Cayman Islands AML & KYC requirements

Cayman Islands AML & KYC requirements

Author: Rachel Sapers
Read time:  4 minutes
Published date:  12 September 2023
This article covers what you need to know about anti-money laundering (AML) and know your customer (KYC) requirements for funds in the Cayman Islands.

The Cayman Islands are an international offshore financial center that offer economic stability, regulatory enforcement, and tax-neutrality. There are no direct taxes in the Caymans, making them a popular place to establish investment funds. That means no income, company, corporation, inheritance, capital gains, or gift taxes.

In this article, we’ll cover what you need to know about anti-money laundering (AML) and know your customer (KYC) regulations when establishing a fund in the Cayman Islands.

→ For information about AML and KYC requirements in the United States, learn more here.

How financial regulation works for funds in the Cayman Islands

The Cayman Islands Monetary Authority (CIMA) oversees the Cayman Islands financial services industry. This includes entities operating in and from the jurisdiction, including any funds. 

How CIMA regulates against corruption and ML 

CIMA plays a central role in enforcing AML regulations and in countering the financing of terrorism (CFT). Its standards are in line with those of the global money laundering and terrorist financing watchdog, Financial Action Task Force (FATF).

Section 6(1)(b)(ii) of the Monetary Authority Law (MAL) gives CIMA legal responsibility “to monitor compliance with the anti-money laundering regulations.” MMA regulations prescribe measures to be taken to prevent using the financial system for money laundering and terrorism financing.

In addition to the Anti-Money Laundering Regulations (“AMLRs”), the regulatory framework against financial crime in the Cayman Islands includes the Proceeds of Crime Act, the Terrorism Act and the Proliferation Financing (Prohibition) Act.

Due diligence in the Cayman Islands

CIMA’s AML regulations require customer due diligence (also known as “know your customer” or simply “KYC”) in the following situations to help prevent against corruption and money laundering:

  1. When establishing a business relationship

  2. When conducting a one-off transaction valued in excess of $10,000

  3. If there is a suspicion of money laundering or terrorist financing

  4. If there are doubts about the veracity or adequacy of customer identification data

  5. When a fund manager or general partner establishes a customer relationship with its limited partners during a financial transaction 

The Caymans take a risk-based approach to due diligence. After assessing the risk of the customer, there are two levels of due diligence that can be performed:

  1. Simplified customer due diligence

  2. Enhanced due diligence

Enhanced due diligence is done when money laundering or terrorist financing risks are higher. Examples include situations when the customer or business is politically exposed, in the event of any unusual or suspicious activity, or when the customer is from a country that CIMA considers to be more vulnerable to risk. 

The beneficial owner threshold

One key nuance that distinguishes the Cayman Islands due diligence requirements from requirements in the U.S. is the threshold for beneficial owners. A beneficial owner is an individual who stands to gain from ownership of an asset, even if it’s legally owned by an entity under another name. For example, all investors in a venture fund are beneficial owners of the fund, even if they invest through another entity, like a trust.

A beneficial owner in the Cayman Islands is:

  •  A person who owns or controls the customer (someone who can make financial decisions for the entity—typically a senior executive such as a CFO)

  • A person for which a transaction or activity is being conducted

  • A person who owns or controls 10% or more in the legal person or entity

In the U.S., financial institutions are required to verify the identities of anyone who holds at least a 25% of an investment entity. The lower percentage threshold required by the Cayman Islands for due diligence is a key distinction. 

CIMA vs. FinCEN due diligence requirements

In a bid to strengthen the Bank Secrecy Act ( BSA), the U.S. Financial Crimes Enforcement Network (FinCEN) released its Customer Due Diligence Rule (CDD rule) in 2018. The CDD rule requires financial institutions to create policies to:

  • Verify customer identity

  • Understand the purpose of the relationship with the financial institution

  • Monitor accounts for suspicious transactions

  • Develop risk profiles for clients

The CDD rule requires financial institutions to verify the identities of anyone who holds at least a 25% of an investment entity (as opposed to the much lower 10% holding threshold in the Cayman Islands).

Why does it matter to you? 

As a regulated fund manager, it’s vital to know the changes in the regulatory environment and the AMLRs require all persons engaged in relevant financial businesses to have in place systems, policies, and procedures to implement a strong AML/CFT/CPF framework in their organization. The Cayman Islands have established a regulatory framework based on international standards of supervision and cooperation with both local and overseas regulatory authorities. Reach out to your Carta Fund Administration team for more information. 

How Carta helps Cayman Islands-based funds

CIMA, your bank, and your LPs will expect you to conduct customer due diligence—including a KYC check—on your investors. To support CIMA’s risk-based approach to due diligence requirements, the Carta team applies mechanisms to the risk score and periodically monitors your fund’s limited partners based on the score.

Carta Fund Administration customers can add Cayman Registrar and Transfer Agent Due Diligence services to review your investors before onboarding them onto your fund.

Rachel Sapers is vice president and chief compliance officer for AML at Carta.
DISCLOSURE: This communication is on behalf of eShares Inc., d/b/a Carta Inc. (“Carta”). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. ©2023 eShares Inc., d/b/a Carta Inc. (“Carta”). All rights reserved. Reproduction prohibited.