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ContactEconomic Substance in the British Virgin Islands
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On 5 February 2024, the Securities and Futures Commission in Hong Kong (“SFC”) published a Statement of Disciplinary Action, which found that PICC Asset Management (Hong Kong) Company Limited (“PICC”), a corporation licensed to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (“SFO”), was guilty of misconduct for failure to discharge its duties as the manager of a Cayman Islands incorporated fund (“Fund”) under the Fund Manager Code of Conduct and the Code of Conduct for Persons Licensed by or Registered with the SFC. PICC was publicly reprimanded and fined HK$2.8 million by the SFC. In particular, the SFC found that PICC had failed to:
(a) properly manage the Fund to ensure that the Fund’s investments were in line with its stated investment objective and investment restrictions;
(b) implement adequate and effective internal controls to properly manage the risks of the Fund; and
(c) adequately supervise the investment manager who managed the Fund on behalf of PICC.
The said Statement of Disciplinary Action can be accessed here.
The above decision by the SFC is an important reminder that Hong Kong domiciled managers licensed to carry on regulated activities (including Type 9 (asset management) regulated activity) under the SFO must ensure that their actual operations when managing Cayman Islands incorporated funds must comply with the Fund Manager Code of Conduct and the Code of Conduct for Persons Licensed by or Registered with the SFC, failing which the SFC may take various disciplinary actions.
Cayman Islands law relating to Overseas Managers
There is no requirement for the investment manager of a Cayman Islands investment fund to be resident or domiciled in the Cayman Islands and there are no specific statutes that seek to regulate overseas managers of Cayman investment funds. However, depending on the nature and extent of the responsibilities stated in the investment management agreement between a Cayman Islands fund and its overseas manager, the latter could fall foul of certain Cayman Islands laws governing the management of the fund.
Our legal briefing on Fund Management can be found here: Cayman Fund Management
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.
E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
BVI – The Virtual Assets Service Providers Act
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Introduction
Loeb Smith is pleased to welcome Ivy Wong to the firm as Senior Legal Director for its Corporate practice in the Hong Kong office, where her practice focuses on advising multi-national corporations and conglomerates, shareholders, investment funds, financial institutions, banks, public and private companies, as well as high net worth individuals. Ivy will become a Partner of the firm pending upon registration as a foreign lawyer in Hong Kong.
Ivy is a seasoned corporate transactional lawyer who is qualified in multiple jurisdictions and has led many unprecedented and high-profile cross-border transactions that won industry awards and recognitions. She was previously a Partner and had served as a regional steering committee chair and a global steering committee member for her practice at one of the largest international law firms. Her practice is primarily focused on cross-border corporate work, capital markets, corporate finance, merger and acquisition, investments and restructuring, compliance and general commercial work.
Ivy is highly experienced in communicating with regulators, providing solutions that meet both regulatory and commercial needs, and advising board members and senior management in their corporate planning and transactions. With a track record serving a wide range of industry sectors, multiple of Ivy’s recent transactions are in healthcare, biotech and life sciences sectors.
Ivy has been shortlisted for Euromoney Asia Women in Business Law Award for consecutive years and is named one of the leading practitioners in Hong Kong. She is a Vice Chair of the Social Sustainability Committee of The British Chamber of Commerce in Hong Kong and sits on the judging panel for the Hong Kong Corporate Governance and ESG Excellence Awards co-conferred by the Chamber of Hong Kong Listed Companies. She has been quoted and interviewed by international media and journals including Bloomberg, CNBC, The Wall Street Journal, The Economist and Reuters.
“Ivy’s addition adds greater depth and expertise to the firm’s corporate, capital markets and M&A practice in Hong Kong for its international clients and enables the firm to better serve its clients and their business needs in Asia, practice areas that continue to be a strategic priority for our firm.” said Gary Smith, Partner. “Ivy is an experienced corporate transactional lawyer with a strong market profile, and a wonderful addition to our growing team in Hong Kong focused on offshore legal expertise and outstanding client service.”
“I am pleased to have the opportunity to join the team, which is young and energetic, with a clear vision for growth and commitment to the region. What sets it apart is also its expertise in the virtual assets space that is both cutting edge and fast-growing, and also its responsiveness to the regulatory changes and delivery of timely and quality advice to its clients.” said Ivy Wong.
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By way of an update on our recent publication (which can be found here) that the Financial Action Task Force (FATF) had determined that the Cayman Islands has substantively fulfilled its action plan, and following completion of a recent on-site visit by the FATF, the Cayman Islands has now been de-listed from the FATF so-called “Grey list”.
The FATF plenary congratulated the Cayman Islands for its significant progress in addressing the strategic AML/CFT deficiencies previously identified during its mutual evaluations. The Cayman Islands will no longer be subject to the FATF’s increased monitoring process.
With its removal from the FATF’s Grey list there is an expectation that the Cayman Islands will be de-listed from the EU’s AML / CFT List shortly.
The Cayman Islands has continued to be the premier offshore jurisdiction for, among other things, structuring investment funds and special purpose vehicles notwithstanding its inclusion on each of the FATF Grey list and the EU’s AML/CFT List. One of the key reasons for this is that the jurisdiction operates a business friendly and well-regulated financial system underpinned not only by a belief in proportionate, risk-based regulation and a conviction to integrity and transparency, but also by the belief that appropriate regulation and international cooperation drive commercial success.
The removal of the Cayman Islands from the Grey list will hopefully serve to underscore the jurisdiction’s drive to adopt the highest international standards and industry best practices.
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 Legal Update, 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
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2023 Team Highlights
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Introduction
We are pleased to announce our firm’s recognition on The ALB Fast 30 list which reinforces the firm’s growth strategy in Asia by providing high quality technical legal advice and commercial solutions, outstanding client services, and continuous drive to stay at the forefront of the fast-changing business and technological landscapes in Asia.
We value that ALB has adequately appreciated the rapid and robust growth of Loeb Smith in the past year. We appreciate the recognition alongside other law firms in the region and are proud to have achieved a steady growth across our jurisdictions and practice areas and look forward to upholding the Loeb Smith standards of excellence.
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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We are pleased to share that Loeb Smith Attorneys has won Best Law Firm – Fund Domicile at the Private Equity Wire US Awards!
It feels great to see that our team’s relentless determination for successful closures has been recognized multiple times this year, including for the second time at Private Equity Wire Awards 2023. For the service provider categories, the nominated firms were based on a widespread survey of more than 500 GPs and other key industry participants. Congratulations to our Investment Funds team for their top notch legal advice and for working seamlessly between our offices in the BVI, the Cayman Islands and Hong Kong!
We thank Private Equity Wire and the clients for their vote!
Find out more here: https://awards.privateequitywire.co.uk/us-awards
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In recent years, especially during the COVID-19 pandemic, onboarding clients and monitoring business relationships on remote basis have become the dominant trend.
In light of such trend, the Cayman Islands Monetary Authority (“CIMA”) has timely amended the Guidance Notes on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in the Cayman Islands (the “Amended GN”) in August this year, which essentially codifies how Financial Service Providers (“FSPs”) can use e-KYC and/or digital identification (“ID”) systems to conduct remote onboarding and ongoing monitoring of business relationships. The Amended GN is also in line with the concepts in the previously-issued FATF guidance on how entities can use digital ID systems to conduct customer due diligence (“CDD”).
In this Briefing, we provide a brief overview of the principal concepts and requirements for remote onboarding and ongoing monitoring of business relationships according to the Amended GN.
What is e-KYC?
E-KYC refers to the process whereby a client’s identity is verified via electronic means.
What is a digital ID system?
A digital ID system refers to a system that covers the process of identity proofing/enrolment and authentication. Identity proofing and enrolment can be either digital or physical (documentary), or a combination, but binding, credentialing, authentication, and portability/federation must be digital.
Application of risk-based approach on remote onboarding and ongoing monitoring processes
In general, FSPs are required to apply a risk-based approach (“RBA”) on remote onboarding and ongoing monitoring of business relationships in order to assess money-laundering/terrorist financing (“ML/TF”) risks.
The decision to onboard a customer remotely, using e-KYC methods and/or digital ID technologies, will depend on the risks presented and assessed. Where applicable, FSPs are required to consider the application of tiered CDD.
Where an FSP identifies a higher risk of ML/TF, additional verification measures are require to be adopted to ensure the accuracy of e-KYC procedures.
Application of risk-based approach on the digital ID / e-KYC systems
In general, FSPs must consider the basic components of the technology solutions including digital ID/e-KYC systems and take an informed RBA when relying on these systems.
In this regard, the Amended GN introduced a concept of “assurance level”, which measures the level of confidence and accuracy in the reliability and independence of a digital ID system and its components.
When applying the RBA, FSPs are required to understand the chosen system’s assurance level and ensure that such level aligns with the assessed level of ML/TF risks of the relevant case. For instance, if it is determined that simplified due diligence is sufficient in cases of low ML/TF risk, FSPs may consider utilising digital ID systems/e-KYC processes with lower levels of assurance.
For e-KYC/digital ID systems with appropriate risk mitigation measures in place that meet ISO/IEC technical global standards for digital ID systems, they may present a standard level of risk, and may even be of a lower risk where higher assurance levels are and/or appropriate ML/TF risk control measures are present.
Additionally, before adopting a new digital ID/e-KYC system, an FSP should carry out formal risk assessments on such system, which include documented consideration of:
(a) how the proposed system works;
(b) the level of assurance that it provides; and
(c) any particular risks associated with it, inter alia, accuracy of the underlying information and/or technology, appropriateness of the application for the licensee’s client base (i.e. some applications are aligned to verify identification within a specific region), timeliness of the applications’ updates (i.e. sanctions lists), evaluation of the resilience and cyber security measures of the application, storage of personal information etc.
Customer due diligence
For the purpose of CDD, FSPs should put in place robust documented policies and procedures on new digital ID system/technology solutions, which may include (but are not limited to):
(a) a tiered CDD approach that leverages the new technology solutions with various assurance levels;
(b) policies for the secure electronic collection and retention of records by the new technology solutions;
(c) a process for enabling authorities to obtain from the new technology solutions the underlying identity information and evidence needed for identification and verification of individuals;
(d) anti-fraud and cybersecurity processes to support e-KYC/digital ID proofing and/or authentication for AML/CFT efforts resulting from the new technology solutions;
(e) back-up plans for possible instances where the new technology solution fails;
(f) a description of risk indicators that would prompt an FSP to refrain from utilising new digital ID system/technology solutions; and
(g) procedures for the regular, ongoing and independent review of the effectiveness of the new systems and processes used.
It is worth noting that when verifying customers that are corporate legal persons, FSPs are allowed to use publicly available sources, including company registries.
Government-issued identification in electronic form is also an acceptable CDD document, provided that the FSP takes a RBA and has suitable documented policies and procedures to ensure the authenticity of such electronic document(s).
Video-conferencing as a method of e-KYC
Video-conferencing is considered to be an e-KYC mechanism, so additional checks have to be conducted in the same way as other non-face-to-face measures.
FSPs shall implement appropriate controls during the video-conferencing process to verify the identity and authenticity of the ID documents presented.
If an eligible introducer or suitable certifier has met the client, they must confirm to the FSP that they have met the client via video-conferencing, including a photograph of the client or scanned copy of the certified documents.
When onboarding clients who are corporate legal persons or legal arrangements (trusts, foundations), video-conferencing may be used to identify natural persons relevant to such persons or arrangements, such as their directors and officers, ultimate beneficial owners, settlors or grantors, trustees, protectors, enforcers or those appointed to act on behalf of the client.
“Selfies”
“Selfie” photographs may be used as a documentation for evidence of identity, provided that such photographs are in colour and clearly show the person’s face, with that person holding the identity document in the same photograph to demonstrate it actually belongs to that person. A clear scanned copy in colour or photograph of the identity document shall also be provided.
Conclusion
The amendments in the Amended GN are much welcomed because it has the potential to significantly reduce uncertainties surrounding the use of e-KYC processes / digital ID systems when onboarding clients and monitoring business relationships. The changes also show CIMA’s willingness to keep up with FATF’s guidance and recommendations.
The ability to (i) verify clients/customers that are corporate legal persons, by using publicly available sources, including company registries, and (ii) use Government-issued identification in electronic form as acceptable CDD document (provided the FSP takes a RBA and has suitable documented policies and procedures to ensure the authenticity of such electronic document(s)) should facilitate client onboarding and assist with existing challenges in some jurisdictions in finding public notaries or appropriate certifiers of documents.
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.
E: robert.farrell@loebsmith.com
E: elizabeth.kenny@loebsmith.com
We are excited to announce that Loeb Smith has been shortlisted in two categories for the prestigious With Intelligence HFM Asian Services Awards:
With Intelligence HFM Asian Services Awards recognize and celebrate excellence in hedge fund services. The jury will announce the results at the ceremony taking place in Hong Kong on September 6, 2023, based on the following criteria:
- Commercial success and business growth
- Demonstration of product or service innovation
- Description of future product or service development possibilities
- Positive customer feedback via submitted testimonials
We would like to thank first of all our team in Hong Kong and across Cayman Islands and the BVI for their constant dedication, our clients in Asia for their support, and the HFM Asian Services jury members for this nomination!
This follows the recognition of Asian Legal Business’ Offshore Client Choice List 2023 for the third consecutive year as well as our Hong Kong Partner Peter Vas being awarded with ALB Hong Kong Rising Stars 2023.
For more information please visit https://hfmasiaservicesawards.com/hfmasianservicesawards2023/en/page/2023-shortlist
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