Introduction

Reasons for the proposal Beneficial ownership register

Contents of register

Failure to maintain register

Next steps

Introduction

Following an initial public consultation during 2016, the government has published draft legislation which, when adopted, will require Cayman companies to maintain beneficial ownership registers and for the information in the registers to be made automatically available to the Cayman Islands competent authority through a centralised beneficial ownership platform. The proposed amendments to the Companies Law, Limited Liability Companies (LLC) Law and Companies Management Law provide for an electronic platform to be established. This will be searchable by the competent authority in the Cayman Islands, but otherwise private. The proposals are constructive and positive, and will enable law enforcement authorities to access the information that they need in cases where the corporate veil is abused, while continuing to protect the privacy of legitimate commercial interests and individuals.

Reasons for the proposal

In 2013 the Cayman Islands and other UK crown dependencies and overseas territories agreed to assess whether creating central registers of ultimate beneficial owners of companies would be the most appropriate and effective way to improve transparency in support of internationally adopted and practised standards. The Cayman Islands published its findings in 2014, confirming that its current system of collecting and verifying beneficial ownership information through regulated corporate service providers was appropriate and in compliance with international standards.

However, the Cayman Islands also decided to enhance its systems by developing the concept of a centralised platform of beneficial ownership information. In 2016 the United Kingdom confirmed that this is similar to having a central government register of that information. The Cayman Islands' proposed beneficial ownership register regime borrows a number of concepts from the United Kingdom's 'persons with significant control' regime. However, unlike the United Kingdom, the Cayman Islands will continue to rely on regulated corporate service providers to verify the information. The new regime aligns the Cayman Islands with the United Kingdom on the beneficial ownership issue and reflects similar international initiatives, including the Fourth Anti-money Laundering Directive in the European Union (MLD4), which is to be implemented by EU member states by June 2017. Ireland introduced legislation for a central register of beneficial ownership in 2016 and the United Kingdom is expected to expand its persons with significant control regime to ensure compliance with MLD4.

The Cayman Islands has also recently published amendments to the Common Reporting Standards Regulations to ensure effective implementation of the Organisation for Economic Cooperation and Development's Common Reporting Standards in the Cayman Islands, as well as amendments to its Monetary Authority Law that introduce powers for the Cayman Islands Monetary Authority to issue administrative fines for breaches of certain regulatory laws. Alongside the proposed beneficial ownership registers, these changes and proposals show a continued commitment to implementing international transparency standards and a willingness to legislate in order to maintain the Cayman Islands' position as a leading international finance centre.

Beneficial ownership register

If the changes to the Companies Law, LLC Law and Companies Management Law are adopted as currently drafted, subject to an exception for certain regulated entities, Cayman companies incorporated under the Companies Law and LLC Law will have to establish and maintain a register of beneficial ownership information at the registered office of the company which can be searched by the competent Cayman authority. UK authorities will be able to request a search by Cayman authorities and, in future, other jurisdictions entering into similar agreements with the Cayman Islands may also be able to request a search.

The registers will otherwise be private and confidential. The government has confirmed that it will not consider the introduction of a public register of beneficial ownership, unless and until this becomes an accepted and implemented international standard.

Under the draft proposals, the following companies will be exempt from having to maintain a beneficial ownership register:

  • companies listed on the Cayman Islands Stock Exchange or an approved stock exchange;
  • companies registered or licensed under a regulatory law as defined, including regulated funds under the Mutual Funds Law and excluded persons under the Securities Investment Business Law; and
  • certain companies which are managed, arranged, administered or promoted by an entity that is regulated or listed in the Cayman Islands or an approved (Schedule 3) jurisdiction, where the company is a special purpose company, a private equity or collective investment scheme, or an investment fund (or the fund's general partner where it is an exempted limited partnership).

There are no proposals to extend the registers to cover beneficial ownership of limited partners in exempted limited partnerships.

Many hedge and private equity funds, and managers which are registered as excluded persons under the Securities Investment Business Law, are not expected to have to maintain beneficial ownership registers, provided that, in the case of exempted hedge funds or private equity funds, they have a manager or administrator which is regulated in the Cayman Islands or a Schedule 3 jurisdiction. A fund whose administrator is located but not regulated in the United States will be unable to take advantage of this exemption, unless the relevant investment manager is itself regulated.

For companies that do not fall within an exemption, the register must be maintained at the company's registered office address by the registered office provider in the Cayman Islands.

Contents of register

The beneficial owner register must contain details of each individual who is the ultimate beneficial owner of the company where he or she:

  • holds, (in)directly, more than 25% of the shares or LLC interests with a right to share in more than 25% of the capital or profits in the company;
  • holds, (in)directly, more than 25% of the voting rights of the company;
  • holds the right, (in)directly, to appoint or remove a majority of the board of directors or managers (as the case may be);
  • has the absolute and unconditional right to exercise, or actually exercises, significant influence or control over the company; or
  • has the absolute and unconditional right to exercise, or actually exercises, significant influence or control over the activities of a trust or trustee firm, other than in a professional advisory capacity.

The register must also contain details of the trustees of the trust or members of the relevant firm (that is not a legal person) where they meet any of the above conditions, or would do if they were individuals.

The details to be included on the register include:

  • name;
  • residential address and (if different) address for service of notices;
  • date of birth;
  • identification information from a passport, driving licence or other government identification; and
  • the date on which the individual became a registrable person.

A company will not have to include intermediate entities in its ownership chain on its register and the chain can stop where the next registrable company in the chain is itself a company for which a beneficial ownership register is held. The register must be updated within one month of any changes.

Failure to maintain register

If a company fails to maintain a register or keep it up to date, and fails to respond to a notice from its corporate services provider requiring it to do so, the company must issue a restrictions notice over the shares or LLC interests. A restrictions notice will have the following effects:

  • Any transfer or agreement to transfer the relevant shares will be void;
  • No rights will be exercisable in respect of the shares (eg, voting);
  • The owner will be unable to take up any further shares issued in respect of the restricted shares or similar rights on the shares; and
  • No payment may be made in respect of the shares (eg, of dividends or other distributions), except in a liquidation.

Equivalent provisions will apply for restriction notices over LLC interests. The proposals also include a right to apply to the Grand Court of the Cayman Islands to remove or relax any restrictions notice imposed.

Penalties on conviction include fines of up to US$30,490 for a company that knowingly and wilfully breaches the relevant sections. This includes any director or manager (for an LLC) or other officer where it is proved that the offence was committed with the consent or due to the wilful default of a director, manager (for an LLC) or other officer of the company. Penalties of imprisonment for two years and/or a fine of US$12,195 will apply on conviction of an individual. The proposals include a one-year transitional period from the date in which the law enters into force, after which prosecutions may be brought.

Next steps

A further short public consultation period ended on January 5 2017. The legislation is now expected to pass through the usual approval process in the Legislative Assembly. The government has previously indicated that it plans to introduce the registers and platform by June 30 2017, in line with Cayman's agreement with the United Kingdom. As the platform will require a new, secure IT system to be developed by the government and corporate service providers to develop their IT systems to allow the platform to connect to the beneficial ownership registers that they maintain, this timetable could be challenging. Further secondary legislation is also expected to be published to expand on some aspects of the proposals.

For further information on this topic please contact Jonathan Culshaw at Harneys' Hong Kong office by telephone (+852 3195 7200) or email (jonathan.culshaw@harneys.com). Alternatively, contact Ian Gobin at Harneys' Cayman office by telephone (+1 345 949 8599) or email (ian.gobin@harneys.com). The Harneys website can be accessed at www.harneys.com. Alternatively, contact Sean Scott at Harneys' London office by telephone (+44 20 7842 6080) or email (sean.scott@harneys.com).

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.