Quarterly review

Financial services industry
Cayman Finance and government sign agreement

In November, government and Cayman Finance signed a memorandum of understanding governing the consultation of the private sector on legislative and other financial industry related issues. 

The agreement established Cayman Finance as the voice of the industry, charged with representing the diverging views across the financial services sector, and sets out joint initiatives between the association and government.

While government does not intend to cut off any access from any part or business of the financial industry, Minister of Financial Services Wayne Panton said, it would be helpful to have “one voice” or “one body” that represents the views of the industry to the ministry.

The minister encouraged broad participation through Cayman Finance, as active engagement by all firms in the industry will strengthen and encourage the advancement of Cayman’s position as a leading international financial center.

Gonzalo Jalles, the chief executive officer of Cayman Finance, said the agreement “formalizes the work we have been doing the last six months with the ministry, including jointly attending international events, managing international PR, and hosting local seminars for our community.” 

He said, as such, the agreement is a step in the right direction and follows what most of Cayman’s competitors have done.

However, he also called on government to do more to promote and defend the Cayman Islands financial services industry. While the Cayman Islands government spends about $14.5 million to promote tourism, it does not have a comparable budget for financial services, in spite of the industry directly representing 52 percent of Cayman’s economy and 55 percent of all government income, Jalles said.

Competitor jurisdictions like Bermuda, Guernsey or Jersey have promotional bodies that are financially supported by government. The budget for Guernsey Finance is about $1.3 million. Bermuda Pro Business has a budget of $4 million and Jersey Finance has about $6.4 million available to promote its jurisdiction.

The agreement with government contains for the first time a small financial commitment by government, but Cayman Finance wants to undertake as much active promotion as competitor jurisdictions. So far the organization lacks the government mandate and financial backing to assume this role.
Cayman Finance also wants the ministry of financial services to be part of promotional events because investors want to hear about the opportunities for doing business in Cayman directly from the government.

Public consultation on beneficial ownership registry

The Cayman Islands government circulated a public consultation document on a proposal to introduce a public register of beneficial owners of Cayman entities.

The consultation followed a call by U.K. Prime Minister David Cameron for the establishment of public registers of beneficial ownership in the U.K., its overseas territories and Crown dependencies, and other countries. Cameron, who had made tax transparency a key theme of the June G8 summit, said a small minority had hidden their business dealings behind a complicated web of shell companies and “this cloak of secrecy” led to “questionable practice and downright illegality.”

Making the centralized repository of beneficial ownership information publicly available would be beneficial for businesses and developing countries, “who will have easy access to all this data, without submitting endless requests for each line of enquiry,” he said.

At the G8 Summit in June, the Cayman Islands committed to assessing its own regime of beneficial ownership. In an action plan on the misuse of companies and other legal structures, Cayman said it would evaluate by 2015 whether a central registry of beneficial ownership is the most appropriate and effective way to improve transparency.

“Universal success will be predicated on a fair and level playing field in which all jurisdictions adhere to accepted and recognized standards,” Minister for Financial Services Wayne Panton said.

Cayman Finance CEO Gonzalo Jalles said a centralized registry does not offer many benefits, because under the existing tax agreements it is not that difficult to access this type of information.

Licensing requirements in Cayman demand that financial services providers collect and update information about beneficial owners of companies and trusts and maintain these records on their premises.

CIMA agreement with German regulator paves way for marketing of Cayman funds

The Cayman Islands Monetary Authority signed a memorandum of understanding with the German financial services regulator Bundesanstalt für Finanzdienstleistungsaufsicht, providing for mutual assistance in the supervision of alternative investment fund managers who operate in both jurisdictions.
Without the agreement, new hedge funds that are subject to the recently implemented EU Alternative Investment Fund Managers Directive could not have been marketed to German investors. 

Although German institutional investors are not the main hedge fund investors in Europe, they place approximately half of their hedge fund allocations with funds based in the Cayman Islands, according to data service provider Prequin.

CIMA has now signed 27 memoranda of understanding with European counterparts to enable to the continued marketing of Cayman funds under the directive, which was implemented across Europe July 22.

In order for an overseas investment fund to be marketed in the EU, the directive requires that a cooperation agreement exists between the securities regulators in the country where the fund is marketed and the jurisdiction where it is based, that this jurisdiction is not on the Financial Action Task Force ‘non-cooperative list’ and that agreements are in place for the exchange of information for tax purposes between the EU and non-EU jurisdiction. 

Italy, Slovenia and Spain are the only members of the European Securities and Markets Authority that are yet to sign agreements with the Cayman Islands.

Cayman remains offshore M&A leader

The Cayman Islands maintained its position as the most popular offshore jurisdiction for dealmaking in the third quarter of 2013. Cayman saw 20 percent more mergers and acquisitions in the third quarter 2013 and an increase of 32 percent in the value of transactions over the previous quarter, according to the Offshore-i report by law firm Appleby.

Cayman accounted for 26 percent of all the deals done and 39 percent of the total deal value, with 140 of the 538 offshore deals and US$13.5 billion of the $34.5 billion deal value. The average deal size in the Cayman Islands in the third quarter was US$96.3 million, well above the overall average value of $64 million.

Cayman was home to the three largest offshore transactions and four of the top five overall. In the quarter’s biggest deal, Baidu, China’s largest search engine, revealed plans to acquire Cayman-incorporated mobile app distribution company 91 Wireless Websoft from NetDragon for $1.9 billion. In the second-largest deal, Chinese semiconductor company Spreadtrum Communications, which is Cayman-incorporated, agreed to be acquired by Tsinghua Holdings for $1.8 billion. A third Cayman-incorporated target rounds out the top three deals with British manufacturing business Edwards Group the subject of an acquisition by Sweden’s Atlas Copco for $1.6 billion.

Tax transparency: Cayman ‘largely compliant’

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes published a ranking of 50 jurisdictions that have gone through two phases of peer reviews of the state of implementation of the OECD’s tax information exchange regime. 

Phase one looked at the laws and regulations that are in place to support tax information exchange agreements, and phase two focused on tax information exchange in practice. Of 50 jurisdictions, 44 were deemed compliant or largely compliant. While Austria and Turkey are regarded as partially compliant, only four jurisdictions – Cyprus, Luxembourg, the Seychelles and the British Virgin Islands – are not compliant with the existing tax information exchange regime.

The Cayman Islands was ranked ‘largely compliant’ with only a few minor shortcomings in relation to the availability of ownership and accounting information highlighted in its phase two review. In detail the criticism noted that in cases where bearer shares are held by recognized custodians outside of the Cayman Islands, ownership information on the bearer shares may not always be available in Cayman and it may not be possible to enforce penalties for noncompliance on overseas custodians.

The report highlighted that the registrar of companies does not have a system of monitoring compliance with ownership and identity information keeping requirements in respect of companies and partnerships. While legislative amendments have increased penalties for noncompliance, these are untested in practice, the report said.

The peer review also criticized the fact that for entities not licensed with the Monetary Authority, no system exists to monitor compliance with accounting record-keeping requirements. This would make the legal obligation to keep accounting records difficult to enforce.

As a result, Cayman was ranked compliant in eight of the 10 examined areas around tax information exchange and largely compliant in the remaining two.

During the 2009 to 2011 period examined in the report, the Cayman Islands Tax Information Authority received a total 65 information requests, of which 64 were processed. 

Only one request could not be complied with due to legal issues. In that case, information could not be made available because the information requested predated the Tax Information Authority Law, which came into force in 2005. The law is the basis upon which tax information exchange arrangements can legally take effect in Cayman. 

The review stated that in cases where an inconsistency arises between the domestic legislation and an international agreement, which is scheduled as part of the TIA Law, the objective of the international agreement should be followed. This was confirmed by the Cayman Islands attorney general.

The report noted that in the case, the Cayman Islands “recognized this inconsistency, and following the request has amended the TIA Law, which now allows for exchanging information relating to taxation matters that arose prior to September 1 2005 where the TIEA so requires (s3(2) TIA Law). The [Cayman Islands Tax Information Authority] has informed the information exchange partner of the legislative amendment, and is now in the process of obtaining the information.” 

Grand Court quashes tax info exchange with Australia

The Cayman Islands Grand Court quashed a decision by the Tax Information Authority to provide information to the Australian Taxation Office in response to four requests made under a tax information exchange agreement between Cayman and Australia.
In a decision dated Sept. 13, Justice Charles Quin directed the Tax Information Authority to demand from the Australian Taxation Office the immediate return or destruction of the documents, as these had been unlawfully provided by the Cayman authority. The TIA was also directed to formally revoke its consent that the information given could be used in court proceedings.

While the judgment acknowledged that the authority owed a duty to assist the Australian authorities, it had to ensure that the requests were in compliance with the Tax Information Authority Law and the tax information exchange agreement and did not infringe the rights of those subject to the request.
According to the judgment, the authority failed to ensure that the information sought by the Australian Taxation Office only related to tax years and taxable periods after July 1, 2010, as prescribed by the tax information exchange agreement.

The Tax Information Authority also had “no legal authority to provide the ATO with its consent to use the material in court proceedings without first applying to a judge of the Grand Court for directions.”

Moreover, the Tax Information Authority had failed to notify the companies subject to the tax information exchange request of “the jurisdiction making the request and the general nature of the information sought.”

This is required by section 17 of the Tax Information Authority Law for cases that are not criminal or alleged criminal matters, provided the authority knows the whereabouts of the taxpayers concerned. In the circumstances, producing the information infringed their rights to “a fair and public hearing” and their “rights to privacy” under the articles 7 and 9 of the Cayman Islands Bill of Rights, the judge ruled.

An Australian court subsequently defied the Cayman judgment that tax information unlawfully handed over by the Cayman Islands Tax Information Authority should be returned and not used in Australian tax evasion proceedings. 

Australian federal court judge Nye Perram said the ruling of the Cayman Islands Grand Court to quash the decision of the Tax Information Authority to send the information to Australian tax authorities is a matter of domestic Cayman law and can have no effect on the lawfulness of the Australian Taxation Office’s receipt of that material.

In his Oct. 9 ruling, Justice Perram stated that tendering the documents in the Australian proceedings “might be an offense under the laws of the Cayman Islands,” but he nonetheless granted an application for the use of the documents as evidence in the Australian tax case.

The court held that no contempt was involved in obtaining the documents from the Cayman Islands, nor in using them in court proceedings.

GDP rebounds

The Cayman Islands’ real gross domestic product grew by an estimated annualized rate of 0.9 percent in the first half of 2013 compared to a year ago.

Upbeat growth rates were indicated for most sectors, led by hotels and restaurants (5.4 percent), construction (4.4 percent), real estate, renting and business activities (2.0 percent), electricity and water supply (1.5 percent). Financing and insurance, the largest sector, posted marginal growth (0.4 percent). However, declines were indicated for wholesale and retail trade, agriculture and fishing, government services and manufacturing.  The economy rebounded in the second quarter with a 1.2 percent expansion, reversing the 0.6 percent dip in the first quarter.  Given the first half of the year’s performance, government forecasts  1.5 percent GDP growth for the year 2013.

This assumes acceleration in growth during the second half of the year particularly from public-private partnership construction projects, wholesale and retail trade, financial and business services, and government services. Barring sharp changes in oil prices, the  inflation forecast for 2013 is 2.1 percent given the 2.0 percent average inflation in the first six months.

The number of work permits grew 2.3 percent in the first six months of the year to 20,616 compared to a year ago. The growth rate is sharper than the 1.2 percent recorded for the same period last year.

Cayman Captive Forum

The Cayman Captive Forum heard that the insurance industry is lacking innovation. Brendan Barry, chief underwriting officer at Cayman reinsurer Greenlight Re said the insurance industry has been successful in attracting capital, but it has not kept up with the requirements of buyers in terms of coverage.
Financial institutions in the United States, for instance are facing much greater threats from cyber risks – such as computer crime, the loss or theft of data or the physical loss of computer systems – than from windstorm damage.

“Yet, as an industry, we will line up to give them insurance coverage for that building and nobody will give them any coverage for the cyber exposure,” he noted.

Meanwhile, the difference between insured losses and economic losses continues to grow, following each major catastrophic event, highlighting the failure of the insurance industry to develop new products that meet the needs of customers. 

Peter Mullen, chief executive of Aon Captive and Insurance Management, said the gap between economic losses of $85 billion and insured losses of $20 billion during the first six months of 2013 should give the insurance industry enough incentives and opportunities to innovate.

He believes the majority of the top 50 business risks are either not or not fully insurable and should be a starting point for innovation in the industry.

Captive insurance, which used to be new, interesting and cutting edge, is becoming conventional, he said. However, by focusing on clients’ needs there are many opportunities to innovate, for example around new regulations such as Solvency 2 or the use of data and analytics.


Previous articleEU’s tax transparency impacting the captive market?
Next articleSTAR Trusts: A world class structuring vehicle?
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. 

Compass Media Ltd

Cayman Financial Review is the only magazine which promotes the Cayman Islands financial services industry at a local and international level. The Cayman Financial Review is published quarterly and is distributed in print and online to organisations and associations worldwide as well as at key financial conferences. Over 30,000 online and targeted printed copies are distributed to clients, their nominated local and international contacts, relevant conference participation lists and a current researched international contact list continuously updated and prepared by Compass Media Ltd. In addition the product has a fully integrated website, a link of which will be sent to ‘Top 500’ legal, accountant, government, insurance, financial service and hedge fund contact list in United States, United Kingdom, Europe, South East Asia, Dubai and the South Americas.
The Compass Centre Shedden Road PO Box 1365 GT Grand Cayman Cayman Islands British West Indies KY1-1108 T: +1 (345) 949-5111 F: +1 (345) 949-7675 W: www.caycompass.com