FINANCIAL IMPERIALISM: International challenges to the offshore financial services industry

Welcome to the second issue of the Cayman Financial Review. The first issue was very well received, but is only the start. We are focused on providing an even better and more focused publication!

We are in probably the most turbulent times the offshore financial industry has ever seen. Almost daily, new events come to light and new initiatives are unveiled. The pen is no sooner dry, than the commentary is out of date, so I apologise if that is the case here. I hope not, as I have tried to look over the horizon.

The financial services industry is vital to the economic well-being of many small jurisdictions such as the Cayman Islands – offshore financial centres. Historically, the UK supported the development of the industry in the Crown Dependencies and the Overseas Territories to develop their financial self-sufficiency. In 40 years, Cayman has gone from relative poverty to one of the highest per-capita GDPs in the world. Meanwhile, the recent report, Economic Benefits of the Financial Services Industry to the Cayman Islands, underscores what we knew intuitively. However, the model is facing major challenges so its continued success is not a given.

OFCs have, for some time, wrestled with international initiatives designed to make them better world citizens in the eyes of leading industrialised nations (G7, G8, G20 et al) together with international standard-setters such as the Financial Stability Forum, the Financial Action Task Force, the International Monetary Fund, the International Organisation of Security Commissions and the Organisation for Economic Co-operation and Development. Politicians have also criticised OFCs. Most vociferous have been French, German and UK leaders, the new US President and some US senators. Meanwhile, Pope Benedict XVI and certain charities, (all of them enjoying tax-free/exempt status) have joined the throng, accusing OFCs of causing poverty by assisting in the looting of third-world countries by corrupt officials.

The recent global financial crisis (even if its origins were indisputably onshore not offshore) has produced a plethora of demands for action including a single global regulator and tax collector, global colleges of regulators, enhanced regulation, transparency and cross-border cooperation and assistance (principally exchange of information in banking, securities and tax matters such as an expansion of automatic reporting under the EU Savings Directive). This is complemented by demands for domestic onshore legislation making the legal use of offshore centres increasingly difficult. In the US, the draft “Stop Tax Haven Abuse” legislation (co-sponsored by the then-Sen. Obama) and similar measures seem likely to resurface in some form in 2009. In the UK and Germany, tighter anti-avoidance/anti-tax haven legislation is a near certainty. We may know better where this is going internationally after the G20 meeting this April.

Cayman (like other leading OFCs) has a long history of stable democratic government, respect for the rule of law, an open market economy and fiscal discipline. And it chooses to pay its way through non discriminatory indirect rather than direct taxation. It works hard to maintain a sound, sensible and balanced regulatory regime. To-date no local banks have failed due to the global meltdown. Cayman also works hard to deter and punish abuse of its financial services and to cooperate with other jurisdictions in appropriate circumstances. In particular, it has:


Tim Ridley_April172009Implemented the EU Savings Directive.
Tim Ridley_April172009A mutual legal assistance treaty with the US and tax information exchange agreements (TIEAS) with the US and the seven Nordic countries.
Tim Ridley_April172009Demonstrated a good faith willingness to negotiate further TIEAS and like agreements.
Tim Ridley_April172009Various Laws providing for cross border assistance and enforcement in criminal and civil matters.
Tim Ridley_April172009Amended its domestic legislation recently to broaden the gateways for exchange of information on regulatory and tax matters.
Tim Ridley_April172009Routinely assisted foreign regulators and law enforcement pursuant to MOUs and other arrangements.
Tim Ridley_April172009Successfully prosecuted money launderers and fraudsters and confiscated their assets.
Tim Ridley_April172009Recently enacted its Freedom of Information Law and Anti Corruption Law.


The stated goal of most major jurisdictions is open and competitive global markets with capital moving freely between them. There are academic studies from respected economists that show that OFCs enhance competition in onshore markets and facilitate foreign investment into onshore jurisdictions that might not otherwise be made due to domestic constraints in those jurisdictions. After all, the funds do not remain in the OFCs. Their domestic markets are far too small and undeveloped to absorb the capital flows.

So why the continued outcry against OFCs?

>> Many jurisdictions that claim to support free markets principles and the unrestricted flow of capital do so only as long as this system works in their favour. Behind the façade, they actually pursue self interested financial imperialism and protectionism. In financial services and products and in facilitating the global allocation of capital, OFCs pose a major competitive and potentially uncontrolled threat. So, for instance, the UK and the US are not keen to see OFCs thrive too much, but they have traditionally recognised that, for their own financial service industries, and multinationals to be competitive, they must allow them to use OFC domiciled structures. Further, they recognise that such structures are also often the conduit for valuable inward investment from foreign investors. This approach is now under serious pressure as politicians (egged on by the media and the shouting classes) appear to see more downsides than upsides in the continued symbiotic relationship between onshore and offshore.

>> Other major OECD members with growing and unfunded entitlement programmes and ageing populations fear loss of capital and reduced tax revenues. And they wrongly see OFCs (as opposed to their own domestic policies) as the cause. So, while voicing their commitment to open markets for their own financial services and products, they continue to impose burdensome and anti-competitive regulation on OFCs and to raise barriers to their residents investing in or using IFC financial products or services. Again, protectionism in all but name, despite protestations to the contrary.

>> The international standard setters driving the initiatives are the creatures of the same major countries that have no real interest in a level playing field open to OFCs or to anyone else threatening to deprive them of control of the world’s capital.

>> It is always easier to find the mote in someone else’s eye than the plank in one’s own. OFCs have little political leverage onshore or in international organisations so they are easy targets to blame (unfairly) for the woes caused by poor policies (e.g., easy mortgages and cheap credit in the UK and the US), poor regulation (e.g., the SEC in Madoff and the FSA in Northern Rock) and poor enforcement (e.g., anti corruption in the UK) in the major onshore jurisdictions. The latest manoeuvring is all part of the struggle to ensure control of the world’s capital remains in the same old hands.

So what should OFCs such as Cayman do? The start point is essential. There must be clearly identified and committed political leadership and support for the financial services industry and all it takes for it flourish. That requires a holistic approach, spearheaded by an elected cabinet minister and backed by a separate and properly focused, resourced and newly branded government department to ensure that the right platform (in all its facets) is in place, is nurtured and is promoted locally and internationally. The devil is always in the details, so what are the specifics that this minister, his department and the private sector should do?


Tim Ridley_April172009OFC Governments and private sectors must interact closely, respect and listen to each other and be proactive in moving forward together.
Tim Ridley_April172009Domestic legal, regulatory and enforcement regimes must be kept current, meet internationally accepted and applied standards (including improved transparency and disclosure of information locally and cross border) and be effectively executed while remaining innovative, competitive and not unnecessarily burdensome.
Tim Ridley_April172009There must be engagement with the major jurisdictions and standard-setters (including participating in global colleges of regulators) to shape the development and implementation of fair international standards that create a non-discriminatory playing field, open to all legitimate OFCs.
Tim Ridley_April172009
Agreements must be developed or improved with key counterparty jurisdictions for cross-border cooperation and assistance (information exchange, including both criminal and civil tax matters, and law enforcement), with appropriate benefits, gateways and safeguards for legitimate privacy and other legal rights (recognising that compromises will be necessary).
Tim Ridley_April172009

Advance intelligence must be improved to ensure early and proactive rather than late and reactive responses.

Tim Ridley_April172009
Better targeted and effective lobbying and media relations are essential, particularly in key centres such as Washington DC, London and Brussels to influence political and media perceptions, opinions and outcomes.
Tim Ridley_April172009

Think tanks and the research, publication and dissemination of quality academic analyses of the beneficial impact of OFCs on the world economy should be sponsored and supported.

Tim Ridley_April172009OFCs should join together (recognising they are also competitors) in building a cohesive group to conduct the necessary international efforts to protect their common interests.
Tim Ridley_April172009OFCs should capitalise on the increasing tax pressures onshore and encourage wealthy people to take up physical residence, buy houses and invest locally.
Tim Ridley_April172009OFCs should encourage much greater decision making and economic activity to occur within their jurisdictions by the entities domiciled there.
Tim Ridley_April172009
OFCs must provide the appropriate physical infrastructure, sensible and welcoming immigration policies to attract and keep the brightest and the best and a well educated, motivated and participating local labour force to work with them.
Tim Ridley_April172009

OFCs should develop governmental contacts and new business sources in Africa, Asia, Latin America and the Middle East (conveniently, many of their constituent countries are G20 members). These countries are less likely to submit to the imperial writs of the US, UK and the EU and have little or no enthusiasm for control of international capital remaining in those protectionist hands or for the impoverishment of small democratic nations.


These are formidable challenges. But to survive and thrive, governments and the private sector in OFCs must devote the necessary resources and energy to the tasks. Those that do should flourish. I believe Cayman can be in that select group and is belatedly starting to do some of the right things. But parochialism is no defence to imperialism and complacency is not an option.

Tim Ridley_April172009

Timothy Ridley
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Timothy Ridley
Timothy Ridley qualified as a solicitor in England and is an attorney-at-law in the Cayman Islands. He provides legal consulting and advisory services and acts as an expert witness in Cayman Islands legal and regulatory matters. He holds directorships in various private companies engaged in a broad range of activities, including fund administration. Prior thereto, he was for many years a senior partner of the leading Cayman Islands law firm and from 1995 until 2000 led the Asia practice in Hong Kong. He specialized in a broad range of international financial transactions.

Tim has wide regulatory and governance experience. Currently he is a member of the Disciplinary Tribunal Committee of the Cayman Islands Society of Professional Accountants (CISPA) and a member of the Board of Advisors of the Foundation for Fund Governance. He served on the Boards of the Cayman Islands Health Services Authority (2002-2005) and the Cayman Islands Monetary Authority (2002-2008, Chairman 2004-2008). He has also served on various consultative committees that advise the Cayman Islands Government on matters relating to the financial services and local industries.

Tim has taught law at the University of Southampton and at Trinity College, Cambridge and writes and speaks widely on Cayman Islands legal, financial and regulatory issues. He is a member of numerous international professional associations and has served on the editorial boards of leading publications, including the Harvard International Law Journal. Most recently he was chairman of the editorial advisory board of the Cayman Financial Review.

He is a graduate of Cambridge University (BA, Senior Scholar, Trinity College) and Harvard Law School (LL.M, Kennedy Memorial Scholar).

In recognition of his services to the financial services industry and the local community in the Cayman Islands, he was appointed an Officer of the British Empire (OBE) in 1996.

Timothy Ridley
E. [email protected]