestically. Following are just some of the highlights of what was an eventful and productive year. 137
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
A SNAPSHOT OF OUR YEAR 2017
ABOVE: CAYMAN FINANCE CO-HOSTS SEMINAR WITH UK HMRC In partnership with the UK HM Revenue and Customs (HMRC) Department, Cayman Finance co-hosted an information seminar on the UK's Criminal Finance Bill.
JANUARY
FEBRUARY
ABOVE: CAYMAN FINANCE HOSTS THE CHINESE AMBASSADOR TO THE UK
BELOW: CAYMAN ECONOMIC OUTLOOK CONFERENCE Jude Scott speaks at the Fidelity Cayman Economic Outlook Conference.
BELOW: 4TH ANNUAL NEW YORK BREAKFAST BRIEFING Cayman Finance hosts 4th annual New York Breakfast Briefing at the Harvard Club of New York City.
138
MARCH
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
LEFT: STUDENT EDUCATION AND WORK EXPERIENCE PROGRAMME LAUNCH Jude Scott greets students who along with industry mentors gathered to meet each other and learn more about the programme.
APRIL
MAY
JUNE LEFT: CAREERS EXPO AWARD Jude Scott presents a St Ignatius student with an award for acheiving top marks in a quiz on the financial services industry at a career expo.
139
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
TOP ROW: CAYMAN FINANCE CELEBRATES 3RD SET OF STUDENT EDUCATION AND WORK EXPERIENCE PROGRAMME GRADUATES Sixty-two students successfully completed all three aspects of the 3rd annual Cayman Finance Student Education and Work Experience Programme and were celebrated at a an event held at the Grand Cayman Marriott Beach Resort.
JULY BOTTOM ROW: CAYMAN FINANCE IN LONDON Cayman Finance hosted a member breakfast briefing in London, providing an opportunity for key stakeholders to discuss current pressing issues in the global financial services industry with the Cayman Finance CEO, Jude Scott, and the Minister for Financial Services, the Hon Tara Rivers. 140
AUGUST BELOW: STUDENT AWARD Jude Scott presents student Matthew Giscombe with a laptop for scoring 100 percent in a quiz on the financial services industry.
SEPTEMBER
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
BELOW: OFFSHORE ALERT CONFERENCE Jude Scott attends at the Offshore Alert conference in London for traditionally fiercest critics, and speaks on a panel about the Paradise Papers to claim that Cayman is “very transparent, very cooperative” jurisdiction.
ABOVE: BLOOMBERG/ HEDGE FUND ASSOCIATION GLOBAL REGULATORY BRIEFING Jude Scott spoke as a panelist at the Hedge Fund Association’s 2017 Global Regulatory Briefing at the office of Bloomberg LP in New York City.
OCTOBER
NOVEMBER
DECEMBER LEFT: CAYMAN FINANCE AGM/CHRISTMAS LUNCH Cayman Finance hosted its AGM and a Christmas lunch for members at the Kimpton Seafire Hotel. Conor O’Dea was voted as the new Chair of Cayman Finance.
141
BOARD MEMBERS OF CAYMAN FINANCE Our Board of Directors is comprised of the following dedicated, experienced and well-respected members of the Cayman Islands financial services industry. Their broad range of skills and experience provides our association with the strong and capable leadership our industry needs to continue to prosper in the ever-changing landscape of global finance.
CONOR O’DEA, CHAIR Conor worked for Butterfield Bank (Cayman) Limited in various capacities since 1989, including Managing Director and Senior Executive VP, International Banking for 18 years, and Managing Director Cayman, and President & Chief Operating Officer, BNTB Group. In April 2016, he retired from executive responsibilities with Butterfield Group and assumed a non-executive role as Director of BNTB Board and Chairman of Butterfield Bank (Cayman) Ltd Board. Throughout his career, O’Dea has served in various associate and government positions, including member and President of the Cayman Islands Board Members Association, a member of the Cayman Islands Government National Advisory Council, Chamber of Commerce Council member, and President of the Cayman Islands Chamber of Commerce. JUDE SCOTT, CEO Jude Scott, Cayman Finance CEO, is well respected locally and globally having spoken internationally on financial services topics and featured on a number of occasions in international media. He retired as an Audit Partner in 2008 after spending over 23 years with Ernst & Young. As the Global CEO of Maples and Calder, he took an active role in the strategic growth and development of the firm. Having served on various Cayman Islands Government and private sector committees, including the Cayman Islands Financial Services Council, the Cayman Islands Society of Professional Accountants, the Education Council, the Insolvency Rules Committee and the Stock Exchange, Jude has attained extensive experience within the Cayman Islands’ financial services industry. He has served as the CEO of Cayman Finance since 2014, and is committed to protecting, promoting, developing and growing the financial services industry of the Cayman Islands.
142
DR. DAX BASDEO Dax oversees the strategy, operations and administration of the Cayman Islands Ministry of Financial Services and Home Affairs as its Chief Officer. Entities under his leadership include the Department of Financial Services Policy and Legislation; the Department of International Tax Cooperation and the General Registry. The Ministry also has responsibility for the jurisdiction’s financial services regulator, the Cayman Islands Monetary Authority, as well as the Auditors Oversight Authority; the Cayman Islands Stock Exchange; the Maritime Authority of the Cayman Islands; the Financial Services Legislative Committee and the Cayman Islands Stock Exchange Authority. Dr Basdeo’s background is in economics, finance, statistics and strategic management.
RICHARD FEAR Richard is a Partner in the Cayman Islands office of Conyers Dill & Pearman. His practice covers a broad range of corporate and finance transactions. Richard’s particular focus is on corporate finance, M&A, debt and equity issues, private equity portfolio transactions, stock exchange listings and corporate reorganisations. His clients include multinational banks, corporate groups and investment managers. Richard has been practising Cayman Islands law for more than 15 years and the laws of Bermuda and the British Virgin Islands for 7 years. He brings a commercial approach to transactions, having previously been managing director of the Cayman subsidiary of a London merchant bank and practised as a chartered accountant at a big four firm.
JON FOWLER Jon is Global Head of the Investment Funds group of Maples and Calder and is based in the Cayman Islands. He specialises in hedge fund and private equity fund formation, representing a diverse industry client base. Jon has extensive knowledge of structuring and regulatory issues, and is a frequent speaker at industry events. Who’s Who Legal ranked Jon as one of the top ten Most Highly Regarded Individual Offshore Lawyers in private funds. He has been recommended in Legal 500, and named as a leading lawyer by IFLR1000. Jon has been ranked in Band 1 as a notable practitioner by Chambers Global.
143
PETER HAYDEN Peter is the Managing Partner of the Cayman Islands office of Mourant Ozannes. Prior to joining Mourant Ozannes in 2008, he worked in London as a partner at Matthew Arnold & Baldwin and before that at Allen & Overy. Peter has extensive experience of financial services litigation and insolvency matters. He has worked in-house at UBS and Barclays. Peter was admitted as an English solicitor (currently non-practising) in 1996 and granted higher rights of audience in 2002. He was admitted as a Cayman Islands attorney in 2008. Peter is a member of the Chancery Bar Association, Insolvency Lawyers’ Association, INSOL and the Commercial Fraud Lawyers’ Association.
BRYAN HUNTER Bryan is the Managing Partner of Appleby’s Cayman office and the Corporate and Commercial practice group head in Cayman. He has extensive experience in the structuring and formation of hedge funds, funds of funds and private equity funds. He regularly advises on various operational and regulatory issues in relation to these funds. His practice also includes general corporate matters, corporate finance and merger and acquisition transactions. Bryan is a notary public in the Cayman Islands. He has served as a board member of the Civil Aviation Authority, the Caymanian Bar Association (of which he is a past president) and the Chamber of Commerce and has served as a member of the Financial Services Council. Bryan has contributed to various legal publications, including Legal Week and the Cayman Financial Review. ASHLEY GUNNING Ashley Gunning is a partner in Walkers’ Global Investment Funds and Corporate Groups based in the firm’s Cayman Islands office. He specialises in the formation of hedge funds and private equity funds, and all aspects ofcorporate work, restructuring and mergers and acquisitions and has extensive experience dealing exclusively with international transactions Ashley qualified into the investment funds team at Norton Rose in London and in 1999 moved to their Singapore office where his area of practice included cross-border mergers and acquisitions, joint ventures and foreign direct investment. In 2004, Ashley joined Walkers in the British Virgin Islands before moving to the Cayman Islands in 2006. He then set up the Singapore office in 2009 before returning to the Cayman Islands office in 2012.
144
KEVIN LLOYD Kevin is Managing Partner at KPMG in the Cayman Islands, joining the office of the firm in 1991. He became a partner in 1997 and was appointed as Regional Head of Audit in 2004 and then Managing Partner in 2012. He has led the audit practice through significant growth and regulatory change, driving industry specialisation, collaboration, leadership and engagement. Kevin’s responsibility as Partner in charge of People, Performance and Culture was critical in ensuring that KPMG recruits, develops and retains high performers who are passionate about delivering real value to our clients. Kevin’s client base focuses on entities in the Insurance and Banking sectors and he served as Lead Insurance Partner for many years.
MICHAEL MCWATT Michael is the Managing Director for Butterfield Bank (Cayman) Limited with responsibility for the Butterfield Group’s Cayman operations as well as overall responsibility for Community Banking functions in Bermuda and Cayman. He is a career banker with more than 25 years’ experience in Canada, Bermuda and the Cayman Islands. He has been with Butterfield for the past 17 years and was previously Group Chief Credit Officer in Bermuda and Executive Vice President and Deputy Managing Director in Cayman. He previously held positions in Corporate Banking and Risk Management in Canada. Michael holds a BA in Economics from McMaster University, an Honours Commerce Degree from University of Windsor and is a graduate of the Executive Program from the Ivey School of Business at Western University. He is a Director and past president of the Cayman Islands Bankers’ Association. DAVID ROBERTS David is the Managing Director of Cayman Management joining the firm in 1982 and has the overall responsibility for the diverse range of services provided by Cayman Management and its affiliated companies. He specialises in the establishment and operation of a variety of corporate structures and holds numerous executive and non-executive directorships, including hedge funds, insurance and reinsurance companies, investment companies, international holding company structures, along with general operating and asset holding companies. David has an extensive background in business administration, investment and international corporate matters. He took up residency in the Cayman Islands in 1982, prior to which he gained international experience to a senior level with an international publicly quoted company based in the UK. He is a Fellow of the Institute of Chartered Secretaries and Administrators in the United Kingdom and is a registered Trust and Estate Practitioner. David is a long standing Director of Cayman Finance Ltd., is a founding member of the Cayman Islands Directors Association and is currently sitting on a number of other financial sector representative boards and committees.
145
NICK ROGERS Nick joined Ogier as a partner in 2010. He advises on a wide range of corporate matters with a focus on hedge fund and private equity fund formation, joint ventures, acquisitions, and venture capital financing transactions. His principal areas of practice are investment funds, corporate and commercial business and trust law group and listing services.
DON SEYMOUR Don is the Founder of DMS Offshore Investment Services and is recognised by the Financial Times as one of the most influential men in the global hedge fund industry. He was directly responsible for the creation of the Investment Services Division of the Cayman Islands Monetary Authority (CIMA), where he is credited with the development and implementation of its market-friendly and responsive regulatory framework for regulating hedge funds that propelled the Cayman Islands to become the leading hedge fund jurisdiction in the world. After his tenure as Heads of Investment Services, he served as a member of the board of directors of CIMA. A Notary Public, he holds a Bachelor of Business Administration degree in Accounting from the University of Texas at Austin and a Certified Public Accountant certificate from Illinois. ROHAN SMALL Rohan is a partner in the Bahamas, Bermuda, British Virgin Islands and Cayman Islands (BBC) region of Ernst & Young’s Financial Services Organisation. He has more than 20 years of audit experience in the financial services sector serving numerous large hedge funds, private equity funds, special purpose vehicles and banks. He is currently the IFRS leader for the BBC. Rohan received Bachelor Degrees in accounting and computer science from the University of Texas located in Austin. He is licensed as a CPA in the State of Illinois, a member of the American Institute of Certified Public Accountants (AICPA) and a member of the New York State Society of CPAs. Rohan has served on various government, statutory and service organisation boards and committees. Rohan is a past Chairman of the Cayman Islands’ Chapter of the Alternative Investment Management Association (AIMA), past president of the Cayman Islands Society of Professional Accountants (CISPA) and the first chairman of its Licensing Committee.
146
GRAEME SUNLEY Graeme serves as assurance leader and alternative asset management leader for PwC in the Caribbean and is also the PwC Cayman Islands territory leader. Graeme was admitted to the PwC Cayman partnership in 2006, and has more than 20 years of professional experience with PwC. His client portfolio comprises alternative investment funds with a variety of different investment strategies and legal structures and involves working in conjunction with major fund administrators, legal counsel and fund governance firms. Graeme is a member of the New Zealand Institute of Chartered Accountants. He is a Cayman Finance board member and sits on various industry groups consulting with the Cayman Islands Monetary Authority and the Cayman Islands Government. Graeme is past president of the Cayman Islands Institute of Professional Accountants and a former member of the Executive Committee of the Cayman Chapter of the Alternative Investment Management Association. .STUART SYBERSMA Stuart is Deloitte’s Cayman Islands’ Office Managing Partner and has over 25 years’ experience in public accounting, the last 18 of which have been based in the Cayman Islands where he has been a partner since 2000. Stuart specialises in insolvency, forensic accounting and dispute consulting. He is a Canadian qualified Chartered Accountant, as well as a Chartered Insolvency and Restructuring Professional and Certified Fraud Examiner. He is a member of the Cayman Islands Society of Professional Accountants and founding board member of the Cayman Islands chapter of the Alternative Investment Management Association. In addition to his local responsibilities, Stuart is the lead partner for Financial Advisory Services in the Deloitte Caribbean & Bermuda Cluster, as well as a member of the America’s Financial Advisory Services board. WILLIAM WALMSLEY William is a Partner of Rawlinson & Hunter and has responsibility for the firm’s trust and corporate services department. He has over 25 years of experience and specialises in private client services including international trust structures, private trust companies and purpose trusts. William is a director of The R&H Trust Co. Ltd. and The Harbour Trust Co. Ltd., duly licensed Cayman Islands trust companies owned by Rawlinson & Hunter in the Cayman Islands. He advises on the establishment and ongoing administration of Cayman Islands trusts and companies including acting as a director of a number of private trust companies, other regulated entities and other client companies. He is a Fellow of the Institute of Chartered Accountants in Ireland, a member of the Society of Trust and Estate Practitioners (STEP), Vice Chairman of the Cayman Islands branch of STEP and a member of the Cayman Islands Society of Professional Accountants.
147
MEMBER FIRMS 19 Degrees North Fund Services Ltd. 19northfs.com
1 345 749 1919
AON Risk Solutions (Cayman) Ltd. aon.com/caymanislands
1 345 949 0002
Apex Fund Services apexfundservices.com
1 345 747 2739
Appleby (Cayman) Ltd. applebyglobal.com
1 345 949 4900
Artex artexrisk.com
1 345 949 5263
Aureum Re
aureumre.com/reinsurance
1 345 640 0070
BDO bdo.ky
1 345 943 8800
Butterfield Bank (Cayman) Ltd. ky.butterfieldgroup.com
1 345 949 7055
Campbells
campbellslegal.com/
1 345 949 2648
Carey Olsen
careyolsen.com/
1 345 749 2000
Carne Global Financial Services Ltd. carnegroup.com
1 345 769 9900
Cayman Management caymanmanagement.com
1 345 949 4018
Circumference FS (Cayman) circumferencefs.com
Circumference
1 345 946 4091
Codan Trust Company (Cayman) Ltd. conyersdill.com/pages/codan
1 345 949 1040
Conyers Dill and Pearman
conyersdill.com
(Cayman) Ltd.
1 345 945 3901
Collas Crill collascrill.com
1 345 949 4544
Reversed out
Crestbridge Cayman Ltd. crestbridge.com
1 345 814 9380
B/W
CMYK
Deloitte deloitte.com/ky
1 345 949 7500
RGB
Dillon Eustace dilloneustace.com
1 345 949 0022
DMS Governance dmsgovernance.com
1 345 949 2777
EFG Wealth Management
https://ky.efgbank.com/
(Cayman) Limited
1 345 943 3350
Etienne Blake
etienneblake.com
1 345 743 2496 149
YOUR WEALTH MANAGED LOCALLY
EY
ey.com/ky
1 345 949 8444
Fidelity Bank (Cayman) Ltd.
fidelitygroup.com/caymanislands
1 345 949 7822
Five Continents Financial Limited
fivecontinents.ky/
1 345 949 3022
Genesis Trust & Corporate
www.genesis.ky/
Services Ltd
1 345 945 3466
Greenlight Reinsurance Ltd.
greenlightre.ky
1 345 943 4573
Harney Westwood & Riegels
harneys.com
1 345 949 8599
HF Fund Services
hffunds.com
1 345 949 9900
Higgs & Johnson higgsjohnson.com/
1 345 640 2295
Highwater highwater.ky
1 345 949 7555
Hyperion Risk hyperion-risk.com
150
1 345 623 6500
KPMG
kpmg.com/ky
1 345 949 4800
Maples and Calder
maplesandcalder.com
1 345 949 8066
Marsh Management Services
marsh.com
Cayman Ltd
1 345 949 7988
MG Management Ltd
mgcayman.com
1 345 749 8181
Ministry of Financial Services,
caymanfinance.gov.ky
& Home Affairs
1 345 945 5819
Morval Bank & Trust Cayman Ltd.
morval.ch
1 345 949 9808
Mourant Ozannes
mourantozannes.com
1 345 949 4123
NCB
ncbcayman.com/
1 345 949 8002
Ogier
ogier.com
1 345 949 9876
Premier Fiduciary pfscayman.com Services (Cayman) Ltd.
1 345 936 6789
PwC Cayman
pwc.com/ky
1 345 949 7000
Queensgate Bank &
queensgate.com.ky
Trust Company Ltd.
1 345 945 2187
151
Rawlinson & Hunter
rawlinson-hunter.com
1 345 949 7576
RBC Dominion
rbcds.com
1 345 949 4066
Sackville Bank
sackvillebank.com
1 345 749 6100
SMP Partners
smppartners.com 1 345 949 9107
Sterling Trust (Cayman) Ltd. sterlinggloballtd.com
1 345 945 7676
Summit Management Ltd. sml.ky
1 345 945 7676
US Bancorp Fund Services Ltd. usbank.com/usbfs
1 345 946 2630
Vistra Cayman Trust Ltd. (OIL) vistra.com
1 345 769 9372
Walkers walkersglobal.com
1 345 814 4667
PRO BONO AUDIT SERVICES EisnerAmper eisneramperl.ky
152
1 345 945 5889
ASSOCIATE MEMBERS BravaComm bravacomm.com
1 345 928 6161
Cayman Airways caymanairways.com
1 345 949 2311
Cayman Enterprise City caymanenterprisecity.com
1 345 945 3722
eShore eshoreltd.com
1 345 946 3673
IFINA (Cayman) Ltd. ifina.com
1 345 949 5263
Maritime Authority of the cishipping.com Cayman Islands
1 345 949 2883
O2 Micro International Ltd. o2micro.com
1 345 945 1110
Wheaton Precious Metals wheatonpm.com
1 345 945 3584
153
INDUSTRY PARTNERS 100 Women in Finance 100womencayman.com
The Cayman Islands Bankers’ cibankers.org Association
1 345 949 0330
Cayman Islands Company
cicma.net 1 345 916 2445
Managers Association (CICMA)
Cayman Islands Compliance cica.ky Association (CICA)
Association
cida.ky 1 345 814 2343
CIIPA
1 345 749 3360
Cayman Islands Directors
Cayman Institute Islands Cayman Islands of ciipa.ky Institute of Professional
ProfessionalAccountants Accountants (CIIPA) CIIPA CIIPA CIIPA
Cayman Islands Institute of Professional Accountants
Cayman Islands Institute of Professional Accountants
Cayman Islands Institute of Professional Accountants
Cayman Islands Law Society caymanlawsociety.org
CIIPA CIIPA
Cayman Islands Institute of Professional Accountants
1 345 815 7400
Cayman Islands Institute of Professional Accountants
Caymanian Bar Association caymanbar.org.ky
154
CFA Society of the Cayman Islands cfasociety.org/caymanislands
C AY M A N I S L A N D S
1 345 815 7604
Chartered Alternative Investment
caia.org 1 413 253Â 7373
Analyst Association (CAIA)
ICSA: The Governance Institute icsa.org.uk
+44 (0)20 7580 4741
Insurance Managers Association imac.ky of Cayman (IMAC)
1 345 949 4622
The Society of Trust & Estate step.org Practitioners (STEP)
Cayman Islands Fund cifaa.org.ky Administrators Association (CIFAA) Cayman Islands Insurance Association
ciia.ky 1 345 949 8699
Alternative Investment Management cayman.aima.org Association (AIMA)
Recovery and Insolvency
risa.ky
Specialists Association (RISA) 155
USEFUL RESOURCES Cayman Islands Chamber of Commerce The Cayman Islands Chamber of Commerce is the country’s largest not-for-profit organisation established to support, promote and protect the interests of its more than 700 member businesses across all industry sectors.
__________________________________ caymanchamber.ky Cayman Islands Economic and Statistics Office (ESO) The ESO produces the Cayman Islands’ official national economic reports and socio-economic statistics which are released to the public online. Among the statistics are the National Accounts (Gross Domestic Product), Balance of Payments, Consumer Price Index, Labour Force Surveys, Household Budget Survey and the Population and Housing Consensus.
________________________________ eso.ky
156
Cayman Islands Ministry of Financial Services and Home Affairs The Ministry of Financial Services creates an environment in which financial services can flourish, to the benefit of all stakeholders. Its departments include the Department for Financial Services Policy and Legislation; Department for International Tax Cooperation; and General Registry. The Ministry also oversees six government authorities: the Cayman Islands Monetary Authority, Cayman Islands Stock Exchange, Maritime Authority of the Cayman Islands, Cayman Islands Development Bank, the Auditors Oversight Authority and the Special Economic Zone Authority.
MINISTRY OF
FINANCIAL SERVICES & HOME AFFAIRS
________________________________ caymanfinance.gov.ky
Cayman Islands Monetary Authority (CIMA) CIMA began operations on 1 January 1997. It was established as a body corporate under the Monetary Authority Law, which was brought into force on that date. CIMA protects and enhances the reputation of the Cayman Islands as an international financial centre by fully utilising a team of highly skilled professionals and current technology, to carry out appropriate, effective and efficient supervision and regulation in accordance with relevant international standards and by maintaining a stable currency, including the prudent management of the currency reserve. C-0% M-18% Y-100% K-27% C-100% M-57% Y-0% K-40%
________________________________ cimoney.com.ky Cayman Islands Stock Exchange (CSX) CSX is a stock exchange based in Grand Cayman, Cayman Islands. It started operations in July 1997, and is fully owned by the Cayman Islands government. The CSX was recognised by the London Stock Exchange as an approved organisation in July 1999. The CSX was originally set up to provide a listing facility for the specialist procedures of the Cayman Islands – mutual funds and specialist
CAYMAN ISLANDS: THE PREMIER GLOBAL FINANCIAL HUB
debt securities. The CSX’s capabilities now exten to sophisticated vehicles and structures including the listing of derivative warrants, depositary receipts, Eurobonds, preferred shares and international equity.
________________________________ csx.com.ky Department of Commerce and Investment The Department of Commerce and Investment is the central point for the coordination of resources and information for investors, entrpreneurs and developers seeking business opportunities in the Cayman Islands. Our vision is to contribute to Cayman’s economic development by encouraging investment and entrepreneurial ventures that generate income, employment, innovation, linkages and domestic competitiveness. The department’s mission is “to lead in promoting and facilitating appropriate long-term foreign and local investment in the Cayman Islands.”
Maritime Authority of the Cayman Islands The Maritime Authority of the Cayman Islands (MACI) is recognised as a leading maritime administration, providing exceptional service to the global shipping community. MACI is a statutory corporation formed as a separate entity under the Maritime Authority of the Cayman Islands Law (2005), made effective on 1 July 2005. MACI is wholly owned by the Cayman Islands Government and it is governed by a Board of Directors appointed by the Cabinet. MACI reports to the Cabinet of the Cayman Islands through the Ministry of Financial Services, Commerce and Environment. It is also responsible to the UK Secretary of State via the UK’s Department of Transport to ensure effective implementation of relevant international maritime and related conventions that have been ratified by the UK Government and extended to the Cayman Islands.
Civil Aviation Authority of the Cayman Islands The role of the CAACI is primarily to function as the regulatory organisation responsible for safety oversight and economic regulation of the aviation industry throughout the territory and to ensure that the Cayman Islands aviation industry conforms to the standards and recommended practices of the International Civil Aviation Organisation (ICAO).
________________________________ caacayman.com/
________________________________ cishipping.com
________________________________ investcayman.gov.ky
157
Style has a new home.
World-class contemporary living on Grand Cayman’s Seven Mile Beach. One to four bedroom residences priced from US$1.5 Million. +1.345.640.7000
seafireresidencescayman.com
LIST OF ADVERTISERS APPLEBY 67 BANK OF BUTTERFIELD 4 CAYMAN FINANCE 109 CAYMAN MANAGEMENT 36 CAYMAN ISLANDS MINISTRY OF FINANCIAL SERVICES 20 CONYERS DILL AND PEARMAN 99 DART REAL ESTATE 9 DELOITTE 125 EFG WEALTH MANAGEMENT 2 EY 25 HARNEYS 33 KPMG 72 MAPLES AND CALDER 55 OGIER 85 PROVENANCE PROPERTIES 158 PWC BACK COVER RAWLINSON & HUNTER 125 RBC DOMINION SECURITIES 13 WALKERS 24
159
www.pwc.com/ky
Creating the edge you need
As a leading provider of assurance, tax and advisory services to the financial services industry, PwC Cayman helps create the edge you need. We bring a broader, deeper spectrum of skills across all segments of the industry, delivered with energy, passion, teamwork and the proven ability to develop customized solutions for you.
We use the knowledge and experience of more than 236,000 people in the PwC global network of firms to help our clients not only to implement new standards and requirements, but also to prepare for the future.
Let’s talk... Graeme Sunley Territory Leader graeme.sunley@ky.pwc.com Tel +1 345 914 8642
Simon Conway Advisory Leader simon.r.conway@ky.pwc.com Tel +1 345 914 8688
T.C. Leshikar Tax Partner tc.leshikar@ky.pwc.com Tel +1 345 914 8616
Bob Stanier Risk Assurance Partner robert.d.stanier@ky.pwc.com Tel +1 345 914 1802
Š 2017 PricewaterhouseCoopers, a Cayman Islands partnership. All rights reserved. PwC refers to the Cayman Islands member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.