Cayman Islands: Impossible To Please

The OECD claims to seek a level playing field for the financial regulation of all jurisdictions, but it is unlikely to be an impartial referee when 80% of the market is dominated by OECD members.

The report titled "Towards a Level Playing Field," prepared last year by the international law firm, Stikeman Elliott, gives substance to a view widely held in the offshore financial centres; that the OECD and the FATF–both of which are agencies of the G7 countries–are simply applying a double standard.

The report makes it clear that not only is corporate transparency in the offshore financial centres already at a far higher level than that applicable in most OECD jurisdictions but, further, there appears to be no pressure from the OECD jurisdictions to improve their own transparency to a similar level.

While the new report focuses on the transparency of corporate vehicles, partnerships and trusts in the offshore financial centres, similar conclusions can be drawn with regard to the standards of transparency, Know Your Client due diligence and anti- money laundering legislation across the board in each of the recognized offshore financial centres.

No doubt should exist that these new standards of transparency have resulted from the highly successful OECD initiatives and in part from the pressure applied by the FATF with regard to money laundering.

But given that those standards have now been introduced, why is it the case that no one has yet turned off the spigot that controls the negative information used to shape public opinion prior to these initiatives?

Few in recognized offshore centres had supposed that aiding and abetting crossborder tax evasion was either sensible, sustainable or permissible in light of the suspicious activity reporting obligations introduced in the mid 1990s. Yet press releases that emanate from treasury departments still relentlessly press on the subject of the offshore money laundering scourge.

If this were an even-handed and objective debate, the offshore jurisdictions should now be anticipating from the OECD a more mature recognition of that which has been achieved. Indeed, if there were any degree of probity in the debate, some pause for reflection of that sort would be appropriate to allow the onshore jurisdictions, the United Kingdom apart, time for their legislation to catch up.

But it seems that the offshore financial centres are entitled to no such recognition from the G7 countries nor their treasury departments. A charitable response might suggest that, notwithstanding the OECD commitment letters signed by the major offshore financial centres, there is still some time to go before the bilateral agreements pursuant to that commitment are in place, country-by-country.

Perhaps there is also doubt remaining within those treasury departments as to whether or not the OECD has successfully moved the goal posts to include tax offences within the definition of money laundering. Perhaps that explains why the negative campaigning continues relentlessly. However, even if doubt does remain, it is hard to justify continued criticism on the point; similar doubt would exist in any of the OECD countries.

It is then increasingly difficult to understand why so little credit has been accorded to those offshore financial centres that have acceded to the OECD initiatives on tax transparency and which have applied the new FATF anti-money laundering regulatory regime. Certainly that regime–as it now applies in the Cayman Islands, Bermuda and Jersey, for example–requires:

• a higher standard of due diligence than exists in Continental Europe or under the USA Patriot Act;
• application across a broader band of financial service providers;
• retroactive application of Know Your Client and source of funds due diligence to every existing client regardless of the date of inception.

In which OECD countries is the anti-money laundering regulatory regime this stringent?

The gap between the two standards sought to be applied by the OECD is now so wide that it can no longer be spanned by artifice alone. The offshore financial centre must now drill through corporate ownership until the identity of each ultimate 10% beneficial owner is obtained. No such similar obligation applies in most of Continental Europe or in many other OECD jurisdictions.

Why then, in the Senate Sub-Committee hearings on Enron, did Senator Carl Levin refer to the Cayman Islands as a "secrecy jurisdiction," notwithstanding that the Cayman Islands was one of the first jurisdictions to enter into the full spectrum antimoney laundering treaty with the United States in 1990, and was one of the first to enter into the tax information exchange agreement with the United States in November 2001 following the OECD commitment to tax transparency?

Did this not adequately demonstrate cooperation of the highest order in relation to what was at the time new and not universally accepted (then or now) standards of international comity?

The better and more compelling answer is that suggested by the new report. The G7 nations' application of a double standard is primarily driven by the need to prevent an outflow of mobile capital from the high tax European Union jurisdictions, where the fear of budgetary deficits, unfounded pensions and uncompetitive levels of social security spending make increased levels of taxation a foregone conclusion.

To the treasury departments in these jurisdictions, globalization and mobile capital are the weapons of mass destruction; no wonder the events of September 11 have been so conveniently hijacked by those treasury departments keen to maintain political momentum against those offshore financial jurisdictions which, in their eyes, harbor the threat.

But as time passes, the negative implications suggested by these public relations campaigns are becoming less and less credible. An impartial review of the evidence does not place the OECD jurisdictions in good light:

TERRORIST FUNDING: We are aware that the funding for the September 11 terrorists passed through routine banking channels in the United States.

We also know that a transfer of US$75,000 to Mohammad Atta, one of the hijackers, at the Florida Sun Trust Bank in Delray Beach triggered a suspicious activity report to FinCEN that was not acted upon.

RUSSIAN MONEY LAUNDERING: We are aware that Russian interests were able to launder US$7 billion directly to a bank in Manhattan.

We also know–as does the US General Accounting Office in a report tabled in October 2000 entitled "Suspicious Banking Activities: Possible Money Laundering by US Corporations formed for Russian Entities"–that more than 2,000 Delaware companies were formed for Russian citizens from 1997 to 2000 in blocks of 10 to 20 at a time, and sold to Russian corporate brokers.

The result was that over US$2 billion was laundered directly into the Commercial Bank of San Francisco. Yet the subsequent report by the US Senate Commission on Suspicious Banking Activity focused public danger entirely on offshore financial centres.

POLITICAL CORRUPTION: We are aware that General Sani Abacha transferred US$4 billion from the Nigerian Treasury through banks in the City of London to Switzerland.

We also know that–notwithstanding the transparency with regard to money laundering in the Cayman Islands which dates from the Mutual Legal Assistance Treaty with the United States in 1990–no similar case of money laundering, or anything like it, has yet been revealed.

The relevant US authorities are surprisingly coy about revealing to the Cayman Islands authorities precisely how many of the investigations pursuant to the 1990 Treaty have resulted in convictions for money laundering, if any.

COMMON SENSE ANALYSIS

Clearly, the offshore financial centres remain the victims of the internecine warfare between the US regulatory agencies. Little or no credit was given to the offshore financial centres by any agency other than the Department of Justice, which is the federal department designated by the US Government pursuant to the 1990 Treaty as having exclusive access to the Treaty with regard to money laundering offences in the Cayman Islands.

No favorable conclusion appears to have been drawn from the fact that, in the Cayman Islands, less than 200 applications have been made by the Department of Justice pursuant to the Treaty over a 12- year period.

Nor have any positive comments been elicited by the fact that the Treaty provides greater transparency with regard to information sought than exists in the US. Information obtained, for example, must be sent to the United States without the application of client-attorney privilege, or any fifth amendment rights. A Cayman Islands professional would commit a criminal offence, if he advised the client that the information has been disclosed.

This transparency is of a very high, indeed some would say the highest, order. Given that criminals and money launderers are generally well-advised, an objective analysis should conclude that it has been, for over a decade, sufficient to dissuade the money launderer from using the Cayman Islands.

But neither that common sense analysis nor the evidence seem to play compellingly with the competing US agencies. Nor does it seem to have an effect with certain US prosecutors, who no doubt feel frustrated that their investigations lack similar extraterritorial effect, and may not be advanced save by recourse to the Department of Justice.

This comparatively simple expedient for information gathering in the offshore financial centres appears not, (for reasons best known to them) to be an available or attractive option.

Whatever the perceived deficiencies of the 1990 Treaty may have been, one must ask whether continued and continual criticism is justified in light of the cross-border regulator- to-regulator disclosure now introduced in the offshore financial centres pursuant to the FATF initiatives?

The answer to that question seems to lie with the European Union, which is enmeshed in a mutually destructive battle of its own making on the subject of the European Union Savings Tax Directive.

While the predictable recalcitrance of the Swiss bankers is providing a possibly fleeting diversion, the fact of the matter is that whether it is the immediate and spontaneous tax reporting required by the Directive or the application of a withholding tax, potential for significant damage to the EU economy arises unless the mechanism of choice (or possibly a classically negotiated EU compromise), is adopted on a global basis.

Once again, with no voice at the table, the offshore jurisdictions simply represent the soft and immediate target. It is highly unlikely that full faith and credit, let alone positive publicity from the relevant treasury departments, will be accorded to any such jurisdiction for its tax transparency or its anti-money laundering legislation while that offshore jurisdiction has a more competitive tax rate and is not fully signed up to the EU playbook.

Indeed, the position of the offshore financial centres is somewhat more parlous than that; those constitutionally entrusted with advancing the interests of the Dependent Territories appear to regard them as no more than a chip to be brought to the table in an effort to avoid the imposition of withholding tax on the City of London euro bond market.

In light of the foregoing, it may be naïve to suppose that there is room for objective analysis on the part of the OECD or FATF countries. In a proper forum, however, the argument would be advanced that well regulated and transparent offshore financial centres have an important part to play in enabling onshore institutions to access the international capital markets, reducing reliance on bank and quasi-bank funding and therefore the cost of borrowing.

To make the point as was made by Alan Greenspan most recently, the reason why a current banking crisis may have been averted in the G7 countries has a great deal to do with the financial engineering and risk transference that is an essential part of the bankruptcy remote vehicle structured in the offshore financial centre for the benefit of onshore financial institutions.

Unless and until there is a more realistic assessment by the G7 countries of the policies that drive mobile capital and of the realistic relationship of the offshore financial centres and the onshore markets, it is unlikely that the public relations machines that have been responsible for forming negative public opinion about the offshore financial centres will be reined in.

On any objective analysis, the debate and the public relations campaigns have become dangerously unbalanced. Clearly, if those responsible for forming public opinion on these matters are truly intent on cooperation and a globally transparent system, then the deliberate disinformation and disingenuity that underlies this negative campaigning does not form the basis on which to forge any meaningful relationship.

It is this relentless bias that poses a systemic risk. As it stands, there are hundreds of billions of dollars of well-structured financial transactions based in well regulated and transparent offshore financial centres with excellent professional infrastructure to support them, all of which are inextricably linked to the financial position of financial institutions in OECD countries. One possible outcome is the flow of these funds to infinitely less transparent centres where the writ of the OECD does not run, with costly dislocation to the current financial architecture.

If the financial condition of the G7 economies were robust, that would be a brave enough risk to take. In the current climate, it seems ill considered, but would have the ancillary benefit of establishing beyond reasonable doubt the existence of the law of unintended consequences.

At the least, those responsible for the negativity should realize that their position is becoming increasingly untenable. By acceding to the OECD and FATF initiatives, a number of offshore jurisdictions have changed the rules of the game objectively and transparently so. As a result, their standing has been necessarily enhanced in the eyes of the financial institutions who access the international capital markets. That should be regarded by all as a positive outcome and should be described as such.