Following the devastating destruction caused by Hurricane Irma and the disruption of essential services in the British Virgin Islands, numerous corporate services providers pulled their employees out of the territory with some of the staff to their firm’s sister offices in Cayman.
Richard Reading, a partner at Baker Tilly’s Cayman office, said about 15 to 20 financial services firms booked a jet to evacuate 250 employees. Other firms worked separately to help their workers leave.
He expected between 10 and 15 BVI employees to come to Cayman on a 60-day work permit exemption that allows them to continue carrying out BVI-related business.
Nick Bullmore, a partner with Carey Olsen’s branch in Cayman, said government had been very helpful in facilitating the relocation. He said his firm is moving between five and 10 of its employees and their families here.
“For what it’s worth, our government has done a fantastic job of facilitating these moves,” he said. “It is wonderful to be able to help our sister islands in their time of need. Even though it has now been 13 years since Ivan, we all still remember the generosity shown by others at that time.”
It is not clear how long it may be before the displaced workers can return to the BVI.
“It could take one month, six months, or a year,” Reading said. “It’s going to be a challenge to rebuild. It’s a hard place to build in.”
When Hurricane Ivan hit Cayman in 2004, BDO Managing Partner Glen Trenouth spent about three weeks in the BVI before returning to Cayman. His employees soon followed him, he said.
However, Trenouth said, he was able to find accommodations for himself and his employees. If the BVI cannot rebuild its infrastructure and housing, it would be pointless to send workers back, he said.
“They’d just be a burden on the territory,” he said. Eight BDO workers were expected to come to Cayman.
Meanwhile, the BVI Financial Services Commission announced that its Hong Kong-based BVI House Asia would be the point of contact for regulatory-related matters with the online portal back up and running.
BVI House Asia’s Elise Donovan insisted that the territory is open for business.
“Our financial services business was built to allow people to do BVI business from anywhere in the world, and to continue business regardless of the physical conditions in this jurisdiction,” Ms. Donovan said.
Record number of suspicious activity reports filed in 2015/16
A record number of suspicious activity reports of potential money laundering and other financial crimes were made in the Cayman Islands between July 1, 2015 and June 30, 2016 according to the Financial Reporting Authority.
The 620 SARs represented a 9 percent increase from 2014/15, and marked the fourth straight year the number of reports filed had increased, the Financial Reporting Authority stated in its annual report.
The authority noted that 124 of the cases resulted in information disclosures to the Royal Cayman Islands Police Service, 24 disclosures to the Cayman Islands Monetary Authority, 23 to other law enforcement authorities, and 22 to overseas financial investigation units.
The number of entities making those reports increased from 116 in 2014/15 to 140 in 2015/16, with the largest number of reports (266) coming from the banking sector.
Most of the reports involved suspected “suspicious activity” – typically reports on accounts showing activity that is out of line with the account holder’s expected level of income – while other reports suspected fraud, corruption, money laundering and “other” financial crimes.
There were 1,257 suspects identified in the reports, 796 of them being “natural persons” and 461 of them legal entities.
Most subjects of SARs came from Cayman – including 71 “natural persons” and 210 legal entities being suspected of wrongdoing. The jurisdiction with the second-most number of subjects was the U.S. (100 natural persons and 19 legal entities), followed by the U.K. (51 natural persons and nine legal entities). The other jurisdictions with more than 30 suspects of suspicious activity reports were Taiwan, Jamaica, Canada, the British Virgin Islands and Brazil.
The financial intelligence unit, whose international call sign is CAYFIN, said that the growing volume of SARs is likely due to the territory’s enhanced financial crime-tackling measures.
“The FRA has long held the view that the growing number of SARs is indicative of the vigilance of the reporting entities against money laundering and terrorist financing,” the Financial Reporting Authority stated. “The substantial number of cases in the past three fiscal years appears to have been influenced by due diligence reviews as a result of overseas tax, legal and regulatory updates coming into effect.”
While noting that Cayman has enhanced due diligence measures, the Financial Reporting Authority stated that the volume of reports has put “considerable strain” on its resources. The authority has “around” 12 staff, including one legal adviser.
Cayman and Bermuda captives outperform commercial insurers
Captive insurers domiciled in Bermuda and the Cayman Islands posted strong operating earnings and outperformed commercial insurance companies, rating agency A.M. Best reported in September.
A.M. Best’s report, “The Beat Goes On: Rated Bermuda & Cayman Captives Continue Their Strong Operating Performance,” noted that among the captives rated by the agency, “premium leverage ratios improved, as capital grew at a healthy rate of 8 percent, buoyed by strong operating earnings.”
The report highlighted that 2016 marked the fifth year of above-par operating results for captives with a total return on revenue of 23 percent, down from 24 percent in 2015.
“Underwriting results declined somewhat, to a combined ratio of 85.3 in 2016 from 80.0 the year before, but were well above the results posted by A.M. Best’s composite of U.S. commercial casualty insurers. In addition, the Bermuda and Cayman five-year [2012-2016] average combined ratio of 82.5 far exceeded the U.S. commercial casualty segment by more than 16 points,” the rating agency found.
A combined ratio of less than 100 indicates an underwriting profit, while a ratio of more than 100 means the insurer pays more in claims and expenses than it receives in premiums.
“The Bermuda and Cayman captives saw their net premiums earnings decrease for the first time in five years, to a modest 4.7 percent compared with a high single-digit growth that averaged 7 percent in the prior four years. This included a 10.1 percent growth in 2014, which was far greater than the premium growth reported by U.S. commercial casualty insurers over the same period,” A.M. Best said.
The rating agency noted that unlike traditional property and casualty insurers, captives are not pressured by stakeholders for returns on equity or revenue growth. In addition, extensive use of reinsurance allows captives to transfer a significant amount of catastrophe risk, resulting in less volatile results compared with traditional insurers.
“Bermuda and Cayman captives have posted strong, double-digit [return-on equity] despite difficult market conditions and challenges, with a five-year compound average growth rate of 13 percent for operating ROEs. Favorable reserve releases and limited catastrophe events are the two key contributors to their solid margins and strong ROEs,” A.M. Best stated.
The rating agency further predicted a healthy future for captive insurers “based on the success of the captive business model, the efficiencies gained from the use of alternative risk transfer and the benefits of increased risk awareness and loss control, as well as the ability to integrate sound risk management practices throughout the organization, all of which lead to operating results that outperform the commercial market.”
Trade body responds to criticism of CLOs
Collateralized loan obligations, securities backed by a pool of debt such as low-rated corporate bonds, have performed well this year but attracted criticism for it.
European CLO issuance for the year to date is higher than during the same period last year, when issuance was the highest since the financial crisis with 16.8 billion euros issued in 41 transactions. In the larger U.S. market, year-to-date CLO issuance of $71.2 billion is twice as high as in the same period in 2016, according to Bloomberg. The majority of CLOs are structured through the Cayman Islands.
Media reports have equated the resurgence of collateralized loan obligations to a new form of systemic risk, similar to the risks that materialized from the more complex collateralized debt obligations during the financial crisis. Given that most of the loans underlying CLOS have a low credit rating on their own, the criticism is specifically leveled at the triple-A ratings assigned to tranches of CLOs, indicating a minimal risk of default.
The Loan Syndication and Trading Association responded to the criticism in a statement, noting: “The suggestion that somehow the companies that CLOs lend to are unworthy because they are not investment grade seems troubling. After all, 70 percent of rated American companies are rated below BBB/Baa3; these are important and iconic American companies such as Burger King, Avis, American Airlines and Dell, as well as many innovative middle market companies.”
The comparison with collateralized debt obligations is unwarranted, the trade body noted, because the long-term loss rate on investment grade CDO notes is much higher at 34 percent – a figure that includes the performance during the financial crisis – than CLOs, which according to rating agency Moody’s only had long-term loss rate of 0.1 percent. The association also stated that there has never been a default on a CLO note that was rated AA or better according to Moody’s.
Not only have CLOs performed better than other asset backed securities, they were also much safer than corporate bonds, the LSTA said, citing cumulative default rates compiled by Wells Fargo in 2015. For instance, A and BBB-rated CLO note defaults were both less than 0.5 percent compared with 2 percent and 5 percent, respectively, for equivalently rated corporate bonds.
For BB-rated CLO notes and corporate bonds the difference is even larger: 2.26 percent compared with nearly 16 percent.
The LSTA also played down the correlation risk between by pointing out that CLOs must invest in loans to a diverse set of industries. For AA-rated CLO notes to be impaired, default rates of the underlying loans would have to be nearly seven times higher than during the financial crisis and for AAA-rated CLO notes there is no default rate high enough to cause losses, the LSTA said referring to research by Bank of America.
OECD report: Cayman remains ‘largely compliant’
Despite numerous government measures to bring Cayman in line with the tax transparency guidelines propagated by the Organisation for Economic Cooperation and Development, Cayman is still only deemed “largely compliant,” according to the latest OECD peer review report.
This is essentially the same result as the 2013 review of the way in which Cayman collects and exchanges tax information with other countries.
Although government has addressed the recommendations in the last peer review report, certain amendments, for example with regard to the availability of beneficial ownership information, were “too new to evaluate,” the latest assessment noted.
Cayman was rated “compliant” in seven and “largely compliant” in three of the 10 elements that made up the assessment.
“Cayman tested very well against this more rigorous set of standards, and this clearly demonstrates the high quality of our cooperation with our treaty partners,” said Minister of Financial Services Tara Rivers.
The new peer review follows a six-year process during which the Global Forum first assessed the legal and regulatory framework for tax information exchange and then the actual practices and procedures in 119 jurisdictions worldwide.
The Global Forum’s new review process combines the two elements with a focus on the ability of tax authorities to access beneficial ownership information of all legal entities and arrangements.
The latest report concluded the requirements to maintain beneficial ownership information are generally well implemented in practice. However, the new beneficial ownership requirements for 11,000 domestic companies, put in place in March 2017, remain untested.
During the review period, one company refused to provide information in response to a notice requesting information that was not held in the Cayman Islands. Although the Tax Information Authority referred the case to the Director of Public Prosecutions, the case was not pursued.
“Therefore, in those cases where information is not maintained in the Cayman Islands, the Cayman Islands should ensure that its enforcement powers are sufficiently exercised to ensure that it has access to all information in all cases,” the peer review stated.
A follow-up report on the steps taken to address the latest recommendations will be issued no later than June 2018, the OECD said.