From obscurity to offshore giant
Part 1:The Early Years – 1960’s:The Cayman Islands: From obscurity to offshore giant
Part 2:From obscurity to offshore giant; The freewheeling 1970’s
The Cayman Islands: A decade of challenges
Part 4:The booming 1990’s
Part 5:From obscurity to offshore giant
The Cayman Islands: A decade of challenges
Financial industry professionals still used Cayman’s confidentiality law and terms like ‘tax haven’ as marketing tools, while at the same time they strived to project the jurisdiction as a legitimate offshore financial centre. Indeed,Cayman’s tax haven status and confidentiality law were seen by many as critical to the continuing success of the financial industry. Some saw nothing wrong with Cayman’s way of doing business and staunchly defended it.
In late 1980, attorneys Michael Alberga and Darryl Myers published a 60-page booklet called ‘Focus on the Cayman Islands’ as an aid for investors wishing to do business in the country.
The authors matter-of-factly noted that because of Cayman’s tax advantages, companies and trusts formed here were often used for tax avoidance. “Tax avoidance must be viewed in its proper perspective,” the authors wrote. “It is a creation of statute, pure and simple, and not a moral precept.” Banks also boasted of Cayman’s confidentiality laws.
In discussing the competitive threat posed by New York on Cayman’s financial industry, Monte Smith, then manager of the Bank of Nova Scotia, sung the praises of confidentiality in an interview with Nor’wester magazine in 1981.
“What we sell is confidentiality; they can’t match it,” he said. “I have no fear that they can sell what we, the Cayman Islands, have sold; our track record is excellent.” Even Financial Secretary Vassel Johnson, who strongly advocated the Cayman Islands becoming a legitimate financial services provider and not catering to criminals, defended the confidentiality law.Speaking at an international tax seminar in November 1981, Johnson explained why the Cayman Islands felt it necessary to enact The Confidential Relationship (Preservation) Law in 1976.
“We found that a system of confidentiality by statutory arrangement was essential for the purpose of strengthening the local operation because there were times when due to legal manipulation, foreign tax authorities could cunningly devise means of extracting the kind of information they needed,” Johnson said.
“Metropolitan countries seem to feel it is a form of dishonesty for offshore financial centres to maintain strict confidence in their financial operation, but the Cayman Islands view confidentiality differently: we treat it with kid gloves, for it is the prime support of the country, of promoting the tax haven business.”Although Johnson did not single out any particular country, the main culprit complaining about Cayman’s confidentiality laws was the United States.
The US worried that Cayman’s confidentiality laws were aiding in illegal activities, including the drug trade, something that proved at least partially warranted when Caymanian Leigh Ritch was arrested in 1986 for his role in a drug smuggling operation that included Panamanian leader Manuel Noriega.
But the United States was also looking to get into the offshore finance centre business itself in the early 1980’s, something Johnson noted in an address he made in Cayman’s Legislative Assembly in February 1981 about the future of the Cayman Islands as an offshore financial centre.
“According to New York State authorities, as from October 1981, American banks will be allowed to set up in New York special departments called international banking facilities which will be free from all major United States banking regulations and state taxes,” he said. “New York banks will then be able to compete directly with offshore banks… It is thought that the greatest aim is to repatriate business now in offshore shell operations in Caribbean islands like Bahamas and the Cayman Islands.”
Johnson warned that all offshore financial centres would face a formidable rival in New York, but said he was confident that the Cayman Islands Government, working along with the private sector, could meet the challenge.
Innovation and sophistication
Attorney Barry Smith, who arrived in Cayman from the United Kingdom in 1971, said the 1980s were a time of innovation for the financial services industry.
“To a large extent, we were responding to the needs of financial advisers elsewhere,” he said. Cayman’s investor clientele started to change, Smith said. “More institutional work started coming here. Our business was not necessarily driven by private client work anymore.”
Communications improved in the 1980s as a result of advancing technology and the advent of the facsimile machine. Desktop computers also changed the way offices were run.As Cayman’s infrastructure developed – the new airport terminal opening in 1985 – and better shops and restaurants opened, it attracted more professionals from overseas. Smith says the new influx of personnel helped support the idea that Cayman was a legitimate offshore financial centre.
“We had professionals coming from well-regulated jurisdictions,” he said. “A lot of guys had worked (in London) before coming here.” Smith said Maples and Calder recruited lawyers who had attended Oxford or Cambridge – the so-called Oxbridge attorneys – by design.
“They wanted to create the Oxbridge brand to draw clientele to the Cayman Islands,” he said. As Cayman became generally more sophisticated, it helped attract new business as well, Smith said. “It allowed us to generate our own flow of business, rather than relying on people leaving the Bahamas or Bermuda,” he said. “We started dealing with bigger financial centre jurisdictions that took themselves seriously. It gave us a fresh start in life.”
Captive insurance companies had begun setting up in Cayman from the mid-‘70s. In 1979, the Cayman Government introduced the Insurance Law, which required licensing of domestic and offshore insurance companies. The Insurance Law was implemented in June 1980 and enforced by Superintendent of Insurance, John Darwood. The new regulatory regime chased away about 200 Cayman-registered insurance companies.
Peter MacKay, who was one of the founders of Global Captive Management in 1981, said the exodus was a good thing.“It was a time when some of the independents who shouldn’t have been here were moved out,” he said, adding that some of the operators weren’t completely legitimate. “Because of the increased regulation, they decided to leave.”
MacKay praised Darwood’s efforts as the first Superintendent of Insurance. “He did a great job of regulating the industry and promoting the island,” he said, adding that Darwood travelled to conferences and in general made himself very assessable. Early in his career at Maples and Calder, attorney Timothy Ridley set up a medical malpractice captive insurance company that gave the Cayman Islands instant credibility in the industry. CRICO, as it is called, was formed for the Harvard Medical School.
“The Harvard seal of approval is about as good as it gets,” said Ridley. “It was indeed manna from heaven.” MacKay agreed that the Harvard med-mal, as it is called in the industry, helped bring a lot of captive insurance business to Cayman.
“Clients would think, ‘if it’s good enough for Harvard, it’s good enough for us’,” he said. Cayman’s first captive management company was formed by Fred Reiss, who MacKay calls the ‘Father of Captives’. Other major players in the industry like Johnson and Higgins, a subsidiary of one of the largest captive insurance company in the world, also set up operations here.
Ian Kilpatrick, who started work with the Reiss-owned Transnational Limited in 1974, said Cayman got a boost when captives moved away from the Bahamas. “They moved from the Bahamas because they imposed a one-per cent tax on premiums received, which made them uncompetitive,” he said.
Captives also came to Cayman as a result of developments in Bermuda, which Ridley said was telling groups like Harvard that their business wasn’t welcome. Harvard wanted to provide malpractice insurance not only to its employed physicians, but to credentialed doctors who used the facility, Ridley said. “That was not ok in the eyes of the Bermuda regulators, who were nervous that these physicians would sink the captives,” said Ridley, adding that the Bermuda regulators were very wrong in their assessment. “It’s a decision Bermuda is regretting to this day.”
Then developments in the United States in the mid-1980s created a hard market for insurance, which provided the impetus for rapid growth. MacKay said.“Insurance rates were going sky high,” he said. “Mission Insurance Company went bankrupt and several other large US property and casualty insurance companies went bankrupt.”
The resulting loss of insurance capacity increased demand and raised prices, encouraging organisations to seek alternative insurance solutions. The growth in captives also helped two other industries in the Cayman Islands – tourism and real estate – MacKay said. “No one else in the financial industry brings the kind of tourism captives do.” MacKay said captive groups come to the island regularly and many of the principals buy properties here.“The spin-off from captives is tremendous.” Kilpatrick agreed.
“The board meetings of the association captives and hospital groups, as well as single parent captives, result in significant spin-off to hotels, restaurants and other stores, as well as fishing and snorkelling operations. When I was at J&H in 1982, I would estimate that its captives generated more than $2m to tourism.”
Real estate soars
Although Cayman’s first big residential real estate boom started in the 1970s, the ‘80s would be the decade that introduced luxury properties to Seven Mile Beach. Prices of beachfront property along West Bay Road rose up to tenfold during the ‘80s. Real estate speculation became common.Attorney Casey Gill remembered an incident in the early 1980s where a client took an option to purchase a beach property for US$850,000. “He had made a $50,000 down payment and then another $100,000 within the month and he had nine months to close,” Gill said. “But then two guys came down and told him they wanted to pick up the option, so the price became $1.5m. “Then, before closing, they met two Canadians who took the option for $2.5m,” he said. “And this all happened within the space of 90 days.”
The severe recession in the United States between 1981 and 1982 put a halt to the real estate boom, and it wasn’t until the mid-1980s that things began to pick up again.
By the mid-80s Cayman was attracting more affluent visitors to the island and there was a need for better accommodations. The Hyatt Regency opened on West Bay Road in 1986, raising the bar on hotels and service in the Cayman Islands. The Britannia condominium project, one of the first large-scale accommodation developments not directly on the beach, also started in the 1980s. Architect Arek Joseph, whose firm Chalmers Gibbs Martin and Joseph worked on the Hyatt project, spoke about the importance of improving the tourism product for the island. “They set the standard,” he said. “The sort of people that were coming here at the time wanted better accommodations and restaurants. They wanted better hired cars; they couldn’t be rusty ones any more.” Then in 1988, the Paradise Manor hotel – which had stalled out half-way during construction as a result of the 1981/82 recession – was completed and opened as the Treasure Island Resort, with a group of US country and western performers as owners. Real estate speculators began buying condominiums built by Brian Butler, the most prolific Seven Mile Beach developer, pre-construction and selling them for significant profits even before the units were completed.
The late ‘80s also brought Cayman’s first million dollar condominiums with projects like the Great House and the Cayman Club. Although the early ‘80s recession had brought some doubts about Cayman’s real estate market, by the end of the decade, there was no question that prices were only heading upward.
A foundation for fund’s
The 1980s were also a time when offshore investment fund industry got going in Cayman.Ridley said that concerns about the Channel Islands and exchange controls, particularly prior to the 1983 elections in the UK, led to an increasing number of funds being established in the Cayman Islands. “In the early days, these were traditional open-ended mutual funds investing in bonds and equities,” he said. “There was no leverage and nothing exotic. “But these early funds certainly set the foundation for the growth that then followed.” By 1987, Ridley noted at a seminar that a substantial number of listed funds in London, New York and Chicago were in fact Cayman Islands companies.
Foreign co-operation begins
Under pressure and harassment from the United States, particularly as it related to the illegal drug trade, the Cayman Islands entered into an informal arrangement with the US Government in the early ‘80s to offer assistance in supplying information about specific Americans living or doing business in the Cayman Islands. That arrangement then led to the formal 1984 Narcotics Agreement, which allowed Cayman’s Attorney General to provide disclosure of information in circumstances where the US certified it was conducting an investigation into narcotics activities. Ridley said the agreement caused considerable concern in Cayman’s financial community because it allowed for an automatic administrative process without the possibility of judicial review. Two years later, Cayman signed the Mutual Legal Assistance Treaty with the US, which broadened the scope of information Cayman was required to provide to other criminal matters. Again, many in Cayman’s financial industry predicted doom, but it did not happen. Ridley said the signing of the agreements actually helped in three ways, including a decline in bad press about the Cayman Islands in the US; an almost complete elimination of the harassment of Cayman Islands residents visiting the US; and a reduction of pressure on the US branches of banks with a presence in the Cayman Islands.
Attorney Barry Smith says the agreements also had other benefits.“They made us aware we needed to be mindful of our image; that we needed to cooperate,” he said. “We couldn’t go through life being a pariah.” Smith said after the agreements were signed with the US, foreign investors took notice. Ridley also noted the abundance of high-quality business that came Cayman’s way as a result of the “much-needed certainty” provided by the agreements. A decade that began with strict confidentiality laws and more than a few shady investors with briefcases full of cash, ended with less confidentiality, but a higher quality of legitimate investors.
However, the Confidential Relationships (Preservation) Law was still in effect, and Ridley, speaking at a seminar in 1987, knew it could mean trouble in the future. “Confidentiality has always played an important part in the life of offshore jurisdictions such as the Cayman Islands,” he said. “Many, and I count myself as one of them, consider that this aspect has been seriously over-played and offshore jurisdictions as a whole would be well-advised, in my opinion, to soft-pedal previously much-vaunted… secrecy.”Ridley also recognised the limitations of the Mutual Legal Assistance Treaty, in particular as it related to the US Internal Revenue Service’s ability to chase American tax evaders.
“We should not be lulled into a false sense of security,” he said in 1987. His words would turn out to be prophetic.