Following an initial public consultation during 2016, the Cayman Islands Government has published draft legislation which, when adopted, will require Cayman Islands 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 Law (LLC Law) and Companies Management Law provide for an electronic platform to be established which will be searchable by the competent authority in Cayman but otherwise private. The proposals are to be welcomed as constructive and positive and would strike a sensible balance by enabling law enforcement authorities to have access to the information they need in cases where people abuse the corporate veil, while continuing to protect the privacy of legitimate commercial interests and individuals.
Why is a beneficial ownership platform being proposed?
In 2013, the Cayman Islands and other UK Crown Dependencies and Overseas Territories agreed to assess whether the creation of 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, Cayman also decided to enhance its systems by developing the concept of a centralised platform of beneficial ownership information. In 2016, the UK confirmed that this is similar in effect to having a central government register of that information. Cayman’s proposed beneficial ownership register regime borrows a number of concepts from the UK’s “persons with significant control” regime but it is important to note that Cayman will, unlike the UK, continue to rely on regulated corporate service providers to verify the information. The new regime should allow Cayman to reach closure with the United Kingdom on the beneficial ownership issue and it also reflects similar international initiatives, including the Fourth Anti-Money Laundering Directive in the EU (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 allow compliance with MLD4.
Cayman has also recently published amendments to the Common Reporting Standards Regulations, to ensure effective implementation of the OECD’s Common Reporting Standards in the Cayman Islands, as well as amendments to its Monetary Authority Law to introduce powers for the Cayman Islands Monetary Authority to issue administrative fines for breaches of certain regulatory laws. Taken together with the proposed beneficial ownership registers, these changes and proposals show the Cayman Islands’ continued commitment to implementing international transparency standards as well as their willingness to legislate in order to maintain Cayman’s position as a leading international finance centre.
Which companies will have to maintain a beneficial ownership register and who will have access?
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 Islands 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 in the Cayman Islands which can be searched by the competent authority in Cayman. The UK authorities will be able to request a search is done by the Cayman authorities and, in the 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 and not open to public inspection. The Cayman Islands Government has confirmed that it will not consider the introduction of a public register of beneficial ownership unless and until that becomes an accepted and implemented international standard.
Under the draft proposals the following companies would be exempted from having to maintain a beneficial ownership register:
- A company listed on the Cayman Islands Stock Exchange or an approved stock exchange
- A company registered or licensed under a regulatory law as defined, which includes regulated funds under the Mutual Funds Law and excluded persons under the Securities Investment Business Law (SIB Law)
- Certain companies which are managed, arranged, administered or promoted by an entity that is regulated/listed in Cayman 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 currently no proposals to extend the registers to cover beneficial ownership of limited partners in Cayman exempted limited partnerships.
Many Cayman hedge and private equity funds and managers which are registered as excluded persons under the SIB 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 who is regulated in Cayman or a Schedule 3 jurisdiction. One point to note here is that a fund whose administrator is located but not regulated in the US will not be able 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 Cayman.
What information must the register contain?
The beneficial owner register must contain details of each individual who is the ultimate beneficial owner of the company because he or she falls into one of the following categories:
- Hold, (in)directly, more than 25 per cent of the shares or LLC interests with a right to share in more than 25 per cent of the capital or profits in the company
- Hold, (in)directly, more than 25 per cent of the voting rights of the company
- Hold the right, (in)directly, to appoint or remove a majority of the board of directors or managers (as the case may be)
- Have the absolute and unconditional right to exercise, or actually exercise, significant influence or control over the company
- Have the absolute and unconditional right to exercise, or actually exercise, significant influence or control over the activities of a trust or trustee firm, other than in a professional advisory capacity; and the trustees of the trust or members of the relevant firm (that is not a legal person) meets any of the above conditions or would do if they were individuals
Details of the name, residential address and (if different) address for service of notices, date of birth, identification information from the individual’s passport/driving licence/other government ID, and date on which they became a registrable person are to be included on the register. 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.
What happens if the register is not maintained?
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/LLC interests. A restrictions notice will make any transfer or agreement to transfer the relevant shares void, no rights will be exercisable in respect of the shares (eg voting), the owner will not be able to take up any further shares issued in respect of the restricted shares or similar rights on the shares and except in a liquidation no payment may be made in respect of the shares, eg of dividends or other distributions. 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 2 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 the law enters into force, after which prosecutions may be brought.
When are the changes expected to come into effect?
A further short public consultation period ended on 5 January 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 30 June 2017 in line with Cayman’s agreement with the UK. 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 they maintain, this timetable could be challenging. Further secondary legislation is also expected to be published to expand on some aspects of the proposals.