Private Banking is an often used, but loosely defined term, which may be interpreted in several different ways. It encompasses the provision of banking, investment and trust services to the high net worth individual. Cayman is a leading offshore financial centre and is one of the few equipped to provide "one-stop shopping" to those with a long list of requirements to be met offshore. In the United States, within the international business community, Cayman enjoys an excellent reputation and is widely and increasingly used as the offshore domicile of choice. In the United Kingdom and the rest of Europe, however, Cayman's reputation and employment as an offshore financial centre is less certain, largely due to poorly researched and misinformed tabloid journalism, which tends to focus on perceived negative aspects of Cayman's stringent confidentiality provisions.
Cayman - Location of Choice
The Cayman Islands, which are situated 475 miles due south of Miami, comprise three islands - Grand Cayman, Cayman Brac and Little Cayman - and virtually all business and Government are located in Grand Cayman. Cayman is an English speaking, British Dependent Territory, and while it has a resident Governor appointed by the British Government, it enjoys a large measure of internal self-government. The Cayman Islands can boast of excellent telecommunications systems and easy access with daily flights to and from several cities in the USA. A very sophisticated and diversified financial infrastructure has been developed enhancing Cayman's image as one of the leading offshore financial centres in the world. All the major international accounting firms are represented in the Cayman Islands and the local legal firms are of very high standard, many of them specialising in international tax planning and finance.
Cayman offers the highest standard of living of any island in the Caribbean and, with a pleasant climate the entire year-round and social harmony, it provides a very attractive environment in which to live and work. Cayman does not have exchange control regulations and the Cayman Islands Dollar is pegged to the US Dollar at a rate of CI$1:US$1.20. The Honourable Thomas Jefferson, OBE, JP (former Financial Secretary) in 1991 at a Cayman Banking conference, cited three factors that underscore Cayman's continuing success and these still holds true today, namely:
- Cayman is a no-tax jurisdiction in contrast to other locations that offer temporary tax breaks or holidays. Cayman does not have income tax, corporation tax, inheritance tax, withholding tax,etc.;
- Cayman has enjoyed a history of social harmony between the different races and nationalities which constitute the population of over 31,000; and
- A responsive and responsible government has ensured that Cayman has adapted to the needs of the modern business world.
Currently there are approximately 588 licensed banks and/or trust companies in Cayman with over US$480 billion of assets. Cayman is a common law jurisdiction and the use of trusts has long been recognised in Cayman, as elsewhere, as an excellent means of preserving and protecting assets in a rapidly changing world. However, one may legitimately question why Cayman should be the preferred situ's for a trust. There are several reasons which suggest themselves as follows:
- As mentioned already, Cayman as a location offers security and stability and highly professional trustees, banking and investment services are readily available. Cayman's standing as a well-run financial centre was strongly endorsed by the Gallagher Report, commissioned by the British Government and published in1989.
- In today's turbulent world, there is increasing political and country risk and the prudent man is well advised to diversify his asset holdings and to locate certain of his assets in a secure offshore jurisdiction, such as Cayman.
- Cayman offers modern, pragmatic trust legislation together with a well established financial infrastructure, ensuring that full trustee services including asst management can be provided in Cayman.
The trust law of the Cayman Islands is based on the relatively recent Trust Law, 1967 and this statue in turn in virtually identical to the English Trustee Act, 1925. However Cayman, in addition, offers certainly flexibility in trust administration, not found in other common law jurisdictions and this includes:
- 1.Income may accumulate tax-free in the offshore trust during the life of the trust and in the case of an exempted trust (see below) this can be for a period of up to one hundred years. The normal limitation of twenty-one years from income accumulation does not apply in Cayman.
- 2.There are two broad categories of trust:
- (2.1) the ordinary trust, the maximum duration being the usual life-in-being plus twenty-one years; and
- (2.2) the exemption trust, which can have a maximum duration of one hundred years. In addition, the exemption trust obtains a written undertaken from the Cayman Government guaranteeing its tax-free status from up to fifty years.
- 3.In contrast to the English Trustee Investment Act, 1961 Cayman legislation is silent on restricted investments for trustees.
- 4.Trust (Foreign Element) Law, 1987: This act stipulates that Cayman law will recognise the choice of governing law expressed in the trust instrument and that changes in the governing law a repermissible, if allowed for in the trust instrument. In particular, however, this act state that a Cayman trust may be set aside due to:
- (4.1)the laws of a foreign jurisdiction prohibiting or not recognising the concept of trusts; or
- (4.2) the Cayman trust defeating certain rights conferred by a foreign law, such as forced heir ship provisions.
- As a result, Cayman has a strong appeal for settlors/grantors living in civil law countries.
- 5.Fraudulent Dispositions Law, 1989
- This act replaces the sixteenth century status of Elizabeth and shifts the onus of proof to the creditor wishing to set aside the trust. Specifically, the act provides for the following:
- (5.1) the disposition of assets must have taken place at an undervalue; and
- (5.2) the creditor must demonstrate an intent to defraud on the part of the settlor/grantor; and
- (5.3) the obligation to the creditor must have existed at the date of the disposition as a result future creditors are specifically excluded; and
- (5.4) the grantor must have had notice of the obligation to the creditor at the time of the disposition; and
- (5.5) the creditor must demonstrate that he/she has suffered a loss as a result of the disposition; his/her claim being limited to the extent of the loss; and
- (5.6) proceedings must commence within six years of the date of the disposition.
Whilst trust companies in Cayman naturally continue to exercise caution in such matters, this legislation makes Cayman a favourable location for the so-called "asset - protection" trust.
In Cayman there are now four broad categories of company:
- 1.resident companies, used for local trading purposes and subject to certain ownership provisions;
- 2.non-resident companies, used for a variety of international activities.
- 3.exempted companies (similar to international business companies or IBC's), non-resident companies which are registered as exempted companies in order to provide additional flexibility, such as the ability to issue bearer shares, obtain a written undertaken from the Cayman Government on its tax-free status, dispense with "Limited" in the company name, etc.
- 4.exempted limited duration companies, i.e. corporate entities with fiscal trasparency in the United States.
Once new business vetting formalities have been completed, many trust companies in Cayman will offer clients same day incorporation and currently over 31,000 companies are registered in Cayman, with 4,269 new companies registered in the first nine months of 1994, (a 30% increase over the same period in 1993). Effective from 1 April 1994 the authorities in Cayman took the unusual step of actually reducing company registration fees and whilst the same high standards are still maintained in Cayman concerning new business, this measure has contributed to the record growth in creation of Cayman companies currently being experienced.
Reporting and accounting requirements are minimal and most trust companies can offer their clients a comprehensive array of company management services, ranging from basic company incorporation and registered office at one extreme to a full board of directors and officers at the other extreme.
Cayman companies have been used for a variety of purposes and some of the more popular uses include the following:
- offshore captive insurance and reinsurance companies. Cayman is ranked second in size to Bermuda as an offshore captive insurance centre.
- bond issuing companies raising finance in the international capital markets. A variety of sophisticated financial engineering techniques are employed using Cayman companies.
- centralised treasury/cash management companies, with tax-free income accumulation taking place in Cayman.
- investment holding and property holding companies.
- invoicing and trading companies, etc.,
Company legislation is based on the English Companies Law, 1929 but considerable flexibility is provided through such provisions as:
- the objects of the company need not be specific.
- the principle of ultra vires is considerably watered down in Cayman and does not apply to third party transactions.
- complete confidentiality may be achieved through the use of exempted Cayman companies, in particular.
Collective Investment Schemes
Cayman does not have OECD status nor does it have Designated Territory Status. Thus, it may appear strange that Cayman is particularly popular as a domicile for offshore mutual funds and unit trusts. What Cayman does offer is a lack of red tape and bureaucratic obstacles to the setting up of the offshore vehicles required and, allied with its excellent infrastructure and availability of professional service providers locally, Cayman has succeeded in attracting an ever-increasing share of institutional offshore funds. Mutual funds legislation was introduced into Cayman in 1993 and Cayman as a result has now joined the ranks of the regulated offshore financial centres. However, this is a piece of pragmatic legislation and it has significantly enhanced Cayman's reputation in the international business community.
There are four vehicles which may be employed for collective investment schemes in Cayman, namely:
- 1.Exempted mutual fund companies.
- 2.Exempted unit trusts.
- 3.Exempted limited partnerships, which may be employed as open-ended mutual funds.
- 4.Exempted limited duration companies.
Cayman is a leading centre for offshore collective investment schemes and with the continued development of this business and the arrival of new service providers, it is taking on more and more of a servicing role, ensuring full compliance with Regulation 864 in the USA.
Much of the credit for Cayman's growth and endurance as a leading offshore centre must be attributed to the responsive and responsible government referred to already and what Cayman has succeeded in doing is achieving an optimum mix of free enterprise and pro-business pragmatic regulation. Cayman has worked very hard to enhance its reputation as a superior offshore financial centre and it is very proud of its recognised status today. It continues to develop to meet the changing needs of the world of international finance and, based on the excellent partnership which has been forged between the government and the business community. Cayman is well positioned to occupy a dominant role for some time to come.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.