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CAYMAN 2012 ACCOUNTA NCY 1. Participating FFI 2. Registered deemed-compliant FFI 3. A non-registering local bank 4. Restricted distributor Another requirement of a restricted fund is agreements that govern the distribution of the restricted fund’s debt or equity must prohibit the sale of fund interests to US persons, non-participating FFIs or non-foreign financial entities with one or more substantial (10% or more) US owners. A restricted fund will still have to perform certain due diligence on direct investors and change how it does business with its distributors based on the limitations of the sale of debt/equity. INTERGOVERNMENTAL APPROACH Concurrent with the release of the proposed Fatca regulations, a two-page joint statement was released indicating the United States, France, Germany, Italy, Spain and the United Kingdom were exploring an intergovernmental approach to Fatca compliance. The approach would require domestic tax information reporting which would be exchanged between participating countries. Given the current income tax regime in the Cayman Islands, the reciprocity offered by the intergovernmental approach would likely not yield any immediate direct benefits. However if such an approach is available one would speculate that the Cayman Islands would be inclined to contemplate and perhaps fully participate. The current Confidential Relationships (Preservation) Law (2009 Revision) is likely a significant hurdle Cayman Islands FFIs must navigate in any Fatca compliance strategy, though the intergovernmental approach may be part of the solution. It has been reported that the Cayman Islands Premier, the Honourable W. McKeeva Bush, OBE, JP, has announced future trips to Washington to continue talks with American officials about Fatca. The topic of intergovernmental reporting is likely to be on the agenda. COMPLIANCE There are many questions within the offshore investment fund industry regarding the party responsible for compliance. The proposed regulations indicate the FFI itself is required to comply whether it is as a participating FFI, or a registered deemedcompliant FFI, or risk becoming a non-participating FFI and be subject to withholding. Each FFI must quickly determine if it can meet the requirements of a deemedcompliant FFI, and if failing to do so, whether the FFI will participate in Fatca compliance. Many in the industry are hopeful Cayman Islands regulated investment funds will qualify under either registered deemed-compliant category. Once an FFI determines its Fatca strategy as either a deemed-compliant FFI, participating FFI or non-participating FFI, it must begin to put the strategy into action. Among many regional and local fund administrators there seems to be an understanding the administrators will likely be eyed to assist in Fatca compliance though this may differ from fund to fund. Accordingly, fund administrators must begin to assess their own systems, processes, capabilities and capacities to ensure their ability to provide additional Fatca compliance services. Under the current proposed rules participating FFIs can enter into an FFI agreement online with the IRS starting 1 January 2013. Furthermore for participating FFIs the responsible officer must certify to the IRS by 1 July 2013 that the participating FFIs’ new account opening procedures are in place to identify US account holders. In general a deemed-compliant FFI would likely register with the IRS before withholding is scheduled to begin on 1 January 2014. Given the imminent due dates for both, participating FFIs and deemed-compliant FFIs, discussions on Fatca compliance is a timely issue. SUMMARY While the proposed regulations may make it easier for certain offshore investment funds to be deemed-compliant, there still may be a significant number of offshore investment funds that do not qualify for this category and will therefore need to become a participating FFI or be subject to the withholding. Assistance may be required by each FFI in its deemed-compliant determination as well as registration and compliance with the administrative burdens thereafter. Similarly FFIs who become participating FFIs may also require assistance with its FFI agreement, certification process, and ongoing documentation and informational reporting. Lastly, the intergovernmental approach is an intriguing option and should be monitored as the approach evolves from its current joint statement status. The threat of a 30% withholding tax is too significant for offshore investment funds to delay an inevitable Fatca compliance strategy as either a deemed-compliant FFI or participating FFI. n 40 HFMWEEK.COM
CAYMAN 2012 FINANCIAL SE RVICES CRITICAL ADVANTAGES RICHARD COLES TALKS TO HFMWEEK ABOUT HOW CAYMAN FINANCE’S ROLE HAS EVOLVED OVER THE YEARS AND WHY THE CAYMAN ISLANDS REMAINS ONE OF THE MOST ATTRACTIVE PLACES FOR FUND MANAGERS Richard Coles is chairman of Cayman Finance. Mr. Coles is an experienced lawyer both in England and in the Cayman Islands, being a solicitor admitted in England, a Cayman Islands Attorney-at-law and Notary Public. He was for six years the Attorney General for the Cayman Islands, a member of the Cabinet and Legislative Assembly and a government minister having been appointed to that position on the recommendation of the British Government. HFMWeek (HFM): Why was Cayman Finance formed Richard Coles (RC): Cayman Finance was created to promote the development of the Cayman Islands Financial Services Industry through cooperation and engagement with domestic and international political leaders, regulators, organisations and media. A key part of our overall purpose is to promote the integrity and transparency of the industry by legislative and regulatory enactment and to encourage the sustainable growth of the industry through innovation, education and integration. It is worth mentioning that as one of the world’s leading offshore financial centres, the Cayman Islands has always served as a strong leader in the offshore world and in the Caribbean region in terms of our innovations. Examples include being one of the first jurisdictions to focus on captive insurance and in particular healthcare captives, being the first to introduce legislation and regulation geared specifically towards offshore hedge funds, serving as the first president of the Caribbean Action Task Force, the regional arm of the FATF, through our Financial Secretary and in other areas. We felt we needed to support these efforts by having an organised mechanism to maintain continuous promotion and protection of the interest of our industry. From a domestic perspective, we also felt it was important to have a cohesive partnership among the local financial industry which joins together the various stakeholders to assist with the promotion of one of the primary sectors of employment of the Cayman Islands’ economy. HFM: Why should fund managers consider Cayman when wishing to establish an offshore fund RC: There are quite a few advantages to fund managers when using the Cayman Islands, though I will focus on four key aspects. The first of these is that the Cayman Islands offers a uniquely qualified professional infrastructure for fund THE CAYMAN ISLANDS HAS ALWAYS SERVED AS A STRONG LEADER IN THE OFFSHORE WORLD AND IN THE CARIBBEAN REGION IN TERMS OF OUR INNOVATIONS ” managers. We have many of the world’s best lawyers, accountants, independent directors and access. This range and depth in quality is one of our key attractions to fund managers. Another key benefit is that setting up a fund can be done very quickly in Cayman and our experience shows that this advantage can be critical when clients are looking to capitalise on a market opportunity. The third aspect, which in my opinion is key to professionals such as fund managers, is that the Cayman Islands fund product and brand is known worldwide as a respected jurisdiction for the vast majority of hedge funds. The confidence this brings to investors in a fund, due to their knowledge that the fund is licensed and regulated to high international standards, remains one of our key advantages, in my opinion. Finally, fund managers know that when they choose to do business in the Cayman Islands, not only do they have access to a wide range of professionals, but they can also carry out other business as we are uniquely the only offshore centre which can boast simultaneous leadership positions across several industries, including captive insurance, banking, hedge funds and securitisations. Bearing in mind that many fund clients are also seeking out wealth management and other financial services, this breadth of financial services provides a ‘one-stop-shop’ feature opportunity for these managers. It has been one of the key aspects of the competitive edge that we possess as a financial services jurisdiction. HFM: What are the challenges that will come with regulatory changes in Cayman in 2012 RC: We do not anticipate any significant regulatory changes in the short term. The jurisdiction underwent significant enhancements to its regulatory framework in the early 2000s. These changes focus mainly on improvements to the jurisdiction’s anti-money laundering regime, but also included enhancements to other regulatory legislation and policies in accordance with international stan- HFMWEEK.CO M 41
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