The effects of international regulation

Institutions such as the EU, the G20, the Organisation for Economic Co-operation and Development and the Financial Action Task Force (FATF) have all passed rules that have implications for captives and other companies doing business in Cayman.

Below are some of the key resulting regulatory developments, and how they will impact Cayman captives.

Economic substance

In December 2018 the Cayman government passed new economic substance (ES) rules and laws to avoid an EU tax blacklisting. The EU is specifically targeting companies based in low- or no-tax jurisdictions that have little or no economic activity but attract substantial profits generated elsewhere.

The new rules require Cayman-registered companies active in nine defined areas, which includes insurance, to demonstrate they have “adequate” economic activity locally to justify the profits they make.

Of note is that certain companies that have elected to be a Cayman Islands Company, but are tax resident outside the Islands (such as those who have taken the 953[d] election) are not subject to the substance requirement of the ES Law and may be entitled to an exemption from these rules but not from the requirement to make a notification to the Cayman Tax Information Authority (TIA).

Since the passing of the regulations, guidance has been published that helps to clarify what constitutes a relevant entity and relevant activity and the various items to be considered to help determine whether an entity satisfies the ES test.

Starting in 2020, a relevant entity shall notify TIA annually whether or not it is carrying on a relevant activity. Going forward a relevant entity must satisfy the ES test and submit a report 12 months after the last day of the end of each financial year of the relevant entity.

Boards should consult with their Cayman Islands legal advisor and/or insurance manager to determine whether they meet the definition of “relevant entity” and if they satisfy the “relevant activity” requirements of the ES Law and minute their findings accordingly and give the necessary authority to their insurance manager to make all necessary filings on their behalf.

Data protection

The Cayman Data Protection Law (DPL) 2017 regulates how businesses and government agencies must handle all personal data in the Cayman Islands and provides a framework of rights and duties designed to give individuals greater control over their personal data.

The law specifically covers how such data is collected, processed, stored or transmitted, and destroyed, particularly when dealing with government bodies, corporate entities, practices and firms. The Office of the Ombudsman will be regulating compliance with the law.

The commencement date was September 30, 2019. Under the DPL, anyone who controls personal data must provide information at the time the data is collected, including why the data is processed and how it is safeguarded. Individuals also have the right to request and access their personal data that is held by an organisation, and data controllers have 30 days to comply.

As a result, companies need to have policies and procedures in place, if existing agreements do not recognise the requirements of DPL, enabling them to find the information and report it to the individuals when requested.

Under the new law, it is also important not to keep any personal data longer than necessary. While there are no prescribed time periods, organisations need to analyse how long they should maintain personal data for a specific purpose.

All insurance managers should have in place and make available to captive boards information on how they handle data and cybersecurity, and be able to provide a privacy notice that details how personal information is handled.

Fines and penalties

The Monetary Authority (Administrative Fines) Regulations 2017 became law effective December 15, 2017. However for the time being any fines apply only to breaches of the Anti-Money Laundering Regulations 2017.

These regulations were considered necessary to ensure that the Cayman Islands regulatory framework meets FATF and International Monetary Fund standards.

It is expected the fines and penalties regime will be extended to other regulatory breaches before the end of 2019. Clients should not be impacted as long as appropriate risk management and corporate governance frameworks are in place and reviewed annually and that regulatory approval is sought prior to making business plan or ownership changes.

International rules and regulations are dictating changes to the way we currently do business but that is the price Cayman pays for being one of the top offshore domiciles. It is therefore the job of clients and their advisors to ensure boards maintain good corporate governance practices.

Clients should ensure that they have in place a proactive team, including an insurance manager who can highlight regulatory matters, educate boards of directors and help to establish working policies and procedures.

Taken together, regulatory challenges should be viewed as opportunities to grow and enhance Cayman as a jurisdiction and ensure best practices remain at the forefront of boards’ thoughts.

Beneficial ownership

Following the passage of three legislative amendment bills in March 2017, Cayman established a centralised beneficial ownership platform before the June 2017 deadline agreed to with the UK government.

The amendments to the Companies Law, the Companies Management Law and the Limited Liabilities Companies Law define beneficial ownership and enable the creation of a corporate registry that is accessible by UK law enforcement and tax authorities.

The Beneficial Ownership (Companies) (Amendment) Regulations, 2018 were published in March and require that all corporate service providers provide the competent authority with written confirmation of the exemption provided.

Captive insurance clients should be aware there is no requirement to register as they are licensed entities and therefore exempt from the requirement and no information will be included on this platform, but it is recommended that each board should minute the exemption and authorise its insurance manager to evidence the exemption from the Registry requirement in the manner prescribed.

Directors’ register

The Companies (Amendment) Law 2019 published in August included provisions effective October 1, 2019 that the Cayman Islands General Registry will make available the names of directors and their alternates for public inspection for a fee of CI$50.

This is in addition to the other basic company registration information that has been publicly available for almost 60 years, including the company name, the type and status of the company, the registered office, the date of registration and registration number.

This initiative was launched in response to the Caribbean FATF peer reviews which noted Cayman did not provide access to director names unlike many other countries. It should be noted that searches can be made only by company name and not by director, and that no personal details will be provided.

The law was also updated to reduce the time within which a Cayman company must notify the Registrar of changes to its directors and officers, from 60 to 30 days. This is important for captive boards to be aware of as the failure to provide notification within a timely manner will result in monetary penalties.

Kevin Poole is deputy managing director of Artex in Cayman. He can be contacted at:
kevin.poole@artexrisk.com