The Cayman Islands: Transparency and Cooperation

Although many will have read statistics about the size and scope of the Cayman Islands' financial services industry, perhaps less are aware of the lengths to which the Cayman Islands has gone to cooperate with other jurisdictions in the implementation of legislation and infrastructure to facilitate the global fight against money laundering, terrorist financing and unlawful tax evasion.

A review of the Cayman Islands' current international information sharing framework demonstrates that the standards upheld in the Cayman Islands should be the yardstick to which other financial centres should aspire and to be judged by.

Confidential Information Disclosure Law

The Confidential Information Disclosure Law, 2016 (CIDL) re-affirms pre-existing gateways through which confidential information may be legitimately shared and protects those who disclose wrongdoing. 

The CIDL expressly protects disclosures made (a) pursuant to requests by local tax, law enforcement and regulatory authorities, (b) in response to an order from a Cayman Islands authority pursuant to its international obligations (c) in the normal course of business and (d) pursuant to any other rights or duties under Cayman Islands' law.

CIDL also includes common-sense provisions to protect ‘whistle-blowers’ that disclose confidential information of wrongdoing, in relation to a serious threat to the life, health or safety of a person or in relation to a serious threat to the environment. Whistle-blowers must act in good faith and in the reasonable belief that the information was substantially true and discloses evidence of the wrongdoing.

Data Protection

The Data Protection Bill, 2016, introduces a rigorous data protection regime on a par with the extensive regime in place across the European Union, and is on its way to become law.

The legitimate right to privacy enshrined in the Bill is distinct from the assertion of ‘bank secrecy’,which may be used to facilitate unlawful tax evasion, money laundering and terrorist financing. A legitimate right to privacy is enshrined in the European Convention on Human Rights and incorporated into English Law under the Human Rights Act. Similar provisions appear in the United States' Constitution and in the domestic legalisation of numerous democracies across the globe.

Simply stated, if the right to privacy is protected abroad it must be protected in the Cayman Islands.

Automatic Exchange of Tax Information

Almost everyone attempting to gain access to financial services recently has been affected by the implementation of the United States' Foreign Account Tax Compliance Act (FATCA), which is concerned with obtaining information on accounts held outside of the United States for domestic United States taxation purposes.

In 2014, the Cayman Islands entered into an agreement with the United States to give effect to FATCA, thereby requiring Cayman Islands financial institutions to report on certain United States financial accounts with non-compliant institutions, which are effectively frozen out of global capital markets and significant withholding taxes are imposed on the recalcitrant.

The intergovernmental agreement is now enshrined in Cayman law and requires, for example, Cayman Islands investment funds and banks to register directly with the US Internal Revenue Service (IRS) and to disclose details of financial accounts owned by reportable US persons to the Cayman Islands Tax Information Authority, which may then provide such information directly to the IRS.

The Cayman Islands was also one of the first jurisdictions to commit to implementing the Organization for Economic Cooperation and Development's (OECD) Standard for Automatic Exchange of Financial Account Information – Common Reporting Standards (CRS).

CRS is akin to a global version of FATCA and will require financial institutions to identify the tax residency of account holders and to report certain details of specified accounts to the tax authorities in the almost 100 jurisdictions now signed up.

The implementation of the automatic exchange of tax information was a  significant change in the way financial information is disclosed to global tax authorities, but compliance has quickly become ‘business as usual’ in George Town.

Anti-Money Laundering

Collecting the information necessary to classify reportable accounts under FATCA and CRS is often conducted when ‘know your client’ due diligence information is collected and vetted for compliance with anti-money laundering regulations.

With all of the relatively recent international press concerning the new automatic exchange of tax information legislation, it is easy to overlook the fact that Cayman Islands financial service providers have been complying with anti-money laundering (AML) requirements since the 1990s.

The Cayman Islands' Proceeds of Crime Law, Money Laundering Regulations, and the Cayman Islands Monetary Authority's Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands, have created a solid framework for the implementation of the Cayman Islands' robust anti-money laundering regime. The Cayman Islands also adheres to the US Financial Action Task Force (FATF) 40 Recommendations on Combating Money Laundering and the Financing of Terrorism and Proliferation. 

The AML framework does not just require the collection of photocopied passports, which are then locked away in a vault after the appropriate box has been ticked on an account opening form. Rather, the framework adopts a risk-based approach which requires, for example, the identification and verification of the beneficial ownership of Cayman-domiciled entities and the intended nature and purpose of relevant financial business. Confirmation of the source of funds used in financials transactions, ongoing staff training and reporting of suspicious activities is also required, as is a process for ensuring that such information is kept current.

Non-compliance with the AML framework, including ‘tipping off’, is a criminal offence and is punishable by significant fines and custodial sentences.

Compliance with the AML framework requires significant undertaking and far exceeds onshore standards. The volume and nature of the information needed and the subsequent verification process has the effect of steering those who cannot or will not comply away from the jurisdiction – and that is precisely the intended outcome.

Regulatory Oversight

As the Cayman Islands' independent financial regulatory authority, the mission of the Cayman Islands Monetary Authority (CIMA) is to ‘protect and enhance the reputation of the Cayman Islands as an international financial centre by fully utilising a team of highly skilled professionals and current technology, to carry out appropriate, effective and efficient supervision and regulation in accordance with relevant international standards’.

The Cayman Islands benefits from CIMA being the sole financial services regulator because CIMA is able to consistently apply regulatory requirements across the various sectors of the financial industry and is able to monitor and respond to trends across the industry.

CIMA has entered into memoranda of understanding with various overseas regulatory authorities and with domestic public sector and industry bodies to facilitate information exchange and regulatory assistance via clear information sharing gateways (specifically, the Confidential Information Disclosure Law and the Monetary Authority Law).

In the context of the operations of foreign bank branches and subsidiaries located in the Cayman Islands, the existing legislative framework facilitates the sharing of relevant information with foreign financial regulators for the purpose of consolidated supervision in accordance with the relevant Basel Core Principles for effective banking supervision.

Beneficial Ownership Agreement

The Cayman Islands' government has entered into a reciprocal framework agreement with the United Kingdom to allow designated Cayman Islands officials to directly obtain and provide details of beneficial ownership of entities incorporated in the Cayman Islands to the United Kingdom.

Under the terms of the agreement, beneficial ownership details will not be made public but will remain with the service providers managing them and such information would be accessed via a central technical platform. Over the next year, the Cayman Islands have committed to preparing legislation and completing details of how the new regime will work.

However, it is important to note that beneficial ownership information has been collected and vetted in the Cayman Islands under the AML framework for decades. Information about the operations of foreign bank branches and subsidiaries is already appropriately shared by CIMA with overseas regulatory authorities. The OECD's Common Reporting Standards are enshrined in local law and require the disclosure of beneficial information on UK reportable accounts; similar provisions apply to reportable accounts of nearly 100 other countries. The US-Cayman intergovernmental agreement, which enshrines FATCA into local law, is even more stringent.

Entering into the beneficial ownership agreement with the United Kingdom is further evidence of the Cayman Islands' commitment to the global fight against money laundering, terrorist financing and tax evasion and its willingness to cooperate with other jurisdictions in that fight.

Conclusion

The reality of the Cayman Islands' transparency and cooperation regime is simple – it exists, it is more sophisticated and robust than most of its onshore and offshore contemporaries, it is constantly being improved, it is responsive, it is responsible and it works.

The standards created and upheld in the Cayman Islands are the yard stick to which other jurisdictions should aspire to and be judged by. The Cayman Islands must balance the needs of those using its financial services industry with the need to ensure the reputation of its financial services industry.

It is time for the factually incorrect notion of the Cayman Islands as a paradise for money launderers, terrorist financiers and unlawful tax evaders to be put to bed.