The Audit of a Fund on the Cayman Islands

The audit of a fund on the Cayman Islands is the main instrument of prudential supervision, which guarantees the transparency of the structure of assets and the verification of the net value of the units for international investors. The strengthening of control on the part of the Cayman Islands Monetary Authority (CIMA) requires of management companies the rigid observance of the schedules of reporting in order to avoid the compulsory suspension of operations. The financial year closes for the majority of structures on 31 December, and so the passing of checks forms the basic agenda for corporate lawyers throughout the entire first half of the year.

In the present material, the criteria of the recognition of the IFRS and US GAAP standards are analysed in detail, as well as the regulation of the interaction with authorised local inspectors through the digital system REEFS. The practical analysis of the regulatory base makes it possible to timely initiate the extension of the timeframes of the submission of documents and to carry out the mandatory check of the reporting of a fund on the Cayman Islands without the risk of the imposition of administrative fines on the operators and directors.

The Regulatory Base and the Regulation of the Audit of a Fund on the Cayman Islands

The legal regulation of the audit of investment funds on the Cayman Islands relies on a strict legislative base, which minimises the risks of abuses in the sphere of collective investments. The main pillars of this system are the Mutual Funds Act and the Private Funds Act. These regulatory acts oblige structures of the closed and open type to ensure the regular independent check of their financial indicators. The Cayman Islands Monetary Authority, performing the functions of the central regulator, carries out end-to-end prudential supervision of the observance of these directives.

The current regulatory base of the supervisory check of funds on the Cayman Islands is supplemented by rules on corporate governance, which establish the direct responsibility of the management for the organisation of the accounting processes. The regulator does not limit itself to the formal collection of documents, but analyses the internal protocols of control. The procedures of the check are regulated down to the smallest details, including the requirements for the qualification of the inspecting persons and the protection of confidential information.

The current requirements for the reporting of funds on the Cayman Islands prescribe the mandatory application of generally recognised standards. To them belong the International Financial Reporting Standards and the Generally Accepted Accounting Principles of the USA. The use of these systems makes it possible to unify the indicators for departmental analysis.

The regulatory acts and standards of supervision of CIMA:

1. The Mutual Funds Act — the regulation of open investment structures.

2. The Private Funds Act — the regulation of closed investment structures, including direct investments.

3. The CIMA rules on corporate governance — the standards of the accountability of the management composition.

The comprehensive regulation of funds on the Cayman Islands provides for the integration of local legislation with global fiscal rules. The implementation of end-to-end control protects the rights of investors and maintains the stability of the jurisdiction. Thus, the audit of a fund on the Cayman Islands is the central element of the maintenance of the legal status of the company. The high-quality fulfilment of the supervisory directives excludes claims on the part of the fiscal bodies.

The state consistently implements the international standards of the regulation of funds on the Cayman Islands, adapting the local legislation to the requests of institutional contributors. The official rules of CIMA clearly delimit the zones of responsibility between administrators, auditors and directors. The observance of these instructions guarantees the legal cleanliness of the business. The current requirements for the regulatory check on the Cayman Islands are mandatory for all licensed subjects, regardless of the volume of their assets.

Which Funds Are Obliged to Pass an Audit on the Cayman Islands and When It Is Required

The current legislation clearly determines the list of collective investment structures subject to the annual mandatory check. Under these criteria fall all the registered mutual funds, including the licensed and administered categories. This rule also extends to private funds, to which belong structures of direct investments, venture organisations, real estate funds and credit projects. Any structure that has obtained the approval of CIMA automatically takes upon itself the obligations on the annual confirmation of the financial results.

The official reporting of investment funds on the Cayman Islands is rigidly tied to a timescale. The state has established a six-month period for the completion of all the checking procedures after the closing of the financial year. If the reporting period of a company ends on 31 December, then the final documents must arrive to the regulator not later than 30 June of the following year. The missing of this date is regarded as a serious offence.

It is possible to determine which funds are obliged to pass an audit on the Cayman Islands by the fact of their entry into the register of the Monetary Authority. The inclusion into the state database places on the management the obligation to engage independent experts. The presence or absence of commercial activity during the year does not cancel the general requirements, with the exception of specific situations provided for by the instructions of CIMA.

The parameters of reporting for regulated structures:

• Registered Mutual Funds — the mandatory annual submission of declarations;

• Licensed Mutual Funds — a heightened level of prudential control;

• Private Funds — the supervisory check of assets, including venture and credit portfolios.

The exact timeframes of the audit of funds on the Cayman Islands do not depend on the internal workload of the accounting service. The management needs to plan the schedule of work with the checking firm in advance. Practice shows that the postponement of the process to the last month leads to technical mishaps.

It is necessary to initiate the mandatory check of the reporting of investment funds on the Cayman Islands immediately after the summing-up of the internal results of the year. The time lag of half a year is provided for the detailed reconciliation of complex transactions and cross-border operations. A clear understanding of when the regulatory check of a fund on the Cayman Islands is carried out makes it possible to avoid haste and operational errors upon the preparation of the final package of documents.

Who Carries Out the Audit and How the Reporting Is Submitted to CIMA (REEFS, FAR)

The right to carry out the check of regulated investment structures belongs exclusively to organisations that have obtained the official status of an approved auditor. These companies must be physically registered on the territory of the islands and included in the current register of CIMA. The engagement of foreign specialists without a local licence is not permitted by the legislation. Such an approach guarantees that the check is carried out by persons who thoroughly know the specifics of the local law.

The established regulation determines how the reporting is submitted to CIMA on the Cayman Islands. The procedure is fully digitised and realised through the specialised protected portal REEFS. Access to this system is held only by the authorised local specialist, who acts as the official applicant on behalf of the fund. The independent uploading of files by the directors of the company through the interface of the platform is not provided for by the technical regulations.

The comprehensive audit of an investment fund on the Cayman Islands is completed by the formation of a unified package of documents. This set includes three main elements, which are checked by departmental analysts. Any incompleteness of the data or the absence of signatures on the forms entails the automatic refusal of the acceptance of the documents.

The mandatory composition of the annual package for the sending to the regulator:

• the audited financial reporting of the company (Audited Financial Statements);

• the official independent conclusion of the licensed auditor (Independent Auditor’s Report);

• the filled-out annual form of the fund (Fund Annual Return).

The professional check of funds on the Cayman Islands requires the detailed filling-out of all the boxes of the declaration. In the FAR form, information about the participants, the operational indicators and the engaged providers of services is reflected. These data are used by the state for the compilation of macroeconomic statistics.

The regular supervisory check of investment structures on the Cayman Islands is the main barrier against the legalisation of illegal proceeds. The approved structure of reporting makes it possible to reveal discrepancies in the movement of capital at the early stages. The responsibility for the correctness of the transferred information lies on the checking company, and so the process of verification bears an uncompromising character. The regulator trusts only that information which has passed through verified channels of communication. 

The Standards of Reporting, the Procedure of the Audit and the Check of the NAV

The preparation of documents requires the strict observance of methodological rules. The international standards IFRS or the American system US GAAP are permitted. In separate cases, CIMA approves the application of the accounting principles of the United Kingdom, Japan or Canada. The choice of a specific model must be fixed in the constituent documents of the investment project.

Special attention during the control measures is paid to the verification of the net value of the assets. The thorough auditor's check of the NAV on the Cayman Islands includes the analysis of the internal policy of assessment, approved by the management. The specialists reconcile the market value of the portfolio with the historical data of transactions. 

The standard check of the financial reporting of a fund on the Cayman Islands passes in several consecutive stages. The transition to the next step is possible only after the full closing of the previous questions.

The official standards of reporting of funds on the Cayman Islands oblige the disclosure of information about all the related parties. The inspectors study the contracts with management companies and brokers. This excludes manipulations with commissions and hidden payments.

The independent check of the financial reporting on the Cayman Islands includes the assessment of the continuity of the activity of the fund and the stability of its operational model. If doubts arise in the solvency, this is obligatorily reflected in the final document. The professional audit of an investment fund on the Cayman Islands minimises the risks of a sudden bankruptcy. 

The Timeframes of Submission, the Extension and the Exemption from the Audit of Funds on the Cayman Islands

The standard time window for the sending of reporting is limited to six months, however the regulatory base provides for a certain regulatory flexibility. The management has the right to submit a motivated application for the postponement of the final date. The legislation makes it possible to fix up to three extensions, each of which constitutes one month. Thus, the maximum legal deferral may reach ninety days.

The current timeframes of the submission of the audit of funds on the Cayman Islands may be shifted only on the condition that the company is in the proper legal status. This means the absence of debts on state duties and submitted reports for the previous periods. The request for the movement of the deadline is directed by the corporate provider through the electronic system of management.

It is important to take into account that the procedure becomes more complicated as the period of the deferral increases. If the first application is approved in a simplified order, then for the subsequent steps weighty grounds are required.

The necessary conditions for the change of the schedule of the submission of reporting:

• the presence with the company of the official status of Good Standing at the moment of the application;

• the timely payment of the state duty for the consideration of the petition for the postponement;

• the provision of an official letter from the approved auditor with the explanation of the reasons for the delay for the second and third extensions.

In exceptional situations, the Monetary Authority may grant a full exemption from the audit on the Cayman Islands. This measure bears an individual character and is applied if the structure actually did not conduct operational activity. For example, if after the registration there did not follow the attraction of investors or the launch of the investment mechanism.

It is impossible to arrange the extension of the reporting of funds on the Cayman Islands retroactively. The application must arrive before the occurrence of the official deadline. The agreed deferral of the regulatory check of an investment fund on the Cayman Islands protects the management from the automatic accrual of penalties. 

The Responsibility, the Fines and the Consequences of the Breach of the Audit of a Fund on the Cayman Islands

The non-observance of the regulatory timeframes entails the immediate application of measures of administrative influence. The breach of the rules of the submission of documents is regulated by the special regime AFR within the framework of the Monetary Authority Act. The breaches are classified by the degree of severity, determining the size of the financial sanctions. For basic delays, the minimum threshold of the penalty begins from five thousand Cayman dollars, which is equivalent to approximately six thousand one hundred US dollars.

A serious breach of the timeframes of the check of the reporting of funds on the Cayman Islands launches the mechanism of the accrual of repeated penalties if the company ignores the requirements of the authorities. For prolonged offences of a minor character, the maximum limit of the cumulative penalty is established in the amount of twenty-four thousand three hundred and ninety US dollars. The department directs an official Breach Notice, granting thirty days for the elimination of the deficiencies.

The regulator separates the responsibility of the legal entity and its beneficiaries. If the non-observance of the audit of an investment fund on the Cayman Islands occurred through the fault of the management, the sanctions may be directed at the natural persons personally.

The system of administrative fines of CIMA for the audit

The rigid responsibility of investment funds on the Cayman Islands includes not only financial losses. The delay of documents destroys the business reputation of the project, causing wariness among counterparties. International banks may block the accounts of the company until the full settlement of the dispute with the regulator.

The negative consequences of the breach of the audit on the Cayman Islands directly affect the relations with investors. Contributors have the right to demand the early redemption of the units if the management allows delays. Thus, the timely check of a fund on the Cayman Islands is the guarantee of the stable functioning of the business. 

Conclusion

The timely fulfilment of the regulatory requirements of the Cayman Islands Monetary Authority is a basic condition for the preservation of the operational legitimacy of any investment project. Attempts to economise on the services of local accredited verifiers or the ignoring of the six-month term of the submission of documents lead to tangible financial losses and the personal administrative responsibility of the directors. The building of a transparent system of interaction with auditors within the framework of the IFRS or US GAAP standards makes it possible for international business to minimise the risks of compulsory liquidation and to preserve a high level of trust on the part of institutional investors.