The Cayman Islands make up the world's fifth largest financial
centre. There are approximately 580 licensed banks and trust
companies in the Cayman Islands with assets of around US$747.6
billion. 47 of the world's 50 leading banks have a presence
in the Cayman Islands.
The Cayman Islands is one of the leading offshore jurisdictions
for funds with over 3,600 regulated mutual funds. There are
also a significant number of unregulated funds in the Cayman
Islands which fall under available exemptions. In the last
few years, the Cayman Islands have emerged as the jurisdiction
of choice for many hedge fund managers. In fact, it has been
estimated that over 80 per cent. of all new offshore hedge
funds are domiciled in the Cayman Islands. Why are the Islands
such an attractive jurisdiction?
The laws of the Cayman Islands are substantially based upon
English common law, and a number of "key" English
statutes with the addition of local statutes which have in
many respects changed and modernised the common law to reflect
the demands of the global financial industry. This gives Cayman
Islands law and legal system a common origin with those of
many of the jurisdictions of its users. It also means that
the fund vehicles available and the types of securities offered
by them are well recognised and accepted around the world.
There are three main structures available: the company, the
unit trust and the limited partnership.
Unit trusts are particularly favoured by promoters wishing
to market their funds to investors in Japan. This is because
participations in a unit trust are considered more acceptable
or attractive than shares in a company or interests in a limited
partnership. Units may result in more favourable tax treatment
for the investor or, in some other jurisdictions, offer regulatory
Cayman Islands trust law essentially follows English trust
law and employs the substantial body of English case law on
the subject. The concept of a unit trust is that subscribers
contribute funds to a trustee which essentially holds those
funds as custodian whilst they are managed by the investment
manager for the benefit of the subscribers, known as unitholders.
Each unitholder is entitled to a pro-rata share of the trust's
For investors outside Japan, the most common vehicle for
mutual funds in the Cayman Islands is the company.
Companies are almost always incorporated with limited liability;
although it is possible to incorporate companies with unlimited
liability or with liability limited by guarantee. The liability
of a shareholder of a company incorporated with limited liability
is limited to the amount paid up and agreed to be paid up
on the shares taken by that shareholder.
Shares of the same class in a company rank equally with each
other. However, by appropriate adaptation of the articles
of association (constitutional documents) of the company,
it is possible to create separate share classes (or separate
series within the same class). This may be necessary if, for
example, performance fees payable to the investment manager
are to be calculated on a per investor basis or if certain
categories of investors are not permitted to participate in
certain assets or classes of assets.
The vast majority of Cayman Islands companies issue shares
of a stated par value (although no par value shares are permitted).
The Cayman Islands legislation permits amounts standing to
the credit of a company's share premium account to be used
for dividends or other distributions, subject to the company
being solvent, even if no profits are available.
Shares in a Cayman Islands company may be redeemed or repurchased
from capital, subject to the company being able to pay its
debts as they fall due in the ordinary course of business.
The other major form of investment vehicle which the Cayman
Islands currently offers is the limited partnership. The limited
partnership concept is essentially similar to that which applies
in the United States and indeed the Exempted Limited Partnership
Law of the Cayman Islands is based substantially on the Delaware
equivalent. For that reason, the limited partnership is very
popular with United States promoters and their advisers.
Each of the available vehicles can be used to create any
investment fund structure including master/feeder, multiclass,
umbrella, multiple allocator (replicating partnership accounting
in a corporate vehicle) and hybrid debt/equity structures.
In addition to its legal framework, the Cayman Islands offers
the following fundamental advantages for establishing mutual
Quality of Local Service Providers
The quality of the service providers (attorneys, mutual fund
administrators, trust companies, company managers, etc.) in
the Cayman Islands is generally very high. Of particular interest
to Japanese fund managers and promoters is that there are
Cayman Islands service providers located within the Asian
region making the Islands an extremely convenient jurisdiction
for offshore funds.
Speed of Formation
The fund vehicle can be established very quickly, usually
within one working day of the constitutional documents being
settled, and without the need for any prior governmental approvals.
Absence of Tax
The Cayman Islands have no direct taxes of any kind. There
are no income, corporation, capital gains, withholding taxes
or death duties. Under the terms of relevant legislation it
is possible for all the types of fund vehicle - the company,
the unit trust and the limited partnership - to register with
and apply to the government of the Cayman Islands for a written
undertaking that they will not be subject to various descriptions
of direct taxation, for a minimum period, which in the case
of a company is usually twenty years and, in the case of the
unit trust and limited partnership, fifty years.
Absence of Exchange Control Restrictions
There are no exchange control restrictions or regulations
in the Cayman Islands (unlike many other jurisdictions, including
some of the Cayman Islands' offshore competitors). This means
that funds can be freely transferred in and out of the Cayman
Islands in unlimited amounts.
No Local Service Providers Required
There is no requirement that a Cayman Islands' fund should
have any local directors or officers; these may be provided
by the advisors, administrators, promoters or the investors
themselves. Nor is there any requirement for local service
providers, for example, administrators or custodians; except
that for funds regulated under the Mutual Funds Law, there
is now a requirement for their audited accounts to be signed-off
by a local firm of auditors.
No Requirement for Annual Shareholder Meeting
Expenses may, if desired, be minimised by virtue of the absence
of a statutory requirement for company meetings to be held
in the Cayman Islands. There is no requirement that an exempted
company hold any shareholders' meetings at all, if the shareholders
or directors do not wish to do so. Nor is there any requirement
to hold directors' meetings in the Cayman Islands.
Mutual Funds Law (2003 Revision) (the "Law")
The Cayman Islands have, for a number of years, regulated
banks, trust companies, insurance companies and managers.
As part of the overall good governance of the financial industry,
the Law regulating mutual funds and mutual fund administrators
came into force in July 1993. The aim of the Law is to protect
investors and the Cayman Islands against undesirable promoters
and managers of mutual funds by ensuring that only those with
the appropriate experience and standing are permitted to establish
and manage mutual funds in the Cayman Islands. The Law supplements
the statutory regime and common law rules that existed prior
to the enactment of the Law and which regulated the establishment
and operation of mutual funds. As such Cayman Islands mutual
funds are widely regarded within Japan as meeting the Standards
of Selection of Foreign Investment Fund Securities prescribed
by the Japanese Securities Dealers Association, which has
resulted in the Islands becoming an increasingly popular jurisdiction
for funds that are publicly offered to investors in Japan.
The Cayman Islands are already an established jurisdiction
for funds marketed to Qualified Institutional Investors or
on a private placement basis in Japan.
Responsibility for regulation of mutual funds rests with
the Cayman Islands Monetary Authority (the "Authority").
Mutual funds are required to be licensed before commencing
business. Fees payable by mutual funds under the Law - typically
US$2,439 initially and annually - are in addition to fees
payable under the Companies Law, the Trusts Law or the Exempted
Limited Partnerships Law (depending on the structure of the
A mutual fund is defined as any company, trust or partnership
either incorporated or established in the Cayman Islands,
or if outside the Cayman Islands, managed from the Cayman
Islands, which issues equity interests redeemable at the option
of the investor, the purpose or effect of which is the pooling
of investors funds with the aim of spreading investment risk
and enabling investors to receive profits or gains from investments.
Thus, mutual funds which provide no redemption or repurchase
rights to investors, i.e. closed-ended funds, are excluded
from the definition and regulation.
Exempted under section 4(4) of the Law from regulation is
any company, unit trust or limited partnership where the equity
interests are held by not more than fifteen investors who
by majority are capable of appointing and removing the directors,
the trustee or the general partner of the mutual fund (depending
on whether the mutual fund is structured in a corporate form,
a unit trust or a limited partnership). The reasoning is that
mutual funds should be excluded if the number of investors
is conveniently small and if together they control the appointment
and removal of managers or operators of the mutual fund, i.e.
control of the mutual fund rests with those investors.
There are three available forms of regulation. The most straightforward,
and the one usually pursued by hedge funds, is the Section
4(3) Mutual Fund which will be applicable either where the
minimum investment per investor is not less than US$50,000
or where the equity interests are listed on a recognised stock
exchange (such as the Cayman Islands Stock Exchange). The
fund will simply need to file a straightforward form (Form
MF1) with the Authority, together with its prospectus and
consent letters from the administrator and the auditors. Registration
will be virtually immediate.
Alternatively, the fund can apply for a licence or designate
its principal office in the Cayman Islands at the office of
a licensed mutual fund administrator (which is required to
satisfy itself as to the fitness and propriety of the promoter).
The Securities Investment Business Law
The Cayman Islands have recently implemented a new Securities
Investment Business Law. This new legislation regulates all
securities investment business and creates a new regime for
open- and closed-ended fund managers and advisers. The principal
advantage for fund operators is the exemption permitted to
managers of funds marketed only to sophisticated investors
(essentially someone who is regulated by a recognised regulatory
authority, or whose shares are listed on a recognised securities
exchange, is a high net worth investor or who is reasonably
to be regarded as being capable of evaluating the merits of
the proposed transaction and invests at least US$100,000 or
its equivalent). As a result, managers incorporated in the
Cayman Islands, who usually delegate investment management
to an entity based elsewhere, are no longer required to be
These exemptions apply in the case of hedge funds and so
will facilitate the establishment of hedge funds in the Cayman
Islands. A declaration must be filed with the Authority to
obtain the exemption and there is an annual exemption fee
of approximately US$1,250.
The OECD and FATF
Recent initiatives by the Organisation for Economic Co-operation
and Development (OECD) and the Financial Action Task Force
(FATF), have led to the implementation of legislation and
commitments by the Cayman Islands Government to ensure they
are in line with internationally accepted standards with regard
to anti-money laundering measures. These include:
- No change will be made to the zero tax regime in the Cayman
Islands. The OECD has accepted this system of taxation and
confirmed that it is not considered "harmful"
and the Cayman Islands Government is committed to its continuation.
- To introduce effective tax information exchange. For criminal
tax matters, this will become effective for the first year
after 31 December 2003 and for civil and administrative
matters this will become effective for the first tax year
after 31 December 2005. Information will be provided in
response to a request probably pursuant to a treaty mechanism
to be negotiated on a country by country basis.
- No bearer shares, although issues in relation to institutional
transactions are not affected.
- The Government has undertaken to advise service-providers
that "aggressive marketing policies based exclusively
or primarily on confidentiality or secrecy are not in the
national interest and should not be pursued". It is
not considered that this more proactive approach will adversely
affect the financial services industry which is substantially
based on transparent internationally sponsored transactions.
The FATF review process was of a technical rather than substantive
nature focusing on the nature of anti-money laundering regulations
in place and the sanctions imposed thereunder, rather than
the substantive results of any policies and regime in place.
The position in practice as reflected in the review conducted
by the Caribbean Financial Action Task Force is that the Cayman
Islands has implemented a level of regulations substantially
in compliance with the "Vienna Principles" enumerated
in the 40 FATF recommendations published in its 1990 report
and the Caribbean FATF recommendations. Since then, the Government
has responded by making amendments to the various pieces of
anti-money laundering legislation already in place and, in
recognition of this, the Cayman Islands were removed from
the FATF's "blacklist" in June 2001.
The essence of the Cayman Islands as a domicile is that they
provide a stable, well understood environment with sensible,
but non-intrusive, levels of regulation. The impact of the
various supranational initiatives will undoubtedly be that
well-established and recognised jurisdictions meeting the
requirements of bodies such as the OECD and the FATF will
continue to prosper whilst the rest will dwindle away. A rationalisation
in the offshore world can be expected and the Cayman Islands
are well placed not only to maintain their pre-eminent position
but to further consolidate it.