After Blacklist Challenges, the Cayman Islands Emerge Stronger Than Ever

Despite misrepresentations in movies showing businessmen traveling to the Cayman Islands with suitcases stuffed with cash, the truth is that the Cayman Islands are entirely in compliance with the regulations of the European Union (EU) and the Organisation for Economic Co-operation and Development (OECD). But after the government missed a compliance deadline early in 2020, the Cayman Islands spent eight months on the EU’s blacklist, leaving questions in the minds of many.

To bring clarity to the subject, we spoke with David Boyd, Alter Domus’ Cayman Islands Country Executive. Here, he describes how the Cayman Islands wound up on the blacklist, who was affected, how the country resolved the issue, and what the Cayman government plans to do to ensure the country avoids being blacklisted again. He also talks about the repercussions of being on the list. “It was a reputational risk,” he says, “with real-world consequences.”

Why did the EU put the Cayman Islands on its blacklist?

In its simplest terms, the Cayman Islands didn’t have laws that would give the Cayman Islands Monetary Authority (“CIMA”) authority over unregulated funds, so the EU put the jurisdiction on the blacklist until those measures were in place.

Fund administrators in the Cayman Islands administer many types of funds, including private equity funds, which are typically closed-ended and unregulated. The EU wanted these funds regulated by CIMA to ensure that the same level of oversight was being conducted on unregulated funds as it was for regulated funds.

In the past, reliance was placed on administrators to perform fund administration without any real oversight by the Monetary Authority. And although the funds were being administered correctly, the Authority didn’t have the types of checks and balances it wanted to ensure due diligence was being done on investors as well as the types of investments the funds were investing in.

The EU wanted to bring all fund activity up to a standard level so nothing could fall through the cracks. For instance, it wanted assurance that if investment capital came into a Cayman fund from a suspect county, it would know that CIMA had the correct oversight procedures in place to ensure the administrator was subjecting that money to the same rigorous standards for the previously unregulated funds that it was already doing for the regulated funds.

In short, the EU wanted to close the gap for closed-ended structures to ensure that nothing would slip through.

What were the repercussions of being on the blacklist?

The Cayman government and investment industry are eager to be on the good side of the OECD, the G20 counties, and the EU, and being put on the blacklist definitely raised concerns. Boyd explains, “Although Cayman has made significant contributions to the global financial services industry, the Island’s reputation was suddenly at stake.”

Being blacklisted affected fund managers who work in Cayman as well as those in other countries who domicile funds there. Boyd witnessed firsthand the fallback from being on the list. For example, one of his long-term client-managers wanted to set up a second Cayman-based fund but the investors raised concerns because of the blacklisting. To appease the investors, the manager re-domiciled the fund to another country. “We quickly saw the real-world effects of being on the blacklist.”

Cayman has spent years building up its reputation, and even being on the blacklist for a short amount of time caused reputational consequences for some in the industry. But the Cayman government is aware of those risks and is working steadfast to ensure they are compliant with the EU’s demands in the future.

What did the Cayman Islands government do to get off the list?

Once the Cayman government understood what the EU required, it quickly began to work on legislation that would satisfy its concerns. The government passed two laws that closed the gap for closed-ended unregulated funds and satisfied the requirements.

The first law was the Private Funds Law of 2020, which requires that all funds that fall under the definition of a “private fund” are required to register with CIMA. The agency is then responsible for regulating those funds.

Secondly, the Mutual Funds Law of 2020 requires open-ended funds that have 15 or fewer investors and are formed in the Cayman Islands to register with CIMA and be regulated by the agency.

Both laws took effect on February 7, 2020, and all existing funds had to be registered by August 7, 2020.

Unfortunately, even though it had already passed the laws bringing the industry into compliance with the demands, the government missed the EU deadline by four days, which caused the EU to place Cayman on the blacklist. The Islands were removed as soon as the EU committee met for another review in late October 2020.

“The Cayman Islands will take whatever action is necessary to be a good corporate citizen because we don’t just want to be a player, but more so a positive contributor to the world economy.” – David Boyd

Who will benefit the most now that the Cayman Islands are a recognized global player?

The Cayman Islands are known in the financial industry for hiring the best and the brightest, and now that they are officially in compliance with global standards, it will benefit both the service providers on the Islands as well as the fund managers who do business there.

For instance, managers of pension funds understand that Cayman tax laws make it an ideal place to domicile the funds. And now that the cloud of the blacklist has been lifted, both managers and investors can feel confident about doing business with those well-qualified Cayman service providers. It’s a win-win for everyone.

How will the Cayman Islands stay off the blacklist in the future?

The Cayman government is receptive to demands from the EU and will do everything in its power to stay off the blacklist in the future. Cayman has worked hard to achieve its great reputation in the financial sector, and the government will continue to meet the standards as they adapt over time to ensure that the Cayman Island’s financial industry stays robust and remains a good partner in the global industry.

This article was originally published in Sensus Magazine.

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