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Keeping Up with the Cayman Islands: Essential Regulatory Updates for Investment Funds

If you’re in the investment fund world, staying on top of regulatory updates can feel like trying to catch up with a constantly moving target. This year has seen some big changes in the Cayman Islands, and understanding them is key to keeping your fund compliant and thriving. Whether you’re a manager, advisor, or fund operator, here’s a breakdown of what’s new in AML, corporate governance, and economic substance requirements and why it all matters.

AML: Smaller Transactions, Bigger Expectations

Effective from April 19, 2024, the Cayman Islands introduced some noteworthy changes to the Anti-Money Laundering (AML) Regulations. AML updates don’t always have a reputation for excitement, but these changes are more impactful than they first appear.

Key Changes:

  • Lower Transaction Threshold: The AML procedures now kick in for one-off transactions of US$12,100 or more (previously CI$18,200). This lower threshold means funds need to monitor even smaller transactions, so be ready to adjust those internal AML policies.
  • Extra Information for Registration: Designated non-financial businesses and professions need to share more details when registering with supervisory authorities, including information on AML officers and ownership structures. Think of it as a “get-to-know-you” for compliance.
  • Expanded Due Diligence: Higher-risk clients or transactions? Enhanced due diligence now includes sanctions screening for higher-risk situations, particularly for proliferation financing.
  • Risk Assessments and Policies: Entities are expected to keep their AML risk assessments up-to-date and aligned with the latest guidance from the Cayman Islands.

The takeaway? With these tighter AML requirements, fund managers and entities need to stay proactive. Review your policies, ensure they cover smaller transactions, and reinforce your AML team’s training, these are the real “new standards” of 2024.

Corporate Governance and Internal Controls: New Rules to Raise the Bar

On October 14, 2023, the Cayman Islands Monetary Authority (CIMA) rolled out new corporate governance and internal control rules for regulated entities. These changes are a call to action for funds to shore up their governance practices and documentation processes.

What’s New?

  • Corporate Governance Rule: This rule calls for a well-structured, proactive governing body. Formal meetings, thorough documentation, and regular review processes for compliance, legal, and service provider reports are now expected.
  • Internal Controls Rule and Guidance: For those handling risk management and internal controls, there’s an added layer of responsibility. Entities must now document their compliance processes thoroughly, covering everything from AML protocols to client onboarding practices.

These changes are about fostering accountability and efficiency, making sure the fund’s governing body is fully in the loop. So, for fund managers, this is the time to double-check that your internal controls and governance practices meet these new standards. Think of it as a compliance health check for your operations.

Economic Substance Requirements: Staying Present in the Cayman Islands

Economic substance requirements are not new to the Cayman Islands, but recent discussions and updates mean they remain top-of-mind. For entities conducting “relevant activities” like fund management, the message is clear: ensure you’re genuinely conducting business in the Cayman Islands.

Why This Matters:

To comply with the Economic Substance Act (as Revised) (ES Act), funds must meet standards that demonstrate a real presence in the jurisdiction. This includes having sufficient staff, physical office space, and spending to back up the business activities conducted from the Cayman Islands. It’s all about showing that your operations aren’t just “on paper” but are legitimately rooted in Cayman.

If your fund is engaged in fund management or other relevant activities, now’s a good time to review your economic substance setup. Make sure you’re meeting the requirements, and be prepared for periodic reviews.

Ready, Set, Comply!

With all these regulatory updates, the name of the game is preparedness. Cayman’s new AML, corporate governance, and economic substance requirements set a clear path forward for fund managers and other regulated entities. Here’s what you can do now:

  1. Review Your AML Procedures: Adjust your transaction monitoring threshold and add any necessary steps for enhanced due diligence.
  2. Strengthen Governance Practices: Plan more structured meetings for your governing body, and make sure compliance documentation is ready for review.
  3. Check Your Economic Substance: If you’re managing funds in Cayman, make sure you have the personnel, premises, and resources to meet substance requirements.

Keeping up with regulatory changes can feel like a lot, but with these clear steps, you’ll be ready to meet Cayman’s new standards and keep your investment fund in top compliance shape. After all, a well-regulated fund isn’t just about ticking boxes, it’s about building trust and staying ahead in a dynamic market.

If you’re a director, investment manager or general partner of a Cayman fund and you are wondering if these updates apply to your business, reach out to your legal counsel at Vale Law for guidance. We’re here to help clarify the requirements and ensure your compliance with Cayman Islands regulations. 

Shelley Do Vale: shelley.vale@valelaw.ky


Santiago Mtnez-Carvajal: sc@valelaw.ky