IFC Review spoke to Jude Scott of Cayman Finance about the role the jurisdiction and its peers play in the global movement of wealth. We also ask how their financial services sectors will cope with the increased compliancy demands being made by supranational organisations and what the future holds for the Cayman Islands as a leading international finance centre.
IFC Review: How is business in the Cayman financial services sector currently? Which areas are seeing growth and which less so?
Jude Scott: The Cayman Islands financial services industry is very strong and is seeing continued growth. In the post-Panama Papers era, we are seeing clients pursue what we could call a ‘flight to quality.’ They are shifting their investments to ‘G20 Plus’ countries, which are G20 countries, plus top International Financial Centres like Cayman that meet or exceed the highest global standards for transparency, cross-border cooperation, Anti-Money Laundering (AML) and Know Your Customer (KYC) standards. Clients want the certainty of investing in jurisdictions, such as Cayman, which can pool investment capital from around the world within a strong legal framework and a robust legal system. We’re seeing growth in investment funds and asset management, but Cayman has also maintained its strength in insurance, re-insurance, trusts, banking and capital markets.
IFC Review: Are global policy developments, such as FACTA, BEPS and the CRS helping or hindering the sector in Cayman and in the region generally?
JS: Cayman’s leadership in meeting or exceeding global standards to combat corruption, money-laundering, terrorism financing and tax evasion has actually worked to its advantage. As a result of being an early adopter of the Common Reporting Standard (CRS), signing FATCA and engaging in the Base Erosion and Profit Shifting (BEPS) process, Cayman has strengthened its reputation as a transparent jurisdiction, which, as noted above, attracts leading international clients and ensures that we continue to attract and retain the first rate service providers necessary to support them.
That approach has worked for Cayman. We have adopted at least as many global standards as any G20 country, and more, when agreements specific to International Financial Centres and UK Overseas Territories are included. However, jurisdictions that have chosen not to make the commitment to maintaining the highest globally-accepted standards for transparency and cross border cooperation with law enforcement unfortunately will continue to struggle.
IFC Review: What impact is the move towards transparency and the call for public registers of beneficial owners having on the sector?
JS: Transparency as a primary tool in combatting corruption, money-laundering, terrorist financing and tax evasion is critical and Cayman has been a leader in this space, with a demonstrated track record of cooperating with tax and crime-fighting authorities around the world as well as adopting the highest global standards. However, it’s also important to recognize that law-abiding parties have a right to their privacy.
There are three kinds of users of the global financial system: honest parties who follow the law, opportunistic parties who may try to cut corners if they feel they can , and hardened criminals intent on operating illegally. Central public registers rely on self-reported information so only beneficial owners (or companies) face penalties for false reporting. Such self-reporting mechanisms will have no impact on honest investors, may shame some opportunistic investors into transparent reporting and will have no impact on hardened criminals who are already breaking the law and have no intention of reporting their activities.
Cayman operates a verified beneficial ownership regime. Under the regime, parties face criminal penalties for reporting false information. The information they provide is verified by regulated corporate service providers, who themselves face criminal penalties for failing to properly verify the information and whose firms face business-wide sanctions for the same. This system will not impact honest investors. The double-layer of criminal sanctions and verification will impact opportunistic investors, who can no longer easily cut corners. And unlike a self-reporting register, it will also impact hardened criminals by requiring independent verification of the information they provide – forcing them to stop their activities, or to seek other jurisdictions with lower standards.
Transparency standards like beneficial ownership registers are important, but the standards must apply to all jurisdictions rather than just a few, and they must also include verification.
IFC Review: How have businesses in Cayman reacted to Brexit – are there concerns within the financial services sector about the relationship Cayman and the other Overseas Territories will have with the EU post-Brexit?
JS: Cayman is an extender of value to economies like the UK. By acting as a neutral, efficient hub connector for investment capital and financing around the world, we are able to pool investments and provide critical liquidity for markets in the UK. So as the UK moves through the Brexit process, we will continue to engage with financial services industry leaders, as well as policymakers, to communicate the constructive role that Cayman can play in channelling inward investment into the country.
Cayman plays a similar role with the EU, however, this is a smaller part of our industry than the UK or the US. Unlike many other jurisdictions, the EU has pursued policies that seem to unfairly target International Financial Centres with regulatory burdens not applied to other jurisdictions and that fail to recognize the commitments we have made to the highest globally-accepted standards for transparency and cross-border cooperation with law enforcement. Yet we continue to show our leadership by engaging with the EU at the government and industry levels to try to find ways to work constructively together.
IFC Review: How is Cayman Finance addressing the ongoing removal of correspondent banking facilities and what impact is this likely to have on the jurisdiction in the long term?
JS: Challenging correspondent banking rules are having an impact around the world. While it has less of a direct impact on Cayman as a jurisdiction - as the premier global financial hub it does have an impact on many of the jurisdictions with which we do business. We believe it should be possible for banks and their regulators to take into account the strength of the standards maintained in a jurisdiction like Cayman, and let that inform the risk management approach. We have a regulatory system based on international standards of supervision and cooperation with overseas regulatory authorities. This system has been recognized for its leadership on tax transparency and anti-money laundering initiatives. This jurisdictional risk profile should play a greater role in the consideration of correspondent banking services in our and other jurisdictions.
IFC Review: What can Cayman Finance and other government bodies in the region do to protect and grow the financial services sector?
JS: Many years ago, the Cayman Islands committed to being a leader on transparency and global standards for combatting corruption, money-laundering, terrorist financing and tax evasion. That leadership as an industry and as a jurisdiction has laid the foundation for our continued success as a G20 Plus country. Any jurisdiction hoping to compete in the international financial services marketplace is going to have to be able to meet those same high standards or face a combination of market forces and international regulations that will negatively impact them.
The Cayman Islands also leads the way by cooperating effectively between industry and government. The Cayman Islands Government, and especially our Ministry of Financial Services, is very accessible and receptive to industry input. We work collaboratively to develop innovative and effectively regulated new financial services products and services, such as the Cayman Islands LLC established last year, to help grow our industry. We also work on immigration laws that allow the Cayman Islands to have a strong blend of local and international professional talent that is class leading and further attracts clients. This is a model that other jurisdictions can consider.
Other specific initiatives targeted for growth include designating reinsurance as a specific industry sector, as well as a focus on the China One Belt One Road initiative, UK Brexit, US inward investment for infrastructure projects, Physical presence and FinTech.
IFC Review: How important are IFCs in general and Cayman in particular within the global economic ecosystem?
JS: The Cayman Islands is a premier global financial hub, efficiently connecting law abiding users and providers of investment capital and financing around the world, which benefits developed and developing countries. The neutral platform we provide offers parties domiciled in different countries with varying laws, regulations, tax rules and customs the opportunity to do business together efficiently and effectively. It’s not possible to replicate this environment in the modern global financial marketplace so our role is unique and valuable to the global economy.
An excellent example of the practical implications of Cayman’s role as a neutral global financial hub is the part we play in international development aid. Organizations like the World Bank invest aid resources from developed countries in funds domiciled in the Cayman Islands. These funds are then pooled with resources from global investors and used to fund development projects in developing countries in Latin America, the Middle East and Asia. In 2015 alone, more than US$400 million in such aid was invested around the world through Cayman-domiciled funds.
IFC Review: How important are the emerging economies, particularly China, to the sector’s growth?
JS: Emerging economies represent an enormous opportunity for growth in the international financial services industry, and International Financial Centres like the Cayman Islands are well positioned to play a key role in their growth. A good example is China’s One Belt One Road initiative. The pooling of global investment capital into extensive infrastructure projects like this will be critical to China’s success as well as offering investors extensive opportunities. Investors can take advantage of these opportunities through funds domiciled in neutral platforms like the Cayman Islands, which offer access to the investments alongside the protection of UK common law, a robust legal and regulatory framework and the highest global standards for Know Your Customer and other transparency regulations. Examples like this have the potential to enhance the growth of all the sectors in the Cayman Islands Financial Services industry for years to come.
IFC Review: What new products and services does Cayman have in the pipeline to entice investors and intermediaries to the jurisdiction?
JS: We are constantly working to offer more innovative products and services. As mentioned, last year Cayman instituted the Cayman Islands LLC which has been very well-received in the market. Cayman Finance, the government and the Cayman Islands Monetary Authority are working together to ensure that the financial products and services available in our jurisdiction are consistently delivered to meet or exceed international clients’ expectations through excellence, innovation and balance.
Cayman is also seeing strong interest from reinsurance and FinTech and is positioning itself to be a leader in these sectors as well.
IFC Review: What do you think are the most common misconceptions about the Cayman Islands as an IFC and what is being done to counter them?
JS: The Cayman Islands is a transparent jurisdiction, despite the efforts of some whose ideological agenda drives them to try to define us in other ways. We meet or exceed all globally accepted standards for transparency and cross-border cooperation with tax and law enforcement authorities. We have adopted at least as many global standards as any G20 country, which places us in a leading position among G20 Plus jurisdictions.
The Cayman Islands also meets none of the descriptions used by entities such as the OECD or Transparency International to define a tax haven. Despite no corporate tax rate, the Cayman Islands does use fees, taxes and other means to raise government taxation revenue equal to approximately 28 per cent of our GDP (2015) – which is comparable to leading jurisdictions around the world. It’s a taxation revenue raising system that works well for our jurisdiction and very adequately funds government operations. This approach, combined with our commitment to global standards and the absence of any laws or agreements to support the shifting of tax base to avoid corporate taxes, demonstrate that the Cayman Islands is a transparent jurisdiction with a globally responsible tax system.
Jude is well respected locally and globally having spoken internationally on financial services topics and featured on a number of occasions in international media. He retired as an Audit Partner in 2008 after spending over 23 years with Ernst & Young. As the Global CEO of Maples and Calder, he took an active role in the strategic growth and development of the firm. Jude has extensive experience within the Cayman Islands financial services industry, having served on various Cayman Islands Government and private sector committees. He has served as the CEO of Cayman Finance since 2014.