Cayman Islands: The Supranational Initiatives: The Hidden Agenda?

Anthony Travers, OBE, is Senior Partner and Managing Partner of Maples and Calder, Europe.

The publication of the report "Towards a Level Playing Field"1 prepared by the influential international law firm, Stikeman Elliott, provides a welcome and timely opportunity to pause and analyse more objectively certain of the assumptions that underpin the initiatives of the Organisation of Economic Co-operation and Development ("OECD")2 and the Financial Action Task Force ("FATF"). The new report makes the evident point. The OECD claim to seek a level playing field for the regulation of all jurisdictions but they are unlikely to be, and on the evidence have not been, an impartial referee in regulating a market in financial products and services, 80% of which is dominated by OECD members.

The new report 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 double standards. 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.

Whilst 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 recognised offshore financial centres, notably the Cayman Islands, Bermuda and Jersey. No doubt should exist that these new standards of transparency have indeed resulted from the highly successful OECD initiatives and in part from the pressure applied by the Financial Action Task Force 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 public relations that have been used to shape the public opinion that presaged these initiatives? Few in the recognised offshore financial centres had supposed that aiding and abetting cross-border tax evasion was either sensible, sustainable or permissible in the light of the suspicious activity reporting obligations introduced in the mid 1990s and 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 an 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 Letter signed 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 have indeed 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 requires a higher standard of due diligence than exists under the Patriot Act in the United States and in Continental Europe, and it applies across a broader band of financial service provider. Further, the know your client and source of funds due diligence must be applied in these offshore financial centres retroactively to every existing client regardless of the date of inception. In which OECD countries is this rule in force?

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 were one of the first jurisdictions to enter into the full spectrum anti-money laundering treaty with the United States in 1990, and were 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 co-operation 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 need for the G7 nations to apply 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, unfunded pensions and uncompetitive levels of social security spending, make increased levels of taxation a foregone conclusion. To the Treasury departments in these jurisdictions, globalisation and mobile capital are the weapons of mass destruction; no wonder the events of September 11th have been so swiftly hijacked by those Treasury departments to maintain a political momentum against those offshore financial jurisdictions which, in their eyes, harbour 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. We are aware that the funding for the September 11th terrorists passed through routine banking channels in the United States. 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 upon3. We are aware that Russian interests were able to launder US$7 billion directly to a bank in Manhattan. We are aware, as is 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, sold to Russian corporate brokers, with the result 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 focussed public danger entirely on offshore financial centres.

We are also aware that Mr Abacha transferred US$4 billion from the Nigerian Treasury through banks in the City of London to Switzerland, and we are also aware 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 United States authorities are somewhat 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.

Clearly also 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 United States Government pursuant to the 1990 Treaty as having exclusive access to the Treaty with regard to money laundering offences in the Cayman Islands. No favourable 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 over a 12 year period pursuant to that 1990 Treaty which provides greater transparency with regard to the information sought than would exist in the United States.4

This transparency is of a very high, indeed some would say the highest, order and given that criminals and money launderers are generally no doubt well advised, an objective analysis should conclude that it has been, for over a decade, sufficient to dissuade the money launderer from the use of the Cayman Islands. But neither that common sense analysis nor the evidence seems to play compellingly with the competing United States agencies. Nor with certain United States prosecutors who no doubt feel frustrated that their investigations lack similar extra-territorial effect, and indeed 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, and for reasons best known to them, an available or attractive option. But whatever the perceived deficiencies of the 1990 Treaty may have been, is continued and continual criticism justified in the 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 affirmative; we should not forget that the European Union is enmeshed in internecine warfare of its own making on the subject of the European Union Savings Directive. Whilst the predictable recalcitrance of the Swiss bankers is providing a possibly fleeting diversion, the fact of the matter is that whether it is immediate and spontaneous tax reporting required by the Directive or the application of a withholding tax, potential for significant damage to the European Union economy arises unless the mechanism of choice (or possibly a classically negotiated European Union compromise), is adopted on a global basis. One has a degree of sympathy on this point; the European Central Bank needs no additional assistance in meeting that objective. Once again, the offshore jurisdictions simply represent the soft and immediate target and it is highly unlikely that full faith and credit and indeed positive publicity from the relevant Treasury departments will be accorded to any such jurisdiction with respect to its tax transparency nor its anti-money laundering legislation whilst that offshore jurisdiction has a more competitive tax rate and is not fully signed up to the European Union 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 Territories5 appear to regard the Dependent Territories 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.

It may in the light of the foregoing be naïve to suppose that there is room for objective analysis on the part of the OECD or FATF countries, or indeed a proper forum in which to advance the argument that well regulated and transparent offshore financial centres such as the Cayman Islands, Bermuda and Jersey 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 indeed therefore the cost of borrowing, or indeed to make the point as was made by Alan Greenspan most recently. In his view, 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 vehicles structured in the offshore financial centres 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. But 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 co-operation 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 in fact poses the systemic risk. As it stands there are hundreds of billions of dollars of well structured financial transactions based in well regulated 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 realise that their position is becoming increasingly untenable, that by acceding to the OECD and FATF initiatives, a number of offshore jurisdictions have changed the rules of the game objectively and transparently so, and that 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.

1"Towards a Level Playing Field: Regulating Corporate Vehicles in Cross Border Transactions" A report commissioned by the International Tax & Investment Organisation and the Society of Trusts and Estate Practitioners, available at www.stikeman.com

2 Organisation of Economic Co-operation and Development "Harmful Tax Competition: An Emerging Global Issue", 27 April 1998, "Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes", July 2001 and "Report on the Misuse of Corporate Vehicles for Illicit Purposes", May 2001

3 See "The Base: In search of Al-Qaeda", Jane Corbin, Simon & Schuster.

4 Information obtained must be sent to the United States without the application of client-attorney privilege, or indeed any fifth amendment rights and the Cayman Islands professional would commit a criminal offence if he advised the client that the information has been thus disclosed.

5 see"Partnership for Progress and Prosperity: Britain and the Overseas Territories" presented to Parliament by the Secretary of State for Foreign & Commonwealth Affairs by Command of Her Majesty March 1999

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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