Both the BVI and Cayman Islands have been busy recently with changes to their AML regimes for investment funds.
Offshore funds established in the Cayman Islands and BVI could be forgiven for thinking that European laws on data protection don’t apply to them. That all changed recently though after the General Data Protection Regulation (GDPR) came into force in Europe last Friday, 25 May.
What’s GDPR and when can offshore funds be caught?
GDPR is broad in scope and expands Europe’s earlier data protection laws, with an overall aim of improving European individuals’ rights over their personal data and how it’s collected, stored and processed. GDPR applies to data controllers and data processors established in the European Union but can also apply to controllers/processors when they’re based outside the EU, depending on their activities.
Offshore funds may be classed as data controllers, if they’re processing data about EU individuals and the processing is related to offering goods or services to individuals in the EU. In practice, this means that offshore funds with EU investors or who actively market their fund to EU investors may be in scope. Unfortunately whether a fund is being offered or actively marketed to EU investors under GDPR isn’t the same as whether it’s being marketed under AIFMD, so funds need to review their activities and investors again to see if GDPR applies. GDPR can also apply to offshore funds where personal data’s being processed outside the EU by controllers/processors established in the EU.
Service providers to funds, including administrators and IT providers who hold personal data caught by GDPR, may also be classed as data processors. Specific GDPR requirements for arrangements between controllers and processors may then mean that a fund’s administration and outsourcing agreements need reviewing.
With potential penalties of Euro 20 million or 4% of annual global turnover, whichever’s greater, offshore funds that may be in scope of GDPR need to take it seriously.
Here at Harneys our Cyprus team has been busy advising funds and their service providers on whether they’re in scope and if so what they have to do to make sure they’re compliant, with a handy flowchart as the starting point.
The detailed impact of GDPR on offshore funds in practice is likely to be a discussion point for the industry for months to come, despite it coming into force last week, with one commentator remarking that the legislation’s “woollier than a row of sheep”. Here in Europe there are many people who are simply relieved that their inboxes have stopped being swamped with updated privacy policies, many from companies they can barely remember being in contact with in the first place…
The Cayman Islands government kept funds lawyers busy over Christmas and into the New Year by publishing a draft of updated laws and regulations in December which affect Cayman Islands investment funds. This blog briefly summarises those changes, please let any of the blog team know if you’d like more information or advice on any of them or have a look at our more detailed client alerts in the links below.
Having worked as a funds lawyer through the 2008 financial crisis and advised various Cayman funds on the meltdowns that followed, it’s easy to agree with the opening remark in the Privy Council’s recent judgment in the Primeo case1 that “the path to redemption is not always smooth.” The Privy Council has provided helpful confirmation of the earlier decisions in the Cayman Islands Grand Court and the Court of Appeal that under Cayman Islands law “redemption” of shares means redemption in accordance with the terms set out in a fund’s articles of association. Once the redemption process in the articles has been complied with, the investor is taken to have redeemed its shares and become a creditor in respect of its redemption proceeds. Payment by the Company of the redemption proceeds is not an inherent part of redemption.
What was the Primeo case about and why does it matter for offshore funds today?
Don’t all rush at once with your XML files, but the Cayman Islands Tax Information Authority (TIA) confirmed last week that its automatic exchange of information (AEOI) portal is now open again for notification and some reporting functions. Those fund administrators who have taken on the task of processing the notification and reporting obligations for Cayman funds are now busy making sure that the funds are properly registered on the portal so that they can file the relevant reports later in the Summer under the Cayman legislation implementing US FATCA and the OECD’s Common Reporting Standard (or CRS as everyone knows it).
So, what are the key dates in 2017 for Cayman funds and AEOI?
|Early May 2017||New AEOI portal user guide for CRS/US FATCA was published here|
|Mid May 2017||CRS and US FATCA notification/registration function now available on AEOI portal, including variation in reporting obligation, and US FATCA XML reporting|
|June 2017||Updated AEOI portal user guide available with detailed CRS user guidance|
|Mid June 2017||CRS reporting function available on AEOI portal|
|30 June 2017||CRS and US FATCA notification/registration deadline for Cayman financial institutions|
|31 July 2017||CRS and US FATCA reporting deadline for Cayman reporting financial institutions, for the 2016 reporting year|
|31 July 2017||Deadline for correcting any errors for US FATCA reports for 2014 and/or 2015|
|31 December 2017||The review of Pre-existing Lower Value Individual Accounts and Pre-existing Entity Accounts for CRS must be completed|
What else should Cayman funds have done or be doing?
The Brexit rollercoaster is showing no signs of nearing the end of the ride yet following the UK Supreme Court’s judgment on Tuesday this week. As has been widely reported, the Supreme Court confirmed that the UK government doesn’t have the power to give notice to withdraw from the European Union under Article 50 of the Lisbon Treaty without an act of Parliament authorising it to do so. The government can’t simply serve notice to leave, as it had hoped and argued before the UK’s highest court, and so it now has to put draft legislation before Parliament, which it published today, to give the government the authority it needs to serve notice.
Opposition parties have already made it clear that they may try to amend the draft legislation, which, with only one section authorising the Prime Minister to serve Article 50 notice, must win the prize for being one of the shortest pieces of legislation in recent years. Although it looks unlikely they’ll de-rail Brexit itself at this stage or even delay the government’s 31 March target deadline for serving Article 50 notice, MPs could try to take Theresa May’s strategy in a different direction from the principles she set out in her speech last week or make the government involve Parliament more in the negotiations, not just give them a vote on the final deal struck.
So what does the Supreme Court judgment mean for offshore funds?
The political and economic rollercoaster ride we’ve been on here in the UK since the EU referendum in June seems set to continue following Thursday’s High Court judgment in London. The High Court held that the UK government doesn’t have the power to give notice to withdraw from the European Union under Article 50 of the Lisbon Treaty. Only parliament has the power to change domestic law in the UK and, as serving notice to leave the EU will affect rights under domestic UK law, the government can’t serve notice without parliament’s approval.
So, just as we’d started to get used to the idea of notice being served by the government in March 2017, with the UK then leaving the EU by March 2019, the Brexit process has now been thrown up in the air again.
Keep calm and stay in London?
Many of our readers will no doubt have heard about the recent decision by the European Commission that Apple’s tax structure in Ireland breached the EU state aid rules. But what, you may wonder, does that have to do with offshore funds? For me it raises an important question of principle of who should be deciding international tax policy for multi-national corporations and other companies – including investment funds – that operate on a cross-border basis in Europe.
As we’ve blogged about before, the OECD’s been busy working on its BEPS plan to try to make the international tax system more joined up – and limit some of the mismatches that multi-national and other companies have for years (completely legally) used to reduce their tax bills.
Here in Europe, the European Council’s also been working on introducing legislation building on BEPS and the Commission’s 2015 Action Plan for Fair and Efficient Corporate Taxation in the European Union, via the Anti Tax Avoidance Directive. So far, this all looks suitably co-ordinated and sounds sensible when you bear in mind the Commission’s website statement that “National governments are responsible for raising taxes and settling tax rates…The EC Treaty does not specifically call for direct taxes (income and corporate taxes) to be harmonised.”
So how then does the 30 August 2016 state aid decision by the Commission about Apple’s tax structure in Ireland fit into this?
They’ve been talked about for a while by our bloggers and contributors but the moment has now come for the Cayman LLC, which has been available for registration since 13 July and numerous of which have already been formed. The Cayman LLC was introduced to meet the requirements of North American managers and intermediaries who use Delaware LLCs and want a flexible offshore version, and Cayman lawyers dealing regularly with North American clients are particularly excited about now being able to offer a “Cayman” version. Its introduction also highlights Cayman’s responsiveness to market demand as it continues to maintain its position as the dominant brand in North America for funds structures.
So what makes the Cayman LLC – or limited liability company, to give it its full name – so interesting?
So, the pound’s tanked, world stock markets are in turmoil, Scotland and Northern Ireland are considering whether to leave the United Kingdom so they can stay within the EU and the Prime Minister has announced his resignation. Last week’s vote to Leave the EU has certainly had a profound (and depressingly predictable for those of us who voted Remain) impact on the UK economy and politics already, with a long period of uncertainty yet to come. The financial services industry in the UK is likely to be significantly affected by Brexit, with various international investment banks having now announced that they’re reviewing their operations here, given the uncertainty over whether they will still be able to passport their financial services and products across Europe from London.
But what impact will Brexit have on Cayman and BVI offshore funds and how they’re marketed into Europe?
Here in the UK the debate is intensifying around the EU referendum on 23 June on whether the UK should remain in or leave the EU. With not long to go to the vote, for obvious reasons a lot of the discussion about the impact of any “Leave” vote has been on the UK economy and UK citizens. Many onshore UK law firms have set out in detail the exit mechanism that would be involved following a vote to Leave and their thoughts on how it could affect the legislative landscape in the UK for financial institutions and investment managers. If the UK votes to remain in the EU, we can expect going back to business as usual in most areas, although quite how the Conservative party will re-unite itself after all the recent mud slinging remains to be seen. However, a Leave vote and subsequent Brexit from the EU could also have a much broader effect around the world, in ways that haven’t necessarily grabbed the headlines so far.
So what impact might any Brexit have on Cayman and BVI offshore funds and how they’re marketed into Europe?
If you’ve decided that a section 4(3) Cayman fund is the best structure for your fund (see our earlier blog for an Introduction to Cayman Fund Products), you’ll need to register it with the Cayman Islands Monetary Authority (CIMA) before you launch. The process is well established and fairly straightforward, involving your Cayman lawyers filing the following with CIMA via their online registration system.
April was a good month for our investment funds lawyers with two major award wins. First the London team, led by Sean Scott, brought home the HFM European Hedge Fund Services Awards, Best Offshore Law Firm – Client Service award, recognising Harneys’ commitment to client service. Next our Asia team, including fellow blogger Marc Parrott, was awarded Best Offshore Law Firm for Hedge Funds at the second annual Hedge Fund China Summit in Shanghai, recognising the Asia team’s continued expansion and expertise. It’s always good to win awards but particularly satisfying when they’re based on feedback from happy clients. All in all, a proud month for us Harneys funds lawyers!
AIFMD. Love it or loathe it – and let’s face it, it’s not the most popular law – the Alternative Investment Fund Managers Directive (AIFMD) has changed the way that alternative funds are marketed to investors in Europe. Ultimately this will hopefully allow European and non-European alternative investment funds (AIFs) to be marketed to professional investors in Europe by way of a passport, similar to the way that UCITS funds can be passported round Europe. For now, though, the passport only works for European AIFs marketed by European managers, with non-European AIFs and managers waiting for the European Securities and Markets Authority (ESMA)’s further recommendations on extending the passport to non-European jurisdictions. Your typical Cayman or BVI investment fund isn’t capable of being passported yet and so needs to be marketed using the AIFMD private placement regimes in each country.
So how do the AIFMD rules work for Cayman and BVI AIFs being marketed to professional investors in Europe by non-European managers?
Once your fund is registered with the Cayman Islands Monetary Authority (CIMA) it will need to comply with various ongoing obligations under the Mutual Funds Law.
The list isn’t long but it’s important for regulated funds to comply to keep the fund in good standing with CIMA and avoid offences / penalties. Failing to comply with FATCA-related reporting obligations can also potentially result in a 30% withholding tax applying to the fund, which is clearly best avoided.
So, if your fund’s registered under section 4(3) of the Mutual Funds Law (see our earlier blog on the different kinds of funds), what are its ongoing obligations?