Second quarter 2013

Read the article in the Cayman Financial Review Magazine 

Politics and Government Elections
General elections in the Cayman Islands produced a new government and a new premier, Alden McLaughlin, the party leader of the People’s Progressive Movement. The PPM won a total of nine out of 18 seats in the Legislative Assembly, one short of a majority required for a ruling government.

Following the election former Premier Juliana O’Connor-Connolly, who retained her seat, joined the Progressives giving the PPM a majority of the seats. However, as Speaker of the House, O’Connor-Connolly will not vote in Legislative Assembly matters.

Premier Alden McLaughlin will have 12 people in his new government. That includes himself, eight Progressives party members and three independents, Tara Rivers, Winston Connolly and Roy McTaggart.

The three independent candidates, endorsed by the Coalition for Cayman, won their seats at the first attempt. Two other independent candidates Ezzard Miller and Arden McLean returned as opposition members of the LA. Tara Rivers joined the Cabinet as minister for education, labour and gender affairs.
O’Connor-Connolly’s switch to the PPM made it the third party in which she has served in six months. Up until December, she had been a member of the United Democratic Party and deputy premier of the Cayman Islands.

The UDP then split when the party leader McKeeva Bush was ousted as premier by a vote of the majority of the Legislative Assembly, including five members of the UDP, who went on to form the People’s National Alliance.

All PNA members, except O’Connor-Conolly, failed to retain their seat in the election. So did two other members of the former UDP government under McKeeva Bush. Bush himself, however, won the most votes in his home district of West Bay and will be the leader of the opposition, a position he held between 2005 and 2009 during the first Progressives administration. He is joined by two UDP candidates who were also elected in West Bay.

Cayman Islands Premier Alden McLaughlin, as the new minister of community and home affairs, will be taking over a new ministry that will essentially replace the old government Portfolio of Internal and External Affairs. That move will take a significant number of responsibilities away from the deputy governor and give them to an elected minister.

Marco Archer was named minister of finance and Wayne Panton is the minister for financial services.
Tax transparency FATCA intergovernmental agreement
In March the Cayman Islands Government announced its intention to sign an agreement with the US authorities to adopt a Model 1 Intergovernmental Agreement (IGA) in response to the US Foreign Account Tax Compliance Act (FATCA). While this agreement applies only to an information exchange with the US, the Cayman Islands government announced a similar agreement will be concluded with the UK as well, after the UK called for a comparable reporting system with regard to accounts that have a UK link.

G5 pilot – multilateral tax information exchange

The Cayman Islands government also indicated to the British government that it is committed to joining the G5 pilot, announced in April by the UK, France, Germany, Italy and Spain, on multilateral automatic exchange of tax information.

The pilot is based on the model agreements negotiated by the five countries with the United States government to comply with the US Foreign Account Tax Compliance Act. FATCA forces financial institutions globally to report American taxpayers’ accounts and account balances to US authorities or face a 30 per cent withholding tax on transactions involving the United States.

The new initiative aims to provide the template for a wider multilateral agreement for the exchange of tax information between participating countries.

The UK overseas territory’s interest in joining the pilot was communicated to British Prime Minister David Cameron in a 25 April letter from Cayman Islands then Premier Juliana O’Connor-Connolly.

Cayman Finance, the private sector body representing the Cayman Islands financial services industry, said that Cayman, by expressing its commitment to join the multilateral tax information exchange pilot, is taking a clear stance on anti-evasion tax measures. Cayman Finance said, in keeping with recent joint consultations, including Cayman’s approach to FATCA with the US and UK, the organisation supports and continues to work with the Cayman Islands government on this initiative.

The multilateral element in practice will provide a single standard, based on the US agreements, aimed at minimising costs to business and government and the underlying policy, to implement automatic exchange of information to avoid a proliferation of multiple standards across multiple jurisdictions.
By joining the G5 pilot, Cayman is continuing its global commitment on the exchange of information for tax purposes. In the European Union, Cayman has been engaged in automatic exchange with EU member states, for the purposes of the EU Savings Directive, since 2005.

Multilateral Convention on Mutual Administrative Assistance in Tax Matters
In June the new Cayman Islands government confirmed that it is prepared to join the Convention on Mutual Administrative Assistance in Tax Matters.

The convention is a multilateral agreement developed by the Organisation for Economic Cooperation and Development and the Council of Europe to combat tax evasion and aggressive tax avoidance. It provides for all possible forms of administrative cooperation between states in the assessment and the collection of taxes.

“Cayman has engaged in substantive discussions with HM Treasury on the particulars of the convention,” said Premier Alden McLaughlin. “We are satisfied that the extension of the convention to our islands will be done in accordance with the UK’s recognition of Cayman’s fiscal autonomy, and the well-established principle that countries have the prerogative to set their own tax rates.”

He noted that committing to the convention is in line with Cayman’s extensive network of bilateral exchange of information agreements. This includes commitments to US and UK FATCA; the European Union Savings Directive; and the G5 pilot on multilateral automatic information exchange.

In contrast to the 31 bilateral OECD tax information exchange agreements signed by the Cayman Islands, the convention can form the basis for any multilateral form of administrative cooperation between states in the assessment and collection of taxes, in particular with a view to combating tax avoidance and evasion.

This cooperation ranges from exchange of information, including spontaneous and automatic exchanges, to the recovery of foreign tax claims. During the past two years, more than 60 countries have signed the convention or stated their intention to do so.

Gonzalo Jalles, CEO of Cayman Finance, said the organisation is supportive of government’s intention to sign up to the convention and agrees with the concept of automatic exchange of tax information.

“In general we support everything that becomes a standard. And lately it has become clear that more and more countries are signing the [convention],” he said.

Mr Jalles stressed that the convention is a framework which will need to be followed by bilateral agreements with the different countries. “It is our understanding that at that stage and even before you sign the convention you can state reservations.”

Reservations may include the concern that rules designed for tax authorities are not applied to financial service providers, he said. The convention will also extend intergovernmental cooperation to the enforcement of tax judgments.

Cayman Finance does not have an issue with the principle of one government assisting another in enforcing their laws. But, Mr Jalles said, there is a big question mark over the implementation of the convention.

G8, trade, transparency and tax
Prior to the Group of Eight leading industrial nations meeting in June, the Cayman Islands government met with British Prime Minister David Cameron and attended the “Open for Growth”, also called the tax, transparency and trade meeting.

The premier attended a private meeting with Prime Minister Cameron. Minister for Financial Services Wayne Panton joined the premier for the “Open for Growth” meeting.


GAIMOps Cayman
7-9 April, 2013
The Ritz-Carlton, Grand Cayman

Panellists at GAIMOps discussed the various challenges compliance professionals at hedge funds are facing and the due diligence that needs to be undertaken by investors before investing in alternative investments.

Institutional investors emphasised the importance of emerging managers for their investment objectives and their willingness to support start-up managers through the potential pitfalls of their compliance, operational and risk management demands.

Investors also debated different due diligence models, while compliance officer panels highlighted the tasks of “living compliance everyday”, covering anything from regulatory filings to preventing insider trading.

Insider trading itself was seen as an increasingly important issue, given the tougher stance by regulators in the US and the UK. Enforcement in the UK had a significant effect on market integrity as “dubious trading activity” around earnings announcement and other news impacting the market has fallen by 50 per cent in three years, said David Kirk, chief criminal counsel of the Financial Conduct Authority.
“If a company is approaching an announcement situation, the minute a portfolio manager hears there is something wrong, they should involve their compliance team,” said Patrick Sinclair, a prosecutor in the US attorney’s office.

Panellists also maintained that despite recent scandals around expert networks, these remain legitimate means of how hedge funds do research, but to continue the use of expert networks hedge funds have to develop new processes.

The focus of investigations meanwhile is shifting to “expert networks 2.0” – political consulting networks and lobbying firms and how they obtain information from political circles.

Offshore Alert
5-7 May, 2013
The Ritz-Carlton South Beach, Miami Beach

A strong contingent from the Cayman Islands financial services industry attended the Offshore Alert conference in Miami.

A panel on bank bailouts which featured Cayman Financial Review editorial board members Richard Rahn and Warren Coats described the various models for resolving banking crises and the former chairman of the editorial board Tim Ridley explained why the bank bailouts would not happen in the same way in Cayman.
He distinguished between the banking assets of Cayman retail banks and Class B licence holders not allowed to operate on island. These Class B banks are often branches large banks in the US, South America and Europe.

12 banks alone represent approximately 55 per cent of the $1.4 trillion in banking assets. And more than half of the banking assets are inter-bank bookings, often placed only overnight. The remainder of the bank assets consists mainly of “corporate banking relationships with major multinationals that are holding their funds offshore”, said Ridley. “The amount of individual business in that 1.4 trillion is tiny, whatever the Tax Justice Network will tell you.”

Asked to give the views of the financial services industry on the various tax transparency initiatives that the Cayman Islands is signing up to, Gonzalo Jalles, CEO of Cayman Finance, said the private sector position is straight-forward.

“There is absolutely full support for transparency.” Cayman has followed international standards for a long time for example by signing tax information exchange agreements, and has committed to an intergovernmental agreement with the United States under FATCA and with the UK for a similar arrangement.

“We were first ones pushing to be part of this [G5] pilot of implementing the FATCA-like multilateral exchange of information.”

But the private sector has concerns and will draw a line, he said.

“We are not prepared to become collection agents, policemen or policymakers for other countries. And we have a concern when people mix the words avoidance and evasion. What we want to do is, we want to give the countries all the information and then they can set up all the regulations and they can enforce and we will help them enforce,” he said.

“But we can’t start guessing if a transaction is good or bad avoidance. We cannot become educated in tax codes of 80 countries around the world or whatever the number is. We will provide all the information and then it is up to each country to draw up the regulations and enforce it.”