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US FATCA and Cayman Funds: Due Diligence

2014年 4月 14日

On 29 November 2013, the Cayman Islands government signed a Model 1B (i.e. non- reciprocal) intergovernmental agreement with the United States of America (the "US IGA"), which came into force on 14 April 2014. The US IGA provides a framework for the implementation of the US Foreign Account Tax Compliance Act ("FATCA") in the Cayman Islands. Cayman supporting legislation is expected to be enacted in early June 2014, with secondary legislation and guidance notes to be implemented in early July 2014.

In our two previous updates, we examined the rules relating to (i) entity classification under the US IGA for Cayman based Investment Entities, and (ii) GIIN registration and the need for a responsible officer for an Investment Entity. These updates can be viewed through the following links: 

US FATCA and Cayman Funds: Entity Classification 

US FATCA and Cayman Funds: GIIN Registration 

In this update, we consider the due diligence obligations on Cayman investment funds that are Reporting FIs (each a "Reporting Fund").

Due Diligence - Focus

Annex I of the US IGA sets out the due diligence obligations applicable to a Reporting Fund.  The requirements are separated out into pre-existing and new accounts for individuals and pre- existing and new accounts for entities.  "Pre- existing" is defined to mean an account maintained as of 30 June 2014.

As a general principle, all Reporting Funds will be required to apply the due diligence procedures (the "Procedures") set out in Annex I to identify not only US Reportable Accounts but also accounts held by Non-participating Financial Institutions (each an "NPFI").  As a reminder, a "US Reportable Account" is defined as a Financial Account maintained by a Reporting FI and held by one or more Specified US Persons or by a Non-US Entity with one or more Controlling Persons that are Specified US Persons. "Controlling Person" is broadly defined as the natural persons who exercise ultimate control over an entity.

Pre-existing Individual Accounts

Small accounts: A Reporting Fund is not required to review, identify or report an account for an individual investor (i.e. natural person) with a balance that does not exceed US$50,000 as of 30 June 2014.

Lower Value Accounts:  An individual investor account with a balance over US$50,000 but which does not exceed US$1,000,000 is a "Lower Value Account". These accounts are to be subject to an electronic record search for "US indicia" by no later than 30 June 2016, i.e. evidence of US citizenship or residency, US birthplace, a US address or telephone number, a standing order to remit funds to the US, a power of attorney in favour of a person with a US address, or an "in care of" or "hold mail" address.

If any US indicia are found, the account is to be treated as a US Reportable Account unless one of the listed exceptions apply.  If there are no US indicia, nothing further need be done unless the account becomes a High Value Account, or there is a change in circumstance that results in US indicia being associated with the account.

High Value Accounts: An individual investor account with a balance over US$1,000,000 is a "High Value Account". These accounts are also subject to an electronic record search for US indicia.  If certain criteria in relation to the electronically held data cannot be met, then a paper record search is also required.  Paper records cover documentation received by the Reporting Fund within the last five years and include any AML/KYC documentation. 

Inquiry must also be made of any relationship manager who might have actual knowledge of an investor being a Specified US Person (such inquiry is subsequently required to be made on an annual basis).

As with Lower Value Accounts, if any US indicia are found, the account is to be treated as a US Reportable Account unless one of the listed exceptions apply.  If there are no US indicia, nothing further need be done unless there is a change of circumstance which reveals US indicia. 

For individual investor accounts which are High Value Accounts as at 30 June 2014, due diligence must be completed by 30 June 2015, and for accounts which are not High Value Accounts as at 30 June 2014 but become so by the end of 2015, or any subsequent year, due diligence must be completed within six months.

New Individual Accounts 

For all new individual investor accounts opened on or after 1 July 2014, self-certification is required upon account opening to determine the tax residency of the investor.  The reasonableness of such self-certification must be confirmed based on documentation collected in opening the account, including any AML/KYC documentation.  If US tax residency is established the self-certification must include the US TIN. If there is a change of circumstances that indicates the original self-certification is incorrect or unreliable, a new valid self- certification must be obtained.  If unable to obtain a valid and reliable self-certification then the account must be treated as a US Reportable Account. We understand that IRS W8 Forms are recognised as being suitable evidence of self-certification.

Pre-existing Entity Accounts

Small accounts: A Reporting Fund is not required to review, identify or report an entity investor account, the balance of which does not exceed US$250,000 as at 30 June 2014, until the account balance exceeds US$1,000,000.

Accounts requiring review:  An investor account with a balance over US$250,000 as at 30 June2014, or which does not exceed US$250,000 at that date but exceeds US$1,000,000 as at 31 December 2015, or any subsequent year must be reviewed.  Only accounts held by entities which are Specified US Persons or by Passive NFFEs with Controlling Persons who are US citizens or residents are treated as US Reportable Accounts.  Accounts held by NPFIs are not US Reportable Accounts but are subject to aggregate payment reporting.

Accounts need to be reviewed as follows:

First, Reporting Funds need to review all information on file to identify if the accounts are held by US Persons and, if so, they must be treated as US Reportable Accounts unless the account holder certifies that it is not a Specified US Person or there is other evidence to that effect.

Second, the Reporting Fund must identify if the account is held by an FI.  If the Reporting Fund identifies the account holder as a Cayman FI or Partner Jurisdiction FI (an FI in another IGA country) and it verifies the GIIN then nothing further is required.  If such account holder is not a Cayman FI or Partner Jurisdiction FI then it must be treated as an NPFI unless it obtains self-certification (where a certified deemed compliant FFI or an exempt beneficial owner) or it verifies the GIIN (where a registered deemed compliant FFI or a participating FFI).

Third, if the account holder is not a US Person or an FI, the Reporting Fund must identify if the account holder is a Passive NFFE, if it has any Controlling Persons, and if any such Controlling Person is a US citizen or resident.  Passive NFFE status can be self-certified, and for Controlling Persons, the US citizen or residency status is determined based on either KYC documentation or self-certification depending upon size of the account. Where the Controlling Person is a US citizen or resident then the account is a US Reportable Account.

Where the investor account has a balance of over US$250,000 on 30 June 2014 then the review must be completed by 30 June 2016.  If the balance does not exceed US$250,000, but exceeds US$1,000,000 on 31 December 2015, or any subsequent year, the review needs to be completed within six months of the relevant year end.

New Entity Accounts

For all new entity investor accounts opened on or after 1 July 2014, the Reporting Fund must identify if the account holder is a Specified US Person, a Cayman or Partner Jurisdiction FI, a participating FFI, a deemed compliant FFI, an exempt beneficial owner, or an Active or Passive NFFE.

As with Pre-existing Entity Accounts, Reporting Funds can rely upon verified GIINs or publicly available information for Cayman or Partner Jurisdiction FIs and Active NFFEs, otherwise self-certification is required.  Where the account is held by Specified US Persons then it is a US Reportable Account. Where the account holder is a Passive NFFE, the Controlling Persons must be identified and, if they are US citizens or residents, the account is a US Reportable Account.

Accounts held by US Persons who are not Specified US Persons, Cayman FIs, Partner Jurisdiction FIs, participating FFIs, deemed compliant FFIs, exempt beneficial owners, Active NFFEs or Passive NFFEs with no Controlling Persons who are US citizens or residents are not US Reportable Accounts.

Overriding Rules

Reporting Funds which "know or have reason to know" that information received is incorrect or unreliable cannot rely upon such information. In many cases, multiple accounts held by the same investor are required to be aggregated for the purposes of determining balances.

For the purposes of determining if there is a High Value Account, account balances need to be aggregated where there is a relationship manager who knows or has reason to know that accounts are directly or indirectly owned, controlled or established by the same person.

Reliance upon third parties in relation to due diligence is expressly permitted.

Action Points

(a) Verification procedures need to be in place to deal with any new investor accounts from 1 July 2014.  The verification requirements apply immediately to these accounts.

(b) For pre-existing accounts, a review of account balances ought to be conducted to ascertain how soon remediation needs to be undertaken and the extent of that remediation.

(c) Procedures need to identify not just US Reportable Accounts but also NPFIs.

(d) Procedures need to address the situation where a Reporting Fund "knows or has reason to know" information received is unreliable or incorrect.

(e) Procedures need to identify any change in circumstances of an account.

If clients require legal advice or have any concerns about FATCA and the US IGA, Maples and Calder has leading expertise on the relevant provisions having established a FATCA team which has worked closely with the Cayman Islands government over the past two years. MaplesFS also provide client focused solutions to FATCA.


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