As an evolving area of commercial disputes in the Cayman Islands, global enforcement trends provide us with valuable insight into the types of regulatory proceedings on the horizon for offshore jurisdictions. In this first edition of our Regulatory Disputes Series, our regulatory enforcement experts share their predictions on three hot topics to watch for the future of offshore financial services regulatory disputes.

The Conyers team of Regulatory Disputes specialists have market-leading experience supporting their clients through high value, high profile and challenging regulatory disputes, including those involving multiple regulators and jurisdictions. We are uniquely placed to advise and appear in the most complex matters and work hand in hand with our Regulatory & Risk Advisory practice to deliver a full service offering across the entirety of the regulatory life cycle.

Offshore regulatory disputes: hot topics to watch

Digital assets

It will likely come as no surprise that the digital assets market is first on our list of key areas to watch. Digital assets are transforming the financial services industry and we see regulators (and lawmakers) across the globe working hard to keep up with the rapidly evolving product and service offerings. Regulators are establishing, growing and training their specialised digital asset and FinTech teams and are pursuing novel claims to test the scope of their regulatory reach.

The Cayman Islands Monetary Authority (CIMA) has recently established the Virtual Asset Service Provider (VASP) & Fintech Innovation Unit, has issued a Regulatory Policy outlining the criteria for approving Registering and Licensing of VASPs, and is conducting a related education campaign through, for example, industry briefing sessions.

This follows similar developments overseas. Each of the US Securities and Exchange Commission (SEC), the UK Financial Conduct Authority (FCA) and the UK Serious Fraud Office (SFO) are demonstrating a strong commitment to ongoing enforcement activity in the digital assets space, particularly in relation to cryptocurrency. For example:

1. The FCA has issued numerous press releases over a sustained period detailing its crackdown on unregistered crypto asset businesses. It maintains a public register of entities that it says appear to be carrying on unregistered crypto asset activity, has set up a dedicated website for consumers about crypto investment scams, and has reportedly coordinated with other law enforcement bodies to inspect and disrupt the operation of numerous unregistered crypto ATMs in the UK.
2. The SFO has publicly stated in its 2024-25 Business Plan that it is committed to building its crypto asset capabilities this financial year.
3. On 28 June 2024, the SEC filed a complaint against Consensys Software Inc., alleging that it is engaged in the unregistered offer and sale of securities in the form of crypto asset staking programs, and that it operates as an unregistered broker with respect to these transactions.

Whistleblower incentives

The Whistleblower Protection Act was enacted to encourage and protect employees who choose to report improper conduct by their employer which is in the public interest. As is apparent from the name of the Act, its focus is on the protection of whistleblowers, rather than incentivisation.

However, an enduring and polarising issue for the global regulatory enforcement community is whether to go further than offering protection, by offering financial incentives to those who blow the whistle on corporate misconduct. On the one hand, some argue that these incentives are integral to effective financial services regulation by increasing the number and quality of disclosures received and, in turn, successful enforcement outcomes. On the other, they arguably create conflicts of interest if the whistleblower is called to give evidence, encourage opportunists to make disclosures based on speculative information and risk undermining effective internal whistleblowing frameworks.

Whistleblower reward frameworks have been a mainstay in the US since the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act over a decade ago. Conversely, the UK and Australia have to date resisted the introduction of such frameworks. Recent developments in the US and UK have brought the issue into the global spotlight once again, most notably:

1. Earlier this month, the Criminal Division of the Department of Justice (DOJ) launched the Corporate Whistleblower Awards Pilot Program (the “Program”). Under the Program, if a whistleblower submits information relating to one of four key areas of interest and it leads to a successful prosecution including criminal or civil forfeiture, the whistleblower may be eligible to receive an award of a percentage of the forfeited assets. The Program is intended to operate together with, and fill gaps in, existing US whistleblower reward frameworks including that of the SEC, Commodity Futures Trading Commission and Financial Crimes Enforcement Network.¹
2. Over the past 18 months, the SEC has issued a steady stream of awards to whistleblowers in the order of tens (and, in two cases, hundreds) of millions of dollars. Its largest award to date was announced on 5 May 2023 as US$279 million.
3. In his first public speech since his appointment as Director of the SFO in September 2023, Nick Ephgrave QPM stated:

“I think we should pay whistleblowers. If you look at the example of the United States of America, their system allows that, and I think 86% of the US$2.2 billion in civil settlements and judgments recovered by the US Department of Justice were based on whistleblower information…”²

In view of these developments, we expect that exploring whistleblower incentives will be a key question on the minds of offshore regulators as they set their strategic plans and priorities for the coming years.

Sustainable finance

‘Sustainable finance’ is a term used to describe the embedding of environmental, social and governance (ESG) considerations into investment decisions. Although there are no mandatory ESG-related disclosure requirements in the Cayman Islands, CIMA has made public statements to the effect that it is monitoring global developments and is working towards a suitable regulatory and supervisory approach for ESG-related risks. Whether through actions based on existing governance regimes, ESG-specific reforms or shareholder/investor activism, we anticipate that sustainable finance will be an area to watch for the Cayman Islands and other offshore courts in years to come.

The accuracy of representations made to the market as to sustainable finance are a growing feature of regulatory enforcement activity in key jurisdictions across the globe. For example, the 2024 priorities of the Australian Securities & Investments Commission include “Misleading conduct in relation to sustainable finance including greenwashing.”

While we have heard a lot in recent years about “greenwashing” and “bluewashing”, a more recent emerging issue with the proliferation of AI is the concept of “AI-washing”. The SEC is acting quickly and has taken the following recent steps:

1. On 18 March 2024, the SEC announced that it had settled charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for false and misleading statements about their use of AI. The firms agreed to pay US$400,000 in total civil penalties. SEC Chair Gary Gensler stated:

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

2. On 15 April 2024, in the course of delivering his remarks at the Program on Corporate Compliance and Enforcement Spring Conference, Gurbir Grewal, Director of the Division of Enforcement at the SEC, stated:

“If you are rushing to make claims about using AI in your investment processes to capitalize on growing investor interest, stop. Take a step back, and ask yourselves: do these representations accurately reflect what we are doing or are they simply aspirational? If it’s the latter, your actions may constitute the type of “AI-washing” that violates the federal securities laws.”

3. On 11 June 2024, the SEC announced that it had charged the former CEO of AI recruitment startup Joonko with defrauding investors of at least US$21 million by making false and misleading statements. Joonko allegedly claimed to use AI to help clients find diverse and underrepresented candidates to fulfil their diversity, equity and inclusion hiring goals. Mr Grewal stated:

“As more and more people seek out AI-related investment opportunities, we will continue to police the markets against AI-washing and the type of misconduct alleged in today’s complaint. But at the same time, it is critical for investors to beware of companies exploiting the fanfare around artificial intelligence to raise funds.”

Stay tuned for the next edition of our Regulatory Disputes Series, where we spotlight our other three hot topics to watch for the future of offshore financial services regulatory disputes.

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