A View from the Cayman Islands

Where precisely do the Cayman Islands stand now that the dust has settled following the Organisation for Economic Cooperation and Development (OECD) and Financial Action Task Force (FATF) supranational initiatives on tax harmonisation and anti money laundering?`The short answer is that the legislative and regulatory amendments are sympathetic and, as a result, the Cayman Islands seem now better positioned in relation to their core institutional business, collective investment schemes, capital markets and structured finance transactions, aircraft financing, hybrid financing vehicles and specialised private client vehicles that are compliant with tax laws of the jurisdiction of residence and domicile of the settlor and beneficiaries. It necessarily follows also that in the event there remain users of the Cayman Islands financial system who are entirely reliant on non-disclosure, then such arrangements will need to be unwound or, in the alternative, moved to less transparent jurisdictions, perhaps, if they insist on withholding tax rather than exchange of information, Luxembourg or Switzerland.`The following are the main features that lead to these conclusions:`Firstly, (and well before the recent US administration decision to withdraw support from certain aspects of the OECD initiative) the Cayman Islands had secured that there would be no change to its indirect system of taxation. There remain no income, corporation, capital gains or withholding taxes. The OECD's (only slightly) hidden agenda in promoting EU tax harmonisation (and doubtless at the highest rates) clearly overreached itself.`Secondly, as a result of amendment to The Proceeds of Criminal Conduct Law, Cayman Islands suspicious transaction reporting introduced in 1996 now becomes mandatory in line with the provisions of the Criminal Justice Act 1993 of the United Kingdom. There are ancillary provisions enabling cooperation between the Cayman Islands Financial Reporting Unit and similar organisations, like the National Criminal Intelligence Service, in FATF jurisdictions.`Thirdly, amendments to the Monetary Authority Law meet the concerns expressed in the Financial Stability Forum (FSF) Report (some would have said that the use of “Report” was altogether too technical a term for a largely anecdotal collection of views of a number of onshore regulators) with regard to the provision of regulator to regulator cross-border disclosure by the Cayman Islands Monetary Authority (CIMA). In enabling CIMA to liaise effectively with overseas regulators, the necessary element of cross-border transparency is introduced. (In practice, little change will result given that the typical Cayman Islands structure is promoted by institutions for institutions (or possibly high net worth qualified investors) and that those concerned are invariably based in the major financial centres and subject to relevant onshore regulation).`Fourthly, all financial service providers are required to “know their customer”, must undertake appropriate source of funds enquiry and maintain due diligence records in the specific form with regard to “relevant financial business” as defined. Again it is unlikely that these provisions will cause any change to the fundamentals of cross-border financing or investment structures; reliance may be placed on any funding through the US, UK, Japan, European and other FATF-approved jurisdictions, which are the typical originator jurisdictions for Cayman Islands structures.`What, if any, are the indications with regard to deal flows as a result of all of this? Interestingly enough, banking deposits and inter-bank bookings have increased substantially throughout the year to something in excess of US$800 billion and regulated mutual funds and incorporations have increased by approximately 20 per cent over a 12 month period. It seems right therefore to conclude that compliance with the OECD and FATF initiatives has been well received in the institutional marketplace.`In April 2001, the Americas Review Group of the FATF travelled to the Cayman Islands to conduct its review with a view to analysing the latest legislative enactments and the operation of the regulatory regime. If indeed it is the intention of the FATF to ensure that all jurisdictions legislate in accordance with the Vienna Principles, then the FATF should be obliged to conclude at its June 2001 meeting that the Cayman Islands legal and regulatory regime meets those and all recognised international standards.`Anthony Travers OBE is senior partner of Cayman Islands law firm Maples and Calder. This is a repeat of last week's column which appeared incomplete