15/11/17

Cayman continues as pre-eminent global offshore jurisdiction

It has been another strong year for the Cayman Islands. Cayman continued its market leading position as the pre-eminent offshore jurisdiction, primarily in the North American and Asia markets, reports the Asia Business Law Journal.

Cayman remains by far the preferred jurisdiction for premium cross-border M&A, private equity (PE) funds, infrastructure funds and hedge funds. In Asia, the growth of Cayman has been underpinned by ongoing Chinese demand for the most efficient and flexible structures to facilitate overseas investment, M&A and asset management in areas such as infrastructure, fintech, healthcare and technology, both inside and outside of China.

It is particularly exciting to see that the Chinese central government’s One Belt One Road (OBOR) initiative has created significant opportunities for Cayman, which offers a variety of structuring options to facilitate the fundraising, development and implementation of OBOR-related projects.

Cayman also saw increased interest in 2017 from asset managers wishing to use the jurisdiction as a domicile to structure some of the fundraising for initial coin offerings (ICO) and blockchain-related applications.

However, given some of the practical difficulties and complexities surrounding ICOs’ compliance with onshore regulation, due diligence, anti-money laundering requirements, automatic exchange of tax information requirements such as the US Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS), adequate investor disclosure as well as other regulatory issues, Cayman is monitoring closely how these issues are being addressed by the major onshore jurisdictions.

We shall continue to monitor onshore regulatory directives and guidance, such as from the US Securities and Exchange Commission, Hong Kong Securities and Futures Commission, and the Monetary Authority of Singapore, amongst others.

With just over a year in operation, Cayman Limited Liability Companies (LLCs) have proven popular for PE and hedge fund managers. According to the Cayman Registrar of Companies statistics, as at the end of September 2017, 663 Cayman LLCs have been formed since the Cayman Limited Liability Companies Law, 2016 commenced on 8 July 2016 (without any corresponding reduction in other Cayman structures such as exempted limited partnerships and exempted companies).

Cayman exempted companies and segregated portfolio companies continue to remain the preferred structuring vehicle for offshore corporate hedge funds in Asia, and Cayman exempted limited partnerships remain the preferred structuring vehicle for offshore PE funds. However, we expect over time that the use of LLCs in Asia will continue to increase as their relative advantages to other fund structures in certain circumstances become more widely known.

2017 also saw the Cayman Islands financial services industry continue its full implementation of FATCA and CRS. The Cayman Islands government, including the Cayman Tax Information Authority and many members of various FATCA and CRS steering committees in the Cayman Islands, have built a world leading architecture to enable Cayman funds to meet their international tax reporting obligations.

International regulators and stakeholders who have, or are building, architecture to service FATCA and CRS requirements in their own jurisdictions have been looking to Cayman as an example of how they should proceed.

On 1 July 2017, a new beneficial ownership regime came into force in the Cayman Islands to provide for the collection and reporting of certain ultimate beneficial owners of equity interests in Cayman companies and LLCs. The new regime applies to Cayman Islands companies and LLCs, but there are a number of exemptions to the regime that apply.

For example, entities that are publicly listed, regulated or licensed under certain Cayman Islands regulatory laws, investment fund vehicles (PE funds and collective investment schemes) and their operators (such as general partners) are out of scope and not caught by the regime. The author understands that the regime will be subject to some further changes shortly, anticipated in December 2017.

On 2 October 2017, significant changes to the Cayman Islands anti-money laundering regulations regime came into force in order to ensure that Cayman’s AML regime be further aligned with Financial Action Task Force Recommendations and developments in international practice. As part of these changes, PE funds, closed ended investment funds and structured finance vehicles that were previously out of the scope of the Cayman AML regime have now been brought into scope and need to now take appropriate steps to meet their obligations.