South America and the financial industry in Cayman

 Read our article in the Cayman Financial Review Magazine, eversion 

South America has always been considered of less importance
to the world’s economy, when compared to North America, Europe or Asia. There’s always been a strong belief (acrimoniously
contested by South Americans) that “where the US goes, so will go the rest of
the Americas”. History has confirmed this trend until recently, when the
economies of certain countries like Chile, Colombia and Brazil started to show
signs that they could finally get rid of the periodic cycles of “boom and bust”
by controlling inflation, reigning in spiralling government deficits and
adopting business-friendly policies to attract long-term, as opposed to merely
speculative, foreign investments. South America is dominated by a “giant” called
Brazil, whose geographical area, population and GDP nearly equals those of all
other countries together. See Figure 1. 

However,
regional integration modelled after the European Union and NAFTA has provided
opportunities for concerted growth and has allayed fears of a Brazilian “imperialistic”
domination over the smaller economies. The countries of the so called “South
Cone”, the members of Mercosul: Argentina, Brazil, Paraguay and Uruguay, with
the addition of Chile, developed economic ties and became strong economies in
their own right. Also Bolivia, Colombia, Ecuador and Peru organised themselves
as the Andean Community and are looking to emulate the same model of regional
economic integration that brings business opportunities to all members.  

Cayman connection 

In
Cayman, business from South America has historically arrived via New York, London or Switzerland, as a spill over
of the corporate banking, Eurobond issuing and private banking provided by
those centres to their South American customers and counterparts.  

In
the early 90’s, a number of banks from Brazil, Argentina and other south
American jurisdictions opened offices in Grand Cayman, mostly because their US
regulators expressed concerns with the fact that these banks were running
Cayman operations from their New York offices. At the peak of that movement,
more than 25 South American banks operated from George Town locations. In
total, more than 60 bank licenses were held by South American banks, making it
the second largest group, after the US banks.  

That
wave of diversification of the banking business in Cayman instigated changes in
the industry’s representation by the Cayman Islands Bankers Association.
Traditionally directed by English, Canadian and American bankers, the
association elected in 1996 Juerg Kaufmann, a German-speaking Swiss as
president and a Brazilian banker, this author, as a member of the board. Two
years later I was elected to succeed Mr Kauffman as president of the entity and
had the honour and privilege of representing the almost 600 banks licensed at
that time.    

In
1998, the Cayman Islands government, in partnership with the Bankers
Association and other private sector entities, held a seminar in São Paulo
attended by more than 200 professionals of the banking and financial community.
It seemed that Cayman had found an ideal place to develop new business. 

However,
because of mergers, acquisitions and the overall re-structuring in the banking
industry, most of that South American business is now closed. Additionally,
many banks that have licenses in Cayman today run their operations from their
headquarters and don’t see the need to keep a physical presence here. However,
one accomplishment still remains, alive and well: the Memorandum of
Understanding (MOU) signed between the Cayman Islands Monetary Authority and
the Central Bank of Brazil in 1996, setting the guidelines for consolidated
banking supervision and exchange of information. That was one of the first
MOU’s signed by CIMA and showed to the world the Authority’s commitment to
proper cross border banking supervision. 
 

The
decrease in South American banking presence gave place to a new wave of
business, this time provided by the creation of mutual funds and other
investment vehicles based in Cayman to invest in the opportunities created by
the Emerging Markets of South and Central America. Again, the Cayman Islands
became the “jurisdiction of choice” for those funds thanks to the
professionalism and flexibility of our industry and regulators. That business
flourished but attracted the attention of onshore regulators and tax
authorities, that argued that some of the money being invested via Cayman and
other offshore centres was “flight capital”, money transferred offshore by
their own citizens and companies, who used the offshore funds to invest back in
the country without identification and enjoying tax breaks originally designed
to attract new foreign investors.  

As
a consequence, blacklists were enacted by authorities in Brazil, Mexico and
Venezuela to name just a few, which penalised foreign investments originating
from “low tax jurisdictions” with additional taxation of dividends and capital
gains. Needless to say that the Cayman Islands figured prominently on such
lists, despite having been removed from the OECD’s own blacklist after agreeing
to cooperate and adhere to its standards for exchange of information. 

The
existence of such blacklists was circumvented by the industry by routing
investments into emerging markets through non-listed jurisdictions like
Delaware or London. That added layers of complexity to the structures, but
avoided the penalties until the on 

shore
authorities could gather the political will to blacklist the US or the UK,
which is what Brazil did, but the country suspended its application “pending
diplomatic negotiations”. 

Present potential  

Meanwhile,
the world continued to change. Most of the jurisdictions that used to be called
“emerging markets” and were only recipients of investments in the 90’s and
early 2000’s have now their own capital to invest internationally and present
new opportunities of business for Cayman. Multinational groups originated from
companies founded decades ago in Brazil, Colombia or Argentina today are listed
on US stock exchanges and are competing and winning market share over European,
American and Asian conglomerates. Traditional US brands like Burger King and
Budweiser today belong to Brazilian investment groups.  

Asset
managers in South America are busy creating venture capital structures to
channel capital from South America to invest in other parts of the world where
the economies are depressed and good businesses can be acquired at attractive
prices. They are using Cayman as a “stepping stone” jurisdiction, where a fund
or company is set up to receive bulk investments, which are then spread and
diversified into to several other jurisdictions.  

This
practice of setting Cayman as a stepping stone can again face criticisms from
international bodies for ‘lack of business substance’, so it would be in
Cayman’s best interest to incentivise the decision-makers to relocate, by
creating immigration policies that are attractive for highest level of
professionals to live and work here.  

Opportunities, diversification and risks  

Economists
who follow the Latin American economies divide its countries in two groups: the
first group, which is strongly dependent on the US and therefore has been
suffering the effects of the US recession, comprises mostly close neighbours
like Mexico, Honduras, El Salvador, but also Venezuela, who, despite of all the
rhetoric by Hugo Chavez, is totally dependent on the US to buy its oil. The
second group, whose economies present a greater degree of independence from the
US and is taking advantage of other partners in progress like China, India and
Russia, include mostly the members of the regional alliances mentioned at the
beginning of this article.  

For
the Cayman Islands, whose economic fortune has been tied to the US for so long,
creating or strengthening ties with Brazil, Argentina, Colombia or Chile should
make great sense, as it would provide diversification to our businesses model
and protection against future crises in US and/or Europe.  

The
development of such new ties would not be without its own perils: these
countries are experiencing fast paced growth, and with that there’s always the
risk of imbalances, instability and even the formation of speculative bubbles
that can burst and wipe out entire segments of an economy. Prudence would be
even more necessary than when dealing with mature economies.  

Additionally,
the old negative image of the offshore financial industry may generate
animosity towards the use of our structures, even though Cayman has been
recognised and accepted by international organisations and entered into Tax
Information Exchange Agreements with many countries.  

Our
government and private sector may be tempted to raise the offer of entering
into TIEA’s with these jurisdictions as a way of combating such animosity, but
such a strategy must be carefully considered with all of its implications.
Having a TIEA with Cayman would be seen by many South American governments as
nothing more than a public relations stunt to intimidate their taxpayers and
investors, rather than an instrument of legitimate international cooperation.
Additionally, as mentioned before, many South American countries have enacted
blacklists that discriminate against the Cayman Islands, and it should be
unacceptable to enter into a TIEA under these conditions.  

In summary,
South America is full of potential and has great complementarity to the present
business model of Cayman. We should be heading south to capitalise on these
opportunities. 

fig 1 S
SHARE
Previous articleGrey Matters
Next articleWhither the Cayman Dollar?
Eduardo Silva

Eduardo is an experienced banking and finance professional with over 30 years’ experience of providing financial and corporate governance services to a wide variety of commercial, private wealth and investment fund clients.
 
Eduardo is the managing director of JP Management Services Limited and is a director of JP Integra Trust Company (Cayman) Limited which together provide corporate governance and trust administration services to private wealth and commercial clients. He is a senior figure in the Cayman Islands financial services sector and has served as president of the Cayman Islands Bankers Association, trustee of the Cayman Islands Private Sector Trust, chairman of Cayman Finance, Honorary Consul of Brazil and Trustee and Chairman of the Chamber Pension Fund, the largest pension fund in the Cayman Islands.
Eduardo started his banking career with Banco Itaú and Banco Crefisul in Brazil, before accumulating extensive experience in international banking and finance business as managing director of the offshore banking arm of Sul America de Seguros Group, a leading financial and insurance group in Brazil and Latin America. He has been based in the Cayman Islands since 1994 and has been a frequent speaker at conferences in Cayman and overseas, on topics related to compliance, regulation and development of the offshore financial industry.
Eduardo has a Bachelor’s Degree in Electrical Engineering and a Master of Business Administration. He is a Notary Public, holds the Accredited Director designation with the Institute of Chartered Secretaries and Administrators (Ottawa, Canada) and is a member of the Executive Committee of the Cayman Islands Directors Association.

Eduardo D’Angelo P Silva
Chairman
EDPS Consulting
P. O. Box 31093
Grand Cayman KY1-1205
Cayman Islands
 

D: +1 (345) 745-2583 | M: +1 (345) 916-1417

T: +1 (345) 943 2252 | F: +1 (345) 946 2252

Brazil +55 (11) 3197-2168

www.jpintegra.com

E: edps@jpintegra.com
W: www.jpintegra.com/
Skype: edps.cayman
LinkedIn

JP Integra Group

JP Integra Group provides a unique offering of financial, fiduciary, transaction, fund and trust administration, consultation and legal expertise to enable clients to structure and manage complex international capital holdings, foreign exchange, broking and investment projects.Governor’s Square, PO Box 10176, 23 Lime Tree Bay Ave, Grand Cayman, KY1-1002.