Uncertainty for offshore financial centres?
The Cayman Islands as one of the leading offshore financial centres have a great level of uncertainty in its future with all the recent developments around tax compliance. One looming uncertainty is the European Union’s (EU) Alternative Investment Fund Managers Directive (AIFMD) passport.
The AIFMD is one of several measures drawn up by the European Commission to regulate financial services in the wake of the global financial crisis. The AIFMD aim is to establish a harmonised regulatory framework for monitoring and supervising the perceived risks posed by unregulated funds such as private equity and hedge funds. Rather than regulate the funds themselves, the Directive targets their fund managers.
Attaining an AIFMD passport allows non-EU jurisdictions such as the Cayman Islands to market Investment Funds registered in the jurisdiction to ‘professional investors’ across the EU.
Cayman Islands investment funds currently are marketed in the EU under national private placement regimes (NPPRs). The NPPR and passport regimes will coexist until at least 2018, by which time the European Securities and Markets Authority (ESMA) will have decided, and acted upon, whether or not the passport regime should entirely displace NPPRs.
Whether the Cayman Islands receives the AIFMD passport will all depend on ESMA assessing the jurisdiction taking into account regulatory issues such as investor protection, competition, potential market disruption and the monitoring of systemic risk.
On 12 August 2015 the Legislative Assembly passed ‘The Securities Investment Business (Amendment) Bill 2015’ and ‘The Mutual Funds (Amendment) Bill 2015’ which are both designed to establish an opt-in regime for regulating Cayman Islands-domiciled investment funds and managers connected to the EU.
Despite all of the efforts by the Cayman Islands to comply with international compliance initiatives such as signing tax information agreements with other countries and complying with the US and UK FACTA, history has shown that the jurisdiction still comes under attack.
On the 17 June 2015, the EU published its first list of international tax havens as part of a crackdown on multinational companies and individuals trying to avoid paying tax in the 28-nation federation. The Cayman Islands appeared on that list issued by the EU prompting responses from the Minister for Financial Services, Hon Wayne Panton and the Cayman Finance group.
Just last summer, the UK’s Financial Conduct Authority (FCA) placed the Cayman Islands on its ‘high risk’ list, again sparking responses from members of Cayman’s financial services industry. The Chamber of Commerce council went as far as saying the FCA’s decision was “a deliberate and misguided attempt to smear Cayman’s reputation and credibility as one of the world’s best regulated jurisdictions.”
Of the more than 40 jurisdictions that ESMA is expected to assess in relation to the passport extension, to date it has assessed six: Guernsey, Hong Kong, Jersey, Singapore, Switzerland and the United States.
ESMA also aims to finalise the assessments of Hong Kong, Singapore and the USA as soon as practicable and to assess further groups of non-EU countries until it has provided advice on all the non-EU countries, including the Cayman Islands, where the majority of the world’s hedge funds are established.
The Cayman Islands will have to wait until this assessment is complete and a decision has been made on whether the jurisdiction will be granted the passport. If Cayman is not granted the passport, it is not fully known the affects this will have on the jurisdictions fund industry. Hopefully we will be accepted into the AIFMD passport programme with the recent amendments to our laws.
