Quarterly review

Economy

Economy grew slower than predicted in 2015

While economists previously predicted the gross domestic product for the Cayman Islands would grow by 2.1 percent in 2015, the forecasted growth rate has been adjusted to 1.7 percent for the year, according to the Cayman Islands’ Semi-Annual Economic Report for 2015.

Although the GDP for the Cayman Islands grew by an estimated 1.6 percent in the first six months of 2015, economic performance for that time period was lower than the 2.2 percent growth for the same period a year ago.

“While unplanned, the moderation in growth so far in 2015 is not totally unexpected,” Finance Ministry Marco Archer said in December. “This is consistent with the International Monetary Fund’s downscaling of global and U.S. growth for 2015 which impacted key local sectors such as hotels and restaurants.”

The slowdown of growth for hotels and restaurants in the first half of 2015, due in large part to slowing growth for stay-over and cruise arrivals, was accompanied by slowdowns in other sectors, as well.

Declines in economic activity were seen by the wholesale and retail trade, government services, transport, storage and communication sectors.

Expanding sectors included real estate; renting and business services; construction; other services; financing and insurance services; agricultural and fishing, mining; and quarrying and manufacturing.

Central government’s overall fiscal balance improved to a surplus of $115.1 million in the first six months of 2015 as compared to a surplus of $100.2 million a year ago.

Archer stated he was “pleased to note the fiscal performance continued to improve” in 2015.
“The central government’s overall fiscal surplus at $115.1 million is 14.8 percent higher than a year earlier while the central government’s outstanding debt amounting to $530.3 million is 4.9 percent lower from the same period a year ago,” Archer said.

Regulation

Government proposes new company form

Government has published a bill to create for the first time limited liability companies in the Cayman Islands. If passed into law, the Limited Liability Companies Bill 2015 will allow the establishment of Cayman LLCs that in its suggested form would be very similar to a Delaware limited liability company.

Offshore law firm Walkers said in a client advisory that there has been considerable demand from the U.S. financial services industry for a Cayman LLC and the firm expects “the market to take up using it straight away.”

The draft LLC Bill is largely based on the current Delaware Limited Liability Companies law.
One advantage of the Delaware LLC is that the business structure and the workings of the company can be tailored in an operating agreement to the exact needs of the LLC members.

This includes agreeing mechanisms such as capital accounting and capital commitments, allocations of profits and losses, allocations of distributions, voting rights and classes of interests, Walkers said.

The LLC agreement also stipulates whether the management of the LLC is determined by the majority of its members or by a management structure with different classes of managers that have certain rights, powers and duties. According to the bill, Cayman LLCs will be registered with the registrar of Limited Liability Companies but the LLC agreement does not have to be filed. Exempted companies in Cayman will be able to convert into an LLC.

If the bill becomes law an LLC would be able to merge or consolidate with exempted companies or any foreign entity with a separate legal personality. Transfers into and out of Cayman are also permitted.

 

Beneficial ownership position unchanged but changes to transparency regime

The Cayman Islands and other U.K. Overseas Territories agreed to implement centralized registers of beneficial owners of companies or “similarly effective systems” at the Overseas Territories Joint Ministerial Council Meeting in December 2015. However, the registers will not be accessible by the public and the media as originally demanded by the U.K.

Premier Alden McLaughlin said, “Our position on beneficial ownership, and our zero tolerance position on corruption and illicit activity, remains unchanged.”

The U.K. started to call for the implementation of centralized registers in its Overseas Territories in 2013. The registers should detail the individuals who control or benefit from companies registered in Cayman to prevent the abuse of anonymity for financial crime, corruption and tax evasion.

Britain launched its own register, which beginning in April will identify people who control at least 25 percent of a U.K.-registered company’s shares or voting rights.

Minister for Financial Services Wayne Panton announced Cayman is not going to establish a central register but is instead exploring a centralized platform that would enable government officials to access and interrogate the beneficial ownership databases of all financial service providers in Cayman without the service provider being aware to address tipping-off concerns.

The system would be accessible from within the ministry’s Department of International Tax Cooperation and work in the exact opposite way the general registry operates, by reaching out to financial services companies and their systems rather than registrants submitting information to a registry.

The minister said he believes that a centralized platform could be similarly effective to a central register without compromising the privacy proposition on which Cayman’s financial system is based.

“We feel strongly that there are privacy rights and we share information in line with international standards. Not all information is relevant for everybody.”

Nevertheless, the government is prepared to make concessions to the U.K. and has invited U.K. law enforcement agencies, and in particular the U.K. National Crime Agency and the Serious Fraud Office, for talks to the Cayman Islands to discuss how collaboration can be improved to ensure that Cayman is not abused to facilitate serious crime transactions including corruption and serious fraud.

In addition, he announced that the Confidential Relationships Preservation Law, which criminalizes the unlawful release of private financial information by service providers, will see major changes and could be replaced altogether this year.

Another system that will be changed, the minister announced, is the eligible introducer regime in Cayman’s Anti Money Laundering regulations. In order to not unduly restrict transactions with AML provisions, service providers are allowed to rely on professional intermediaries, such as lawyers and accountants, in third countries with similar AML requirements, to confirm the identity of new clients.

Service providers who want to rely on an eligible introducer will typically ask for a comfort letter from this intermediary, which assures that the introducer has information that clearly establishes the identity of the relevant person and that the introducer will provide copies of these documents on request.

“We are proposing to change that so that the information has to be brought into the Cayman Islands within a specified time period,” the minister said. “The [eligible introducer] would have to obtain the information and send it to within three months. It could be shorter than that. We are going to a process of having industry experts participating in working groups to understand the practical implications.”

Financial services

Appleby Fiduciary Business completes management buyout

Appleby Fiduciary Business completed the management buyout from Appleby Group by private equity firm Bridgepoint on Dec. 31, 2015. AFB and Appleby are now two independent businesses.

Private equity firms have shown a growing interest in the fiduciary activities of Cayman law firms and caused considerable restructuring activity. In the past three years alone, the Cayman Islands Monetary Authority received 16 applications for shareholder changes from local service providers.

The Appleby buyout follows a similar management buyout at Ogier’s in 2014, which formed a new fiduciary company called Elian.

In May 2015, Walkers announced it would relaunch its professional services business after it had sold its fiduciary business in 2012 to Intertrust.

Farah Ballands, who leads AFB as chief executive officer, said the business had grown significantly over the years, with more than 350 staff located across nine offshore jurisdictions. “With Bridgepoint’s expertise and support, we look forward to building on this success and investing in new infrastructure to give our clients an unrivalled standard of service,” she said.

The firm expects to launch the new branding in the first quarter of this year.

 

Butterfield to buy HSBC’s private banking and trust business in Bermuda

One year after purchasing parts of the corporate and retail banking business of HSBC Bank in the Cayman Islands, Butterfield reached an agreement to buy the private banking and trust operations of HSBC in Bermuda.

The purchase price was not disclosed but HSBC’s trust operations and banking portfolio have respectively about $1.5 billion and $1.2 billion in assets under management.

Butterfield has also entered into a referral agreement with HSBC Bermuda to take on select private banking clients.

The transfer is subject to regulatory approval and expected to be completed in the first half of 2016.

Michael Collins, Butterfield’s chief executive officer, said the bank’s growth strategy is centered on the development of its core businesses in existing markets.

HSBC said the sale of Bermuda Trust Company and its private banking operations to Butterfield “represents further progress in the execution of HSBC Private Bank’s strategy to focus on a smaller number of future growth markets.”

 

Cainvest acquires Intertrust Bank

Private bank Cainvest has bought the Cayman Islands banking operations of corporate services provider Intertrust.

Intertrust Bank is a provider of authorized agent services for Class B banks in the Cayman Islands.

Cainvest International Bank, owned by the Cohab/Aboulafia Group, was formed in 2011 when the Brazilian family holding company acquired Sul America International Bank in the Cayman Islands.

The acquisition will give Cainvest, which mainly offers back office and clearing services to family offices and institutional money managers, a Class A banking license in the Cayman Islands and the ability to serve as an offshore presence for foreign banks.

The new business operates as Cainvest Bank and Trust Ltd.

 

SEC proposes $0 Caledonian settlement

The liquidators of Caledonian have informed creditors that the U.S. Securities and Exchange Commission has internally approved a settlement that involves no payment by Caledonian Bank and Caledonian Securities.

The agreement still needs to be approved by the Cayman Islands Grand Court and the U.S. District Court for the Southern District of New York. The agreement would settle charges against the bank and its brokerage arm which alleged their participation in a penny stock pump-and-dump scheme involving the sale of unregistered securities.

If approved, the lack of a settlement payment will add to the return that the bank’s depositors and creditors can expect to receive. In September, the Caledonian liquidators estimated a return of between 89.5 cents and 94 cents on the dollar if the claim against the bank was resolved and no new unaccounted claims were made. This estimate was already based on the assumption that no payment to the SEC would have to be made.

The SEC has been under fire by the U.S. judge in the case. District Judge William Pauley III called the freezing order against Caledonian, which led to a run on the bank and its subsequent demise, “a pre-emptive strike” and “incredible government overreach.”

The SEC sued Caledonian and three brokers in Panama and Belize for the alleged sale of unregistered securities in connection with penny stock pump and dump schemes but had to amend its initial claim against a co-defendant in the case, pulling back on its initial accusations the broker had traded on its own behalf.

The securities regulator said it could not confirm whether Caledonian was involved in the scheme or had simply acted as a broker in the case, because the bank had not provided any customer information due to Cayman’s bank secrecy laws.

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Michael Klein
Michael Klein Editor Pinnacle Media Group Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: mklein@pinnaclemedialtd.comMichael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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