Framing Cayman

As with the BCCI and Enron scandals before it, the Parmalat affair is generating the usual and entirely predictable observations relating to offshore matters. They range from the simply ill-informed to the biased, both as to the nature of the problem in evidence and the suggested solutions.

One can forgive the armchair commentator, of which there is no more reliable an example than Bob Campion. In the March 2004 edition of Portfolio International in an article entitled ‘Sinner or Sinned Against?’, having made a number of balanced comments, he concludes (with a series of breathtaking leaps devoid of any technical analysis of the facts) that the Cayman Islands is “letting the side down”. But as to how it is letting the side down, and the precise role of the Caymans in Parmalat, he does not enquire at all.

Nevertheless, as support for his conclusion, Campion points to the EU Single Market Commissioner Frits Bolkenstein, who he says is “angry” about the offshore world and its involvement in Parmalat.

But what is he angry about? It seems he is angry about “offshore special purpose” vehicles. This is a somewhat alarming point, since the “missing” billions in Parmalat, insofar as the Caymans may be concerned, are attributable to Bonlat, a wholly-owned on balance sheet Parmalat subsidiary accounted for on a consolidated basis. What, of course, Bolkenstein should have been angry about, as the charges brought over the last weekend now indicate, are the Italian executives (in Parma – and a long way from the Caymans), the Italian auditors and certain Italian financial advisers.

Of course Bolkenstein “points his finger at the offshore centres”. Where did the Bank of England point its finger over BCCI, omitting what might have been regarded as appropriate emphasis on the blindingly obvious point that BCCI was licensed as a deposit taker by the Bank of England and had branches in 44 UK high streets which were fully authorised to accept deposits from the UK public? No such similar licence existed in the Caymans; and had BCCI not been so licensed by the Bank of England, at a time when the Caymans banking regulator was on secondment from the Bank of England, its subsidiary would not have been licensed in the Caymans.

The embarrassed onshore regulator can routinely be expected to point its finger in other directions, and invariably at the offshore jurisdiction. The usual regulatory argument is rarely any more intellectually compelling than “we are large and you are small – hence shady and secretive – and therefore we are right and you are wrong”.

This may be an attractive line of reasoning to those familiar with the works of Roald Dahl, but is not a helpful standpoint to those of us in the offshore world who are interested in improving international regulation to prevent or minimise cross-border fraud of the sort evidenced in BCCI, Enron and Parmalat. No doubt Bolkenstein points his finger offshore; he could be expected to point it in any direction other than towards Parma.

The fallacies in these typical responses are twofold. First, that even without fraud being evidenced, a snapshot of the parlous condition of the UK insurance or pensions industry or split capital trusts (to name but a few) makes it relatively clear that onshore regulators regularly have difficulty in establishing the standards or regulating effectively those standards. As far as we are aware, none of the US Savings and Loan crisis, the decade-long Japanese banking crisis, the Russian financial collapse in 1997-98 or the recidivist lending polices of the International Monetary Fund (IMF) (to name but a few) are attributable to regulatory lapses of the Cayman Islands Monetary Authority. What is missing in the reaction to Parmalat is any kind of perspective.

But the second fallacy is the evident point. Parmalat, if the allegations are proven, like BCCI and Enron before it, is an example of outright fraud. If the onshore regulatory regimes struggle with the issue of prudential regulation, no one has ever supposed that regulation exists in any jurisdiction that will prevent intentional wrongdoing of this order. Regulation may well enable prosecution after the event, but that is the most it can hope to achieve if it is dealing with serious wickedness. Exactly who’s side, then, is the Caymans letting down? And what is this standard to which some would have it held?

The fact that BCCI, Enron and Parmalat were all rooted in fraud is an inconvenient proposition to the armchair commentator and is invariably obfuscated by blatant innuendo.

“At one time the Cayman Islands was home to 692 Enron-related businesses,” states the irrepressible Campion with thinly-veiled glee. No matter to him that these were the on balance sheet consolidated subsidiaries which owned the overseas Enron operating assets, thereby lawfully deferring US taxation on overseas income from transactions with non-related parties, the profits of which transactions (and there has been no suggestion to the contrary) being properly accounted for and audited. No matter that the Caymans limited partnership LJM No 2 was a victim and not a perpetrator, having been defrauded of $16m (£8.7m), and no matter that the vehicles used to perpetrate the frauds were all Delaware limited partnerships, managed and controlled from Houston by Enron executives who are now the targets of criminal prosecutions.

If it were not for a quirk in the laws of defamation, comment of this
sort would be actionable. There are clearly good reasons of policy why a jurisdiction cannot legally complain of defamatory comment made about it. But should journalists and others so routinely take advantage of this fact? And should treasury departments encourage them to do so by leaking deliberately malicious innuendo?

But perhaps more troubling than these references to Enron and Parmalat are those similar comments which appear in an altogether higher forum. Take the question of Lord Wallace of Saltaire in the debate on offshore financial centres in the House of Lords on 20 January 2004, where he said: “Did the noble Lord see the report in The New York Times which stated that, of the 881 subsidiaries of Enron in financial centres, 692 were in the Cayman Islands, 119 in the Turk and Caicos Islands and eight in Bermuda? Does he recall that in the Parmalat saga, both the British Virgin Islands and the Cayman Islands played a substantial part in the disappearance of money?”

Really, Lord Wallace? Leaving to one side the question of the journalistic integrity of The New York Times, how might that have been? Lord Wallace is doubtless privy to highly confidential additional information not in the public domain. I do hope that he is.
What the rest of us suspect about the “missing” Bonlat billions is that they never existed at all, save in a document forged in Italy by a corrupt Parmalat executive. If that is the nature of the fraud in relation to Bonlat, how precisely is the “part” of the Caymans “substantial”? And if Lord Wallace’s comment is not troubling enough as to the understanding of the problem, what does it say about the nature of any prospective legislative response?

If indeed the level of intellectual curiosity demonstrated in this House of Lords debate is indicative of what we may anticipate by way of a solution, then no one should be surprised, in the future, at the continued and metronomic frequency of fraud of this sort.

The indisputable fact, however inconvenient politically, is that the charlatans responsible for this type of behaviour are far closer to Westminster than the Caymans and that this type of superficial analysis of the role of the offshore jurisdiction amounts to no more than a troubling distraction.

The answers, to those of us who have practised offshore, are readily apparent and lie in the area of improved regulator-to-regulator disclosure, ensuring cross-border transparency, improved application of the principles of corporate governance, more rigorous auditing requirements and the application of resources to prosecute and convict wrongdoers.

It will come as something of a surprise, to those whose predisposition is to trot out the hackneyed cliché without having undertaken much in the way of original thought, to read the forthcoming IMF report on the Caymans’ regulatory regime. This will identify a quite different and surprising place: a place where the ‘know-your-client’ due diligence requirements exceed the standard required in the UK; where the anti-money laundering legislation matches that of the UK and exceeds the standards in effect in the US and Continental Europe; and a place which has pledged to meet the highest and quite new international standards of tax transparency, regardless of the fact that there remains considerable doubt in Europe, not to mention within the Organisation for Economic Cooperation and Development (OECD), on quite what that standard should be and which countries should be subject to it. Am I the only person troubled that these indisputable facts did not find their way into the House of Lords debate?

The history of the last four years since the Caymans agreed to and implemented the OECD and Financial Action Task Force (FATF) initiatives has also been surprising. Clearly, investors like regulation and transparency of this sort. Caymans bank deposits and inter-bank bookings have increased over that period, from $630bn (£341.18bn) to more than $1tr (£541.55bn); mutual and hedge funds are fast approaching the 5,000 mark; the Caymans is now the fastest-growing insurance domicile, onshore or offshore; and it is, by a margin, the most favoured of the jurisdictions for structured finance transactions (a glimpse of the website will reveal the position).

Now, consequent upon the Caymans having agreed to implement the European Union Savings Directive (EUSD), the UK Inland Revenue has recognised the Cayman Islands Stock Exchange as an ‘Approved Exchange’. This places the Cayman Islands Stock Exchange on the same footing as Dublin and Luxembourg. And so it should be, with $46bn (£24.91bn) in listings and a clean bill of health from the IMF.

The integration of the Caymans into the international financial marketplace will continue. Better, I think, for those genuinely interested in combating cross-border fraud to focus on the real issues. We recognise and fully understand why a good deal of negative publicity has been fed to journalists by treasury departments. It was doubtless thought necessary to colour public opinion prior to the introduction of the OECD, FATF and more recently EUSD initiatives. But it should occur to even the most casual observer that these initiatives are now in place and that there must therefore be something inappropriate about further repetition of the conventional wisdom. Transaction flows to the Caymans are increasing, not decreasing; law firms from Jersey, Bermuda and other offshore jurisdictions are racing to tie up deals with Caymans firms and not vice-versa. There is indeed a story here. The story is that the belief of various European treasury departments that their tax revenues would be increased by collecting revenues from tax evaders in the Caymans, or otherwise dissuading the use of the Caymans, will be shown to be a misplaced belief. This is a story that needs to be written.

The Caymans has never been a haven for European tax evaders – rather, the transactional flow is institutional. As the new fiscal transparency becomes effective, this will become established beyond doubt. Thus, while the typical commentary of Portfolio International has always been regarded as entertaining in Jersey and Guernsey, it will also need to move with the times. Nor should it continue to obfuscate what is a serious issue. Cross-border fraud is not an entertainment, nor an onshore or offshore problem – it is a global problem which requires less finger pointing and more informed thought before we can hope to achieve a better solution.

Anthony Travers OBE is senior partner at Cayman Islands firm Maples and Calder