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17/04/24
Cayman Islands: Renewed Focus On Commercial Updates To Financial Services Legislation
Backed by a thriving economy, political stability, and continuously strong demand for its financial services, the Cayman Islands is well positioned in 2024.
After years of ensuring the highest levels of regulation and compliance in anti-money laundering, countering the financing of terrorism and proliferation financing (AML/CFT), as well as international tax cooperation, the Cayman Islands is focused more than ever on remaining the leading jurisdiction for cutting-edge commercial solutions, with updates to companies, partnerships, and trusts legislation, as well as the regulatory regime for virtual asset services providers in 2024.
Last year, the Islands successfully completed the Financial Action Task Force’s (FATF) review of its anti-money laundering, countering the financing of terrorism and countering proliferation financing (AML/CFT) regime by fully implementing an agreed action plan.
Over the preceding years, this entailed legislative amendments and practical measures that have strengthened the application of extensive AML/CFT rules.
The results are evident in the FATF’s own statistics. The Cayman Islands has one of the highest levels of technical AML/CFT compliance with the standard setter’s 40 Recommendations, exceeding that of most advanced economies globally.
In 2023, the FATF review process confirmed that this broad regulatory framework is also applied effectively in practice. As in other countries, efforts to improve the effectiveness and efficiency of AML/CFT procedures in the jurisdiction will continue ahead of the anticipated fifth round mutual evaluation, which for the Cayman Islands is expected to commence in 2027.
The Cayman Islands also remains engaged in the work of the OECD BEPS Inclusive Framework on Pillar One and Pillar Two, and is monitoring developments on approaches to implementation.
As the Pillars are concerned with multinational enterprises and the global minimum tax rate, investment funds are not the focus, and any impact is limited to corporate taxation of multinationals that are within scope.
Furthermore, there is no requirement to institute direct taxation in place of Cayman’s current indirect, consumption-based tax regime.
Transparency Updates
New legislation that combines the beneficial ownership rules of the Companies Act, the Limited Liability Companies Act, and the Limited Liability Partnership Act in a single piece of legislation was adopted by lawmakers in November of last year.
The Beneficial Ownership Transparency Act prepares Cayman for future rounds of FATF evaluations, as it aims to ensure compliance with the organisation’s Recommendation 24, which requires competent authorities to have access to adequate, correct, and current information on the beneficial owners of legal companies, limited liability partnerships, and exempted limited partnerships. It also considers increased beneficial ownership transparency in the European Union’s Fifth Anti-Money Laundering Directive.
In 2024, under an updated commitment to the UK, the Ministry of Financial Services and Commerce is working with stakeholders to enhance the beneficial ownership framework further by allowing access to beneficial ownership information to members of the public who can demonstrate a legitimate interest in accordance with the relevant law.
Additionally, the Cayman Islands has committed to support an action plan that will implement the Crypto-Asset Reporting Framework (CARF) by 2027. The CARF provides for the automatic exchange of tax-relevant information on crypto-assets between tax authorities and is part of the automatic tax information exchange standards developed by the Organisation for Economic Co-operation and Development (OECD) under a G20 mandate.
Commercial Updates
In addition to international regulatory matters, commercial updates to financial services legislation will increasingly occupy Cayman lawmakers this year.
Amendments to the Companies Act were passed by Parliament in February 2024. Once brought into force, they will create a new simplified procedure for reducing share capital in certain circumstances that will lower costs for companies and reduce the time involved in the process.
Conversions of a limited liability company or foundation company to an exempted company are now possible to provide flexibility for Cayman structures dealing with changes in circumstances. And exempted companies can be re-registered as ordinary resident companies.
Plans are also underway to make various changes to the Exempted Limited Partnership (ELP) Act. These will align the merger and consolidation provisions for ELPs with those already in effect for exempted companies and limited liability companies.
The changes will permit an exempted company to convert to an ELP, provide for the conversion of an LLC (Limited Liability Companies) to an ELP, and clarify various other aspects of the ELP Act that will enhance the competitiveness of Cayman’s exempted limited partnership legislation.
Cayman’s trusts legislation is likely to see amendments to the Perpetuities Act that will dis-apply the rule against perpetuities to future trusts and to existing trusts via court application. In addition, it is contemplated to produce regulations that would make it easier to transfer existing foundation companies from overseas to the island by way of continuation.
In the virtual asset space, this year the Cayman Islands plans to bring legislation that will start the licencing regime for virtual asset trading platforms and custodians.
Proposed changes will also enhance the application of FATF standards by strengthening the regulator's ability to enforce requirements and clarifying who is considered the operator of a virtual asset trading platform. This is particularly relevant in cases where there is no clear identifiable group operating a platform.
In sustainable finance, the Cayman Islands recognises it has a role to play as the world’s second largest fund domicile after the United States, with close to 30,000 open-ended and private funds managing $8 trillion in net assets in 2022.
Most Cayman funds are already subject to regulation overseas as far as environmental and social transparency standards are concerned, whereas local regulation is focused on governance and the operation of funds.
While the Cayman Islands is monitoring the development of ESG (Environmental, Social and Governance) regulations globally, this approach is unlikely to change. Cayman has a history of being responsive to global regulatory standards, while not overburdening clients with unnecessarily rigid rules and requirements in the form of additional layers of regulation.
Robust Demand
In this environment, the Islands’ funds industry continued to thrive despite difficult market conditions in 2023. The total number of Cayman mutual and private funds grew by 504 (1.7 per cent) to 29,353 during the year. An increase in registered private funds by 697 (4.4 per cent) to 16,551 outweighed a decline of 193 mutual funds (-1.5 per cent) to 12,803 by the end of 2023.
Meanwhile, insurance activity is high, driven especially by exceptional growth in reinsurance. The Cayman Islands Monetary Authority (CIMA) issued 41 new international insurance licences in 2023 – the largest number issued in a single year in more than a decade. Between October and December 2023 alone, CIMA issued fifteen new international insurer licences.
There were 683 Class B, C and D insurance companies licensed in Cayman at the end of last year – the highest total since 2018. In addition to eight reinsurance companies that have their own offices and staff on island, at least 80 reinsurance vehicles are captives run with the help of local insurance managers. The growth in reinsurance activity is expected to continue this year.
Cayman foundation companies, a popular tool for private wealth purposes, and in the virtual asset and Web3 space, are also seeing continued demand with 231 foundation companies added last year. The Cayman Islands is a leader for decentralised autonomous organisations (DAOs), for which foundation companies are the ideal vehicle.
Political And Economic Stability
Cayman’s regulatory regime, high level of compliance with international standards and unequivocal stance on tax, are underpinned by political and economic stability.
Cayman’s economy expanded by an estimated 3.6 per cent in the first half of 2023. Gross domestic product (GDP) indicators suggest economic growth was mainly driven by the tourism recovery and the financial industry.
The finance and insurance services sector remained the largest contributor to GDP and grew by an estimated 2.6 per cent for the first six months of last year. The strength of the economy is evidenced by a buoyant labour market with a 12.4 per cent influx of foreign workers and a low unemployment rate of 2.4 per cent.
Inflation, which largely follows consumer price trends in the US, from where most goods are imported, moderated in the first half of the 2023 to 5.3 per cent as compared to 11.6 per cent in 2022.
One of the best indicators of Cayman’s economic strength is population size. While the Census recorded a population of 71,105 in October 2021, this was estimated to have grown to 83,671 less than two years later in June 2023.
New Businesses And Service Providers
The growing population and labour force is also a reflection of the rising number of businesses and financial services providers that decide to relocate to, or launch from, the Islands. The Cayman Islands often features in business complexity surveys as one of the most convenient and efficient places to do business.
The long-standing experience in corporate legal structuring and offering practical and compliant solutions for cross-border ventures means that the Islands are increasingly able to attract business operations. Service providers offer a streamlined, cost-effective, and fast-tracked way of setting up a physical presence in Cayman. This encompasses the entire process, from incorporation and obtaining the necessary licences and approvals within a guaranteed short timeframe, to finding office space and relocating staff.
With its ability to permanently modernise its financial services legislation, and backed by political and economic stability, Cayman’s financial services industry is well placed to face market challenges and exploit new opportunities as they arise.
Michael Klein
Michael Klein is a Content Editor, responsible for content and public relations at Cayman Finance. Michael has more than 20 years’ experience as a financial journalist. He is the former business editor of the Cayman Compass and former editor of offshore finance magazine Cayman Financial Review.
Michael started his career as a media analyst and corporate communications consultant in Germany, the US and the UK. Before moving to the Cayman Islands in 2008, he wrote for a British corporate finance publication and managed his own public relations business in the UK and Germany.
Michael received an MA in Political Science and International Law from the University of Bonn in Germany.
