24 February 2009
The Cayman Islands’ financial industry relies on institutional work. A glance at the number of Cayman mutual funds (1,933 newly registered in 2007 and 1,650 in 2008; 654 terminated in 2007 and 1,093 in 2008) shows that the effects of the recession, while slower to show themselves offshore than onshore, have the potential to be equally harmful here.
Cayman takes this seriously. A public/private programme has begun to update the industry’s legislation to provide a more flexible product to address the needs of the international financial community as we emerge from the recession, while the Cayman Islands Monetary Authority is overhauling our regulatory legislation to determine if, and to what extent, it needs updating to meet international standards of transparency and accountability.
But the recession is not our only problem. Offshore jurisdictions such as Cayman are repeatedly challenged for harbouring the proceeds of tax evasion, money laundering and so on. Our attackers range from the sublime (literally) to the ridiculous. Even the current Pope took a swipe at us recently for supposedly helping to hide money that could otherwise be spent on the poor. Various UK organisations, charities and unions do likewise, sometimes using figures plucked from goodness knows where purporting to show the amounts hidden. And, of course, the Organization for Economic Cooperation and Development and the EU weigh in too. All their assertions are ill-informed and wrong.
It would be silly to claim that Cayman has never seen financial crime: Enron and Parmalat are two high-profile examples. But while Cayman vehicles were used in both cases, the frauds themselves were still committed in the US and Italy respectively. The argument that somehow a lack of transparency and regulation in Cayman allowed the perpetrators to get away with a crime that they could not have done onshore is nonsense. Cayman is one of the most highly regulated financial jurisdictions in the world, and Enron and Parmalat could just as easily have established their vehicles in Delaware or the UK. It is an interesting fact that Cayman’s regulatory regime is such that Mr Madoff would not have been allowed to do in Cayman what he apparently did in New York.
So why do institutions and businesses do business through Cayman? Our legal system, which is based on the English system, is flexible and creditor-friendly. Cayman entities provide a tax-neutral base in which to combine investors from a number of jurisdictions investing in assets located in the same or other jurisdictions. This neutrality is often important because it provides a level playing field for all investors and avoids creating a vehicle in a jurisdiction that may favour some investors more than others.
This does not affect investors’ duty to pay tax in their jurisdiction of residence: it simply removes what would otherwise be an extra layer of foreign taxation at a particular level of the structure.
So Cayman allows investors to use tax-neutral platforms for their business activities, whether corporate, financial or investment fund. It is emphatically not for tax evasion. Cayman condemns tax evasion as much as anywhere else and its anti-money laundering requirements are second
Some of the strongest anti-offshore rhetoric comes from the US. Comments have been made by senators about “Ugland House” and the 12,000 companies it supposedly ‘houses’; some have referred to it, with touching ignorance, as “the biggest tax scam ever”.
Ugland House is the office building in Grand Cayman that houses Maples
and Calder. The Senate asked the US Government Accountability Office (GAO), Congress’s investigatory wing, to come to Cayman to investigate Ugland House and its 12,000 companies, which it did last year.
The GAO reported back to the Senate that the companies were simply being provided by Ugland House with a registered office address, a requirement in all jurisdictions where companies are incorporated. Indeed, in Delaware a much smaller building provides a similar service to more than 200,000 companies. Additionally there was no question that the businesses were being conducted from Ugland House. In other words, a clean bill of health.
But the rhetoric persists. So while offshore jurisdictions are affected by the recession, we have other issues to address. We have to refute the allegations made about us and to learn skills such as explaining to journalists, politicians and the public exactly what offshore institutional financial work is all about.
And we need to persuade legislators to soft-pedal on knee-jerk legislation to limit offshore work without a full analysis of the repercussions. Offshore jurisdictions are too important a constituent part of the worldwide economic and capital body as a whole simply to be surgically removed.
Charles Jennings is co-managing partner at Maples and Calder