The creation of the Cayman Islands as one of the world's leading financial centres is a stunning development story that illustrates an economic strategy built on the rule of law, one which offers an important model for other nations. Providing the rule of law for international business benefits not just the Cayman Islands and Caymanians; it is a valuable service for the entire world. Caymanian entities play a key role in facilitating investment and international lending, financing major capital goods like aircraft, reducing insurance costs, and managing cross-border investments.
In 1960, the Cayman Islands' main economic activities were turtle fishing, remittances from Caymanian sailors in the US merchant marine, and thatched rope made by local women for sale to passing fishermen. Plagued by ferocious mosquitoes, the tourism industry struggled. By 1980, Cayman had passed Britain in GDP per capita, an amazing accomplishment; the mosquitoes were under control; and tourists were flocking to Seven Mile Beach and Rum Point. Cayman's economy has continued to grow and expand. This unparalleled development story is all the more impressive because it was the result of the creation of an innovative and trustworthy legal system rather than the discovery of natural resources.
Beginning with the 1960 Companies Law, adapted from an English model, and continuing with the 1966 Banks and Trust Companies Regulation Law and Trusts Law, Cayman began to build a legal infrastructure that persuaded foreign investors that the jurisdiction offered a stable legal system that could support a variety of financial products. Capturing a considerable portion of the growing Eurodollar banking business in the 1960s, Cayman did not rest on its laurels but aggressively sought new businesses.
Seizing on Bermuda's reluctance to enter the medical malpractice captive insurance business in the 1970s, Cayman developed a regulatory framework that enabled Caymanian captives to serve US hospitals and doctors in the 1970s and 1980s. Similarly, Caymanian financial firms and the government spotted the opportunity to develop a funds law to capture investment- fund business in the 1990s. And as concern over financial crimes and money laundering grew in the 1990s and 2000s, Cayman enhanced its regulatory capacity, ultimately creating the Cayman Islands Monetary Authority (CIMA) as an independent regulator that helps set international standards.
Cayman's success can be attributed to three things. First, Cayman has taken a collaborative approach to governance of the financial industry from the earliest days. British officials, Caymanian legislators and the financial professionals on the island worked closely to draft key legislation and regulations, ensuring that the legislation addressed important problems while not crippling the Islands' competitiveness. This collaborative approach was demonstrated time and time again, as even fiercely competitive Caymanian politicians would pause in the midst of hotly contested legislative battles to pass amendments to financial statutes to enhance Cayman's position.
British officials cooperated as well, providing technical assistance and loaning money to assist with necessary infrastructure such as an undersea telephone cable and enabling the airport to allow jets to land. And financial services professionals, both Caymanian and expatriate, helped develop legislative measures and regulations, and promoted the Islands as a place to do business.
Second, Caymanians quickly realised their comparative advantage lay with providing a stable legal environment. As a result, they retained many links to the United Kingdom, including allowing appeals to the Privy Council from Caymanian courts. Doing this at a time when many other Caribbean countries were becoming independent, Caymanians understood that the fiscal independence resulting from their economic success gave them greater autonomy than becoming independent but remaining dependent economically would have. Moreover, Cayman welcomed lawyers and other professionals from outside, building a professional services sector with close ties to the financial and legal communities in Britain, Canada and the United States. As one Caymanian put it, "The advantage of being an island is that you get to choose your own neighbours. We've chosen Miami instead of Jamaica".
Third, Caymanians understood the fragility of their success. Having seen other jurisdictions suffer losses when political instability frightened investors, Cayman worked hard to maintain confidence. As Truman Bodden, a member of the Legislative Assembly, put it in 1981, "Most Caymanians are homeowners, sir, ... and most of them have been to sea. They know how quickly a country can be wrecked, and that if they do anything stupid they'll lose. We mustn't kill the goose that lays the golden egg".
Critics of financial centres sometimes claim this sensitivity suggests lax regulation, but Cayman's experience suggests the opposite. Cayman moved promptly to address any gaps in its regulatory structure, creating first a banking inspectorate, then a broader Financial Services Supervisory Department and finally the fully independent CIMA. In a cross-jurisdiction comparison, "Regulatory Effectiveness in Onshore & Offshore Financial Centers", Clifford Henson and I found that Cayman and other offshore financial centres often had more regulatory resources per regulated entity than onshore jurisdictions. In addition, we found that the qualifications of key regulators were significantly higher offshore than onshore.
There is no question that Caymanians today live better lives than their grandparents due to Cayman's success in financial services. A quick glance around the Islands reveals the many benefits of that success: new schools, a modern hospital and a robust local economy. What is less obvious, and easy to forget, is how much the rest of the world has benefited as well. Captive insurance companies lower the cost of providing medical care in the US, investment funds channel money into economies around the world, and a stable legal system provides business entities for use in countries lacking the rule of law. This article is based on "Creating Cayman as an Offshore Financial Center: Structure and Strategy Since 1960", by Tony Freyer & Andrew P. Morriss; Arizona State Law Journal (forthcoming 2014).
About the Author
Andrew P. Morriss is the Chairholder in Law and Professor of Business at the University of Alabama. He holds law and master's degrees from the University of Texas at Austin and a Ph.D. (Economics) from the Massachusetts Institute of Technology.
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