First Quarter 2013

Read the article in the Cayman Financial Review Magazine 

Politics & Government
Former Premier McKeeva Bush charged

Former Cayman Islands Premier McKeeva Bush was charged with two counts of misconduct in a public office, four counts of breach of trust by a member of the Legislative Assembly, contrary to the Anti-Corruption Law and five counts of theft.

Bush was arrested at his West Bay home on 11 December on corruption-related offences and theft. His home and office were searched by police, who confiscated a number of items. The charges came just a week before the 27 March nomination day in the run-up to the May general election.

Bush, who was first elected to the Legislature in 1984 and became the Cayman Islands first premier in 2009, was ousted as head of government a few days after his arrest in December when the majority of lawmakers, including five members of his own nine-member government, backed a vote of no confidence in the United Democratic Party government. He remains an elected representative for West Bay.

Under the constitution, only candidates who have received a prison sentence of 12 months or more, even if the sentence has been suspended, or who have been convicted of an offence involving dishonesty, are barred from running for election.

The United Democratic Party vowed to stand behind its leader. Party chairman Tessa Bodden described the charges against Mr. Bush as part of a campaign to “embarrass” him, his family, the UDP and its supporters. “Our country has faced adversities before and like before; the UDP will stand united with the people of the Cayman Islands to face these challenges,” she said.

People’s National Alliance formed

The members of the interim government revealed their new party name as the People’s National Alliance. The government had previously indicated in weekly media briefings that they would be running together and not as independents. As of March the People’s National Alliance was planning to field six candidates – interim government members Cline Glidden, Rolston Anglin, Juliana O’Connor-Connolly, Dwayne Seymour and Mark Scotland.

The previous UDP government, of which all five members of the interim government were either ministers or backbenchers, was ousted from power after the arrest of then-premier McKeeva Bush.

Moody’s affirms Cayman’s sovereign credit rating status

Rating agency Moody’s affirmed its AA3 sovereign rating for the Cayman Islands. The rating outlook remains “stable” as recent actions by the Cayman Islands government “have reduced the fiscal deficit and appear likely to lead to a fall of the main debt metrics”, Moody’s said in its credit analysis.

In December 2011, Moody’s had released a credit analysis, which noted that a negative outlook or other downward rating was the second most likely scenario, following a stable outlook, due to Cayman’s rapidly rising debt burden between 2007 and 2011.

“Since then debt to [gross domestic product] appears to have peaked at 25 per cent of GDP, reducing the risk of a downwards ratings action. But downwards credit pressure can still result if the government’s efforts to limit the increase in the debt ratios fail, either due to policy reasons, a slower economic recovery or both,” Moody’s said.

In addition to the debt metrics, the stable outlook for Cayman’s credit rating is based on the Islands’ high levels of economic development, which balances a potential risk resulting from the debt burden, according to the rating agency.

Moody’s does not have a numerical threshold in terms of debt-to-GDP that would trigger a negative rating action but in light of Cayman’s “modest” long-term growth prospects of 1 to 2 per cent GDP and the economy’s little diversification, it views current levels of debt as percentage of GDP or revenues “as relatively high”.

In a scenario analysis, a positive rating outlook for Cayman is the least likely scenario due to the already high rating and the fiscal and economic challenges facing the territory and would require a significant reduction in the overall debt levels or higher per capita GDP growth relative to Cayman’s peers. Moody’s mentioned the planned medical tourism facilities as well as the Cayman Enterprise City special economic zone, as projects that could lead to higher than expected growth.

A peer comparison showed Cayman trailing only Bermuda, which has a AA2 credit rating, as a result of its higher wealth in terms of per capita GDP at similar debt burdens and growth perspectives. Cayman’s Caribbean neighbours are typically less wealthy and have higher debt burdens translating into significantly lower credit ratings.

Despite the general scrutiny and pressure on offshore financial centres, for example to exchange tax information, Moody’s believes Cayman’s authorities have proven adept at satisfying all such requirements and will continue to do so.

The financial services sector, which makes up 42 per cent of the economy, showed a modest recovery after the financial crisis. Tourism as Cayman’s other key industry has also shown an increase in stay-over and cruise arrivals. Both offshore financial services and tourism “are very well established and barring major structural changes, should continue ensuring modest rates of growth in the medium term”, Moody’s noted.

The rating agency further credited Cayman’s connection to the United Kingdom for its strong institutions, stability, regulatory framework and respect for contracts. The framework for fiscal responsibility passed by government as an amendment to the Public Finance Management Law tightens prior fiscal constraints and is more comprehensive, Moody’s said.

Legislation moves to create ‘Caymanian only’ jobs

Some job categories could be reserved for Caymanians only under new legislation allowing political leaders to set quotas limiting work permits for certain professions. Hotel concierges, human resources managers and trainee accountants are among the professions that could potentially be closed off to foreigners, Cayman Islands Deputy Governor Franz Manderson said in March.

Amendments to the Immigration Law empower Cabinet to create “restricted areas of employment”. It will be up to Cabinet to decide what limits to set on which professions, depending on the needs of the day. Key employees, non-Caymanian permanent residents and spouses of Caymanians are among those who will be excluded from restrictions.

A committee stage amendment to the bill means Cabinet’s decisions will have to be approved by the Legislative Assembly before they come into force.  Opponents of the bill dismissed it as “window dressing” and “electioneering” that didn’t add anything to the powers already contained in current immigration legislation.

Employment Minister Rolston Anglin, who was involved with the drafting of the bill, said it would allow Cabinet to set policy on immigration rather than leaving it to immigration officers to handle on a case-by-case basis.

“This bill will enable Cabinet to make critical decisions around how it is that we are going to determine what trades, jobs, areas of employment ought to have a quota put in place.”  He said the quota could be zero for some professions.

At the moment, there are 20,396 people on work permits in Cayman. The Work Permit Board refused 4,352 permit applications over the past two years, including 672 that were declined on the grounds that a qualified Caymanian was available.

Financial Industry

FATCA: Cayman opts for Model 1 agreement with US

Following a consultation of the financial services industry and negotiations with US officials, the Cayman Islands government confirmed it will conclude a Model 1 intergovernmental agreement with the US in response to the US Foreign Account Tax Compliance Act.

Under FATCA, foreign financial institutions are expected to sign an agreement with the US Internal Revenue Service identifying any American person accounts and to report certain information on an annual basis. In addition, foreign financial institutions will be required to report details to the IRS regarding substantial American owners of non-financial foreign entities unless an intergovernmental agreement is signed. Because FATCA is applied extraterritorially outside the US, it falls foul of many local privacy laws and other regulations. The US government has therefore offered two alternative forms of implementation through intergovernmental agreements.

Under Model 1 foreign financial institutions will report to their home government, which then relays the requested information to US authorities. The Model 2 agreement in contrast requires foreign financial institutions to enter into direct agreements with the IRS and file reports directly with the IRS.

The commitment to the Model 1 IGA has received the widespread support of Cayman’s financial services industry, and followed significant consultation between the government and representatives of local financial services industry associations.

Representatives of the finance industry said there is a belief that fund managers and other offshore users would prefer to deal with foreign financial institutions that do not report directly to the IRS, but to their home governments. As a consequence some may have relocated to Model 1 jurisdictions if Cayman had not entered such an agreement.

CIMA plans new database, corporate governance changes

The Cayman Islands Monetary Authority is proposing to develop a searchable, public database of licensed and registered entities to facilitate the due diligence process for investors. The database would provide, as a minimum, the name of an entity’s’ directors and its registered office.

In a document circulated in the financial services industry for consultation, the authority has asked the industry for feedback whether such information would be relevant and appropriate and if further information, for example an entity’s related service providers such as auditors, custodians, fund administrators or insurance managers, would be beneficial.

CIMA has also commissioned a survey to assess the views in the industry on the regulatory corporate governance framework, including whether it would be advantageous to recommend a legislative amendment requiring the number of directorships held by a director to be stipulated in an entity’s founding documents, such as the offering memorandum of a regulated fund.

In the consultation paper, the monetary authority argues that limiting the number of directorships a director can hold may be beneficial but it would be challenging to design. For instance, where a director sits on the board of connected entities many decisions will apply to all the interconnected entities, leaving the director with more capacity than a director who holds the same number of directorships but with unrelated entities.

Another concern expressed by the regulator is that a limit would only apply to regulated entities and not take into account board positions of a director in unregulated entities. Rather than limiting directors to a specific number of board positions, the fundamental question is “whether a person is able to adequately his/her mind to all the directorships s/he holds”, CIMA stated.

The monetary authority further proposes to amend the Companies Management Law with an approval process for directors or entities that professionally provide director services for six or more entities.

Other changes to the corporate governance regime of Cayman entities proposed by the monetary authority include the update of the Statement of Guidance for Corporate Governance with key principles and standards expected of corporate entities, their management and their board of directors. The authority also aims to extend the application of the statement of guidance not only to licensees but to all registered entities. The consultation period ended 18 March.

Regulators revoke banking licence of HSBC Mexico SA

The Cayman Islands Monetary Authority revoked the banking licence for the local branch of HSBC Mexico SA. The bank was named last year in an investigation by the US Senate’s Permanent Subcommittee on Investigations of anti money laundering weaknesses at HSBC. The investigation had pointed to a significant number of high risk transactions with insufficient anti money laundering controls involving US dollar accounts held by Mexican residents at the branch, a class B banking licence holder in the Cayman Islands.

The Cayman branch itself had no local staff or customers and was operated from Mexico by HSBC subsidiary HBMX. Its services were not related to the retail arm of HSBC in the Cayman Islands.

According to the investigation, internal documents from HSBC showed that the Cayman accounts had operated for years with deficient anti money laundering and know your customer information. An estimated 15 per cent of the accounts had no KYC information at all, which meant that HSBC’s Mexican subsidiary HBMX did not know who was behind the accounts. Other accounts were, according to an HBMX compliance officer, “misused by organised crime”, the subcommittee said in its report.

In July 2012, following the release of the subcommittee report, CIMA launched its own investigation of HSBC Mexico SA to determine whether the bank and its Cayman affiliate had breached any local laws or regulations.

In a decision notice dated 27 February, 2013, the monetary authority set out its decision to revoke the category “B” banking licence held by HSBC Mexico SA with respect to its Cayman Islands branch pursuant to Section 18(1)(i) of the Banks and Trust Companies Law. CIMA concluded that “the Cayman Islands branch of the company is conducting business in a manner detrimental to the public interest, the interest of its depositors or of the beneficiaries of any trust or other creditors and that the direction and management of its business has not been conducted in a fit and proper manner”.

HSBC had originally acquired the branch when it purchased Mexican bank Bital in November 2002. In 1980, Bital had received a licence from Cayman Islands regulators to offer Cayman US dollar accounts to customers, allowing HSBC in Mexico to circumvent local regulations prohibiting Mexican residents from holding US dollar accounts.

At its peak in 2008, HBMX maintained more than 60,000 accounts with assets of $2.1 billion in its Cayman branch. In 2012, more than 20,000 HBMX clients maintained over $657 million in Cayman US dollar denominated accounts. Following the release of the subcommittee’s findings, HSBC had pledged to close the accounts.

Jalles named Cayman Finance CEO

The board of directors of Cayman Finance, the organisation that represents Cayman’s financial services industry, announced that banking professional Gonzalo Jalles has taken up the position of chief executive officer of the organisation.

Formerly the CEO of HSBC Cayman, Jalles founded his own financial services consulting company, Javelin Group, late last year. Prior to his almost six years leading HSBC in the Cayman Islands, he worked in HSBC’s London, Bermuda and Argentina offices as director of International Development, managing director/CEO and chief investment officer, respectively. From 2009 to 2012 he led the Cayman Islands Bankers’ Association as president.

It is the first time Cayman Finance has instituted the role of CEO. Richard Coles will remain chairman of Cayman Finance in a non executive capacity.

Mourant Ozannes SEC Enforcement Seminar
15 February 2013

A series of high profile “insider trading” cases were highlighted as part of a Securities and Exchange Commission enforcement seminar organised by Mourant Ozannes in collaboration with international law firm Shearman & Sterling.

Experts flagged new enforcement trends and an increasing level of expertise within the Securities and Exchange Commission when it comes to rooting out white collar crime. Lawyers from international firm Shearman and Sterling briefed participants on their own duties in complying with regulators and law enforcement officials in the US.

Adam Hakki, partner at Shearman & Sterling said some cases highlighted a new level of scrutiny from both the SEC and the Department of Justice. He said new methods were being used by investigators who were widening the scope of their inquiries to crack down on insider trading. “It has become a high priority. They are using techniques such as wire tapping, not seen before in the context of white collar crime. They are stretching the boundaries of what is considered insider trading to include fourth or fifth hand information.”

A panel also highlighted the SEC’s new aberrational performance inquiries, which focus on firms that outperform the market indexes by three per cent or higher on a regular basis.

Economy & Development Cayman Business Outlook, 24 January 2013

The Cayman Business Outlook each year presents global economic trends and their local implications for the Cayman Islands, featured this year a cautiously optimistic outlook the former editor in chief of the Economist Bill Emmot.

Emmot declared despite the apocalyptic scenarios presented in the world media about the euro, Iran, the oil price or sovereign debt, there are reasons for optimism. He noted that US firms have been accumulating cash and cut their debt levels. Although they have so far not spent this cash adequately on investments, investors are placing bets in the markets that this is about to change. Emmot also predicted that some of the political uncertainty in Europe is likely to clear and political dysfunctionality is also expected to end in Japan, where elections have produced a decisive majority in parliament determined to put an end to deflation.

A panel debate with local Caymanian politicians meanwhile focused on domestic issues including the question whether gambling should be introduced in the Cayman Islands. Participating lawmakers said, aside from any personal views about legalised gambling, they would support calls for a referendum on casino or lottery gambling. But the idea also drew opposition from panellists who said the social costs would be higher than what government would earn in revenues.

RICS Cayman Islands Property and Construction Conference, 28 February 2013

Hosted by the new local chapter of the Royal Institution of Chartered Surveyors, the first Cayman Islands Property and Construction Conference served as a forum for discussion of many topics relevant to the Islands, including public-private partnerships and the outlook for the real estate market.

The event, held on 28 February at the Grand Cayman Marriott Beach Resort, was also the official launch of the Cayman chapter of the international property professionals organisation.

During a panel discussion on public private partnerships, panellists presented a list of projects in Cayman that could potentially follow the private-public partnership model. In addition to oft-discussed projects such as waste management, cruise berthing, and airport expansion, the list also included projects such as sewage management, roads, schools, sports facilities, affordable housing, health services and facilities, social services and facilities and public transportation.

Panellists noted that public-private partnership can be for anything from a road to education, so long as a service is provided and many Caribbean countries are doing so already.

In terms of cruise berthing, one of the more pressing infrastructure needs in Cayman, there were few examples of true public-private partnerships. Most small- and medium-sized cruise pier projects are done either by the private sector or by government. Public-private partnerships become necessary when the objectives of a major project go beyond that of a functional cruise pier, panellists said. Speakers stressed the importance of transparency in the bidding process and the necessity of demonstrating adequate “value for money” under current law. 


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

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