The coming trade war?

Donald Trump was not the first U.S. presidential candidate to blame foreigners and their trade practices for America’s real and imagined economic woes. That is a time-honored tradition of U.S. electoral politics. But Trump is the first president – at least since Congress began delegating parts of its trade policymaking authority to the executive branch a century ago – to actually believe that protectionism will make America great. That alone makes trade war likely. Add a heaping sense of nationalist grievance and trade war appears imminent.

Behind President Trump’s faith in protectionism is a stubborn belief that trade is not a cooperative, mutually beneficial activity conducted between consenting parties, but a zero-sum game with distinct winners and losers. He perceives U.S. trade deficits as proof that we are losing at trade and we are losing because the foreigners cheat. That perspective departs significantly from the underlying premise of U.S. policy spanning 84 years and 13 presidencies – that trade is a win-win proposition.

After a year in office during which the president’s trade policy actions were far less strident than the tone of his rhetoric, the second year began with the president announcing tariffs on solar panel components and tariff rate quotas on washing machines under Section 201 of the Trade Act of 1974 (the “Safeguards” law). Although the economic rationale for these safeguard restrictions is nonexistent and the costs of imposing them far greater than any benefits, the fact is that use of these kinds of “trade remedy” laws to address injurious import surges is permitted under World Trade Organization rules and is unlikely to be considered rogue or provocative enough to inspire unilateral retaliation by other governments against U.S. interests. WTO members have taken a combined 164 safeguard measures since the organization was established in 1995. The 165th is not going to trigger a trade war.

The same cannot be said with confidence regarding Trump’s early March authorization of steel and aluminum tariffs under the guise of protecting national security. These measures are much more problematic because the flimsiness of the national security rational is reinforced by the president’s numerous on-the-record statements that the restrictions were needed to respond to unfair trade practices (for which there are other remedies) and not exceptional “security threats.”

Moreover, the manner in which Trump is wielding the tariffs as bargaining chips exposes a certain frivolity to the national security claim. It appears that Trump was seeking the leverage that comes with having the authority to impose sweeping tariffs, and invoking Section 232 of the Trade Expansion Act of 1962, was an easy way to get it. Because that statute gives the president broad discretion to define what constitutes a national security threat and even broader discretion to design a remedy to mitigate that threat, he has the latitude to modify the tariffs or exempt countries from its reach. Trump exempted Canada and Mexico on the condition that the renegotiation of the North American Free Trade Agreement proceeds to his liking. Meanwhile, Trump is dangling before the Europeans and others promises of exemptions in exchange for their purchasing more U.S. exports, selling fewer wares to Americans, or ramping up their NATO spending.

Although U.S. courts are deferential to the president on matters of national security and the WTO is reluctant to presume to know better than a member government what threatens its national security, there yet may be challenges in both venues because the circumstances surrounding these cases are unusual and the evidence supporting the security threat claim is so contestable. Still, these actions would take time and the outcomes would be uncertain, making retaliation more likely.

However, retaliation is not a course taken with great pleasure because smart governments understand that responding with import barriers imposes the greatest burdens on their own businesses and consumers. Even though the EU has published a retaliation list, which targets U.S. exports from states of important members of Congress, Europeans do not want to pay more for their Levi’s, bourbon and cheese. Moreover, imposing direct retaliation instead of pursuing resolution through the WTO could put the retaliators in violation of the rules before the United States is ever held to account.

But if there is retaliation, expect it to take the form of invocation of some bogus national security rationale. That would at least provide a similar level of insulation from WTO rebuke that protects the U.S. steel and aluminum actions. The EU might go after companies like Google, Amazon, and the other big U.S. internet giants, which have been in Brussels’ crosshairs for years. Restrictions on the kinds of information that can cross borders, server localization requirements, and other onerous rules to “protect national security,” while burdening U.S. technology titans could be imposed.

Beijing already considers China’s reliance on western technology a real national security threat. China already has a National Security Law and a Cybersecurity Law, which extend unspecified authorities to the Chinese government to inspect U.S. information and communications technology products, and to compel U.S. companies to “share” their technology. Those practices are among the subjects of the Trump administration’s highly provocative Section 301 (of the Trade Act of 1974) investigation. If China was previously on the defensive about those allegations, any inclination toward changing those policies as a result of the U.S. investigation has probably shifted in favor of justifying those practices on account of the U.S. precedent to invoke national security to rationalize protectionism.

The outcome of the Section 301 case is of much greater significance than the steel and aluminum tariffs to the question of whether a trade war unfolds. The U.S. law gives the president the authority to impose trade restrictions in response to any unfair trade practices abroad. The problem is that the United States essentially suspended its right to use the remedial portion of the law when it joined the WTO in 1995. As a WTO member, the United States, like every other member state, cannot be judge, jury and executioner. The United States can bring its evidence of Chinese violations to the WTO and ask for a ruling as to whether China is, in fact, in violation. If China is found to be in violation and it fails to bring its policies or practices into conformity with the WTO agreements it is violating, then the United States can pursue retaliation.

But Trump is reportedly unconcerned about this “problem” and is waiting to receive from his advisers a list of Chinese products that will be subject to retaliation. The value of those products is supposed to bear some relationship to the value of U.S. intellectual property allegedly stolen by Chinese entities, which is a number in the hundreds of billions of dollars.

Such a blatant violation of WTO rules perpetrated by the United States would signal the world that Trump is not interested in the rule of international trade law, but in asserting U.S. sovereignty at all costs. And the costs will be huge, as other governments follow suit and the once predictable global trading system descends into the unpredictable lawlessness of a trade war.

President Trump seems not only to be undeterred by growing concerns about a trade war, but even encouraged. On March 1, betraying his deep misunderstanding of trade accounting, Trump argued: “When a country is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win.”

A Quinnipiac University poll of registered U.S. voters conducted later that week found that 67 percent of Republicans agreed with President Trump’s statement, while only 7 percent of Democrats did. The wide partisan chasm over the question only reinforces the president’s confidence that he’s doing the right thing. He believes he cannot lose politically from blowing things up.

The emerging talking points on Fox News and among other Trump supporters is that the United States has been in a trade war taking on heavy casualties for two decades. The difference now is that we are finally fighting back. And by virtue of the size of the U.S. market, Washington has leverage over the governments of other countries. Producers in countries with smaller markets that hope to achieve the economies of scale necessary to be competitive often require access to larger markets in order to work their way down the cost curve. That should come at a price.

Meanwhile, Washington has even greater leverage with the governments of countries running trade surpluses with the United States because, presumably, their exporters depend on the U.S. market more than U.S. exporters depend on theirs. Accordingly, threatening to block access to the U.S. market should produce favorable results, and U.S. producers and consumers who rely on those imports are merely collateral damage.

Animating this zero-sum fallacy is a sense of resentment that permeates the American nationalist narrative, which portrays the United States as a benevolent giant, having selflessly provided the resources, security and generosity of spirit to rebuild the free world after the war. Under the U.S. security umbrella, our allies took advantage of our kindness, short-changed the till, flaunted the rules, became economic rivals, and adopted policies that advanced their own interests at the expense of America’s industrial base.

This variant of American exceptionalism demands tribute in the form of unquestioning support for U.S. positions on matters of foreign and economic policy, excusing U.S. policy transgressions and acquiescing in other U.S. claims to entitlement or special consideration. That the United States is not treated exceptionally by the World Trade Organization’s Dispute Settlement Body, which is to say with extra helpings of deference or even turning a blind eye, as recognition for America’s selfless leadership in establishing the rules and institutions of the trading system helps explain Trump’s reckless trade policy tack today.

While it may be true that the United States would be less weakened than other countries by a trade war (as the U.S. is much less dependent on trade than almost every other country, trade accounts for 27 percent of U.S. GDP, as compared to a world average of 53 percent), the damage to the U.S. economy would be considerable nonetheless. But the very notion of feeling confident to threaten a trade war because U.S. “casualties” would be lighter than say China’s or Europe’s is anathema to any proper understanding of how trade and the global economy really work. Trade is not a zero sum game, but a win-win, lose-lose proposition. Hurting our trade partners unequivocally hurts ourselves. Trump’s predecessors understood this.

Not since Herbert Hoover has a U.S. president been so cavalier about the consequences of protectionism. Never has a president been more dismissive of the importance of trade to our prosperity and security. Never has a president been so impervious to the lessons of history.

Daniel Ikenson is director of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

Econ 101: Trade deficits

Responding to critics of the administration’s proposed steel and aluminum tariffs, Commerce Secretary Wilbur Ross stated on CNBC: “I think this is scare tactics by the people who want the status quo, the people who have given away jobs in this country, who’ve left us with an enormous trade deficit and one that’s growing. [The trade deficit] grew again last year, and if we don’t do something, it will keep growing and keep destroying American jobs.”1

Though the forces determining our trade deficits have many moving parts, it is not that complicated to explain why everything in the above statement is wrong. In this article I explain why:

  • Our trade deficits are caused more by U.S. government fiscal deficits than by the mercantilist export promotion policies of China, Japan and Germany;
  • Mercantilist policies that subsidize exports and restrict imports do not cost American jobs but rather reallocate workers and capital to less productive jobs that lower our standard of living; and
  • Challenging mercantilist policies using the tools and provisions of the WTO and other trade agreements better serves our long-run interests than unilaterally imposing tariffs and inciting trade wars.

To understand the relationship between our fiscal deficit and trade balance, it is essential to understand the macro level relationship of our trade deficit to the other broad categories of our national income and expenditures. The economy’s total domestic output, known as gross domestic product (GDP), can be broken into the broad components of our output/income that reflect how that income is spent. Starting with the components of expenditures:

GDP = C –M + I + G + X, or GDP = C + I + G + (X-M)
C = household consumption expenditures/personal consumption expenditures
I = gross private domestic investment
G = government consumption and gross investment expenditures
X = gross exports of goods and services
M = gross imports of goods and services

C-M is household consumption of domestically made goods and services, while M is household consumption of foreign made goods and services. If we subtract M from X (foreign expenditures on domestically made goods and services) we have the famous trade balance. When we buy more foreign goods and services than foreigners buy of our output, i.e., when X-M is negative, we have a trade deficit. As discussed further below, it is important to note that the trade balance (deficit or surplus) is between the U.S. and the rest of the world. Bilateral deficits or surpluses with individual countries are irrelevant.

But another way of breaking up total output (and thus income) is into how households allocate it:

GDP = C + T + S
T = household tax payments (personal and corporate income taxes plus sales taxes)
S = household saving

These two equations each provide definitions of the same quantity (GDP) and thus can be set equal to each other. This enables us to arrive at a useful formulation of the trade deficit:

C + I + G + (X-M) = C + T + S, or M-X = I-S + G-T;

The relationships in the identity can be described in several ways. Our fiscal deficit (G-T) must be financed by domestic net saving, i.e., a negative I-S, or by foreigners (M-X), i.e., a trade deficit or a mix of the two. Government finances its deficits by selling treasury securities domestically or abroad. If they are purchased domestically, residents must save more for that purpose or investors must borrow and invest less from existing saving. If a fiscal deficit does not crowd out private investment or increase private domestic saving (e.g., if I-S = 0) then it must be financed by foreigners who get the dollars with which to buy U.S. treasury securities by selling their goods and services to us in excess of what they buy from us, i.e., from a trade deficit.

The above relationships are derived from definitions. They are tautologies. If the government’s spending exceeds its tax revenue, it must borrow the difference from someone: a diversion of spending that would have financed investment (crowding out), a reduction in consumption (i.e., increase in saving), or an increase in the share of consumption spent abroad (increase in imports) giving foreigners the dollars they lend to the U.S. government. The interesting part – the underlying economics – is how markets bring about these results (usually a mix of all three).

When the government increases its need to borrow, other things equal, the increase in the supply of treasury securities relative to the existing demand for them increases the interest rate the government must pay. Higher interest rates generally encourage more saving and discourage investment. If we have no trade deficit (X-M = 0 so that G-T = S-T), the government’s deficit (G-T) must be financed by net saving (S-T). Depending on how much of the net saving comes from an increase in saving and how much from a decrease in investment, government deficits are bad for investment and economic growth in the long run (abstracting from countercyclical budget deficits and surpluses meant to offset cyclical swings in aggregate demand).

However, much of our fiscal deficits have been financed by foreigners (predominantly China and Germany) through their trade surpluses and our trade deficits. The market produces this result because the higher interest rates on U.S. treasury securities (and until now their perceived low risk of default) attracts foreign investors. The foreign demand for dollars in order to buy these treasury securities increases (appreciates) the exchange rate of the dollar for other currencies. An appreciated dollar makes American exports more expensive to foreigners and foreign imports cheaper for Americans. The resulting increase in imports and reduction in exports increases the trade deficit, which then finances our fiscal deficit.

If you have made it this far, you will be better able to understand the errors of Secretary Ross’s statement above: “if we don’t do something, it [the trade deficit] will keep growing and keep destroying American jobs.” If the United States government wants to reduce its trade deficit, it should reduce, rather than further increase, its fiscal deficit.

As noted above, however, our trade deficits reflect many moving parts. In the above example, foreigners want to increase their holdings of U.S. dollars (and dollar assets) in part because the dollar is a widely used international reserve asset. Our trade deficit is the primary way in which we supply our dollars to the rest of the world (and its central banks). However, what if our trading partners were manipulating their exchange rates in order to produce trade surpluses for themselves?

In the past, China followed such a mercantilist policy of promoting its exports over imports as part of its economic development strategy. In that case, our trade deficit would result in foreign investments in the U.S. with the net dollars accumulated abroad even without U.S. fiscal deficits. If they are not soaked up financing government debt they will be invested in private securities or other assets (such as Trump Hotels).

Tariffs do not violate the above national income identities. Rather they potentially change the allocation of resources toward or away from traded goods. The tariffs proposed by President Trump on steel and aluminum imports were meant to prop up inefficient American steel and aluminum firms by increasing the cost of their imported competition. As such, they would reallocate our workers and capital to activities that are less productive than they would otherwise be used for (i.e., to the increased production of steel and aluminum). Once all of the adjustments were made, we would be poorer, though still fully employed.2

It turns out, however, that Trump’s tariff threats were probably a negotiating ploy (as he has temporarily exempted Canada and Mexico from the tariffs and is making deals with other suppliers in exchange for suspending the tariff). China is already paying special tariffs on these products to counter Chinese government subsidies and only sells the U.S. 2 percent of its steel imports. Thus, the tariff is largely irrelevant for China. The net short-term effect of Trump’s ploy may well result in almost no tariff revenue and no protection for U.S. steel and aluminum producers and some improvements in other trade deals with our trading partners or at least what the president considers improvements. In short, Trump’s tariff threat could turn out to be helpful. However, given Trump’s generally negative and/or ill-informed views on trade, this may be an overly generous interpretation.

As The Economist magazine put it: “If this were the extent of Mr. Trump’s protectionism, it would simply be an act of senseless self-harm. In fact, it is a potential disaster – both for America and for the world economy.”3

Why? Even if the tariffs are waved sufficiently to avoid the retaliatory trade war Europe and others are threatening, Trump’s use of the national security justification for his steel and aluminum tariffs cannot be taken seriously. “That excuse is self-evidently spurious. Most of America’s imports of steel come from Canada, the European Union, Mexico and South Korea, America’s allies.” [The Economist, ibid.]

Trump’s national security justification bypassed the World Trade Organization’s normal trade abuse remedy mechanisms and thus potentially weakening the WTO’s effectiveness in promoting the trade from which the world has benefited so enormously. Trump’s renegotiation of NAFTA and his foolish withdrawal from the Trans-Pacific Partnership (TPP) further demonstrate his lack of appreciate of the benefits to the U.S. and its trading partners of freer trade. The WTO has helped develop the international standards that have contributed so much to lifting the standard of living around the world. Despite its many weaknesses and shortcomings, our interests are better serviced by strengthening the WTO rather than weakening it.4

When China was admitted to the WTO in 2001 we expected that it would continue to liberalize and privatize its economy in accordance with the requirements of the WTO’s rules. The expectation was that China’s membership in the WTO would draw it into the liberal international rule-based trading system. Unfortunately, China’s liberalization has gone into reverse in recent years.

China’s behavior has been a disappointment. From its accession into the WTO, China began flooding the world with its “cheap” exports while continuing to restrict its imports from the rest of the world. The normal market reaction and adjustment to the inflow of dollars to China from its resulting trade surplus would be an appreciation of the Chinese currency, which would increase the cost of China’s exports to the rest of the world (and lower the cost of its foreign import). However, China intervened in foreign currency markets to prevent its currency from appreciating and as a result China accumulated huge foreign exchange reserves, peaking at US$4 trillion in 2014. Not only did China intervene to prevent the nominal appreciation of its currency, but it also sterilized the domestic increase in its money supply that would normally result from the currency intervention, thus preventing the domestic inflation that would also have increased the cost of its exports to the rest of the world.

China’s currency manipulation was not seriously challenged at that time. Economic conditions in China have more recently changed and since 2014 market forces have tended to depreciate the renminbi, which China resisted by drawing down its large FX reserves (all the way to US$3 trillion by the end of 2016 – they have risen modestly since then). China is no longer a currency manipulator as part of an export promotion (mercantilist) policy.

But China does continue to violate other WTO rules with many state subsidies to export industries and limits and conditions for imports and foreign investment, such as requiring U.S. companies to share their patents as a condition for investing in or operating in China. A government subsidy of exports distorts resource allocation and thus lowers overall output in the same way but in the opposite direction as do tariffs. Both reduce the benefits and economic gains from trade and are to be resisted. The WTO exists to help remove such barriers and distortions in mutually agreed, rule-based ways. A tariff that balances a state subsidy helps restore the efficient allocation of resources upon which maximum economic growth depends. These are allowed by WTO rules when it is established that a country’s exports violate WTO rules. President Trump is considering such targeted tariffs (his steel and aluminum are certainly not an example of this type of tariff) and hopefully they will conform to WTO requirements.

“Whatever the WTO’s problems, it would be a tragedy to undermine it. If America pursues a mercantilist trade policy in defiance of the global trading system, other countries are bound to follow. That might not lead to an immediate collapse of the WTO, but it would gradually erode one of the foundations of the globalized economy. Everyone would suffer.” [The Economist, ibid.]

As an aside, the U.S.’s bilateral trade deficits (e.g. with China) and surpluses (e.g., with Canada) are totally irrelevant and any policy designed to achieve trade balance country by country would damage the extent and efficiency of our international trade and thus lower our standard of living.5

“Even though trade policies are unlikely to change the long-run trade balance, they are not unimportant. Americans will be better off if the United States can use trade negotiations to open foreign markets for its exports, not because more exports will increase the U.S. trade surplus, but rather because U.S. incomes will be higher if more U.S. workers can be employed in the most efficient U.S. firms that pay high wages, and if those firms can sell more exports at higher prices. Similarly, U.S. living standards will be higher if the United States reduces its trade barriers at home because this will give consumers access to cheaper imports and make the economy more efficient. Ultimately, therefore, the goal of U.S. trade policies should not be focused on trade balances but instead on eliminating trade barriers at home and abroad.” This is quoted from the excellent and more detailed discussion of many of these issues in “Five reasons why the focus on trade deficits is misleading.”6

There is another, very important negative byproduct of Trump’s transactional, confrontational, zero sum approach to getting better trade agreements. Mutually beneficial trade relations strengthen political and security relations and cooperation. These have been important non-economic benefits, for example, of NAFTA. Trump’s confrontational approach undermines these benefits. Pew Research Center surveys in 37 countries found that: “In the closing years of the Obama presidency, a median of 64 percent had a positive view of the U.S. Today, just 49 percent are favorably inclined toward America. Again, some of the steepest declines in U.S. image are found among long-standing allies.”

We have traditionally referred to those we trade with as trading partners. We need to return to that way of thinking.

This article was condensed from, which contains additional text and links to additional material.


  1.  Ted Mann, Bob Tita and Maureen Farrell, Wall Street Journal, March 9, 2018
  2.  For a further elaboration, see:
  3.  The rules-based system is in grave danger, The Economist, March 8, 2018
  5.  See my earlier discussion of this issue in

The global citizenship market: Why it matters today

When the first modern citizenship-by-investment programs were developed in the late 1980s and early 1990s, the investment migration industry was largely unformed, unknown, and unregulated. Today, by contrast, citizenship-by-investment is part of every savvy wealth manager’s vocabulary. The number of citizenship programs is also increasing steadily, as governments seek to tap into their potential to boost capital and talent inflows. The global citizenship market is now an established and fast-growing feature of the economic landscape, with prominent players such as the EU endorsing and participating in the industry. But what exactly does the ‘global citizenship market’ entail, and how are its much-touted benefits distributed? Why, and to whom, does this market matter? This article takes a first step in answering these questions.

A brief history of citizenship-by-investment

In its most basic form, citizenship-by-investment denotes the process whereby qualified, vetted candidates are granted full citizenship in exchange for their substantial economic contribution to the passport-issuing state.

The history of the citizenship industry can be divided into three distinct waves. The first wave, which marked the industry’s haphazard inception, stretched from the mid-1980s to the mid-1990s. In 1984, St. Kitts and Nevis launched the first citizenship-by-investment program in the world. Four years later, the Republic of Ireland created a controversial naturalization program, which was terminated the following decade. Dominica launched its Economic Citizenship Program in 1993, becoming the second Caribbean nation to enter the investment migration space.

The second wave, spanning the late 1990s to the mid-2000s, can best be described as a “cooling period.” In 2001, Grenada closed its citizenship-by-investment program amid heightened security concerns following 9/11. No new citizenship programs were launched worldwide during this period. Activity in the competing residence-by-investment space experienced a comparable slow-down, too.

The boom period of the past ten years or so has seen the industry regenerating itself and gaining widespread credibility and acceptance. The European island of Cyprus legalized citizenship-by-investment in 2011. In the two years that followed, both Antigua and Barbuda and Grenada in the Caribbean launched citizenship programs. In 2014, EU member state Malta introduced its Individual Investor Program, which is the only program of its kind recognized by the European Commission.

Benefits of the industry: A win–win

Offering citizenship in return for investment is mutually beneficial for both successful applicants and the destination countries they choose.

For high- and ultra-high-net-worth individuals, the benefits of alternative citizenship are manifold, but they generally involve a combination of increased travel freedom and improved safety and security. A second or third passport grants holders the right to travel, trade, and settle in an expanded set of countries and regions, as well as access to all the benefits enjoyed by other citizens of the state in question (education, health care, voting rights, and so on). It also eliminates a great deal of the inconvenience and waiting time surrounding visa applications and passport renewal or replacement processes. Finally, and perhaps most importantly, an additional passport can quite literally save a person’s life in times of political unrest, civil war, and terrorism, or in other delicate political situations.

For states that administer citizenship-by-investment programs, the primary benefit is significant financial investment in their domestic economies. The cost and design of each program vary according to the issuing country’s requirements, but most programs involve an up-front investment in the public or the private sector, combined with application fees and a fixed amount to cover due diligence costs.

The inflows of funds from citizenship programs are considerable, and the macroeconomic implications for most sectors can be extensive. Foreign direct investment increases the value of the receiving state, bringing in capital to both the public sector — in the form of donations to the government, tax payments, or treasury bond investments — and the private sector — in the form of investments in businesses, start-ups, or real estate.

The economic benefits are also cumulative. Receiving states tend to experience a combination of the following trends:

  • Rapid growth in the real estate sector, accompanied by growth in the construction industry and among local businesses
  • Increased liquidity in the commercial banking system
  • Employment growth
  • Increased hotel-room supply, leading to greater air traffic to the country, an increase in tourism inflows, and various associated tax and spending benefits.

Countries are able to use citizenship-by-investment inflows to finance infrastructure development, and those that save their inflows may be able to improve their fiscal performance, minimize their dependence on international aid, and reduce national debt.

Apart from these economic gains, successful applicants also bring intangible benefits to receiving countries, such as scarce skills and rich global networks. They add diversity and they uplift host nations through their demands for improved and novel services, which create new employment and entrepreneurial opportunities.

As the number of successful applicants increases each year, host countries often grow in prominence in the international arena, on account of their increased competitiveness. This results in other benefits to the country, including increased publicity and media attention and a boost in tourism, which in turn may encourage more potential applicants.

Case study: St. Kitts and Nevis

Since 2007, when Henley & Partners teamed up with the government of St. Kitts and Nevis to revamp and relaunch the country’s Citizenship-by-Investment Program, financial inflows from the program have grown substantially. Three years post-launch, the program accounted for around 5 percent of the country’s GDP. A year later, this figure had doubled, and after the sixth year this figure had doubled again to 20 percent. By 2014, just seven years since the program’s relaunch, the St. Kitts and Nevis Citizenship-by-Investment Program was responsible for approximately 25 percent of the nation’s GDP.

The St. Kitts and Nevis Sugar Industry Diversification Foundation (SIDF) was established in September 2006 to help the government transition from a dependence on the sugar industry to a more diversified and resilient economy, through research into and funding of alternative industries. To generate income for this important initiative, the government appointed the SIDF as an approved beneficiary of the country’s Citizenship-by-Investment Program.

Contributions to the SIDF of US$250,000 or more qualify foreign nationals who have passed stringent due diligence checks for St. Kitts and Nevis citizenship. To date, through citizenship-by-investment contributions, the SIDF has invested over US$50 million into St. Kitts and Nevis’s economic, social, and agricultural development by way of grants, loans, and share-holdings.

Capisterre Farm is one example of a project that is funded by the SIDF. The 113-acre farm is located in the former sugar belt and was established in 2010 to create employment for displaced sugar workers and help achieve the goal of food security.

The SIDF has also partnered with several local banks to help citizens secure residential loans of up to XCD 500,000 (US$185,000) at a fixed interest rate of 5 percent. By Feb. 2015, 187 residential loans had been disbursed. The SIDF also subsidizes electricity charges for residential consumers to provide financial relief.

The oldest citizenship program in existence, the St. Kitts and Nevis Citizenship-by-Investment Program is an example of the growth and development potential of the investment migration model for small-scale economies that would otherwise struggle to scale or compete.

Sustainability of the industry

The global citizenship market has entered a period of unprecedented evolution and growth, with thousands of people applying for citizenship and residence each year. By the end of 2017, there were over 30 active and successful programs in existence. An emerging trend is localized programs that attract applicants from countries within the same region: Kazakhstan, for example, is planning to introduce a residence program that will appeal to citizens of other countries in Central Asia, and similar developments may soon take place in the citizenship space. There are still many countries in the world where it makes sense to start new programs, and the industry looks set to continue to thrive as global demand for alternative citizenship solutions increases.

As the industry grows in visibility and breadth, so too does the cloud of public dissent and opposition regarding the perceived ‘marketization’ of citizenship, as well as concern from multilateral organizations about tax and money-transfer practices. Accordingly, a strong culture of self-regulation and due diligence is essential to the industry’s continued success and sustainability.

In 2015, the leading firms in the industry formed the Investment Migration Council (IMC), a professional association that establishes and maintains professional standards and codes of conduct. The IMC is tasked with, among things, improving public understanding of the complex processes and systems involved in citizenship and residence programs, and of the issues faced by clients and governments in this area.

Dr. James Canton, CEO and chairman of the Institute for Global Futures, has earned the titles “Digital Guru” and “Dr. Future” from CNN and Yahoo, respectively, for his insights into the major trends that are shaping the 21st century. Canton stresses that to achieve the state he calls “future-readiness,” countries need to build “predictive awareness” — but he is equally convinced that trend-watching, analysis, and hedging against loss and adversity are not in and of themselves enough. Rather, leaders need to be proactive in building systems that will ensure their continued viability in what is poised to be an “extreme future.”

In the citizenship industry, the call for future-readiness is already inspiring innovation. Certain countries are challenging traditional program parameters by considering payment via non-traditional currencies, including cryptocurrencies. The Pacific state of Vanuatu took a tentative first step in this direction in October 2017, and St. Lucia in the Caribbean appears to be following suit, with the latter now accepting foreign currencies such as euro and yen and contemplating adding bitcoin to the equation.

The challenge for the industry, then, is to build longevity and future-readiness while carving out its place in the global community as a beacon of innovation, collaboration, professionalism, and responsible investing. The vast majority of participating countries and intermediaries seem poised to meet this challenge. The global investment market matters and, by all accounts, it is here to stay.

Highest company registrations since the financial crisis

The British government announced a new public register that from 2021 will require overseas companies that own or buy property in the U.K. to identify their beneficial owners.

Cayman’s company formations sector grew in 2017, with the number of new incorporations and total companies on the registry having increased at the year’s end over 2016.

According to statistics released by the General Registry, there were 99,327 Cayman-registered companies active at the end of 2017, a 3.2-percent increase over 2016.

The number of active companies reached a record 102,369 in Sept. 2016 before taking a dip when around 8,500 were struck off the registry shortly thereafter.

The territory saw 13,046 companies register in Cayman last year, which was a 17-percent increase over 2016 and the most since at least 2007. Just over 10,000 companies were terminated from the registry. Of the 13,046 company formations, 11,138 were exempt companies, 25 were non-resident, 583 were resident, 589 were foreign, and 711 were limited liability companies.

In February, the total number of Cayman-registered companies may once again exceeded the 100,000 mark.

The steady growth of Cayman’s incorporations comes as the British Virgin Islands, which is the leading offshore jurisdiction for company formations, has seen a drop in its business in recent years.

Whereas the BVI has seen its number of registered companies decline by nearly half, from around 800,000 in the mid-2000s to 413,273 as of the third quarter of 2017, Cayman has seen an increase from 83,532 in 2006 to around 100,000.

The BVI’s decline has been especially sharp since the second quarter of 2016, when international media outlets published stories on the “Panama Papers,” a trove of more than 10 million leaked documents from the trust firm Mossack Fonseca that allegedly showed BVI companies being used for money laundering and other illegal purposes.

The total number of active companies has apparently also declined in other offshore jurisdictions. The corporate services firm Vistra stated earlier this year that the number of active companies in the major offshore jurisdictions – Cayman, BVI, Samoa, Seychelles, Mauritius, Anguilla and Jersey – decreased in 2017 for the first time in 25 years.

Much of that business is going to “midshore” jurisdictions such as Hong Kong and Singapore, according to Vistra.

Ministry updates financial services industry on EU graylist commitments

The Ministry of Financial Services met with members of Cayman’s financial services industry associations to discuss several commitments made to the European Union Code of Conduct Group for Business Taxation (EU COCG) as part of its evaluation of jurisdictions for tax purposes.

During last year’s EU COCG screening process, Cayman avoided being included on a blacklist of non-compliant countries in tax matters. Cayman was assessed as a transparent jurisdiction but placed on a graylist of cooperative jurisdiction for tax purposes that had committed to addressing certain shortcomings by the end of 2018. According to the EU Council, Cayman has fallen foul of a fair tax criterion aimed at tax regimes that facilitate offshore structures which attract profits without real economic activity.

The assurances given by the Cayman Islands relate to concerns expressed by the EU Code of Conduct Group in relation to ring-fencing of exempted companies.

Government has committed to revising Cayman’s exempted companies regime, which will allow these entities to operate in the local economy, provided that local participation requirements are met.

In addition, Cayman and the EU also are discussing enhanced accounting and regulatory reporting obligations; and the definition of economic substance for relevant businesses.
“This meeting is part of the government’s plan of engagement, which encompasses dialogue with international bodies and discussions with our local stakeholders, to achieve the best outcome for the jurisdiction,” Minister of Financial Services Tara Rivers said. “Our communication with the EU on Cayman’s tax regime is ongoing.”

In March, the EU Council removed Bahrain, the Marshall Islands and Saint Lucia from the tax blacklist and added the Bahamas, Saint Kitts and Nevis and the U.S. Virgin Islands. In addition, six other countries – American Samoa, Guam, Namibia, Palau, Samoa and Trinidad and Tobago – remain on the blacklist. Eight of the original 17 blacklisted jurisdictions were delisted on Jan. 23.

At the same time, the EU Council decided to add Anguilla, Antigua and Barbuda, the British Virgin Islands and Dominica to its graylist of jurisdictions that have made sufficient commitments to address deficiencies identified by the EU.

UK plans new beneficial ownership register for properties

The British government announced a new public register that from 2021 will require overseas companies that own or buy property in the U.K. to identify their beneficial owners to tackle money laundering through property transactions.

More than 75 percent of properties currently under investigation use offshore vehicles, a tactic to hide the true owners that is regularly seen by investigators pursuing high-level money laundering, the U.K. government said.

More than US$252 million worth of property in Britain has been brought under criminal investigation as the suspected proceeds of corruption since 2004.

The Department for Business, Energy and Industrial Strategy’s register will require overseas companies that own or buy property in the U.K. to provide details of their ultimate owners.
“This will help to reduce opportunities for criminals to use shell companies to buy properties in London and elsewhere to launder their illicit proceeds by making it easier for law enforcement agencies to track criminal funds and take action,” the prime minister’s office said in a statement.

Business Secretary Greg Clark said, “We are committed to protecting the integrity and reputation of our property market to ensure the U.K. is seen as an attractive business environment – a key part of our Industrial Strategy.”

He added, “this world-first register” will build on the U.K.’s reputation for corporate transparency, as well as helping to create a hostile environment for economic crimes, like money laundering.

The register will also provide the government with greater transparency on overseas companies seeking public contracts, he noted.

Government committed to publishing a draft bill this summer and introducing it in parliament by next year. Following legislation, the register would go live by early 2021.

The U.K. government had committed to creating a register to disclose the beneficial owners as early as 2016 at the Anti-Corruption Summit in London.

Lord Ahmad, the Foreign and Commonwealth Office Minister, explained during a debate in the House of Lords in January that the Department for Business, Energy and Industrial Strategy has sent more than 100 pages of drafting instructions to the Office of the Parliamentary Counsel, and work preparing the clauses for the bill is under way.

Specific provision will have to be made for Scotland and Northern Ireland, which have different land registration systems and their own land registries.

Lord Ahmad noted that the department commissioned research on the potential impact of the policy on investment decision but work on the impact assessment was ongoing.

He added that the register would warrant a separate bill. “The register will be first of its kind in the world and will affect people’s property rights. A robust enforcement mechanism will be essential.”

The U.K. government believes that criminal sanctions may not be sufficient in isolation, but that additional enforcement through land registration law will also be needed if the register is to have teeth.

“A key proposal is that those who own property who do not comply with the register’s requirements will lose the ability to sell the property or create a long lease or legal charge over it. This will be reflected in a restriction on the register of title,” Lord Ahmad said.

Cayman aims to capitalize on blockchain boom

The Cayman Islands is aiming to be one of the business-friendly jurisdictions that attract blockchain entrepreneurs who look to develop their ventures from startups to successful companies and where they can raise funds and develop their products.

Cayman Enterprise City CEO Charlie Kirkconnell said at a January “d10e” blockchain conference that some 50 blockchain companies have established or are in the process of setting up shop at “Cayman Tech City” – the recently branded branch of the special economic zone that caters to tech-related entities.

Now, about 25 percent of the total Cayman Enterprise City tenants are companies developing or using blockchain technology.

Despite competition from other countries like Puerto Rico, Cayman officials are confident that this jurisdiction has more to offer than others.

For Sensay co-founder Crystal Rose, the choice to domicile for her company here was a no-brainer.

“We’re taking Bitcoin from places around the world, and America would tax that instantly as income … but that money is going to be circulated back into the company as an investment,” said Rose, whose company creates blockchain-based smart contracts.

Additionally, Cayman’s straightforward regulations made the jurisdiction more attractive than staying in the United States, she said. Blockchain companies are subject to know-your-client and other anti-money laundering rules, but Rose said that the U.S. Securities and Exchange Commission issued two conflicting statements about fundraising rules within the span of five months.

Kirkconnell said that Cayman Tech City is trying to make setting up businesses here as easy as possible. Cayman Tech City officials will help entrepreneurs obtain all necessary licenses and permits, and can usually have them ready to do business from the territory within four to six weeks of an application, he said.

That was the experience of Hercules SEZC President Cynthia Blanchard.

“[Cayman Enterprise City] helps guide you through the process, and makes it easy as possible,” said Blanchard, whose company uses blockchain for supply chain management. “Now, we have a community here.”

Cayman Enterprise City’s rules are also flexible in that entrepreneurs can travel and do business around the world while still maintaining a legal presence here.

“There’s no requirement to spend a specific number of days in the jurisdiction,” Kirkconnell said. “We want you to spend as many days as you can here because we want the knowledge transfer and your expertise in the jurisdiction, but the requirement to be here [for example] six months – that doesn’t exist.”

Like other jurisdictions, Cayman is still trying to iron out details about how a blockchain industry might be regulated.

“That’s the kind of thing we’re going to have to build this year,” said Department of Financial Services Senior Legislative Policy Advisor André Ebanks, referring to the regulatory issue. “There are going to be some issues that we have to work through and think about.”

Among the issues policymakers are grappling with is how to make sure “tokens” (a common word for a single unit of cryptocurrency) are not used as bearer shares (shares that belong to whoever physically owns them, which allows for anonymity).

To illustrate his point, Ebanks said that he was recently on a conference call with five major law firms who were discussing legal issues surrounding blockchain and cryptocurrencies.
Normally, these fiercely competitive law firms would not be working together on legal matters, he said. But when it comes to an undeveloped industry, Ebanks said that doing so is for the benefit of all.

“Because this space is so new, it’s going to take education and collaboration to grasp,” he said.

Taxation matters in Bermuda

There is a common misconception in the “onshore” world that jurisdictions like Bermuda and Cayman, actually have no taxes at all – so called, “zero-tax jurisdictions.” Of course, this is impossible. There must be taxes to pay for the government and the services it provides. The correct phrase is that we are zero income tax jurisdictions. There are many other forms of taxation that are levied on our residents that are sources of irritation equal to high tax jurisdictions. The obvious truth is nobody likes to pay taxes, irrespective of the type of tax system.

In Bermuda, the finance minister’s latest budget speech lamented that the island’s tax system, based principally on payroll taxes and customs duties, exacerbates the gap between the rich and poor. I recall making the same speech during my time as minister of finance. The new government has pledged to find a new system to help reduce that gap.

As minister of finance, I pointed out many times that Bermuda’s tax system, with its emphasis on duties and payroll taxes, was and is regressive. This has been well known for decades. Up until last year, payroll tax was levied at a flat percentage of one’s payroll, regardless of whether the salary was $75,000 or $750,000 per year. However, there was the so-called salary cap, which allowed those fortunate enough to earn more than $750,000 to earn any amount over that, tax free. Therefore, if you were a senior executive of an international company earning, say, $5 million per year, your effective payroll tax rate would indeed be minuscule, certainly much less than your secretary’s.

What was the logic behind this regressive tax structure? Presumably, the thinking was that persons with salaries in excess of the salary cap would be international business executives who needed to be incentivized to move to the island, bring their companies, their retinue of staff and their on-island spending with them. In other words, to incentivize on-island job creation and GDP expansion.

While it was always known that payroll tax was regressive, the general public had little appreciation how skewed the tax distribution was, until many of Bermuda’s largest reinsurance companies became listed on U.S. stock exchanges. When that happened the salaries of senior executives of these companies became public and the level of asymmetry was plain for everyone to see.

The last budget I presented, about one year ago, was the first time any government or any finance minister had ever taken any steps to ameliorate the problem of regressiveness in the tax system. We put in a progressive payroll tax system and simplified customs duties. Payroll tax rates were put on a graduated scale and the Salary Cap was raised to $950,000. This was effectuated after an 18-month consultation with the international business sector. So overall, the tax is still regressive – but not as bad as it once was. However, this improvement came at the expense of filing complexity which taxpayers are still getting used to.

For taxpayers whose sole income is their salary, Bermuda’s payroll tax functions exactly like a personal income tax. However, payroll tax does not touch income from business ownership or receipts from “passive income” from investments in shares, bonds or, say, rent from property. This is the principal difference between payroll tax and income tax – taxing passive income.

Philosophically – and empirical evidence has borne this out – I believe that lower taxes encourage private sector economic growth. However, there is no point in having low taxes if the resulting revenues are insufficient to cover the government’s expenses. With the downsizing of the economy during the six-year recession, Bermuda’s revenue intake was nowhere near enough to balance the budget, even with major budget cuts. In small island economics government deficits have to be financed principally with foreign debt which is a drag on the balance of payments and a burden on future generations. We cannot monetize debt like the U.S. Any attempt to do that will inevitably lead to currency devaluation, something that is always bad for small islands economies. Therefore, the tax reform we implemented last fiscal year had an implicit significant revenue boost to help close the budget gap.

Many commentators from various sectors complained that, under the present system, the higher revenues, that are required by the government to balance the budget, will add to the cost of doing business in Bermuda, as such taxes will be passed on to customers. This also applies to the new Financial Services Tax which I introduced. These taxes have added, and will add, to the cost of doing business in Bermuda and will, on margin, reduce Bermuda’s competitiveness and increase the cost of living for Bermudians.

This begs the question “What kind of taxation can the government put in place that will not increase the cost of living and doing business?” The only type of tax, that I know of, that cannot be passed on to customers is a full-blown tax on personal and corporate income i.e. income tax. In simple terms, with income tax, if a company tries to up its prices to compensate for a rise in income taxes, that price increase (all other things being equal) will cause its taxable income to increase and the tax it pays will increase accordingly. So, the only party that will have gained is the government. The degree to which this will happen will depend on what portion of its expenses are fixed and what portion is variable. Higher fixed expenses leverage increases in prices to the bottom line.

Many Bermudians see our huge, profitable international companies sector as a big juicy apple that the government should take a bite out of to solve all its financial problems. They say it will also mitigate the exterior criticism of the island as a tax haven. This view is naive in the extreme. Bermuda’s economy is not suited to income tax.

Firstly, one of the components of our attractiveness to international capital is that there is no income tax. Does this confirm that we are a tax haven? Certainly not. Many countries compete on taxes, now, with recent tax cuts, even the U.S. The term “tax haven” encompasses many evils separate and apart from absence of income tax, and Bermuda has gone the extra mile to address those issues, like money laundering, terrorist financing, secrecy, non-cooperation, etc. We are already ahead of the curve in these areas.

Secondly, the insurance business has, intrinsically, very uneven profit flows. For example, many reinsurance companies suffered huge losses from hurricane related claims during the fourth quarter of last year. If the government was relying on that for tax revenue it would have had to exist for a full quarter, or longer, without any tax revenue at all. You can’t run a government with that kind of uncertainty. This does not happen in larger countries that have the diversification of industry to smooth this unevenness of cash flows.

Thirdly, everyone should know by now that the bottom line, or “net income,” can be massaged by corporations’ army of clever accountants and lawyers to create structures to minimize their tax exposure. To combat this, governments in all income tax paying countries have to hire their own army of clever accountants and lawyers in a continuing tug-of-war to see through the structures invented by their corporate counterparts, and pries the tax revenue out of them, regardless. Globally, the private sector accountants and lawyers have, over the long run, soundly trounced their public sector counterparts. Meanwhile, the government has to pay their own accountants and lawyers, along with the rest of public sector, in this losing game, thereby increasing the need to raise more tax revenue or debt.

Fourthly, income tax has failed miserably in most developed countries to narrow the gap between the rich and poor. According to a new paper by economist Edward N. Wolff, taken from the U.S. Federal Government’s Survey of Consumer Finances, “The wealthiest 1 percent of American households own 40 percent of the country’s wealth. That share is higher than it has been at any point since at least 1962. The wealth owned by the bottom 90 percent, meanwhile, fell over the same period to 22 percent.”

Wolff also cites OECD studies that say: “In high-inequality countries, people from poor households typically have less access to quality education. This leads to large amounts of wasted potential and lower social mobility, which directly harms economic growth.”
This sounds eminently logical, but there’s a problem with this conclusion because the countries with the most glaring wealth inequalities, like India, China and many developing countries, trounce growth rates in “income distribution” countries that can be found in the EU and Scandinavia.

The issues of the gap between the rich and poor in society are complex and evidence suggests there are no magic bullet solutions – particularly for small islands that depend on foreign exchange earnings and capital to survive.

The notion that simply by introducing income tax to Bermuda will narrow the gap between the haves and the have nots is dangerously naive. It may make for good political point-making, but there is no evidence that income taxes will make any difference to this issue.
The real danger for Bermuda, of course, is that such a move will drive the business we have elsewhere. We live in a highly competitive world, and other offshore jurisdictions have already poached significant business from us without such an earth-shaking change as the introduction of income tax.

However, so far the talk of taxes in Bermuda has overshadowed a critical issue when it comes to the ability to balance the budget. The elephant in the room is government spending. It took 18 months of “consultation” with international business (IB) to come up with the plan laid out in the 2017/18 budget. That plan included significant payroll tax increases for IB companies. As many IB companies voluntarily pay the employee portion of payroll tax, the increase in the tax burden for such companies was quite material. They were prepared not to object to that increase on the clear understanding that the increased revenue would go toward reducing the deficit and not to finance increased government spending. I am not certain the new government’s budget continues that understanding.

Increasing taxes on the wealthy in Bermuda – the wealthy companies and their wealthy individual executives/managers – only to increase spending on increased government staff and various capital items is not going to go down well in the C-suites in Hamilton, notwithstanding the polite applause being heard from that quarter at the moment.

The key to balancing government budgets is the establishment of appropriate taxation levels while simultaneously keeping a grip on the government’s natural propensity to spend. This new government needs to demonstrate that it can indeed, “Jump and chew gum, at the same time.” A great deal depends on it.

Beneficial ownership reporting in the United States?

The 115th Congress is seriously considering imposing a beneficial ownership reporting regime on American businesses and other entities, including charities and religious congregations. Two House subcommittee chairmen recently released a discussion draft of legislation and legislation has been introduced in both the House and the Senate. Hearings have been held in both houses.

Under pressure from the Organisation for Economic Co-operation and Development’s Financial Action Task Force (FATF) and the EU, most OECD countries are moving to either a financial institution customer due diligence requirement, similar to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) Customer Due Diligence (CDD) rule discussed below, or a beneficial ownership reporting regime or sometimes both. As with anti-money laundering rules generally, there is little information available as to their effectiveness. Yet politicians continue to blithely enact ever more burdensome and intrusive rules.

The three proposals share three salient characteristics. First, they will impose a large compliance burden of the private sector, primarily on small businesses, charities and religious organizations. Second, they will create hundreds of thousands, and potentially more than a million, inadvertent felons out of otherwise law-abiding citizens. Third, they will do virtually nothing to achieve their stated aim of protecting society from terrorism or other forms of illicit finance. The proposals make lawful avoidance and unlawful evasion quite easy.

Furthermore, the creation of this expensive and socially damaging reporting edifice is unnecessary. The vast majority of the information that the proposed beneficial ownership reporting regime would obtain is already provided to the Internal Revenue Service (IRS). Simply creating a database based on information provided to the IRS and allowing the IRS to share this information with FinCEN would better meet the needs of law enforcement than would the proposed beneficial ownership reporting regimes.

The proposals

The Corporate Transparency Act of 2017 (H.R. 3089) has been introduced in the House by Rep. Carolyn Maloney (D-NY). The True Incorporation Transparency for Law Enforcement Act (S. 1454) has been introduced by Sen. Sheldon Whitehouse (D-RI) in the Senate. Rep. Steve Pearce (R-NM), chairman of the Terrorism and Illicit Finance Subcommittee of the House Financial Services Committee, and Rep. Blaine Luetkemeyer (R-MO), chairman of the Financial Institutions and Consumer Credit Subcommittee of the House Financial Services Committee, recently released a discussion draft of legislation called the Counter Terrorism and Illicit Finance Act. Section 9 of the discussion draft would create a beneficial ownership reporting regime.

The discussion draft would require all newly formed corporations and limited liability companies to report to FinCEN the beneficial ownership of the firm and, among other things, the driver’s license or passport numbers of those owners. The firm would be required to update this information within 60 days of any change. All existing firms would be subject to these requirements within two years. Failure to comply would result in fines of up to $10,000 or three years in prison.

The proposed regime would then “exempt” from the beneficial ownership reporting regime those firms most able to engage in money laundering activities or otherwise facilitate illicit finance. Those exempt include (1) public companies, (2) government-sponsored enterprises, (3) banks and credit unions, (4) broker-dealers, (5) exchanges and clearing houses, (6) investment companies, (7) insurance companies, (8) commodities firms, (9) public accounting firms, (10) utilities, (11) most tax-exempt organizations, (12) firms with more than 20 employees and gross receipts greater than $5 million. Because the exemptions are not self-effectuating, even exempt firms are not truly exempt and must file with FinCEN.

They would not, however, be required to report their beneficial ownership. The only firms subject to the full reporting regime are corporations and LLCs with (1) 20 or fewer employees or (2) receipts under $5 million.

The reporting requirements do not define beneficial owner consistent with normal legal principles or an ordinary person’s conception of owner. Under the proposed regime, beneficial owners would include someone who (1) “… directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise exercises substantial control over a corporation or limited liability company …” or (2) “… receives substantial economic benefits from the assets of a corporation or limited liability company …”

The proposal contains poorly drafted “look through” rules, both explicit and implied, but the application of these rules is not clear. In the absence of such rules, the entire reporting regime could be easily avoided through the simple of expedient of having a corporation or LLC own a corporation or LLC. The discussion draft rules presumably require corporations and LLCs with owners that are also corporations or LLCs to report on the beneficial ownership (as defined) of the corporation or LLC that has a beneficial ownership interest in the reporting corporation or LLC. Thus, for example, a non-exempt firm that had an investment from a venture capital fund would presumably have to obtain information and report on the beneficial ownership of the venture capital fund and report any changes to the venture capital fund’s ownership. How the entrepreneurial firm would be able to secure regular updates from its venture capital investor so as to make new filings with FinCEN within the required 60 days regarding change of ownership in the venture capital firm is left unexplained even though failure to do so would be a felony. It is particularly unclear how this would be accomplished if the investing corporation (the venture capital firm, for example) is exempt and not required to report its beneficial ownership. In fact, exempt firms may not even know their beneficial ownership.

Most of the reporting obligations are imposed on “applicants” but this term is not defined and who is actually to be treated as the applicant is quite unclear. Under state law, the person who forms a business entity is typically known as an incorporator, organizer or authorized person and they often are persons who have no continuing role in the business and do not exercise any degree of control or receive any economic benefit. For ongoing reporting purposes, it is even more unclear who would be responsible as the applicant.

The most important difference between the discussion draft and Whitehouse and Maloney bills is that the discussion draft contemplates FinCEN playing the primary administrative role while the latter contemplate the states playing the primarily administrative role and would provide federal funding to the states. Because most state laws treat corporate filings as public, the Whitehouse and Maloney bills would effectively make beneficial ownership reports public. The United Kingdom is one of the few countries where the information in the beneficial ownership database is currently publicly available. The FinCEN database in the discussion draft would not be accessible by the public. Fines of up to $1 million are permitted in the Whitehouse bill.

The problems with the proposed beneficial ownership reporting regime

The primary burden created by the proposed reporting regime is on firms with 20 or fewer employees or less than $5 million in gross receipts. These are the firms least able to absorb yet another increase in the regulatory burden imposed by the federal government. As should be evident from the brief description in the section above, determining who is and is not a “beneficial owner” under the proposal is complex, highly ambiguous and will often require hiring counsel or a compliance expert. In fact, it will probably take a decade or more of prosecutions and litigation before the meaning of “beneficial owner,” “substantial control as a practical matter,” “substantial economic benefit,” “an entitlement to the funds or assets,” and “directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise” are reasonably well established. Defending these cases will be expensive and often economically destroy the small business and business owner who must defend themselves against the federal government.

Once two years have elapsed, the requirements apply to all existing corporations and LLCs. Thus, for example, a local church or charity that is incorporated (most are) would be required to file with FinCEN. Under U.S. tax law, churches and most other religious organizations do not have to file a Form 990 annually with the IRS. But they would be required to file an exemption certification with FinCEN and update the relevant personnel changes within 60 days or face fines or imprisonment.

Roughly 12 million corporations or LLCs are likely to be subject to the new reporting regime. If even 10 percent are unaware of this new requirement and fail to file with FinCEN, two years after enactment there would be over a million small business owners, religious congregations and charities that will be in non-compliance, subject to fines and imprisonment.
These figures also give a sense of the scale of the compliance industry that would develop and the costs that would be incurred. Assuming, probably heroically, that a small business owner can, on average, read and familiarize him or herself with these rules and file the relevant form in one hour, then the number of compliance hours would be 12 million hours.

Monetized at $50/hr (which is a very low fully burdened rate for management), the compliance costs would be $600 million. If, more realistically, you assume a greater compliance time or a higher hourly rate or that they engage outside counsel or compliance experts (which is likely for many given the ambiguities discussed above), then the likely cost will be well over $1 billion annually and quite probably many billions of dollars.

The highly limited effectiveness of the proposed regime

Successful money launderers are typically sophisticated. They can lawfully avoid the requirements of the proposed reporting regime quite easily. It does not apply to partnerships and business trusts. So to avoid the application of these rules, they need only form a partnership or a business trust instead of a corporation or LLC. Alternatively, they could buy a business that met one of the exemption requirements (e.g. gross receipts over $5 million and 21 employees), file a certification of exemption with FinCEN and lawfully not report. As discussed above, the look-trough rules applicable when entities own entities are opaque, extremely unclear, potentially utterly unworkable and highly burdensome. But if it is ultimately determined that a non-exempt entity can have another entity own it without reporting on the beneficial ownership of the owning entity, then the requirements can be lawfully avoided by simply having a two-tier corporate structure.

Criminals can also illegally evade the system rather easily by simply filing partial but false beneficial ownership reports or not filing at all. Unless FinCEN is going to start routinely auditing firms (expending a great many federal tax dollars and imposing large costs on law-abiding firms), then this is a low risk evasion strategy. The maximum of $40 million in funding contemplated in the legislation is vastly too low to support non-trivial audit rates on roughly 12 million entities. The bulk of the $40 million will not be spent on enforcement but on simply administering the system and maintaining the database. Thus, unless the FinCEN budget is dramatically increased, the chance of FinCEN detecting inaccurate filings would be extremely low.

To the author’s knowledge, there is no actual evidence, as opposed to bare assertions or anecdotes, that the beneficial ownership reporting regimes in other countries have had any material effect on money laundering or terrorism. But the relevant question for the U.S. is not whether they have had any impact but whether they have they improved non-tax law enforcement in a cost-effective manner. The tax information is already available to the IRS. Thus, the only gain to be had for the U.S. from the proposed regime is with respect to non-tax law enforcement.

The existing anti-money laundering regime (AML) is extraordinary expensive. As detailed in a September 2016 Heritage Foundation report, Financial Privacy in a Free Society, the current AML regime costs at least an estimated $4.8 billion to $8 billion annually. It costs at least $7 million per conviction and potentially many times that. There is a need to engage in a serious cost benefit analysis of the AML regime and its constituent parts before adding yet another poorly conceived requirement that burdens the smallest businesses in the country. Yet a serious cost-benefit analysis of the AML has never been undertaken by the U.S. government.
FinCEN’s CDD Rule

In 2016, FinCEN finalized its “Customer Due Diligence Requirements for Financial Institutions” rule with which covered financial institutions must comply by May 11, 2018. Covered financial institutions must identify and verify the identity of the major beneficial owners of all legal entity customers (other than those that are excluded, generally other financial institutions and public accounting firms) at the time a new account is opened. Thus, unlike the Congressional proposals, it would apply only to new accounts. The identification and verification procedures for beneficial owners are very similar to existing rules for individual customers under a financial institution’s customer identification program. Financial institutions may generally satisfy this requirement by having the customer fill out a form specified in FinCEN regulations.

One of the stated reasons for the proposed beneficial ownership reporting regime is to alleviate the burden on financial institutions caused by the FinCEN Customer Due Diligence (CDD) regulation. The objective is to shift the costs imposed on financial institutions caused by the CDD rule onto small firms and, to a lesser extent, government. Yet, the only definite cost savings for financial institutions from section 9 of the legislation is from the temporary suspension of implementation of the CDD rule until a revised rule is promulgated. Beyond that, the magnitude of savings to financial institutions would be a function of what FinCEN chose to do in its revised rule. Given FinCEN’s history, a minimal consideration of private costs incurred is to be expected as the regulation is revised. The justified concern about the costs and inadequate benefits of the FinCEN rule could better be addressed simply by placing a permanent moratorium on the rule. Countering FinCEN’s overreach does not require imposing large costs on small firms and civil society.

An alternative approach

The alternative approach would require the Internal Revenue Service to compile a beneficial ownership database based on information already provided to the agency in the ordinary course of tax administration and to share the information in this database with FinCEN. The database would be compiled from information provided on six Internal Revenue Service forms: (1) SS-4, (2) 1065 (Schedule K-1), (3) 1120S (Schedule K-1), (4) 1041 (Schedule K-1), (5) 1099 DIV [Dividends and Distributions], and (6) 8822-B. With this information, the ownership of every business in America and each business’ responsible party would be available to FinCEN, with the exception of non-dividend paying C corporations.

This alternative approach would also enable FinCEN to look through entities that had ownership in other entities. It would provide more comprehensive information to FinCEN than the proposed reporting regime. Furthermore, the social cost of this approach – creating a database based on information already provided to the IRS – would be a very small fraction of the approach contemplated in the proposed reporting regime. The increase in private compliance costs would be negligible since the information is currently reported for tax purposes and the alternative approach outlined here would not create a large class of inadvertent felons out of small business owners and church treasurers or pastors. It almost certainly would reduce federal administrative costs compared to those contemplated in the discussion draft. Reformatting and sharing existing information should require dramatically fewer resources than creating, administering and enforcing an entirely new reporting system.

To implement this approach, Internal Revenue Code §6103(i) governing the privacy of tax information would need to be amended to allow the IRS to share the information with FinCEN and to govern what FinCEN could then do with the information. The revised approach should also place a moratorium on implementation of FinCEN’s CDD rule.

Not for love or money

The next time you meet your Money Laundering Reporting Officers (MLRO), spend a moment to chat with them and to fully understand the demands of their role, the conditions under which they work, and try to assess how enviable or not, their job is. Some would say their role is thankless but essential.

There has been a recent flurry of activity around the appointment of MLROs and their deputies.  Recent changes to the Cayman Islands Proceeds of Crime Law, 2017 (POCL) has clarified that persons conducting relevant financial business, whether a non-profit or an unregulated investment fund vehicle, are now required to appoint an MLRO, and an alternate, and to have a AML/CFT compliance program in place.

It should come as no surprised to discover that the Cayman Islands Monetary Authority has already been paying keen attention to the suitability of MLROs appointed by its licensees, recommending changes where it considers there is a need. It is anticipated that the Department for Commerce and Investments will ultimately do the same, once its enforcement powers over certain members of the Designated Non-Financial Businesses and Professions and Non-Profit sector, is enlisted.

Under section 136 of the POCL, a person commits an offense if he does not make the “required disclosure” to the FRA or his MLRO or deputy, of a suspicion or actual knowledge of terrorist financing or money laundering that has come to his attention in the course of doing relevant financial business. Section 137 sets out the circumstances in which an MLRO commits an offense for failures to make appropriate disclosures. At the serious end of the stick, persons (including your MLRO) could find him or herself imprisoned for five years so there are real consequences.

Information disclosed to a country’s financial intelligence unit (FIU) or in the case of the Cayman Islands, the Financial Reporting Authority (FRA), often provides an invaluable tool with which various forms of financial crimes can be fought.

But for this to be the case, an MLRO must ask the right questions and provide useful information on the suspicious activity report (SAR). Put another way, it is essential that the MLRO understands the intricacies and vulnerabilities of the product, service, or activity that comprises the relevant financial business that they oversee, so that intelligent questions could be asked and relevant information gathered, accordingly.

In articulating suspicion of a crime to the FRA or any FIU, or indeed in articulating actual knowledge of such crime, the information provided in a SAR should be easy to read, clearly and logically set out.

At minimum, and extrapolating on section 136 of the POCL, the following details should be provided to your MLRO and by the MLRO to the FRA should it consider a report appropriate:

  • Why you are suspicious or how you did you come to have knowledge?
  • Who is involved? Give names and sufficient information to identify those involved
  • How are they involved? Provide specific information on the roles of those believed to be involved, e.g., trustee; investor; settlor; donor; beneficiary; property owner; real estate agent, banker, investment manager; country coordinator for charity; forced labour.
  • What is the criminal/terrorist property? State a type if possible, e.g., gift or store cards; diamonds; expensive watches; gold coins; cash; real estate; trust funds; cryptocurrency, shares, vessels, motor vehicles; drugs; watermelons; software.
  • What is the value of the criminal/terrorist property? Provide details where known.
  • Where is the criminal/terrorist property? Give the location last known to you.
  • When did the circumstances arise or when are the circumstances planned to happen?
  • How did the circumstances arise? For example, we know that what may be suspicious in the insurance sector, may not be cause for concern in the oil and gas sector, or vice versa.

Every MLRO, whether appointed in any organization licensed by CIMA or within a church or charity, must understand the profile of its customers, and the nature and purpose of any transaction. In the absence of this, obvious matters that should be reported may be overlooked, and routine operational issues may raise an unwarranted red flag.

A properly prepared SAR can help the FRA to develop an initial picture of criminal activity or intent. Alternatively, it may provide additional information to a picture that was already developing through, the analysis of previous SARS received, or information shared via other FIUs and international agencies.

There is an open discussion as to whether documents should be appended to the SAR. Where the suspicious activity report is properly documented, it would seem unnecessary to append documents to the report. Indeed, certain jurisdictions like the U.K., specifically instruct that no documents be submitted along with the SAR. An additional consideration is that FIUs, including the FRA, are equipped with the statutory authority to request further particulars and documents from the filers of SARs. It may be in the best interest of all involved to ensure that any supporting documents provided to the FRA, is properly provided in response to a lawful request, and not volunteered, potentially in breach of other confidentiality obligations.

Regardless of whether the incumbent is an employee or an independent third-party service provider, those taking up the role as an MLRO should understand their core function and legal duties, and possess or acquire, the relevant know how and correct levels of access to information, in order to function effectively.

Training is critical since not every unusual activity is suspicious, and not every suspicious activity is unusual. Context is important, and vigilance will only bear fruit if staff and MLRO alike fully understand the nature and purpose of transactions they are involved in, know where to look and how to interpret what they are seeing or presented with.

Where an outsourced MLRO service is utilised, it is essential that clients satisfy themselves that the service provider understands the intricacies of the relevant financial business, or the financial product, that they offer.

An MLRO must have the ability, and inclination, to ask the difficult questions at the highest levels in any organisation, no matter how exhausting or unappealing it may appear. It is unacceptable for lip-service to be paid to the statutory requirement to have a nominated officer, by appointing a staff member into the role, but with no autonomy or real access to pertinent information, and with a substantial concern about reprisal. This may be particularly relevant in organizations that have very strong personalities in senior management positions, and even in law firm settings where the MLRO is often not an attorney and may be subject to direct line management of a senior partner, who may also be involved in the particular, transaction.

The importance of the MLRO’s role cannot be overstated. They have a leading role to play in our efforts to prevent and detect money laundering and to counter terrorist financing. The holders of this role should be empowered, properly trained and supported by the senior management in the execution of their duties.

MLROs are required to be increasingly vigilant in an age of rapidly advancing financial technology and require access to similarly advanced technology to truly keep up. What should be trending is a commitment and willingness to provide the tools these professionals need to do their jobs effectively.

The top 25 Initial Coin Offering jurisdictions and their comparative regulatory responses

Initial Coin Offerings (ICOs) provide unprecedented liquidity and efficiency for capital formation while minimizing transaction cost. While ICOs have historically allowed primarily crypto start-ups, financial technology start-ups, and the crypto community to raise funds, in 2018, legacy businesses with established businesses and products increasingly used ICO fundraising to finance their business activities.

ICOs display several core beneficial characteristics that help explain their attractiveness for crypto startups and legacy businesses alike. ICOs’ comparative advantage over other means of capital formation consists mainly of their cost-effectiveness that helps offsets the complex and unpredictable economic dynamics in the crypto marketplace. Unlike other means of capital formation, ICO’s allow promoters to avoid sacrificing equity for financing. Instead, ICO promoters can use the proceeds of the ICO exclusively for product development. ICOs provide low barriers to entry for a diverse body of investors and thus increase the diversity and the heterogeneity of start-up funding.

ICOs are creating unparalleled efficiencies for capital formation. First, ICOs enable borderless online sales with much fewer points of friction. ICOs enable the promoters to bypass the typical legal, jurisdictional, and business hurdles by directly marketing to a worldwide pool of investors. Moreover, ICOs are still in 2018 subject to rather limited accreditation standards. While accreditation standards have been instituted by some jurisdictions, including full compliance checklists for ICO registrations, ICOs are overall still subject to rather limited accreditation standards and regulatory formality.

ICOs provide unparalleled liquidity for all of its constituents. First, global cryptocurrency exchanges provide significant continuous access to trading ICO tokens which allows for significant liquidity at the earliest possible time in the lifecycle of the underlying business. ICOs provide liquidity to investors much faster than any other form of capital formation. ICOs also allow venture capital funds to capitalize on existing profits much earlier while avoiding a long, complex, and time-intensive processes leading up to an IPO, acquisition, or similar late-liquidity event in the lifecycle of the business. Finally, promoters can get the earliest possible liquidity of their token reserves simultaneously with the financing for their product launch.

Regulatory concerns

Regulators have been evaluating possible risk factors associated with ICOs since the inception of the ICO market. Regulators are particularly motivated by several ICO risk factors for retail investors. Unlike shareholders in the traditional corporate infrastructure who are able vote for or against directors or to nominate directors, ICO investors have not control over the promoters whatsoever. Token holders typically invest in the future promise of an idea or future infrastructure product associated with the platform they invest in without having access to a tangible underlying product. Capped ICO raises evolved in an attempt by the crypto community to address the uncertainty for investors about the valuation of the underlying platform in cases of uncapped raises. However, capped ICO raises crate significant incentive for investors to attempt to get in first, raising the likelihood of retail investor frenzy.

Moreover, the lack of mandatory disclosures for ICOs leads many promoters to make irregular or no disclosures about the platform as time passes, leading to a significant lack of transparency in the ICO market. Promoters can also change the smart contract to change ICO sales rules mid-course during the ICO.

Unlike traditionally listed businesses that have a long history of business success before being listed on a stock exchange, most crypto platforms cannot generate revenue to offset costs. Crypto platforms typically do not have employees in the traditional sense that create and advertise the platform product. Worse yet, because they have no product and no revenue to offset costs, crypto platforms’ revenue raised is typically required to last for the lifecycle of the platform, requiring crypto platforms to set aside a large number of tokens for future funding needs.

ICO investors have no preemptive rights or other anti-dilution protections. If the promoters decide to issue more reserve tokens to additional investors, the ICO investors may be diluted in the future. The only real control token holders have to protect themselves is to sell their tokens post-ICO. In fact, many venture capital funds that received tokens in exchange for their pre-ICO investments often quickly sell their tokens to protect themselves against devaluation.

ICOs are subject to very high volatility. Unlike any prior financing vehicles, ICOs provide the highest possible liquidity for investors at the earliest possible time in the lifecycle of the issuer. Investors in legacy businesses receive significant assurances pertaining to the business success of the issuing entity because the issuing entity is subject to ongoing disclosure requirements. ICOs on the other hand, give investors very limited assurances through upfront and continuous disclosures, making the token market highly volatile.

Token holders typically do not receive a liquidity preference that would protect them in the case of bankruptcy or termination of the platform they invested in. In cases of bankruptcy, token holders typically have no recourse at all after the debt holders and outside creditors were satisfied with the liquidation value of the entity. By contrast, in a typical venture capital seed stage investment, the venture capital fund should typically obtain at least a simple liquidity preference. This allows venture capital funds to reclaim their initial seed investment before other creditors are satisfied.

United Kingdom

The Financial Conduct Authority is the agency of the U.K. government that regulates financial activity such as ICO’s and cryptocurrency. The FCA has taken the position that ICO’s may be regulated as securities depending on the different aspects and rights the coin holder obtains through holding the coin. They propose a case-by-case analysis to determine whether the ICO falls under the regulatory authority of the FCA. Additionally, they recognize the lack of jurisdiction when the ICO is based overseas.

The FCA has also taken steps to regulate distributed ledger technology (DLT). Although they state that their objective is to regulate the outcome rather than the process, the FCA has acknowledged that DLT has unique aspects that can work around current regulations. As a result of a study, the FCA determined that the current laws are flexible enough to confer DLT businesses.

Russian Federation

The Central Bank of the Russian Federation is the regulatory authority in Russia that is considering ICO and cryptocurrency regulation. At the time of publication, the Central Bank of Russia has indicated that the regulation of this technology is premature. For this reason, the Russian government has declined to put forth any regulations to control ICO’s, cryptocurrency or DLT.


The Swiss Financial Market Supervisory Authority has the power to regulate financial matters within Switzerland. FINMA has said that current ICO activity is covered by money laundering, banking, securities and collective investment laws. FINMA has been supporting blockchain technology and sees its benefits within the financial markets. In an attempt to balance this benefit with investors rights, FINMA will investigate every time there is a reported regulatory breach.


The regulatory authority in Singapore is the Monitory Authority of Singapore. In August of 2017, the MAS released guidance on how they plan to approach regulation of digital tokens. In this statement the MAS stated they will regulate tokens if they fall under the Securities and Futures Act (SFA). There is no direct regulation under the SFA unless the currency is linked to an ownership or security interest in the issuers assets or property. If such rights are attached to the currency, the issuer must register with MAS, unless exempted for another reason.
MAS also issued a warning to investors considering investing in these securities. If the securities fall under MAS regulation, there will be a triggering of conduct rules, which concerns fair dealing. If the security falls outside the MAS regulations, there will be no duty of fair dealing.


Lithuania current regulatory body (Bank of Lithuania) takes the position that these financial devices are too risky and discourage investors from investing in them. If a party decides to still launch an ICO or cryptocurrency under Lithuanian jurisdiction, the current laws surrounding securities and money laundering may apply.

The terms for financial institutions stipulates that if a financial institution seeks exposure to cryptocurrencies, they separate the financial services of the cryptocurrency from the other investments. Although this may be difficult for many institutions, there is still a possibility that a financial institution can invest in cryptocurrency if they keep the crypto exposure separate.


The Australian Securities and Investment Commission is the regulatory body for cryptocurrency in Australia. Australia is trying to determine whether the Corporations Act applies to ICOs and cryptocurrencies. If an ICO/cryptocurrency falls under the Corporations Act, additional disclosures are triggered. For instance, an ICO might trigger a disclosure requirement if the ICO is a managed investment scheme (MIS). A few other possible triggers of the Corporations Act involve, for instance, the ICO being offered as a share of a company, as a directive or as a non-cash payment.

Australia has also implemented what they call the “Innovation Hub” to help fintech companies comply and navigate the regulatory world. Through this program, the ASIC is also able to keep track of what is happening in the market. This allows both parties to eliminate uncertainty that may exist.


The Gibraltar Financial Service Commission is in charge of regulating cryptocurrency in Gibraltar. Gibraltar has taken notice of the increased use of distributed ledger technology, cryptocurrency and exchanges. Since Jan. 1, 2018, there are new regulations to address DLT, exchanges and cryptocurrency.

GFSC states that “ICOs are an unregulated means of raising finance in a venture or project.” Under certain circumstances, however, tokens can fall under Gibraltar securities law. In order for a currency to be considered a security a token must be an equivalent to shares in a company. Most currencies are not regulated under securities law because the creator takes steps to make sure there is no interest in the project.


Under the current law, financial regulator BaFin has stated that cryptocurrencies are financial instruments. Additionally, the regulation being applied to the currency is dependent of the rights the cryptocurrency holds. The main difference involves whether ownership rights apply, which will trigger securities law. BaFin has also stated that just because a German citizen is in possession of the currency, German law will not necessarily apply. This deals with a jurisdictional issue where for Germany enforce the law, the coin offeror must be specifically marketing to the German population.

As of the date of publication, BaFin has decided that they will decide on a case-by-case basis whether any of this new technology is in violation of the Banking Act, Investment Code, Payment Service Supervision Act or the Insurance Supervision Act.


The Canadian Securities Administration is the regulatory authority in Canada. The CSA applies a four-factor test in determining whether cryptocurrencies must be registered as securities. The factor test will consider substance over form when considering:

  1.  Soliciting a broad base of investors, including retail investors;
  2.  Using the internet, including public websites and discussion boards, to reach a large number of potential investors;
  3.  Attending public events, including conferences and meetups, to actively advertise the sale of the coins/tokens; and
  4.  Raising a significant amount of capital from a large number of investors.

The CSA has also developed a regulatory sandbox specifically for fintech companies to stay in compliance. The regulatory sandbox allows a fast track for registration or exemption depending on the circumstances. The thought behind the regulatory sandbox is to allow a flexible process for complying with the current regulations.

Finally, the CSA touches on exchanges and how this relates to regulation. In determining whether an exchange must be registered, they must meet the qualifications for being a marketplace. When an exchange is considered a marketplace or alternative trading system, the exchange is required to register. At the time of publication, there were no registered marketplaces or alternative trading systems (ATS) in Canada.


Israel has formed a committee to consider the regulation of cryptocurrencies and ICO’s. The committee will lay the groundwork for future regulation. As of now, the overarching tone from the committee has been to embrace blockchain technology and become an “ICO hub.” With this tone from the committee, it is likely that future regulation will be favorable to ICO’s and blockchain technology.


The National Bank of Ukraine has the power to regulate cryptocurrencies in Ukraine. A statement for the Bank of Ukraine lays out the different views other countries have presented, concluding that the Ukraine has not taken a position on the issue yet. Instead, they are going to discuss the issue at the next financial stability board meeting, which will be held in August of 2018. At the present time, Ukraine is not saying anything as to how they are going to treat this technology.


France’s regulatory authority on the matter of cryptocurrency is the AMF. The AMF has taken the position that they are still not sure what this technology is or how to regulate it. For this reason, France has implemented a new program called the Universal Node to ICO Research & Network (UNICORN). Through this program, France will explore the scope of regulation to be implemented. As of now, the three ways of regulating they are considering are: (1) promoting best practices with existing legislation (2) extend the scope of existing text to include ICOs as securities and (3) propose ad hoc legislation adapted to ICOs.


There is currently no information on the regulation of ICO’s or cryptocurrency beyond gambling laws.


In a joint statement by the Polish National Bank and Financial Supervision Commission, the regulatory authorities said cryptocurrencies are not considered legal tender. As a result of this lack of legal tender, the government issued warnings about investing. The government makes a clear distinction between investing in DLT and virtual currencies. The government says that DLT’s may be subject to other laws that do not apply to virtual currencies. The statement does not explicitly prohibit financial institutions from participating in the crypto market but advised these institutions not to invest.

The KNF issued an additional statement concerning ICO’s specifically. The statement laid out what an ICO was and the risks associated with investing. Depending on the way the currency is structured, there can be a lack of legal protections if the currency does not fall under the regulations financial markets have to follow.


Until recently, Lichtenstein had been relatively silent with regards to taking a stance of whether securities law applied to ICO’s and cryptocurrencies. In September of 2017, the Financial Market Authority came out with a fact sheet concerning ICO’s and cryptocurrency. In the legality section, the government states that the applicability of securities and financial instrument law will depend on the rights attached to the token. If corporations have questions concerning ICO’s, Lichtenstein has established a fast track fintech department to address these issues.

In Dec. 2017 the Financial Market Authority issued the non-profit organization CBN a no action letter. It is important to note that CBN’s ICO currency did not come with any right to assets or property. This could be seen as an indicator of the government’s position on companies engaging in ICO/cryptocurrency activity.


The People Republic of China have taken a firm stance against ICO’s, banning them entirely. This also applies to the offering of coins and the exchanges used to trade the coins. China believes that ICO’s hurt the market because of potential deception and fraud. The PRC recognizes that this has been going on in their country and as a result, issuers of these currencies must take steps to protect investors rights under the current laws.


The Commission de Servellance du Secteur Financier is the regulatory authority tasked with the regulation of cryptocurrency. The CSSF has not issued any regulations but relied on statements from the IOSCO and ESMA.

Costa Rica

There is currently no information on where the government stands on the regulation of ICO’s, cryptocurrency or blockchain technology.


There is currently no formal statement by the government, but the futures market of Mercado de Termino de Rosario is considering the application bitcoin.

The National Bank of Serbia is the regulatory authority over ICO’s in Serbia. Serbia has taken the position that financial institutional are not allowed to participate in ICO’s or other cryptocurrency investments because they are not legal tender. For individuals, the government warns against investment because of security issues.

In addition to the disallowance of cryptocurrency as legal tender, in 2016 the National Bank of Serbia stipulated that they would be considering regulation on the treatment of cryptocurrencies. At the time of publication, no new regulation from the Serbian authorities existed.


Slovakia’s regulatory body that deals with financial matters is the National Bank of Slovakia. The national bank takes the view that cryptocurrencies are not considered money because countries enjoy monetary sovereignty. This makes it difficult to regulate because cryptocurrencies as they cannot fall under the monetary policy of the country. It also means that cryptocurrencies do not fall under the definition of electronic money because there is no monetary value.

The National Bank of Slovakia has also stated “bitcoiny nemajú ani povahu finančné ho nástroja” which translates to “bitcoin does not have the nature of a financial instrument.” Therefore , cryptocurrency does not fall under securities and financial instrument law.


Slovenia’s regulatory body for ICO transactions is the Bank of Slovenia. Slovenia issued a warning to investors about the dangers of ICO and cryptocurrency investment but have since declined to take a position on regulation. Currently, there are no regulations or position taken by the government beyond the formal warning.

There is hope that when the government finally takes a stance on the treatment of ICO and cryptocurrency regulation it will be to foster innovation rather than restrict. In a statement, the prime minister said that the country is currently studying the technology in the hope of turning Slovenia into the blockchain hub of the European Union. One of the ways in which the government is attempting to accomplish this is through a Blockchain Think Tank, which allows companies a point of contact on compliance and development issues.


Myanmar officials have not taken a position on blockchain technology.


The Swedish regulatory authority Finansinspektionen (FI) controls the regulation around ICO’s and cryptocurrency. The FI has taken the stance that ICO’s are investment products that may be traded. Although there is no explicit ban on financial companies raising money through ICO’s, no Swedish company has attempted to do so yet. Along with this notice, Sweden has also issued a warning about the risks associated with cryptocurrencies and the ICO market. Along with this general warning, FI cites the ESMA publications that reference, depending on the cryptocurrency structure, a possible triggering of securities law as well as other consequences.


The majority of the countries examined in this study permit ICO’s and cryptocurrencies or do not explicitly prohibit them. Of the entirety of countries considered, only a very small minority has banned ICO’s and cryptocurrencies altogether. For the most part, the general view of the world governments appears to be that they are using existing laws to regulate cryptocurrencies or wait to see how other countries react to the crypto evolution. Regulatory efforts can take several forms but appear to involve some of the following approaches or permutations thereof: regulating ICOs, regulating cryptocurrencies, regulating DLT, mandating compliance programs, regulating exchanges, securities regulation, prohibition of exposed financial institutions, government suggestions to consumers not to participate.

Book Review: Will blockchain remake accounting, the internet and the world?

Civilization is founded on trust. A welter of research over the past two decades has shown that high trust societies grow more rapidly than low trust societies. There is an immutable logic for this relationship: Growth is generated by the development of better, less expensive products and processes, which in turn is driven by opportunities made possible by trade, and trade is facilitated by institutions that enable counterparties to trust one another.

Historically, trust-enhancing institutions have relied on trusted third parties. Among the earliest of these, dating back 7,000 years, were ledgers documenting exchanges of goods received and traded in Mesopotamia. These ledgers were kept in temples, the primary trusted third party of the day. By the First Century AD, the Romans had developed ledgers into sophisticated means of accounting for credit and debt. These ledgers enabled large sums to be transferred without moving physical currency. Such transactions could even take place internationally through a trusted authority called the publicani – private companies responsible for tax collection in the provinces.

A significant advance in the functional effectiveness of ledgers occurred in 1458, when Benedikt Kotruljevic, a merchant from Dubrovnic, invented double entry bookkeeping. By maintaining a consistent record of all debits and credits, double entry bookkeeping enables investors and potential investors in a company better to identify the company’s assets, liabilities, profits and losses. But for double entry book-keeping to be trusted requires the entries to be verified. Traditionally, this has been the job of auditors — a trusted third party.

Unfortunately, as the various accounting scandals of the past two decades show, auditors can be misled. Moreover, valuations made by auditors typically only reflect a snapshot of the actual value of assets and liabilities at the time of the audit, often based on arbitrary valuation rules. When assets depreciate rapidly, companies that look solid on the basis of “book” value can in fact be insolvent, causing major disruptions to counterparties.

These problems may soon be overcome by a new type of ledger. In The Truth Machine, Michael Casey and Paul Vigna argue that the blockchain, the technology underpinning Bitcoin, is potentially the most significant advance in accounting since the invention of double entry bookkeeping. Instead of a centralized ledger verified by trusted third parties, the blockchain is an immutable, distributed, append-only ledger secured through public key encryption and validated by untrusted third parties through the application of a cryptographic algorithm.

These features make the blockchain incredibly secure and almost impossible to hack. As Casey and Vigna point out, to work through every possible number that could be generated by Bitcoin’s hashing algorithm, for example, would take over 4,500 trillion trillion trillion years using all the computers on its network. Meanwhile, taking over 51 percent of Bitcoin’s miners and thereby forcing the network to accept a false change to the ledger would cost over $2 billion. (One caveat: quantum computing might pose a threat in the future but solutions to such threats are already being investigated.)

Among the many blockchain applications Casey and Vigna discuss is one developed by Factom, “an Austin, Texas, company that created an audit trail of financial documents’ changes, creating a model that if it is widely applied, will eventually replace the whole industry of quarterly and annual accounting and auditing with something that happens in real time.”

While blockchain has significant advantages as a means of securing and validating transaction data without the need for verification by a trusted third party, it has faced challenges due to the small number of transactions that can be processed at any one time and the at-times high cost of such transactions. Bitcoin can only process seven transactions per second, takes about 10 minutes on average for validation, and, depending on the extent of congestion in the system can cost anywhere from 20c to over $100 per transaction. (Transaction costs rose dramatically at the end of 2017 and in early 2018, as bitcoin mania erupted around the world. They have since fallen down to earth.)

By contrast, payment networks such as Visa and MasterCard can process 65,000 transactions per second, provide near-instantaneous verification, and typically charge between 0.1 percent and 1 percent of the transaction amount, depending on the type of transaction and the location and type of merchant. Casey and Vegna incorrectly assert that payment networks charge interchange fees of 3 percent — confusing that fee with the bundled processing fee charged by some merchant acquirers.

Various innovations may dramatically increase the speed and reduce the cost of transacting using blockchains. For example, the Lightning Network is a payment network based on a set of smart contracts that operates in concert with blockchains (primarily but not exclusively Bitcoin). Basically, funds are transferred from a blockchain address to the Lightning Network according to rules in a smart contract. Those funds can then be allocated between participants in the Lightning Network according to agreements embedded in other smart contracts. The blockchain is used for validation of the initial smart contract and as enforcement in the case of a breach of transfer contracts. In principle, Lightning Network has the potential to process 65 billion transactions per second.

As Casey and Vegna illustrate with numerous examples, these and other innovations are likely to bring blockchains into the mainstream within the next few years. Use cases are still being developed but in principle any activity that relies on trusted third parties, from accounting to notarization, and from fund management to property registries, could be dramatically affected.

However, Casey and Vegna sound a note of caution regarding the development of private or “permissioned” blockchains, which are being developed by various banks and consortia. While in principle, these have many of the benefits of public blockchains, such as Bitcoin, Etherium and Eos, they are not truly decentralized and thus retain some of the inherently problematic features of trusted third parties. But it may be that these permissioned blockchains offer sufficient improvements in scale and reductions in cost relative to existing transaction processing systems that they undermine the case for switching to public blockchain based applications.

Alternatively, it is possible that both permissioned and permissionless blockchains will operate in parallel, with some being more-or-less dominant in certain applications and others continuing to compete for market share, just as Apple’s iOS-based products compete with those offered by the many companies offering products operating over Google’s Android OS.

Another note of caution is worth raising: Governments are waking up to the potential for blockchains to be used to circumvent regulations, ranging from capital controls to securities regulation. As others have noted in these pages, China’s government has clamped down on cryptocurrency exchanges, realizing that these offer a means for people to convert currency into private crypto-assets (such as Zcash and Monero) that are almost impossible to trace.

Meanwhile, the U.S. Securities and Exchange Commission has launched investigations into numerous initial coin offerings (ICOs) on the grounds that these are effectively unregulated securities offerings. In response to the latter, most new ICOs are now launched in jurisdictions that are not subject to SEC purview, including Switzerland, Lichtenstein, Gibraltar and Cayman, and U.S. residents are prohibited from participating.

It is probably too early to tell whether blockchain will change the world. The cryptocurrency bubble and associated profusion of ICOs recall the Internet bubble of 1999. There are likely some world changing platforms and apps out there (and Bitcoin may well be among them). But there are also likely many poorly conceived, poorly implemented applications that will fail. And of course there are some outright frauds.

“The Truth Machine” offers a valuable history of the development of blockchain, its potential role as an alternative to trusted third parties, and a discussion of some of the platforms and apps that have thus far been developed. The authors have tried to remain impartial, though they evince a bias in favor of permissionless blockchains that may or may not be justified.

Blockchain and Cayman’s real estate industry

While readily admitting that I am not the world’s expert on the subject of Blockchain, I would like to acknowledge that I am starting to see a definite trend towards the employment of this software platform for digital assets within the real estate industry globally and stirrings of interest even within Cayman’s own real estate industry.

As I explore how this new technology can be incorporated into our industry, I believe it offers an exciting world of possibilities, because it delivers a completely secure environment for buyers and sellers to communicate with their agents/buyers in real time, thereby potentially speeding up the buying/selling process from start to finish immeasurably. Buyers have to undergo a specific due diligence process so that well before they click the ‘Offer now’ button they have been fully scrutinized through multiple layers to ensure eligibility and that they are genuine and legitimate. One major proponent of Blockchain within the real estate industry is a company I have been working with for a while.

This offers real estate brokers and agents the chance to provide their customers with an end to end online offer process, which allows buyers with literally a click of a button, subject to due diligence checks, to make an offer on a property and to complete an offer agreement via Blockchain smart contracts. The process is also currently being rolled out for an end to end online leasing process, with renters and landlords soon being able to complete rental agreements via Blockchain smart contracts.

Down the line later this year, there will also be the possibility of cryptocurrency payment options for security deposits, rents and service fees, which is another exciting development in this area of technology, once jurisdictions get up to speed with the necessary legislation. The first in this field to have successfully implemented a platform of smart contracts to allow the real estate process to function in this way and the first to roll this technology out to real estate brokers and agents for the benefit of their clients. I believe this is a really big step for the industry and definitely an area of technology to watch and grow over the years.

Why we need to shout louder

Last December, it was announced that Cayman Islands was not included on a list of 17 countries that the European Union deemed “uncooperative” in tax matters. But we did not get off scot-free, having been placed on a graylist of 47 countries and jurisdictions that have made written commitments to meet specific EU criteria to show we have tax transparency and “tax fairness.”

Even though this jurisdiction continues to deliver a robust and noted framework for the prevention of money laundering and other financial crime, the anti-offshore campaigns continue to come at Cayman from a variety of different angles. They are not new to Cayman and while they obviously impact the financial services industry, Cayman’s real estate industry also seems to get pulled into the discussion, as an industry that deals in the movement of funds on and off island.

I believe this is an important issue that needs to be dealt with collectively, by all offshore jurisdictions working together as a single voice, explaining the need for an offshore financial services industry and fighting the propaganda that onshore seems to promote.

Cayman’s own Cayman Finance works towards addressing this issue, but I think more needs to be done. For far too long, this playing field has been heavily leveled in favor of offshore, with places such as Delaware, Las Vegas and Colorado all creating their own offshore financial services onshore. The impact on the real estate industry is felt when people tell me they would like to invest in Cayman real estate but are afraid to, given the misconceptions about the role of offshore. Perceptions about what we do here are based upon misinformation and ignorance, so I feel it is important we do more to educate people about the value of what we do, and the fact that ordinary, everyday people in the U.S. particularly, benefit from having their pensions invested in a pension fund that invests in a Cayman Islands domiciled entity.

Simply put, we need to get across that investing in Cayman funds is a good thing, not a bad thing and why.

Chile should give the OECD the cold shoulder

In its never-ending quest to implement a statist version of globalism, the Organisation for Economic Co-operation and Development (OECD) has recommended that Chile undertake a series of interventionist reforms to address supposed problems in its economy.

According to the 2018 Economic Survey of Chile, Chile has lingering levels of inequality that must be taken care of. Rather than focusing on reducing overall poverty – one of Chile’s success stories over the past 40 years – the OECD instead decides to obsess over Chile’s inequality “crisis” that must be addressed by “increasing social spending to reduce inequality.”
In other words, the Paris-based bureaucracy effectively wants people to believe that Chile has a problem because some people have become richer faster than others have become richer. And because of this ideological approach, the OECD is drawn to redistributionist policies. For instance, it asserts that equity “would rise with higher social spending and a reform of the pension system that currently leave many with very low entitlements.”
While Chile is not as developed as some of its OECD counterparts, Chilean policymakers should look at arguments for more interventionism in its economy with a skeptical eye.

A model of hope for Latin America

For all intents and purposes, the Chilean market model based on free trade and a light regulatory touch has worked wonders for the country over the past few decades. Averaging a mediocre real per capita GDP growth rate of 0.70 percent from 1913 to 1983, Chile was stuck in the economic doldrums for most of the 20th century.

However, thanks to the valiant efforts of the Chicago Boys and their far-reaching reforms – abolishing currency and price controls, establishing a privatized social security system, liberalizing trade, privatizing key industries, and reducing spending – Chile was able produce an impressive 4 percent real per capita GDP growth rate from 1983 to 2003.

Since then, Chile has stood out as a beacon of hope for Latin America, a region that has been plagued by interventionist policies of varying degrees, with Argentina, Cuba and Venezuela coming to mind in these comparisons.

Ranked 20th in the Heritage Foundation’s Index of Economic Freedom and 15th in the Fraser Institute Economic Freedom of the World report respectively, Chile has taken a distinct path towards economic development from its regional counterparts and the results speak for themselves.

But success has come with controversy. Chile has been the whipping boy for multilateral organizations for some time, in part because many of the far-reaching reforms in the 1980s were implemented by a non-democratic government. However, the nation successfully democratized and subsequent governments have largely maintained a market-oriented approach. The net result is that Chile has evolved into the most politically and economically stable country in Latin America.

The Scandinavian fallacy

Sadly, the OECD is still stuck on false narratives.

Many international bureaucracies like the OECD not only believe that Chile should increase its use of cash transfers to fight poverty, but that it should also implement a Nordic welfare model in the mold of countries like Sweden.

Recommendations to make Chile follow the Scandinavian model ignore the historical nuances of that region’s economic history.

Contrary to popular belief, countries like Sweden became prosperous through multiple decades of free-market capitalism. Powerhouse companies like Volvo and Ikea would have otherwise not emerged in an environment hostile to capital creation.

Unfortunately, many policy analysts put the cart before the horse and believe that Scandinavian countries became rich mostly because they created generous welfare states.
Objective economic history tells us otherwise; the welfare state established itself in Sweden in the mid-20th century, taking advantage of the capital stock already accumulated during previous decades.

Many thought that Sweden and its Nordic ilk finally defied the laws of economics by providing a “Third Way” to economic development through the development of a more “humane” form of socialism. However, welfarist interventions eventually began to take their toll in the 1970s, and by the 1990s more competitive countries started to leap-frog Sweden in per capita GDP rankings.

Thankfully, cooler heads prevailed from the 1990s and onward when Sweden implemented numerous pension and school choice reforms that lessened the government’s spending burden and introduced much needed competition into its economy.

Rest assured, as the Swedish case vividly demonstrated, these very same downturns and periods of stagnation will occur if Chile opts for the soup kitchen that is social democracy.
However, it could turn out worse since Chile has not reached the level of development where it would have wiggle room to flirt with profound redistributionist and anti-growth policies.

The OECD’s track record in Latin America

The OECD’s policy prescriptions are not part of a nefarious plot to impoverish Chile, but a reflection of the bad philosophical underpinnings that guide these proposals.

However, Chile is not the only country in Latin America that has received statist economic recommendations.

The OECD already has a proven track record of giving unsound fiscal advice to countries like Costa Rica, where bureaucrats believe that it should streamline its income tax i.e. raise it to confiscatory rates to supposedly fight inequality. Further, the OECD proposed that Costa Rica implement a modern broad-based value-added tax (VAT) system in order to get its fiscal house in line.

It is a rather sad state of affairs when the OECD‘s tunnel vision does not allow it to consider other alternatives for economic development. For globalist bureaucrats, wealth is created from the top not from the bottom where market actors produce goods and services that consumers desire.

A public sector that consumes 15 percent, let alone 10 per cent of total GDP, seems completely foreign to bureaucrats that have never seen a top-down government program they did not like.

Chile’s experience with anti-growth policies

But what the OECD does not want to admit is that Chile has already implemented several tax hikes with the aim of financing education and reducing social inequality.

This started with President Sebastián Piñera, who “broke the taboo” of raising corporate taxes in 2013 by increasing the effective rate from 17 percent to 20 percent, a shocking move by a purported free market president.

Sadly, this was not enough for the Chilean left. When Michelle Bachelet assumed office in 2014, her government pursued an unprecedented amount of anti-growth policies such as corporate tax hikes which raised the rates from 20 percent to 27 percent, passing legislation to create a “free” higher education system, and granting big labor special privileges.

Naturally, the economy did not respond well to these interventions, as the country averaged a measly 1.9 percent growth in GDP from 2014 to 2016.

Throughout her presidency, Bachelet openly questioned the validity of the Chicago Boys model and proposed doing away with the current constitutional order, the most classically liberal constitution in the region, in her final days in office.

In 2016, Chilean voters came to their senses in local elections by voting in market-oriented parties into power, laying the groundwork for Sebastián Piñera’s return to office in 2017.
Although Sebastián Piñera’s first presidency did not fully deliver in its lofty expectations to bring Chile to First World status, Piñera was still able to make several sensible reforms such as creating an online platform that reduces the time of incorporating a business.

For a country like Chile to ascend into the ranks of the first world, an environment that fosters entrepreneurship is vital.

Moving forward

In fairness, the OECD did concede in its 2018 report that “productivity and export performance would be aided by lowering high entry barriers and regulatory complexity in some sectors.” No matter how you slice it, business regulations function as barriers to entry and shackle the potential of aspiring entrepreneurs.

If Chile wants to continue its ascent into the first world it should take a page from countries like Hong Kong, Singapore and Switzerland and continue liberating its economy in order to join them as part of the top 10 freest economies in the globe.

Costly and initiative-sapping welfare programs are the last policies Chile needs to implement. These same paternalistic measures have anchored countless Latin American countries to decades of underdevelopment.

Now that Sebastián Piñera has assumed the presidency for a second term, his administration’s mission should be to reverse his predecessor’s sub-optimal economic policies and continue Chile’s successful market experiment.

Experimenting with social democratic policies make for good politics in the short-term, but yields lousy economic results in the long-term.

If it opts to flirt with welfarism, Chile could be at risk of becoming the next Venezuela, a country that initially became rich through relatively free markets, then stagnated under interventionist policies during its social democratic phase, and finally collapsed when these policies were taken to their logical conclusion in the form of tyrannical socialism.

Repeating this vicious cycle, would be a great tragedy considering that Chile is so close to reaching developed status.

Chile’s neighbor in Argentina provides another case of what happens when interventionism gets out of hand. While not as pronounced as the Venezuelan economic tragedy, Argentina’s experience with statism has yielded dismal results since the 1940s, turning a nation destined to reach the ranks of the First World to a middling country plagued by constant bouts of economic instability.

Chilean policymakers should not fall for the Siren Song of interventionism and instead concentrate its efforts on creating a genuine separation of economy and state.

With Sebastián Piñera back in office, Chile has a golden opportunity in front of her. It can re-assert and expand the very policies that have made it Latin America’s envy.

A good first step in continuing this success story would be to disregard the OECD’s redistributionist advice.

Risk management regarding offshore trust planning

In today’s world there must be risk management for all offshore planning, not just with regards to trusts. Trusts, however, must be established properly because of the unique risks involved and increasing scrutiny they are facing by tax and regulatory authorities, especially where the beneficiaries and settlors are domiciled in jurisdictions such as across here in Asia. This is because the concept of a trust, which is an Anglo-Saxon creation, is not fully and properly understood by tax and other governmental bodies. It is important to ensure that planning is executed in a legal manner so that persons involved may avoid criminal charges of tax evasion. This article seeks to seek out some steps that a settlor should take to manage and mitigate risks that he or she faces when establishing an offshore trust.

Steps to management risk

The starting point for risk management for offshore trust planning is the stage at which the trust is being domiciled or settled. The first step that the settlor should take, along with receiving advice from his legal team and tax advisors, is to ascertain and divulge his/her citizenship, tax residency and domicile and those of the beneficiaries. The information gleaned from this analysis will determine not only if the trust should be settled but also where. This is an often overlooked step in the decision-making matrix when it comes to establishing a trust. Settlors must understand how establishing a trust will affect their reporting obligations to tax authorities, if any, whether and how distributions and capital accumulations will be taxed and how distributions will affect the beneficiaries to whom they are made.

The next step is to assess the various offshore jurisdictions to ascertain which one is the best fit for the settlor and beneficiaries and the goals the settlor is seeking to achieve. While jurisdictions are very similar not all fit every settlor and beneficiary. Some high-profile jurisdictions may have a good or bad reputation with different banks, brokerage houses and regulators. While lesser known jurisdictions may also suffer because said institutions and persons are unfamiliar with them, as well as their jurisprudence, court systems and legal/trustee skills-sets, in order to engender confidence in potential trust clients. Further, some jurisdictions may have legal provisions such as settlor reserved powers or modifications to the rule in Hastings-Bass which may or may not be beneficial to certain settlors and beneficiaries under varying circumstances.

The next issue, in my opinion, is to decide whether the settlor wishes to domicile the trust in a jurisdiction where trustees are regulated or where they are not. This is key to risk management. It is obvious that a trustee which is licensed and regulated is a better choice than one which is not. When issues arise, the settlor, beneficiary or any interested party will be able or more able to complain to a regulator who would have some statutory powers to resolve them. Where a trustee is not regulated, the only recourse for a concerned or aggrieved interested party is slow, time consuming and expensive litigation.

After choosing the jurisdiction comes the decision who should be the trustee. However, often this assessment is made even before a decision is taken as to if, or whether or not, the settlor should proceed with establishing the trust. There are many factors to consider when choosing a trustee. These include the competence and reputation of the trustee; whether the trustee is a firm or an individual; if the trustee is licensed or regulated; if a firm, whether the trustee is a multi-jurisdictional one; the costs associated with the particular trustee; the citizenship and residence of its key personnel who may have control over the trust assets and where the trust assets are located. In the context of risk management for offshore trust planning, the cyber-security polices, plans, procedures and capabilities of the trustee to prevent cyber-leaks are of particular concern.

Following the Panama Papers and the recent U.S. Court decision in Sergeeva, the choice of trustee is crucial and should not be underestimated. Trustees with multi-jurisdictional offices with centralized data systems must be given greater scrutiny by settlors from a risk management perspective. Settlors should and have a right to question the cyber-security capabilities of these firms to satisfy themselves that their information may not someday be splashed across the world’s media. Similarly, these trustees must be made to answer if they have offices on U.S. soil and thus subject to U.S. jurisdiction. The decision in Sergeeva makes it clear that a trustee with offices in the U.S. puts at risk all the information held by that trustee in other offices outside of the U.S. It is no offense to say that the long arm of the U.S. courts places settlors’ information at risk and again this risk cannot be minimized. Further, if a trust company, wherever domiciled, has owners or directors who are U.S. persons and thus subject to U.S. courts, then there is no guarantee that through this control over said trust company, a settlor’s information is not placed at risk of disclosure.

The next step, although this may come before the selection of trustee, but should be done in consultation with said trustee to some extent, is the drafting of the trust deed. Usually the settlor’s lawyers and advisors are involved in this process as well. The deed must be drafted carefully in line first and foremost with the laws of the jurisdiction under which the trust will be governed, and goals, objectives and circumstances of the settlor and the beneficiaries. In my opinion, specific clauses that reserve too many powers to the settlor should be avoided since they may lead to the trust, if challenged, being determined by a court to be a sham or the settlor being unable to say truthfully that the trust assets are not his if a tax authority challenges the trust or his/her settlement of it.

Both the trust deed and documented intentions of the settlor and trustee must be such that the trust operates in a way where legal ownership and control vest in the trustee and the trustee exercises independent control and discretion in accordance with the deed and the governing law. This will avoid accusations of the trust being a sham.

There are a few specific issues related to risk management that I will now turn to. The first are the reporting obligations of the settlor, beneficiaries and trustee to regulatory and tax authorities. Depending on citizenship, tax residence and domicile, settlors, beneficiaries and others are required to report their associations with an offshore trust and make the necessary filings or tax payments. Failure to do so may open one to charges of tax evasion and criminal penalty. Thus, even where the trustee is honest and won’t run away with the money or dissipate trust assets, settlors and beneficiaries must be careful that they themselves do not run afoul of the law. One must always be aware that tax evasion in many offshore jurisdictions is a predicate offense to a charge of money laundering which in and of itself is another offense with separate criminal penalty.

The next issue to consider in mitigating risk with regards to an offshore trust concerns the need to balance control to ensure that the trustee is not doing anything wrong to damage the trust property with trust in the trustee. This is a very hard balance to strike even for persons in jurisdictions where trust law is clear, familiar and has been developed over centuries, thus the practice of reserving powers to the settlor in deeds. It is even harder in jurisdictions in Asia and Latin America where trusts are only now being understood widely it seems, by high net worth individuals. As stated earlier, reserving powers, in my opinion, is not the best way for a settlor to keep the trustee in check because of the risks involved.

A better way is to empower settlors and or beneficiaries or a protector via the trust deed where the jurisdictional legislation does not provide for it, to have access to certain information and approve certain actions of the trustee especially where the actions involve dissipating major trust assets, within reason of course. After all, if a beneficiary or settlor under the deed has too much power, it raises the question of whether or not the beneficiaries and settlors are themselves trustees. It is always wise, as a risk management or mitigation strategy, to choose a jurisdiction where the law grants powers to these functionaries even if the trust deed does not grant them.

The best way to manage risk when setting up an offshore trust however, besides not establishing it obviously, is to form a licensed trust company to become the trustee of the trust that the settlor establishes. Such an entity would be best regulated and the settlor and or beneficiaries could be the shareholders and directors. Once all the parties comply with their tax reporting and other obligations, there are no issues with regards to the conduct of the trustees since they would fulfill this role. As a regulated entity, they would have access to the regulator to resolve disputes and thus could avoid court. They would of course still have access to the court if they so desire.

The final issue I will raise has to do with the Common Reporting Standards (CRS) on offshore trusts. Based on my understanding of CRS and the implementing legislation that I have looked at, albeit in a very cursory manner, mainly from Anguilla which is where I am from, while a registered agent, based on the nature of its business, has no reporting obligations, a trustee of an offshore trust qualifies as a FFI (foreign financial institution) and has to report details of all underlying trusts for which it acts as trustee. The same would apply to a private trust company.

Thus, if privacy is an issue, the settlement of a trust in today’s world must be considered carefully. Whereas before, there may have been no reporting obligations based on the settlor’s and beneficiaries’ particular circumstances, now under CRS, with the establishment of a trust, a settlor and others may have those obligations or reports on their financial data may be reportable. Settlors or rather potential settlors may wish to consider this before they proceed or choose to establish a simple offshore company or a private foundation. Neither of these entities causes the registered agent, subject to what I said above, to report under CRS. However, with trusts the situation is different. The settlor should get specific advice with regards to CRS which is part of the new and evolving landscape that is not fully or widely understood. This therefore requires due consideration also to ensure that the settlor complies and is not exposed to legal penalty due to ignorance.


As legal tax and wealth management faces greater public and political scrutiny than ever, high net worth individuals must approach their planning strategies with soberness and clarity of thought. Where a trust is to be part of their strategy, the risks involved in its establishment must be assessed properly and minimized to prevent legal exposure or where the settlor is a high profile public figure, negative media reaction which may affect his or her brand.

This article has set out some key issues which settlors and their advisors should consider. It is not meant to be exhaustive but could serve as a starting point to guide a settlor through the process and is written with that in mind.

Will U.S. tax reform kick off another round of beneficial tax competition?

When Ronald Reagan and Margaret Thatcher slashed top personal income tax rates in the 1980s for the U.S. and the U.K., other nations were forced to follow suit. In the following decades, the global tax environment was transformed. Tax competition led to average top tax rates in the developed world to be cut from more than 65 percent in Reagan’s day to around 40 percent today.

This leaves to an obvious question: will the latest U.S. tax overhaul produce similar results?

A different environment

There are some reasons to question whether the recent U.S. tax reform effort will spark a new cutting frenzy, as there are notable differences between today’s tax environment and that of the 1980s and 1990s. For one, the largest U.S. reforms this time were on the corporate side, where the U.S. dropped the top rate from 35 percent to 21 percent and moved to a territorial system, though one with so-called base-erosion rules that partially undermine the change. This was a dramatic, pro-growth move, but rather than setting a new global standard, it only brings the U.S. approximately even with the OECD average corporate tax rate.

The second reason U.S. tax reform may not lead to a new global tax revolution is the emergence of an organized resistance to the forces of tax competition. With the subsequent takeover of the OECD by European tax collectors, there are powerful and entrenched interests determined and prepared to stop any more tax reform dominos from falling.
Despite these caveats, there is also evidence, in the fact that they are publicly attacking the U.S. tax reform, that high-tax nations are feeling pressured to respond.

The EU resists

Before the legislation was even finalized, much less signed into law, EU ministers were raising objections. A joint letter from finance ministers from Germany, the U.K., France, Spain, and Italy took issue with the Base Erosion Anti-Abuse Tax (BEAT) and the Global Intangible Low-Tax Income (GILTI) provisions.

There are reasons to criticize these provisions, as they exemplify an OECD-style preference for ignoring proportionality and prioritizing the punishment of tax avoidance over establishing an attractive destination for investment, but what the EU ministers really resented was that the U.S. was planning to establish its own rules rather than simply copy the work of the OECD and BEPS. It was, in other words, a threat to the relevance of the organization at the front line in their fight to preserve heavy tax takes.

Douglas S. Stransky of Sullivan & Worcester LLP perhaps said it best: “I find it laughable that the same ministers who have hammered away at U.S.-based multinationals over not paying their fair share are now crying when it looks like the attempts by the U.S. to reduce incidences of BEPS may actually have an indirect impact on these economies. These are the same ministers who have time after time accused U.S.-based multinationals of base erosion and profit shifting in their countries.”

Competition or harmonization?

The real threat to the EU from tax reform is the intensifying pressure to remain competitive. First comes the end of the uniquely uncompetitive corporate tax regime of the U.S. that left opportunity for others to target U.S.-based multinationals with large offshore cash holdings with aggressive tax grabs. That is bad enough for European tax collectors, but the prospect that it could spark a round of cuts from other nations is truly frightening.

This fear was expressed by former French finance minister and current IMF head Christine Lagarde, who fretted, “What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing.’”

The “race to the bottom” rhetoric is frequently deployed by opponents of tax competition who somehow manage to make bloated welfare states sound like paupers. The implication that governments cannot survive without high corporate income taxes, considered by many economists to be among the most destructive forms of taxation, is nonsense.

EU leaders were not quite as forthright as Ms. Lagarde. French Finance Minister Bruno Le Maire somewhat defensively claimed, “We are not criticizing the right of the American administration to reduce the level of corporate tax in the U.S.” Nevertheless, Germany’s acting finance minister promised: “We will closely assess the economic effects. We want to avoid companies moving their headquarters from Europe to the U.S. and we want to avoid investment flows being redirected.”

The key question is whether they will seek to avoid redirected investment by imposing new barriers and hindering tax competition, or by engaging in it.

Perhaps a telling sign is the fact that France and Germany are pressing forward with a plan to establish a common corporate tax, which they hope will build support for the proposed European Union common consolidated corporate tax base. Though, German Chancellor Angela Merkel did say that, “When we decide on a joint corporation tax assessment basis for France and Germany, we will also consider the realities that are unfolding in America.” Whether that could mean lower rates remains to be seen.

Others are working hard to resist the pressures to cut. A senior New Zealand tax figure warned his country against joining in corporate tax cuts. The head of the Chinese state council’s research office announced that his country was ahead of the corporate tax cut curve, but that it would not join a new international tax cut race. Canada’s current government has rejected business calls to cut rates, which Finance Minister Bill Morneau says remain competitive after the U.S. reforms.

At least for the time being, it appears a substantial resistance is holding strong.


While it was not as bold a move as many were hoping for, the U.S. threw down the gauntlet with last year’s tax reform. The world’s largest economy is no longer hampered by the massive handicap that was the previous version of its business tax code. How Europe chooses to respond will have major ramifications for the offshore community and the global economy.

If high-tax nations double down on tax harmonization and an anti-tax competition agenda, they will suffer the consequences of lost business and slower economic growth. The global economy will similarly suffer, but even more so the offshore community and low-tax jurisdictions that will have to deal with the fallout from a renewed push by the OECD or other international organizations to control global financial flows and the tax policies of other nations. If, on the other hand, these nations embrace competing for investment by reducing their most destructive taxes, all will benefit from increased growth under a better global tax environment.

The birth of economic liberty in the Anglosphere

Many of the world’s wealthiest jurisdictions are part of the Anglosphere. But why? Is there something special about the United Kingdom that produces prosperity? And why are many of the nations settled by the English rich as well?

The answers to those questions do not involve Anglo-Saxon DNA. Instead, the roots of prosperity in the Anglosphere trace back several hundred years. The wealth of nations such as the United Kingdom and United States was made possible by economic liberalization.

In England, the Whig Revolution was a series of events – the successful invasion of William of Orange to dethrone James II in 1688, the selection of George I to succeed Queen Anne in 1714, and the selection of Robert Walpole as the first Prime Minister in 1721 – that created the Westminster parliamentary system in which the monarch remained the head of state, but the prime minister, serving at the pleasure of the House of Commons, was the head of government.

Most important, the Whig Revolution also created the institutional and legal framework that transformed England into a modern capitalist economy and sparked the Industrial Revolution.

The adoption of Dutch commercial law, the creation of the Bank of England, and the circulation of its bank notes monetized the English economy. English courts abandoned the medieval “just price” doctrine, which let judges nullify contracts after the fact based on the concept that all goods and services had an objective value and any deviation from this just price should therefore be unlawful. Instead, English courts held that “it is the consent of the parties alone that fixes the just price of anything, without reference to the nature of things themselves, or to any intrinsic value.”

Traditional guilds collapsed. Entrepreneurs were free to create new firms, determine output and prices, borrow from banks, and issue stock. New manufacturing firms lured workers away from the estates of the landed gentry to rapidly growing English cities with wages paid in paper currency. A rising urban middle class challenged the economic and social position of the rural gentry.

Rapid economic, political, and social change inevitably produced a reaction led by the arch-Tory Henry St. John, the First Viscount Bolingbroke. Before the Whig Revolution, Bolingbroke held that England had been a stable society in which a monarch governed and everyone else deferred to their betters and knew their place. Agriculture was dominant, gold and silver coins were the only money, and the trades were justly regulated.

To Bolingbroke, the Whig Revolution corrupted England through “ministers and money.” Paper currency had disrupted the semi-feudal order that favored the rural gentry. Bolingbroke rejected the legal and political reforms that created a modern capitalist economy. Instead, Bolingbroke wanted to restore a governing monarch, abolish banks and paper currency, and return to an idyllic past that had never really existed.

But he failed to turn back the clock.

Before the Revolutionary War, the American colonies also had pre-capitalistic, quasi-feudal economies similar to England before the Whig Revolution. Outside of New England, land ownership was highly concentrated – about two-thirds of all land was owned by less than one-tenth of all free white males. Moreover, land ownership qualifications in all colonies except Pennsylvania, where all taxpayers could vote, disenfranchised more than one-half of all free white males. The upward mobility that had existed in the colonies in the 17th century steadily diminished in the 18th century. Wealth and political power were increasingly concentrated in the hands of a small oligarchy composed of a few intermarried families in each colony.

The Whig Revolution, which had allowed England to develop a modern capitalist economy, did not immediately cross the Atlantic. Royal governors, responsible to London, not colonial legislatures, were headed colonial governments.

In the 1770s, colonial legislatures still regulated the prices for many goods and services and forbade arbitrage and speculation. Colonial courts still accepted “just price” doctrine, allowing judges, all whom were members of a small oligarchy, to overturn contracts when market prices moved against colonial elites. And when crops failed or prices fell, colonial legislatures frequently declared “debt holidays” to prevent creditors from seizing the property of the colonial oligarchs.

Those colonists, who were not oligarchs, Native Americans, or slaves, were mostly subsistence farmers that bartered any excess crops for goods from local merchants. Debts were settled and taxes were paid in crops, not gold or silver coins or paper currency.

Most of the America’s founders were from the small, wealthy elite in the colonies. Identifying with the English gentry rather than the rising middle class, Bolingbroke greatly influenced most of the founders’ views of economics and politics. Most founders, especially Thomas Jefferson and James Madison, agreed with Bolingbroke about the primacy of agriculture, shared his fears of banks and a paper currency, and dreaded industrialization. Most founders accepted Bolingbroke’s policy recommendations with the exception of a ruling monarch.
Alexander Hamilton was different than other founders. Born in Nevis outside of wedlock, abandoned by his father at age 2, and orphaned by his mother at age 13, Hamilton proved to an exceptionally talented clerk at Beekman and Cruger, an international trading firm, on St. Croix. Winning a scholarship to King’s College (now Columbia University) in New York, Hamilton immigrated to America in 1773. Serving as General George Washington’s aide-de-camp, Hamilton observed how a weak Continental Congress imperiled the war effort.

Consequently, Hamilton had a very different prospective from other founders with the notable exceptions of Washington and John Marshall. Hamilton wanted America to become a dynamic meritocracy. Observing the plantation system in the Caribbean, Hamilton understood that (1) land ownership is the only source of wealth in agricultural societies, and (2) any such societies would eventually become static with a few landowning haves and the rest perpetually poor have-nots. Hamilton wanted poor, but talented individuals like himself to have avenues other than land ownership to earn wealth.

Moreover, Hamilton rejected slavery because it prevented slaves from their full economic potential and made masters indolent and lazy. Moreover, Hamilton rejected racism. “The contempt we have been taught to entertain for the blacks, makes us fancy many things that are founded neither in reason nor experience.” During the Revolution, Hamilton proposed emancipating slaves that agreed to fight in Continental Army. Later Hamilton founded the New York Society for the Manumission of Slaves.

Instead of Bolingbroke, Hamilton embraced the Whig Revolution and wanted to bring its economic benefits to the United States. As Secretary of the Treasury, Hamilton sought to monetize America to change it from a semi-feudal economy to a modern capitalist economy.

From his study of the English economy, Hamilton understood when a government faithfully services it debt, its bonds becomes “as good as gold.” Then, government bonds can as bank reserves. Hamilton wanted U.S. debt to become as respected as Britain’s. Then, U.S. debt could serve as the reserves for a national bank that could issue paper currency.

Hamilton’s plan had several parts. First, Congress would assume the Revolutionary War debt from states. Congress would then impose tariffs and excise taxes to service the enlarged federal debt. Congress would create a mint and charter a Bank of the United States, modeled after the Bank of England, to issue a nationally circulating currency. With the support of President Washington and over the opposition of Secretary of State Jefferson, Hamilton persuaded Congress to enact his plan although Hamilton had to agree to move America’s capital from New York City to what would become Washington, D.C.

Money replaced barter as the primary means of exchange. The Bank of the United States along a newly established stock and bond exchanges helped Americans entrepreneurs to start new manufacturing and trading businesses that were not dependent on land ownership.
While some future policymakers misused Hamilton to justify their protectionism, Hamilton was not a protectionist in the modern sense. Hamilton recognized potential benefits of free trade, but he believed in reciprocity. So long as the United Kingdom, the world’s leading economic power, practiced mercantilism, a peripheral economy, as the United States was then, would not, in Hamilton’s mind, benefit from unilateral free trade.

In a world in which income and value-added taxes had not been invented, the major sources of government revenue were tariffs, property taxes, and the profits from government monopolies. Hamilton opposed government ownership of any enterprise except for “manufactories of all the necessary weapons of war.” Hamilton favored a revenue tariff that averaged about 10 percent over a property tax to fund the federal government. Hamilton sought to maximize the federal government’s revenue and provide a modest margin of protection to domestic manufacturers rather than to block imports. Indeed, Hamilton argued: “It is a signal advantage of tax on articles of consumption, that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed – that is an extension of the revenue.” The United States did not establish protective tariffs until after the War of 1812.

Moreover, Hamilton was staunch defender of property rights even when it was politically costly to him. As a lawyer in New York City, he successfully argued for the restoration of property of Englishmen and Loyalists that had been seized after the Revolutionary War in violation of the Treaty of Paris and the law of nations.

There is a debate in some circles regarding who among America’s founders was the most consistent advocate for free markets and economic liberty. Today most Americans would incorrectly identify Thomas Jefferson. However, it was Jefferson’s rival, Alexander Hamilton, that did more than any other founder to give the United States a free market economy.

Jefferson opposed Hamilton’s policy innovations as a threat to the ideal of a republic of yeomen farmers led by gentlemen planters. Yet as President, Jefferson could not undo Hamilton’s work. The American version of the Whig Revolution endured and the United States was on the path to great prosperity.

The author of this article, who goes by the name “Hamilton” is a senior U.S. economist who frequently writes under a nom de plume.

Hurricane Irma highlights BVI’s need for reforms

After Hurricane Irma devastated the British Virgin Islands last September, more than 150 financial services workers and their families came to the Cayman Islands to continue carrying out BVI business.

By early March, only a few dozen evacuees remained, and the BVI government set a March 31 deadline for the rest to return.

In making that target date for displaced workers to come home, the BVI government signaled that its recovery from last September’s storms is well under way.

“While there are many persons still to receive some essential services, it is safe to say that the general quality of our lives has remarkably improved over the past six months,” said BVI Premier Orlando Smith.

According to government, power has been restored to more than 90 percent of the islands, more than 70 percent of the public spaces have been cleaned, 75 percent of the telecommunications infrastructure has been restored, and other essential services are back online. Cruise ships are again making calls, hotels are reopening, and the financial services industry remained steady even in the immediate aftermath of the disaster, with the private and public sectors working together to make sure BVI business could be carried out from jurisdictions like Cayman and other offshore centers.

However, the territory continues to grapple with multiple problems, including destroyed homes, roads and sewerage systems, a sluggish financial services industry, fiscal woes, and rising crime. Some of these problems were caused by Irma, but others were present beforehand and have only become more glaring in recent months.

The territory continues to grapple with multiple problems, including destroyed homes, roads and sewerage systems, a sluggish financial services industry, fiscal woes, and rising crime.

Besides proposing spending packages, few public policy measures have been introduced to address those problems.

But whether government likes it or not, public recovery loans are contingent on at least some reform.

For instance, a US$65 million loan from the Caribbean Development Bank brings with it strict procurement rules for public projects. While some BVI contractors complain that the development bank’s rules favor larger bidders, the CDB’s rules are intended to guard against corruption and waste.

Likewise, the United Kingdom offered the BVI some US$400 million in loan guarantees, which came with stringent requirements. The U.K. government will establish an agency to monitor the BVI’s spending of that money, and will also conduct an audit of the territory’s public finances – and require reforms based on the results of that audit.

The requirements sparked outcry from some residents, with one opposition legislator even likening the U.K. mandates to “economic slavery.” A prominent billboard was installed downtown Road Town, reading, “We Virgin Islanders do not support the U.K. framework for the BVI recovery plan.”

Nevertheless, Smith maintained that the U.K. guarantees are vital to fund government’s US$722 million disaster recovery plan, because they will allow government to save tens of millions of dollars by borrowing at 1 percent interest rather than the higher rates that would be charged with non-guaranteed loans.

“It is time for the raw sewerage to stop running in our streets and ghuts [gutters]. It is time for us to build a stronger and more resilient electricity grid. It is time for us to restore our criminal justice system including rebuilding accommodation for our judiciary,” Smith urged in a March speech in favor of taking the U.K. guarantees. “It is time for our prisoners housed in St Lucia to be back at Balsam Ghut where they can be in touch with their families and friends. It is time to find shelter for those made homeless.”

Along with rebuilding the territory’s physical infrastructure, a large portion of the recovery plan – more than US$200 million – will be used to expand the BVI’s main airport.

With no direct flights between the BVI and the United States and many other Caribbean jurisdictions – Cayman Premier Alden McLaughlin traveled on a Cayman Airways flight with supplies to Anguilla immediately after Irma, but said he couldn’t travel to the BVI because its runway was too short for the jet to land on – government has long maintained that an expanded airport is necessary for its financial services and tourism industries to compete with others in the region. Smith painted the project as even more crucial to stimulate the recovery.

Over the protests of the opposition and some in Smith’s own administration, government passed legislation at the end of March to accept the U.K.’s loan guarantees and accompanying requirements.

Still, more reforms needed if the BVI is to thrive in the long run, according to many professionals there.

Baker Tilly insolvency lawyer Hadley Chilton, who lived in Cayman from 2005 to 2008 and is now based in the BVI, said the BVI would be best served to emulate other Cayman policies that make it relatively easier for non-citizens to obtain permanent residency and open businesses.

“There are people who’ve lived here for 10 to 20 years and still aren’t permanent residents,” he said. “We might want to revisit that.”

Other hurricane-devasted jurisdictions are reviewing their policies for allowing non-citizens to own land. In Barbuda, government passed legislation in the wake of Irma to overturn the island’s longstanding system of communal ownership – where Barbudans would vote on how land should be used – to allow for citizens and non-citizens alike to freehold land. Barbuda Prime Minister has touted the land reforms as necessary to finance reconstruction, but his change was met with much resistance and is currently being challenged in court.

In the BVI, government allows residents to freehold land, but government approval is required for non-citizens to own land, and non-citizens can generally only own one property apiece – with rare exceptions, such as billionaire Richard Branson, who owns two islands there. While loosening those restrictions may encourage outside investment, such reforms have not been discussed in public by government officials.

Perhaps the most pressing need is for immigration reform.

In 2015, government commissioned a study from the consulting firm McKinsey & Company on how to address the long downturn of the jurisdiction’s financial services industry. The BVI’s company formation sector – which is the largest aspect of the BVI’s financial services industry, and the main source of public revenue – has declined by nearly half over the last decade or so, from more than 800,000 active BVI companies in the mid-2000s to around 400,000 now.

One of the study’s primary recommendations was to streamline a decades-old immigration system that takes months to process and renew work permits.

Whereas work permit applicants currently have to obtain separate permissions from the BVI immigration and labor departments, McKinsey & Company recommended that those departments integrate the application process to provide a one-stop shop for applicants – as is done in Cayman and other jurisdictions.

Officials began working on those reforms in 2016, with the goal of being able to process new applications within a month and renewals within two weeks. But those efforts were not carried out, and the immigration process reportedly became as inefficient as ever after Irma.

According to the territory’s local newspaper, The BVI Beacon, people have arrived at the department as early as 3:30 a.m. to ensure they would be seen, with latecomers sometimes being turned away. In a jurisdiction that had more than 4,000 homes destroyed, residents have also been subject to house inspections, with immigration officials declining to renew work permits if the department is not satisfied that applications are living in “favorable” conditions.

In response to growing dissatisfaction from the public, government instituted a number of reforms in March – along with the reassignment of the chief immigration officer. Those reforms include the immigration department allowing requests for permit renewals and extensions to be submitted electronically and processed in the employees’ absence. The department has also announced the establishment of an appointment system that designated certain days for specific steps in the immigration process.

However, the territory’s labor department has not followed in immigration’s footsteps, and delays persist in processing work permit renewals and applications.

But even if the BVI does institute good-governance and pro-growth reforms, Chilton said its economy will likely still be largely dependent on the performance of the global economy
“Cayman had momentum. Ivan was three years before the 2008 [financial crisis],” he said, adding, “I think it’s a bit too early to tell [for the BVI]. We definitely don’t have booming economies around the world.”

CCCTB and the European Union’s three-pronged tax grab

The European Union is working on its latest attempts to squeeze more money out of multinational businesses for its bankrupt governments.

The Common Consolidated Corporate Tax Base (CCCTB) is not new, it has been proposed in various forms for most of this century. But “in Europe, a bad idea rarely goes away,” as PwC Ireland’s Feargal O’Rourke said of it, and it seems CCCTB is moving forward in an even worse form than before, and recently moved a step closer to actually being implemented.

The EU’s idea is to ignore the usual way of calculating tax for multinationals, tearing up the long-established system. CCCTB abandons any attempt at actually calculating how much profit is made in each country; instead a single profit will be calculated for the whole of the EU. That total profit will then be allocated between the member countries according to a formula, rather as a pirate ship divides its spoils, and each country will then able to tax the share allocated to it.

This makes two huge changes in the corporate tax system.

First, under CCCTB, countries within the European Union will not be able to decide how taxable profit is to be calculated. What income is taxable and what is exempt; which expenses are allowed and which are not; what allowances are given for capital investment; the treatment of interest payments and dividends; all of these will become EU decisions.

Currently these are national matters, often fiercely debated in national parliaments, and different countries adopt different approaches depending on what they think is best for their economy. But under CCCTB Brussels will take over all these powers, and the method of calculating taxable profit will be set centrally by the European Union.

The other major change is in the allocation of profits to different countries.

Currently profits are allocated on some version of the arm’s length basis; companies and tax authorities try to calculate how much profit was made in each country, as if the group’s operations in each country were an independent company dealing with the other parts of the group at a proper market price.

This is currently a complex calculation but a fair one; it takes account of the different contributions made by each part of the multinational group, and values them on a fair basis. But under CCCTB that will all be ignored, and instead the group’s entire EU profits will be allocated between the various EU countries according to a formula.

The proposed version of that formula is that:

  • One third of the profits will be allocated according to where the customers are based;
  • One third of the profits will be allocated according to where the assets used in the business are based;
  • One sixth of the profits will be allocated according to the number of employees based in each country; and
  • One sixth of the profits will be allocated according to the total employee payroll in each country.

As can be seen, there is no attempt to discover which countries the group’s profits are actually made in. No account is to be taken of which operations are actually profitable or significant to the group.

Worse, when allocating part of the profit according to where the group’s assets are located, a very restricted and old-fashioned definition of assets is to be used that focuses only on physical, tangible assets.

It is as if no-one in the European Union has noticed the huge changes in business in the last thirty years; the ever-growing importance of intellectual property, of patents and commercial know-how, is ignored. So is the essential role of finance to the modern company.

Instead the only assets that count under the apportionment formula are physical ones; the European Commission seems to be stuck in a 1950s fantasy world of metal-bashing factories.

But although the CCCTB has a simplified method of calculating profit, it still has room for the usual anti-avoidance rules; deductible interest payments will be capped at 30 percent of EBITDA; there will be a controlled foreign company (CFC) rule to include the profits of subsidiaries in low-tax countries; and of course on top of the rules for calculating profit there will be a general anti-avoidance rule (GAAR), to allow tax authorities to ignore any principle they do not like.

This is an unambiguous attempt to squeeze more taxes out of businesses and remove the ability of EU member countries to control their own taxes and attract multinational businesses by offering better tax systems. Under CCCTB the only freedom left to member countries will be to choose the actual tax rate to be applied. Everything else, the calculation of taxable profits, what expenses or allowances are given, and so on, will be set centrally by Brussels, the same for every country in the EU.

As one MEP (Alain Lamassoure, of France) boasted, CCCTB will “put a halt to unfettered competition between corporate tax systems within the single market.” The ability of countries to have business-friendly tax systems appropriate to a modern economy is to be ended, to allow other countries within the EU to continue with their outdated high-tax models.

To show how difficult it is to change thinking in the EU, Lamassoure thinks that this ending of tax competition is a good idea, and he is from the supposedly center-right and pro-business European People’s Party; the comments from the more left-wing parties are even worse.
Its supporters repeatedly claim that CCCTB is a “modern” tax system, “targeting profits where they are made,” but neither claim is true.

As a group of MEPs opposed to CCCTB (led by Brian Hayes of Ireland) have pointed out, the system of calculating consolidated EU-wide profits and then allocating them according to a formula “favors the larger member states where factories have been built, but not the place where, due to high investments in research, development and innovation, the profit is actually being made.”

Ignoring patents, R&D and innovation, as CCCTB does, is hardly appropriate for a “modern” tax system, nor does it seek to tax profits “where they are made” if it ignores intellectual property, which is widely accepted as one of the most important sources of modern business profits.

No, CCCTB is neither modern nor fair; it is a tax grab designed to shore up the revenues of old-fashioned high-tax member countries and block those, such as Ireland, with more modern systems.

Sadly, CCCTB is still moving forward. The current status is that it was passed by the relevant committee of the EU Parliament on March 7, 2018. Indeed, the committee not only approved the Commission’s plans in general terms but also called for them to be toughened and implemented more quickly.

The EU Commission had initially proposed a two-stage implementation, with a Common Corporate Tax Base (CCTB) first. Under this the common rules for calculating taxable profits would be implemented across all of the EU, with Brussels laying down exactly how profits would be taxed in each member country. But under the Commission’s proposal the full CCCTB (with the extra ‘C’ for ‘consolidated’), i.e. the single EU-wide calculation of profits and their allocation to countries by formula, would be postponed until a later second stage.

But the EU Parliament’s economics committee wanted a faster result, and recommended that the CCCTB system be implemented in full, in a single stage, and to be operational before the end of 2020.

That date is unfortunate, because the U.K. and EU have recently agreed that the transitional period for the U.K.’s withdrawal from the EU will last until the end of 2020, with the U.K. having to follow all new EU law until then. Hopefully CCCTB is delayed until after the U.K. is free.

Fortunately, there is still some way to go before CCCTB becomes a reality. As well as the full EU Parliament (which is likely to approve its committee’s decision), the proposal still needs to be approved by the Council of Ministers, i.e., the governments of all of the EU member countries, and that is by no means a foregone conclusion.

Seven national parliaments within the European Union objected to CCCTB last time it was proposed. That included the U.K., which might not have a vote this time round, if it falls within the Brexit transitional period. However, other countries objecting included Ireland, the Netherlands, Luxembourg and Malta (all of which have very successful low-tax regimes to attract international business), and the more surprising Denmark and Sweden.

However, the vote in the Council of Ministers is by national governments, not parliaments, and a great deal of horse-trading and arm-twisting can take place, so a national objection at the parliamentary level might not result in that country actually voting against CCCTB in the Council of Ministers.

Worse, the EU Parliament’s committee called for the CCCTB proposal to be toughened up in several ways:

  • They want the turnover threshold for companies to be forced to adopt CCCTB to be lowered from the Commission’s proposed €750 million to €40 million, so as to catch more corporate groups, and ultimately for the threshold to be abolished;
  • They want all EU member countries to have a minimum corporate tax rate of 20 percent (the original Commission proposal had allowed each country to continue to choose what tax rate to apply to the share of the group’s profits allocated to them).

The EU Parliament also called for additional ways of allocating profits of digital business, allowing high-tax countries to grab an even higher share of profits earned elsewhere. These include more emphasis on the location of customers, looking at which countries’ domain names are used by websites, or which countries websites are “directed towards.”

This is not, as is claimed, a modern system trying to tax profits where they are made. This is a protectionist, nationalist system that believes the state has the power to tax the profit on all sales to anyone within its borders.

So CCCTB is one attempt by the EU to increase the tax take of its big high-tax high-spend member countries, at the expense of those with more modern systems. But there are two other proposals that are also trying to squeeze more tax out of businesses.

The first is a turnover tax on digital businesses, expected to be proposed at 3 percent. Like CCCTB, this is initially said to apply only to multinationals with turnover of more than €750 million, but if the CCCTB threshold is reduced it seems likely that this threshold will be cut also.

This is a new proposal and details are not yet available at the time of writing, but the aim is clear; like CCCTB, this is moving away from taxing businesses where their profits are earned, the whole basis of the modern international tax system, and towards taxing them where their customers are based. No doubt we will hear more of this over the next few months.

The third move, which is ongoing, is of course the EU’s “blacklist” of more competitive tax regimes. So far that has not yet been linked to CCCTB, but once CCCTB gives Brussels control of how taxable profits are calculated, it seems likely that they will seek to include the blacklist as part of that, perhaps putting restrictions on multinational groups including legitimate payments to blacklist jurisdictions when calculating taxable profits.

This has already been hinted at, with the EU saying that it intends to seek new ways of using its blacklist.

So, three EU tax attacks on business – CCCTB, the turnover tax on digital business, and widening the use of the “blacklist.”

All of them have a similar approach; rather than the established idea of taxing businesses where the profits are made, they seek to tax profits in the countries where the customers are based. All ignore the role of innovation, intellectual property and finance in modern businesses, and instead try to levy tax based on the old-fashioned concepts of physical plant and customer location.

Fundamentally, these proposals are driven by the EU’s fear of change. Instead of embracing the modern world and seeing the huge advantages for their citizens from the services offered by high-tech multinationals, the EU’s instinct is to circle the wagons, put up a wall and try to protect the status quo – and their tax revenues.

Successfully promoting Cayman

The inaugural International Wealth Structuring Forum was held at the Kimpton Seafire hotel.

In January 2018, the Cayman Islands Branch of the Society of Trusts and Estates Practitioners held its inaugural International Wealth Structuring Forum at the Kimpton Seafire hotel. The Forum promoted the Cayman Islands as a leader in the global wealth management industry, and educated and informed attendees, who included STEP members and the general public, as to developments and issues of relevance in the jurisdiction.

Extremely well attended by both onshore and offshore professionals, the forum is now widely acknowledged by delegates to be the leading private client conference in the Cayman Islands and plans are already underway to ensure the return of the forum in 2019.

The Forum

STEP, a global network of professionals who specialize in family inheritance and succession planning, has a significant membership base in the Cayman Islands comprising lawyers, accountants, fiduciaries and other wealth structuring specialists. From that membership base, and via STEP’s global network, 254 people registered to attend the forum over two days to listen to a number of highly regarded speakers who led insightful discussions on the developments impacting the private client industry from both a Cayman and an international perspective. In addition to receiving cutting-edge guidance, delegates were also provided with extensive networking opportunities among fellow experts from the wealth management industry.


The content of the forum was expansive and covered notable developments in trust litigation, data protection and private client confidentiality, as well as guidance regarding the holding of unusual assets in trusts, and succession planning in the light of advances in medical science and technology. Presentations included panel discussions, break-out sessions, and topical group case studies all with up-to-date information and insightful analyses of new laws, structures, and cases.

The conference program began with presentations by Alan Milgate, the chair of STEP Cayman and Tara Rivers, minister of Financial Services and Home Affairs, followed by a speech by the Chief Justice of the Cayman Islands Anthony Smellie QC, who formally opened the conference with a summary of his perspective on notable developments in international trust law. The speech by the chief justice was followed by a memorable panel of leading industry practitioners who discussed the age old ‘art or science’ question in the context of wealth structuring. Further sessions throughout the day touched on the challenges facing practitioners in the areas of effective compromise, data protection and client confidentiality, structuring for private aircraft, superyachts and other unusual assets, and considering family office operations and issues. The day concluded with delegates being treated to a substantive, albeit slightly light-hearted, mock court application from leading Cayman and international advocates.

The second day of the forum combined a session imparting essential knowledge on how to best support clients based in Latin America (a discussion which was led by private client advisors from Mexico, Chile and Argentina) with segments addressing what it takes to be an exceptional trustee and how to use the new Cayman Foundation Companies Law to good effect. A separate discussion of the implications for the wealth management industry of the dramatic improvements in medical technology that will soon be available – including clones and the use of deceased settlors’ DNA – was followed by very lively and well researched assessments of how trustees might cope with generational changes and differences and whether millennials really deserve their reputation.

All in all, the conference offered a refreshing format, with topical content and a focus on the transfer of knowledge among delegates. Given its location at the Kimpton Seafire, and a number of social events planned by the Forum organizers, delegates also had ample opportunities to enjoy the hotel’s expansive facilities, and Cayman’s natural beauty.

Promoting Cayman

Thanks largely to key sponsors the Ministry of Financial Services & Home Affairs, Dart Enterprises, Harneys, Rawlinson & Hunter, CIBC Bank and Trust Company (Cayman) Limited, and Sharp Partners P.A, and careful organisation by STEP Cayman’s Forum Committee, the forum was a great success. It is likely to become a key component of the international private wealth calendar and the jurisdiction’s wider marketing efforts. Promoting Cayman as a jurisdiction of choice via the forum has ultimately been an easy task, and one that will be repeated and capitalized on in 2019.

OECD and EU target citizenship and residency-by-investment programs

The Organisation of Economic Cooperation and Development and the European Union have targeted citizenship-by-investment (CBI) and residency-by-investment (RBI) programs. Most Caribbean jurisdictions have either CBI or RBI programs. This article will discuss the EU and OECD initiatives and then highlight the Caribbean programs that may be impacted, as well as potential remedies.

EU initiative

On Feb. 8, 2018, the Conference of Presidents adopted the mandate for a new Special Committee on financial crime, tax fraud and tax avoidance. It is the 4th committee of the European Parliament after TAXE, TAX2 and the Committee of Inquiry PANA. Parliament is also responding to the publication of the Paradise Papers. The mandate was negotiated across the political groups. All relevant proposals from the group have been accepted. The new Special Committee will also review the extent to which the EU Commission and the European member states have implemented the recommendations of the previous special committees on LuxLeaks (TAXE and TAX2) and the Committee of Inquiry on the Panama Papers (PANA). Approval by the plenary session of the European Parliament on March 1 is only a formality.

Sven Giegold, the Green negotiator for the agreed mandate, says the pressure for tax justice in Europe will increase. “The former special and inquiry committees have contributed successfully to the progress for tax cooperation in Europe during the last years,” Giegold says. “Unfortunately, the Paradise Papers scandal has not had any new political consequences neither in the EU nor in the member states. The new tax haven blacklist of the EU lacks credibility and transparency. We will demand full access to all documents on the screening of third countries. We will assess whether some countries or jurisdictions received unjustified special treatment. We also have to follow closely the compilation of the strengthened EU blacklist of non-cooperative money laundering jurisdictions. The mistakes of the tax haven blacklist may not be repeated. It is totally unacceptable that the EU’s blacklists do not include the most important places in the world of shadow finance.”

Giegold also notes that the parliament will be investigating for the first time “tax privileges for new residents or foreign income such as citizenship programs or non-dom regimes. Such distorting privileges are offered by Portugal, Italy, Malta, the United Kingdom and Cyprus.” Giegold further emphasized that in “the context of Brexit, the committee will give particular attention to the British Crown Dependencies and Overseas Territories.”

The fact that the European Parliament and the EU as a whole has decided to focus on the potential abuse of CBI will add to the work of the OECD Global Forum on the abuse of CBI/RBI to avoid/evade the CRS. The investigation by the European Parliament and the EU will likely add to the scrutiny of the 10 Caribbean jurisdictions mentioned in Section III below with CBI and/or RBI programs.

OECD consultation document

On Feb. 19, 2018, the OECD released a consultation on preventing the abuse of residence by investment schemes to circumvent the CRS. The OECD is reviewing the use of “residence by investment” (RBI) or “citizenship by investment” (CBI) laws permitting individuals to obtain citizenship or temporary or permanent residence rights in exchange for local investments or against a flat fee.

Individuals are interested in these laws for many legitimate reasons, including greater mobility due to visa-free travel, better education and job opportunities for children, or the right to live in a country with political stability.

The laws also allegedly offer a backdoor to money launderers and tax evaders, as well as those seeking to circumvent reporting under the Common Reporting Standard.

The OECD’s consultation (1) evaluates the ways these schemes can be exploited in an effort to circumvent the CRS; (2) summarizes the types of laws that present a high risk of abuse; (3) reminds stakeholders of the need to correctly apply relevant CRS due diligence procedures to help prevent such abuse; and (4) sets forth future steps the OECD will take to remedy the perceived problems, once it receives public input.

The OECD invited public input to obtain more evidence on the misuse of the CBI/RBI laws and on effective ways for preventing such abuse. The OECD will then determine the next steps.

How CBI and RBI schemes can be exploited to circumvent the CRS

CBI/RBI laws provide a right of citizenship of a jurisdiction or a right to reside in a jurisdiction. They do not grant tax residence. Reporting under the CRS is based on tax residence, not on citizenship or the legal right to reside in a jurisdiction. When individuals gain tax residence through some RBI laws, these laws alone do not affect the tax residence in the original country of residence of the individual. The CRS requires taxpayers to self-certify all their jurisdictions of residence for tax purposes.

CBI/RBI laws can potentially be exploited to help undermine the CRS due diligence procedures, which may lead to inaccurate or incomplete reporting under the CRS, especially when not all jurisdictions of tax residence are disclosed to the reporting financial institution. The consultation seems to mistakenly assume that an individual cannot legitimately change his or her tax residence through participating in a CBI/RBI scheme. In such a case, it is possible that an individual does not actually reside in the relevant jurisdiction but claims to be a resident for tax purposes only in such jurisdiction and supplies his financial institution supporting documentary evidence (e.g., certificate of residence; ID card; passport; utility bill of second house).

The consultation paper gives an example of a new individual account in which the account holder falsely self-certifies tax residency and furnishes a tax residence certificate in support.

A second example features a pre-existing individual account with the use of tax residence certificates or passports as documentary evidence under the residence address test.

High risk RBI/CBI schemes

The risk of abuse of CBI/RBI laws is especially high when the law in question has one or more of the following circumstances:

a. the law imposes no or limited requirements to be physically present in the jurisdiction in question or no checks are done as to the physical presence in the jurisdiction;

b. the law is offered by either: (i) low/no tax jurisdictions; (ii) jurisdictions exempting foreign source income; (iii) jurisdictions with a special tax regime for foreign individuals that have obtained residence through such laws; and/or (iv) jurisdictions not receiving CRS information (either because they are not participating in the CRS, not exchanging information with a particular (set of) jurisdictions or not exchanging on a reciprocal basis); and

c. the absence of other mitigating facts. For example, such measures could include:

(i) the spontaneous exchange of information about individuals that have obtained residence/citizenship through such a CBI/RBI law with their original jurisdiction(s) of tax residence; or

(ii) an indication on certificates of tax residence issued that the residence was obtained through a CBI/RBI regime.

Importance of correctly applying existing CRS due diligence procedures

In many cases, a government can prevent the circumvention of the CRS through the abuse of CBI/RBI regimes by the correct application of the existing CRS due diligence procedures. In this regard, the requirement to have a real permanent physical residence address (and not just a PO Box or in-care-of address) for the application of the residence address rule and the necessity to confirm the presence of a real, permanent physical residence through appropriate documentary evidence is important.

Also significant is the requirement to instruct account holders to include all jurisdictions of tax residence in their self-certification. Another important rule is that financial institutions cannot rely on a self-certification or documentary evidence if they know, or have reason to know, that such self-certification or documentary evidence is unreliable, incorrect or incomplete.

Possible additional measures to combat the abuse of CBI/RBI laws

At present, the OECD is collecting a list of high-risk laws based on the above risk factors to raise awareness amongst stakeholders of the potential of such schemes to undermine the CRS due diligence and reporting requirements.

Already on Dec. 11, 2017, the OECD released a consultation document requesting stakeholder input on model mandatory disclosure rules requiring disclosure of CRS avoidance arrangements and offshore structures. The rules require promoters and other intermediaries to disclose arrangements for which it is reasonable to conclude that they will have the effect of circumventing CRS reporting. The adoption of such model mandatory disclosure rules will have a deterrent effect on the promotion of CBI/RBI schemes for circumventing the CRS and provide tax authorities with intelligence on the misuse of such schemes as CRS avoidance arrangements. Many commentators stated that the due date for comments – Jan. 15, 2018 – and the coincidence with the Christmas holiday season did not begin to allow sufficient time for meaningful comment, especially since the rules were retroactive.

The OECD is also considering a range of other initiatives to prevent the abuse of CBI/RBI laws. This may include tax compliance and policy-related measures and will consider the possible role of all stakeholders involved, including the jurisdictions offering these regimes, the tax administrations of jurisdictions participating in the CRS, financial institutions subject to CRS reporting, the intermediaries promoting the schemes and taxpayers.

The OECD purportedly is soliciting public input both to obtain further evidence on the misuse of CBI/RBI laws and on effective ways for preventing such.

Analysis and impact on the Caribbean and potential remedies

While the consultation states that a CBI or RBI program cannot change tax residence, the issue of an individual’s tax residence can indeed change if the individual genuinely acts so that they change their tax residence. Whether the change is legally effective requires a review of the laws of the countries involved and any international standards. The OECD consultation is an effort to establish international standards.

At least five countries in the Caribbean obtain substantial revenue through the operation of CBI programs. They include Antigua & Barbuda, Dominica, Grenada, St. Kitts and Nevis, and St. Lucia.

In addition, the Bahamas, Barbados, and the Cayman Islands have RBI programs, while Belize and Bermuda have incentives for retired persons.

Other non-Commonwealth Caribbean countries such as Costa Rica and Panama have retirement programs whereas the Dominican Republic has a CBI.

Politically, an important element is that the G20 under China’s leadership have prioritized transparency, anti-corruption, and developing better ways to both extradite fugitives and deprive them of entry into jurisdictions where they can seek refuge.

It is beyond the scope of this article to analyze whether the concerns of the OECD with respect to countries hosting CBI or RBI exempt foreign source income are warranted, whether they receive and supply CRS information, and whether the jurisdictions have a special tax regime for foreign individuals obtaining citizenship or residence through such schemes.

Failure to exchange and/or receive information through the CRS would violate tax transparency principles. The existence of a special tax regime for foreign individuals obtaining citizenship or residence through such laws ostensibly would violate the “ring-fencing” prohibition, if they genuinely discriminate between non-resident aliens and residents for tax purposes. However, the ring-fencing prohibition is not hard law. Exempting foreign source income does not seem to violate any tax or legal principle.

The biggest problem for Caribbean jurisdictions are that EU members, namely Austria, Cyprus, and Malta have CBI programs, while Austria, Belgium, Portugal and the United Kingdom have RBI programs. In addition, among the G20 countries with RBI programs are Australia, United Kingdom, and the United States. Many of these programs, including those of the United States, have been susceptible to abuse.

Even though the European Parliament states it intends to examine and act against EU members with the so-called offending schemes, the EU, when issuing its list of jurisdictions violating the EU Code of Conduct in Taxation, did not name any EU members. The ability of the EU and OECD to deal fairly with their own or G20 members remains in doubt.

The potential remedies for the Caribbean include educating the EU and OECD that the CBI and/or RBI programs are not harmful to their harmful tax and tax transparency initiatives. Such education and persuasion efforts are not easy to execute, however because the Caribbean are not members of these organizations.

Although these organizations purport to support democratic ideas, their own governance has large gaps. Other remedies include retaliation, which can work only in concert with other targeted jurisdictions, such as Panama. Another remedy is resort to the World Trade Organization. Still another remedy is educating the broader and professional sectors of the public about the potential adverse impact of the initiatives. Of course, insofar as the Caribbean CBI and RBI policies have abuses, they must be quickly addressed.

Holographic wills

I have written often about the remarkable level of innovation and change that has occurred in the world over the last 30 or so years and the implications for trusts and private client practitioners. I have also highlighted the extent to which our judiciary, particularly in trusts and estates matters, is faced with issues that relate directly to the increasing ease of access to information, changes in society’s customs and beliefs and technological advancement.

This theme is clearly illustrated in a recent Australian case from the Supreme Court of Queensland. In Nichol v Nichol the court dispensed with the execution requirements for a valid will, finding that an unsent text message held in the deceased’s draft messages on his mobile telephone amounted to his valid will.

The execution requirements for making a valid will in the Cayman Islands are set out in the Wills Law (2004 Revision). It is also a requirement of Cayman Islands law that a testator must have testamentary capacity at the time of creating his will. The test for testamentary capacity, known as the “golden rule,” was first elucidated in the English case of Banks v Goodfellow and it remains good law in the Cayman Islands today:

(a) Does the testator understand the nature and effect of what he is doing;
(b) Is he aware, broadly, of the extent of his estate;
(c) Does he appreciate the claims of those who might reasonably expect to benefit from his estate; and
(d) In considering (c), is there any disorder of the mind or insane delusion that will influence the disposition of his property or poison his affections such that he would make a disposition of property that he would not otherwise have made.

In summary, the Wills Law provides that a will must be in writing; it must be signed by the testator or by some other person in his presence, at his direction. If the latter, the testator must acknowledge such signature in the presence of two witnesses present at the same time. If the former, the testator’s signature must be attested to by two witnesses present at the same time in his presence. Subject to only two exceptions for soldiers and sailors on active service, the execution requirements must be complied with; if not, it will be invalid.

Save for the exceptions described above, Cayman Islands law does not, as a general principle, permit holographic wills. Holographic wills are documents that are usually handwritten and do not comply with the strict requirements for proper execution as a will but have nevertheless been written as testamentary documents, often in extreme circumstances. The most famous holographic will may be that of Cecil George Harris, a Canadian farmer who in 1948 suffered the misfortune of becoming trapped under his tractor and fearing (rightly) that he was about to die, carved a will into the fender which read, “In case I die in this mess I leave all to the wife. Cecil Geo. Harris.” The fender was submitted to probate as his valid holographic will.

Queensland legislation also allows for holographic wills, meaning that the courts there can, in certain circumstances, adopt a more flexible approach. The facts of the Nichol case were this. The deceased suffered from depression and tragically, took his own life, leaving behind his wife Julie and son, Anthony, from a prior relationship. The deceased was also survived by his brother David, and his mother.

The deceased and Julie had been married for a year and in a relationship for almost four years. The couple had been having problems for some time, Julie having left him at least three times, the final time only days before his death. Notwithstanding that fact, she continued to make arrangements to take her husband to his medical appointments and they had spent the weekend prior to his death together doing gardening and boxing up books for a charity.

The mobile telephone containing the unsent text message was found on the workbench in the shed where the deceased’s body was discovered by Julie on Oct. 10, 2016. The following day, she asked a friend to access its contacts list so they could work out who to inform of the deceased’s death. On finding the text message, the friend informed Julie, the deceased’s brother David and nephew Jack.

The message said:

“Dave Nic, you and Jack keep all that I have house and superannuation, put my ashes in the back garden … [wife] will take her stuff only she’s ok gone back to her ex AGAIN I’m beaten. A bit of cash behind TV and a bit in the bank Cash card pin 3636 … MRN190162Q [the deceased’s initials and date of birth] … 10/10/2016 … My will.”

The court was faced with two competing applications: the first made by Julie, supported by Anthony, that she be granted letters of administration on the basis that the deceased had died intestate. The competing application was made by David and Jack with the support of the deceased’s mother, that the unsent text message be treated as a will and the usual execution requirements dispensed with.

Local succession law set out three conditions for the waiver of the execution requirements for a valid will: (i) there must be a document; (ii) it must embody the testamentary intent of the deceased; and (iii) the court must be satisfied upon careful consideration of the evidence that the deceased intended that document to operate as his will. The court would have regard, amongst other things, to the manner in which the document was executed and any extrinsic evidence of testamentary intention, like other documents, acts of or statements made by the deceased.

The court would also have to be satisfied that the deceased had testamentary capacity at the time the document was created. It was for those propounding the holographic will to prove that the deceased had the necessary capacity, in the Nichol case, David and Jack.

Applying the reasoning of the Queensland Supreme Court in Re Yu which involved a Word document created and stored on an iPhone, the court held that a text message could constitute a document for the purposes of the legislation. Despite its informality, the text message did state the deceased’s testamentary intentions – it disposed of the entirety of his estate and gave instructions for the disposal of his ashes. The court was satisfied that the deceased intended it to operate as his will, given that it was created shortly before his death.

No other will had been found and the terms of the text message were consistent with prior statements made by the deceased as to how he wished his estate to be disposed of after his death. The court rejected the suggestion that because it was saved as a draft he did not intend it to operate as his will, finding that having the phone with him when he died and not sending the text message were consistent with wanting it to be found with his body and not wanting to alert his brother to the fact that he was about to commit suicide.

Finally, the court rejected the argument that the fact that the deceased committed suicide gave rise to a presumption that he did not have the necessary mental capacity to make a will. Although there was no medical evidence proffered by either the applicant or respondent parties, the court heard evidence from the deceased’s family and friends describing his behavior leading up to his death. No one described him as acting erratically or so afflicted by depression that it was affecting his ability to think or function. He was functioning well enough to ask Julie to attend at his home to feed his dogs. He clearly understood the nature of his estate and appreciated those who might have a claim on it, facts supported by the reference to “my will,” the terms of the text message, specifically his reference to his wife Julie and the fact that she was to take what belonged to her from the house, and sought to effect the disposition of all of his assets. Although he did not mention his son Anthony, the court found that this was consistent with the fact that he had not been in regular contact with him and they had periods of estrangement. Despite the absence of medical evidence, the court found on the balance of probabilities that the deceased had the necessary mental capacity to create a valid will, consistent with the principles in Banks v Goodfellow.

As mentioned above, Australia, Canada and some states in the U.S. do permit holographic wills. In contrast, the Cayman Islands has not legislated to allow for holographic wills unless written by a member of the armed forces on active duty.

The administration of a deceased’s estate will be governed by the laws of his domicile. So as to avoid any risk of invalidity or questions from the court on a holistic will being submitted to probate for re-sealing here, it is essential to ensure that wills and estate planning are completed with proper consideration for and advice taken in the laws of the jurisdiction in which the assets are located.

OECD Watch


Late 2017 saw the release of the first peer review for the implementation of the BEPS Action 5 standard on the exchange of information on certain tax rulings. Action 5 (Harmful Tax Practices) requires exchange of information on five categories of tax rulings: those relating to certain preferential regimes, unilateral advance pricing arrangements or other cross-border rulings on transfer pricing, rulings providing for a downward adjustment of taxable profits, permanent establishment rulings and related party conduit rulings.

The review is the first of what is to be an annual occurrence through 2020 and covered the practices of 44 jurisdictions for the year 2016. It found that all jurisdictions either had the necessary legal framework or were working toward implementation. The next report will include, in addition to an update on the progress of the same 44 jurisdictions, other members of the Inclusive Framework on BEPS.

An earlier Action 5 report, “Harmful Tax Practices – 2017 Progress Report on Preferential Regimes,” identified 20 nations with regimes considered “preferential.” In January, the OECD changed the status of Canada’s regime for international banking centers to “abolished” from “potentially but not actually harmful,” and updated two Barbados regimes – its international financial services and credit for foreign currency earnings/credit for overseas project or services regimes – from “potentially harmful” to “in the process of being amended.”

The Bahamas, Zambia, and Serbia joined the Inclusive Framework on BEPS, bringing the total participating jurisdictions to 112. Curaçao joined the BEPS Multilateral Convention, Jersey deposited its instrument of ratification, and officials from Barbados, Côte d’Ivoire, Jamaica, Malaysia, Panama and Tunisia partook in a signing ceremony at OECD headquarters in January. These actions brought the total number of signatories for the Multilateral Convention, which updates bilateral treaties to reflect priorities of the BEPS Project, up to 78. The Bahamas also signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, becoming the 116th jurisdiction to join the Convention.

The end of 2017 also saw release of the latest OECD Model Tax Convention. It was updated to reflect a consolidation of treaty-related matters from the BEPS Project, including under Action 2 (Neutralizing the Effects of Hybrid Mismatch Arrangements), Action 6 (Preventing the Granting of Treaty Benefits in Inappropriate Circumstances), Action 7 (Preventing the Artificial Avoidance of Permanent Establishment Status) and Action 14 (Making Dispute Resolution More Effective).

The second batch of stage 1 peer reviews for BEPS Action 14 (Dispute Resolution) were released, featuring evaluations of how seven countries – Austria, France, Germany, Italy, Liechtenstein, Luxembourg, and Sweden – are implementing new minimum standards. The reports offered more than 170 recommendations, the remedies to which will be scrutinized in stage 2.

One of the most contentious aspects of the BEPS project, the country-by-country (CbC) reporting under Action 13, moved forward. It saw another wave of activations of automatic exchange relationships under the Multilateral Competent Authority Agreement on the Exchange of CbC Reports. Automatic exchange of CbC reports is set to start June 2018, after which the business and privacy-minded communities will need to be on alert for government abuse of sensitive information.

On the topic of contentious privacy issues, Panama, a nation besieged by the press and international tax collectors alike for its low-tax environment and respect for privacy rights, continued its apology tour by sending Publio Ricardo Cortés, director-general of Revenue, to OECD headquarters to sign the Common Reporting Standard Multilateral Competent Authority Agreement. Panama became the 98th jurisdiction to join as a signatory to the CRS MCAA, and exchanges are set to commence in September 2018.

In non-BEPS related news, the OECD continued its push for higher taxes on fossil fuels. A recent report, Taxing Energy Use 2018, compared patterns of energy taxation across 42 OECD and G20 countries. Overall, it argues that energy taxes are “well below where they should be to reflect climate costs alone.” OECD Secretary-General Angel Gurría finds this result “disconcerting.” Although supposedly focused on taxing energy to combat climate change, the report tellingly neglects the possibility of using the revenue to reduce other taxes, instead also touting the supposed benefit of “funding vital government services.”

Economic surveys were produced for Brazil, Norway and Finland. Brazil was encouraged to cut spending but also to focus more benefits on the poor, and to reduce trade barriers. Norway was urged to prepare for a housing market correction. And Finland was contradictorily praised for its high burden of government as a share of GDP and welfare provisions but warned that a low unemployment rate was the result of high taxation and generous handouts. Finland was also warned that a plan for universal basic income would either be too expensive or provide too little benefit. The fiscal threat posed by aging workforces was also a common concern among the reports.

The Platform for Collaboration on Tax, a joint initiative between the OECD, IMF, UN and the World Bank Group, held its First Global Conference February 14 to 16 in New York. The agenda featured numerous ideologically driven panels. For instance, “The Future of Corporate Taxation: Time to End the Race to the Bottom,” entailed the usual effort to undermine tax competition, while social agendas were well represented with panels on “Smarter Taxation for Better Gender Equality,” “Equity Challenges: Taxation for Better Income Distribution,” and “Mobilizing Resources for Gender Equality.” No panels on the destructive economic impact of excessive taxation were held.

Finally, the OECD is struggling to defend its role as the world’s self-appointed tax enforcer from EU encroachment. The OECD has long been challenged by low-tax jurisdictions and advocates for fiscal sovereignty, but over time has sapped much of the opposition’s will using both a carrot and stick approach. Even the organization’s constant moving of the goal posts has yet to produce a coordinated revolt from targeted jurisdictions. However, if jumping through the OECD’s ever moving hoops is not enough to satisfy European tax collectors, jurisdictions are likely going to revisit the wisdom of complying with OECD demands.

Ironically, this means that the biggest threat to the OECD’s credibility ultimately comes from even more radical tax grabbers. Self-preservation, in other words, might turn the OECD into a quasi-ally against EU extremists, though they have yet to demonstrate any effectiveness.

The EU laughed off OECD concerns regarding its recently created tax haven blacklist. Now, the OECD has again warned the EU to watch its step with efforts to tax digital firms ahead of the OECD’s own work on the issue. Assuming the European bureaucrats again ignore them, the OECD may start to lose much of the perceived authority it relies upon to gain the cooperation of the many countries it badgers into adopting policies against their own interests.