Cayman’s compliance regime leads by example

On 3rd December 2018, the Cayman Islands Monetary Authority (CIMA) published amendments to December 2017’s AML Guidance notes on the Prevention and Detection of Money Laundering and Terrorist Financing. Under the AML/CFT regime, a clear distinction has been made between delegation and reliance with respect to how an investment fund manager handless its AML obligations.

Many Cayman hedge funds go the ‘reliance’ route, using a trusted service provider whose own AML officer performs the duties in line with the service provider’s own compliance framework. This is unlikely to change under the AML/CFT regime, but CIMA will expect fund managers to check that the service provider’s AML measures are sound and robust.

This is another step forward in the evolution of Cayman’s compliance regime and will require directors of fund boards to apply close scrutiny to service providers performing AML/KYC duties to the fund.

“The directors of a Cayman fund have the ultimate responsibility for the fund and its activities and that is the case for AML,” says Sean Inggs, Fund Director at International Management Services Ltd. (IMS), one of the leading providers of governance and directorship services to the investment fund industry in the Cayman Islands.

“In almost all cases, a Cayman fund will enter into an administration agreement, which should be with a reputable and (if relevant to the administrator’s place of business) a licensed and regulated entity. Under that agreement, the practical duties of collecting and verifying investor KYC/AML are carried out by the fund administrator.

“They report their findings back to the fund board, which oversees the administrator’s activities to make sure everything is going according to plan and that the administrator’s AML/KYC policies and procedures (on which the fund relies), are being adhered to.”

As corporate governance specialists, Inggs says that IMS has welcomed the introduction of changes to Cayman’s AML/KYC regime

“CIMA now requires all investment funds, whether they are regulated or not, to appoint three AML officers. Those are the AML Compliance Officer, the Money Laundering Reporting Officer and the Deputy MLRO. Those roles have to be fulfilled by individuals and not by corporates.

“The AML/KYC guidelines and legislation that are now in place are crystal clear in terms of how these regulated entities need to conduct themselves and what they need to be aware of to combat terrorist financing and general money laundering,” adds Inggs.

In his view, there is a strong argument that Cayman is better equipped to oversee and handle AML issues than some larger onshore jurisdictions. There is a specific requirement for parties to document an investor’s source of funds – investors must be specific as to where their monies have come from for the purposes of investment into a Cayman fund. Those individuals are then put through sanctions and compliance checks to make sure those monies are not coming from a sanctioned individual or country.

“Not only is there directorship oversight of the fund’s AML policies,” says Inggs, “the fund (and its investors) now get the benefit of additional officers who have to undertake specific duties related to the fund’s AML performance and its adherence to AML policies, as well as reporting to the board of directors.

“Overall, this is a positive development for the industry and demonstrates that Cayman is cooperating with onshore regulators and complying with global compliance standards.”

Inggs is of the view that if a fund’s independent director acts in any of the three AML officer roles, it can lessen the risk of a potential conflict as opposed to one of the fund manager’s employees being appointed, who may have a direct connection with investor take-on and/or the dealing and trading process.

With respect to the MLRO, it is their duty to file a suspicious activity report with CIMA, should they learn of any fraudulent activities in the fund.

“Therefore, I believe that best practice would be for a fund manager to appoint someone independent of their front office/ management activities.

“We see this as an opportunity to strengthen funds’ AML processes. Notwithstanding increased regulation, Cayman continues to be seen as the jurisdiction of choice for offshore entities,” concludes Inggs