In an effort to take the Cayman Islands off the EU tax blacklist, government introduced last-minute, ungazetted changes to the Private Funds Law, on Wednesday.
The Private Funds Law was introduced in February of this year in response to EU pressure and required certain closed-ended funds, or private funds, to register with the Cayman Islands Monetary Authority.
Under the new law, private funds must file audited accounts, have appropriate internal asset valuation procedures and proper custodial and cash monitoring processes. The law also extends CIMA’s enforcement powers over the funds.
Minister Tara Rivers said government had identified some areas in the law “which seem to be creating uncertainty among practitioners”.
Changes to the definition of private funds in the law were needed to eliminate any “ambiguity regarding the registration of funds which were contemplated to be registerable,” she said.
In other words, the government believes many more closed-ended funds have yet to register with the regulator.
A six-month transitional period for private fund registration ends on 7 Aug. According to consulting firm Cartan, only 771 private funds have registered with CIMA so far.
How many closed-ended funds are subject to the law is not certain, because they can be structured as companies, partnerships or unit trusts. Cayman has about 110,000 registered companies and almost 30,000 registered partnerships.
In contrast to open-ended funds, closed-ended funds issue only a fixed number of shares which are not redeemable from the fund. Instead, their shares trade like a stock in the secondary market.
It is expected that the new definition of private funds, introduced by the government during committee stage amendments on Wednesday, will significantly increase the number and types of closed-ended Cayman investment vehicles that need to register with CIMA.
The changes leave service providers little time before the 7 Aug. deadline to explain to their clients that entities which were previously believed not to be in scope of the legislation, now are.
Opposition MLA criticises industry consultation
Opposition MLA Chris Saunders criticised the government consultation process with the financial services industry, arguing that it had created a culture of the regulated writing the rules that regulate them.
“We cannot have the foxes write the rules to guard the henhouse,” Saunders said.
He said lawmakers were reliant on feedback from lawyers and accountants and others in the industry to understand how laws are applied in practice. But in the case of the Private Funds Law, the legal profession had acted “selfishly” and done what was best for their clients, not what was best for the country or the financial services industry as a whole.
Saunders said, “The truth of the fact is the very people that we depended on to help us through this issue, basically for their own self-serving purposes, wrote a definition that gives them a backdoor and a loophole out of this system.”
He added, “The blacklisting of this country as a result of some people trying to be cute and running the risk that it did for the entire country was really unconscionable.”
Quoting a Financial Times article about Singapore angling for Cayman’s fund business after the EU tax listing, Saunders said the Opposition recognises the importance of a transparent fiancial services industry that meets all international obligations and that is taken off the EU blacklist.
Minister Rivers responded that by bringing the amendment forward, government was doing everything it could to ensure there “is no shadow of a doubt to the EU or anybody else” as to the government’s intention of having a robust regulatory framework that can withstand scrutiny, so that Cayman will be removed from the EU list at the earliest opportunity.