Banking secrecy in the Cayman Islands

The offshore jurisdictions are commonly thought to be highly secretive, with banking secrecy being an important part of what those jurisdictions offer to businesses and individuals who use them. For example, in 2000, the U.S. Treasury Department issued an advisory notice stating that extra vigilance was required in doing business in the Cayman Islands: “The Cayman Islands remains committed to strict bank secrecy, outside of a limited suspicious transaction reporting and international cooperation regime.”

The Confidential Relationships (Preservation) Law was introduced in the Cayman Islands in 1976. There had been a previous 1966 Law seeking to establish banking secrecy, based on a piece of Bahamian legislation introduced the year before. In proposing the new legislation in 1976, the major concerns were firstly, the then recent Field case in the U.S. (in which a Cayman banker had been served with a subpoena at Miami Airport and was held in contempt for refusing to answer questions which would cause him to commit an offence in the Cayman Islands under the 1966 Law) and secondly, the activities of foreign investigators on the islands (see the U.S. Supreme Court decision of Payner 447 US 727 for a discussion of thefts by IRS agents in pursuit of information offshore around this time, as part of “Operation Trade Winds”).

The current law is contained in the Confidential Relationships (Preservation) Law (2009 Revision). The Law creates offences of (1) divulging confidential information or (2) attempting, offering or threatening to divulge confidential information or (3) willfully obtaining or attempting to obtain confidential information (Section 5).

Section 3(2) sets out the eight exceptions to the offense. In April 2013, the Financial Services Division of the Grand Court heard an in camera application which put the Confidential Relationships (Preservation) Law back in the spotlight. A Magistrates’ Court in England had granted a production order against a London Bank pursuant to the Proceeds of Crime Act 2002.

The application had been made in support of a money laundering investigation by the Metropolitan Police. Section 4 of the Law expressly refers to the holder of the information’s obligation to apply for directions where they intend, or are required, to “give in evidence in, or in connection with, any proceeding being tried, inquired into or determined by any court, tribunal, or other authority (whether within or without the Islands) any confidential information within the meaning of this Law …”. The judge found that in this case there was no “proceeding” in respect of which the confidential information concerned was required to be given in evidence.

Production order

The judge rejected a submission that the application for a production order was a “preliminary or interlocutory matter” arising out of “any court proceeding, civil or criminal” (the definition of “proceeding” set out in Section 4(7)), finding instead that: “It was clearly an application by the police for information held by the Bank to be produced to them for the purposes of their investigations. There is no evidence that that application has or inevitably will lead to any other proceeding. The application having been granted there is no longer any continuing ‘proceeding’ before the English court.”

There was an attempt to persuade the court that the police investigations themselves constituted a proceeding being inquired into by an “other authority.” It was submitted that, by analogy, the Metropolitan Police may be regarded as performing a similar function in determining whether or not a person should be charged on the basis of material acquired by them. The Judge also rejected this submission as a “step too far” which would “in effect amount to sanction of the acquisition by the police of a wide range of generalized material that is clearly confidential”; in effect sanction of a “fishing expedition.”

Fundamental objections

The Judge ignored two more fundamental objections. Firstly that, in fact, the police in the U.K. do not determine whether a person is charged with the more serious criminal offences (such as money laundering); this has been a role performed by the Crown Prosecution Service since 2003 and, secondly, this very argument had already been rejected in the earlier case of In the Matter of Criminal Investigations by the Frankfurt Police [1999] CILR 1, which (in fairness to the judge) does not appear to have been cited to the court.

An argument that the bank could rely on Section 3(2) (b)(v) (i.e. that the Law has no application to a bank in “any proceedings, cause or matter when and to the extent to which it is reasonably necessary for the protection of the bank’s interest, either as against its customers or as against third parties in respect of transactions of the bank for, or with, its customer”) was also rejected on the basis that the bank was not a party to any proceedings in the U.K. in the sense required by the section (following Re BCCI Overseas Limited [1994-95] CILR 56).

Being a respondent to the application for a production order was not sufficient to engage the Section 3(2)(b)(v) exception. The judgment in the case correctly applies the law in relation to the arguments made, although it seems to leave the U.K. police with no ability to investigate potential money laundering. That does seem to be at odds with the various reassurances made when the Law was introduced that the Law is decidedly not intended to protect criminal activity.

So what is the solution for the U.K. police in investigating potential money laundering in the Cayman Islands? One answer would have been to seek mutual legal assistance from the Cayman Islands authorities. Consistent with the desire to retain local control over investigations but to permit the same where appropriate, the Law sets out the following exception at Section 3(2): “This Law has no application to the seeking, divulging or obtaining of confidential information … (b) by or to; … (iii) a constable of the rank of Inspector or above, specifically authorised by the Governor in that behalf, investigating an offence committed or alleged to have been committed outside the Islands which offence, if committed in the Islands, would be an offence against its laws.”

There are additional avenues for mutual legal assistance provided by Sections 3-5 of the Criminal Justice (International Cooperation) Law (2010 Revision) in the Cayman Islands and Section 7 of the Crime (International Cooperation) Act 2003 in England. Importantly, the Cayman Law provides at Section 15 that: “A person who divulges any confidential information or gives any testimony in conformity with a request shall not be considered to commit an offence under the Confidential Relationships Preservation Law (2009 Revision) by reason only of such disclosure or the giving of such testimony.”

Policy question

Whether the Law should be retained at all is a more difficult policy question and requires some considerable analysis of the future role of the offshore jurisdictions in a more connected world economy. There are certainly some signs, for example in the developments relating to tax information exchange agreements that the time may be approaching when banking secrecy legislation is seen as a relic from a bygone age and the Law here is repealed.

However, for the moment at least, clients and their advisers will continue to grapple with problems such as that raised by the April 2013 application to the Grand Court, sometimes with considerable difficulty.

 

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Sebastian Said

Sebastian Said is a senior associate in the Litigation & Insolvency department. He practises all aspects of commercial litigation, contentious insolvency and contentious trust issues. He has particular experience of cases involving investment funds, banking and finance, civil fraud, directors’ liability and shareholders’ remedies.

Sebastian Said
Appleby Global
Clifton House
75 Fort Street
PO Box 190
KY1-1104
Cayman Islands

T:+1 345 814 2766
E: ssaid@applebyglobal.com
W: applebyglobal.com

 

 

Appleby

The Cayman office of Appleby, Appleby (Cayman) Ltd., traces its origins back to 1945 and as such is the oldest legal practice in Cayman. The office now has over 150 partners and staff and is widely recognised for providing first class litigation and insolvency legal services as well as corporate and commercial advice.

The Cayman Islands have branches of 40 of the world’s 50 largest banks. It is the leading offshore jurisdiction for the registration of investment funds and is the second largest captive domicile in the world with more than 700 captives. The jurisdiction is also recognised in providing trusts, structured finance, company and partnership formation and vessel and aircraft registry services.

The availability of expert professional advice and the reputation for being a respectable and well-regulated financial centre with a stable and business-friendly government, have contributed to the success of the islands’ financial services industry. Listed on the OECD’s white list, service providers adhere to all relevant international compliance standards and are committed to supporting global efforts to fight financial crime. 

Clifton House
75 Fort Street
PO Box 190
Grand Cayman KY1-1104
Cayman Islands


T: +1 345 949 4900
F: +1 345 949 4901
E: info@applebyglobal.com
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