Oversight and Enforcement for Accounting Records Requirements

It is a legal requirement under Cayman Islands law that most legal entities, including exempted companies, exempted limited partnerships, and limited liability companies, must keep “information regarding books of account”.

This update is intended to remind you of this obligation, and to inform you of proposed increases in the oversight and enforcement of this obligation by the Cayman Islands Ministry of Financial Services (the “Ministry”).

The Existing Requirements

“Proper books of account” is a broad term with no specific definition, as the books may differ depending on the nature and complexity of the business. For a simple business “books of account” may include bank statements, purchase orders, and sales and purchase invoices; whilst a more sophisticated business may have electronic records.

Whatever the form of the records, they should enable trial balances to be constructed and should enable directors to prepare a statement of the company’s affairs and explain its transactions. This is not limited to the cash position, and books of account should also contain records, documents, and information on which a set of financial statements would be based.

The books of account should also contain any additional items necessary to make those financial statements true and fair, such as explanations and other information that could be provided by management.

Proposed oversight and enforcement

In October 2020, the Ministry consulted industry associations on a proposed system of oversight and enforcement related to the existing obligations set out above. The Ministry has recently published its response to that first round consultation.

The precise nature of the proposed system varies depending on the nature of the entity, but in essence each entity would be required to:

1. provide, on a 6-monthly basis, a copy of its “books of account” to its registered office service provider; and
2. confirm, as part of the annual return filed in January of each year, that it had complied with the first requirement.

Failure to do this would mean that the annual return was unable to be filed, and so the entity would not be in good standing and may be liable to a late filing penalty.

The proposals would, if enacted, bring the Cayman Islands into line with other similar jurisdictions that already have similar requirements in place. The 6 monthly basis is in line with Hong Kong and Guernsey and is less frequent than the 3 monthly basis required in Bermuda.

Exempted Entities

Although the proposals remain in draft form, they are expected to affect almost all legal entities in the Cayman Islands.

The one exception that the Ministry has made clear is that entitles that have a requirement to file audited financial information with the Cayman Islands Monetary Authority – including all registered Private and Mutual Funds – will not be subject to the increased oversight, and would not be required to provide their registered office service provider with their books of account.

Further exemptions may be put in place in future drafts of the legislation.

Expected Timeline

The proposals are currently undergoing a second-round consultation process. However, the Ministry has indicated that the requirements may be put into law in time to affect the January 2022 annual return filings. As such clients should ensure now that they are maintaining “proper books of account” as described above as these may need to be provided urgently later in 2021.

If you have any questions or queries regarding your obligations, please contact your usual Stuarts attorney as soon as possible.