On 6 April 2018, CIMA released a notice (the “Notice“) in which it addressed three points raised by Cayman Finance in relation to unclear provisions of Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (“Guidance Notes“): (i) the designation / appointment of natural persons as MLROs, DMLROs and AMLCOs (together “AML Officers“) for investment funds; (ii) the need to carry out a gap analysis where AML functions have been delegated to a service provider outside the Cayman Islands and where relying on Eligible Introduction Letters; and (iii) whether subscription payments by an investor from a Cayman Islands bank, or equivalent jurisdiction bank, negated the need for full AML verification.
CIMA acknowledge in the Notice that the Guidance Notes are unclear and will need to be amended to reflect CIMA’s expectations on the points. While clarifying that natural persons need to be appointed as AML Officers, the Notice also provided a deadline for appointment of such AML Officers of 30 September 2018 for funds in existence prior to 1 June 2018. From 1 June 2018, new funds are expected to have such designated AML Officers.
In response to the Notice, a Cayman Finance working group, including a Maples and Calder representative, met with CIMA on 11 April 2018 (the “Meeting“) for the purpose of discussing the practical implementation – both of the three points raised in the Notice and a number of other issues. The Meeting helped to clarify a number of CIMA’s expectations and requirements. However, certain matters discussed require further consideration and it is expected that CIMA will engage in further consultation with industry. Notes of the Meeting, agreed by Cayman Finance and CIMA will be a useful reference for industry, but do not constitute official guidance.
CIMA expect to release both FAQs and draft revised Guidance Notes, subject to formal private sector consultation.
Appointment of Natural Persons as AML Officers
The need to amend the Guidance Notes notwithstanding, AML Officers will need to be appointed by both registered and unregistered Cayman Islands investment entities prior to the relevant deadlines noted previously.
Since the same individual can act both as fund AMLCO and one of the MLRO and DMLRO, each fund will need to designate at least two individuals.
Registered funds will need to designate the AML Officers via the REEFS portal. CIMA has no current plans for REEFS filings by unregistered investment entities. However, such entities may have to otherwise demonstrate their AML Officer appointments (and compliance with the AML regime) in due course.
What is independence?
Despite statements from some service providers to the contrary, there is no prima-facie disqualification from being designated an AML Officer, based on an existing relationship with the fund or its service providers. For example, it is permissible for employees of investment managers or the administrator, or for a fund director affiliated with the investment manager, to be designated in one or more of the AML Officer roles.
From an ‘independence’ perspective, CIMA has clarified that the principal question is whether the AML Officer is autonomous in carrying out their function, and not that they are independent from the investment manager or any other service provider to the fund.
So what’s the process?
CIMA does not have any stipulations with respect to the process of AML officer designation. For instance, if an AML Officer will be provided by a service provider, then the designation can be included as part of an AML delegation arrangement formalised in an administration agreement, an investment management agreement, or as part of a separate service agreement.
We would expect such service providers (including administrators) to have different contracting models.
At this stage, CIMA does not require copies of appointment resolutions or documents, in the ordinary course, but offering documents may, in the future, need to include the names and biographies of the AML Officers.
CIMA does not currently intend to place a limit on the number of AML Officer appointments that a single individual can take on. The question in practice will be what number of engagements an individual is capable of taking on in the context of the resources available to them.
Where to from here?
To address practical application, we expect service providers will consider and respond with a variety of AML Officer service offerings. MaplesFS offers a risk-based, cost-effective AML solution that can be tailored to suit individual requirements.
We also expect there to be a period of normalisation for new industry standard documentation, as further discussed below, including offering and subscription documents, associated resolutions and AML delegation / designation terms.
Clients should consider how they would prefer to address the new requirements before the deadlines. We would be pleased to discuss these options with you.
In the Meeting, clarity was sought as to the deemed equivalence of service providers who are AML regulated in a country listed by the Cayman Islands Anti-Money Laundering Steering Group (“AMLSG“) list of Countries and Territories Deemed to Have Equivalent Legislation (the “Equivalent Jurisdiction List“). Although the Guidance Notes currently permit the reliance on an AML delegate’s home rules, where they are based in, and subject to the AML regime of, a jurisdiction on the Equivalent Jurisdiction List, CIMA’s position is that the AMLSG list is relevant only for the purposes of assessing the possible applicability of simplified due diligence procedures for investors in the fund. It is not relevant to the question of whether a fund delegate is automatically suitable as a delegate and so their expectation is that standards equivalent to the AML regime of Cayman should be applied. In that sense, they are less concerned about the finer details of standards applicable to a delegate but are focused on equivalency of outcomes, e.g. that suspicious / illegal activity will be identified and reported (including to the Cayman Islands Financial Reporting Authority) whether applying the Cayman Islands or an Equivalent Jurisdiction AML regime. There is no expectation that there will be a granular comparison of each stipulation of the Cayman Islands AML regime.
Investment entities will be expected to demonstrate that they have considered the suitability of a delegate and its AML / CFT programme.
However, this is an area that requires further development and industry practice.
There is an expectation that a fund will carry out and document a risk assessment of (inter alia) its activities / investments and investors. Such assessment ought to be prior to launch and one approach would be to document this in the launch resolutions.
The AMLCO (who may be a director) is required to have AML oversight of an investment entity’s activities, going beyond investor related AML issues and compliance. The designated individual will be required to take measures to develop and maintain systems and controls, regularly reporting to and advising the Board of issues that should be addressed and liaising with and responding to requests from relevant regulatory bodies and authorities.
The AMLCO will have particular responsibility for receiving periodic reports from service providers (e.g. administrators and the investment manager) and the ongoing monitoring of the maintenance of the procedures by the AML delegates / designates.
The MLRO and DMLRO (who again, may be directors) will serve as the key points of contact for all suspicious activity reports and will be responsible for reporting suspicious activity to the appropriate authorities.
Verification Materials Required to be Provided by Nominees
CIMA has been alerted to the practical difficulties arising from a requirement under the Anti-Money Laundering Regulations (“AMLRs“) whereby nominees (including regulated financial institutions) must provide a written assurance, including confirmation that information on the underlying principal and beneficial owners will be provided upon request. CIMA confirmed that it was not their intention to complicate investment in Cayman Islands funds, especially by financial institutions that would meet the criteria for simplified due diligence, and will consider the matter further.
Payments from Bank Accounts in an Equivalent Jurisdiction
Previously, identity verification requirements were deemed to have been met where subscription monies were received from an account in a subscriber’s name at a bank that is based and regulated in the Cayman Islands or an Equivalent Jurisdiction. The AMLRs qualified that measure by requiring due diligence where there was an ‘onward payment’, which CIMA initially viewed as including a payment back to the same bank account of the original subscriber.
Following discussions with Cayman Finance, CIMA will consider the scope of this measure further.
If CIMA’s interpretation remains, the measure will be fairly limited in utility, essentially being a tool to allow subscription where the relevant investor’s verification documentation was not obtained prior to the relevant closing.
Extent of Application of the AMLRs
There are possible differences in interpretation of the updated categories of ‘relevant financial business’ with the AMLRs and the extent to which they can apply technically to unregistered Cayman Islands entities. For example, there are instances of passive entities in investment group structures where any deemed application of the AMLRs could be viewed as unnecessarily duplicative. CIMA will develop guidance on this point in consultation with Cayman Finance.