Why did the Cayman authorities need to revamp/update its existing AML regulations and what was the catalyst?

The new Anti-Money Laundering Regulations, 2017 of the Cayman Islands (AML Regulations), which came into force on 2 October 2017 and the Proceeds of Crime Law (2017 Revision) (PCL) which came into force in May 2017 have together expanded the scope of Cayman Islands anti- money laundering regime (AML), including application to investment funds generally and specifically to (i) private equity funds and other closed-ended funds (e.g. real estate funds) and (ii) structured finance vehicles that are not registered with the Cayman Islands Monetary Authority (CIMA).

The main aim behind the changes to the AML Regulations has been to more closely align Cayman Islands’ AML regime to the Financial Action Task Force 2012 recommendations. The AML Regulations introduce a new risk-based approach to AML in the Cayman Islands, including requiring persons subject to the AML Regulations (Financial Service Providers) 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 a customer, the country or geographic area in which the customer resides or operates, the Financial Service Provider’s products, service and transactions, and the Financial Service Provider’s delivery channels.

Could you provide a few salient points on the gaps that have been addressed in the new AML regime?

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 PCL. The definition continues to cover (emphasis added) “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 a SIBL Exemption). 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 “otherwise investing, administering or managing funds or money on behalf of other persons,” is that now all unregulated investment entities (as well as regulated investment entities) are covered and will need to maintain AML procedures in accordance with the AML Regulations.

AML Procedures

Going forward all Cayman unregulated investment entities (as well as regulated investment entities) will be required to have the 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 (i.e. appointment of a money laundering reporting officer and deputy money laundering reporting officer);
  • 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 unregulated investment entities not previously subject to the AML/ CFT regime to implement appropriate procedures (or delegation arrangements) to comply, the AML Regulations have been amended to provide a grace period until 31 May 2018 within which to assess their existing AML/CTF procedures and to implement policies and procedures which are in compliance with the AML Regulations.

What are the enforcement powers that CIMA will be able to bring to bear for those entities who fail to comply?

The Monetary Authority (Amendment) Law, 2016 (the Amendment Law) which came into force on 15th December 2017 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 CI$5,000 (approximately US$6,000). For a breach prescribed as minor the Authority also has the power to impose one or more continuing fines of CI$5,000 each for a fine already imposed for the breach (the “initial fine”) at intervals it decides, until the earliest of the following to happen:

  1. the breach stops or is remedied;
  2. payment of the initial fine and all continuing fines imposed for the breach; or
  3. the total of the initial fine and all continuing fines for the breach reaches CI$20,000 (approximately US$24,000).

For a breach prescribed as serious, the fine is a single fine not exceeding: (a) CI$50,000 (approximately US$61,000) for an individual; or (b) $100,000 (approximately US$122,000) for a body corporate. For a breach prescribed as very serious, the fine is a single fine of not exceeding: (a) CI$100,000 (US$122,000) for an individual; or (b) CI$1,000,000 (US$1,220,000) for a body corporate.

The Monetary Authority (Administrative Fines) Regulations, 2017, which came into force immediately after the Amendment Law came into force sets out, among other things, rules and guidance regarding the amount of fines, different categories of breaches, the criteria for exercising fine discretions, including procedures of imposing fines, appeals, payment and enforcement.

How would you assess the overall improvements made in the new AML regulations, vis-à-vis other global funds jurisdictions?

The AML Regulations are intended to more closely align Cayman Islands’ AML regime to the Financial Action Task Force 2012 recommendations which are intended to set the standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. The changes introduced by the AML Regulations enhances the Cayman Islands’ AML regimes adherence to such international standards and its reputation as one of the premier offshore financial centres.

What advice would you give to fund managers who rely on their service providers to handle AML/KYC checks?

Fund managers should check (i) whether the AML regime being applied in respect of their Fund is the Cayman AML regime or the regime of jurisdiction recognised as having an equivalent AML regime, (ii) if it is the latter whether or not the relevant delegate is actually subject to the AML regime of that jurisdiction, and (iii) whether or not the delegate has the requisite personnel (in terms of numbers, training and experience) to maintain the AML / CFT procedures on the Fund’s behalf.

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Introduction

In a research paper on initial coin offerings (“ICOs”) published in December 2017, it was noted that fewer projects had reached their financing goals in November 2017 than in the previous months. It was also noted that most ICOs lacked a clear reason for using tokens and blockchain technology. Statistics published in the same research paper illustrated the fact that ICOs related to blockchain technology were among the most successful, together with projects targeting data storage, finance and online gaming. At the end of 2017, it was clear from the same statistics that most projects still remained in the “idea stage”, with very few prototypes and even fewer running platforms. Yet the appetite for ICOs has seemingly not diminished, as illustrated by the high number of events, publications and initiatives.

What this first wave of ICOs brought, however, is awareness of the issues to be addressed by regulators, lawyers and other advisors and service providers working with blockchain start-ups. It became clear that the blockchain entrepreneurs could not continue to rely on purely technological solutions ignoring existing legal and regulatory problems. As part of our series on FinTech, after discussing some of the risk factors related to cryptocurrencies (see Top Ten Risks for the Crypto-Currency Investor: A View from the Cayman Islands) and Cayman Islands laws which may be triggered in connection with ICOs (see Cayman Islands Legal Perspective on the Regulation of Initial Coin Offerings (ICOs)), this issue will focus on some best practices for blockchain start-ups in the Cayman Islands in preparation of an ICO.

Do Categories of Tokens Matter?

The term ICO refers to an “initial coin offering”, i.e. a public sale of digital tokens or coins, to which various rights may be attached. Although there is no generally recognized classification, industry experts and some regulators have started referring to several categories of tokens based on the underlying economics, as determined on a case-by-case basis after review of the white paper published by the founder team.

  • Payment Tokens or Cryptocurrencies: Modeled after Bitcoin (BTC), some tokens (or coins) have no rights attached giving the holders a claim against the issuer, but they are designed to be limited in quantity, similar to precious metals, so that their value may increase based on their adoption by various users. Their value is also tied to the benefits provided by the blockchain platform they are built on (e.g., security, decentralization, disintermediation, anonymity or pseudo-anonymity). Although Mastercoin is generally regarded as the first ICO, Ethereum (ETH) was more successful in 2014, raising 25,000 BTC from investors in the first two weeks of the public sale and later on developing Ethereum as the largest platform for ICOs.
  • Utility Tokens: Most ICOs sell tokens which are designed to provide access to an application or service on a blockchain-based platform. Such tokens may be “burned” upon use, but new tokens can generally be purchased on the same platform. Such tokens are the blockchain version of digital coupons, but with the additional benefit of being tradeable securely and pseudo-anonymously (and benefiting from a potential increase in value if the number of users of the platform increases).
  • Asset Tokens: Tokens which give the holder a portion of the profits of the business or other economic rights are considered to be securities in several jurisdictions, i.e. a blockchain version of equity interests, debt instruments, etc.
  • Hybrid or Other Tokens: Any combination of the above can generally be considered a hybrid token; this may trigger an overlap of applicable regulations.

In some cases, the same blockchain project generates two or more categories of tokens with different rights attached, which are issued in the different stages of the project. In other cases, investment contracts for future tokens (SAFT, SAFTE, and several other variations) are signed before an issuance, enabling the founder team to develop a working model of the blockchain project before any “public” sale. Finally, some blockchain start-ups do not offer any type of coins or tokens.

The assumption would therefore be that issuing tokens in a certain “category” would trigger regulation, while another “category” may not. Such assumption, however, if not confirmed by review by specialist legal counsel, exposes the issuer to substantial legal and regulatory risks, especially since the regulators’ position, as expressed through “Guidance Notes” or unofficial statements, may change over time.  Also, ICO founder teams are generally based in multiple jurisdictions, and promotion efforts may target investors from various countries. Without realizing it, ICO founder teams may in fact be required to comply with several very different regulatory environments.

What Guidance for Cayman Companies Undertaking an ICO?

As at the date of this publication, there is still no specific regulation in the Cayman Islands addressing ICOs and blockchain technology. However, several of the existing laws and regulations are applicable to blockchain start-up companies and their pre-ICO and ICO operations. Also, a recent series of statements have been made by the Cayman regulatory authority, which generally encourage the blockchain ecosystem development. The Cayman Islands Monetary Authority (“CIMA”) itself has unofficially commented that cryptocurrencies, ICOs and FinTech generally are here to stay and that although the Cayman Islands Securities Investment Business Law (2015 Revision) (SIBL) does not include cryptocurrencies or tokens in its list of securities , CIMA may be issuing further guidance to issuers and promoters as they increasingly look to access “real money” through the offshore funds industry.

As things currently stand, ICO founder teams and promoters looking at the Cayman Islands for incorporation of their company or companies should be aware of the following best practices:

1. Have a Real Project. Setting up a Cayman Islands exempt company for your ICO (the “Company”) is not complicated and it usually only takes a few business days. However, a successful project requires more than a legal entity. Based on your business model and strategy, the legal vehicle which may be best suited for your purposes may also be different: for example, a foundation company instead of a regular exempt company may work best if your purpose is to create a stand-alone blockchain ecosystem, not “owned” by a particular person or group of persons. For more details regarding Cayman Islands foundation companies, see our alert Foundation Companies can now be incorporated in the Cayman Islands. Generally, the founder team should be prepared to answer the following questions:

    • What are the key features of the service/platform to be developed?Which market participants (investors) will the ICO target? Are there any restrictions regarding investors? Are the founders planning to bring in pre-ICO investors on a private placement basis (through SAFT agreements or otherwise)?
    • What is the project timeline (ICO phases, milestones, etc.)?
    • What technologies will be used (new or existing, open source project vs. blockchain patent envisaged, etc.)
    • Which cryptocurrencies will be accepted? Will the ICO have a floor or a cap?
    • Have the funds already been allocated to a specific project? How will surplus funds be handled?
    • Will a token be created in the course of the ICO?
    • Which functionalities are planned for the token? What rights will be attached?
    • At which point, by whom and in which manner will the token be transferred to the investors?
    • How can the token be transferred (compatible wallets, technical standards)?
    • Is the token already functional at the time of transfer? If yes, to what extent?
    • How and where can the token be acquired or sold after the ICO (secondary market platforms)?
    • Will it be possible to use the tokens to buy goods or services or make payments to third parties?
    • Are there plans for the Company to buy back tokens?
    • Which service providers will be involved with the ICO?

2. Have a Real Lawyer. A lot of the information generally available on the web about setting up a company or opening up a bank account in the Cayman Islands is inaccurate. Even going to a real CIMA-regulated corporate service provider may not be sufficient in itself, as they will only be able to help with setting up the company and certain basic compliance issues. It is imperative that founder teams use legal counsels who regularly operate within the ICO space and have detailed, specialist knowledge of the regulatory landscape. As shown by the recent wave of enforcement actions and subpoenas in the United States , regulators will not hesitate to go after ICOs if not properly carried out, and the founder team may be forced to return funds, raise compliance standards or face sanctions.

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Notes

  1. EY research: initial coin offerings (ICOs), December 2017, in which Ernst & Young studied 372 ICOs having raised US$3.7b in funds.
  2. Such as FINMA, the Swiss regulator – see https://www.finma.ch/en/news/2018/02/20180216-mm-ico-wegleitung/
  3. From the Ethereum self-published statistics – see https://blog.ethereum.org/2014/08/08/ether-sale-a-statistical-overview/
  4. It has been pointed out by many that although blockchain gives the impression of anonymity, in reality most wallets can be linked to a physical identity and in reality only offer a sort of pseudo-anonymity. For example, KYC/AML obligations apply to all cryptocurrency exchange platforms and buying cryptocurrencies on such exchanges is subject to the user providing government-issued identification.
  5. For this reason, it may be considered that all tokens are in reality bought for speculative purposes and therefore all tokens (even utility tokens) should be treated as securities in the US (among other jurisdictions).
  6. For example, China and South Korea have banned all ICOs. Other regulators have issued warnings to investors and guidance notes, but reserve the possibility to adopt a specific ICO-related regulation or take action at a later stage.
  7. Quote from Ms. Heather Smith, Head of Investments & Securities Division of the Cayman Islands Monetary Authority (CIMA), during the Opalesque 2018 Cayman Roundtable.
  8. Schedule 1 of Cayman Islands Securities Investment Business Law (2015 Revision) (SIBL) exclusively refers to shares (including stock of any kind in the share capital of a company, interests in a limited partnership, or units of participation in a unit trust), instruments creating or acknowledging indebtedness such as debentures, debenture stock, loan stock, bonds, certificates of deposit and any other instruments creating or acknowledging indebtedness, instruments giving entitlements to securities, certificates representing certain securities, options, futures and contracts for differences.
  9. Quote from Ms. Smith during the Opalesque 2018 Cayman Roundtable, see FN vii above.
  10. On 24 August 2017, following a request for information from the Securities and Exchange Commission (SEC), Protostarr cancelled its ICO and refunded its investors. On 4 December 2017, the SEC obtained an emergency asset freeze to halt the ICO of Quebec-based PlexCorps. On 11 December 2017, the SEC ordered Munchee Inc. to cease and desist its ongoing token sale. On 17 January 2018, the Enforcement Section of the Massachusetts Securities Division of the Office of the Secretary of the Commonwealth brought an enforcement action against Caviar, a Cayman Islands company, and its founder. On 30 January 2018, the SEC obtained a court order to halt the ICO of Dallas-based AriseBank for allegedly conducting a fraudulent ICO.

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The Cayman Islands Monetary Authority (CIMA) conducts inspections to ensure that regulated entities comply with applicable laws and regulations. We set out below a general guide on inspections by CIMA.

1. Purpose of Inspections

  • To assess compliance with regulatory requirements.
  • To evaluate risk management practices.
  •  To verify financial records and reports.
  • To assess overall operational effectiveness.

2. Types of Inspections

  • Documentation: Ensure all relevant records, including financial statements, policies, and procedures
    are up-to-date and accessible.
  •  Staff Training: Make sure staff are aware of the inspection process and their roles.
  • Internal Review: Conduct internal audits to identify and rectify any compliance issues before the
    inspection.

4. Inspection Process

  • Notification: CIMA will inform the entity about the inspection and its scope.
  • On-site Inspection: CIMA inspectors visit the premises (or have an opening call to speak with Directors, Senior Officers (e.g. Compliance Officer) and examine records, interview staff, and review operational practices.
  • Exit Meeting: An initial feedback session may be held at the end of the inspection to discuss
    observations

5. Post-Inspection Actions

  • Report Issuance: CIMA will issue a report outlining findings and any required corrective actions.
  • Remediation Plan: Entities may need to develop a plan to address identified issues and submit it to CIMA.
  • Follow-Up Inspections: Depending on the outcome, CIMA may conduct follow-up inspections to ensure compliance.

6. Key Compliance Areas

  • Anti-Money Laundering (AML) regulations.
  • Risk management frameworks.
  • Governance and operational procedures.
  • Financial reporting and disclosures.

7. Best Practices

  • Keep clear and organized records.
  • Maintain ongoing communication with CIMA.
  • Foster a culture of compliance within the organization.
  • Regularly review and update policies in line with new regulations

8. Resources

  • CIMA’s official website provides guidelines, templates, and regulatory updates.
  • Engage with industry associations for insights and support.

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Further Assistance

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to CIMA’s regulatory inspections, please contact us. We would be delighted to assist.

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Corporate governance in the Cayman Islands primarily follows international standards and best practices, influenced by various factors including legal frameworks, regulatory bodies like the Cayman Islands Monetary Authority (“CIMA”), and market expectations. We set out below some of the key principles that regulated entities in the Cayman Islands are generally expected to adhere to:

1. Transparency

Entities which are regulated by CIMA should provide accurate and timely information to stakeholders, including shareholders (or interestholders in a limited partnership) and regulators. This includes financial reporting, compliance filings, and any material changes that could affect shareholders/interestholders.

2. Accountability:

The board of directors of a Cayman Islands company (“Board”) may delegate some of its responsibility to others (e.g. the Board of Directors of a Fund delegating management of its assets to a Fund Manager) but is nonetheless required to exercise supervisory oversight and control over those delegated functions and moreover the Board should be accountable for its actions and decisions. This includes setting clear roles and responsibilities, establishing performance metrics, and ensuring that there are mechanisms in place to evaluate the performance of the Board and management.

3. Fairness

Depending on the subject matter of the rights and entitlements in question, shareholders (particularly those in the same class) should be treated fairly and/or equitably, with their rights respected and any conflicts of interest managed appropriately.

4. Board Effectiveness:

The Board should be composed of qualified individuals with the appropriate diverse skills, experience, and independence to make informed decisions. Regular assessments of Board performance and training opportunities are encouraged to enhance effectiveness.

5. Risk Management:

Effective risk management frameworks should be in place to identify, assess, and mitigate the internal and external risks that the company faces. This includes financial, operational, legal, and reputational risks.

6. Regulatory Compliance:

Companies must comply with the legal and regulatory frameworks applicable in the Cayman Islands, including the Companies Act, the Beneficial Ownership Transparency Act, the Securities
Investment Business Act, the Mutual Funds Act, the Private Funds Act, and relevant guidelines issued by regulatory bodies such as CIMA.

7. Ethical Standards

Companies should promote and adhere to high ethical standards and conduct business with integrity. This involves establishing codes of conduct, policies to deal with conflict of interest appropriately, anti-corruption policies, and procedures for reporting unethical behaviour.

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By following these principles consistently, Cayman Islands regulated entities can effectively enhance their corporate governance practices, comply with Cayman Islands legal requirements and thereby avoid fines and penalties, align with best practices globally, and foster trust among their stakeholders.

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

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Overview

Christal is based in Loeb Smith’s Cayman Islands Office where her role focuses on providing board support and guidance to Governing Boards and Committees in respect of Corporate Governance matters for Cayman Islands and BVI investment funds and companies. In alignment with regulatory frameworks, she assists clients to maintain effective board oversight and control with meetings and other best practices in corporate governance.

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Open-Ended Funds

The Mutual Funds Act (for open-ended funds) and the Private Funds Act (for closed-ended funds) are the two main statutes relevant to the regulation of investment funds in the Cayman Islands. The Cayman Islands Monetary Authority (“CIMA”) is the regulatory body responsible for compliance with these laws and related regulations and has broad powers of enforcement.

The Mutual Funds Act defines a mutual fund as “a company, unit trust or partnership that issues equity interests, the purpose or effect of which is the pooling of investor funds with the aim of spreading investment risks and enabling investors in the mutual fund to receive profits or gains from the acquisition, holding, management or disposal of investments but does not include a person licensed under the Banks and Trust Companies Act (2021 Revision)…” The reference to “equity interests” means that debt instruments (including warrants, convertibles and sukuk instruments) are excluded and funds issuing such instruments will not be required to register with CIMA as a mutual fund.

Limited Investor Funds:

The scope of regulation extends to Cayman Islands incorporated or established master funds that have one or more CIMA-regulated feeder funds and hold investments and conduct trading activities. Changes to the Mutual Funds Act means that certain mutual funds, which were previously exempted from registration with CIMA because they had 15 investors or less, the majority of whom have the power to appoint and/or remove the operators of the investment fund (the operator being the directors, the general partner or the trustee, as is relevant given the corporate structure used for the fund) (“Limited Investor Funds”), are no longer exempt from registration with CIMA. Limited Investor Funds are now required to be registered with, and are regulated by, CIMA.

Audit Requirement:

Each CIMA registered mutual fund is required to have its accounts audited annually and filed by a firm of auditors on the CIMA approved list of auditors with CIMA within six (6) months of the end of each financial year of the mutual fund (along with a Financial Annual Return in CIMA’s prescribed form).

Single Investor Funds

Mutual funds that are established for a sole investor and do not involve the pooling of investor funds fall outside the regulatory framework of the Mutual Funds Act. Nonetheless, a mutual fund with a single investor can apply for voluntary registration to, among other things, benefit from the status of being a regulated fund.

Cayman Islands laws and regulations do not impose restrictions on, or prescribe rules for investment strategies of open-ended funds, or their use of leverage, shorting or other techniques.

Registration of Directors:

Directors of mutual funds structured as exempted companies, managers of investment funds structured as LLCs and directors of general partners of investment funds structured as an exempted limited partnership (in each case, wherever in the world these persons are located, not just Cayman Islands-based directors) regulated by CIMA are required to register with CIMA under the Directors Registration and Licensing Act (DRLA). The DRLA enables CIMA to verify certain information in respect of directors or managers of CIMA-registered funds. There is currently no requirement for registration of directors with CIMA under the DRLA who are directors of closed-ended funds that fall within the scope of the Private Funds Act. However, this may change in the future.

Closed-Ended Funds

The Private Funds Act requires the registration of closed-ended funds (typically, investment funds that do not grant investors with a right or entitlement to withdraw or redeem their shares or interests from the fund upon notice) with CIMA. The Private Funds Act applies to private equity funds, real estate funds, venture capital funds, and the other types of closed-ended funds set up as Cayman Islands limited partnerships, companies (including SPCs), unit trusts and limited liability companies. The Private Funds Act also applies to non-Cayman Islands private funds carrying on business or attempting to carry on business in or from the Cayman Islands.
In addition to registration with CIMA, the Private Funds Act also imposes the following regulatory requirements to be met by private funds:

Audit

Each private fund is required to have its accounts audited annually and filed by a firm of auditors on the CIMA approved list of auditors with CIMA within six (6) months of the end of each financial year of the private fund (along with a financial annual return in CIMA’s prescribed form).

Valuation of assets

A private fund must have appropriate and consistent procedures for the purposes of proper valuations of its assets, which ensures that valuations are conducted in accordance with the requirements in the Private Funds Act. Valuations of the assets of a private fund are required to be carried out at a frequency that is appropriate to the assets held by the private fund and, in any case, on at least an annual basis.

Safekeeping of fund assets

The Private Funds Act requires a custodian: (1) to hold the private fund’s assets that are capable of physical delivery or capable of registration in a custodial account except where that is neither practical nor proportionate given the nature of the private fund and the type of assets held; and (2) to verify title to, and maintain records of, fund assets.

Cash monitoring

The Private Funds Act requires a private fund to appoint an administrator, custodian or another independent third party (or the manager or operator of the private fund):

  • to monitor the cash flows of the private fund;
  • to ensure that all cash has been booked in cash accounts opened in the name, or for the account, of the private fund; and
  • to ensure that all payments made by investors in respect of investment interests have been received.

Identification of securities

A private fund that regularly trades securities or holds them on a consistent basis must maintain a record of the identification codes of the securities that it trades and holds and make this available to CIMA upon request.

Anti-Money Laundering

All investment funds are required to comply with Cayman Islands anti-money laundering legislation and regulations, including appointing an anti-money laundering compliance officer, a money laundering reporting officer, and a deputy money laundering reporting officer. The Cayman Islands government and CIMA actively work with the European Union, the Organisation for Economic Co-operation and Development, the Financial Action Task Force and regulators in numerous jurisdictions to observe and maintain international standards on transparency, and good corporate governance.

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Further Assistance

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Briefing, please contact us. We would be delighted to assist.

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Loeb Smith Attorneys is pleased to announce that our team has been rated as a Leading Firm in client satisfaction 2024 by the Legal 500.

Every year the Legal 500 team speak to clients and peers about the top law firms around the globe.

After in-depth client feedback research for over a 6-years period and all aspects of law firm practice were analyzed and measures based on client service and customer experience from responsiveness, efficiency, communications, billing transparency, through lawyer quality and industry profile, only the firms in the top percentile firms receive this kite mark badge to recognize the high level of customer satisfaction they are delivering.

Loeb Smith Attorneys is very proud to have received this ranking from the Legal 500 as it comes from direct engagement with our clients. Special thanks to our much-valued clients and partners as their continued trust and support in us are the key reasons for our achievement.

This achievement is another testament to our team’s expertise and Loeb Smith Attorneys’ commitment in client services.

With offices in the British Virgin Islands, the Cayman Islands and Hong Kong, Loeb Smith Attorneys has won numerous awards over this year and has achieved high rankings in well-known international legal directories.

 

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A Private Trust Company (PTC) is an entity that is established with the sole purpose of acting as a corporate trustee to a trust or a number of trusts, provided those trusts are “connected”. The term “Connected trust business” means trust business where the settlors of funds to the trusts are all “connected persons” in relation to each other. PTCs afford high net worth individuals a greater control over their assets and have become extremely attractive for families seeking to manage their wealth effectively.

The regulatory basis for the operation of trust companies in the Cayman Islands is found in the Banks and Trust Companies Act (2021 Revision) as amended (BTCA) and the Private Trust Companies Regulations (2020 Revision) as amended (PTCR). These regulations provide for the establishment of PTCs which do not require a licence to carry on connected trust business.

PTCs – requirements 

The PTC is founded under the provisions of the PTCR. The main requirements for the PTC include:

  1. It must maintain a registered office at the office of a company that holds an unrestricted Trust licence granted by the Cayman Islands Monetary Authority (CIMA) provided for under the BTCA;
  2. It must allow CIMA, at any given time, to inspect all its documents and records or that should be held at the registered office;
  3. It must keep at its registered office and make available for inspection at its registered office, in relation to each relevant trust, adequate, accurate and up to date copies of the trust deed or other documents containing or recording the terms of the trust, names and addresses of the settlor, protector, enforcer, contributor to the trust, any beneficiary to whom a distribution is made from the trust, any deed or other document varying the terms of the trust and all financial transactional records of the PTC and its connected trust business;
  4. It must file an annual declaration with CIMA every year declaring the name of the PTC, the name and addresses of the directors, shareholders (if any), the name of the holder of the Trust licence providing the registered office of the PTC, that the Company is a PTC which does not require a licence to carry on connected trust business and that the PTC is in compliance with the requirements of the PTCR;
  5. It must file with CIMA, the identification of the directors and shareholders of the PTC;
  6. The PTCR prescribes that a natural person must be appointed as a director for the PTC;
  7. The PTC must include the word “Private Trust Company” or the letters “PTC” in the name by which the company is registered under the Cayman Islands’ Companies Act;
  8. It must not solicit or receive contributions in respect of trusts of which it is trustee from the public or persons other than those who are, in relation to each other, connected persons.

Private Trust Companies (PTCs) vs. Restricted Trust Licence Companies (RTLCs) 

  1. Fees
    The initial registration fee for a PTC is US$4,268.29 (CI$3500) and thereafter an annual registration fee of the same amount is applied to be paid before the 31st day of January every year. The application fee for an RTLC is US$2,439.02 (CI$2000) and the fee paid on the grant of a licence and subsequently every year is US$8,536.59 (CI$7,000).
  2. Net worth Requirements
    The PTCR does not prescribe a minimum net worth requirement for the PTC. The RTLC, on the other hand, is required to have a minimum net worth of US$25,000 (CI$20,000).
  3. Audit
    There is no requirement for the PTC to file audited accounts with CIMA. The RTLC is under an obligation to file its audited accounts annually with CIMA by an auditor approved by CIMA.
  4. Directors
    A PTC is required to have a natural person appointed as director, but the PTCR is silent on the minimum number of directors. CIMA however recommends a minimum of two individual directors. It is a mandatory requirement for an RTLC to have at least two natural persons appointed as directors on its Board. There is no requirement for the directors to be approved by CIMA.

Timing
A PTC can be up and running within three to four business days from the day the application for registration has been submitted to CIMA. The turnaround for processing an application for an RTLC is six to eight weeks from the date the application was submitted to CIMA. PTCs have gained more popularity in the Cayman Islands as CIMA has noted a steady increase in the number of PTCs seeking to be registered over the past eight (8) years based on the table below which has been published on the CIMA website.Shareholders of a PTC 

The shares of a PTC are commonly held by one or more individuals, or by a company limited by guarantee or in a STAR Trust. It is advisable to use a corporate entity as opposed to an individual because in the event of death, the devolution of shares may take a long time owing to the probate process.

Benefits of using PTCS 

PTCs are regularly used by high net worth families in their wealth structuring for a number of reasons:

  1. they protect confidentiality and are lightly regulated when compared to using a large and highly regulated international financial institutions as trustee;
  2. they provide a comprehensive framework under which family members and advisors can be involved in decision making (by being on the board of Directors of the PTC) which gives room for flexibility as families can tailor the PTC based on their personal needs and objectives;
  3. they can avoid the complications of succession when used in conjunction with a STAR Trust (i.e. a STAR Trust can be used to hold all the shares of the PTC).
  4. The speed at which a PTC can be established (i.e. 3-4 days), and the relatively low cost of operation have made PTCs extremely attractive to HNW families and their advisors.

Further Assistance 

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the formation of a Cayman Islands Private Trust Companies, establishing family offices or protecting private wealth generally, please contact us.  We would be delighted to assist.

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E. elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

Loeb Smith Attorneys is pleased to announce that our Hong Kong team has been ranked on the firms to watch list published by Asian Legal Business 

Hong Kong’s status as a global financial centre has fostered a highly competitive legal market. Fast growing law firms have emerged as significant contributors, demonstrating exceptional capabilities and a deep understanding of local business needs. ALB continues to identify and recognise these standout firms for their achievements.

With offices in the British Virgin Islands, the Cayman Islands and Hong Kong, our latest accolade is another testament to our team’s expertise and Loeb Smith Attorneys’ commitment in Asia.

Visit ALB to read the announcement:

https://www.legalbusinessonline.com/features/rankings-alb-hong-kong-firms-watch-2024 

About Loeb Smith Attorneys 

Loeb Smith Attorneys is one of the leading offshore corporate law firms considered one of the most active and knowledgeable firms for advising on offshore investment funds formation and launch of all asset classes including public securities, private equity, venture capital, real estate, and virtual assets. Other areas of strength and growth are advising on M&A, Finance, Corporate Restructurings, Capital Markets, Regulatory Compliance, Investments, Logistics, Shipping and Aviation.

Considered a leading law firm in the Fintech and Blockchain Technology space, Loeb Smith also advises on token issuances, application for VASP licences for Web 3.0 businesses, Metaverse infrastructure and other virtual asset service providers, and utilising Cayman and BVI structures to develop virtual asset platforms for DAOs. Loeb Smith’s clients are investment managers, financial institutions, onshore counsels, and HNWIs who the firm advises on day-to-day legal issues and complex, strategic matters.

Some of our firm’s recent accolades are: winning Leading Firm in Client Satisfaction 2024 award by Legal 500; ranked in Investment Funds category and listed as one of the Firms To Watch for Corporate & Commercial by Legal 500 in 2024; named as Recommended Firm by IFLR 1000 from 2021 to 2024; named in Offshore Client Choice List by Asian Legal Business from 2021 to 2023; ranked amongst Top 30 Asia’s Fastest Growing Law Firms by Asian Legal Business in 2023 and 2024; ranked in The A-List: Top Offshore Lawyers by Asia Business Law Journal in 2022 and 2024; named as one of the ALB Hong Kong Firms to Watch 2024; winning Best Law Firm – Fund Domicile at Hedgeweek US Emerging Manager Awards 2023 and 2024; winning Best Law Firm – Fund Domicile at Private Equity Wire US Emerging Manager Awards 2023 and 2024; winning Best Law Firm – Fund Domicile at Private Equity Wire US Awards 2023; and winning The Best Offshore Law Firm – Client Service at With Intelligence HFM Asia Services Awards 2024.

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The Perpetuities (Amendment) Act, 2024 (the “Act”) (which is not yet in force) abolishes the mandatory 150-year perpetuity period for ordinary trusts established after the Act comes into force (except with respect to trusts holding land or interests in land situated in the Cayman Islands). By dis-applying the rule against perpetuities in respect of Cayman Islands ordinary trusts, such trusts will be able to last indefinitely.

What is the position before the Act comes into force? 

Prior to the Act, Cayman Islands trusts (except for STAR trusts which were not subject to the perpetuity rule) were subject to the rule against perpetuities, which means that these trusts could not last perpetually and instead are required to vest within a perpetuity period of 150 years, at which point the trust property was required to be distributed in accordance with the terms of the trust.

How does this affect existing trusts? 

Section 20(2) of the Act sets out the categories of interested parties (e.g. trustees, settlors and enforcers of existing trusts) who may apply to the Grand Court for an order declaring that the rule against perpetuities in respect of existing Cayman Islands trusts established before the Act comes into force does not apply to a disposition in respect of the trust and the property which is the subject of the disposition in respect of the trust. Such existing trusts would then be able to carry on indefinitely.

Key takeaway from this change 

The disapplication of the mandatory 150-year perpetuity period brings the Cayman Islands in line with many other offshore jurisdictions and reflects the jurisdiction’s focus on enhancing its laws to maintain its position as a premier offshore jurisdiction for clients globally in terms of, among other things, asset protection and family succession planning purposes.

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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 unfair prejudice claims in the BVI, please contact your usual Loeb Smith attorney or any of the following:

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E. elizabeth.kenny@loebsmith.com
E: edmond.fung@loebsmith.com
E: vivian.huang@loebsmith.com
E: faye.huang@loebsmith.com
E: yun.sheng@loebsmith.com

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