The Private Funds Law, 2020 (the “Law“) which came into force on 7th February 2020 requires all private funds (e.g. Private Equity funds, Real Estate funds, Venture Capital funds, and certain Private Credit funds) which fall within its scope which were either (i) launched prior to 7th February 2020 or (ii) launched since 7th February 2020, to register with the Cayman Islands Monetary Authority (“CIMA“) before 7th August 2020. The Law refers to these closed-ended funds as “Private Funds”. A copy of our previous legal update is attached for your information.

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Bearing in mind that the Law has introduced a number of new legal requirements for existing Private Funds, we recommend that you seek advice from Cayman legal counsel (1) as to whether or not your investment fund falls within the scope of the Law and therefore needs to register with CIMA before the deadline (not all closed-ended investment funds fall within the scope of the Law), and (2) as to how to satisfy these requirements in order to register your Private Fund before the 7th August deadline.

i. Audit – Your Private Fund will be required to undertake an audit for its 2020 financial year. Do you require any recommendations as to audit firms? When will the first audit be required?

ii. Valuation of assets – The Law has introduced new requirements regarding the valuation of your Private Fund’s assets. Does your Private Fund have a valuation policy? Do you require any recommendations as to valuation service providers?

iii. Safekeeping of fund assets – The Law has introduced new requirements regarding the safekeeping of your Private Fund’s assets. Does your Fund have a custodian? How and on what basis can your Private Fund apply to CIMA for an exemption from this requirement?

iv. Cash monitoring – The Law has introduced new requirements regarding cash monitoring for your Private Fund. How can you introduce a mechanism to deal with this new requirement? Will cash monitoring need to be done internally?

v. Identification of securities – The Law has introduced new requirements regarding maintaining identification procedures and records for listed securities that your Private Fund may hold. Does your Private Fund hold any listed securities?

1. Director Appointments – Does the general partner or corporate director of your Private Fund have only one natural person as Director. If yes, then it will need to make one or more appointments as CIMA will apply the two (2) directors test to the general partner or corporate director of a Private Fund.

2. AML Regime – Does your Private Fund have an Anti-Money Laundering (AML) framework focused on ensuring that it adheres to the Cayman Islands AML regime when onboarding and monitoring investors? Has your Private Fund undertaken a risk assessment of its AML policies and procedures?

3. AML Officers – Has your Private Fund appointed AML Officers?

4. FATCA/CRS Registration – Has your Private Fund put into place a mechanism for
dealing with FATCA/CRS registration and annual reporting?

Timing: It will take some time to make changes (including amending Fund documents, appointing Directors, etc.) and to appoint service providers who can assist with helping your Private Fund to satisfy the requirements set out above. Therefore we recommend taking steps now to commence the process. Please contact us for legal advice and recommendations on effectively satisfying the new legal requirements and registering your Private Fund successfully with CIMA before the deadline of 7 August 2020.

This publication is not intended to be a substitute for specific legal advice or a legal opinion.
For specific advice on registering your Private Fund with CIMA, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: benjamin.wrench@loebsmith.com

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Prior to applying for deregistration and in order to avoid delays in the processing of the application, a Registered Person is required to ensure that all fees are paid, the annual declarations have been submitted and there are no outstanding queries from, or regulatory filings with, CIMA. The following documents are required for de-registration:

(i) a written notice of the intention to deregister;
(ii) the deregistration fee of or approx. US$610;
(iii) a certified copy of the Board resolution which indicates the date on which the Registered Person has ceased to carry on as a SIBL Manager and/or Adviser ; and
(iv) an affidavit by a senior officer of the SIBL Manager and/or Adviser that attests to the following:

a. the reason for the cessation of business;
b. that, as far as the senior officer is aware, the applicant has operated in accordance with its Articles of Association;
c. that all client relationships have been properly terminated or transferred¹ to another service provider;
d. that the applicant has not conducted its securities investment business and has not wound up such business in a manner that is prejudicial to its clients and creditors; and
e. that the applicant intends (i) to continue as a legal entity in the Cayman Islands, or (ii) to apply to be struck-off (e.g. through voluntary liquidation and dissolution) from the register of companies maintained by the Companies Registry, or (iii) to merge with another Registered Person.

In addition, the Regulations specifically address the following cases of deregistration, where additional requirements and documentation are or may be requested by CIMA.

1. The Registered Person is being wound up.
2. The Registered Person is being merged with another Registered Person.
3. The Registered Person seeks to cancel its registration with CIMA by reason of its transfer to another jurisdiction.
4. The Registered Person has never carried on business.

Voluntary Liquidation

The Registered Person applying to CIMA for deregistration in connection with a voluntary liquidation² is required to provide, in addition to the documentation referred to above, the following:

(a) the notice of voluntary winding up (Form No. 19 of the Companies Winding Up Rules, 2018);
(b) the voluntary liquidator’s consent to act (Form No. 20 of the Companies Winding Up Rules, 2018); and
(c) the declaration of solvency (Form No. 21 of the Companies Winding Up Rules, 2018).

Merger

The Registered Person applying to CIMA for deregistration in connection with a merger with another Registered Person is required to provide, in addition to the documentation referred to above, an application to CIMA for prior approval of the merger which shall be accompanied by resolutions of the merging and surviving parties, the plan of merger and appendices, and such other documents as CIMA may specify. Where CIMA approves the merger, the surviving Registered Person is required, upon the merger becoming effective, to provide a certified copy of the certificate of merger within seven (7) days of its issuance.

Transfer to another Jurisdiction

The Registered Person applying to CIMA for deregistration in connection with a transfer to another jurisdiction is required to provide, in addition to the documentation referred to above, an affidavit from a senior officer that attests to the following:

(a) the reason for the transfer and name of the jurisdiction to which the Registered Person is being transferred;
(b) that the Registered Person has operated in accordance with its Articles of Association; and
(c) that the transfer is not prejudicial to the Registered Person’s clients or creditors.

In such specific cases (voluntary liquidation, merger or transfer to another jurisdiction), the Registered Person will be assigned “registration under termination” status, until all the documents listed above are submitted to and received by CIMA, and CIMA is satisfied that the Registered Person has complied with the Regulations.

Registered Person that Never Carried on Business

A Registered Person that has never carried on business means a Registered Person that has not commenced any client relationships contractually or otherwise for the purpose of carrying on securities investment business. In this case, the Registered person will be required, for purposes of deregistration, to provide to CIMA an affidavit by a senior officer that attests to the fact that the Registered Person has never carried on such business.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: ramona.tudorancea@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: santiago.carvajal@loebsmith.com

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The Privy Council judgment in Bermuda Bar Council v Walkers (Bermuda) Ltd delivered on 10 June 2019 recently clarified the longstanding “60:40 rule” in respect of local companies in Bermuda, which could also have a wider economic impact on local companies in the Cayman Islands and their ability to access foreign capital. The principal question in the Privy Council appeal was the nature of foreign control over a local company, Walkers (Bermuda) Ltd (“WBL”), which would prevent it from being “controlled by Bermudians” and would therefore require it to be licensed by the Minister of Finance in Bermuda.

The local company 60:40 rule is enshrined in Part I of the Third Schedule of The Companies Act 1981 in Bermuda (“Companies Act”), which provides that a local company must be (i) controlled by Bermudians (ii) at least 60% of the total voting rights to be exercisable by Bermudians and (iii) the board of directors to comprise at least 60% Bermudians. This mirrors the local company requirements in the Cayman Islands set out in section 5(1) of the Local Companies (Control) Law (2019 Revision), which requires a local company or an exempted company that is carrying on business in the Cayman Islands to be (i) Caymanian controlled (ii) at least 60% of its shares are beneficially owned by Caymanians and (iii) at least 60% of its directors are Caymanians. The principal purpose of the 60:40 rule in both Bermuda and the Cayman Islands is to aim to ensure local control over local companies and the economy.

1. In May 2015, Walkers Global, a partnership established in the Cayman Islands determined to set up a local presence in Bermuda and in October 2015 incorporated WBL as a local company in Bermuda under the Companies Act.
2. All of the issued share capital of WBL is held by Bermudian barristers with valid practicing certificates, with no legal control over or beneficial interest in the shares being exercised by Walkers Global. Kevin Taylor is the sole director.
3. Two draft agreements were prepared between Walkers Global and WBL, being (i) a licensing and services agreement to allow professional services to be provided in Bermuda under the “Walkers” brand, including access to human resources, marketing and IT support and (ii) a loan agreement for a loan of up to US$5 million to be lent by Walkers Global. If executed, these two agreements would govern the relationship between Walkers Global and WBL.
4. Kevin Taylor applied to the Bar Council in Bermuda for a certificate of recognition of WBL as a professional company under section 16C of the Bermuda Bar Act 1974. The application was refused on the grounds that the terms on which WBL proposed to operate in Bermuda with respect to Walkers Global, would contravene section 114 of the Companies Act, that requires a local company cannot carry on business in Bermuda unless it complies with Part I of the Third Schedule (as set out above).
5. WBL’s appeal against the Bar Council’s decision was granted by the Chief Justice, on the basis that the proposed arrangements regulating the operation of WBL as a professional company were not contrary to section 114 of the Companies Act or contrary to public policy.
6. On appeal to the Court of Appeal of Bermuda, the Court of Appeal disagreed with the decision of the Chief Justice and interpreted the local company provisions of The Companies Act as extending beyond control over the voting power of shareholders, to include the substance and reality of commercial control.
7. Adopting a practical interpretation of the concept of “control” over a company, the Privy Council held that non-Bermudians may exercise de facto control over a local company by way of commercial arrangements without having to first obtain a licence from the Minister of Finance, provided that the directors and shareholders of such company are free to vote of their own volition. The decision determined that “control” of a company to be exercised over a local company is at board and shareholder level and that influence over a local company’s operations does not constitute “control”. In restoring the decision of the Chief Justice, the key arguments of the Board of the Privy Council were:

• • Lord Hodge stated that “if it were sufficient to establish non-Bermudian control by commercial control alone, a local company might face intolerable uncertainty as to whether it was carrying on business legally or was committing an offence.” In support of this determination, he provided an example of a primary producer entering into an exclusive supply agreement with an overseas buyer which made it dependent on the commercial decisions of the buyer – in this case, the buyer would have considerable influence over the supplier’s commercial decisions and would have the potential to control the quality and quantity of the supplier’s products. In a similar context, if a local company had borrowed a large sum of money from an overseas lender and came into financial difficulty such that it was required to act in the interests of the overseas lender, this would cause uncertainty as to what would constitute “control” and breach of The Companies Act.
  • The Board of the Privy Council interpreted Part I of the Third Schedule as preventing agreements or arrangements which confer voting control or constrain the effectiveness of majority votes in director or shareholder meetings.
  • Lord Hodge further stated that there is no requirement in the Companies Act (either express or by implication) that a local company must pay or attribute a minimum percentage of its profits to Bermudians in order for it to be controlled by Bermudians.
  • Lady Arden determined that “controlled by Bermudians” is that of “board and of the company in the general meeting. Mere influence of any kind on a company’s operations does not constitute control in this sense.”

As the Privy Council is the highest court of appeal for the Commonwealth countries and its decisions are binding on all countries in the Commonwealth, the ruling in this case will be binding in the Cayman Islands. Furthermore, the similarity between the 60:40 rule in Bermuda and requirements under Section 3(2) and Section 5 of the Local Companies (Control) Law (2019 Revision) of the Cayman Islands means that the reasoning put forward in the Privy Council decision is equally applicable in determining whether a local company incorporated in the Cayman Islands is “Caymanian controlled”. On a practical level, this ruling means that an element of commercial influence may be exercised by non-Caymanians in respect of the day-to-day operations of a local company in the Cayman Islands, provided that the key constitutional documents and any shareholders’ agreement do not constrain the voting rights of the board and/or shareholders.

For specific advice on this matter, please contact your usual Loeb Smith attorney or:

E: elizabeth.kenny@loebsmith.com

The Anti-Money Laundering Regulations (2018 Revision) of the Cayman Islands (AML Regulations) have expanded the scope of the Cayman Islands’ anti-money laundering regime significantly, including its application to investment funds generally, and specifically to (i) private equity funds and other closed-ended funds (e.g. venture capital and real estate funds) which are not registered with the Cayman Islands Monetary Authority (Cima).

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The AML Regulations have introduced a new risk-based approach to AML in the Cayman Islands, including requiring persons subject to the AML Regulations (which include Cayman Islands investment funds) to take steps appropriate to the nature and size of their business to identify, assess, and understand its money laundering and terrorist financing risks in relation to each investor, the country or geographic area in which each investor resides or operates, the types of individuals/entities that make up the investor base of the investment fund, source of funds (e.g. investment funds with lower minimum investment thresholds might pose a greater risk of money laundering, especially if the subscription proceeds are not coming from a regulated financial institution), and redemption terms.

The scope of the AML Regulations is still defined by reference to “relevant financial business”. Persons undertaking relevant financial business in the Cayman Islands must comply with the requirements of the AML Regulations. The definition of relevant financial business that was included in previous versions of the anti-money laundering regulations has been removed from the AML Regulations and has instead been placed in Section 2 of the Proceeds of Crime Law (2018 Revision) (PCL). The definition continues to cover “mutual fund administration or the business of a regulated mutual fund within the meaning of the Mutual Funds Law (2015 Revision)” which covers all funds registered with and regulated by Cima. The definition had also covered and continues to cover investment managers licensed by or registered with Cima (e.g. those who have applied for and obtained status as an “excluded person” under the Securities Investment Business Law for an exemption from the requirement for a licence).

However, Section 2 and Schedule 6 of the PCL now extends the meaning of “relevant financial business” to cover activities which are “otherwise investing, administering or managing funds or money on behalf of other persons”.

The net effect of expanding the meaning of “relevant financial business” to include activities of investing, administering or managing funds or money on behalf of other persons is that now all unregulated investment entities are also covered and will need to maintain AML procedures in accordance with the AML Regulations.

Going forward, all non-Cima-registered and unregulated investment funds will also be required to comply with the same AML regime as Cima registered and regulated funds.

Pursuant to regulations 3(1) and 33 of the AML Regulations, an investment fund doing business in or from the Cayman Islands must designate a natural person, at managerial level, to act as its anti-money laundering compliance officer (AMLCO), money laundering reporting officer (MLRO) and deputy money laundering reporting officer (DMLRO). Cima requires that a person acting as MLRO/ DMLRO must (i) act autonomously; (ii) be independent (have no vested interest in the underlying activity of the investment fund); and (iii) have access to all relevant material in order to make an assessment as to whether an activity is or is not suspicious. The AMLCO role should be performed by someone who will be the point of contact with the supervisory and other competent authorities.

Cima guidance to the AML Regulations requires that an AMLCO must be a person who is fit and proper to assume the role and who:

• has sufficient skills and experience;
• reports directly to the board of directors of the fund or equivalent;
• has sufficient seniority and authority so that the boardreacts to and acts upon any recommendations made;
• has regular contact with the board so that the board is able to satisfy itself that statutory obligations are being met and that sufficiently robust measures are being taken to protect the fund against money laundering/terrorist financing risks;
• has sufficient resources, including sufficient time and, where appropriate, support staff; and
• has unfettered access to all business lines, support departments and information necessary to appropriately perform the AML/CFT compliance function.

In addition to having the AMLCO, MLRO, and DMLRO officers in place, investment funds are required to have following AML procedures in place:

• identification and verification (KYC) procedures for its investors/clients;
• adoption of a risk-based approach to monitor financial activities;
• record-keeping procedures ;
• procedures to screen employees to ensure high standards when hiring;
• adequate systems to identify risk in relation to persons, countries and activities which shall include checks against all applicable sanctions lists;
• adoption of risk-management procedures concerning the conditions under which a customer may utilise the business relationship prior to verification;
• observance of the list of countries, published by any competent authority, which are non-compliant, or do not sufficiently comply with the recommendations of the Financial Action Task Force;
• internal reporting procedures (involving the MLRO and DMLRO); and
• such other procedures of internal control, including an appropriate effective risk-based independent audit function and communication as may be appropriate for the ongoing monitoring of business relationships or one-off transactions for the purpose of forestalling and preventing money laundering and terrorist financing.

In order to allow non-Cima registered unregulated investment entities (e.g. closed-ended funds such most private equity funds, venture capital funds, and real estate funds) not previously subject to the AML regime time to implement appropriate procedures (or delegation arrangements) to be in compliance with the new AML regime, the AML Regulations have been amended to provide these entities up until 31 May 2018 to assess their existing AML/ CTF procedures and to implement policies and procedures which are in compliance with the AML Regulations.

The deadline to designate an AMLCO, MLRO, and DMLRO and to notify Cima of the identity of such persons holding these roles is on or before 30 September 2018 for existing funds.

A Cayman fund that is already registered with and regulated by Cima will typically have delegated the maintenance of AML procedures on behalf of the fund to a fund administrator, and should therefore check that the scope of its current delegation to its administrator is sufficiently broad to cover the requirements of the AML Regulations (e.g. check (i) whether the AML regime being applied in respect of the fund is the Cayman AML regime or the regime of jurisdiction recognised as having an equivalent AML regime, and (ii) if it is the latter, whether or not the relevant administrator is actually subject to the AML regime of that jurisdiction ).

Non-Cima-registered investment funds which now fall under the new AML regime and which have delegated maintenance of AML procedures on behalf of the fund to a fund administrator should also check that the scope of delegation to its administrator or investment manager is sufficiently broad to cover the requirements of the AML Regulations. Investment entities which have not appointed a fund administrator (e.g. because the investment manager maintains the AML procedures on the fund’s behalf) should check the same matters outlined above and additionally, whether or not the delegate (e.g. the investment manager) has the requisite personnel (in terms of numbers, training, and experience) to maintain the AML procedures on the fund’s behalf. The extent to which (i) the maintenance of AML procedures on behalf of the fund, and (ii) the designation of AMLCO, MLRO, and DMLRO functions, has been or is to be delegated to a third party service provider should also be considered within the context of Cima’s guidance on outsourcing.

The Monetary Authority Law (2018 Revision) gives Cima the power to impose administrative fines for non-compliance on entities and individuals who are subject to Cayman Islands regulatory laws and/or the AML Regulations.
For a breach prescribed as minor fine would be KYD5,000 (approximately US$6,000). For a breach prescribed as minor, Cima also has the power to impose one or more continuing fines of KYD5,000 each for a fine already imposed for the breach (the “initial fine”) at intervals it decides, until the earliest of the following to happen:
(a) the breach stops or is remedied;
(b) payment of the initial fine and all continuing fines imposed for the breach; or
(c) the total of the initial fine and all continuing fines for the breach reaches KYD20,000.
For a breach prescribed as serious, the fine is a single fine not exceeding: (a) KYD50,000 for an individual; or (b) KYD100,000 for a body corporate. For a breach prescribed as very serious, the fine is a single fine of not exceeding: (a) KYD100,000 for an individual; or (b) KYD1m for a body corporate.

Gary Smith

Gary Smith is a partner in the corporate and investment funds group at Loeb Smith Attorneys. He is an expert on Cayman Islands investment funds law and has given expert evidence in the US Federal Bankruptcy court relating to Cayman investment funds. He is also author of many legal articles including: US Court and Cayman Islands Court: Sharing Jurisdiction in the Interests of Comity, published in International Corporate Rescue Vol.12 (2015) Issue 1; and Fiduciary duties of a general partner of a Cayman exempted limited partnership published in Practical Law Global Guide 2015/16 – Private Equity and Venture Capital.

E gary.smith@loebsmith.com
W www.loebsmith.com

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