Under recently passed legislation, certain Cayman Islands companies and Cayman Islands limited liability companies ("LLCs") will be required to maintain a beneficial ownership register that records details of the individuals who ultimately own or control more than 25% of the equity interests, voting rights or have rights to appoint or remove a majority of the company directors, or LLC managers, together with details of certain intermediate holding companies through which such interests are held (the "Regime").1
The new Regime codifies a commitment agreed with the UK Government by way of an Exchange of Notes in April 2016 by the Cayman Islands, together with other Crown dependencies and overseas territories, to enhance existing robust arrangements on the exchange of beneficial ownership information to assist law enforcement agencies combat tax evasion and money laundering.2
Each company or LLC that falls within the Regime's ambit (an "In-Scope Entity") will be required to complete and maintain a beneficial ownership register at its Cayman Islands registered office with a licensed corporate service provider.
There are specified exceptions that will exempt certain types of companies and LLCs from the requirement to maintain a beneficial ownership register (notably those that are listed or subject to direct or indirect regulatory oversight).
The register will not be public and the information will be accessible only by a specified Cayman Islands competent authority, principally on proper and lawful request made by UK law enforcement agencies.
This update provides a general overview of the Regime and summarises the obligations and actions that In-Scope Entities need to take to comply with the Regime.
Which entities are within scope?
Subject to specified exceptions, the Regime is intended to apply to:
(a) companies incorporated or registered by way of continuation under the Companies Law (2016 Revision), including ordinary resident and non-resident companies, special economic zone companies and exempted companies (including exempted limited duration companies and segregated portfolio companies); and
Which entities are out of scope?
The Regime does not apply directly to foreign companies or foreign limited liability companies that are registered in the Cayman Islands as a "foreign company" pursuant to Part IX of the Companies Law (to qualify as the sole general partner of a Cayman Islands exempted limited partnership, for example), nor does it apply directly to partnership vehicles (such as exempted limited partnerships).
There are also a number of exceptions where certain categories of companies or LLCs will be exempted from the Regime and will not need to maintain their own beneficial ownership register. Broadly, these exceptions will apply to companies or LLCs either where they are:
(a) listed on the Cayman Islands Stock Exchange or another approved stock exchange (e.g. NYSE, NASDAQ, London or Hong Kong Stock Exchanges);
(b) registered or licensed under one of the Cayman Islands regulatory laws (e.g. a hedge fund registered under the Mutual Funds Law (2015 Revision) or a management vehicle registered or licenced under the Securities Investment Business Law (2015 Revision));
(c) managed, arranged, administered, operated or promoted by an "approved person" as a special purpose vehicle, private equity fund, collective investment scheme or investment fund;
(d) a general partner of any vehicle, fund or scheme referred to in paragraph (c) above that is managed, arranged, administered, operated or promoted by an "approved person"; or
(e) a "subsidiary", being a company or LLC where: (i) more than 75% of the interests or voting rights are, collectively, held by one or more exempt entities or other legal entities; (ii) exempt entities or other legal entities have the right to appoint or remove a majority of directors or managers; or (iii) it is itself a subsidiary of another exempt subsidiary.
An "approved person" is a person or a subsidiary of a person that is (i) regulated, registered or licensed under a Cayman Islands regulatory law or regulated in an approved jurisdiction (e.g. investment advisors or managers regulated by the SEC or the FCA would fall within this limb), or (ii) listed on the Cayman Islands Stock Exchange or another approved stock exchange.
Obligations of an In-Scope Entity and Beneficial Owners
If no exemption applies, an In-Scope Entity must take "reasonable steps" to identify:
(a) whether any individual is a qualifying "beneficial owner" (as described below) of that In-Scope Entity; and
(b) whether any legal entities that are registered in the Cayman Islands (including as a "foreign company") would meet the definition of a beneficial owner in relation to that In-Scope Entity if they were an individual rather than a legal entity (a "relevant legal entity").
This obligation may require an In-Scope Entity to enter into correspondence with, and give formal notices to, one or more persons whom it knows, or has reasonable cause to believe, are relevant legal entities or would be if registered in the Cayman Islands. Persons who receive a notice from an In-Scope Entity must respond within one month of receipt, as it is a criminal offence to fail to do so.
All individuals who are qualifying beneficial owners will have their details entered in the beneficial ownership register, but only certain relevant legal entities will be so registrable (as described further below).
Similarly, beneficial owners and relevant legal entities may be subject to a proactive disclosure obligation in certain circumstances. An obligation to notify an In-Scope Entity within one month will arise where a person knows that they are a registrable person and their details are not otherwise entered in the In-Scope Entity's beneficial ownership register or where their registered details subsequently change.
It is an offence for an In-Scope Entity or registrable person to fail to comply with obligations under the Regime.
Who is a beneficial owner?
Generally, a beneficial owner of a company or an LLC will be an individual who meets one of the following conditions with respect to an In-Scope Entity:
(a) directly or indirectly holds, in aggregate, more than 25% of the shares or membership interests;
(b) directly or indirectly holds, in aggregate, more than 25% of the voting rights;
(c) directly or indirectly holds, in aggregate, the right to appoint or remove the majority of directors or managers;
(d) if no individual satisfies any of the conditions in (a) – (c) above, has the absolute and unconditional legal right to exercise, or actually exercises, significant influence or control over the In-Scope Entity, other than solely in the capacity of a director (or manager in the case of LLCs), professional advisor or professional manager; or
(e) otherwise, if no individual satisfies any of the conditions above, but the trustees of a trust or the members of another legal vehicle that is not a legal person (such as a general partnership) satisfy one of the conditions set out above in relation to an In-Scope Entity in their capacity as trustees or members, then such persons will be beneficial owners for the purposes of the Regime if such persons have the absolute and unconditional legal right to exercise, or actually exercise, significant influence or control over the activities of that trust or other vehicle, other than solely in the capacity of a director (or manager), professional advisor or professional manager.
These conditions are primarily purposive in nature and should be interpreted accordingly and in conjunction with the Regulations.
Required Particulars for Beneficial Ownership Register
The particulars of a beneficial owner that are required to be included in an In-Scope Entity's beneficial ownership register are set out in the legislation and Regulations, and include details such as name, address, date of birth and a passport or other identifying document details (or relevant corporate identifying information for a relevant legal entity) or, where applicable, a note of the status of enquiries. The register must also contain details of the date on which such individual became a registrable person with respect to an In-Scope Entity.
Required particulars must be complete, and the In-Scope Entity must have reasonable grounds to believe such particulars are confirmed, before being entered on the register.
Certain other entities are deemed by the Regime to be individuals, such as governmental or statutory bodies and international organisations, and the Regime will apply, with appropriate adjustments, to such entities as if they were individuals.
The beneficial ownership register must also include required particulars of any "relevant legal entity" that (i) directly holds an interest in an In-Scope Entity or meets one or more of the specified conditions directly in respect of that In-Scope Entity; and (ii) through which any beneficial owner or relevant legal entity indirectly owns an interest in that In-Scope Entity.
What actions should Cayman Islands companies and LLCs take?
All Cayman Islands companies and LLCs will now need to take proactive steps to determine whether they are In-Scope Entities or whether they fall outside the scope of the Regime. Those entities which are exempt should also document their determination as to status under the Regime.
In-Scope Entities, once confirmed, should commence taking various steps set out in the Regime to identify, obtain and hold information about their beneficial owners and relevant legal entities.
In light of the obligations imposed under the Regime, we will be liaising with clients to assess the impact of the Regime on their entities registered in the Cayman Islands and to provide advice on next steps. We can also advise In-Scope Entities in relation to the creation and maintenance of a beneficial ownership register, preparation of appropriate notices and such other matters required in order for In-Scope Entities or other persons and relevant legal entities to fulfil their legal obligations under Cayman Islands law.