With the Cayman Islands Monetary Authority now able and willing to issue fines for everything from breaching AML regulations to missing deadlines around fees and regulatory filings, a diligent and experienced independent director plays an integral role and could be worth their weight in gold – literally.
Good corporate governance has always been important for fund managers. But with the Cayman Islands Monetary Authority (CIMA) now able to issue fines for a broader array of discrepancies including missed deadlines and failings in anti-money laundering practices (and has shown it is willing to do so), a good independent director could now be indispensable to ensure your Cayman structure is compliant with the Cayman regulatory requirements.
In November 2020, CIMA fined Cainvest Bank and Trust $100,000 for breaches of Cayman’s Anti-Money Laundering Regulations. The fine was a seminal moment for the regulator and those that come under its regime as it was the first time CIMA had exercised its power to issue fines since it was first given the ability in 2017.
The original legislation only applied to Anti-Money Laundering Regulations but in June 2020 this was revised and extended to include all of the regulator’s laws and rules. The Mutual Funds Law, the Private Funds Law, the Securities Investment Business Law and the Directors Registration and Licensing Law (DRLL) all come under the scope of CIMA’s regulations and administrative fines can be issued for breaches of any of these laws.
The size of fines range from $6,100 to $122,000 (for individuals) and go up to $1.2 million (for entities), depending on the nature and category of the breach. Fines can also be imposed multiple times for multiple breaches.
While Cainvest Bank and Trust was fined for breaches of AML regulations, fines can now be issued for a range of other offences that could often represent an oversight or misunderstanding of deadlines or compliance obligations.
Fines can be issued, for example, for failing to pay the annual CIMA annual registration fee, for failing to file audited financials within six months of a fund’s year end, for providing CIMA with false or misleading information or if a director of a CIMA registered fund is not registered with CIMA under the Directors Registration and Licensing Law (DRLL).
Directors of Cayman funds are liable for the fines whether they are a resident in the Cayman Islands or not. The responsibility for filing accounts and paying fees to CIMA typically falls to a registered office provider. However, ensuring that an entity is organised and well run is also a responsibility taken on by the wider board under the oversight of independent directors.
The board of directors of a fund are ultimately responsible for compliance with regulatory and legal obligations. And with the legal and regulatory requirements around funds more complex than ever, and with CIMA now clearly prepared to issue hefty fines for noncompliance, a diligent independent director may increasingly become a valued asset to avoid such fines.
The fact is that there are now many key deadlines that funds should not miss – but these can also change at short notice and their criteria can also be complex and confusing.
One good example of this is the portal created by the Department for International Tax Cooperation (DITC) for registration (notification) and reporting purposes. Funds need to be aware of several key deadlines relating to this portal including December 16, 2020, and March 31, 2021. The DITC Portal will also be used to submit an Economic Substance Return, the deadline in early 2021.
Meanwhile, an easier date to remember, but one which should also not be missed, is January 15: the deadline by which The Mutual Funds Law requires mutual funds and mutual fund administrators to pay the prescribed application and renewal fees to CIMA on an annual basis. Another might be December 31, by which any fund managers terminating funds will need to act to avoid or at least seek a 50% reduction in 2021 fees – only it is not quite that simple.
The best way to hit all deadlines and avoid fines or damage to reputation is to get good help and advice. A good system of corporate governance and experienced and diligent independent directors should prevent this. As Geoff Ruddick, partner of Paradigm Governance Partners, who serves on the boards of many alternative investment funds and special purpose vehicles, says:
“The range and scope of regulatory requirements relating to Cayman-base funds have increased exponentially in recent years and it can be hard to keep track of different regulatory obligations as well as the relevant deadlines and dates for filing and submitting certain pieces of information or paying fees.
“Against this landscape of increased requirements and complexity, we now also have a regulator that has an enhanced ability to issue fines – and has now shown it is willing to exercise those powers. Good corporate governance and an experienced independent director can help avoid many of these pitfalls.”
Paradigm Governance Partners
Paradigm Governance Partners is a licensed fiduciary services company based in the Cayman Islands. Paradigm was established by Cayman-based senior professionals who came together to build a fiduciary services company with a client and investor-focused service delivery model along with a multi-tiered and segregated take-on and review process. Its vision is to provide high quality, high touch boutique fiduciary services to investment managers, including hedge funds, family offices, closed-end funds and private equity, which has set a new standard for excellence in governance to the alternative investment industry.
Paradigm sets itself apart in the following ways:
Our directors are truly independent which is integral to our role to avoid conflicts of interest in line with regulatory independence standards and stakeholder expectations. We have a robust conflicts policy and we are regulated by the Cayman Islands Monetary Authority.
Capacity constraints and Continuity are core governance principles of ours. We have no employee versus company conflicts and all appointments are made on the basis of that individual doing the work as opposed to the institution.
All of our directors are highly experienced professionals in the Cayman Islands financial services industry. Our team has an aggregate of 250 years of collective experience while our directors have complementary skill sets that cover all aspects of the industry spectrum.