Cayman PF funds law adjusted in hopes of de-blacklisting by EU

Cayman Islands has retooled its Private Funds Law 2020 in a bid to getting itself removed from the EU’s blacklist of non-cooperative tax jurisdictions in October, when finance ministers will conduct its next review of the jurisdiction.

Cayman was added to the blacklist in February, shortly after it published the initial version of the Private Funds Law 2020. The new regime attempts to address the law’s shortcomings in the eyes of the EU’s 27 finance ministers by expanding the scope of private funds needing to register in Cayman.

“The point was raised that the scope of the legislation that Cayman passed, albeit in consultation with the EU, might result in fewer vehicles being registered and therefore regulated than was originally expected,” said Nick Rogers, a partner with Ogier in the Cayman Islands.

Vehicles structured to hold single assets, such as co-investments, as well as alternative investment vehicles established in the Cayman Islands, and certain master fund structures, among others, must now register with the Cayman Island Monetary Authority.

EU ministers will meet again in October to update the blacklist, giving an opportunity for Cayman to be removed from it.

“The feeling in Cayman is that we have done everything we possibly can and more to comply with the requests of the EU,” Rogers said.

Overall, the Private Funds Law 2020 will not add tremendous burden on funds, he explained. Although some funds that didn’t previously have to register will now have to do so, the registration requirements are less onerous than sponsors will have experienced in dealing with the Securities and Exchange Commission or the Financial Conduct Authority in the UK.

Some of the initial requirements include that private funds for the first time have to appoint a locally approved auditor in Cayman to audit their financial statements. On an ongoing basis, all private funds also need to have in place coherent valuation policies.

“I think that some clients have expressed initial dismay that the previously permissive framework for establishing a Cayman private equity fund was being made more difficult, but actually if you then start digging into how it’s going to affect their operational practices day-to-day, there’s not a lot of difference,” said Rogers. “The only thing which is the more material change would probably be the local audit sign-off. You can have your audit conducted anywhere in the world but the financial statements have to be signed off by a Cayman auditor.”

So far, Rogers said being on the blacklist has not had any material consequences for business in the jurisdiction, with fund launches continuing to take place. Cayman offers convenience to US tax-exempt investors and foreign investors, though if the EU blacklisting continues into 2021, there could be some ramifications.

“The EU itself is not the primary source of funds, investors, investments or managers for the Cayman Islands,” Rogers said. “Nonetheless, it is an influential block and many institutions with EU operations may want to analyze the consequences to them. But limiting EU investments by Cayman vehicles or investments into Cayman vehicles by EU investors, could have negative consequences for the EU, as it reduces access to international pools of capital.”