Originally published in The Fort Street Journal Newsletter, September 2002
If you believed all the doomsayers and gloom merchants two years ago, when the offshore world was reeling under a bombardment of international initiatives, you may be surprised how things have turned out for the Cayman Islands.
Earlier this month, Moody’s Investor Service released its annual report on the Cayman Islands. The highly respected rating organisation maintained the country’s Aa3 foreign currency country ceiling and described the outlook for the Cayman Islands as stable, despite the disturbances to the economy caused by September 11 and the U.S. recession, and thanks, it said, to a large and diverse offshore financial services industry.
Among the factors cited by Moody’s in support of the rating was precisely the fact that the Cayman Islands has taken legal and regulatory measures to satisfy the concerns of the Financial Action Task Force about the possibility of money laundering through the financial services industry. In July the FATF announced that as a result of the Cayman Islands’ commitment to international anti-money laundering efforts, it was no longer formally monitoring the territory.
The Government has also moved to satisfy the Organisation of Economic Co-operation and Development (OECD) in relation to information sharing issues and what the OECD terms "harmful tax practices. According to Thomas Byrne, Vice President of Moody’s and the author of the report, "the Government’s cooperation with these organisations has reduced reputation risk that could otherwise arise."
As well as the regulatory position, the report cites prudent economic policy and a favourable external debt position, along with a "stable political system and favourable social indicators." It pointed to the country’s strong legal and accounting systems, attributed in part to its status as a British Overseas Territory. The report points out, however, that tourism, the Islands’ other key sector, has yet fully to recover and, not surprisingly, that "fiscal capacity ... remains constrained by a limited revenue base, which stems from the jurisdiction’s tax regime."
Certainly, the economic indicators are not showing the meltdown in the Islands’ financial services industry that some were predicting at the height of the OECD/FATF debate. In fact, exactly the opposite is true. Mutual funds established in Cayman now number 4,172 – up 15% on the year so far. Following the introduction of a requirement for local auditing of mutual funds, a number of leading accountancy firms have opened, or announced plans to open offices in Cayman.
Company registration now exceeds 63,000, up 13% on a year ago.
Cayman has consolidated its position as the world’s leader for captive insurance companies in the healthcare sector and as one of the top two jurisdictions for captive insurance overall. Forty-eight new captives were registered during the first eight months of the year, half of which were in the healthcare sector.
Shipping, too, is flourishing. For some years the Cayman Islands has been the number one offshore register for super yachts, with some 20% of the world’s total fleet. As well as some 1,265 such vessels, over 200 commercial vessels, totalling 2.25 million tonnes, are registered in Cayman and this sector is growing at about 30% per annum.
Whether all of this results from the official recognition that Cayman now justifiably enjoys as a well-regulated, reputable financial centre, or whether other factors are at work, none can tell. But it seems that someone, somewhere has got something more or less right.
SECURITIES INVESTMENT BUSINESS LAW
We reported, in the first edition of FSJ, details of the Securities Investment Business Law which was passed in March 2002, but not due to come into force until an order to that effect had been made by the Governor in Council. Since then, an order has been made to bring into force only the provisions relating to "Excluded Persons" - those carrying on investment securities investment business who do not require a licence under the terms of the Law. Such Excluded Persons are, however, required to pay an annual fee and file an annual declaration stating that they are eligible for exemption. This obligation arose as of 14 August and requires anyone carrying out securities investment business in or from the Cayman Islands to examine their potential status under the law and consider whether they should now apply for Excluded Person status, or potentially be subject to the full force of the Securities Law in due course.
LOCAL AUDITOR SIGN-OFF REQUIREMENT BRINGS NEW ACCOUNTANCY FIRMS TO CAYMAN
Further to a decision made in June by the Cayman Islands Monetary Authority to require local auditor sign-off on all types of entity regulated by the Authority, including mutual funds domiciled in Cayman, eleven major accounting firms have chosen to set up operations in the Cayman Islands.
The local press recently quoted Government officials, saying that some of the eleven were in the "very advanced stages" of setting up operations here in Cayman, either in the form of a physical presence or by forming associations with major existing local firms. Licences have yet to be granted, but it is expected that the reputation of the Cayman Islands as the premier jurisdiction for funds work will be endorsed by the addition of names such as RSM Robson Rhodes, BDO Binder, Eisener LLP, Winer & Evens, Arthur J. Bell Jr. & Associates and others.
Some 60% of offshore hedge funds worldwide are registered in the Cayman Islands and Cayman funds are currently audited by approved auditors Deloitte & Touche, Ernst & Young, KPMG, Moore Stephens, Morris Brankin & Co, PricewaterhouseCoopers and Rothstein Kass & Company (Cayman). Cayman looks set to strengthen its position further with the impending new arrivals.
Temporary reduction of stamp duty to expire 14 November
In November, 2001, the Cayman Islands Government introduced a temporary reduction of stamp duty - the tax charged on the market value or price paid on transfers of real estate - from the usual rates of 9% or 7.5% (depending on location) to only 5%.
Aimed at stimulating the property market, the reduced rate applies across the board, so the greatest reduction is on conveyances or transfers of property in registration sections that normally attract stamp duty at the higher rate.
Though usually thought of as a property tax, stamp duty is actually a tax on documents. It is not only levied on documents transferring land, but on other instruments, such as cheques. Where real estate is concerned, it is the conveyance or Transfer of Land that attracts the charge. To qualify for the reduced rate, this document has to be signed and delivered to the Registrar of Lands on or before 13 November , 2002.
Where the purchase is not as far advanced as the completion and transfer, there is another way to take advantage of the lower rate: the law allows duty to be assessed and paid on the contract for the purchase of property. If this is done on or before 13 November , 2002, the lower rate applies, even if the transfer itself takes place after that date. When it is then registered, the Transfer of Land will not attract further stamp duty.
CAYMAN CONSTITUTIONAL REFORM
If the experience of the UK following the enactment of the Human Rights Act is anything to go by, the pending adoption of a Chapter on Fundamental Rights and Freedoms into the Constitution of the Cayman Islands may be expected to lead to interesting legal debate in and out of the courts. However, the fact that these provisions will be introduced into the constitution itself will give that debate a rather different dimension. It also makes it timely and appropriate to consider the likely attitude of the Courts to constitutional interpretation.
In general, the English courts and the Privy Council have adopted a broad and purposive approach, taking into account the influence of the European Convention for the Protection of Human Rights and Fundamental Freedoms and the United Nations’ Universal Declaration of Human Rights. We expect the Cayman courts will largely follow that lead.
A particular issue that is likely to be specifically addressed in the Constitution itself is the relationship between the powers of the legislature and the provisions of the Constitution. Purported laws which contravene the provisions protecting fundamental rights and freedoms will be rendered invalid.
This may well mean, for example, that in criminal trials the concept of fairness will be absolute and "not something which is capable of modification according to circumstances" (as it was put in one 1990 case).
It is to be noted that the protections afforded will be subject to express limitations to ensure that the enjoyment of constitutional rights by an individual does not prejudice the rights and freedoms of others or the public interest. However, the Privy Council has been that such limitations are not to be interpreted expansively. Limitations which are shown not to be reasonably justifiable in a democratic society will not be upheld.
It must be remembered also that these provisions will be matters of public not private law and will concern the acts of the state or of other public authorities endowed by law with coercive powers. In other words the fundamental rights and freedoms guaranteed by the amended Cayman Islands Constitution will not be intended to protect purely private rights. In this respect in particular, the Cayman experience will depart from that of the UK, but significant litigation regarding constitutional issues may nonetheless be predicted.
This article is distilled from submissions made by the firm to the Constitutional Review Commissioners as part of the review process that concluded earlier this year.
SEE US AT MARHedge
In October, we will be exhibiting at the 9th annual International Conference on Hedge Fund Investment (MARHedge) at the Fairmont Southampton Princess in Bermuda. Peter Stafford and Allison Nolan, of our funds team, will be attending the conference from 27-29 October and would be pleased to see you if you are also attending. Please feel free to visit our stand at booth 92 in the Atlantic Ballroom Lobby.
This article has been prepared for you as a summary only and it is not a legal opinion and does not contain specific legal advice on the matters covered.