The Cayman Islands entered the 1970s ready to explode with growth as an offshore financial centre.
Buoyed by the passage of investment-friendly legislation, infrastructure improvements and the political instability of one of its largest offshore competitors – the Bahamas – Cayman suddenly found itself on the map of more than just scuba divers.
Following the bold steps taken in the 1960s to make Cayman more attractive as an offshore financial centre, the government continued to act; sometimes in cooperation with the British government.
A constitution, giving Cayman a degree of self-governance, was agreed with the UK and came into force in August 1972.
Truman Bodden, then a young government lawyer who served as acting attorney general during the constitution negotiations, remembered how it widened Cayman’s appeal to potential investors.
“It was difficult getting people to have confidence in three little islands in the Caribbean,” he said. “There was the stability of having Britain as the mother country, but people want to know if they go somewhere to invest, that there is a proper court system to deal with disputes.
“The 1972 constitution entrenched the Privy Council as the final appellate body, which strengthened our judiciary system in the eyes of clients.”
Cayman’s status as a British Crown Colony made investors less worried about the proximity to Cuba, still viewed warily then, Bodden said.
“The UK had responsibility for all internal and external security, so it covered our defence at the time.”
Free flowing cash
Bodden said there was concern about the exchange controls in place in the early 1970s because government permission was required to take money out of the country.
“To have banking here, we had to have free flow of money,” he said.
At the beginning of the decade, the currency in the Cayman Islands was the Jamaican dollar, which was subject to exchange control. In 1971, the Currency Law came into force leading to the creation of a Cayman Islands currency the following year.
Michael Austin, the second chartered accountant in the Cayman Islands when he arrived in 1968 to set up the office of Peat, Marwick, Mitchell & Co., spoke about the importance of the development.
“Having a Cayman currency had the same kind of effect as having our own airline,” he said, noting that it enhanced Cayman’s image as a major financial services centre.
Austin said having a Cayman dollar replace the Jamaican currency also helped investors understand that Cayman was independent of Jamaica, which had a lot of political turmoil at the time.
The Cayman dollar was first fixed to the Jamaican dollar at a one-to-one rate when it came out in May 1972. An amendment to the Currency Law in 1974 allowed the Currency Board to peg the CI dollar to the US dollar at the still-existing rate of CI$1 = US$1.20.
Bodden recalls that Financial Secretary Vassel Johnson also suspended the exchange control requirements, opening the floodgates for investment. Money, some from dubious sources, poured in from around the world.
Cayman’s secrecy laws were promoted as reason for investing in the jurisdiction. Another accountant who arrived in the late 1960s, Chris Johnson remembered why many early investors came to Cayman.
“I think in those days, it was mostly tax evasion or tax avoidance,” he said. “That was why they were here.”
Large sums of cash came in on private jets, he said.
“Money was still coming in large suitcases in the 1970s. People arriving with large amounts of money would get a police escort from the airport to the bank if they requested it.”
The laissez-faire attitude of the government attracted all sorts of characters to Cayman.
Austin also remembers the 1970s as a freewheeling era.
“It was vastly different from today,” he said. “Regulation was definitely low key and there wasn’t much in the way of know-your-customer requirements.
“You could have a secret bank account. That aspect really wasn’t frowned on then. We never had numbered accounts, but we really didn’t ask a lot of questions.”
Getting the word out
Although those in banking circles were learning about the tax benefits of incorporating in the jurisdiction, most people in the world did not know the Cayman Islands.
The government didn’t really have the mechanisms or the contacts to reach potential investors, so the private sector began promoting.
Accountant Paul Harris said US attorney Marshall Langer helped spread the word.
“He was one of the most well-known attorneys for US tax planning at the time,” he said. “He was the one who really promoted bank secrecy in those days.”
Harris made his own contributions to the promotion of the jurisdiction, travelling to Los Angeles, San Francisco, Atlanta and Miami to give seminars for lawyers and accountants about the benefits of Cayman’s financial services.
“I’d tell them that people in the Cayman Islands don’t live in thatch huts… and try to instill a sense of security about the place.”
Although he only charged $75 per person to attend the seminars, they paid off in a big way for Harris.
“I had a huge number of clients coming to the Island from those seminars for about ten years,” he said.
Harris also wrote and published the first editions of the Cayman Islands Handbook, a comprehensive guide to doing business in the jurisdiction.
“I was constantly writing letters to people explaining the same things, so I decided to put it all down in a form that I could send to everyone.”
The Doucet saga
Another key player in the promotion of Cayman was a Canadian banker from Montreal named Jean Doucet, who had learned about Cayman through Langer in 1967.
After first forming International Corp. of the Cayman Islands, later becoming known as International Bank, Doucet moved to Grand Cayman in 1968.
With office space and accommodations scarce, Doucet set up shop in a refurbished garage of a bungalow on West Bay Road where Buckingham Square now stands.
In his efforts to promote Cayman, Doucet commissioned Langer and attorney W. S. Walker to write a booklet extolling the tax benefits of Cayman.
He mailed 20,000 copies of the pamphlet to potential investors around the world. Doucet continued the practice for years and spent about $250,000 on printing and mailing it out in 1973 and 1974 alone.
Doucet also created a 35-minute film, The Cayman Islands, to promote Cayman for tourism and financial services.
Attorney Casey Gill praised Doucet’s efforts.
“He brought in a lot of business,” he said. “He helped put Cayman on the map.”
In 1970, Doucet formed Sterling Bank and Trust, which later opened a branch in London.
People saw Doucet as an innovator. His bank was the first in Cayman to bring in a computer to handle accounts; his female staff members were encouraged to wear hot pants, mini skirts and knee-high boots to work; the Interbank House featured wall-to-wall carpeting; and there was a sign on the front door that read: ‘Come in, as you are.’
Some people, like Austin, had doubts about the flamboyant Doucet’s establishments.
“I always regarded his banks with suspicion,” he said. “His girls used to dress in hot pants; he offered very high interest rates; he did all the things you don’t do as a conservative bank.”
It turned out the suspicions of Austin and others were well founded.
Cayman’s first black eye
In July, 1974, Doucet hosted about 1,000 guests at the Holiday Inn hotel, in what many considered one of the most lavish parties ever held in Cayman, to celebrate the launch of Cayman Mortgage Bank Ltd. One of that bank’s main goals was to offer home loans to Caymanians.
On 16 September, a little more than two months later, Doucet’s $50m empire collapsed because of liquidity problems.
Doucet, who left on a private jet three days earlier, went to Monaco with his wife as the first major company liquidation in Cayman began.
The failure of Doucet’s banks affected Cayman in many ways, Johnson said.
“He had well over 100 people working for him and was the largest employer on the Island after government.”
Many Caymanians also had deposits at the bank, which were immediately frozen when the doors closed.
Austin, who was appointed as one of the liquidators, said Doucet wanted to put the banks into voluntary liquidation and appointed his own liquidators from off-island.
“But Vassel Johnson said ‘you can’t have a voluntary liquidation; it’s too serious,’ so it became a compulsory liquidation.”
Austin said the liquidation was not easy.
“No insolvency laws existed in Cayman at the time, so we adopted UK insolvency laws,” he said. “But also, Sterling was not just a local bank; it had subsidiaries and all sorts of investments. It was a very complicated structure with companies all over the world.”
Johnson, who was heading up Coopers & Lybrand at that time, thinks the government should have seen the collapse of Doucet’s banks coming. Coopers & Lybrand had been hired as auditors for the banks the previous year.
“I gave them a qualified audit report and we were subsequently fired,” said Johnson. “This was basically telling the government to close the bank down, but they didn’t do it.
“Mr Doucet’s problem was he was investing in long-term assets and he had short-term deposits,” he said. “Then there was a recession around 1973 and people started taking their money out. He ended up selling clients’ gold to shore the bank up.
“I don’t think he had any intentions of ripping anyone off, but he had his back to the wall and he used someone else’s assets.
“He had good intentions, and he did a lot of good things for the Island.”
Doucet was extradited from Monaco in May 1975, and after a six-week trial in December, he was convicted of 13 charges of fraudulent conversion and sentenced to nine months imprisonment.
Though many in the community had lost savings in Doucet’s banks, he still had supporters.
“He was such a good client of Grand Old House, they used to serve him his meals in jail,” said. Johnson.
Gill, who helped defend Doucet, said many people still liked him.
“Even when he was in jail, he was getting a lot of high-profile visitors, including some from government on a regular basis,” he said.
When he was released from jail in June 1976, his sentence reduced by one-third for good behaviour, a much thinner Doucet took a final tour of Cayman and then boarded a flight to Miami en route to Montreal.
He never returned.
The public/private partnership
In early 1974, a large conference on the financial services industry took place in Cayman.
Governor Kenneth Crook spoke about developing a policy to ensure Cayman’s growth as a responsible financial centre, not one for disreputable or even criminal activities.
“In this policy, we will seek to convert the concept of tax haven into that of a purely financial centre,” he said, “and we must institute and keep under continuous review, the sort of control, which is necessary, if we are to attract the right people and maintain the Islands’ position.”
Vassel Johnson agreed with the plan to develop Cayman’s financial industry with long-term benefits in mind and he stressed the need for a partnership between government and the financial sector.
Austin, who gave the opening address to that conference in 1974, believes it was the effectiveness of that public/private partnership that allowed Cayman to become a major force in the world’s financial services sector.
“The whole financial industry was established on a hugely friendly relationship between the government and the private sector,” he said. “That was the whole key for the financial industry really taking off in the 1970s.”
Bodden, who served in the civil service, in the private sector and as a member of the elected government, said there was truly a consultative approach.
“People like Sir Vassel and Mr Jim [Bodden] appreciated the importance of consulting with the private sector,” he said. “In those days, we worked with the private sector. We sat down with them and asked advice; and a lot of the time, we followed it.”
In 1975, under the guidance of Vassel Johnson, the Financial Community Committee – which became known as FINCOCO – formed to help advise government on matters affecting Cayman’s financial services sector.
“It was the original liaison between the financial sector and government,” said Austin. “It was quite active, meeting at least once a fortnight. It was very useful in recommending legislation and refinements to the financial industry.”
Chris Johnson agreed that there was more cooperation between government and the financial community in the 1970s. “You could get things done a lot quicker then and with less red tape,” he said. “There was a great deal of cooperation from all politicians and government.
“There was tremendous enthusiasm within the financial community to put Cayman on the map,” he said. “There was a spirit of cooperation.”
The need for regulation
As Cayman grew, governments around the world started to take notice. What they noticed most were some of what Governor Crook had termed “disreputable, even criminal, activities”.
The Cayman Islands Government started a programme of damage control. At the Offshore Financial Centres Conference in Nassau, Bahamas, in November 1975, Vassel Johnson tried to assure attendees Cayman was a responsible jurisdiction.
“The Cayman Islands have never attempted to introduce legislation to attract the sort of business from highly-taxed countries, which would tend to promote the local economy at the expense of foreign tax evasion, as we think this is unethical,” he said.
The US wasn’t buying it. Just two months after Johnson’s address in the Bahamas, Antony Field, the managing director of Castle Bank and Trust (Cayman) Ltd, was served a subpoena when he arrived at Miami International Airport. Field was directed to appear before a Florida grand jury and reveal information about Cayman bank clients. He refused and was threatened with a jail sentence in Florida.
Field argued that, if he were to reveal information about Cayman banking activities, he would breach confidentiality laws in the Cayman Islands and he was, therefore, protected by the provisions against self-incrimination in the Fifth Amendment to the US Constitution.
In refusing Field’s defence, the judge said: “In a world where commercial transactions are international… conflicts are inevitable”.
The Cayman Government responded a few months later by passing The Confidential Relationships (Preservation) Law, which strengthened banking secrecy in the Cayman Islands. It also legislated against disclosing confidential information outside Cayman.
The act of defiance did not last long. Three years later, the government passed an amendment to that law to facilitate disclosure of confidential information in certain circumstances.
As the freewheeling 1970s approached closure, most people knew changes were coming.
“We knew money laundering was going on,” said Chris Johnson. “We wanted to improve our image.
“We were taking a closer look at regulation. Cayman was becoming an alternative to Bermuda at the time for the captive-insurance industry and it was felt insurance companies should be regulated.”
The government passed the Insurance Law in 1979, which regulated the entire insurance industry. While not as burdensome as laws in Bermuda, it sent a message Cayman wanted to do things responsibly.