Cayman: Turning International Scrutiny into Opportunities

The Cayman Islands' decades-long record of compliance with global initiatives relating to regulation, transparency and the exchange of information for tax purposes highlights the jurisdiction's record as a premier international financial centre and as one of the first domiciles considered by institutional investors for the establishment of investment funds, corporate vehicles and complex cross border transactions.

Cayman Islands’ ability to ‘weather the storm’, that is, maintain its commercial success while complying with an ever-increasing barrage of global initiatives, tells the true story of why the jurisdiction remains a leading international finance centre (IFC).

Recent global initiatives include enhancements to Cayman's anti-money laundering (AML) framework and an innovative approach to the implementation of a beneficial ownership register – which has been a major focus of IFC critics.

Maintaining Regulatory Balance

Legitimate IFCs such as the Cayman Islands operate a business model based on open disclosure of tax information in a robust regulatory framework that is conducive to attracting business in keeping with international conventions, but which also has the ability to minimise tax exposure within the boundaries of international law.

One of the hallmarks of the highly respected regulatory framework in the Cayman Islands is its ability to develop and evolve through a strong relationship between the public and private sector. This enables changes to the laws and the introduction of new products that meet the needs of global clients that have adopted Cayman as their home domicile for international financial services.

Equally, the intense focus on the offshore world by overseas politicians and supranational organisations, such as the OECD and the EU, has afforded the Cayman Islands the opportunity to demonstrate the robustness of its regulatory system. The jurisdiction is also in an increasingly stronger position reputationally, and as such can successfully defend itself from unwarranted and misinformed attacks on the offshore world.

The frequent examinations of policy and adherence to global standards, in particular regarding tax information exchange, anti-money laundering activities and other cross-border initiatives, are rarely treated as a deterrence by Cayman Islands authorities. In fact, the efforts to strike a balance between commercial success and regulatory compliance allows the jurisdiction to differentiate itself in that the jurisdiction is able to demonstrate the continuous process of legislative enhancement and compliance, which often exceeds the prescribed international standards.

Cayman’s Financial Services: Resilient and Thriving

At the same time, Cayman Islands’ financial services industry continues to grow and thrive. It has remained strong since the initial blacklisting of offshore activities by the OECD in the early 2000s. It has also increased in prominence through the 2008 financial crisis, which saw governments hunt down a soft target for their own mishandling of the economy and regulatory failings onshore. Following the successful implementation of initiatives such as FATCA and the Common Reporting Standards, the industry is stronger than ever. The process of being under the international microscope for so many years has in fact brought Cayman to greater prominence as a financial jurisdiction, and has put the jurisdiction in a stronger position since it operates under the highest regulatory standards.

Beneficial Ownership

The issue of beneficial ownership registries provides a good example of Cayman’s ability to strike the right balance on regulatory and cross-border transparency matters, while maintaining economic success. The push for public registers of beneficial ownership became a core feature of the OECD’s drive towards tax transparency, famously (and initially) put forward by the UK government as a key measure that might be forced on its Overseas Territories and Crown Dependencies, in particular the adoption of a publicly accessible register.

The Cayman Islands industry and government took the view that having a publicly searchable database would put financial services at a disadvantage with competitors that had not implemented such a register, for the simple reason that clients would express their legitimate right to privacy and establish vehicles in a jurisdiction not subject to these requirements.

Furthermore, it was felt that the long-standing practice in Cayman of beneficial ownership information being collected by licensed corporate services providers was a far more optimal solution to the UK government’s proposal for a system of self-certification. Clearly, a system of self-certification would be open to significant abuse, as there would be nothing to stop a potential criminal failing to correctly declare their identity.

Cayman went to great lengths to convince the UK government that its proposed system of encrypting beneficial ownership information in a database, which would only be accessible in response to proper and lawful requests from specified enforcement agencies, was the route that should be taken to comply with the international initiative. This new system was ultimately accepted by the UK government and put into practice.

It was notable that, in addition to being licensed by the Cayman Islands Monetary Authority, Cayman’s corporate services providers are regularly required to verify the beneficial ownership information they collect, so the resulting solution will, not only be more accurate, but maintains the legitimate desire for privacy in business affairs by the clients and institutions involved.

CFATF Review

The latest Mutual Evaluation by the Caribbean Financial Action Task Force (CFATF), which took place in December 2017, was seen as an opportunity to demonstrate both Cayman’s robust anti-money laundering framework, which has operated successfully for decades, as well as the relatively recent enhancements, which illustrate our responsiveness to addressing any issues that arise in a constantly evolving financial industry.

Ahead of the on-site CFATF visit, which focused on the effectiveness of Cayman’s AML regime, the government tabled an update to the AML regulations, which introduced a risk-based approach and a clarification of the law to ensure it is operating as was intended, bridging a gap which had emerged between the actual legislation and the more stringent Cayman industry guidance notes. The updated rules ensured that all hedge funds and private equity funds, regardless of their regulatory status with the Cayman Islands Monetary Authority, would be captured by the definition of ‘relevant financial business’, as well as bringing some of Cayman’s regulation in line with certain definitions in the FATF regulations. It also provided the opportunity for all stakeholders in the Cayman financial services sector to examine their own policies and procedures through risk assessments, based on the 2015 Cayman Islands National Risk Assessment on money laundering.

Although the actual outcome of the latest CFATF evaluation is not known at this time, Cayman’s compliance culture and its continued recalibration of the legislation as international requirements are updated, have left Cayman well placed to benefit from the upward march in standards (a ‘march’ that seems never ending at times).

The Great EU Escape

Cayman’s improved international reputation (in spite of the proliferation of international initiatives that followed the financial crisis) is also evident from its absence on the EU Blacklist of Non-Cooperative Jurisdictions in Taxation Matters. The list, published on 5 December 2017 by the EU is based on a number of criteria in the areas of tax transparency, fair taxation and the adoption of anti-base erosion and profit shifting (BEPS). Instead the Cayman Islands was included on the so-called ‘grey list’, which included nearly 50 other nations, including the British Virgin Islands, Jersey and Guernsey – and recognises the existence of tax regimes that facilitate offshore structures.

Many would argue that the EU’s initiative is politically motivated to a large degree. Nevertheless, the Cayman Islands can highlight its success in implementing both FATCA and the Common Reporting Standards as evidence of its wider acceptance as a trusted and willing international partner in the fight against tax evasion. The Tax Information Authority in Cayman now has all the procedures in place to share tax information with the Internal Revenue Service and other financial authorities around the world, and the Cayman Islands is also engaged in an extensive legislative exercise –to create the mechanism for Cayman Islands investment funds to operate under the EU’s Alternative Investment Fund Managers Directive (AIFMD) directive.

It Really is ‘Paradise’

The headline grabbing release of the so called ‘Paradise Papers’, which was in effect the electronic hacking of client records, held by one of the major law firms based in Cayman, failed to uncover anything other than wholly legitimate business dealings between the law firm involved and the clients it serves. This was in contrast to the prior Panama Papers scandal and helped illustrate the true reality of the properly regulated offshore sector and the disconnect with the often sensational news coverage.

While successive waves of international initiatives and politically driven criticisms of offshore practices will no doubt continue, the Cayman Islands’ financial services industry has already been through enough to ensure its ongoing resilience. Cayman has not only grown more robust, but is confident that its place at the heart of the global financial system is both secure and vital.

This balancing act of meeting global standards, while remaining an attractive place for clients to do business is arguably one of the key factors behind Cayman’s relative success. The lesson here for IFCs generally may be that the ‘magic’ to success lies as much in the ability to work assiduously on getting the balance right, as it relates to technical expertise, marketing, client service, as well as political lobbying to reassure clients. One of Cayman Islands’ advantages, relative to its competitors, is that it continues to find that ‘sweet spot’ often.

Paul Byles
Paul Byles is Director of FTS, a Cayman Islands compliance and management consulting firm and founder of the Cayman Islands Financial Services Institute. He also serves as an independent director and consultant to financial services firms. He is an economist and former regulator who has worked in the offshore sector for over 25 years. He is author of the books ‘Inside Offshore’ and 'Introduction to Offshore Financial Services: A BVI text'.