Protecting privacy

Two offshore powerhouses are taking radically different approaches to handling the same dilemma: how to protect financial privacy. 

The British Virgin Islands and the Cayman Islands have both come under even heavier scrutiny than usual after data leaks published by the International Consortium of Investigative Journalists last year revealed the identities of thousands of companies’ owners – exposing the wrongdoing of some, but violating the privacy of many, many more.

In response, both territories have drafted legislation that addresses the issue of data leaking. But while one would indiscriminately clamp down on all disclosures, the other is seemingly an effort to punish corruption and criminal activity while still maintaining the right to privacy.

The BVI House of Assembly passed a bill in March that could punish people who divulge information from a computer “without lawful authority” with multiple decades in prison and hundreds of thousands of dollars in fines. Before the original bill was amended, the Computer and Cybercrime Act even criminalized journalism by punishing the publication of unlawful information with up to 15 years in prison and a $500,000 fine.

The proposal has sparked an outcry from free-press advocates around the world, who are decrying its indiscriminate nature – nothing in the bill protects divulging information that’s in the public interest – as well as its heavy-handedness.

The Economist, a magazine that generally supports offshore finance, noted that the law would impose a harsher penalty on whistleblowers and government watchdogs than it would on child pornographers. “Reporting financial wrongdoing is apparently more heinous (than child pornography),” said its editorial opposing the bill.

The international pressure forced lawmakers to introduce a clause in late July that protects the publishing of information that’s in the public interest, making the bill slightly less draconian to the eyes of free-press advocates. However, whistleblowers remain unprotected by any public interest clause.
The Cayman Islands has a similar piece of legislation in its Confidential Relationships (Preservation) Law, but it also has and continues to introduce policies that make exceptions for leaking information that is in the public interest.

One such proposal was made in April, when Cayman’s Law Reform Commission introduced legislation that encourages whistleblowing by imposing a maximum penalty of five years in prison against anyone who takes or threatens “detrimental” action against people who report improper conduct.
The proposal applies to both the private and public sectors, and would bolster the jurisdiction’s existing Freedom of Information Law (that the BVI lacks), which protects people who disclose corruption and criminal activity from legal retribution.

Both jurisdictions are right in attempting to protect their investors. While the ICIJ disclosed some wrongdoing – third-world government officials hiding ill-gotten gains in tax havens, for example – the data leaks trampled the privacy of lawful persons in the process (by its own account, only 30 U.S. citizens of the 4,000 listed in the leaked records are known to be involved in lawsuits or cases of criminal fraud).

More importantly, what the territories are doing is protecting perhaps the most important ingredient in achieving lasting economic growth: property rights. Economists have pointed out for decades that the distinguishing factor between rich and poor countries isn’t natural resources or technological know-how, but property rights. Evidence has proven those arguments to be correct – per capita GDP is nearly twice as much in countries with the strongest protection of property rights as it is in countries that only have “fairly good” protection.

Moreover, what is often forgotten is that property rights and privacy are inexorable.

Most people agree that having property rights to land entails being able to keep people off, and have privacy while on, that land – unless criminal activity is reasonably suspected. But, unfortunately, they change their tune when it’s suggested that the same should apply in more abstract areas, such as when one has property rights in an offshore company or trust.

Policy makers in Cayman and the BVI realize the link between property rights and privacy, though, which is admirable.

However, while both aim to protect property rights, Cayman goes a step further by promoting another key ingredient to economic growth: open governance.

In its zeal to protect financial privacy, the BVI omits the promotion of open governance by threatening to punish the very people who would shed light on corrupt activities. The territory is already behind many of its competitors because it lacks sorely needed freedom of information laws. Punishing government officials who are willing to disclose information that’s in the public interest would be a monumental step in the wrong direction.

Cayman legislation, on the other hand, promotes open governance. By criminalizing threats against those who report unlawful activities, people who work in government would be much more likely to disclose the corruption of the peers.

Some may argue that Cayman’s proposal would decrease foreign investment. If data leakers are more protected, they may say, then ceteris paribus, institutions will be more likely to invest in the BVI and centers with similar policies.

That argument might be true to some small extent in the short run, but it ignores the fact that open governance is much more important in the long run. When public officials are allowed to operate in secrecy, special interests receive favors at the expense of their competition, bureaucracies become bloated and corrupt, and therefore economic stagnation ensues.

An added bonus of the Cayman legislation is related to public relations. By allowing whistleblowers to disclose unlawful activity while still protecting the privacy of lawful investors, it would undercut a major argument that detractors use against offshore finance: that they are simply havens through which drug lords and dictators launder money.

Cayman’s proposal provides the best of all worlds: the promotion of open government, the ability to expose crimes, and the maintenance of privacy for investors. The territory’s legislature would be wise to pass it, and other jurisdictions would be wise to emulate it.
Whether they will is another question.

Despite Cayman Deputy Governor Franz Manderson imploring the territory’s legislature to implement the recommendations “as quickly as possible,” 11 of the 18 Cayman members voted against a motion put forward by independent member Ezzard Miller. (Ironically, all votes in favor of the proposal came from the United Democratic Party – perhaps a show of atonement since UDP member McKeeva Bush was ousted as premier after being arrested in 2012 for alleged misuse of a government credit card and importing expensive materials.) Manderson did vow that the legislation would be progressed, however, so there is still hope.

Not as much hope exists in the BVI, though. The Law Reform Commission there made a number of recommendations over the years, including mental health, jury reform, and yes, freedom of information legislation. None of those recommendations have been acted on, and it doesn’t even appear as if open governance is on the government’s radar, as the House of Assembly elections are next fall and no candidate is campaigning on a transparency platform.

If there’s one consolation, it’s that the Cybercrime Act has not been made law yet. International pressure forced BVI lawmakers to introduce a public interest clause for journalists in July. Hopefully, further disproval will encourage the introduction of a public interest clause for whistleblowers, too. That way, the Virgin Islands can have the same win-win opportunity Cayman has to promote open governance while maintaining protection for investors in a vital industry.