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In a further affirmation of the Cayman Islands’ compliance with international standards of transparency and tax information exchange, a new report points to the jurisdiction’s continuing improvements.
A recently released Organisation of Economic Co-operation and Development report praises Cayman’s efforts since last year’s Global Forum on Transparency and Exchange of Information for Tax Purposes Peer Review. The Supplementary Peer Review notes;
“The changes rapidly introduced by the Cayman Islands since the 2010 Report demonstrate its commitment to implementing the international standards for transparency and exchange of information.”
The report points out that the Cayman Islands now has 25 Tax Information Exchange Agreements in place, having signed five more since the 2010 OECD review was released.
In addition, the review confirms that legislative changes have taken effect concerning the availability of accounting information for companies, partnerships and trusts so that the Cayman Islands now satisfies the 2010 report’s recommendations in this regard.
Last year’s report, however, already identified Cayman’s “well-developed legal and regulatory framework”, concerning transparency and information exchange, and a Phase 2 Peer Review scheduled for the second half of 2012 will look at any further developments in this regard.
This latest positive review is one of many international reports that confirm that the Cayman Islands is a well-regulated, transparent jurisdiction. Yet, despite facts to the contrary, there remain misconceptions leading to an unwarranted negative reputation.
Remarkably, and without any basis, the picture painted by the film, “The Firm”, of the Cayman Islands as a freewheeling haven for money laundering still lingers almost two decades later. This unfortunate situation forces entities like Cayman Finance to continue to defend against accusations that should have long ago been put to rest.
Even more disturbing is how what has come to be known as “The Grisham Effect” has made its way into the political arena. No one in Cayman can forget US President Barack Obama’s vague reference to Ugland House, which contains a company providing registered office services (a required function by Cayman Islands law), as “the biggest tax scam in the world”.
But the President knows that this description is not true. The US Government Accountability Office (GAO) conducted an extensive review of operations within Ugland House and Cayman in general (The US GAO Report GAO-08-778, July 2008) and found that “…the Cayman Islands’ legal and regulatory system is generally regarded as stable and compliant with international standards, US persons looking for a safe jurisdiction in which to place funds and assets may choose to carry out financial transactions there.”
The OECD, which considers themselves the world’s tax and regulatory standards police, governed and funded by the 31 major developed countries of the world, produced a report:
“Harmful Tax Competition: An Emerging Issue (1998)”. In this report, the OECD found the definition of a ‘tax haven’ in these four criteria: a) imposes no or only minimal taxes, b) lacks policy or effective exchange of information, c) lacks transparency, and d) has no requirement of ‘substantial activity’.
Noting the composite membership of the OECD, their mandate, the subjectivity of the definition criteria, and the fact that no OECD member state is on the ‘tax haven’ list, although 80 per cent of the ‘offshore market’ is controlled from them, it may be reasonable to conclude that the major economic powers of the world were up to no good. You can see the pattern of thinking, as well as the faulty logic: if we abolish tax competition that would mean fewer cross-border transactions and less flight of capital.
Cayman regulators and legislators understood decades ago that relevant regulation, a strong reputation and appropriate co-operation were the foundations for, not impediments to, building a successful financial centre.
Cayman is not an island with bountiful natural resources (setting aside tourism-based attractions such as pristine beaches and world-class diving), so the country’s leaders were concerned about making way for an industry that would bring employment and positive economic benefits for its citizens over the long term.
The legal and regulatory framework was established to be suitable for attracting foreign investment. Over the years, Cayman has melded its British common law structure with tax neutrality and innovative instruments, gaining its place amongst recognised international financial centres.
The initial vision has materialised beautifully and currently Cayman now has one of the highest standards of living in the Caribbean, and indeed, the world.
Cayman has progressed in step with (and in many cases ahead of) international regulatory standards set by the OECD, the Financial Action Task Force and the International Monetary Fund, participating in every initiative that was based on a level playing field.
The last phrase is an important note: Cayman did not feel obliged to comply with standards that OECD member countries were not prepared to adopt themselves (although the retroactive “Know Your Customer” exercise was certainly an exception to that rule – in 2001, Cayman undertook the expansive and expensive undertaking of conducting retroactive due diligence on every existing client).
Cayman has continued to show resilience in the face of the public-relations challenges – a real David and Goliath story. Investors and their service providers still consider Cayman attractive because it is one jurisdiction that has found that satisfying middle ground between the OECD’s fight for complete transparency and a depositor’s legitimate right to privacy.
Banking confidentiality is a British common law principle that has underscored the function of international financial centres in general. Although the form of this confidentiality has dramatically changed with the introduction of the OECD’s TIEAs, it should be stressed that this information exchange is not automatic and a request for information must adhere to certain criteria, such as it must be from a recognised tax authority and it must be clear in its scope – ie the law does not allow for fishing expeditions.
Quality investment management companies and professional services firms have established here because Cayman is a perfect vantage point for setting up a credible business. With unfettered access to global markets, the ability to attract the very best talent who serve loyal clients looking for returns available from a progressive business model, Cayman shines.
This jurisdiction works for those people and organisations looking for that fine balance between a robust regulatory framework and the concept of commerciality – a respect for investors’ interests.
All the evidence clearly points to the quality of Cayman as a financial-services centre. It is an OECD white-listed jurisdiction with standard-setting anti-money laundering legislation, a robust regulatory regime and a tax-neutral platform. But, just as clearly, Cayman Finance cannot relax in its efforts to promote this jurisdiction and counteract uninformed criticism.
In fact, an argument can be made that these efforts are needed even more than ever considering the state of the global economy and the apparently fashionable trend to condemn the Cayman Islands. Cayman Finance will continue to publicise the issues and communicate the true state of this jurisdiction.
For more information
c/o Tower Marketing
494 Shedden Road
T: +1 (345) 623 6700
E: [email protected]