The Cayman Islands’ commitment to international transparency standards has been reinforced by its adoption of amended Common Reporting Standards regulations in December 2016 to ensure effective implementation of the OECD’s Common Reporting Standards in the Cayman Islands.
Why have the Common Reporting Standards regulations been amended?
The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) (Amendment) Regulations, 2016 (the Regulations) amend the original 2015 CRS1 regulations through which the Cayman Islands became one of the early adopters of the OECD’s Common Reporting Standards (CRS). As we noted in our earlier client alerts on Preparing for the CRS and Cayman Islands Financial Account Reporting for Investment Funds, 2016 is the first reporting year for CRS for Cayman financial institutions, with certain information due to be submitted to the Department of International Tax Co-operation (DITC) on or before 31 May 2017, for accounts opened since 1 January 2016.
The Regulations represent the next step in Cayman’s implementation of CRS and are expected to allow Cayman to satisfy its “effective implementation” obligations of reporting and compliance procedures under CRS. Effective implementation of CRS is also one of the criteria that the EU recently confirmed it will require for a jurisdiction to be considered compliant on tax transparency under its screening process of non-EU jurisdictions for its proposed list of non-cooperative jurisdictions for tax purposes. Cayman is now well placed to confirm its effective implementation of CRS if it is screened as part of the EU’s process in early 2017. The DITC has stated that it will issue updated CRS Guidance Notes in the first quarter of 2017 to cover the Regulations.
Key changes introduced by the Regulations:
- Registration: all Cayman Financial Institutions (as defined in the Regulations), whether or not they are classified as ‘Reporting’ or ‘Non-Reporting’ and regardless of whether or not they have any reportable accounts, will have to register with the DITC on the Cayman Automatic Exchange of Information online portal and to provide certain information by 30 April 2017, including contact details for an individual designated as the principal point of contact for CRS. This is a broader requirement than under the Cayman regulations which implemented FATCA2, and is intended to provide the DITC with details of all Cayman financial institutions. In reality, the effect of this change is relatively limited because there is currently only one limited class of Non-Reporting Cayman Islands Financial Institution. As we noted in our previous client alerts, investment managers and general partners of funds which were classified as Non-Reporting Financial Institutions under FATCA and UK CDOT3 were classified as Reporting Cayman Islands Financial Institutions for CRS purposes in any event.
- Nil returns: Cayman Reporting Financial Institutions must file nil returns for all reportable jurisdictions for which they have no reportable accounts. Currently, if a reporting financial institution has no reportable accounts in a reportable jurisdiction it does not have to file a nil return. Our advice to clients has always been to file nil returns for US FATCA, UK FATCA and CRS in any event.
- Clear requirement for written policies and procedures: Cayman Reporting Financial Institutions must establish, implement and comply with written policies and procedures to cover all of their obligations under the Regulations. The TIA has stated that when it takes any compliance or enforcement action, they will expect a Cayman Reporting Financial Institution to produce these written policies and procedures. For investment funds who have delegated this role to third party service providers, this will mean ensuring that the service provider has written policies and procedures which could be produced.
- New offences and penalties: the Regulations introduce various offences, including providing materially inaccurate information, tampering with information and hindering the Tax Information Authority in its functions, with fines / penalties for breach of up to US$60,975. The offences include potential criminal liability for directors and certain officers where their financial institution commits an offence, unless they exercised reasonable diligence to prevent the breach. Any defendant has a defence if they have a reasonable excuse - insufficient funds and reliance on an agent are not classed as reasonable excuses however. There will also be a deemed breach of policies and procedures if a Cayman Reporting Financial Institution relies on a self-certification or documentary evidence which it knows or has reason to believe is materially inaccurate. In addition, it is now an offence for any person to provide a false self-certification to a Cayman Financial Institution. It is therefore important for a Cayman Financial Institution and anyone who has been engaged to assist with the CRS due diligence process to be aware that if they do receive a false self-certification and they are aware of that fact, it may give rise to a requirement to make a suspicious activity report under the Proceeds of Crime Law.
Reminders/clarifications from the DITC
- Due Diligence - the ‘Wider Approach’: The DITC has given a timely reminder about the ‘wider approach’ that the Cayman Islands is taking to CRS. Under CRS, there is still a distinction between a ‘Participating Jurisdiction’ (which has indicated that it will sign up to and implement CRS) and a ‘Reportable Jurisdiction’ (for which reporting will be required). Cayman Reporting Financial Institutions should ensure that they identify the tax status of all ‘account holders’ and relevant controlling persons (in the context of investment funds this means investors) and not just those that are in Reportable Jurisdictions. The DITC recognises that the timing of confirmation of Reportable Jurisdictions is an issue, but given the ‘wider approach’ we recommend that all Cayman Reporting Financial Institutions should be ready to make returns on all of the currently listed Participating Jurisdictions.
- Due Diligence – US professionally managed investment entities: The funds industry in the Cayman Islands has been lobbying the DITC for some time for clarity as to how to identify and report controlling persons for US professionally managed investment entities. Given that a large number of investors in Cayman Islands funds are US tax exempt entities which include these types of investor this is a key bone of contention and the DITC has said that they will give clarification of a possible relaxation of due diligence requirements for these types of entity. We are hopeful that this will come before the May 2017 reporting deadline.
What do Cayman Financial Institutions need to do now?
All Cayman Financial Institutions must review their current CRS compliance policies and update them to make sure that they have suitable policies and procedures in place, they are correctly registered with the DITC and that they are able to file any nil returns needed in May 2017. Cayman incorporated investment managers and general partners of certain limited partnerships in particular may previously have been able to rely on an exemption from registration on the DITC’s online portal for FATCA compliance purposes but will now need to register to comply with their CRS obligations.
Other recent regulatory changes financial institutions should be aware of:
The Cayman government has also published proposed changes to the Companies Law and Limited Liability Companies Law to bring in beneficial ownership registers for Cayman companies, subject to certain exemptions for some regulated entities. If adopted in the current form, the registers would not be open to the public but would be searchable by competent authorities in Cayman via a platform. Amendments were also introduced recently to the Monetary Authority Law as discussed in our recent update giving the Cayman Islands Monetary Authority new powers to issue administrative fines for breaches of certain regulatory laws.
Taken together, these regulatory changes and proposals show the Cayman Islands’ continued commitment to implementing international transparency standards as well as their willingness to co-operate with international bodies to maintain Cayman’s position as a leading international financial centre.