Cayman Islands CRS Regulations: compliance and penalty provisions

The Cayman Islands Ministry of Financial Services has released for consultation amending Common Reporting Standard (CRS) regulations. The amending regulations primarily address CRS compliance and enforcement in the Cayman Islands and it is intended that they will enter into force by 31 December 2016.

However, apart from adding compliance and penalty provisions to the regulations, the amending regulations will also bring in significant reporting changes, including a requirement for the provision of a “nil return” where no reportable accounts are held during a year.

Background

The CRS was endorsed by the G20 in 2014 and the Cayman Islands was part of the early adopters group of jurisdictions committed to a timetable for implementation involving first exchange of information by the end of September 2017 and covering accounts opened from 01 January 2016.

The CRS will require jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations 2015 came into force in October 2015, implementing the substantive aspects of the CRS in the Cayman Islands. The Ministry of Financial Services has now released further draft regulations dealing largely with the compliance and enforcement issues of the CRS in Cayman.

Amending regulations

Assuming the amending regulations are adopted in their current form, the main implications would be as follows.

One of the main purposes of the amending regulations is to ensure that the Cayman Islands satisfy the requirements regarding “effective implementation” of the CRS. In this regard, it appears to have been considered necessary that the Cayman Tax Authorities have information concerning all Cayman Financial Institutions (FIs) and designated contacts for those Cayman FIs. The amending regulations therefore impose wider obligations for notifying the Cayman Islands authorities by including a revised regulation 8 (Obligation of all Cayman Financial Institutions to notify certain information) that extend to Non-Reporting Financial Institutions as well as Cayman Reporting Financial Institutions.

The revised regulation 8 will require a Cayman FI to provide to the Cayman Islands authorities required information about that FI by 30 April 2017. The required information includes:

• whether the FI is a Cayman Reporting FI or Non-reporting FI and what type of Reporting or Non-reporting FI, and
• the full name and address and other details of an individual designated as the principal point of contact for CRS purposes.

However, the amending regulations will also change the requirements in relation to reporting. In particular, under the amended rules a Cayman FI will need to provide a “nil return” if it did not maintain any reportable accounts in a year (nil reporting is only optional under these circumstances under the 2015 regulations as currently in force). This change would primarily impact Cayman asset managers (who are generally exempt from having financial accounts to report on under CRS) and Cayman master funds with only Cayman feeders. Whilst most such Cayman master funds should already have registered on the Cayman Islands Automatic Exchange of Information electronic portal for FATCA reporting and/or notification purposes, most Cayman managers are likely to be doing this for the first time by 30 April 2017 as a result of the amending CRS regulations where, for FATCA purposes, they have been relying on an exemption (ie certified deemed compliant investment manager status).

Offences and penalties

Apart from amending the reporting obligations of Cayman FIs, the amending CRS regulations will also set out a new Parts dealing with penalties and offences for breaches of the regulations. These appear generally broader in scope than those applicable for compliance breaches under the Cayman regulations implementing FATCA, although notably the possible criminal penalties for non-compliance with FATCA can include up to two years’ imprisonment which is not a feature of the amending CRS regulations.

The new Part 3 contains a number of new offences. For example, a person will commit an offence where they make a false self-certification and provide that self-certification to a Cayman FI for, broadly, any CRS purpose. In addition, an offence will be committed where a Cayman FI provides inaccurate information to the Cayman authorities and does so knowingly, recklessly, in contravention to its policies and procedures or later discovers the inaccuracy and fails to inform the Cayman authorities. A Cayman FI will also commit an offence if it contravenes any of the provisions of Part 2 of the regulations (which provide for the application of the CRS in the Cayman Islands).

It should be noted that where a Cayman FI is guilty of a criminal offence in relation to CRS, the directors and similar officers and members (in the case of a body corporate), the partners (in the case of a partnership) and the general partners and other partners involved in management (in the case of a limited partnership) will also be guilty of an offence, unless they can show that they exercised reasonable due diligence.

Fines of $50,000 for body corporates and $20,000 for individuals may be levied against persons who commit an offence under the CRS regulations.

However, it should be noted that the Cayman authorities can also impose similar penalties for offences under Part 3 (including further daily penalties where contravention continues) and whilst a prosecution of a person for an offence under Part 3 will prevent the imposition of a penalty in relation to the same matter (protection against double jeopardy), the same is not true where a person has been subjected to a penalty. Part 3 deals with the process for the provision of penalty notices, appeals and enforcement of penalties.

Comment

It is noteworthy that the compliance regime proposed in the draft regulations would be more onerous than in a number of competitor fund domicile jurisdictions. However, this is perhaps consistent with a more recent trend towards imposing more substantial obligations on FIs in a range of jurisdictions to ensure “effective implementation” with the CRS.

It is understood that aspects of the proposed regulations, such as the nil reporting obligation and penalty regime, have been subject to adverse feedback and, as such, it remains to be seen whether the final regulations are further amended to reflect that feedback.