The long-term stability of the Cayman Islands, coupled with its early willingness to participate in global efforts to create an international network of automatic information exchange and similar schemes, are seen as helping it to maintain its place as a top financial services jurisdiction, particularly for hedge funds. Still, it went through some lively weeks in the run-up to its general election last May, as Peter Body reveals below.
They say “June too soon” for hurricane season in the Caribbean. But at times this past May, it appeared to have arrived early in the Cayman Islands, as the country’s citizens prepared to head for the polls.
Even after the campaigning ended, votes had been cast and the polls closed, the drama continued at first, as the islands’ politicians struggled to form a coalition government that satisfied all concerned.
“The weekend of the long knives” is how some Caymanians were heard to refer to the immediate post-election period, the Cayman News Service noted, as coalitions formed and dissolved within hours.
It was only after a few false starts that, as expected, Alden McLaughlin returned as premier, his party having taken seven out of the 19 seats that had been up for grabs, and a new cabinet was assembled from a mixture of new and familiar faces.
And by early June, long-time observers said things were settling back into a routine, with few expecting any major shifts in policy.
After all, they point out, it’s Cayman’s stability over the years, with little social or racial division, that has long been one of its greatest advantages over the various other jurisdictions – both in the Caribbean and globally – that it competes with for tourists, investment, HNW residents, and the ever-important financial services sector.
(Of an annual budget approaching US$900m, more than a third is contributed by the financial services industry.)
From bankless to IFC in <60 years
In some ways it is remarkable that this tropical British Overseas Territory, tucked away in a trade winds-caressed corner of the Western Caribbean, is consistently rated among the most important financial centres in the world. As recently as 1960, for example, it didn’t have a single bank anywhere in all its 260sq km (100 sq mi).
In addition to its stability, deeply-rooted tradition of British common law, tax neutrality, and proximity to the United States – all of which are often mentioned among its other USPs – it is also not a “one trick pony”, as Rawlinson & Hunter, an international accountancy with a major outpost in the Caymans, explains in its promotional literature.
“Unlike other offshore financial centres, the Cayman Islands is in the unique position of being a top international banking centre, a leading jurisdiction for the creation and administration of trusts, the world’s leading domicile for offshore funds, the second-largest captive insurance centre and a world leader in structured finance,” R&W explains.
Caymanians point with pride in particular to the islands’ role as the domicile of some two-thirds of the world’s hedge funds, with 7,600 entities regulated there, with assets under management of US$2.3trn. More recently, it has been attracting private equity vehicles as well, which now number more than 20,000.
In the most recent edition of the Global Financial Centres Index, published in March of this year, Cayman was ranked 31st, two above Dublin, another funds industry centre, but which focuses more on EU-regulated and -compliant fund vehicles. (Cayman is more focused on the US and South American markets, although it also domiciles European funds and other vehicles.)
This is a move up of 13 places, from 44th place, from five years ago, according to Mark Yeandle, associate director of the Z/Yen Group, which carries out the GFCI research, on which the ranking is based, twice a year.
“The Cayman Islands tends to move in lockstep with the other Caribbean centres,” he notes, “mainly due to the fact that these centres are dependent on their collective reputations. If the US says they are going to get much tougher on the ‘offshore’ centres, then perceptions for the future [for all of them] go down.
“The perceptions of these centres went down after the Panama Papers news, for example.”
That the Cayman Islands has risen in the GFCI ranking reflects, he says, that the jurisdiction’s efforts to raise its game and boost its image, and make a case for using its financial services sector ahead of those of some of its rivals, is starting to be recognised by the marketplace.
One way it’s done this has been to participate actively in debates carried out on the pages of publications like The Financial Times, which is widely read by financial services executives around the world.
Cayman Islands Stock Exchange chairman and attorney Anthony Travers OBE, pictured below, is one of the jurisdiction’s most outspoken defenders in such situations, often responding feistily on behalf of his countrymen at the slightest suggestion that the Cayman Islands might be anything but squeaky clean.
A few days after the Panama Papers scandal broke in April 2016, for example, he responded to press reports of a UK politician’s warning that Britain might have to impose “direct rule” on its “tax haven” territories if they didn’t fall into line with British tax standards by noting, in a letter to the FT, that “The reason the Cayman Islands do not feature in the Panama Papers is that you would need to be unsound of mind to use the jurisdiction for any form of improper tax structuring”.
“Because the British and Cayman Islands governments have set the global standard on the issue of tax transparency, HM Revenue & Customs, the Internal Revenue Service and the tax and law enforcement authorities of all EU jurisdictions, among others, have complete and unrestricted access to all beneficial ownership information on Cayman structures,” Travers added.
Noting that unlike the Caymans, such US jurisdictions as Delaware, Wyoming and Nevada keep no beneficial ownership records at all, he concluded his letter by saying, pointedly, “It is not for no reason that the Panama Papers reveal the increasing use of US corporations”.
Low tax regime
Nevertheless, one of the difficulties for the Cayman Islands – which is also true of certain other low-tax jurisdictions – is that it isn’t possible to pretend it isn’t a low-tax regime, because it is, in that it doesn’t raise money to fund government in the same way as many G20 countries do.
There are no income taxes, no corporation taxes, nor are there any capital gains, wealth, inheritance or gift taxes; nor is there estate duty.
While this is perceived by its critics as an important attraction for companies and individuals, Caymanians argue that its image as a low tax jurisdiction is actually a “mis-characterisation” that is rooted in the fact that its tax regime, in Travers’s words, “isn’t more similar to that of, say, the US or the UK”.
In other words, instead of income and capital gains taxes, it employs instead a system of “indirect” taxation, making use of stamp duties, customs duties, business licences and various fees to raise the money it needs.
The fees include work-permit fees, paid by the island’s large expatriate workforce; transaction fees, paid by those active in the financial services sector; and fees levied on tourists who visit the islands.
“All Cayman Islands vehicles pay tax in the jurisdiction of investment, in accordance with the laws of that jurisdiction; and investors will do so in their jurisdiction of residence,” Travers told International Investment.
“This should all become blindingly obvious now that Cayman has signed up to the US Foreign Account Tax Compliance Act, the OECD’s Common Reporting Standard, and has now introduced a new beneficial ownership registry.
“What will also become apparent is that, contrary to [some critics expectations], these initiatives will not move the needle of onshore tax collection one iota. The function of the Cayman Islands as a transparent, tax neutral jurisdiction has been completely misunderstood, and ironically, these initiatives will make the mis-characterisations apparent.”
Bank numbers down
Tax haven accusations aren’t the only challenge for the Caymans, of course. Like many other offshore jurisdictions recently, for example, Cayman has seen the number of its banks drop, to 158 earlier this year, well down on the 426 that were present in 2001.
The number of active mutual funds licensed in the territory was slightly down last year, too, at 10,586.
Among the residents of Cayman, meanwhile, a few issues that have nothing to do with taxes, banking statistics, beneficial ownership or mutual funds have been attracting considerable attention in recent months – particularly among the expatriates who account for more than half of the island’s population of around 60,000. And, some sources there say, some of these issues could have implications for the islands’ financial services industry, which needs to attract and maintain the best people it can to compete globally.
Perhaps the most potentially disruptive is a package of unpopular reforms made recently by the Cayman Islands government to its pensions laws, as they pertain to expatriates.
Under the so-called National Pensions (Amendment) Law 2016, which took effect on 1 January but which isn’t yet fully in force, foreign workers with a Cayman Islands pension who move abroad from Cayman from December 2017 onwards will only be able to access their money when they reach retirement age.
Although this may not seem an unreasonable stipulation for a pension pot, it’s turned out to be highly unpopular among expatriates because it effectively prevents a portability feature that until now has allowed such foreign workers to enjoy early access to the pension savings they had built up while in Cayman, within two years of leaving the island.
The reforms have been defended on grounds that they would bring the country’s pensions regime into line with pension regulations in the rest of the developed world.
Ahead of May’s election, Cayman Islands government spokespeople stressed that the pension law reforms could change under the new administration. But Cayman Islands sources say that, given the make-up of the coalition government that was ultimately formed after the election in May, change now seems unlikely – in spite of opposition from such groups as the Cayman Islands Chamber of Commerce, the Cayman Islands Tourism Association and many if not most of the islands’ employers.
Immigration is another matter that has been the subject of some debate in the islands, with a reported backlog of more than 900 applications for permanent residence from long-term non-Caymanian residents said to be a particularly hot issue.
Some individuals have filed judicial review actions against the government, in an effort to force the process along, according to media reports.
Here again, financial industry sources have said that the government’s failure to deal with this issue has been a concern for their sectors, as many of those affected are long-term professionals who work in Caymans’ legal and accounting professions.
As in many other jurisdictions, there are issues as well about the way immigration is handled generally, and this, too, is seen as having implications for the financial services industry.
Less than two weeks after taking office for his second term as the Cayman Island government’s leader, in what was seen as a fresh acknowledgement of the importance of the issue, McLaughlin told a press conference that the territory’s immigration problems needed to be sorted out, and that he would see to it that it was done.
This story originally appeared in the July/August issue of International Investment. Additional reporting by Helen Burggraf