Cayman Islands: The Cayman Islands - Thriving Amid The OECD FAFT And Other International Initiatives

At the time of writing (8 November 2000) the Cayman Islands, like many other offshore centres, has been caught up in various international initiatives for over two years. The general effect of these initiatives is to raise professional standards and requirements in the offshore financial services industry, to improve and fortify the anti-money-laundering architecture, including formal know-your-customer requirements, to provide increased co-operation with other jurisdictions and mandatory reporting of suspected money-laundering. These are the continuation of trends that started many years ago, in particular with the Mutual Legal Assistance Treaty with the USA.

1. The OECO "Harmful Tax Competition" Initiative

The Cayman Islands were one of six jurisdictions that gave an "Advance Commitment" to the OECD and did not therefore appear on the OECD list of 35 "tax havens" published in June 2000. The Cayman Islands Government gave a broad commitment to eliminate certain harmful tax practices and specified more clearly what measures would be implemented. The position may be summarised as follows:

1. The Cayman Islands As A Tax-Neutral Jurisdiction

It was established that no change would be made to the zero tax regime in the Cayman Islands. The Islands have a long history of no "direct" taxes, ie no income, capital gains, corporation, gift, estate or inheritance taxes. This regime has no aspect of "ring fencing" and applies equally to residents and non-residents, to individuals, partnerships, trusts and companies. The OECD have now formally commented that this system of taxation is not of itself considered "harmful" and the Cayman Islands Government is committed to its continuation.

2. Cayman Islands Commitment To Tax Information Exchange

The Cayman Islands Government undertook in its OECD commitment letter to introduce tax information exchange on the following basis:

1. Criminal Tax Matters. The Government committed that effective exchange of information for criminal tax matters shall become effective for the first tax year after 31 December 2003.
2. Civil And Administrative Tax Matters. The Government committed that effective exchange of information for civil and administrative tax matters shall become effective for the first tax year after 31 December 2005.
3. By Request Only. Information will be provided in response to a request probably pursuant to a treaty (or equivalent agreement) mechanism to be negotiated on a country by country basis.
4. Competent Authority. Pursuant to such treaty a foreign tax authority will be required to submit a request to a competent authority in the Cayman Islands, that will act in a capacity similar to that in which the Chief Justice currently acts under the Mutual Legal Assistance Treaty with the USA to establish a prima facie case.
5. Confidentiality. There will be confidentiality provisions to ensure that the information is adequately protected from subsequent unauthorised disclosure.The implementation of this commitment will require a treaty to be entered into with each relevant country and, possibly a memorandum of understanding. It will also require a mechanism for the relevant Cayman authority first to obtain the requested information from the private sector (or a public sector authority or department, if it has it), because there is no central revenue agency, department or body in the Islands.
3. Ring Fencing/Preferential Regimes

Because of the "no-direct-tax" fiscal regime the Islands necessarily have no preferential tax regimes.

The Government has, however, committed to harmonising the laws on companies, the laws on partnerships and the laws on trusts for residents and non residents. These changes will probably remove restrictions on offerings to, participations by, or activities of, local individuals and businesses. The distinctions, in terms of the company laws, between "ordinary" and "exempted" companies may be removed completely by extending the benefits of the exempted company to the ordinary and the ordinary non-resident company. While this amending legislation will doubtless be technical, the attractiveness and flexibility of Cayman Islands vehicles, entities and structures for offshore investors is not likely to be affected.

4. Bearer Shares

It is the Government's intention to phase out or immobilise private company bearer shares. Bearer securities (shares and debt instruments) in relation to institutional transactions will not be affected.

5. Aggressive Marketing Of Confidentiality/Secrecy

This trend to provide better access in the event of criminal activity will continue in accordance with developing international standards. It is anticipated that the Confidential Relationships (Preservation) Law of 1976 will be repealed and replaced with more modern financial privacy legislation and will take into account the new European Union sponsored Human Rights legislation. The Government has, in the meantime, undertaken to advise service-providers that "aggressive marketing policies based exclusively or primarily on confidentiality or secrecy are not in the national interest and should not be pursued". This also accords with the Cayman Islands Bankers Association current Code of Practice.

2. The FATF Listing

Shortly after the OECD announcement of the "tax havens" list and the list of jurisdictions that had given an Advance Commitment, the FATF published a list of 15 non-co-operative jurisdictions in the international fight against money-laundering. The Cayman Islands were included on that list, along with other jurisdictions that are better known for being money-laundering risks.

Since the publication of the list, substantial amendments have been made to the Monetary Authority Law, the Proceeds of Criminal Conduct Law, The Banks and Trust Companies Regulation Law and the Companies Management Law. These amendments in the main provide for regulatory access to client-specific information (which was previously prohibited by statute), compulsory know-your-customer requirements and compulsory reporting obligations where there is a suspicion of money-laundering.

When the FATF met further in October 2000 they indicated that they were pleased with the progress made by a number of jurisdictions, including the Cayman Islands, but decided it was too early to formally "de-list" any of the 15 jurisdictions. Currently, it seems likely that this will occur in February 2001.

3. US Withholding Tax And Qualified Intermediary Rules

New withholding tax rules in the USA will come into effect on 1 January 2001. They are designed to prevent US taxpayers from evading taxes by receiving payments through offshore structures, while also preserving the confidentiality of non-US-taxpayers in offshore structures. This is accomplished through the IRS having a contract with a paying bank or other financial institution that is either overseas or a US branch of an equity headquartered overseas. Such an entity is termed a "Qualified Intermediary".

In order to become a Qualified Intermediary an entity must be headquartered in a Qualified Jurisdiction (or be a branch of an entity headquartered). The IRS has been individually evaluating jurisdictions to check whether they have adequate know-your-customer and similar laws and regulations. A number of offshore jurisdictions have been approved. As of early November 2000 the Cayman Islands were approved as a Qualified Jurisdiction

4. The KPMG Report On Financial Regulation

On 27 October 2000 the Governments of the UK, Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Montserrat and Turks and Caicos Islands released to the public the KPMG Reports on each of the six Overseas Territories' financial regulatory systems.

The Report on the Cayman Islands did not contain many surprises. The Report is not qualitative or evaluative but essentially exceptions-based. It recommends that the Monetary Authority be made operationally independent. (This is something to which the Cayman Islands Government had previously committed in principle. The only concern is to ensure adequate safeguards and accountability). The Report also recommends that the Monetary Authority and Government Legal Department be increased in size and resources.

In relation to banking matters, the Report recommends increased on-site and off-site inspection. In relation to investment matters the Report recommends securities legislation to cover, in particular, the licensing of those who provide investment advice and management services to individuals.

In relation to trusts and trust companies, the Report recognises the futility of trying to regulate trusts, which are not even legal entities, and recommends regulation of trust service-providers instead. It praises the Islands for having regulated trust companies for several decades, unlike many other onshore and offshore jurisdictions (such as the UK and USA). It recommends that this regulation be extended to individuals and partnerships acting as professional trustees. It praises many aspects of the requirements of Cayman Islands trust law and regulation for being above the requirements of good practice and international standards.

In relation to company formation and registered office services, the Report recommends that businesses providing these services should be required to be licensed.

It is not anticipated that the Islands will have significant difficulty in making the recommended changes or that the changes will adversely affect the Islands' financial services industry, most of which already complies with the standards the Report refers to.

In terms of the quantity and quality of business through the Islands the result of all these changes so far has proved highly beneficial. The Government's statistics show that in the first nine months of the year 2000 there has been more measurable economic activity in the financial services industry than in the whole of 1999. The Islands are therefore well set to consolidate their position as one of the world's leading international financial centres.

1 Cayman Islands, Bermuda, Mauritius, Malta, San Remo and Cyprus