Further changes need further consideration

Given the intense political grandstanding that surrounded the G8 Summit in June, the likely benefit and cost of implementation of the various measures described was understandably hard to discern. “All jurisdictions should take part in the initiative to stop tax evasion,” said Chancellor George Osborne. 

I am determined that tax that is owed must be paid. We all agree on the importance of collective action to avoid tax evasion and avoidance and the Crown dependencies and the overseas territories need to play their part in that drive. They will need to do more.”
The immediate problems with this high sounding pronouncement were three fold.

Firstly, the statement took no account of the fact that the Cayman Islands already had in place not only full proactive reporting with each European Union Treasury pursuant to the 2005 European Union Savings Directive, full tax transparency with the IRS pursuant to the 2001 Tax Information Exchange Agreement and with the United Kingdom pursuant to the 2009 Double Tax Treaty and with 28 other jurisdictions.

As a result, Osborne was apparently unaware that tax evasion was already firmly off the table in the Cayman Islands and that little else could usefully be done. Specifically too under the various Financial Action Taskforce initiatives information on 10 percent beneficial ownership of Cayman Island companies is already maintained, a fact available on the Cayman Islands’ government website.

Secondly, and as a result, the possibility that the “drive” could raise further revenues for the benefit of the U.K. budget is remote to none. We already know from publicly available statistics that aggregate deposits in the Cayman Islands for EU residents amount to a statistically insignificant US$25 million and bank accounts for United States citizens are few and far between.

Thirdly, no one appears to have undertaken any cost/benefit analysis of the introduction of the United States and United Kingdom FATCA legislation. Most recent indications show that the cost of the U.S. FATCA compliance for any one hedge fund is likely to be a minimum of $15,000 per annum.

Ignoring the some 80,000 corporations (a net figure) and focusing just on some 10,000 hedge funds and 12,000 private equity vehicles the likely cost of compliance those areas alone amount to a minimum of $300 million per annum for an initiative that is unlikely to raise 1 percent of that amount for the aggregate benefit of the United Kingdom and United States Treasury Departments. 

It may well have been concluded given the political weight brought to bear from the United States and the United Kingdom on the FATCA initiatives that no alternative course of action was available to the Cayman Islands government. But the playing field is now tilted significantly against the Crown dependencies and the overseas territories by the application of these initiatives.

By comparison a Delaware company is not required to undertake any enquiries whatsoever as to beneficial ownership and Delaware is typical of the States responsible for forming over one million companies a year. We can possibly take some comfort from the thought that further unjustified criticism in light of the FAtcA proposals would be increasingly difficult to sustain. Indeed, the letter of the premier dated April 25, 2013 to Prime Minister David Cameron, includes a justifiable expression of optimism, “Given the significant commitments we have expressed in this letter, it is our sincere hope that the Cayman Islands will receive its fair share of recognition from Her Majesty’s government”. But there is a further concern which arises from the terms of that letter in that an action plan is promised to strengthen the Cayman Island regime, including the area of “transparency of beneficial ownership.”

In the same way that the legitimate advantage of tax avoidance was conflated by Mr. Osborne with the illegality of tax evasion so too the clear bright line distinguishing a legitimate commercial right to privacy on the one hand and on the other hand abusive bank secrecy runs the risk of being erased by this suggested initiative. 

In fairness, at the time of writing, the Premier Juliana O’Connor Connolly could not have known of the precise proposals now suggested by the U.K. discussion paper dated July 2013 produced by the Department for Business Innovation and Skills under the auspices of Secretary of State, Vince Cable, and entitled “Transparency & Trust.” 

In brief, that paper proposes that in the United Kingdom there should be a registry of all beneficial owners (defined to mean a 25 percent owner in a company) and the question raised for consultation is whether that information should be available to the public (proposals dealing with directors seem less problematic).

Whatever the outcome of that United Kingdom consultation process further, and very detailed, consideration must be given as to the likely effect of any such proposals on the fundamental principles underlying the financial services industry in the Cayman Islands and, in particular, the protection of the legitimate right to privacy.

The position of the newly installed Cayman Islands government offers some comfort in that there is an expressed intention in the now published Action Plan to “conduct an assessment of whether a central registry of the beneficial ownerships and control of companies is the most appropriate and effective way to improve transparency.” Our own independent review is vital because there is a real risk that the application of the outcome of these United Kingdom determinations would be neither appropriate nor relevant to the Cayman Islands industry and could cause significant harm.

In addition, it should be remembered that the Cayman Islands already complies with the highest standards laid down by:

  • (i)  the Global Forum on Transparency and Exchange of Information on Taxation which provides for information sharing on request under the direction of the OECD;
  • (ii)  the EU Savings Tax Directive which requires a cross-border exchange of information on bank interest to EU Treasury Departments; and
  • (iii)  the Financial Action Taskforce initiatives.

But each of the above mechanisms requires the exchange of information to be available only to tax authorities or for the purposes of law enforcement. These initiatives presuppose the pre-existing information on beneficial ownership will be available in the very few cases where legitimate enquiry is made.

And it is important to note that it is very few cases; numbering in the tens annually out of the tens of thousands of vehicles established and trillions of dollars of capital that flows through the Cayman Islands. The history of compliance in this area is good and is recognized as such by the OECD and the FATF.

Very careful consideration must be given to the question of whether we are now to have a further initiative requiring complete transparency on all beneficial ownership, with the attendant risk that this information, if made public, would be available not only to journalists and financial competitors but to terrorists and crime syndicates. 

Then there is the vexed question, whatever the outcome of the consultation process undertaken by Secretary Cable’s department, of how exactly any such public database would affect the competitive model of the Cayman Islands as against those jurisdictions that would most certainly not introduce anything similar.

In to this latter category we can include the relevant United States jurisdictions, Delaware, Nevada and Wyoming, the Asian power houses, Hong Kong and Singapore and, no doubt, Dubai. It should be noted that a non-U.S. citizen or resident establishing a Delaware company, for example, to undertake business activities outside the United States can conduct those activities tax free and without any disclosure as to his identity.  So too China showed a notable reluctance at the 2009 OECD Conference in Mexico to accept initiatives on the subject of tax avoidance.

No coherent argument has yet been advanced to dispense with the legitimate right to privacy in circumstances where the tax authorities and law enforcement have a right to enquire in the specific case. That is the model which the Cayman Islands has successfully constructed and it answers all criticisms.

There continue to exist many and good reasons why lawful commercial enterprises established onshore or offshore or, indeed, high net worth individuals, should be entitled to operate outside the spotlight of their competitors, journalists or others with no lawful or proper right to make enquiry as to ownership or indeed any other confidential business or family matters. 

In the light of the recent inspections by the FATF and the OECD which find the Cayman Islands adherence to the requisite international standards to be “robust” what is the purpose or benefit of these new proposals for a centralized and publically available register of beneficial ownerships? The danger of novel and ill considered legislation of this sort, when not introduced globally, is that the playing field simply becomes unplayable.

Careful consideration should be given to the dangers of the introduction of these measures given the increased costs of operation with which the Cayman Islands financial service industry has already been burdened by what will be shown, in the fullness of time, to be the wholly unnecessary application of the FATCA legislation. The burden of these costs already threatens the Cayman Islands model. Any further changes which may further detract from our competitive position must be looked at carefully.

 

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