Mr Morgenthau and the Cayman Islands

Whilst it is recognised that Mr Robert Morgenthau’s career as New York District Attorney was both long and distinguished, it had been hoped by many observers that his views of offshore financial centres or ‘tax havens’, as he describes them, would be retired with him.

But from his article in the New York Times of 5 May 2012, it seems that Mr Morgenthau’s ability to conflate tax evasion and tax avoidance with resulting inevitable mischaracterisation remains unimpaired.

“The Senate’s Permanent Subcommittee on Investigations in 2008 estimated that at least $5 trillion to $7 trillion was sheltered in offshore jurisdictions like the British Virgin Islands, the Cayman Islands, Gibraltar, Bermuda and the Bahamas – not just by Americans, but by everyone. These jurisdictions have little or no income tax.

The favorable tax rates encourage corporations to avoid paying American taxes by structuring complicated international transactions, like Apple’s “Double Irish With a Dutch Sandwich,” recently described The New York Times. But it’s not just the low tax rates that make these jurisdictions attractive to those following the rules. The secrecy of offshore jurisdictions allows some individuals and corporations to engage in outright tax fraud, costing America at least $40 billion each year.

And that secrecy makes offshore tax fraud almost impossible for law enforcement to detect. When I was the Manhattan district attorney, we learned offshore accounts only through whistle-blowers, cooperators and serendipity.”

These statements require a degree of forensic dissection before we can arrive at the true position. Firstly, the suggestion that offshore secrecy makes tax fraud impossible for US law enforcement to detect is the purest nonsense. The Cayman Islands amongst many offshore financial centres and notably those of the Overseas Territories, the transparency regimes of which fall under the guidance of the UK Foreign & Commonwealth Office, have all entered into Tax Information Exchange Agreements, which give the IRS unparalleled rights of access to any account the subject of enquiry. The staggering statistic is that the Cayman Islands Treaty entered into in November 2001 has been in place for over a decade during which the IRS has managed less than 25 enquiries and with no discernable benefit to the United States Treasury as a result. This should be compared to the 40,000 requests originally made by the IRS in respect of US citizens holding bank accounts in Switzerland. Mr Morgenthau does not distinguish between the legislative regimes of quite distinct offshore financial centres with quite distinct business models. Worse than that, he makes his allegations about the wrong ones.

What in fact Mr Morgenthau means, and much to his continued and evident irritation, is that the November 2001 Treaty negotiated between the United Kingdom Government and the Cayman Islands Government did not permit direct access to the New York Attorney General’s Department. Rather enquiry had to be made through the Internal Revenue Service; a much less vote worthy method of investigation for one reliant on eye-catching headlines to maintain public office.

But rather more sinister than that misstatement is the manner in which legitimate tax avoidance, which by definition is the function of domestic tax law and lawfully undertaken, is conflated with secrecy and tax evasion. This new argument seeks to deflect cause and blame from the legitimate provisions of United States tax law that provide for deferral and in some way implicate the offshore financial centre by suggesting wrong doing. Nothing could be further from the truth. The provisions that enable US corporations to ‘shelter’ monies in offshore jurisdictions are provisions of United States tax law designed to render those corporations more competitive in relation to their global operations. But the money is not ‘sheltered’. Specifically, to avoid the deemed distribution provisions of United States tax law, the profits generated by those overseas operations must be reinvested annually in genuine trading activity with one or more unrelated parties. If it is no longer felt appropriate to confer this particular benefit on US corporates, then by all means amend US domestic tax law. Notably, President Obama’s effort to do so in 2010 failed to pass in the Senate.

And whilst on the subject of President Obama, we see again the old chestnut referenced: the “19,000 companies” listed at Ugland House. This statistic apparently also flunks the ‘red-face test’. Facial complexion is, I suppose, a less egregious offshore offence than the description “tax scam” conferred by the President. But neither Mr Morgenthau nor the President can identify any wrong doing in the statistic. Of course they cannot. There is no rule or principle that dictates that an offshore financial structure, which may be located across many time zones, is obliged to locate all its service providers under one roof as if it were a car manufacturing plant in Detroit. But nor can wrong doing be inferred from the fact that as with the 217,000 registered offices in one building in the Vice President’s home State of Delaware, an international financial corporation may locate its domicile in the jurisdiction with the most effective corporate law.

Tedious as it may be to the informed observer, I suppose we must deal also with the comment that “tax havens are at the root of serious crimes: fraud, money laundering and international terrorism”. This is a bold statement by Mr Morgenthau given the branches of the financial crisis spread from a tree firmly rooted in New York, which he had full authority to ensure was regularly pruned. The 1990 Cayman Islands Treaty with the United States provided the Department of Justice with carte blanche to make enquiry into any account in the Cayman Islands concerned with all crimes, money laundering or fraud, and the powers conferred are broader and more comprehensive than those that exist under domestic United States law, overriding client/attorney privilege. This shibboleth suggested by Mr Morgenthau does not stand a moment’s scrutiny. Indeed, in his recent analysis, Professor Sharman concludes that of 183 jurisdictions which he subjected to an objective blind test regarding their money laundering regulation, it was only the Cayman Islands and the Isle of Man service providers who insisted on full disclosure and notarized documentation relating to beneficial ownership and directorship on company incorporation. If Mr Morgenthau wishes to strike a blow against international crime, he should ensure that similar principals relating to ‘know your client’ due diligence are applied in Delaware, Wyoming and Nevada which languished at the bottom of Professor Sharman’s list in the company of such bastions of transparency as Ghana and the Czech Republic.

But then we find a new heresy in relation to one Mr Bernard L Madoff. “Everyone knows that Bernard L Madoff worked in New York”, says Mr Morgenthau, thus far correctly, “but the funds that secretly funded his Ponzi scheme favored more exotic offshore locales”. Of course, given so distinguished a career, we are sympathetic to some rewriting of history at the margins, but this is unbridled chutzpah of Madoffian proportion. The blindingly obvious fact that Mr Morgenthau wishes to obfuscate is that Mr Madoff committed his fraud in the very jurisdiction that Mr Morgenthau was responsible for policing. The fact that a number of regulated offshore hedge funds were defrauded cannot absolve the regulatory authorities, the SEC and Mr Morgenthau’s department from full responsibility. No secrecy shrouded the affairs of Fairfield Sentry, or other of the funds thus victimised and nor, given the enhanced audit requirements applied to regulated funds in the Cayman Islands, could Madoff have operated in that jurisdiction.

What is particularly mystifying about Mr Morgenthau’s article is the suggestion that Senator Levin’s legislation, preventing the use of shell corporations in hiding the true ownership of assets, would represent a step forward in relation to jurisdictions like the Cayman Islands. The mechanisms for ascertaining beneficial ownership of every Cayman Islands corporation already exist as has been verified by the IMF, the FATF and the US Government Accountability Office. Mr Morgenthau would be better advised in directing his forensic eye towards Wyoming, Nevada and Delaware where obscurity remains the order of the day. Mr Morgenthau needs to understand better the advances made in the offshore financial centres with respect to all crimes and tax transparency. We anticipate these blatant mischaracterisations from the social engineers of the extreme left but we anticipate better from elected officials, retired or not, from jurisdictions with which offshore financial centres have cooperated fully.

Mischaracterisations of the sort are not merely unfair to offshore financial centres they are unhelpful to the United States. In failing to identify the real issues they will result in further ill-conceived domestic legislation.

Anthony Travers OBE
Anthony Travers OBE is the Senior Partner of Travers Thorp Alberga, former Chairman of Cayman Finance and former President of the Cayman Islands Law Society. The former Managing and Senior Partner of Maples and Calder, he has extensive experience in all aspects of Cayman Islands law and has worked closely with the Government and prepared the Cayman Islands legislation for Mutual Funds and Private Equity vehicles, in the Private Trusts area, the Asset Protection Legislation and drafted the Cayman Islands Stock Exchange Law. Anthony was made an Officer of the Most Excellent Order (OBE) for his services to the Government and the Financial sector in August 1998. Anthony has written numerous articles and has spoken regularly at conferences and seminars.