This article is was originally posted in Asset Servicing Times.

Kendell Pierre, Chief Compliance Officer for MUFG Investor Services, explores how the Cayman Islands continues to maintain its dominance as a global funds domicile amid evolving regulation, rising investor expectations, and emerging digital asset trends.

How has the Cayman Islands’ position as a leading funds domicile evolved in recent years, and what key trends are you observing in terms of fund formations and asset flows compared to competing jurisdictions?

Kendell Pierre: It is evident that Cayman remains the premier jurisdiction for fund domicile. This remarkable achievement is a testament to the collective hard work, dedication, and the strategic decisions of the entire financial services industry made along the way. The total number of funds registered with the Cayman Islands Monetary Authority (CIMA) is at an all-time high. This incredible achievement is partly fueled by a surge in private equity activity, with 2024 marking the highest number of private funds registered since the introduction of the Private Funds Act in 2020.

Flexible legislation, political and economic stability, and the quality and depth of the local service providers have provided the foundation for this continued growth and is the ideal platform for any future developments.

How do you assess the Cayman Islands’ competitive advantages against other major domiciles, particularly regarding regulatory flexibility, tax neutrality, and time-to-market for fund launches, and where do you see the most significant challenges?

Kendell Pierre: The statistics do not lie and with more than 50 per cent of the world’s funds domiciled in the Cayman Islands, Cayman is clearly the choice for fund entities. I see this in a number of areas:

Regulatory flexibility — with more than three decades of experience servicing the funds industry, the Cayman Islands have grown through innovation and forward-looking policies that embody best practices and have served as a blueprint for others. The Cayman Islands has a mature and well-respected legal and judicial system that’s primarily based on UK common law. Over the years, Cayman’s legal framework has evolved to accommodate various fund structures and investment strategies. The flexibility, strength, and integrity of the AML regime was demonstrated through enhancements of the corporate governance regime. The positive outcome of the FATF inspection and subsequent reporting following improvement measures implemented in the jurisdiction promote stakeholder confidence.

Tax neutrality — the fact that Cayman does not add an extra layer of taxes on transactions taking place there is an attractive factor for fund vehicles. Taxes on the income, capital gains, or dividends of certain Cayman-domiciled entities can be structured so they are not applicable for a period. This does not take away from the significant role that the jurisdiction plays in global efforts to combat tax evasion through legislation, regulation, and automatic tax information sharing arrangements that uphold the highest international standards for transparency and cross-border cooperation under regulations such as the OECD Common Reporting Standard (CRS) and US Foreign Account Tax Compliance Act (FATCA).

Time-to-market — the Cayman Islands is in a favorable time zone, with premier law, accountancy, corporate services, and investments professionals that are employed by some of the world’s leading firms. Their expertise ensures efficient fund administration, compliance, and governance. Under their stewardship, Cayman boasts a robust and quick launch and registration process for investment funds and fund managers facilitating a rapid, yet comprehensive, launch that positions businesses to secure opportunities in a fast-paced market.

The main challenges are perception, cost, and the ever-evolving geopolitical landscape. For years, Cayman has been fighting the stigma of having lower AML standards that create difficulties for the financial services sector. This will be mitigated by the recent FATF endorsement of the AML regime. Cost will always be an issue as inflation rises and companies focus more and more on managing their expenses, however, costs are generally aligned with other offshore jurisdictions. Finally, monitoring requirements for any proposed regulatory changes, assessing the impact, and implementing change in this rapidly changing environment is a challenge that every jurisdiction faces.

What operational and compliance considerations do fund administrators face when servicing Cayman-domiciled funds, especially regarding cross-border reporting requirements, FATCA/CRS compliance, and managing multiple regulatory frameworks?

First and foremost, there is a significant lack of understanding from both the financial institutions (FIs) and the investors/account holders in the respective funds. This lack of clarity spans all jurisdictions and is not confined to any single location.

Another pressing issue is data quality and ongoing remediations. The requirements can sometimes change on short notice, which has a substantial impact on the administrators. For instance, updating a self-certification to modify a percentage on a controlling person might appear straightforward, but it entails considerable time spent examining investors and reaching out to obtain updated documentation. Moreover, it is challenging and costly to find comprehensive systems that can manage all aspects efficiently. Each jurisdiction involved in FATCA and CRS has slightly different requirements, whether it’s the way XML is generated, the portal is used, etc., making it difficult to standardise processes.

The process for offboarding funds is another area of concern. For FATCA and CRS, this process depends on when the fund officially dissolves and receives its certificate of dissolution, which typically occurs well after the last NAV is struck, creating a backlog of pending dissolutions. Adding jurisdictions to the reporting list also introduces risks. When a new location is added, all self-certifications received by an investor there prior to the addition must be updated, as the classification changes.

Additionally, changes to reporting or regulations require administrators to constantly update their procedures to align with new requirements from all jurisdictions. While some provide easily accessible manuals and FAQs, others do not. Furthermore, there are jurisdictions where documentation is not published in English, complicating the understanding of these changes. When administrators use third-party systems, they must rely on vendors to be prompt in updating for any new regulations. Unfortunately, most systems lack a comprehensive end-to-end process, necessitating manual intervention or the use of custom IT solutions.

Lastly, we are seeing an increase in the number of investors and account holders with very complex structures entering funds. This often necessitates seeking external advice, which adds to the overall costs.

How are ESG considerations and sustainable finance trends influencing fund domiciliation decisions, and is the Cayman Islands adapting its regulatory framework to accommodate these evolving investor demands?

Kendell Pierre: The evolution of ESG in the Cayman Islands has been a conservative yet steady journey building on the supervisory issues and information circular issued by CIMA in December 2021. As of now, there are no specific reporting and disclosure regulations tailored to ESG. The Cayman Islands continue to keep a watchful eye on international best practices, carefully measuring their responses to global trends.

The approach taken has not been one of strict regulations on financial industry vehicles. Instead, the Cayman Islands have maintained a deliberate flexibility, acknowledging their unique position as the world’s leading domicile for investment funds and capital markets across a broad spectrum of financial services products. Notably, there has been an uptick in new fund launches with an ESG focus, as well as an increase in green bonds within the fixed income market. Asset managers, possibly spurred by investor activism, have been integrating ESG into their investment objectives. Industry experts in the Cayman Islands are well-prepared to adapt to this growing trend, maintaining a close watch on global best practices, and actively engaging in dialogue with the Cayman Islands Government through industry peer groups and direct engagement.

What role does the quality and depth of the local service provider ecosystem — including administrators, auditors and legal counsel — play in maintaining the Cayman Islands’ competitiveness as a funds hub?

Kendell Pierre: Service providers are integral to maintaining the Cayman Islands’ place at the top of the podium for competitiveness as a funds hub. Professional services providers extend beyond administrators, legal and public accounting to other fiduciary services and are further supported and governed by the local regulator, government, and bodies such as Cayman Finance.

Collectively they work together to maintain the integrity of the jurisdiction by advising on, reviewing, and consistently delivering world-class services that adhere to international regulatory standards. Partnering with local experts gives businesses peace of mind and places the focus on growth, while ensuring that funds remain compliant with global regulations.

Looking ahead, what do you see as the most significant opportunities and threats facing the Cayman Islands as a Financial Centre in general and a funds domicile in particular — particularly in light of changing geopolitical dynamics, regulatory harmonisation efforts, and emerging digital asset fund structures?

Kendell Pierre: Change can either be viewed as an obstacle or an opportunity. Investing in technology and development, such as introducing tech in fund management with the steady rise and acceptance of digital assets, is a significant opportunity for Cayman to stay ahead of other competing regions.

Service providers and regulators alike need to harmonise efforts to design flexible structures that embrace and meet the ever-changing needs of the market.

As previously mentioned, Cayman has been addressing the stigma of having lower AML standards that create difficulties for the financial services sector.

The dedication and hard work by its professional infrastructure continue to chip away at this ongoing pressure to implement international regulatory standards and correct reputational challenges around transparency, which historically may have been a deterrent to some investors.