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Financial Services Regulatory Initiatives in 2021

In further preparing for continuing financial services regulatory developments, the Ministry of Financial Services is providing industry with an overview of key initiatives for the year 2021.

As with all financial services jurisdictions, the Cayman Islands continually reviews, evolves and enhances its legislative and regulatory environment to ensure it is in line with evolving global standards and best practices and the evolving needs of global clients.

The Ministry notes that policy decisions on these matters have not yet been made. Feedback from stakeholders, including industry, will be considered through a revised Ministry consultation process, which is intended to best reinforce the Cayman Islands’ position as a well-regulated, commercially attractive jurisdiction. General principles of the revised consultation process include consulting at the earliest possible stage in the decision-making process; facilitating the widest participation of stakeholders as feasible; and the Ministry’s provision of timely feedback to stakeholders.

The four key financial services regulatory initiatives that are expected to continue or commence in 2021 broadly relate to tax transparency, and AML/CFT/CFP (anti-money laundering, countering the financing of terrorism, and countering the financing of proliferation).

As industry is aware, the Hon. Attorney General is responsible for AML/CFT/CFP in the Cayman Islands. The Anti-Money Laundering Unit (AMLU), under the Attorney General’s remit; and the National Coordination Team, which reports to the Anti-Money Laundering Steering Group and the Ministerial Sub-Committee, are coordinating these efforts nationally. By its nature, financial services’ sustained success relies on a strong AML/CFT/CFP framework.

The Financial Action Task Force (FATF) sets the global standard for AML/CFT/CFP. The Caribbean Financial Action Task Force (CFATF), which is an FATF-style regional body, assesses and supports the development and implementation of the FATF standard in this region.

CFATF’s March 2019 Mutual Evaluation Report (MER) of the Cayman Islands made recommendations regarding Cayman’s AML/CFT/CFP technical compliance and effectiveness. Since then, the jurisdiction has made significant progress in addressing the recommended actions. Agencies involved in Cayman’s response are continuing their work to bolster our AML/CFT framework.

Based on this, and progress made by other Government agencies in their respective legislative areas, Government has asked, and CFATF has agreed, to re-rate Cayman on technical compliance.

The current re-rating exercise by the Group of Experts, in conjunction with CFATF, reviews technical compliance, based on the FATF 40 Recommendations (relating to the legislative and institutional framework of the jurisdiction, as well as the powers and procedures of competent authorities). The Joint Group of the Americas (a sub-group of FATF) will assess whether sufficient progress has been made since the publication of the MER, with respect to the FATF’s 11 Immediate Outcomes for effectiveness.

CFATF is expected to announce its re-rating decision early next year. FATF will announce its assessment of Cayman’s legislative effectiveness at its plenary, scheduled for 21-26 February 2021.

EU Fourth Anti-Money Laundering Directive (4AMLD)
On 7 May 2020, the European Commission adopted a new delegated regulation in relation to high-risk third countries that have strategic deficiencies in their AML/CFT regimes. The delegated regulation is a part of the 4AMLD, which is one of the pillars of the EU’s legislation to combat money laundering and terrorist financing. Accordingly, the EC plans to assess high-risk third countries that it considers as having strategic deficiencies in their regimes. Following this process, those jurisdictions that the EU identifies as high-risk will be placed on its AML list.

Jurisdictions that the FATF has identified as having strategic AML deficiencies will be considered by the EU for inclusion on its list. However, the EU also may impose additional AML requirements, as part of its own assessment process.

The AMLU and the Department for Financial Services Policy and Legislation (DFS) are now analysing the 4AMLD Methodology and comparing it with the FATF’s Methodology and Cayman’s AML regime.

The effectiveness of accessing information on trusts and legal arrangements; and any necessary enhancements to improve Cayman’s overall framework for transparency and cooperation, are identified as two areas requiring additional exploration.

Beneficial Ownership
To meet the Cayman Islands’ commitment to introduce a public register of beneficial ownership information, as this becomes the global standard, Cayman’s legislation and systems will continue to be refined and improved. Part of this work includes testing the current framework to ensure that General Registry, as the designated competent authority, has appropriate access to information, including to information held by other authorities within the Cayman Islands.

Industry is reminded of the connection between beneficial ownership and the EU’s list of non-cooperative jurisdictions for tax purposes. Specifically, the EU listing criteria, approved by the Council in November 2016, includes the following reference: “Future criterion: in view of the initiative for future global exchange of beneficial ownership information, the aspect of beneficial ownership will be incorporated at a later stage as a fourth transparency criterion for screening.”

This reference was again reiterated in the Code of Conduct Group (Business Taxation)’s 20 November 2020 report.

The Ministry believes Cayman’s existing beneficial ownership regime and our commitment to introduce a public register of beneficial ownership as it becomes a global standard should be sufficient to address any EU concerns. However, DFS will continue to monitor and evaluate these developments.

Industry is aware that the Cayman Islands International Tax Co-operation (Economic Substance) Law requires relevant entities, which carry on relevant activities, to satisfy the economic substance test relating to that activity; and that currently, this law does not apply to partnerships.

However, the EU, through its Code of Conduct Group (Business Taxation), has recently stated that economic substance commitments made by the Cayman Islands and certain other countries in 2017 should extend to relevant partnerships. Please note this excerpt, also taken from the Code of Conduct Group (Business Taxation)’s 20 November 2020 report:

“43. The ECOFIN Council endorsed in December 2019 the activity-based approach for partnerships under criterion 2.2, set out in annex to the Group’s 6-month report, as well as a common approach for activating exchange of information with jurisdictions under criterion 2.2.

44. In December 2019, the Commission services wrote to the 2.2 jurisdictions concerned to inform them of this decision and share with them the questionnaire. Jurisdictions were asked to reply by 15 February 2020. All jurisdictions replied and the Commission services sent follow-up questions where needed.

45. On 21 September 2020 the Fiscal Attachés examined a progress report on partnerships under criterion 2.2 and agreed on the way forward.

46. The Member States concluded that Anguilla, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Isle of Man and Jersey should extend their economic substance requirements to all relevant partnerships which were identified to fall out of the scope of existing legislation.

47. It was also agreed that without (sic) this was already covered by the commitment of the jurisdictions concerned to comply with the scoping paper for criterion 2.2. and a new commitment was not required. The following timeline should apply to the relevant jurisdictions to adopt and put into effect the necessary amendments to their legal framework so that this could be taken into account in the October 2021 listing update:

(a) by 30 June 2021 for the adoption of necessary amendments;
(b) by 1 July 2021 for the entry into force with a maximum 6-month transition period for existing entities.”

DFS and the Department for International Tax Cooperation are analysing all types of partnerships in the Cayman Islands, the rationale for their initial exclusion from economic substance requirements, and the outcomes of applying economic substance requirements to partnerships factor into Cayman’s next steps in relation to the EU’s request. Industry consultation on partnerships will commence on 5 January 2021.

Mandatory Disclosure Rules (MDRs)
In June 2018 an EU Code of Conduct Group paper introduced MDRs as a further transparency measure for criterion 2.2 jurisdictions. The Cayman Islands subsequently gave a commitment to the EU to consult on MDR with its stakeholders, using the OECD’s MDR framework as the guideline for meeting the EU’s request.

This commitment applies to all 2.2 jurisdictions, some of whom have already approved their MDR regulations.

Industry consultation on the implementation of MDR in the Cayman Islands will commence on 2 February 2021.