As expected, and mentioned in our previous advisory Cayman Islands Anti-Money Laundering Regulations Update 2018, the on-going consultation with the Cayman Islands Monetary Authority (CIMA) has resulted in further clarification in respect of the Anti-Money Laundering Regulations, 2017 (AML Regulations).

Following an open and constructive meeting with CIMA last week (CIMA Meeting) attended by Ogier as well as certain other Cayman Finance representatives, CIMA has provided further practical guidance in respect of AML officer appointments and outsourcing of AML functions. Our discussions at the CIMA Meeting with respect to these issues are summarised below.

Certain matters discussed at the CIMA Meeting require further consideration and CIMA has confirmed it is prioritising its consideration of these issues. In addition, CIMA has stated their intention to issue a set of FAQs together with an updated draft of the AML Regulations guidance notes (Guidance Notes); Ogier will be actively involved in the related consultation process and will provide necessary updates when available.

AML officer appointments confirmed with a grace period

On 6 April 2018, CIMA published a notice which confirmed that natural persons need to be appointed to the following three AML officer roles: money laundering reporting officer (MLRO), deputy money laundering reporting officer (DMLRO) and AML compliance officer (AMLCO and together, AML Officers). In practice it seems likely some funds will appoint one individual to the dual roles of AMLCO and MLRO and a separate individual as DMLRO. The good news is that CIMA's notice introduced a grace period with respect to such AML Officer appointments such that with respect to funds in existence prior to 1 June 2018, the appointments must be made by 30 September 2018. From 1 June 2018, new funds are expected to have appointed such designated AML Officers. In the case of CIMA regulated funds, notification of the designated AML Officers must be made to CIMA by the applicable deadline. With respect to private equity funds and other unregulated funds, whilst AML Officers must be appointed by the deadline, there is currently no stipulated notification procedure for such vehicles.

The CIMA Meeting provided useful practical guidance on the AML Officer appointment requirements. Importantly, the following points were confirmed:

  • There is no prima-facie disqualification from being designated an AML Officer based on an existing relationship with the fund or its service providers. The CIMA Meeting discussed each of the following as potential candidates for taking on an AML Officer appointment:
    • Directors– both investment manager appointed directors and independent directors;
    • Investment Manager employees (e.g. compliance officers);
    • Administrator employees; and
    • Other service providers.
  • The AMLCO will be required to have AML oversight of all of a fund's activities, crucially, this goes beyond investor related AML issues and compliance and extends to the fund's downstream investment activities. It will therefore be essential for clear reporting lines from any fund delegate (including the Investment Manager) to the AML Officers and for the AML Officers to receive regular AML related reports from all relevant parties. Carefully considered and drafted contractual arrangements and, to the extent relevant, policies should be prepared to ensure a fund's ultimate responsibility to comply with the Cayman AML regime is properly documented.
  • There is no current intention to place a limit on the number of AML Officer appointments one individual can take on. Any AML Officer appointment must consider all relevant factors contained in the Guidance Notes and consider the over-riding requirement for a risk-based approach.

Outsourcing to equivalent jurisdictions

It is not uncommon for funds to delegate AML compliance functions to persons or organisations outside of the Cayman Islands.The AML Steering Group maintains a list of countries which may have an equivalent AML regime to the Cayman Islands (AMLSG List, under the prior regulations referred to as "Schedule 3" Countries). The purpose and application of the AMLSG List was clarified at the CIMA Meeting, the key points of note are as follows:

  • The AMLSG List does not represent a "blank cheque" certification as to the suitability of a delegate's jurisdiction's AML regime. Whilst a country being on the AMLSG List is a useful indicator of potential suitability with respect to delegates complying with the AML regime of a foreign jurisdiction, funds relying on such delegate must be satisfied that the regime being applied by the delegate is, at a minimum, of a standard equivalent to the AML regime of the Cayman Islands.
  • It seems likely that professional service provider delegates (such as administrators) in AMLSG List countries will be asked to represent to their fund clients that they have undertaken the required gap analysis and are satisfied as to the equivalency of their jurisdiction's AML regime.
  • With respect to the required gap analysis, there is no requirement for a line by line comparison of each provision of the Cayman Islands AML regime. Rather, there is a requirement as to equivalence of outcomes. For example, if a circumstance which would give rise to the need for a suspicious activity report (SAR) to be filed under the Cayman Islands AML regime, would not give rise to such a report being required under the foreign AML regime, such foreign AML regime (despite being the regime of a country on the AMLSG List) would not pass the gap analysis test. Similarly, if a foreign AML regime has materially more relaxed customer identification and verification measures such that, for example, it has a blanket policy which permits simplified, limited or no customer verification in high risk scenarios, such foreign AML regime would not pass the gap analysis test.
  • A key concern for CIMA is to ensure that SARs reach the Financial Reporting Authority in the Cayman Islands, even where MLROs and DMLROs are located in and reporting in a country on the AMLSG List. It is advisable that this point is covered off in any delegation agreement.

Issues requiring further clarification:

There was detailed discussion at the CIMA Meeting regarding Regulation 24 (which deals with nominee arrangements) and Regulation 23 (which relates to, inter alia, situations where wire payments are made from banks in an AMLSG List county). CIMA has confirmed that it is addressing these points and we expect to hear from CIMA in the near future.

We are also continuing to work with CIMA with respect to the applicability of the AML Regulations to certain unregistered, passive Cayman vehicles in typical fund structures (for example GP entities, tax blockers and SPVs). CIMA confirmed at the CIMA Meeting that it will develop guidance on this point in consultation with Cayman Finance.