ERNST & YOUNG


It is impossible to understand the current success of the Cayman Islands as an offshore financial centre without an examination of the hedge fund industry. Cayman Funds hears from Ernst & Young.


While the Cayman Islands is a full-service financial venue with


well developed sectors that include banking, insurance, company registration—and a shipping register that includes more super yachts than anywhere else—it is the fund industry that has now taken centre stage.


Approximately eight out of 10 new offshore hedge funds are


domiciled in Grand Cayman, the Island’s financial capital, and nearly all the wide-reaching financial infrastructure of the Island, which includes sophisticated international law firms, the Top Four and numerous mid-tier accounting firms, and dozens of small practitioners, to one extent or another services the hedge fund industry.


A leading participant in this space is the accounting firm of Ernst


& Young, which for more than 25 years has been the preferred international service provider for hedge funds.


The Ernst & Young hedge fund practice globally is led by highly


skilled professionals including more than 200 partners, principals, and executive directors and 2,000 industry-focused professionals. Teams are located throughout the world to service clients where they need service, providing first-hand insight into local market trends and accounting tax and regulatory issues.


As part of Ernst & Young’s commitment to the hedge fund


sector, the firm conducts a series of symposia in 20 locales across the globe, including the Cayman Islands. The theme of the Cayman-hosted 2011 event was New Responsibilities. New Expectations, where panels addressed the emergence of Brazil as a growing economic power, Ernst & Young’s 2011 Global Hedge Fund Survey, ‘hot topics’ in the industry, and a keynote discussion on Global Hedge Fund Trends.


Flavio Peppe, financial services partner, Ernst & Young Terco,


Brazil, led the panel discussion on opportunities for Cayman service providers in the burgeoning economy of Brazil.


Complying with FATCA While the symposium put the spotlight on Cayman’s growing


opportunities in the hedge fund industry, a number of issues that will have an impact on the asset management industry were also discussed, including the Foreign Account Tax Compliance Act (FATCA).


Signed into legislation in 2010 to prevent offshore tax abuses


by US citizens, this act will have a significant impact from 2013. Among the requirements is that foreign financial institutions must report directly to the US Internal Revenue Service (IRS) certain information about financial accounts of more than $50,000 held by US citizens. Those who fail to do so face paying a 30 percent withholding tax on payments made from American and foreign participating financial institutions to other foreign financial institutions (FFIs), beginning in 2014. Non-US banks, trusts, and investment funds are all considered FFIs.


Though final regulations are still pending, there is no indication


that FATCA is going away. Thus, those institutions that begin to tackle the process of compliance early will later be the institutions best-positioned to be leaders in the marketplace. Investment managers and administrators would be well advised to start, and several have already begun to put policies, controls, and systems in place, effectively to address the requirements that FATCA will impose.


Navigating the act’s rules and regulations is a challenging task


for many foreign institutions seeking to be compliant. The costs associated with understanding FATCA, data analysis, and systems changes are the primary hurdles for entities to overcome.


Professionals at Ernst & Young are already well-versed in the


intricacies of FATCA, and can provide assistance with achieving compliance. This is accomplished by guiding clients through a three-stage process:


• Assessment of their current situation, including an evaluation of the quality of data, systems, and processes;


• Implementation, including any changes which need to be made to update data and processes; and


• Compliance, which includes the actual collection and validation of the data and, ultimately, filing with the IRS.


Mike Mannisto from Ernst & Young in the Cayman Islands, says,


“There are lots of competing regulatory changes happening at the moment and prioritising all of these changes is a challenge. We are now seeing FATCA being placed as a top business priority as clients understand that non-compliance is not an option. Much work still needs to take place in a very short time to get ready for FATCA, and that will require training, client communications, updating legal documents, changing policies, procedures and related controls, as well as changes to systems.”


Preparing for Form PF Advisers should also be aware of impending changes in


reporting regulations that will affect three types of funds: hedge funds, liquidity funds, and private equity funds.


The US Securities and Exchange Commission (SEC) has begun


the process of standardising risk reporting, and advisers will now report on a similar basis across the private fund universe. This will change the way private fund advisers conduct business.


Investment advisers registered with SEC who manage private


funds will be required to report risk exposure on a consistent basis, starting June 15, 2012, on what’s known as Form PF. Many private funds are within the scope of Form PF and subject to various levels of reporting dependant on the type and size of the funds; private funds with less than $150 million in assets


CAYMAN FUNDS | 2012 37


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