Corporate Governance for Cayman Private Funds
XX April 2024 - Many Cayman Islands Private Funds (Private Funds), as opposed to Mutual Funds and other regulated entities, have tended to be managed by Boards of Directors (Boards) located outside of the Cayman Islands primarily for flexibility and cost purposes – both huge drivers for efficiency and return over investments.
However, this doesn’t mean that Boards and stakeholders of Private Funds are off the hook when it comes to complying with regulatory and legal obligations while executing their duties.
The Cayman Islands Monetary Authority (CIMA) frequently conducts on-site inspections of regulated entities, and regularly publishes its findings, which provides a transparent approach with regards to oversight of the financial services industry.
In February 2024, the AML/CFT Activity Report 2022 by CIMA (the Report) shed light on clear indicators to Boards and those charged with governance on where to focus their efforts to ensure adherence to regulatory requirements particularly viewed in the context of the Corporate Governance Rule issued in 2023, which brings into scope, for the first time, Private Funds.
The Report highlights that in 2022 almost 50% of regulated entities were Private Funds, with indicators suggesting that such number has surpassed the 50% mark since. The Corporate Governance Rule now brings additional scrutiny, aimed at strengthening Cayman’s investment funds products with additional protections for all stakeholders.
Other prominent findings were focusing on internal controls and governance issues suggesting that the ‘Tone from the top’ is becoming more important than ever within the financial services industry, in particular for regulated entities.
Considering that the ultimate responsibility rests with the Board, it is imperative to ensure the appropriate establishment of internal controls surrounding compliance issues. This includes appropriate recording of minutes relating to compliance matters; approval of policies and procedures; discussions on internal audit requirements and self-testing in conjunction with considerations as to whom should perform those testing roles, levels of independence required, and more.
The findings also point to the need for directors to safeguard they avail of adequate training on an annual basis and the recording of those. The Board should also review its Anti-Money Laundering and Counter Terrorism financing policies and procedures annually; this will ensure they are up to date and robust. In relation to this key area, the Report brought to light that 23% of all deficiencies identified through onsite inspections in 2022 were around client identification/know your client and verification documentation.
The risk-based approach was not too far from the AML one, with 21% of all those identified during 2022 inspections.
The Board should ensure that its policies and procedures target the riskiest areas of the business as it relates to the size, nature and complexity of its operations and client relationships.
Citco Corporate Solutions, as part of the Citco group of companies (Citco), provides a full suite of corporate services through our specialized team located in the Cayman Islands to assist clients in meeting the local requirements whilst ensuring compliance is kept at the center of operations.