There has been a great deal of attention focused on the Cayman Islands these past few months, more so than usual. Much of the debate as to what to do about the so called ‘tax havens’ has ranged from the White House, the G8 and the G20 to the Organisation for Economic Co-operation and Development. Whilst the unprecedented global economic crisis has generated what appears to be the ‘perfect storm’ for the offshore financial centres, it is unfortunate that, perhaps for political reasons, no distinction seems to be made for those well regulated offshore jurisdictions.
What may even be more indicative of a political bias is that there has been little said to address the real identified factors behind the crisis. As a result, the Cayman Islands Government was forced to feverishly fight being ‘grey-listed’ by the OECD. Cayman however, on the signing of its twelfth Tax Information Exchange Agreement with New Zealand in August, was placed on the white list.
The current efforts of the EU and the US against the so called ‘tax havens’ and businesses established offshore, particularly those that are based in well run and well regulated offshore jurisdictions, seem to require thwarting capitalism and fair market trade in the private sector, especially onshore. The level of backlash to the draft EU Directive for Alternative Investment Fund Managers, designed to further regulate alternative investments, should have been perhaps therefore anticipated, as the Directive seems to run contrary to capitalism and fair market trade.
The EU Commissioner for Internal Market and Services Charlie McCreevy admitted that most commentators agree that alternative investments were not the primary cause of the financial crisis but stated publicly that there has been ‘strong political pressure’ for more regulation. Such a confession should be of concern to all in the global market. The Financial News1 reported that some of Europe’s leading institutional investors said they will oppose the draft Directive as it is imposing yet another burden. At the forefront of the battle against the Directive, is the Alternative Investment Management Association, whose membership will be affected most. AIMA has launched a major campaign against the Directive that, it has warned, could potentially have devastating consequences for Europe’s pension fund industry which could lose up to €25bn a year if the Directive was implemented in its current form.
Earlier this summer the International Fund Investment’s research department3 interviewed UK based alternative fund managers and their consultants as well as institutional investors and family offices to get their views on domiciliation on the heels of the Directive and the recent income tax increases. Ultimately, when asked if they will relocate their funds as a result of the Directive, most interviewed indicated that it is the rules, resources, reputation and regulatory infrastructure that are the critical factors in domicile satisfaction – not so much that they are in the EU.
Cayman currently hosts 80 per cent of the world’s hedge funds. The fact that the Cayman Islands has as strong an infrastructure to support the investment fund industry as most onshore jurisdictions, has kept the Cayman Islands at the pinnacle of success in the hedge fund industry to date. It might prove to be a critical factor to enable it to weather the storm.
When asked to rate the service they receive from their offshore service providers, the report showed that auditors came top, lawyers came second and administrators came last. The fact that the Cayman Islands continues to host almost all of the top accounting firms and more leading law firms than most of its competitor offshore jurisdictions allows Cayman to continue to be favourably viewed for domiciliation of funds.
Whilst the research was geared mostly to investment managers and their own domiciliation, the statistics and overall information that the report generated was quite enlightening. Some 84 per cent view the current draft Directive as negative to the industry and managers and advisers alike were ‘unremittingly hostile’. The prediction by most in the industry particularly in the UK is that, if the Directive goes through anywhere near its current form, the migration out of the UK and out of the EU will be almost certain.
Only 22 per cent of managers ruled out leaving the UK if the Directive is not substantially amended. But whilst many are predicted to launch new funds in the EU moving forward, most managers will, it is predicted, keep their current offshore fund structures. The EU Funds will be additional and will mirror the offshore structures. The fund managers have made the point that EU based funds will be ‘expensive and time consuming’ and most predict the failure of the draft Directive. If it goes through, regardless of its objective, it seems clear that it will deal a lethal blow to the European fund managers and the industry.
Any relocation of the funds themselves to Europe as a result of the draft Directive is not one that most are willing to make. Most who have worked in the industry believe the move will mean being forced to work in a jurisdiction that is less user friendly, has less efficiency, less flexibility and higher set up costs and overall expenses than setting up in the Cayman Islands. This also applies to the more likely jurisdictions that they will consider, if they are forced to relocate, such as Ireland and Luxembourg.
In the meantime, much will depend on proactive measures to ensure that the Cayman Islands remains a key player in the industry. At a Chamber of Commerce luncheon held in July McKeeva Bush, the Leader of Government Business for the Cayman Islands, announced that the Cayman Islands Government was “seeking legislative support to encourage fund managers to physically set up operations in Cayman.” Mr. Bush continued: “To this end, I will shortly announce a working group to produce a comprehensive strategy for attracting these fund managers here. I also intend setting up a similar group to encourage international businesses to establish a physical presence locally.” This is heartening and encouraging news as it shows a willingness to continue to evolve to meet the market conditions, although this also seems to require a paradigm shift in local policies including Cayman’s Immigration laws and policies.
It is imperative that other key stakeholders in the global industry also speak up and underscore the importance of the role that the well regulated low-tax jurisdictions, such as the Cayman Islands, play for the continued welfare of the industry as a whole. Richard Baron, the Head of Taxation at the Institute of Directors for instance commented, “There are some bad jurisdictions, which facilitate tax evasion or worse crimes. But we must also recognise that low-tax jurisdictions can oil the wheels of commerce. It is perfectly reasonable for other states to act to protect their tax revenues, but they must be careful not to throw grit into the mechanism.”
An article published on Step.org, written by Jason Sharmon , author of “Behind the Corporate Veil: A Participant Study of Financial Anonymity and Crime” detailed a study to determine which countries were more rigorous or lax in applying international rules of due diligence for corporate vehicles as well as opening of bank accounts. The study brought home what those of us who work in the industry in Cayman have long known: “On average the US and the UK have a worse record of compliance than the offshore financial centres… Corporate service providers in jurisdictions like…[the] Cayman Islands… were punctilious in their customer due diligence.”
Mr. Sharmon summarises the political nature of the assessment made by the OECD and G20 in stating, “the G20 and OECD have fixated on the problem of willingness to exchange financial information between countries. This ignores the prior issue that unless countries enforce the obligation to collect information on those entering the financial system, there will simply be no information to exchange. It is hardly credible to say that major OECD centres lack the means to enforce the ‘know your customer’ standards they have designed, committed to and imposed on others. Instead, it seems that these countries have simply chosen not to comply with important international benchmarks…”
The recent significant income tax increase in the UK has caused concern with almost all fund managers (94 per cent). Most London based fund managers have said that they would consider having an additional office elsewhere as a result of the tax increase. The tax increase might be the last straw for fund managers in the UK. It was commented that because of the high income and capital taxes, legitimate tax planning and offshore structures have increased and will continue to increase. This again, might be good news for the Cayman Islands, which may prove to be a benefactor.
For the Cayman Islands, however, the task of finding a level playing field to stand up and defend itself has always been a tall order. This time around it seems that Cayman might have allies in the private sectors onshore, which have quickly surmised that everyone’s bottom dollar is at risk with the implementation of the Directive and the general attack on the offshore centres.
This is the shorter version of an article published under the same title.