Legal Special: Expert Commentary – Walkers

“The truth should never get in the way of a good story” – or so the saying goes. From Hollywood to Man Booker Prize authors and Pulitzer Prize winning journalists, the truth, on occasion, can be stretched in order to reach a story's desired outcome. Whether the desired end product is for entertainment or to persuade audiences, hyperbole is a useful tool.

The Cayman Islands is a place where a romanticised reputation has been forged by media half-truths and fantasy. As a legal and business jurisdiction it is not the place that John Grisham, politicians or journalists would have you believe. It seems that every year the jurisdiction has to continuously defend itself from political and journalistic assailants, despite the financial and legal business worlds knowing better. The Cayman Islands is not a sunny place for shady people.


Cayman's compliance with international standards is well known inside sophisticated business circles and as such its strong position as the leading International Financial Centre (IFC) for private equity and hedge funds continues to be maintained. Well-cited Securities and Exchange Commission (SEC) statistics from 2015 show that just fewer than 50 percent of the funds that are registered with the SEC are domiciled in the US, and almost 38 percent are registered in the Cayman Islands. After that there is a huge drop-off with jurisdictions such as Ireland, Luxembourg and Bermuda garnering between 1 percent and 5 percent.

Institutional investors and high net worth individuals do not just invest on a whim, so why is it that Cayman has the lion's share of the offshore private funds market? Why is it that investors feel so secure in doing business on an island in the Caribbean Sea at latitude 19° longitude 81°?

Walkers has the privilege of working with 75 percent of the Private Equity InternationaI top 50 private equity houses. According to PEI data, in the past five years the top 20 of the PEI 300 have in aggregate raised over $330 billion in funds. These large private equity houses would not consider discussing or conducting business with or through a shady jurisdiction. They would not risk channelling capital through a jurisdiction where money laundering, bribery or illegal activity was a daily routine. The reasons for the utilisation of the Cayman Islands are the rarely reported facts that Cayman is a well-regulated jurisdiction and a highly sophisticated place to do business.


Contrary to recent rhetoric in the developed world, the Cayman Islands is at the forefront of jurisdictions that enforce robust anti-money laundering policies and procedures. For sophisticated investors, the focus of regulators at home and abroad on transparency and the management of systemic risk has helped to eliminate concerns about capital raising in the leading IFCs.

The Cayman Islands has an extremely open, accountable and transparent government and regulatory system. In fact, the Cayman Islands is a member of the OECD's Steering Group that assists in restructuring policy for the Global Forum, the final decision making body for all OECD matters. This means that the Cayman Islands is actively involved in helping to shape international standards for tax transparency and co-operating on the initiative to fight against cross-border tax evasion.

The latest international initiative that the Cayman Islands has agreed to participate in is the Common Reporting Standard (CRS). On 29 October 2014, the Cayman Islands was among 50 other jurisdictions which signed a Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information demonstrating its commitment to implement CRS, an international regime developed by the OECD to facilitate and standardise the exchange of information on residents' assets and income, primarily for taxation purposes.

CRS is akin to a global version of FATCA, of which the Cayman Islands was an early adopter, and requires certain financial institutions to identify the tax residency of their customers and report on details of specified personal accounts to the tax authorities in the jurisdictions which implement CRS.

The Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations, 2015 were enacted in the Cayman Islands on 16 October 2015 and must be complied with by Cayman Islands Reporting Financial Institutions from 1 January 2016.


With all the technological advancements of the past decade, one of the biggest questions our society faces is that of the right to personal privacy. It is a fundamental human right that people should be free from intrusion into their private lives, whether they are relaxing at home, browsing the internet, using their mobile phones or engaging in legitimate business transactions. It is well understood and slowly coming into law, through data protection acts and EU cookie laws, that a person's actions should be kept as private as possible so that the information collected cannot be used by businesses to exploit consumers. In addition, governments should not have powers to snoop on private citizens unless they have reasonable grounds to believe that a crime has been committed. This could be said to be a component of the right not to be subject to unlawful search and seizure.

Global transparency and reporting initiatives, underpinned by new legislation, rules and regulations, mean that fund managers and other members of the financial services industry are now required to collect and store more due diligence and more client data than ever before. In order to meet these requirements, companies need to ensure that their customers' private data is indeed kept private, secure and treated as confidential. The potential legal and reputational fallout for fund managers if they fall foul of these principles, through erroneously disclosing private information externally, abusing personal data for financial gain or allowing software systems to be hacked, could be significant. Consumers expect companies to respect their private personal data and expect governments and the judicial system to act swiftly if breaches are discovered. Investors in private funds and other financial instruments have similar expectations.

Privacy may be a key consideration in OECD countries but when considering and analysing IFCs and confidentiality, the word “privacy” is often replaced with the word “secrecy”, which has a more sinister connotation. The word secrecy can imply conscious action to keep an unlawful activity out of the spotlight.

The Cayman Islands has always respected privacy and confidentiality with the intention of keeping legitimate business transactions private when necessary. Cayman Islands law puts the English common law duty of confidentiality owed by a bank to its customer on a statutory footing and includes obligations on business intermediaries such as lawyers, accountants and government officials to maintain the confidentiality of the identity and business of their clients.

However, Cayman Islands legislation provides 'gateways' through which confidential information can be passed to law enforcement and regulatory authorities if there is evidence that wrongs have been, or are being, committed. Cayman does not deliberately seek to make business transactions opaque, but rather respects the privacy of the persons who do business in its jurisdiction, in the same way that consumers would expect their privacy to be respected by companies and governments.

This is not to suggest that no one is monitoring “relevant financial business”. Lawyers and entity formation agents in the Cayman Islands (not just banks) are required by law to notify their mandated internal reporting officer of any suspected suspicious activity. The officer must then report the activity to the Cayman Islands Financial Reporting Authority if it is deemed suspicious in accordance with the applicable legislation. All a member of the financial services industry requires is reasonable grounds to suspect that a transaction involves the use of the proceeds of criminal conduct or is intended to facilitate criminal conduct. The penalty for failing to report any such suspicion, where money laundering is then found to have occurred, on summary conviction is a fine and/or imprisonment for two years. On indictment, the penalty is a fine and/or imprisonment for five years.


There has always been a need in the developed world (and in the emerging markets) for efficient means of raising international capital. From a fund formation perspective, the Cayman Islands in particular offers a well-developed and widely-understood limited partnership structure under a statutory regime that is highly responsive to changes in the global marketplace. This statutory regime is underpinned by a common law system that is renowned for its sensible approach to commercial disputes, with English common law being persuasive in the absence of specific Cayman authority. Coupled with the ability to raise capital efficiently in a tax neutral environment, the benefits to investors and the jurisdictions in which they deploy their capital are significant.

The world's most prominent financial institutions and international private equity investors see the Cayman Islands Exempted Limited Partnership (ELP) as a favoured vehicle for the efficient pooling of international capital. ELPs cater to private equity investor requirements by facilitating fund sponsors structuring and managing entities with many investors and allowing for a variety of strategies that can be executed effectively and productively in a multinational environment. Consistently updated legislation ensures that the Cayman product remains at the cutting edge.

From a mergers and acquisitions perspective, there has been a notable increase in interest and appetite for the use of IFCs such as the Cayman Islands to structure complex transactions. The solution for persons tasked with the responsibility of structuring holding companies and acquisition structures in a world that is increasingly complex and global is a jurisdiction that offers tax neutrality in the first instance, and the ability to structure and manage vehicles with multiple investors and multiple layers of debt and equity as efficiently as possible.

Aside from fundraising vehicles, one of the most successful innovations in the Cayman private equity market has been the introduction of the statutory merger regime which is based on the Delaware equivalent. These statutory merger provisions in many cases provide a more straightforward and cost-effective means for companies to merge or consolidate than a court approved scheme of arrangement. Shareholders who dissent to a proposed merger are afforded the opportunity under the statute to petition the court for an assessment of “fair value” for their shares should the merger be approved by the requisite majority. The statutory merger provisions of the Companies Law of the Cayman Islands have now been in force for some time, and the regime is used frequently to effect a wide range of corporate transactions.


With the success of incorporating the statutory merger provisions into the Cayman Companies Law, the financial services industry and the Cayman Islands' legislature have looked at the next logical step to ensure that the jurisdiction remains front of mind in private equity. The gap to be bridged is the introduction of a Cayman Islands Limited Liability Company (the Cayman Islands LLC), a close relative to the Delaware equivalent.

In 2016 the Limited Liability Companies Bill (the “LLC Bill”) will become law. With it, the Cayman Islands LLC will be born. There has been much demand from the US financial services industry for a Cayman Islands LLC. We therefore expect the market to take up using it straight away.

What will a Cayman Islands LLC look like and what benefits will it provide to the market?

A Cayman Islands LLC will be very similar to a Delaware limited liability company. In fact, the LLC Bill is largely based on the current Delaware Limited Liability Companies law, with certain changes for Cayman Islands law and concepts.

We envisage that there will be many possible ways for private equity firms to utilise the Cayman Islands LLC, although the exempted limited partnership is likely to remain the vehicle of choice for PE funds. Based on discussions with global structuring advisors, it is clear that the Cayman Islands LLC will become a key component in cross-border mergers and acquisitions, joint ventures and corporate transactions. It will enable Cayman to remain, and continue to develop, as a conduit for international commerce.


Cayman is a well-regulated and compliant jurisdiction designed for international business. There are often accusations from some countries that International Financial Centres (and Cayman in particular) are shrouded in secrecy and designed to hide the assets of the rich and the profits of multi-national corporations from the tax man of foreign lands. It is evident, however, that the Cayman Islands is actively pursuing and implementing reporting initiatives to combat tax evasion and is working with the OECD to drive change through the OECD Steering Group. It is also often overlooked that many countries pointing the finger also find themselves on the very same banking secrecy lists that they use to pressure Cayman.

Even with the additional reporting requirements of the past two to three years, the Cayman Islands' investment funds industry is thriving. Private equity houses continue to transact business via the Cayman Islands because it is the best possible place to do business.

Perception is not always reality. While the truth may not be as exciting and tantalising as a novel or a Hollywood crime drama, the true story is that Cayman is good for international business. 

Caroline Williams is based in Walkers' Cayman Islands office and is a partner in the firm's Global Investment Funds and Global Corporate Groups. She has a broad private funds practice specialising in both hedge funds and private equity. Caroline has extensive experience advising private equity fund sponsors on the structuring and formation of funds and co-investment and alternative investment vehicles and the completion of transactions undertaken by them.

Caroline has broad experience advising on the sale and purchase of portfolio investments and advising on secondary transactions. Her practice also encompasses advising on initial public offerings, mergers and acquisitions, joint ventures, corporate reorganisations and capital call financing. Caroline acts for leading financial institutions, investment managers, including institutional sponsors of private equity and hedge funds, and also boutique and start up managers.

Jason Allison is a partner in Walkers' Global Investment Funds Group. He advises on all aspects of Cayman Islands corporate and investment funds law, with particular expertise advising institutional clients on the structuring and establishment of investment funds, mergers and acquisitions, joint ventures and secured and unsecured financing transactions. His clients include market leading institutional investment managers, investment banks, corporations and investment funds.

This article is sponsored by Walkers. It first appeared in PEI's Legal Special, published in April 2016.