Updated ESL in the Cayman Islands

Given the recent changes in fund management regulation in the Caymans, quite a few entrepreneurs are now having difficulty confirming economic substance in the Cayman Islands. So, let’s take a closer look at the amended ESL & ways of getting around those difficulties.

Cayman Islands: Financial Regulation

Using IM companies (i.e. companies managing investments in the Cayman Islands) as fund managers was a common practice until lately. However, after the passing of the amended ESL, companies are now required to confirm economic substance in the Caymans. Those planning to register a company in the Cayman Islands should keep in mind that companies engaged in economic activities (e.g. LLCs, LLPs or foreign companies) are now referred to as “relevant entities” & have to report their activities to the relevant authorities.

Those of them that haven't yet taken any steps have 2 options:

• register an IM in the Caymans & adhere to ESL criteria; 
• restructure.

The second option includes:

• removing an IM from a fund’s structure;
• keeping an IM in a fund’s structure.

Removing an IM

In such an event, an IMA concluded between funds & their IMs is terminated. Following that,  an IMA between funds and their investment advisors is re-concluded. IMs can then be disposed of or reused for other purposes.

Keeping an IM

Managers of assets unwilling to remove IMs from their funds’ structure & seeking to avoid being subject to additional scrutiny associated with undergoing a substance test may leave their funds’ structure unchanged; however, they will have to revise an IMA to make sure that a Cayman IM:

• doesn’t provide asset management services in the Cayman Islands;
• doesn’t get any profit from provided services.