Since tax avoidance and international corporate tax planning appear to have been top of the political agenda over the last 12 months, the IFC Caribbean Review spoke to the CEO of Cayman Finance, Gonzalo Jalles, on how the Cayman Islands are adapting to increasing regulatory pressure and what the future holds for the jurisdiction as an International Finance Centre.
IFC: How is business in the Cayman Islands?
Gonzalo Jalles: Business is slowly recovering from the crisis, and we are seeing signs of growth in certain areas. While we are experiencing a number of regulatory changes, we are confident clients are receiving guidance from their respective professional service providers. By all accounts, we remain comfortable and confident the Cayman Islands will retain its leadership position within the global financial services industry regardless of the regulatory changes.
IFC: What areas of Cayman financial services are likely to experience growth this year?
GJ: Cayman is the undisputed leader in registration of hedge funds. This is unlikely to change soon, and industries that service hedge funds are likely to continue to do well. In particular, there is development in the area of corporate governance; and in my opinion, we are likely to continue to see growth in that area -- perhaps not limited to the hedge funds sector.
IFC: The Cayman Islands was recently praised for its ability to handle EOI requests following completion of the OECD Peer Review Phase 2, how has this enhanced Cayman’s reputation globally?
GJ: This is another example of Cayman’s continued commitment towards transparency. Cayman committed to the Intergovernmental Agreement Model 1 for FATCA in March; was one of the first countries to finalise negotiating the terms of the agreement with the US; was the first country outside Europe and the first IFC to commit to the pilot on multilateral automatic exchange of information; and has committed to the OECD’s convention on tax matters -- just to name a few. These various milestones provide more than sufficient evidence to support the transparency of the jurisdiction. However, unfortunately we continue to be misrepresented within certain segments of global media and some politicians who continue to rely on IFCs as a scapegoat for domestic issues.
IFC: Following recent declarations on tax transparency and a move towards automatic exchange of information are existing treaty structures such as TIEAs still relevant?
GJ: Very much so -- the agreements and recent discussions around exchange of information and others are the basis under which the TIEAs will be revised to implement things like the multilateral exchange of information in an automatic way. It is likely bilateral TIEAs are going to legally support the new system. How well a country has responded to requests under the current TIEAs is, in my opinion, a good indicator of its willingness to move towards the automatic exchange of information and other new standards.
IFC: What impact will the signing of the Model 1 IGA with the US under FATCA have on business in the Cayman Islands?
GJ: FATCA is already affecting the global financial industry in a significant way. The costs of implementing FATCA are significant, and institutions are devoting significant resources to it.
In the case of Cayman, the decision to sign Model 1 was arrived at after a detailed consultation with industry in which Cayman Finance played an important role and is, in our opinion, the best way to implement FATCA for the Cayman Islands. Because of the way FATCA is enacted, it is almost impossible to imagine any competitor jurisdiction arriving to a significantly different position, so we don’t believe FATCA in itself will affect Cayman’s competitive position. I strongly believe FATCA will be very positive for Cayman in the long run. The automatic exchange of information, taking into account the ultimate beneficiary, will help Cayman demonstrate the fact our business model is not based in any kind of secrecy, and will make the efforts of those who wish to portray the jurisdiction as a shady place to do business much more difficult.
IFC: Do you foresee more FATCA like agreements with other jurisdictions?
GJ: When you consider the manner in which FATCA was enacted it could only be done by the US as a country that holds the world’s reserve currency, which is still used as the main means of international payments. We have since seen a similar initiative from the UK limited to the dependent territories. Perhaps because if this were a unilateral attempt to implement it around the globe, it would mean other countries and institutions could chose to stop using the British Pound.
We are seeing and are likely to see a continued move towards automatic exchange of information. However, that will be achieved in a very different way than FATCA and, hopefully, the result will be a much simpler multilateral standard that is as effective as FATCA but does not attempt to get the providers of information to adapt to the particular requirements of the tax code of the receiver.
IFC: How has the implementation of the AIFMD affected the funds landscape in the Cayman Islands?
GJ: AIFMD is still going through the implementation phase, and it is difficult to judge at this stage what will be the final impact as, for example, it is unclear what the final viability of private placement will be. We are seeing some players setting parallel structures to be able to sell openly into Europe, but most of those are maintaining Cayman structures in order to continue offering a more efficient vehicle without the restrictions imposed by the AIFMD outside Europe. We are also seeing some players increasing their physical presence in Cayman to deal more effectively with the requirements imposed by certain countries on private placement. So far, there are no indications AIFMD will affect the Cayman Islands in a negative manner.
IFC: Do you think regulatory initiatives such as the AIFMD will see a transfer of funds towards onshore jurisdictions?
GJ: I have no significant evidence of such a transfer taking place other than one case I came across whereby a fund was managed from Europe and actively selling only in Europe. What I think is likely to happen if private placement is not allowed to continue is some fund managers will create parallel structures to service two distinct markets. However, I think it is also possible many countries in Europe might chose to continue allowing private placement under certain conditions.
IFC: The Cayman Islands is noted as the world’s leading ‘offshore’ financial centre. Does the jurisdiction’s reputation as such over shadow its legitimacy and success as a global financial centre?
GJ: We don’t like the term ‘offshore centre’. We refer to jurisdictions like ours as ‘IFCs (international financial centres)’. We have been portrayed as the leaders based on metrics that are not necessarily the most appropriate in my opinion. One metric commonly used is banks’ balance sheets. Cayman has a significant number of banks licensed under a type of license that allows them to operate from other jurisdictions, mainly the US. We, therefore, have shown in the past banks’ assets at over a trillion dollars; however, the banking assets effectively managed from Cayman are estimated at US$20 billion at most. Similar can be said about hedge funds. In my opinion, Cayman registered fund assets are not a relevant measure of our size and that can be made evident by a walk around George Town. That said, we believe Cayman continues to be a global leader largely due to the recognition of the excellent service provided by our professional infrastructure. This success does not undermine our legitimacy as a financial services jurisdiction because the jurisdiction is also known to be very highly regulated. In fact, one of the key factors of our success and growth over the years is we have managed to maintain very high standards both in terms of client service as well as our regulatory framework.
IFC: Do you think the portrayal of IFCs as tax havens in the media, is detrimental to the business being done in the Cayman Islands and what can IFCs do to enhance their reputation?
GJ: I think it is unfortunate the way IFCs are portrayed given the critical role they play in facilitating capital flows. The world economy would be in a deeper recession if it weren’t for the role played by IFCs in recent years. Cayman Finance will continue to explain what we do and respond to misinformed and biased comments.
IFC: Should Caribbean IFCs be working together more to protect the financial services industry in the region?
GF: In the current world of electronic communications I don’t think there is a particular reason to group only Caribbean IFCs in this effort. More can be done between all IFCs, and we have been working closer with some of our peers not just within the Caribbean.
IFC: What does the future hold for the Cayman Islands as an IFC?
GF: The industry is changing; there is no doubt about that. The need for a facilitator of international capital flows is, however, unlikely to diminish anytime soon. I believe we are likely to continue to see an increased focus on substantial presence requirements over pure registration of business in different jurisdictions; and as such, Cayman has the opportunity to grow its economy by welcoming those businesses and people that may seek a properly regulated, legally and economically sound environment with an efficient tax system.
Gonzalo Jalles CEO. Formerly the CEO of HSBC Cayman, Mr Jalles founded his own financial services consulting company, Javelin Group, late last year. Prior to his almost six years leading HSBC in the Cayman Islands, Mr Jalles worked in HSBC’s London, Bermuda and Argentina offices as Director of International Development, Managing Director/CEO, and Chief Investment Officer, respectively. He also served as President of the Cayman Islands Bankers’ Association from 2009 to 2012. Before joining HSBC, Mr Jalles worked at Santander Investments, developing the firm’s asset management business for over five years and creating the second largest asset manager in Argentina.