The AML Regulations bring about many significant changes to Cayman's anti-money laundering ("AML") and combating of terrorist financing ("CFT") regime to align it more closely to the FATF Recommendations and global practice.
Perhaps the most important effect is that the AML Regulations now apply to a wider range of Cayman Islands entities, including unregulated investment entities; e.g. private equity or closed-ended investment funds and structured finance vehicles that are not registered with the Cayman Islands Monetary Authority ("CIMA"), and investment related insurance entities.
The AML Regulations remove the definition of "relevant financial business" under the prior regulations and now infer the application of the same term as expanded under Schedule 6 of the Proceeds of Crime Law (2017 Revision) ("POCL"). Accordingly, any entity conducting the business of "investing, administering or managing funds or money on behalf of other persons", or "investment related insurance" in or from the Cayman Islands, will be conducting "relevant financial business" for the purposes of the application of both the POCL and the AML Regulations.
The term "investing, administering or managing funds or money on behalf of other persons" reflects wording used under FATCA and CRS ("AEOI") in the definition of an "Investment Entity". As such, any entity that may have been classified as an "Investment Entity" using this test under those regimes will likely now be subject to Cayman's AML regime (to the extent it may not have been previously).
This means that all Cayman Islands investment entities will need to maintain AML procedures in accordance with the AML Regulations, which includes appropriate delegation arrangements in certain circumstances (see further below). As there are many synergies between the Cayman AEOI and AML regimes (e.g. the use of FATF definitions under AEOI), some of the due diligence procedures may have already been undertaken to an extent.
In order to allow unregulated investment entities not previously subject to the AML / CFT regime to implement appropriate procedures (or delegation arrangements) to comply, an amendment to the AML Regulations has also been enacted that essentially defers the application of the AML Regulations to such entities until 31 May 2018. This means that such entities will have until 31 May 2018 to finalise their AML / CFT procedural arrangements.
The Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands ("Guidance Notes") are also under review and shall be updated in the near future. The AML Regulations provide that the Guidance Notes shall be taken into consideration in determining compliance with the AML Regulations. We understand that there will need to be a "sector specific" section in the Guidance Notes addressing the approach to be taken by these unregulated investment entities.
For further explanation on which procedures need to be maintained, please refer to our client update titled "The Anti-Money Laundering Regulations, 2017".
Delegation of Procedures
In most instances, rather than maintain procedures themselves, investment entities will look to delegate to, or rely on, a staffed and experienced service provider to maintain their AML / CFT procedures on their behalf. The Guidance Notes and Regulations expressly permit delegation of the maintenance of AML / CFT procedures.
Where the delegate is both located in an approved jurisdiction (i.e. a jurisdiction recognised as having an equivalent AML regime1) and subject to the AML regime of that jurisdiction, the delegate can apply their own (home) jurisdiction AML standards. Where the delegate is either not located in an approved jurisdiction, or is not "subject to the AML regime" of an approved jurisdiction, the investment entity or its delegate must apply the Cayman AML / CFT regime. Similar principles are applied for any sub-delegation of AML / CFT procedures.
For these purposes, "subject to the AML regime" means being subject to legislation equivalent to the Cayman AML Regulations compelling the maintenance of AML / CFT procedures. For example, certain administrators or managers based in the US will not be subject to the US AML regime and are therefore required to comply with the Cayman AML / CFT regime, if they wish to act as an AML delegate for a Cayman investment entity.
In terms of ensuring compliance with the AML Regulations, investment entities should either:
(a) confirm the scope of existing delegation / reliance arrangements in accordance with the AML Regulations; or
(b) establish delegation / reliance arrangements with the most appropriate service provider.
If a regulated investment fund, the delegate will likely be the fund administrator. If an unregulated investment fund, the delegate may be the manager or sponsor. For insurance companies engaged in investment related insurance, the insurance manager, if any, may be the most appropriate delegate.