29 March 2004
29 July 2013
3 May 2013
22 July 2013
15 January 2014
The long arm of the law — freestanding Mareva injunctions and clarification from the Court of Appeal
6 August 2013
There is a scene in the film Runaway Jury in which an unsavoury jury-fixer arranges for $15m to be paid into a designated account to ‘buy’ the verdict that one of the jurors claims to be able to deliver in a huge firearms liability trial. And where is that account? In the Cayman Islands, which some would have you believe is a den of iniquity, where criminals are safe from justice, and dodgy characters spend their days laundering dirty money.
This bears no relation to reality. The Caymans is one of the most effectively regulated financial centres and has for some years been one of the most cooperative when it comes to investigating crime and tracking down its proceeds.
Since 1986 there has been a Mutual Legal Assistance Treaty with the US, which has been used more than 200 times. The financial regulator, the Cayman Islands Monetary Authority, has been given wide powers to obtain information and documents, not just for its own regulatory needs, but for assisting overseas regulators to carry out their functions. In recent years, the principle has also been accepted that this international cooperation will extend to tax matters. Previously, in common with many countries, the Caymans did not assist other countries to enforce their tax laws. Also, the Tax Information Exchange Pact has been signed with the US, and the Caymans government has indicated a willingness to sign such agreements with other Organisation for Economic Cooperation and Development (OECD) countries where there is a level playing field and the Caymans is treated no less favourably than other countries.
In terms of anti-money laundering legislation, the Caymans has a regime in place that is recognised by the Financial Action Task Force (FATF), the OECD’s anti-money laundering offshoot, to meet international standards. It is one of only two jurisdictions to have made it compulsory to gather client identification retrospectively for those clients who were already established before the regulations came in. The International Monetary Fund recently carried out an extensive onsite inspection. Its report is due soon and is expected to be very positive towards the jurisdiction.
The reality is that the Caymans is about the last place a criminal should try to hide anything. For instance, in order to open the account in the first place, criminals would have had to provide extensive and verified identification documents, including references from other banks, all of which are kept by the bank along with the transaction record and which can be handed over to the authorities if need be. It is more difficult to open a bank account in the Caymans than in the US.
As the eminent US economist Dr Richard Rahn pointed out in a recent article in The Washington Times, the Caymans did not become the world’s fifth-largest financial centre by catering to criminals. As he put it: “Think about it for a moment. If you were looking for a place to put your money, would you choose a bank run by incompetents or criminals in a country run by the mob, or would you put your money in a bank run by honest and competent bankers in a country with the rule of law?” He also made the point that all of the world’s largest financial centres, both onshore and offshore, are characterised by having honest courts and competent administrators.
If all this is so, why then do the Caymans and other financial centres continue to be portrayed in this negative manner in the media?; and more importantly, why do they continue to be mentioned in the context of corporate scandals such as Enron and Parmalat? Are they, as recently suggested in the House of Lords by Lord Wallace, in need of still tighter regulation?
One problem is that perception tends to lag behind reality. Back in the 1970s it might have been possible to deposit money without many questions being asked. But then the same was true in London or New York, as money laundering did not become a criminal offence anywhere until the latter half of the 1980s. Likewise, people still think of the Caymans as being all about tax – or rather, avoiding (or evading) it.
The reality is that most of the islands’ business these days is institutional and tax-transparent. While tax may be a factor, it is not usually the driving force. Clients normally cite their motivation for choosing the Caymans as being the availability of a wide range of specialist advisers, the effective but not overly bureaucratic regulatory regime, the business-friendly laws, the English-based legal system and the long history of political stability. Where tax is an issue, it is more often a question of permitted deferral or avoiding the need to reclaim double payments of tax through cumbersome and sometimes defective treaties.
Perhaps because of this perception issue, it is often thought somehow significant that a large organisation is incorporated or has subsidiaries in the Caymans. Reality check: it is, after all, the fifth-largest financial centre in the world, and most of the world’s leading financial institutions are present or represented there. It is no more unusual that they have operations in the Caymans than that they have operations in London, New York or Frankfurt.
There is, though, a perception that companies (or certain individuals within them) that do have something to hide choose to use the Caymans. After all, both Enron and Parmalat had Caymans subsidiaries. The fact is, however, that neither of those affairs really had anything to do with the islands.
Enron still has a large number of subsidiaries in the Caymans. Apart from one, they were not the off-balance sheet partnerships that triggered the restatement of the accounts and later Chapter 11 proceedings: the rest were set up in Delaware. The Caymans companies were formed at the behest of an entirely different part of the Enron organisation responsible for the original ‘pipes and wires’ side of the business in order to bid for infrastructure projects and real assets such as pipelines and refineries. Various bodies, including the US Senate Finance Committee, have painstakingly investigated their role and found them to be entirely legitimate. Enron as a financial scandal is simply not a Caymans issue.
In the case of Parmalat, the facts are still emerging, but the heart of the situation seems to be that certain people in Italy claimed falsely that one of Parmalat’s assets (a Caymans subsidiary) held a large sum of money. The subsidiary was not regulated or subject to its own audit requirement, nor was it the type of entity that would be regulated or audited in most other jurisdictions, so an English private company with nominee shareholders would have suited its needs just as well. The previous auditors of the parent company in Italy appear to have been satisfied, as do the Italian regulators.
No amount of regulation or auditing can entirely guard against fraudulent or dishonest conduct within a company. Yet it is being said (especially in Italy) that the Caymans is at the root of the problem. This is rather like blaming it on Ford when a crooked dealer sells a Mondeo that has been ‘clocked’.
The question remains: why, given the true state of regulation, industry vigilance and international cooperation in the Caymans, would anyone with a nefarious purpose be foolish enough to think that a Caymans entity would serve them. Maybe some people continue to base their view of the Caymans on Hollywood movies, badly researched press articles and the novels of John Grisham.
Andrew Bolton is head of litigation at Appleby Spurling Hunter