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AML risk meets SIBL entities

October 9, 2018
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If you are licensed under the Securities and Investment Bill (SIBL) in the Cayman Islands, or you are registered as an Excluded Person under SIBL, you can be forgiven for either thinking that much of the anti-money laundering framework doesn’t seem to apply to your business, or being confused about what you need to do to ensure you are fully compliant.

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Race To The Top: In A New Era

August 20, 2018
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IFCs have been under immense pressure for the past two decades to introduce ever increasing regulation of their financial services industry. Whether this pressure has been politically motivated (lopsided pressure from the OECD or EU- based bodies) or genuinely required is up for debate. But the end result is that many of the mainstream IFCs have taken the view that keeping up with reasonable global regulatory standards is the only way to go.

Striking A Balance: Tax Compli…

To say that such pressure has increased exponentially over the past three to five years would not be an exaggeration. New economic substance requirements, changes resulting from Caribbean Financial Action Task Force (CFATF) mutual evaluation reports, the OECD’s BEPS (Base Erosion and Profit Shifting) driven initiatives and the UK’s call for beneficial ownership public registries are among the key initiatives that have threatened to push the economies of all faint- hearted IFCs over the edge.
In the past, it has been argued that when there is pressure to increase regulations many IFCs engage in regulatory competition by offering less regulation to attract the clients from the newly and more well-regulated IFCs, resulting in the so- styled ‘race to the bottom’. This argument has been used for more than two decades beginning with the tax arbitrage argument. This ‘race to the bottom’ is, of course, unsustainable because the less regulated IFCs will eventually come under so much global pressure that they can no longer offer services and they risk eventually being forced to close their financial services centres down entirely.
The reverse competition, referred to as a ‘race to the top’, has also been criticised because of the risk that an IFC could win the ‘regulatory awards’ but regulate itself out of a thriving economy and jobs. This theory behind this latter type of race is not that the IFC will now lose many unscrupulous clients. It’s that an IFC may well lose many good and reputable clients because the sheer and immense increased cost of doing business in the jurisdiction (as a direct result of having to abide by many new regulatory procedures) may make some legitimate transactions commercially unviable, leading to a similar fate as its sister race; a declining economy.
The actual experience in some jurisdictions that have been involved in the ‘race to the top’, such as the Cayman Islands, is quite different from the theory. At the same time as the Cayman Islands has introduced numerous amendments to existing legislation, as well as introducing new laws and imposing tens of millions of dollars in additional compliance costs on financial services institutions, the jurisdiction continues to demonstrate a robust financial services sector. The number of Cayman Islands hedge funds stood at 10,992 in 2018 and all signs are that the jurisdiction will very shortly surpass its peak of just over 11,000 funds which occurred in 2013.
The Cayman Islands banking sector remains one of the strongest among IFCs, with over 650 billion in assets and the jurisdiction’s captive insurance sector has maintained steady growth.
Several other IFCs, including Bermuda and the BVI, have also demonstrated resilience in the face of increasing regulatory requirements on their financial services industry.

The Pressure
The following 3 key developments have imposed extraordinary pressure on IFCs within the past 3 years:
Beneficial Ownership
Several IFCs introduced legislation to establish beneficial ownership registers in 2017. The UK applied pressure on all of its territories operating as IFCs to introduce this new regime. The new requirements mean that companies within the jurisdiction must create and maintain a register of beneficial ownership, unless they fall within certain categories of exemption. The Cayman Islands and several other IFCs have already established these registries. The purpose of the registries is, essentially, to enable law enforcement agencies and regulators the ability to easily obtain information on the ownership of entities to facilitate any investigations.
Despite being viewed by many clients as a risk to their legitimate right to financial privacy, the initiative has not had a material negative impact on IFCs.
Economic Substance Initiative
Although the pressure came from the EU, this initiative is influenced partly by the OECD’s BEPs project which focuses on the extent to which international companies can superficially engineer their operations to minimise their tax burden. The approach taken by BEPs is unique in that it does not distinguish between whether the reduction of taxes is carried out illegally or legally, but merely that there is a method to reduce payment of tax in one country.
Economic substance requirements seek to establish minimum legal requirements on international companies doing business from IFCs to demonstrate that these companies have a substantial economic presence in the jurisdictions from which they are earning profits. The onus is placed on each company to prove that it does indeed have a physical economic presence in the jurisdiction from which it earns profits from certain activities.
While, technically, economic substance laws have already been enacted in most of the mainstream IFCs, it will take some time for clarity on what is regarded as ‘adequate’ proof that each company meets the economic substance standards. This is the case largely because there are no current globally adopted economic substance measures and it’s likely that only through the courts when challenged, or via regulatory inspections, will precedents be established to give more clarity for IFC clients, For the time being, clients are advised to make some efforts, based on the best judgement of their advisors, to put in place measures to meet the general principles outlined in the legislation.
To date, this initiative has not had any material impact on IFCs although it has the potential to have a significant impact. The new requirements provide an opportunity for increased economic activity within IFCs to the extent that companies need to establish a more significant physical presence. On the other hand, if such presence presents an overbearing increase in a company’s operational costs there is also a risk that IFCs may lose some clients. The net effect can be assessed over the next few years once the law has been in force for a longer period.
CFATF Mutual Evaluation Exercise
Many Caribbean IFCs have recently undergone their 4th Mutual Evaluation Review (MER) by the CFATF. This is by far one of the most significant developments impacting Caribbean IFCs and has resulted in many recommended enhancements to each IFC’s anti money laundering, terrorist financing and proliferation financing framework. A raft of legislative and regulatory changes are required in most IFCs, resulting in many tens of millions of dollars being allocated to increased public sector staff, systems, new departments, legislation, and additional public awareness and education. In addition, the increased reporting requirements on the financial services industry will most certainly result in a significant increase in compliance related operational costs for hundreds of businesses in the private sector.

Why Is the ‘Race To The Top’ So Different Now?


Despite all of these changes, many of the more established IFCs in the Caribbean are likely not only to survive but continue to experience growth in their financial services sectors. The so- styled ‘race to the top’ is likely to have a positive impact for the following two reasons:


Correspondent Banking Relationships


Access to the correspondent banking network can no longer be taken for granted by financial institutions operating in IFCs which need to move funds across borders to facilitate clients’ transactions. Over the past years, many US based correspondent banks have been engaged significantly in ‘De-Risking’, as a direct result of pressures from US regulators, by closing accounts held by institutions operating in certain sectors (for example, money remittance or casino services or certain jurisdictions deemed as high risk).
When a US- based correspondent bank considers the risk profile of each entity, it looks carefully at the jurisdiction from which that entity operates. The fact that several Caribbean- based IFCs have made significant enhancements to their regulatory frameworks will be viewed positively by many US- based correspondents.
In that sense, the ‘race to the top’ is no longer a luxury but essential to survival. It also means that there are significant benefits to an IFC in implementing these new onerous and costly enhancements to their regulatory frameworks. For an IFC Government, having a fully functioning financial system whereby the domestic and international financial sectors can participate fully in the globally markets through free movements of funds takes priority over whether several businesses may lose clients, or whether a jurisdiction might see a reduction in some of its financial services licenses.


Client Perception and Branding Considerations


Perception is reality and for IFCs there is no shortage of misperceptions perpetuating an image of a 1980s’ world where very few countries (including the OECD member countries) had anti money laundering legislation in place. For the most part, this perception issue did not have a material negative impact on IFCs between the early 2000s and 2015. But over the past three to five years, there seems to be a change in client perceptions based partly on pressures from onshore regulators as well as the fact that media coverage is included in the long list of information being assessed when a client considers doing business in a certain jurisdiction. Take, for example, a major fund group looking to establish a new entity for investors. Saying that the fund will be incorporated in country X which is on the FATF blacklist and has a long list of sanctions against it will make all the difference in comparison to creating that vehicle in one of the more well-known and highly regulated IFCs such as the Cayman Islands. In today’s era, and in addition to potential investors in the fund, third party service providers, such as fund administrators, auditors, and legal counsel will all require some level of confidence that the fund will be operating from a credible IFC. Indeed, very few credible investors will commit to the fund manager if that’s not the case.
While there are still several good reasons why IFCs need to ensure continued balance between the extent of regulation and commercial success, the lines between the two have become increasingly blurred simply because being well regulated is an even more important factor today than it was a decade ago.
IFCs that can afford to make the costly adjustments to their regulatory frameworks, providing that such changes are genuinely global standards and a level playing field remains, will continue to do well. But perhaps, more importantly, those that cannot won’t be in the race at all.

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Digital IDs can resolve Caymanian status question

May 22, 2018
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The solution to the growing problem of Caymanians needing to prove their status is most likely to be found through the use of digital technology, Premier Alden McLaughlin told an industry conference in Cayman on Thursday. Speaking at the Cayman Islands Digital Economy Conference (CYDEC), held at the Kimpton Seafire, McLaughlin said the ability to identify who is Caymanian has become ever more important to gain access to voting and employment opportunities. 

“Having to prove that you are Caymanian can be onerous, and having to do it over and over when changing jobs for instance can be annoying to say the least,” the premier said. “So it is important that we find some way to solve this issue and it is thought that by using a digital identification, where ones status as a Caymanian is proven for once and all and linked to your digital ID, is likely the best solution to this problem.  And potentially this ID will also serve as your voter ID, driver’s licence as well as identity card.”

McLaughlin said the government had made some important progress in delivering public services online, notably in the business sector, with company registrations, land registry and work permits, along with areas that most have welcomed, like online driving licences and motor vehicle registration, which would otherwise involve long queues and often a return visit.

Today some 36% of police clearances are done online, he stated, but there is much more to be done.

“But certainly the last administration that I lead, as well as the current administration, is taking e-Government seriously and we intend to make a lot of progress over the next three years to move our e-Government initiatives forward and ensure that Government is doing its part for Cayman’s digital economy,” McLaughlin said.

Turning to the financial industry and fintech sector in Cayman, the premier said he was very excited about Cayman’s prospects to become a major player in this fourth industrial revolution. Leveraging on the conditions that have made the Cayman Islands such a successful jurisdiction for financial services, McLaughlin said the same things make us attractive to the blockchain industry.

These include Cayman’s ability to cater to a diverse market, as it does with funds, insurance and trusts, all supported by the industry’s world class service providers, strong copyright and IP protection, of course in a tax neutral jurisdiction.

“Blockchain related companies have already set up shop at Cayman Tech City, a part of Cayman Enterprise City, and I am told there are more in the offing. We are embracing the opportunity for innovation,” he said

While Cayman is indeed making progress in online delivery of government services, the question remains how far away Cayman is away from a full digital ID system for the population, compared to progressive digital countries like Estonia, represented at CYDEC by Dr Arvo Ott of the nation’s e-government Foundation, which can deliver a digital ID to an individual in just one day.

Ian Tibbetts, Director of e-Government at the Cayman Islands Government, however, indicated that the timeline might be not be that far away.

The key issue of interoperability will be in place by July, Tibbetts said, which is where a system is in place for the different parts of government IT to talk to each other, so that when an individual shows up at a government department, the system is able to check what it needs to.

In terms of solutions to get the base data for a digital ID system, procurement is currently ongoing and that is expected to be in place by the first half of next year. At that point, e-government services for individuals can be identified and employed. As for full rollout of a system of digital IDs to the population, that could be done in up to three years, he said.

Right now, the areas the department is most closely focused on are identity and citizenship, trade and business licensing and property transactions.

“In terms of e-voting, the technology will be ready in six months but do we really want it as a community?” Tibbetts asked. “That is a discussion we need to have. E-voting systems require earned trust. You need to have the technology but also to be able to trust that technology. You can’t just transplant and deploy an e-voting system in a matter of months.”

It was further noted that the process of digitising public services would have an impact on employment in Cayman, particularly in the civil service for the individuals at the front line delivering these services.

Chris Bailey, of PwC, added that in addition to thinking about retraining and what these workers will be doing in three years, we also need to address a potential skills shortage in technology and to train our young people for the jobs that will need to be done in the future, and we don’t know yet what some of those will be.

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FTS to host seminar on Roles of MLRO, AMLCO & Deputy MLROs

May 18, 2018
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Following the Cayman Islands Monetary Authorities (CIMA’s) recent clarification on the various compliance roles of investment vehicles and other entities, local financial services training company, FTS, has announced it will be hosting a seminar on the roles of MLRO, AMLCO & Deputy MLROs for compliance professionals, CEOs and fun directors.

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The UK’s recent decision on public registries: ineffective, discriminatory and out of touch

May 4, 2018
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Cayman Islands, Cayman Finance, Tax Havean, UKThe UK parliament recently advanced legislation which will require some of its Overseas Territories to implement a public beneficial ownership registry by 2020 or face the prospect of the UK forcing them to do so via its reserve powers. There are several issues with this nuclear action which suggest many reasonable parliamentarians were ‘out to lunch’ when the vote was taken. Here are a few:

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Byles takes helm at Chamber of Commerce

January 25, 2018
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At the Cayman Islands Chamber of Commerce’s annual general meeting on Wednesday afternoon, new Chamber President Paul Byles promised he will be dedicated to serving the entire business community.

“We are a Chamber for all businesses, large and small, with hundreds of employees or just one,” he said. “We will be dedicated to all our members.”

Mr. Byles was giving his first public speech as the Chamber’s new president. Wednesday’s meeting also saw the election of Woody Foster as the Chamber’s new vice president, Colin Robinson as its treasurer, and Shomari Scott, Nelson Dilbert and Mario Ebanks as its councilors.

Outgoing president Kyle Broadhurst also gave an overview of what the Chamber accomplished over the last year under his leadership.

“One of the core things we accomplished this year was developing an advocacy agenda and action plan, which will provide the Chamber a road map for the next three years,” he said. “The plan addresses key areas impacting all our members, such as education, employment and workforce development, economic growth and diversification, regulatory efficiency and community development.”

Specifically, Mr. Broadhurst touted the Chamber’s “Growth Matters” campaign – a series of videos that explained the importance of economic growth to the territory, and how that growth is generated.

“The campaign was a resounding success, with the educational videos having been viewed hundreds of thousands of times by a worldwide audience,” he said. “We were presented with two international industry awards for this outstanding campaign, and other Chambers from the Caribbean region have reached out to us for guidance in creating their own, similar initiatives.”

Mr. Broadhurst also mentioned the social work done by the Chamber, such as its annual Earth Day roadside and beach cleanup.

Looking forward into this year, Mr. Byles said he plans on continuing many of the initiatives started by his predecessor. He urged Chamber members to take initiative in moving the business community forward instead of relying on government.

“We don’t need a new policy or a new piece of legislation to get everything done,” he said. “We can work together to get things done.”

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PwC to deliver unique seminar on compliance and regulatory readiness

July 28, 2017
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Bob Stanier

A unique seminar is aimed at helping local financial services firms carry out their own ‘compliance health check’ will be held at the Grand Cayman Marriott Beach Resort on September 11th.

The seminar will be delivered by experts from PwC in partnership with FTS, a local management consulting and training services firm.

Presentations will be made by PwC Partner Robert Stanier who will be joined by other speakers and panellists which will include; Mr. Don Ebanks from DMS, and Mr. Peter Colegate from Appleby.

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