Cayman Islands constitutional reform: A time for rebirth amidst the perfect financial storm?

Emerging as one of the leaders in the global financial offshore industry was no accident for the Cayman Islands. In fact, such good fortune was crafted from a very strategic union between private sector innovators and public sector movers and shakers at a time when all the Cayman Islands needed was an opportunity to grow.

Recognising that the perfect formula included the right good governance model and a vibrant public service, Paul Harris, in his recent CFR article entitled “Effective regulation, expertise, and stability put Cayman ahead1″ noted the key main factors that contributed to Cayman’s success included that “…Cayman is a UK overseas territory, which up until now at least, has provided a sense of security and stability for investors” and that “…the Cayman government has provided a legal and regulatory framework that has allowed the industry to develop and maintain itself…”.

The renaissance of the Cayman Islands was hailed to have occurred in the 1970s when the sleepy Caribbean islands began to feature in the world economic stage. It is perhaps serendipitous that it was also at this time, that the islands underwent significant constitutional reform after a decade of deciding where it stood in the Caribbean community: would it join other territories and become independent or would it continue to be a UK overseas territory.

By the mid 1960s Cayman made its decision – to pursue a path of internal self government as a UK overseas territory. Hence, the necessary steps began to enable the islands to function within the framework of a more modern democratic system.

The year 1972 saw the completion of this transformation, with the introduction of a new constitution. For all intents and purposes this was extremely timely as the introduction of a modern political infrastructure would only serve to improve Cayman’s image in the eyes of foreign investors as a modern stable place to do business.

The relevance of the 1972 constitutional reform to Cayman’s ‘economic miracle’ meant that in marketing the Islands as a desirable financial offshore destination, key selling points would have included that the Cayman Islands through its constitutional arrangement with the United Kingdom afforded a mixture of internal self-governance and external oversight through the islands’ alignment with one of the world’s oldest super powers, the United Kingdom.

Today, however, the benefits of constitutional reform are less apparent amidst the hurricane of financial turmoil that has engulfed these small islands. For the first time, this tri-island jurisdiction is caught in the perfect storm: international pressure to change the way Cayman conducts its financial offshore industry, a hard hitting global recession and the corresponding threat of domestic bankruptcy.

On the eve of going through all of these events, the islands are also poised to introduce a new constitution before the end of November 2009. Is this irrelevant to Cayman’s present situation or can it be seen as another sign of rebirth for the Cayman Islands and a perfect opportunity for it to reinvent itself?

The Cayman Islands Constitution Order 2009 – an opportunity to reinvent oneself
 
The Office of the Minister of Finance

With the advent of the new Cayman Islands Constitution Order, 2009 new reforms in Cayman’s governance structure may place the islands in an advantageous position politically as it embarks in an aggressive fight to keep its proverbial head above water.

Two new key constitutional reforms that may be of immediate benefit to the islands political and financial leaders are the new financial regime and the increased international personality that will be bestowed upon the political leaders.

Departing from a system whereby a non-elected representative of Cabinet, namely, the Financial Secretary is charged with the country’s finances, the new constitution will now place this responsibility in the hands of an elected Minister of Finance2.

It is hoped that this change in regime would allow the financial vision of the islands to be seamless from conception to implementation because it is represented through one group, the political policy makers that represent the views of stakeholders within the country.

Through the implementation of new government policies under the auspices of the Minister of Finance, Cayman can look forward to seeing government support the financial industry in new and innovative ways.

In preparing for this change, steps are already being taken under the direction of McKeeva Bush, the Premier Designate and future Minister of Finance, to reorganise how government partners with the financial services industry. And under the present administration, this will certainly allow the United Democratic Party government to follow through on their policy initiatives to put in place:

  • a fully functional Financial Services Secretariat to support the Minister with responsibility for the financial services industry
  • a properly funded local and international marketing promotional programme for the financial services industry;
  • new measures to encourage international business to establish physical offices and headquarters in the Cayman Islands.

Likewise from a public finance perspective, the Minister of Finance will also be constitutionally responsible for managing this area. Therefore, new relationships would have to be forged with the private sector to determine the extent to which government provides public services to the financial services industry and to what extent the industry pays for such services and supports the wider economic base whilst remaining a leading competitor within the global financial industry.
 
Ministerial delegation in matters of external affair

On a separate front, the constitutional delegation of certain aspects of external affairs may also be extremely important to Cayman’s financial future. As a player in the global financial market it is extremely important for the Cayman Islands to be able to represent itself politically in the international platform.

On a separate front, the constitutional delegation of certain aspects of external affairs may also be extremely important to Cayman’s financial future. As a player in the global financial market it is extremely important for the Cayman Islands to be able to represent itself politically in the international platform.

The last 37 years have seen a dramatic change in the way the world viewed the concepts of tax evasion, tax avoidance and mitigation. As a small jurisdiction, an overseas territory and a non member to international tax conventions, the financial services industry in the Cayman Islands has faced a number of challenges as it tried to maintain its image as a legitimate competitor of global financial services in a level playing field whilst having no international voice to make these representations.

In its own publication dated 2 September 2009 entitled “OECD Global Forum consolidates tax evasion revolution in advance of Pittsburgh”, the OECD reported the views of its Secretary General Angel Gurria that the work of the OECD was “… nothing short of a revolution”. The focus of the forum outlined four major initiatives, namely:

to strengthen its teeth by putting in place robust, comprehensive and global monitoring to ensure members implement their commitments through a peer review, with the first report being issued the end of 2009;

  • to extend its global reach by expanding its membership and to enshrine that all members enjoy equal footing;
  • to ensure faster agreements by speeding up the process of negotiating and concluding exchange agreements including exploring new multi lateral avenues; and
  • to develop country assistance by putting in place a coordinated technical assistance programme to assist smaller jurisdictions to implement the standards rapidly.

It is perhaps as this juncture where the OECD views its work as being “nothing short of a revolution” that the Cayman Islands must secure its position to represent itself to ensure that its interests are protected and that it may engage the OECD on a level playing field.

Up until now, constitutionally, the area of external affairs was the sole domain of the Governor, Her Majesty’s local representative on island whose primary constitutional responsibility is to administer the islands on her behalf. However, with the advent of the new constitution, Cayman can look forward to locally elected representatives becoming increasingly involved in the external affairs of the islands.

Unlike the present constitution, section 55 of the new constitution will require the Governor to assign/delegate responsibility for the conduct of external affairs insofar as they relate to any matter falling within the portfolios of Ministers. Some of the areas listed in the new constitution include:

  • the Caribbean community and Caribbean associations including the United Nations Economic Commission for Latin America and the Caribbean;
  • other Caribbean regional affairs relating specifically to issues that are of interest to or affecting the Cayman Islands;
  • tourism and tourism related matters;
  • taxation and the regulation of finance and financial services; and European matters directly affecting the Cayman Islands.

Whilst the exercise of these new constitutional responsibilities will in some instances require the involvement of the UK Secretary of State, they may nonetheless be viewed as an important development in Cayman’s ability to market and represent itself and be its biggest advocate.

A good governance model

As for the remaining constitutional reforms, they largely address new roles and responsibilities, checks and balances to ensure that the Cayman Islands can continue to emerge as a modern democratic society. Areas of reform largely cover the introduction of a Bill of Rights, Freedom and Responsibilities, the establishment of a number of constitutional institutions that support the democratic system in the islands, the independence of the judiciary and the enhancement of internal self governance measures within the legislature and the executive.

These elements of stability that are embedded in Cayman’s constitution promote actual stability, good governance and the rule of law in the islands. For the investor, this is just as important as the financial services themselves as it gives them peace of mind that their funds are safe and that they do not have to deal with complex problems that national unrest or official corruption brings.

Although, it is possible to see the potential the new constitution brings to the world of financial services, it is perhaps too early to completely gauge the extent to which it will help Cayman to successfully navigate its way out of the perfect financial storm.

 

 

 

 

 

 

 

Leg-Assm-Building

Legislative Assembly,