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Cayman’s New Beneficial Ownership Rules Could Put Your Fund at Risk

Posted on Nov 13, 2024

The Cayman Islands, a leading jurisdiction for private investment funds, has implemented significant changes to its beneficial ownership regime. With the Beneficial Ownership Transparency Act, 2023 (the “Act”), which came into effect on July 31, 2024, fund managers and administrators must prepare to navigate a more stringent regulatory environment. Here’s what this means for the private investment fund industry.

 

Enhanced Transparency Requirements

The Act responds to global calls for more transparency in financial services, especially entity ownership and control. The legislation aligns with the Financial Action Task Force’s updated Recommendation 24. It ensures competent authorities can access accurate and up-to-date beneficial ownership information.

 

Who is Affected?

Under the Act, the scope of entities required to comply has broadened. Exemptions that previously applied to certain entities, such as exempted limited partnerships and special purpose vehicles, have been removed. These entities must now identify and report their beneficial owners. The threshold for determining beneficial ownership under the Act remains at 25%.

This expansion means that Cayman Islands domiciled private investment funds, trading subsidiaries, blocker entities and other special purpose entities, will need to reassess their compliance obligations. Fund managers must ensure that all relevant entities within their structures are compliant with the new rules.

 

New Data Requirements

All in-scope entities will need to provide certain information to their Cayman Islands registered office services provider. Certain entities may elect to establish and maintain a beneficial ownership register or may elect to name an Authorized Contact in lieu of maintaining a beneficial ownership register.

The definition of a beneficial owner has been revised to align more closely with the Cayman Islands’ AML regulations. Entities subject to the Act must identify and monitor changes to its beneficial owners and reportable legal entities. In-scope entities must maintain additional information about beneficial owners, including their address, nationality, and the nature of their control over the entity. This data requirement underscores the importance of maintaining detailed and up-to-date records.

Fund administrators will need to work closely with fund managers to gather the necessary information and ensure timely reporting.

 

Temporary Suspension of Filings and Future Enforcement

The Cayman Islands government has introduced a temporary suspension of beneficial ownership filings under the old regime, allowing entities time to adjust to the new requirements. The Cayman Islands Ministry has confirmed that there will be no enforcement of obligations under the Act until 1 January 2025. This grace period offers fund managers a window to ensure full compliance without immediate penalties.

The penalties for non-compliance under the new regime are substantial, including administrative fines that can accumulate monthly. Early action will mitigate the risk of financial penalties and reputational damage.

 

Preparing for Compliance

Private investment funds must take proactive steps to ensure compliance with the Act. This includes:

 

  • Reviewing Entity Structures: Assess which entities within the fund structure are now in scope and determine whether they are subject to standard beneficial ownership reporting requirements or whether they fall within a category that can use the alternative route to compliance.
  • Contact your registered service provider: coordinate with your registered service provider to confirm how in-scope entities will satisfy their obligations under the Act.
  • Gathering Required Data: Collect and verify the additional information required under the Act.
  • Engaging with Administrators: Work closely with fund administrators to ensure that all beneficial ownership information is accurately reported and kept up to date.

Conclusion

The Cayman Islands updated beneficial ownership regime represents a significant shift towards greater transparency and compliance. For private investment funds, early preparation and detailed record-keeping are crucial. Close collaboration with regulatory experts is also key. As global transparency standards evolve, staying ahead of changes is essential. This helps maintain investor confidence and regulatory compliance.

Please reach out to Joanne Remillard at jremillard@pinnaclefundservices.com or 1-604-559-8920 for more information about the new Cayman beneficial ownership rules.