Cayman in Focus 2023

CAYMAN IN FOCUS 2023

Connect to the Cayman Islands

The Cayman Islands is a leading international financial centre, committed to supporting global economic growth. Our members offer deep expertise across fiduciary services, legal services, public accounting, investment funds & asset management, trusts, capital markets, banking and insurance.

Find out why the Cayman Islands leads the way at caymanfinance.ky

Powers of the founder of Cayman

Boutique Firm Tailored Services Professional Expertise

Paget-Brown Financial Services Limited provides company management solutions to Cayman Islands structures for a wide variety of corporate and individual clients. As a full range financial services provider, we offer a comprehensive suite of corporate, fund and regulatory and compliance services inspired by our clients and tailored to their needs.

We are committed to providing solutions that fit specific client needs, partnering with each client to provide valued services as an extension of their own operations. Our dedicated and knowledgeable team offers extensive experience in the offshore financial industry.

Toni Pinkerton Director and Chief Executive Officer toni@pagetbrownfs.ky

Corporate and Governance Services

Bonnie Willkom bonnie@pagetbrownfs.com

Ryan Cooke ryan@pagetbrowntrust.ky

Fund Administration Services

Vanessa Rose vanessa@pagetbrownfs.com

www.pagetbrownfs.com

HERALDING CAYMAN FINANCE 2.0

f you’re a regular HedgeWeek reader, you probably already know that the Cayman Islands is the world’s number one domicile for alternative investment funds.

At Cayman Finance, it’s our job to help ensure it stays that way.

As we mark the 20th year since our founding in 2003, we’re excited to be relaunching the Cayman Finance brand, expanding our team, and inviting you, the valued users of our jurisdiction, to become more involved. It’s all part of what we’re calling Cayman Finance 2.0.

With the support of the Cayman Islands Ministry of Financial Services and a Board of Directors comprising representatives of the islands’ top financial services firms, our new mandate has four strategic pillars.

The first is Promotion. Like any successful brand, the Cayman Islands needs an effective sales and marketing team to articulate its value proposition. We’re proud to be the standard bearer for the global leader in investment fund services.

But we know all too well that even the best sales and marketing team cannot succeed without a world class product. That’s why our second strategic pillar is Product Development. That is, a focus on the end-to-end user experience with a view to eliminating the bugs that frustrate our clients and introducing new features that help them to thrive.

Responding to the slights and slanders of journalists and interest groups who mean well but misunderstand or mischaracterise the jurisdiction’s role in the global financial system, falls under our third pillar of Protection.

Our fourth pillar is Community Engagement. But last is by no means least; indeed, it is foundational. For the Cayman Islands to go from strength to strength requires the investment and support of our government and the public our government represents. Our Community Engagement efforts help to make sure that through the philanthropy and talent development programs of our members, our success as a financial center is reflected in the success of our citizens.

For we must always remember that the Cayman Islands’ dominance in alternative investments didn’t come about by chance, but through a combination of smart and effective regulation, a reliable common law judicial system and above all, a phalanx of word class service providers. Investment in talent is not a by-product of our success, but the main driver of it.

How can you become involved? If you’re not already a member of Cayman Finance, reach out to the team today to find out how you can become one. As a member, you’ll receive industry and community updates as well as an invitation to exclusive member events like our recent New York breakfast briefing. We’d love to hear your comments and ideas for how we can continue to excel as a jurisdiction.

Whether you are an investment manager, lawyer, accountant, analyst, or other service provider, on behalf of the entire team at Cayman Finance, we look forward to meeting you, working with you and helping you and the organizations you represent grow and thrive for many years to come.

OUTBOUND INVESTMENT SCREENING: WHERE NATIONAL SECURITY AND CORPORATE FINANCE INTERSECT

he year 2022 saw unprecedented level of sanctions imposed on Russia, as well as new and expanded sanctions controls targeting old foes like China and Iran. While the fund sector has become accustomed to the new normal, a new dawn of economic controls looms on the horizon.

In recent years, support for the introduction of outbound investment screening for certain corporate

such as Russia and Iran, has gained significant traction in the United States. Recent research shows that US investors’ indirect investment in China was far greater than initially understood, as a result of their holdings in offshore structures – the majority of which were Cayman-domiciled entities. The United States government has ratcheted up its efforts to address national security risks relating to China in areas that have been identified in supply chains and corporate transactions, with proposal for outbound

providers should be aware of these developments that will undoubtedly affect the way we do business.

If outbound investment screening is successfully implemented in the US, it will have an impact on how US investors and fund managers direct capital flows, which will in turn affect the Cayman Islands’ fund sector.

US’ PUSH FOR THE IMPLEMENTATION OF OUTBOUND SCREENING MECHANISMS

The recent journey of an alleged Chinese spy balloon has renewed calls for dissuasive actions to be taken against China in order to mitigate national security threats posed by China. While there is a robust inbound investment screening process in place, outbound investment screening has been hotly debated for some time with draft legislation, the National Critical Capabilities Defense Act (NCCDA), still to be enacted by Congress. However, in March 2023, the Departments of Commerce and Treasury submitted a reports to US Congress describing how an outbound investment screening programme would work, and the resources required over a threeyear period, in order to establish and implement it. It was reported that the programme would cover private-equity and venture capital investments in advanced semiconductors, quantum computing and some forms of artificial intelligence.

Even if the NCCDA is not enacted by Congress, reports indicate that the White House is on a fast track to establish outbound investment screening

the screening, reporting thresholds, what investments will be caught or deemed critical for US national security purposes, or which agency or agencies will be responsible for oversight. It is expected that at minimum, US persons would have to report on their planned investments in countries deemed to be countries of concern .

IMPACT ON THE CAYMAN ISLANDS FUND SECTOR

The Cayman Islands’ is a popular jurisdiction for fund managers and investors globally. US-domiciled fund managers represent a significant majority of managers of Cayman Islands’ registered funds. Thus, the Cayman Islands’ fund sector is materially connected to the United States, and changes in the regulatory and private equity landscape in the United States, such as the implementation of outbound investment screening, will have an impact on the Cayman Islands.

It is expected that the proposed regime will impose on US persons, including entities owned or controlled by a US person, the obligation to report on any reportable transactions. Moreover, the draft NCCDA gives broad powers to the oversight agency to prohibit a transaction from occurring.

From the above, there are a few ways in which a Cayman Islands fund could become party to a covered transaction.

– Where a Cayman Islands fund meets the definition of a US person. From a practical perspective the most common instance where a Cayman fund could be deemed to be a US person, is where the fund sponsor,

Gabriela Gibson provides AML/CTF/CPF compliance and regulatory support services to Paget-Brown’s fund clients. She is a former financial crime intelligence analyst, having been responsible for the analysis of suspicious activity reports, and providing actionable intelligence to assist in cross-border financial crime investigations and asset tracing. She specializes in global sanctions compliance and has significant knowledge of key anti-money laundering legislation and related regulatory obligations. Gabriela has served on national working groups in the Cayman Islands, and has a keen interest in national security issues.

GABRIELA GIBSON Senior Regulatory Services Officer

investment adviser or manager, or the directors, general partner, trustees etc. is a US person.

2. As an entity of concern – The NCCDA categorises an ‘entity of concern’ as a subsidiary of an ultimate parent company domiciled in a country of concern, or one that is directly or indirectly owned or controlled by, or subject to the influence of a foreign person. Likely scenarios include Cayman Islands’ funds that are publicly traded on Chinese exchanges, or coinvestment vehicles where a material co-investor is a Chinese person (e.g. private company or state-owned entity).

OPPORTUNITIES

It is important to note that any positive impact of outbound investment screening on the Cayman Islands’ fund sector will be incremental and likely to occur over the long-term. This development could provide Cayman Islands’ service providers with an opportunity to leverage the already robust compliance framework to assist their fund clients in meeting these new obligations.

The industry could also benefit from diversification, pushing the jurisdiction to attract and develop relationships with fund managers outside of the US. It can also serve to boost the Cayman Island’s reputation by providing an opportunity for the jurisdiction to demonstrate its commitment to transparency and regulatory compliance.

THREATS

Notwithstanding the opportunities, all jurisdictions that facilitate global financial markets, including the Cayman Islands, may be constrained by the prohibition of certain corporate transactions. US investors may need to reassess their investment strategies if outbound investment screening policies result in restrictions on certain types of investments or industries. This could lead to a shift in investment flows away from certain sectors or industries, potentially impacting the investment focus for certain Cayman Islands’ funds. The implementation of outbound investment screening is also likely to

increase the level of scrutiny applied to investments made through the Cayman Islands’ fund sector. This increased scrutiny could lead to delays and additional regulatory requirements, making investing through Cayman Islands funds less attractive to US investors.

RECOMMENDATIONS

Given the rapid developments in this space, Cayman Islands’ firms should be proactively monitoring and reviewing their book of business to identify those client entities that may be in scope for outbound screening requirements due to the connections to China and other countries of concern, and that are investing in, or planning to invest in areas deemed critical for national security purposes. Of special note are those firms with exposure to China whose investments are targeted within the technology or military, defense or intelligence sectors.

CONCLUSION

Internationally, there appears to be greater convergence by governments on the importance of mitigating the national risks present in the foreign direct investment sphere. There is growing support for outbound investment screening in Europe and the UK, and the G-7 is expected to discuss this topic at their upcoming May meeting.

Overall, the impact of outbound investment screening policies in the United States on the Cayman Islands’ fund sector will depend on the specifics of the policies implemented, the level of scrutiny applied, and the response of US investors. Developments are occurring in real time that indicate that outbound investment screening could be implemented in the US before the end of 2023.The long-term economic implications of the introduction of outbound investment screening are still unknown, however, local fund administrators should take the time to fully understand the implications of outbound investment screening and prepare for its imminent implementation.

INVESTOR VIGILANCE DRIVING MORE INDEPENDENT DIRECTOR APPOINTMENTS

ncreased investor vigilance is driving more fund managers to place independent directors on the boards of their entities in the Cayman Islands. They are also placing a greater emphasis on requiring service providers without conflicts of interest.

Given the close scrutiny the Cayman Islands financial services industry has been under, fund managers are taking precautions and ensuring they do all they can to protect their funds and their investors.

Appointing an independent director can give investors comfort as it can help

ensure the fund’s interests continue to be closely aligned with those of the investors themselves in that there is independent oversight of the various activities of the fund.

“We have also seen an emphasis on requiring service providers who have no conflicts of interest,” observes Gary Butler, Managing Director, IMS Fund Services. From the firm’s perspective this is a positive development since, as a provider of independent governance services IMS does not provide services that could be seen as potentially conflicting with our governance services, such as fund administration or legal services.

More broadly, the outlook for fund launches in the Cayman Islands is showing signs of green shoots as the industry hopes for a year in which inflation begins to subside and without much regulatory upheaval.

“In recent years we saw a number of material changes to legislation regulating Cayman funds and hope that 2023 will be a quiet year for funds-related legislation,” says Gary Butler, Managing Director, IMS.

A shift in economic conditions which are more conducive to new fund formations will also help support growth in the

industry. Butler notes the jurisdiction is already starting to see new fund launches taking place during the first quarter of 2023.

Butler notes that the grey listing of the Cayman Islands in October 2022 by the Financial Services Task Force (FATF) seems to have had little impact on the funds business in the domicile.

On the other hand, the crypto winter in the wake of the FTX collapse has had considerable ripple effects across the Cayman Islands industry, due to the heavy focus placed on crypto funds in the past few years.

“Over the past couple of years, a

material portion of new fund formations have been blockchain/crypto related, although in the wake of the FTX collapse, new blockchain related business has slowed down significantly,” Butler says.

Although industry participants hope for less regulatory change over the course of 2023, Butler notes that the fall of FTX is likely to lead to increased regulation for crypto/blockchain related business, which will have knock-on effects for funds business generally and its regulation. “Though whether this happens in 2023 or later remains to be seen,” he adds.

However, Butler concludes: “Cayman

Gary Butler is Managing Director of IMS and serves as a director on the boards of a limited number of investment funds and special purpose vehicles. He is a Solicitor of the High Court of England and Wales and is a Professional Director in the Cayman Islands registered pursuant to the Directors Registration and Licensing Act and is a member of the Cayman Islands Directors Association. His expertise is in the fields of corporate and fiduciary law, with an emphasis on offshore structures.

continues to be an excellent jurisdiction for funds and remains the jurisdiction of choice for the majority of new fund formations due to the quality of service providers, the ease of registration and timezone for US based managers.”

GARY BUTLER Managing Director & Fund Director

THE CARIBBEAN: WHY A EUROPEAN-FOCUSED FUND MANAGER RELOCATED TO THE CAYMAN ISLANDS

ames Rasteh, founding partner of Coast Capital, had a compelling choice of jurisdictions when he made the decision to relocate from the United States to earlier this year. But there was no doubt in his mind the Cayman Islands had more to offer than any other location he considered.

Born in Iran and raised in France and Canada, James lived in New York for most of the past 25 years, although like many others he relocated from Manhattan to Miami during the COVID 19 pandemic.

Long acquainted with Cayman as a centre of excellence for alternative investments, Rasteh has always been impressed with the regulatory regime. “Cayman has a very established compliance, regulatory, and legal apparatus that is exacting, and that is reassuring to me.” This includes the Cayman Islands Monetary Authority (CIMA), which, Rasteh says, is more engaged than other regulators. “CIMA is incredibly proactive at communicating with their registered funds and their registered directors about bestin-class performance from a compliance perspective.

His familiarity with Cayman as a financial centre led him to look closer at the islands as a location to move to, one where he could run his business and enjoy a more leisurely way of life.

“From a business perspective, Cayman is simply a great jurisdiction. It is a global leader...the leading financial center for

sophisticated funds. I have always been impressed with how sharp, well connected, and helpful the local counterparts are,” Rasteh explained, “Lifestyle-wise, Cayman is incomparably healthier than anywhere else I have ever lived. I wake up at 5:30a.m. and an hour later I am swimming in the ocean. By 8a.m., I’m on a call with our investment team. It has been an invigorating experience.”

The fund manager had good reasons to consider other destinations. “We invest a lot in Europe, and so London would have been a natural choice. I grew up in France, did part of my high school in Paris, French is my second language, and I have family there, so that was another option. And I love to ski, so Switzerland was also an attractive location.”

Residents of the Cayman Islands enjoy one of the highest standards of living in the Caribbean, a healthy and robust economy, modern infrastructure, an active real estate market and a thriving financial services industry. Rasteh is not the first, nor will he be the last, to decide to relocate to a country where he can not only easily run his business operations, but also enjoy all that the Cayman Islands lifestyle has to offer.

If you’re an investment funds professional interested in living and working in the Cayman Islands, why not visit the Cayman Finance website or reach out to the team to find out more today. As Rasteh explains, you may be surprised by the welcome you receive. “The extraordinary warmth of the local community has helped me feel more at home than anywhere else I have lived so far.”

About Us

Stuarts is a leading Cayman Islands law practice. Our clients come to us with their most complex and challenging business needs from around the world. Our team of experienced attorneys offer expert advice on a wide range of areas including, Funds, FinTech, Corporate, Immigration, Liquididation, Litigation and Regulatory.

Why Choose Us?

Funds

Investment Funds

Cayman Islands

Advising leading international law firms, investment managers and high net-worth individuals with their most significant and complex business challenges.

TECHNOLOGICAL INNOVATION POWERING THE CAYMAN ISLANDS

echnology has fundamentally shifted the landscape of the investment industry and, as players in the Cayman Islands embrace this progress, the adoption of these innovations is bringing with it a plethora of benefits.

“Given the remote nature of the Cayman Islands as an offshore jurisdiction, the integration of technology grants operators here increased efficiency, real time access to data and analytics while encouraging greater communication and collaboration with clients,” says

Benjamin Reid, co-founder and comanaging partner at The Catalyst Group. Further, making full use of technological advancements has improved reporting reliability and accuracy, reduced the need for storage and shipping of physical documentation and simplified the investor onboarding and AML/KYC processes.

“Technology also has the power to reduce the challenges associated with firms expanding their portfolio, allowing them greater opportunity to focus on quality and innovation,” outlines Reid.

Historically, firms struggled with scaling their business, in terms of increasing the quantity of clients, funds or assets, while simultaneously maintaining and enhancing the quality of their service offering. Thus, adopting new technology solutions can help ease this pressure. Reid says Catalyst fully embraces this concept and the team is tasked every day to question, ‘how can we do things better against ourselves’. “Too many firms are constantly looking at how others are doing things. At Catalyst, our team members are driven to compete against ourselves and look to improve

on the last deliverable – The use of technology allows for this,” he notes. The preeminent examples of these technological developments are Robotic Process Automation (RPA) and Artificial Intelligence (AI). These two technologies, in their constantly evolving forms, have helped to remove redundant, repetitive, manual tasks and systemise them. The introduction of RPA and AI into firms’ operating models and the potential future use cases for these technologies is extraordinary. Increasingly, we are seeing forwardthinking service providers leveraging these tools to underpin and redefine how they operate.

In addition to these two tools, the industry has seen the emergence of an array of applications and systems that range from workflow tools to portals and data warehouses that allow both providers and their clients a level of

collaboration that has not been seen before. “Such tools have resulted in enormous opportunities for material improvements in efficiency, costreduction, communication, engagement, reporting reliability and scalability,” Reid says.

Although the benefits of integrating these technologies are being reaped throughout the industry, from service providers to asset managers and investors, the change has not been without challenges.

Any transition can bring with it a certain level of reluctance, and some groups have been hesitant to integrate these systems into their businesses. The primary difficulties have revolved around legacy systems, cost, data security and cultural resistance.

“Integrating new technology into existing

systems can be difficult, especially if legacy systems are involved. Older firms built on legacy systems are particularly plagued by this, as unplugging old legacy tech is a difficult exercise,” explains Reid.

Smaller firms may also find it hard to justify the cost involved in implementing new technology. But although the payoff may not be immediate, those firms that are prepared to invest are more likely to reap the rewards in the future.

Some concern about new systems revolves around data security. However, there tends to be more risk of cyber attacks when running legacy technology and having structured data is now critical, especially in light of the introduction of the Global Data Protection Law (GDPL) in 2016 and the Cayman Islands Data Protection Act) DPA 2021.

There are also some industry players who are generally resistant to change and would rather stick with the methods they are familiar with. However, as more firms adopt new technologies to gain a competitive edge, the reluctance is bound to ease somewhat.

“There is no doubt that technology will continue to play an increasingly pivotal

role in the Cayman Islands’ investment funds industry,” states Reid, “However, ensuring long-term success and continued evolution of the technology products that will power the industry will be dependent on the training, and education that is available to the next generation of product specialists and fund accountants in the local market.”

Benjamin started his career at Merrill Lynch before becoming involved with the setup and roll-out of the LatAm desks at two of the world’s largest financial institutions (RBC and HSBC). During his time in the banking sector, he oversaw books of $500M – $1BN and focused on the institutional and ultrahigh-net-worth segments.

Benjamin also spent more than 8 years with the Maitland Group where he built the company’s presence in Latin America.

Alongside his fellow founders, Benjamin saw the opportunity to apply his experience and expertise in the creation of a new breed of tech focused financial services firm.

BENJAMIN REID Co-Founder & Co-Managing Partner

POWERS OF THE FOUNDER OF CAYMAN ISLANDS FOUNDATION COMPANIES

n 2017 the Cayman Islands’ Foundation Companies Act came into force. The Act introduced what was then a new type of company which bolsters the jurisdiction’s offering of versatile special purpose vehicles which has potential application in a wide range of structures and scenarios. The foundation company and the act sit within the framework of the Companies Act. While a foundation company bears many of the characteristics of a traditional limited liability company, it also blends in certain attributes of a trust or civil law foundation. This article gives an overview of the key role of the founder of a foundation company.

THE ACT

A foundation company’s management will be carried out by its directors. In addition, the act states that its constitution may give rights, powers and other duties to members, directors, supervisors, founders or others relating to: a) admitting, appointing or removing members, supervisors and

directors; b) making and amending any bylaws; c) the supervision of the Foundation Company’s management and operations; d) enforcing duties; e) general meetings and voting on resolutions; f) altering the constitution; and g) winding up and disposing of surplus assets.

THE ARTICLES OF ASSOCIATION

Certain powers of the founder are set out in the articles of association of the foundation company though they can be amended to suit the needs of the foundation company. The articles state the founder has the power to: 1. authorise the admission of the members, or to restrict or prohibit the admission of members; 2. appoint or remove directors; 3. call for reports, accounts, information and explanations from the directors; 4. appoint or remove supervisors, and settle their powers and duties; 5. designate beneficiaries, give directions as to their benefits, grant them enforceable rights, and to revoke or vary the same; 6. cause the company to be wound up; and 7. adopt, revoke or vary bylaws. The articles also typically state that that founder will also have the right

Chris is the Managing Director of Stuarts. He joined in 2004 as one of the founding directors, from the London office of Kendall Freeman (now Locke Lord LLP), where he specialised in the financial services industry and regulatory related matters.

As head of the specialist investment funds team at Stuarts, Chris is a recognised leader in his field with over 20 years’ experience and having registered several hundred mutual funds with the Cayman Islands Monetary Authority. Chris routinely advises on regulatory and compliance issues involving funds, investment managers and fund administrators.

to receive notice of, and attend and vote at, general meetings of the company.

The founder’s powers are free of any duty, and may be exercised for the founder’s own benefit. The founder may, by giving notice to the company, revocably or irrevocably terminate or restrict any or all of the founder’s powers and if the termination or restriction is expressed to be irrevocable, it may not be altered or revoked, directly or through an alteration of these articles. The founder’s powers are not assignable and, except as permitted by these articles or required by law, may not be exercised by any other person on behalf of the founder. Upon the founder’s death, the founder’s powers shall terminate. An exercise of a founder’s power does not cease to be effective by reason only that the founder subsequently dies or ceases to have the power.

CHRIS HUMPHRIES Managing Director

Catalyst is an innovative, technology focused financial services firm, offering a range of next generation financial services solutions to Investment Managers, Family Offices, Banks, Corporate and Private Ultra-High-Net-Worth Individuals. A true one-stop-shop; offering a carefully curated portfolio of service solutions that are designed to cater to the full life cycle of a wide range of investment structures.

IMS

Financial Services

Cayman Finance is the industry association that champions the Cayman Islands’ world-class financial services sector, for the benefit of our members, their clients and all Cayman residents. We represent over 80 members and 16 industry associations and nonprofit organisations in investment funds and asset management, banking, insurance, reinsurance, capital markets, and trust sectors as well as fiduciary, legal, and accounting service providers.

Cayman Finance is committed to supporting the Cayman Islands’ financial services sector, driving its success, and serving the community we represent with pride and integrity.

One of the largest and oldest offshore company management firms in the Cayman Islands. Our fund governance team focuses on the provision independent directors, AML Officers and trustees to hedge funds and associated entities. Over 200 years of collective expertise, providing services to some of the largest global hedge fund organizations. Our fund governance professionals are independent of investment managers, fund administrators, legal counsel and other service providers, ensuring exceptional and independent governance services to all of our clients.

Paget-Brown Financial Services Limited provides company management solutions to Cayman Islands structures for a wide variety of corporate and individual clients. As a full range financial services provider, we offer a comprehensive suite of corporate, fund and regulatory and compliance services inspired by our clients and tailored to their needs.

We are committed to providing tailored solutions that fit specific client needs, partnering with each client to provide valued services as an extension of their own operations. Our dedicated and knowledgeable team offers extensive experience in the offshore financial industry.

Stuarts is a leading Cayman Islands law practice. The firm advises international law firms, investment managers and high net-worth individuals around the world on their most complex and challenging business needs. Stuarts’ team of experienced attorneys offer expert advice on a wide range of areas including, Funds, FinTech, Corporate, Immigration, Liquidation, Litigation and Regulatory.