Musical chairs in the Cayman Islands

Private equity houses have recently made certain strategic investments in fiduciary businesses in the Cayman Islands whilst at the same time two household names in the banking arena are exiting the jurisdiction.

In June 2012, Intertrust Group Holding S.A., which is owned by private equity behemoth Blackstone, acquired Walkers Management Services, the fiduciary arm of the law firm, Walkers Global. In February 2014, the law firm Ogier announced that it had sold its fiduciary business, Ogier Fiduciary Services, in a management buyout backed by private equity fund manager, Electra Partners.

In November 2013, Coutts, the Queen of England’s private bankers, announced that it had sold its remaining trust business in the Cayman Islands. Subsequently, in July of this year, HSBC declared that it was leaving the Cayman Islands, having agreed to sell part of its corporate and retail banking operations to Butterfield Bank.

What prompted these private equity investments? Are these two high-profile banking departures, both of which the authors of this article advised on, symptomatic of a deeper underlying rationale that the Cayman Islands is facing increased scrutiny as a leading global offshore center? Or should these be seen as strategic divestitures unconnected with the wider health of the jurisdiction as evidenced by the inflow of private equity capital?

Motivations for exit

Coutts announced its plans to invest in a market-leading, client-centric trust business in mid-2013, recognizing the benefits of focusing expertise and resources in a Jersey-based center of excellence. As a result, the Cayman Islands- and Geneva-based offices were refocused and slimmed down substantially.

At the time of announcing the move, Martin Hall (chief executive of the trust business and head of Coutts’s wealth planning services) commented, “This is not really about jurisdictions per se. We have a very high regard for the Cayman Islands and the quality of the Cayman Islands trust law. However, we are driven mostly by what our clients and advisers say will fit their needs”.1

Merger and acquisition climate

Such a shift of strategy by Coutts should be viewed in the context of the recent favorable economic climate for mergers and acquisitions. Vendors, such as Coutts and HSBC, attracted by resilient valuations, have been seeking to dispose of assets in order to free up their balance sheets in light of the strict regulatory capital requirements imposed under Basel III. Meanwhile, purchasers, benefiting from continuing low interest rates, have sought acquisitions to either grow or consolidate their offshore market share. Yield-hungry private equity investors are looking to potentially higher yielding offshore markets in contrast to the declining profitability of certain domestic businesses, with a possible future exit by way of an initial public offering, a secondary buyout or a trade sale.

Increased cooperation with international regulators

The Cayman Islands has undergone significant enhancements to its financial services regulatory regime in recent years, with the jurisdiction continuing its commitment to adhere to the highest international regulatory standards. The Cayman Islands adheres to Basel core principles for effective banking supervision, and the International Organisation of Securities Commissions (IOSCO) principles for the regulation of investment business.

The jurisdiction has in place a comprehensive anti-money laundering and anti-terrorist financing legislative regime. This regime is derived from the Proceeds of Crime Law (as amended), the Money Laundering Regulations (as amended) (Regulations) and the Anti Corruption Law (as amended) with the regulations ensuring conformity with general compliance and worldwide “know your client” standards.

FATCA

The Foreign Account Tax Compliance Act (FATCA), which was introduced by the United States in 2010, aims to tackle tax evasion by United States citizens. FATCA requires that financial institutions outside of the United States report information on financial accounts held by their United States customers to the United States Internal Revenue Service. In November 2013, the Cayman Islands entered into a FATCA Model 1 intergovernmental agreement (IGA) with the United States in order to provide for automatic exchange of tax information under FATCA.

The entry into the IGA was a result of the Cayman Islands having entered into an equivalent arrangement with the United Kingdom earlier that same month. FATCA Model 1 IGA’s are viewed as the global benchmark for multilateral exchanges of information and further evidence the Cayman Islands’ commitment to disclosure and the exchange of information for tax purposes.

OECD

In recognition of the Cayman Islands’ efforts to back global efforts to fight financial crime, the Organisation for Economic Co-Operation and Development (OECD) placed the jurisdiction on the “white list” (the highest possible level) for adhering to all relevant international compliance standards. The jurisdiction is also commended in the OECD Secretary-General’s report to the G20 leaders, issued at the beginning of September 2013. The report identified ratings for 98 jurisdictions, based on nine criteria, giving a green, amber, or red rating for each, with green being the highest rating. The Cayman Islands, like France, was rated green in all nine categories. The United States had two amber ratings, whilst the United Kingdom and Germany each had one.2

The Cayman Islands has been recognized and applauded for its efforts to adhere to international regulatory standards. Speaking in the House of Commons in September 2013, United Kingdom Prime Minister David Cameron commented that, “I do not think it is fair any longer to refer to any of the Overseas Territories or Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems.”

The departures of Coutts and HSBC originated from so called big picture internal strategic reviews in the context of a favorable economic climate for deal execution. It should be noted that 40 of the world’s 50 largest banks continue to have branches in the Cayman Islands.

In addition, the jurisdiction remains the principal offshore jurisdiction for the establishment of hedge funds and has the second largest captive domicile in the world with more than 700 captives. Indeed, for the fifth consecutive year, the Cayman Islands has been recognized as the best specialized financial center in the world, as surveyed by The Banker.

The Cayman Islands continues to demonstrate that it is an evolving, well regulated, transparent and economically stable financial center.

ENDNOTES: 

  1. [1] Cayman Compass (3 July 2013).
  2. OECD Secretary-General Report to the G20 Leaders (5-6 September 2013).

 

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Jacob MacAdam
Jacob MacAdam is a senior associate in the Corporate & Commercial practice group. His practice areas include, corporate finance, mergers and acquisitions, subscription finance and private equity funding. Previously he worked as an associate at the London office of Gibson Dunn in their corporate finance group where he developed a broad range of corporate transactional experience, including public takeovers, domestic and cross-border mergers and acquisitions, joint ventures and corporate reorganisations. Before joining Gibson Dunn, Jacob trained and qualified at Berwin Leighton Paisner.


Jacob MacAdam
Senior Associate
Appleby
Clifton House
75 Fort Street
PO Box 190
KY1-1104

t: +1 345 814 2016
e: jmacadam@applebyglobal.com
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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
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