In The Matter of Padma Fund L.P. [FSD 201 of 2021] (RJP), the Cayman Grand Court held that the Cayman Court does not have jurisdiction to order the winding up of a Cayman exempted limited partnership (“ELP”) on the basis of a creditor’s petition for the winding up of the ELP. The Court ruled that the correct procedure for a creditor to follow is to commence proceedings against the general partner of the ELP for an unpaid debt. This case has clarified the process for creditors’ claims against ELPs but has also in the process added some interesting scenarios to consider for a general partner. This is particular interesting in light of the fact that ELPs are commonly used for private equity, venture capital and other investment funds and therefore the ruling provides guidance for not only general partners but also investors and creditors.

In the Padma case, the petitioners presented the petition in July 2021 seeking orders from the Court for the winding up of Padma Fund L.P. (the “Partnership”) on the basis that the Partnership is unable to pay its debts and therefore should be wound up pursuant to section 92(d) of the Companies Act (2021 Revision), as applied by section 36(3) of the Exempted Limited Partnership Act (2021 Revision).

If, as the Court ruled, the remedy of any creditor of an ELP is to commence proceedings against the general partner, how will this impact on the use of foreign companies which are sometimes registered in Cayman in order to become the qualifying general partner of the ELP? How easy will it be to successfully bring a winding up petition in Cayman against a U.S. domiciled company registered in Cayman as general partner of an ELP which can apply for Chapter 11 debtor in possession protection in the U.S.?

Will the Court’s decision, perhaps over time, change the often seen practice of having one general partner in respect of several ELPs in order to, among other things, consolidate and maintain control of several ELP investment funds? The general partner holds the assets of each ELP on statutory trust. If a winding up order is made against the general partner of an ELP, and there is a shortfall in the ELP’s assets available for distribution to creditors, the liquidator appointed has a claim against the separate assets (if any) of the general partner and such claim would constitute an unsecured claim in any liquidation of the general partner. The use of one general partner to manage and control large numbers of ELP investment funds brings the solvency of such general partner more into focus.

This blogpost is not intended to be a substitute for specific legal advice or a legal opinion on the laws governing limited partnerships in the Cayman Islands. For specific advice, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: robert.farrell@loebsmith.com

A Cayman Islands merger take-private is the process whereby two “constituent companies” – namely, a Cayman Islands company (“MergerCo.”) and a listed Cayman Islands company (the “Target”) – merge pursuant to Part XVI (the “Cayman Merger Law”) of the Cayman Companies Act (2021 Revision) (the “Cayman Islands Companies Act”). Upon the merger becoming effective (the “Effective Time”):

(a)  MergerCo. is struck-off the register of companies;

(b)  the rights and property of the constituent companies vest in the Target as the surviving company; and

(c)  subject to any specific arrangements entered into by the relevant parties, the Target is liable for and subject to all mortgages, charges and security interests, and all other liabilities of the constituent companies.

The following is a summary of the key steps that need to be taken from a Cayman Islands law perspective in order to consummate a statutory merger:

1. Forming MergerCo. In a typical take-private transaction, MergerCo. is incorporated in the Cayman Islands by the investors adhering to the takeover group (often involving the founders/managers of the listed company, its parent company and/or several private equity investors acting as sponsors for the purposes of the take-private transaction) (the “Buyout Group”) in order to obtain finance and ultimately merge with the Target.

2. Take-Private Offer. After obtaining legal and financial advice, the Buyout Group agrees on the terms of the proposed merger take-private, including the consideration which will be offered to the shareholders of the Target, and makes an offer to the board of directors (the “Board”) of the Target (the “Initial Take-Private Offer”). As a matter of best practice, since most take-private transactions are initiated by, or with the involvement of, the management or certain shareholders represented at Board level, the merger process requires that a special committee formed of independent directors of the Target (the “Special Committee”) be designated to review the take-private offer and negotiate on behalf of the Target with the Buyout Group. This is both to ensure that the Board is in compliance with the fiduciary duties it owes the Target, and to avoid any accusation of self-dealing.

3. Negotiations. The Special Committee reviews and negotiates the offer with the help of its own independent legal and financial advice. Overall, the typical mission of the Special Committee is to:

(a) investigate and evaluate the Initial Take-Private Offer;

(b) discuss and negotiate the terms of the merger agreement (the “Merger Agreement”);

(c) explore and pursue any alternatives to the Initial Take-Private Offer as the Special Committee deems appropriate, including maintaining the public listing of the Target or finding an alternative buyer;

(d) negotiate definitive agreements with respect to the take-private or any other transaction; and

(e) report the recommendations and conclusions of the Special Committee to the Board with respect to the Initial Take-Private Offer.

4. Board Approval. The directors of each constituent company in a merger are required to approve the terms and conditions of the proposed merger in a written plan of merger (the “Plan of Merger”), including, among other things:

(a) how shares in each constituent company will convert into shares in the surviving company or other property (e.g. cash payable to shareholders);

(b) what rights and restrictions will attach to the shares in the surviving company;

(c) whether the memorandum of association and articles of association of the surviving company will be amended and, if so, then how; and

(d) any amounts or benefits paid or payable to any director of either constituent company or the surviving company consequent upon the merger.

5. Shareholder Approval. The Plan of Merger is required to be authorized by a special resolution of the shareholders of each constituent company who have the right to receive notice of, attend and vote at the relevant shareholders’ meeting, voting as one class with at least a two-thirds majority. The resolutions of the MergerCo are often passed by its shareholder(s) unanimously in writing. 


6. Consents. Each constituent company must obtain the consent of any creditor(s) holding a fixed or floating security interest in the relevant company. To the extent that debt finance is being provided in the context of a privatization, the consent of any relevant secured creditor(s) are typically included in the intercreditor agreement if there is one, or in the relevant facility agreement if there is not. Any other relevant authorizations and consents, such as under the articles of association of a constituent company or pursuant to any regulatory laws, must also be obtained prior to consummation of the merger. 


7. Declarations, Undertaking and Certificate of Good Standing. A director of each constituent company must provide a written declaration which confirms:

(a) that the relevant constituent company is, and the surviving company will be, immediately after the merger, able to pay its debts as they fall due;

(b)that the merger is bona fide and not intended to defraud unsecured creditors of the constituent companies;

(c) 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 the relevant constituent company in any jurisdiction;

(d)that no receiver, trustee, administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the relevant constituent company, its affairs, or its property or any part thereof;

(e)that no scheme, order, compromise or other similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the constituent company are, and continue to be, suspended or restricted;

(f ) the assets and liabilities of the relevant constituent company made up to the latest practicable date before the making of the declaration;

(g) in the case of a constituent company that is not the surviving company, that the relevant constituent company has retired from any fiduciary office held or will do so immediately prior to the merger; and

(h) that the relevant constituent company has complied with any applicable requirements under any relevant regulatory laws.

A director of each constituent company must also undertake to give a copy of the certificate of merger to all of its members and creditors, and to publish a notification of the merger in the Cayman Islands Gazette.

A certificate of good standing must also be obtained by each constituent company.

8. Filing and Registration. After obtaining all necessary authorizations and consents, the Plan of Merger is required to be signed by a director on behalf of each constituent company and filed with the Cayman Islands Registrar of Companies (the “Cayman Islands Registrar”) along with the other merger documents detailed above. The Cayman Islands Registrar registers the Plan of Merger and issues a certificate of merger so long as all of the requirements of the Cayman Merger Law have been complied with. A certificate of merger is prima facie evidence that all such requirements have been complied with. It is market practice to pre-vet unsigned copies of all of the merger documents with the Cayman Islands Registrar prior to filing them to ensure that all of the requirements of the Cayman Merger Law will be complied with upon submission.

Unless the Plan of Merger provides for a later specified date or event , the merger will be effective on the date that the Plan of Merger is registered by the Registrar of Companies. At the Effective Time, all of the rights and assets of each of the constituent companies immediately vests in the surviving company and, subject to any specific arrangements, the surviving company assumes all of the assets and liabilities of each of the constituent companies.

Each shareholder of a constituent company is entitled to payment of the fair value of its shares upon dissenting from the merger under section 238 of the Cayman Islands Companies Act. Fair value can either be agreed between the parties or determined by the Cayman Court. There is considerable case law with respect to the meaning of “fair value” and that is outside the scope of this article.

Many take-private transactions are financed by a combination of cash, equity and debt in our experience.

With respect to equity commitments, the investors adhering to the Buyout Group typically execute an equity commitment letter undertaking to finance the transaction, subject to completion of the merger and any regulatory approvals. They typically also provide guarantees for any costs and expenses and termination fees in case the merger is not completed. Within the Buyout Group, relations between the various parties are governed by an interim investors’ agreement or a consortium agreement, which is negotiated prior to finalizing the merger terms.

A portion of the financing that is needed for a merger is typically provided by one or several banks, through a bilateral or a syndicated lending facility, or in the form of a bridge loan that is to be repaid shortly after the completion of the merger. As there is no prohibition on financial assistance under Cayman Islands law, a company may fund or guarantee the acquisition of its own shares, as long as the transaction taken as a whole is deemed by its board of directors as being in the best interests of the relevant company.

The security package that is put in place will ultimately depend on the creditworthiness of the borrower group and other commercial considerations, but as a general rule will include:

(a) an equitable share mortgage over the shares of MergerCo. prior to the Effective Time (the “Merger Sub Share Security”);

(b) an equitable share mortgage over the shares of the Target from the Effective Time;

(c) security over the assets of MergerCo. prior to the Effective Time (the “Merger Sub Asset Security”); and

(d) security over the assets of the Target from the Effective Time (the “Target Asset Security”).

It is worth noting that:

(a) the Merger Sub Share Security sometimes contains an automatic discharge provision from the Effective Time, but certain lenders resist this in case the merger is subsequently unwound;

(b) many lenders are happy to rely on a debenture that is entered into as part of the Merger Sub Asset Security package for the purposes of the Target Asset Security, though the security is typically drafted to make clear that it will attach to the Target’s assets from the Effective Time; and

(c) the register of mortgages and charges of the Target at the Effective Time should include details of the security interests granted by MergerCo. prior to the Effective Time as the Target is, subject to any specific arrangements, liable to all such security interests.

Copies of the following merger specific conditions precedent typically need to be delivered to the lender(s):

(a) the executed merger documents (other than the Plan of Merger), which usually include the acquisition agreement, the company disclosure schedule and any other document designated as a “merger document”;

(b) the agreed form Plan of Merger, which is typically expressed to be subject to any amendments recommended by the Cayman Islands Registrar;

(c) the form of constitutional documents and statutory registers to be issued by the registered office service provider of the Target at the Effective Time;

(d) a merger costs certificate, which is usually satisfied by providing a funds flow statement;

(e) a merger conditions certificate with respect to the satisfaction of conditions under the Merger Agreement, as well as certain solvency conditions;

(f) the corporate authorizations, which include board and shareholder resolutions of the constituent companies and resolutions of the Target’s special committee;

(g) the “section 233(9) documents”, which include the declarations and undertaking referenced above, as well as a certificate of good standing in relation to each constituent company; and

(h) the secured creditor consent.

In our experience, closing of the merger typically occurs within 2 business days of the utilization date. Copies of the following merger specific conditions subsequent typically need to be delivered to the lender(s):

(a) the application letter to register the Plan of Merger stamped by the Cayman Islands Registrar;

(b) a certified copy of the Plan of Merger;

(c) the certificate of merger;

(d) a certificate of good standing of the Target as the surviving company issued after the Effective Time;

(e) certified copies of the Target’s updated constitutional documents and statutory registers; and

(f) a Cayman Islands law legal opinion with respect to the effectiveness of the merger.

In the 1990s, many Chinese companies chose to list on NASDAQ or the NYSE to gain credibility and access to capital from US investors. In or around 2011 and 2012, this trend changed . While US listings remained attractive for Chinese companies, the cost of complying with reporting standards continued to increase. Additionally, a lack of comprehension by US investors of the corporate structures being utilized by these companies and of the underlying business environment in China led to lower market valuations for these Chinese companies.

This opened the door for arbitrage opportunities. A Chinese company which was listed on NASDAQ or the NYSE but which had a stock market value lower than its intrinsic value would be taken private and de-listed with help from private equity sponsors and either: (i) continue to be privately held and later sold to a strategic or a financial buyer, or (ii) re-listed on the Shanghai Stock Exchange, the Shenzhen Stock Exchange or the Hong Kong Stock Exchange for better pricing. A wave of merger take-private transactions followed and this trend has resurfaced throughout the Covid-19 pandemic.

Since 2010 , the Cayman Merger Law has offered a more streamlined and efficient offshore alternative to the onshore merger law regimes (e.g. in New York and Delaware). The popularity of the Cayman Islands for merger take-privates further increased in 2011 when the shareholder voting threshold for approving a merger was reduced to a special shareholder resolution requiring only two-thirds of the votes cast.

The Cayman Merger Law is attractive for both companies and investors due to the process being relatively straightforward and simpler than either a tender offer under section 88 of the Cayman Islands Companies Act or a court-approved scheme of arrangement under sections 86 or 87 of the Cayman Islands Companies Act. Cayman Islands merger take-privates are also well tried and tested in practice.

Despite tensions between the US and China, Chinese companies raised a total of US$17.55 billion in US IPOs by the end of the first quarter of 2021, which is more than four times the amount raised during the previous 12-month period . However, the tides are arguably turning and we foresee that a large number of Chinese companies that are currently listed on NASDAQ or the NYSE will be de-listed in the short to medium term for a variety of reasons.

Firstly, the Holding Foreign Companies Accountable Act (the “HFCA Act”) now requires companies that are listed in the US to declare whether they are owned or controlled by a foreign government. In addition, in response to the fraud perpetrated in connection with Luckin Coffee, which culminated in trading of the company’s shares being halted on 6 April 2020 and de-listing by NASDAQ on 29 June 2020, the HFCA Act also authorizes the de-listing of foreign companies from US stock exchanges if they fail to provide the US Public Company Accounting Oversight Board with access to auditing records covering a three consecutive year period. We anticipate that these requirements will prove unappealing to certain businesses.

Secondly, US-listed Chinese companies are facing enhanced levels of scrutiny from both US and Chinese regulators. For example, the US Securities and Exchange Commission is scrutinizing variable interest entities (“VIE”) and requiring enhanced disclosures to be provided to investors regarding the key risks of investing in VIE structures. This is in addition to the blacklisting of over 130 Chinese companies by the Trump and Biden administrations, as a result of which new investors are unable to purchase stocks in these entities on the US stock market. The Cyberspace Administration of China has also imposed additional conditions on Chinese businesses that want to list of overseas and the crackdown has wiped hundreds of billions of US dollars off the market capitalizations of certain listed companies, particularly in the education and technology sectors.

Thirdly, the prospect of listing in Hong Kong or China is understandably appealing to US-listed Chinese companies that wish to avoid blacklisting and onerous auditing regulations and achieve better valuation levels. For example, US-listed DQ, a leading player in the solar energy supply chain with significant operations in Xinjiang, recently listed its key operating subsidiary in Shanghai’s STAR Market at a valuation level 3 times higher than in the US. We predict that other companies are likely to follow this path given the trends which have been identified in this article.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas
Partner
Loeb Smith Attorneys
Hong Kong
www.loebsmith.com
Peter is recognized as a leading offshore lawyer in the Asian Legal Business Offshore Client Choice List 2021

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An SPC is a single legal entity, which can create an unlimited number of separate segregated portfolios. The assets and liabilities of a segregated portfolio benefit from a statutory “ring-fence” from the assets and liabilities of (i) any other segregated portfolios of the SPC and (ii) from the general assets and liabilities of the SPC, under section 216 of the Companies Act. Given the flexibility of the corporate structure, ability to prevent cross-liability issues between different segregated portfolios and to pursue a different investment strategy for each segregated portfolio, the SPC is a very popular Cayman Islands investment vehicle for multi-class and/or multi-strategy investment funds. Please see our Briefing Note Benefits of Segregated Portfolio Companies for investment purposes for further details.

The Fund is registered with the Cayman Islands Monetary Authority as a mutual fund. Obelisk Capital Management Ltd. (in official liquidation) (“Investment Manager”) is the Cayman Islands investment manager which provided (i) investment management services to segregated portfolios of the Fund, (including SP1) and (ii) operated the sourcing and pre-financing of gold doré from mines in East and West Africa. The Investment Manager was placed into official liquidation on 26 June 2020.

The Fund on account of SP1 is indebted to the Investment Manager in the sum of approximately US$55,000 pursuant to a loan transferred by the Fund to SP1 on 6 May 2019 (“Debt”).

The joint official liquidators of the Investment Manager demanded payment of the Debt and issued a statutory demand on SP1 on 10 February 2021 in respect of the Debt, which was acknowledged but not paid by SP1. The Investment Manager sought a receivership order from the Grand Court in respect of SP1, on the basis of SP1’s insolvency.

The winding-up procedures set out in Part V of the Companies Act apply in respect of a “company”, therefore as a segregated portfolio does not have a separate legal personality to the SPC, the statutory modes of winding-up which are available to a company, cannot apply to a segregated portfolio on its own. However, receivership allows a specific segregated portfolio to be closed down without the overall SPC structure having to be wound-up.

Section 224 of the Companies Act sets out the grounds for the appointment of a receiver over a segregated portfolio of an SPC. The key provisions are summarized as follows:

a.  Section 224(1) of the Companies Act provides that the Court may make a receivership order in respect of a segregated portfolio if the Court is satisfied:

1. 1. “that the segregated portfolio assets attributable to a particular segregated portfolio of the company (when account is taken of the company’s general assets, unless there are no creditors in respect of that segregated portfolio entitled to have recourse to the company’s general assets) are or are likely to be insufficient to discharge the claims of creditors in respect of that segregated portfolio”; and
   2. the making of a receivership order would achieve the purposes of “the orderly closing down of the business of or attributable to the segregated portfolio” and “the distribution of the segregated portfolio assets attributable to the segregated portfolio to those entitled to have recourse thereto.”

b.  Section 224(2) of the Companies Act states that a receivership order may be made in respect of one or more segregated portfolios.

SP1 did not dispute the fact that the Debt is owed by SP1, the quantum of the Debt or that the sum of the Debt is above the statutory minimum for a statutory demand pursuant to section 93(a) of the Companies Act.

However, counsel for SP1 opposed the receivership application in respect of SP1, on a number of grounds, including that it had not been shown that SP1 “has or is likely to have insufficient assets to meet the claims of its creditors”. It was also argued that if SP1 is deemed to be “balance sheet solvent” in the long term, the Court may not make an order for the appointment of a receiver.

Counsel for the Investment Manager argued that the relevant test for insolvency must either be by reference to a “cash flow test” or “balance sheet test” and submitted to the Court that a cash flow test should be used.

1. Cash flow test: a company is deemed to be insolvent under the cash flow test if it cannot pay the debts that are due at present, or if on the balance of probabilities, it does not or will not have the resources to discharge those debts that will fall due in the reasonably near future.
2. Balance sheet test: a company is insolvent under the balance sheet test if its assets do not exceed its liabilities, taking into account contingent and prospective liabilities.

Counsel for the Investment Manager argued before the Court that there is no case in the Cayman Islands Court of a petitioner having to prove that an entity is balance sheet insolvent. Furthermore, it was argued that a balance sheet test would bring up evidentiary issues for a petitioner (i) as a creditor would not usually have access to the books and accounts of the applicable company (especially in respect of a Cayman Islands company, for which there is no legal requirement to make accounts publicly available) and (ii) the valuation of assets is not an easy matter, even if a creditor has access to the relevant information.

As the Debt was settled before the judgment in this case was delivered, the judgment only covered the jurisdictional aspects of the application for receivership of the Segregated Portfolio by the Investment Manager.

The Judge in the case, Justice Raj Parker, did not accept that the wording in section 224(1) of the Companies Act equates to a cash flow test of insolvency – in particular, it was noted that no language as to debt and timing of payment is included within this sub-section.

The Court ruled that on a plain reading of section 224 of the Companies Act:

1. the test as to whether the Court has jurisdiction to make a receivership order in respect of a segregated portfolio is whether the assets of a company are or are likely to be sufficient to discharge the claims of creditors, which can be regarded as its liabilities i.e. a balance sheet test, rather than a cash flow test; and
2. this involves a determination on the available evidence of whether the assets are sufficient at present or are likely to be in the reasonably near future when assessed against its liabilities (including prospective and contingent liabilities) and are held in a form where they may be used to pay the claims of creditors.

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

Elizabeth Kenny
Senior Associate
Tel: +1 (345) 749 7594
E: elizabeth.kenny@loebsmith.com

Asian-based sponsors, investors and managers have demonstrated a keen interest in SPAC IPOs on US stock exchanges, particularly in the technology sector. As a result, stock exchanges in Asia, such as in Hong Kong and Singapore, are considering lifting their longstanding prohibitions on raising funds for unspecified purposes.

While Asia’s conservative approach to SPACs is unlikely to match the level of deal flow or capital raising seen in the US in the short or medium term, the region’s financial markets are reliant on a steady stream of IPOs to remain competitive. Therefore, Asia’s key financial centres are expected to develop a suitable regulatory framework. A number of SPACs are currently exploring de-SPAC opportunities in China and South Asia, where an abundance of private equity-backed companies with promising growth prospects are located.

Considering that SPAC fundraising in Asia may be more limited, it is important to note that there are options to mitigate the liquidity risk associated with shareholder redemptions and fund the post-closing operations of the combined entity. Many SPACs issue new shares to institutional investors in private investment in public equity (PIPE), which closes concurrently with the de-SPAC transaction to raise additional funding. The sponsor or institutional investors may also enter into purchase arrangements with the SPAC to commit to purchasing new shares of the SPAC concurrently with the closing of the de-SPAC transaction.

Most SPACs pursuing US targets continue to be incorporated in Delaware, although the BVI and Cayman Islands also remain popular. The popularity of both offshore jurisdictions is expected to increase as SPAC activity picks up in Asia. BVI and Cayman Islands companies are widely adopted across the region and familiar to stock exchanges, regulators and other relevant market participants.

The Cayman Islands are currently more popular than the BVI, probably because the Cayman Islands continues to be the jurisdiction of choice for listed companies and private equity funds. That being said, BVI companies may confer certain advantages in the context of SPAC transactions. For example, the shareholder approval thresholds in a de-SPAC transaction for a statutory merger are typically lower in the BVI than in the Cayman Islands.

There are various features of BVI and Cayman Islands law that make them attractive for SPACs, including:

(1) BVI and Cayman Islands companies may have unlimited objects and purposes, which is important for SPACs with broad investment mandates;

(2) There is significant flexibility in tailoring the articles of association of the relevant SPAC to accommodate the issuance of warrants and different classes of shares, as well as the incorporation of defensive takeover tactics;

(3) There is no takeover code or legislation that is specifically applicable to listed companies, with the exception of the Cayman Islands Code on Takeovers and Mergers, which is only applicable to companies whose securities are listed on the Cayman Islands Stock Exchange;

(4) BVI and Cayman Islands companies that are listed on a US stock exchange may be able to qualify as a foreign private issuer, thereby taking advantage of reduced disclosure and reporting requirements; and

(5) Both jurisdictions have well-established and straightforward statutory merger regimes that are conductive to de-SPAC transactions.

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PETER VAS is a partner at Loeb Smith Attorneys in Hong Kong
“The attached article was first published in the Asia Business Law Journal.”
Contact details:
T: +852 5225 4920
E: peter.vas@loebsmith.com

The Cayman Islands Monetary Authority (“CIMA”) in December 2020 published its preliminary findings from on-site inspections (“Inspections”) conducted of Registered Persons (“RPs”) as defined pursuant to schedule 4 and section 5(4) of the Securities Investment Business Act (“SIBA”). RPs cover Cayman Investment Advisors, Investment Managers, Securities Brokers, Deal Arrangers, and Market Makers. CIMA identified key areas of weakness across anti-money laundering (“AML”), countering the financing of terrorism (“CFT”), countering proliferation financing (“CPF”) and targeted financial sanctions (“Sanctions”) (together, “AML/CFT”) compliance.

CIMA reminded all RPs of their regulatory obligations to adhere to Cayman legislation, regulatory rules and/or statements of guidance, and to ensure that their own policies, procedures, systems, and controls are of the appropriate standard.

CIMA’s review of the RPs’ adequacy and effective implementation of their AML/CFT programmes including policies and outsourced AML/CFT functions revealed the following weaknesses:

i. AML/CFT policies and procedures: 79% of the RPs inspected indicated weaknesses in the development and maintenance of policies and procedures appropriate for the nature, size, and complexity of their business.

ii. CDD and ongoing monitoring documentation: 50% of the RPs inspected indicated weaknesses in their CDD and ongoing monitoring programmes to evidence that the customer documents, data, or information collected are kept current and relevant.

iii. Outsourced AML/CFT compliance functions: 33% of the RPs inspected indicated weaknesses in their outsourcing policies, procedures, and risk assessments.

iv. Employee training and awareness programme: 33% of the RPs inspected indicated weaknesses in their training and awareness programmes to evidence that their employees are aware of their regulatory obligations.

v. Assessing risk and application of a RBA: 25% of the RPs inspected indicated weaknesses in assessing risk and applying a RBA relative to their identified AML/CFT risks.

vi. Oversight of compliance function: 25% of the RPs inspected indicated weaknesses in the oversight of the compliance function by their Board or equivalent.

vii. Internal reporting: 21% of the RPs inspected indicated weaknesses in either designating an independent Money Laundering Reporting Officer (“MLRO”) without vested interests in the underlying business activity or reporting suspicious activity.

viii. Independent AML/CFT Audit Function: 17% of the RPs inspected indicated weaknesses in establishing an effective independent risk-based audit function to perform periodic AML/CFT audits.

ix. Record keeping policies and procedures: 13% of the RPs inspected indicated weaknesses in their records management system to evidence that all relevant records are appropriately maintained and readily accessible to the Authority.

Whilst the laws and regulations governing RPs have not changed in any substantive sense in 2021, we have seemed a more activist approach by CIMA to contact RPs and request documents (e.g. AML policies and procedures and corporate governance policies and procedures). Service providers such as banks also appear more alert to requesting and obtaining confirmation that RPs are in compliance with Cayman Islands laws and regulations.

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For specific legal advice and guidance on ensuring that your Cayman Investment Manager and/or Investment Advisor complies with Cayman Islands AML and other regulatory requirements, please contact any of:

E: elizabeth.kenny@loebsmith.com
E: sandra.korybut@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com