Fourth Quarter 2012

Read the article in the Cayman Financial Review Magazine 

Politics & Government

No confidence vote against government successful

Following the arrest of Premier McKeeva Bush on 11 December on suspicion of theft in connection with the alleged misuse of a government credit card, as well as breach of trust, abuse of office and conflict of interest under the Anti-Corruption Law 2008, and his subsequent release on bail until February, the PPM opposition called for his resignation.

A defiant Bush, refusing to step down as premier during the course of the investigation, also lost the support of his own United Democratic Party Cabinet members.

On 18 December both government and opposition members of the Legislative Assembly brought a no confidence motion against the government which was adopted with 11 votes in favour, 3 against and Bush abstaining.

The three Cabinet ministers who voted against the motion, left the government, leaving Cayman with a five person minority government, sanctioned by the governor. The minority government is led by new Premier Juliana O’Connor-Connolly.

Coalition for Cayman

A public interest group formed ahead of the 2013 general election – known as the Coalition for Cayman – launched its plans to redraw the face of politics. The organisation announced an executive committee charged with managing the group’s organisational structure and creating by-laws, but it did not name any individual candidates it would be supporting in the next election. The group will not field any candidates, but instead identify, support and endorse independent nominees to run for election.

C4C blames the political party system for the country’s economic woes and says a push for the “right” independent candidates will transform Cayman into a place of propriety, innovation and transparency.

During the last election only one independent candidate successfully won a seat in the Legislative Assembly. According to independent candidates the poor showing was due to a lack of monetary resources compared with the United Democratic Party and the People’s Progressive Movement.

However, three and a half years later the Coalition has been set up in reaction to what it perceives as the frustration of the people of Cayman with “party politics, government overspending, debt, crime and economic uncertainty”.

The Coalition for Cayman says it now plans to ensure the next leaders to be elected in Cayman are “honest, proven, independent” individuals who put Cayman before all other interests, adhering to the group’s slogan “Country First”.

Framework for Fiscal Responsibility

Prior to his ouster as premier, Bush presented a revised amendment bill to the house that incorporated most of the provisions set out in the Framework for Fiscal Responsibility signed in 2011.

The framework agreement requires certain procedures for financial management, public borrowing and public project bidding processes to be followed by the Cayman Islands government. The fiscal framework document also requires Cayman to get its budget back into line with responsible financial management guidelines contained in the territory’s Public Management and Finance Law by the end of the 2015/16 budget year.

At the time of the signing, the UK Foreign and Commonwealth Office required that the document be passed into law by September. This did not happen in time due to protracted budget negotiations last year.

The initial amendment bill presented by the government to the Legislative Assembly did not follow all of the dictates in the original framework document and invented some new provisions including one that required the UK to compensate Cayman for any reputational or financial damage that occurred because of the framework’s implementation.

However, following a warning by the UK Overseas Territories Minister Mark Simmonds that the Framework for Fiscal Responsibility would have to be passed into local legislation in the same form it was signed in 2011, the Legislative Assembly passed a bill that attached the complete Framework agreement as a schedule.

Data Protection Draft Bill

A Data Protection Draft Bill 2011 was released for public review until 2 November 2012. The bill is similar to legislation approved by the European Union and the United Kingdom in the 1990s, which seeks to regulate the processing of personal data to ensure those records are maintained fairly, accurately and kept from those with no right to see them.

The complex draft bill seeks to strike a balance between the needs of personal privacy protection, the rights of individuals with regards to the types of records government or organisations maintain on them and the rights and responsibilities of certain organisations that may use that data for specific purposes.

The proposal also has major implications for the territory’s Freedom of Information Law and how journalists, writers and artists can make use of personal information.

Data protection is aimed principally at giving effect to the rights to privacy in relation to data while ensuring that certain exceptions are allowed.

There is no timeline for the bill to come before the Legislative Assembly. It is likely that the public sector will adopt the tenets of the bill first, if it is passed into law. Private sector businesses might not see the results of the legal changes until around 2015. 

Foreign Account Tax Compliance Act

The US Department of Treasury announced it is actively engaged in a dialogue towards concluding intergovernmental agreements for the implementation of FATCA with the Cayman Islands and 15 other countries. The negotiations are expected to be finalised in 2013 with more jurisdictions having already expressed an interest in this form of FATCA implementation.

Four countries – the UK, Denmark, Mexico and Spain – have already agreed to follow the Model I intergovernmental agreement (IGA), according to which foreign financial institutions do not have to enter into an agreement with the US government. Instead financial institutions will follow domestic law and the required reporting will be done through their own government. In contrast, the Model II IGA requires foreign financial institutions to report directly to the IRS, but they do not have to conclude an FFI agreement, which is required when no IGA is in place.

Given that other offshore financial centres have indicated that they are close to completing an IGA with the US, competitive pressure on Cayman will mean that the conclusion of an IGA is likely. Because the Model II IGA places a lesser administrative burden on governments, for example a potentially expensive government reporting is not needed, it is expected that the Cayman Islands government is negotiating this type of agreement.

Economy & Development

Future of Cayman Forum
23 November 2012

The Future of Cayman Forum, which is part of the cooperation between the Cayman Islands Chamber of Commerce and government launched in 2010, focused on building a smarter infrastructure and developing talent, two of the five economic drivers identified by the Forum.

The other three economic drivers are creating a business friendly climate, enhancing the quality of life and diversifying the economy.

Conference participants noted that several infrastructure projects continue to languish in uncertainty despite several false starts as well as the lack of an overall national policy, for example on waste management, meaning that individual proposals are considered without a framework. In contrast, other areas where such a policy exists, such as the National Energy Policy, which is still being formed, were mentioned as a positive example for the way forward.

It could also serve as the model for public-private sector cooperation in the development for a National Infrastructure Plan, similar to the one released by the UK in 2011. Such a plan could help identify needs and coordinate the development of the necessary infrastructure.

It would also be needed to deal with the potential strain on infrastructure, potentially resulting from the many ad hoc projects (eg the Shetty Hospital) that are currently proposed.

Shetty Hospital

The site of the proposed Shetty hospital development project in Grand Cayman is now subject to three separate planned area development applications.

Health City Cayman Islands submitted its planned area development application to build a hospital, hotel and medical and nursing schools on 50 acres of land in the High Rock area of East End. Health City Development Limited submitted another application for an adjoining 50 acres for another hotel, commercial and retail areas, apartments and homes, assisted living accommodation and restaurants. City Services (Cayman) Limited, run by developer Joe Imparato, lodged an application for a 132-acre community surrounding the hospital, which includes hotels, residential areas, commercial buildings, retail outlets, restaurants and civic buildings. For the latter project, site preparation and road infrastructure work could begin early this year, according to the developer.

The Health City Cayman Islands plans call for a 150-bed cardiac and orthopaedic hospital to be built from 2012 to 2013; a 360-bed facility for other specialties, as well as medical and nursing schools for 2,000 nurses and 1,000 students, and a 300-room hotel to be built from 2014 to 2016; a transplant facility with 500 beds to be built from 2017 to 2019; and a further expansion of 1,000 beds from 2020 to 2030.

The Health City Development plans call for 150,000 square feet to be built from 2014 to 2016 (residential, office, retail, restaurant, shopping centre and saltwater air-conditioning plant); 300,000 square feet to be built from 2016 to 2018 (retail, office, assisted living, residential, park); 380,000 square feet to be built from 2018 to 2021 (residential, offices, retail, apartments); and 500,000 square feet to be built from 2021 to 2023 (retail, residential, homes, hotel, condominium). 

The Health City Development group is a joint venture, owned 70 per cent by Ascension Health Alliance of St. Louis, Missouri, and 30 per cent by Dr. Shetty’s interests. Dr. Shetty’s local partners include Gene Thompson and Harry Chandi.

The Shetty group has options to purchase more land at the 600-acre site at High Rock. Eventually, the facility would grow to be a $2 billion, 2,000-bed hospital over the next 15 years, the developers have said.

Cruise ship facilities

UK Overseas Territories Minister Mark Simmonds said he would not allow the Cayman government to proceed with the procurement of the new cruise ship terminal “unless the proper procedures have been followed”. He advised the government that if it pushed on with its plans regardless, he would have no other option but to ask the secretary of state to instruct the governor to reject the proposals.

The Cayman Islands government is in talks with China Harbour Engineering Company to expand cruise ship facilities in Grand Cayman. However, both Simmonds and his predecessor Henry Bellingham raised the concerns over the cruise ship project procurement a number of times in meetings and in correspondence with Premier Bush over the past year.

The Ritz-Carlton, Grand Cayman 

letters-of-RitzRitz-DB

In October, The Ritz-Carlton, Grand Cayman was sold for US$177.5 million at a public auction to the property’s secured lender RC Cayman Holdings LLC. The new owner RC Cayman is an affiliate of Five Mile Capital Partners LLC, an alternative investment and asset management company based in Stamford, Connecticut, that has more than US$2 billion in equity, including close to US$1 billion in funds invested in the hospitality sector, primarily in the US, Mexico and Caribbean.

In March, RC Cayman filed a writ demanding the immediate repayment of nearly US$234 million from Ritz developer Michael Ryan, and appointed Kris Beighton and Keith Blake of KPMG as joint receivers of companies, formerly controlled by Ryan, that were behind the development and ownership of the Ritz.

With the auction RC Cayman sought to recover some of the money owed. An initial reserve price for the auction of US$240 million was later lowered it to US$177.5 million.

The property was sold as a block and includes the 136-acre resort, the nine hole Blue Tip golf course and future development land. Along with the property, the sale included the transfer of the long-term management contract of The Ritz-Carlton Hotel Company of the Cayman Islands Ltd, which lasts for about 20 more years.

Financial Industry

Mourant Ozannes Trust and Private Client Conference
5 October 2012

The trust concept will remain an important tool in the offshore world despite existing criticisms, according to the Chief Justice of the Cayman Islands Anthony Smellie. Speaking at the conference, he noted the flexibility of the trust concept has over time led to the modernisation of trust law, particularly in international financial centres, and new forms, such as non-charitable purpose trusts, ie STAR trusts.

This development in turn has given rise to a new debate about whether the core concept of the trust has been left too far behind in response to commercial demands, the chief justice said.

“But at the end of that debate what matters most is certainty … in the application of the legal principle and confidence in the infrastructure of the court system in the Cayman Islands. These are key to the continuing success of the jurisdiction. 

“In the same way that confidence in legislative developments such as STAR, is strengthened by mature debate and careful deliberation, the credibility, durability and strength of the trust concept is further supported by its frequent examination and the application by the Cayman Islands Courts of the principles of equity and of precedent-based case law,” he added.

He noted there is a “fine balance between, on the one hand, individuals who may wish to protect their assets legitimately or who may seek to minimise their tax bills in compliance with their local tax laws, and, on the other, creditors, including government revenue agencies, who wish to recover debts or revenues owed to them and, of course, the obligation to co-operate in the fight against international crime.”

The balancing act also extends to the concept of confidentiality, which is not absolute but subject to numerous exceptions in line with the Cayman Islands’ international obligations in relation to the investigation of criminal offences, tax information exchange, regulatory matters and the vindication of rights in civil proceedings. 

Anti Money Laundering, Compliance and Financial Crime Conference
11-12 October 2012

Under the theme “Navigating the Minefield of Responsibility” the event highlighted the ever increasing obligations placed upon the financial services industry. Reflecting the diversity of the challenge the conference covered the Foreign Account Tax Compliance Act, anti-money laundering, internal audits, compliance and anti-corruption legislation.

As typical for this event, a number of presentations explored compliance issues not only from a high level theoretical perspective but also from the point of view and motivation of the money launderer/ white collar criminal.

Cayman Alternative Investment Summit
1-2 November 2012

At the inaugural summit, Grand Cayman senior executives from the funds industry debated how the industry can retain its X factor in spite of the increasing institutionalisation of the industry in response to a changing investor base towards pension funds and other large investors.

Although institutionalisation has brought more capital and professionalism to the industry, it is potentially a threat to the innovation and entrepreneurial nature of hedge funds. Because pension funds and endowments are less willing to accept risk and volatility than high net worth individuals, most funds have to conform with strategies that offer lower volatility and provide greater loss protection, panellists said.

At the same time this requires institutional infrastructure on behalf of managers and results in a barrier of entry. Yet strategies that do not fit neatly into the boxes, demanded by some institutional investors, are often the ones that have better performance and also offer the benefits of lower correlation, delegates heard. In terms of performance smaller and younger is statistically better than larger and more established.

Panellists noted that absolute return does not mean positive, uncorrelated return in any market environment and acknowledged that this stands in contrast to how funds were sold in the past.

To restore the trust of investors, managers need to communicate, engage and deliver investment solutions based on a detailed understanding of the client’s needs in the form of a “solutions alpha” rather than a “product alpha”.

In addition, fee structures need to be designed in such a way that the interests of managers and investors are aligned.

Campbells Fund Focus
16 November 2012

The Campbells Cayman Fund Focus investigated prevailing fund governance issues in a number of panels based on a case study. It also featured a discussion of the future of Cayman’s hedge fund industry, which found that Cayman’s hedge fund product, in terms of legislation and regulation, will continue to be superior and that Cayman’s reputation as the number one jurisdiction for hedge funds is intact.

However, the ability of the service industry to hedge funds to attract and retain talent is threatened, panellists said. In particular the Cayman Islands fund administration sector has seen business shift to onshore jurisdictions such as Canada or Ireland with lower labour costs and better access to skilled labour. Outsourcing solutions with places like India have also taken hold, forcing businesses to consider moving jobs abroad.

Given that Cayman does not have the labour force to compete in the volume business, the industry has to find a niche area to capitalise on the well-established, highly skilled individuals who are based in Cayman, panellists said. In order to attract and retain the right talent, the needs of the industry have to be aligned with immigration and labour policies that fit Cayman as a whole. 

Cayman Captive Forum
27-29 November 2012

At the Cayman Captive Forum, Cayman’s largest conference with more than 1,200 delegates, Gordon Rowell the head of Insurance at the Cayman Islands Monetary Authority said despite the uncertain economic situation it had been “a really good year” for captives.

CIMA received 60 licence applications in 2012, double the number of previous years. Yet, in order to return to the peak of the captive formations with 90 to 100 in a year, a tightening in the market is needed but not immediately expected.

As of 31 October there were 737 captive insurance companies registered in Cayman with US$88.1 billion in assets and US$11.8 billion in premiums written.

Rowell said it is time for captive directors to focus a lot more on the asset side, because asset risk is becoming problematic in a low interest rate environment.
 

 

FourthSm

McKeeva Bush; Juliana O’Connor-Connolly, JP
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Richard W. Rahn

Richard W. Rahn is Chairman of Improbable Success Productions, Chairman of the Institute for Global Economic Growth, and a former Member of the Board (2002-08) of the Cayman Islands Monetary Authority.

Richard W. Rahn, Ph.D.
Chairman
Institute for Global Economic Growth
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