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Cayman Islands EU’s Blacklist Removal Highlights Cooperation

Oct. 19, 2020, 7:00 AM

On Oct. 6, 2020, the EU finance ministers comprising the Economic and Financial Affairs Council (ECOFIN) affirmed that it considers the Cayman Islands to be a fully cooperative jurisdiction for tax purposes by removing it from its Annex 1 list of non-cooperative jurisdictions (the Annex 1 list). This news was not only welcomed by the jurisdiction itself but throughout the global alternative investment community.

As a professional independent director providing governance solutions to investment funds, I am pleased to see this recognition of the Cayman Islands as a jurisdiction that is fully committed to implementing the highest of international standards. But really this announcement should come as no surprise, it is the fact that the Cayman Islands was ever placed on this list that is more curious.

Cayman was added to the Annex 1 list in February this year, being deemed as non or partly compliant with international tax standards, despite adopting over 15 legislative changes since 2018 which are in line with the EU’s criteria. As I see it, the placement on the list was mainly due to issues of timing and some residual concerns which surely amount to technicalities rather than substantive continuing concerns. Query whether this should have happened at all.

The Annex 1 list was established in December 2017. It has been revised several times, and this was the first appearance of the Cayman Islands on the list. At the time that the list was revised to include Cayman, the jurisdiction was already in the process of implementing further regulatory modifications as recommended by a review of international tax standards by the EU Council’s Code of Conduct Group. Further, in July 2019, the OECD’s Forum on Harmful Tax Practices assessed the regime in the Cayman Islands as “not harmful,” which is the highest ranking possible.

The changes to the regulatory regime that were already in process, in addition to the robust Cayman Islands’ anti-money laundering (AML) and countering the financing of terrorism (CFT) framework were mainly to address EU economic substance requirements. Cayman introduced an Economic Substance Law (the ES Law) effective from Jan. 1, 2019, under which in-scope entities that carry on particular activities are required to demonstrate economic substance in Cayman. The ES Law was introduced to ensure that the Cayman Islands meets its commitments to the EU as well as its obligations as an Inclusive Framework member under the OECD’s global Base Erosion and Profit Shifting (BEPS) initiatives—in particular, Harmful Tax Practices.

This was further enhanced by introducing the requirement for registration and thus regulatory oversight of investment funds operating in or from the Cayman Islands. As noted by the Cayman Islands Premier, Alden McLaughlin, “Cayman responded positively by expanding the scope of our funds regime to ensure that the Cayman Islands Monetary Authority, our financial services regulator, has the legal mandate to supervise all Cayman-based investment funds.”

The main legislative changes took the form of the introduction of the Private Funds Law bringing closed ended funds into the regulatory regime for the first time and resulting in over 12,300 being registered with the Cayman regulator by the 7 Aug. 7, 2020, deadline. In addition, changes were made to the existing registered funds framework within the Mutual Funds Law to remove the limited investor exemption that was previously in place.

The jurisdiction reacted quickly to its inclusion on the Annex 1 list in February and the Cayman Islands Government has worked with the EU in the past months to correct this anomaly and identify and address their concerns leading to the removal of the Cayman Islands from the EU list at the first possible opportunity.

The Alternative Investment Management Association (AIMA), the global representative of the alternative investment industry welcomed the news and Jack Inglis, AIMA CEO commented: “The Cayman Islands have been at the forefront of tax transparency in the asset management industry and the EU’s decision is a recognition of the jurisdiction meeting the most stringent conditions. This is good news for the alternatives industry, given the importance of the Cayman Islands as a fund and services centre globally.”

Overall the regulatory enhancements have resulted in a best-in-class regulatory regime governing investment funds. Most importantly, viewed from my governance lens, Cayman offers unrivaled protection to investors and that bodes well for the continuation of the Cayman Islands as the pre-eminent offshore jurisdiction for investments.

Amidst the attention around this announcement, I was able to catch up with the Cayman Islands’ Minister of Financial Services, the Hon. Tara Rivers, who has been at the forefront of the regulatory enhancements, to learn her perspective. She told me that “The EU’s decision recognises that the Cayman Islands has kept pace with evolving standards on tax transparency, fair taxation, and measures to be taken to prevent tax base erosion and profit shifting,”

She continued: “As a result, the EU has joined the OECD—the global standard-setter for these matters—in recognizing Cayman’s tax good governance regime.”

On the positive side, in addition to the regulatory enhancements, placing the Cayman Islands on the Annex 1 list paved the way for stronger lines of communication between the EU and the Cayman Islands. Perhaps a better area of focus is to draw a line underneath this and turn now to the prospect of enhanced collaboration and cooperation between the EU and the Cayman Islands going forward.

One person well positioned for communication between the two factions is the Cayman Islands Representative to the U.K. and Europe, André Ebanks. With a mandate for representing the jurisdiction whilst being physically on the ground in the U.K., I wanted to get his reaction to this development. Ebanks commented “From my perspective, I echo Premier McLaughlin’s comments that Cayman looks forward to continued collaboration with the EU, to broaden our dialogue to topics of mutual interest, such as environmental actions and green/blue financing.“

This is a nod to the fact that the EU is examining how to integrate sustainability considerations into its financial policy framework in order to mobilize finance for sustainable growth.

It seems that such “green” financing could be promoted through further changes in countries’ regulatory frameworks and the focus by the Cayman Islands on this shows how innovative the jurisdiction is and how it is always looking to adapt in the ever-evolving financial services landscape.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Allison Nolan is the founder and Managing Director of Athena International Management, a boutique corporate governance provider offering experienced independent directors to the international hedge fund community and licensed by the Cayman Islands Monetary Authority. She has been a director of Cayman Islands regulated entities since 2002 and has served as a full time professional independent director since 2005. From her background as a partner in a leading offshore law firm and her commercial and transaction management experience, Allison has developed a wealth of expertise in the international financial services arena and has extensive knowledge of the legal and regulatory framework in the Cayman Islands and other offshore jurisdictions.