As UK politics in 2015 moved towards the May general election, it was little surprise that the issue of beneficial ownership and the introduction of a central registry for the main offshore financial centres, returned to the political agenda. With the main parties battling a tight contest, the opportunity to shift the spotlight to 'tax havens' as hiding places for elusive corporate profits, provided plenty of sound bites for politicians in the run up to the election, with little regard for the flaws in the UK proposed system, the absence of similar reporting in other leading economies or the merits of beneficial ownership collection systems in IFCs, particularly the Cayman Islands.
As part of the continued repercussions of the financial crisis, pronouncements from the G8 and G20 groups of nations have encompassed an international strategy to counter cross-border tax evasion and tax avoidance by identifying and disclosing to the public true beneficial ownership of assets and wealth within cross border and interlinked corporate structures. As part of this strategy, UK Prime Minister David Cameron stated in 2013 that "a publicly accessible registry provides the best outcome for sound corporate behaviour", with benefits for effective law and tax enforcement and allowing authorities, particularly in the developing world, to prevent misuse of corporate structures.
Alongside a raft of measures outlined at the G8 summit in Northern Ireland in summer 2013, Prime Minister Cameron proposed a public register of beneficial company ownership, revealing ultimate ownership and control. Taking the lead on the issue, Prime Minister Cameron insisted that the UK's Crown Dependencies and Overseas Territories (IFCs) outline the steps they would take to implement central registers of information and open the contents of those central registers to law enforcement agencies.
From the perspective of the IFCs, the UK proposals were counter intuitive. Recognising the importance of improving transparency of ownership and control of companies, but on a level playing field, the Cayman Islands government highlighted the merits of Cayman's existing central data collection system where beneficial ownership information is collected by its licensed and regulated corporate service providers and trustees. This has been a legal requirement in Cayman for over 10 years, as part of a licensing and supervision process – which includes onsite regulatory inspections. Industry bodies, including the IFC Forum, raised concerns about the viability of a public register of beneficial ownership on privacy grounds, as well as for the potential for abuse of the system.
Far from being a corporate domicile, which enables secrecy, Cayman's regulatory framework for licensed corporate service providers ensures that the correct information is requested, recorded and verified, due diligence takes place and also that information on beneficial ownership information is regularly refreshed and updated. This contrasts with the UK's selfreporting system, which, despite accessibility to the public, is easily manipulated where real criminal intent to conceal ownership exists. Individuals engaged in fraud are highly likely to provide false or inaccurate information, while those on the right side of the law that do make full disclosure run the risks of loss of privacy and cybercrime, such as identity theft. The right to privacy for law-abiding citizens is a fundamental principal of common law and is enshrined in the Cayman Islands constitution.
While considerable doubts have emerged over how accurate information could be collected via a central public register, from a commercial standpoint, industry figures in Cayman argued that it would not be in the jurisdiction's best interests to lead such an initiative, without certainty that the same standards would be upheld in all competing jurisdictions.
The impact of the Fourth EU Directive on Anti money-laundering (AMLD) is still a while away (Member States having two years to implement central registries in accordance with its provisions). It is noticeable that many EU Member States, including France and Germany, as well as the US, have failed to announce plans for any kind of public corporate register. Without a global standard yet being devised or applied, if any – or all – of the smaller IFCs introduced a publicly accessible database of ownership information, additional costs would likely see client business migrate to jurisdictions where a central register is not required. This opinion was shared by the leading IFCs, with a firm view being expressed that their processes for corporate ownership record keeping far exceed the proposed central registry in the UK. For the Cayman Islands, its regulatory framework is significantly superior to its onshore counterparts in many ways – for example, in 2000, when Cayman's anti-money laundering regulations were introduced, Cayman also required full retrospective duediligence on existing client relationships, something said to be too onerous to undertake in the UK, US and elsewhere.
Late last year, following a period of industry consultation, the Cayman Islands rejected the introduction of a central register, in the form proposed by the UK for its IFCs. The Cayman Islands government announced that it would instead continue with its current regime of providing beneficial ownership information to law enforcement, tax and regulatory authorities, in the way it had been doing for the past 10 years and which was in line with the global standards dictated by the Financial Action Task Force (FATF). The FATF prescribes three alternative methods of collecting beneficial ownership information: requiring a jurisdictions companies registry to obtain and hold the information (as the UK proposed), requiring companies to hold such information, or by using existing information collected by licensed and regulated corporate services providers (as Cayman already does). With its regime also in line with the G20's High Level Principles on Beneficial Ownership Transparency, issued in November 2014, the Cayman Islands government said it would continue with its current practice, rather than introduce a central registry, until such time as there is global agreement on appropriate exemptions and safeguards.
It is interesting to note that in Article 30 of AMLD proposed registers are referred to as "central" or "public" which gives the impression that even in the Directive endorsed by the European Parliament on 20 May 2015, there is still uncertainty as to exactly how the proposed registers are expected to operate. All the more reason for the Cayman Islands to wait and see how the AMLD will be interpreted and applied in the onshore EU Member States.
Political posturing continued going into the final weeks of the UK election, when Ed Miliband, leader of the opposition Labour Party, suggested that unless the IFCs cooperate with the drive against tax avoidance within six months of his taking office, a new Labour government would introduce sanctions and demand the OECD blacklist these nations. These comments clearly demonstrated a significant lack of understanding about the extensive tax avoidance activities already adopted and supported in the financial services sector in the Cayman Islands, but perhaps could only be expected of politicians ahead of a public vote.
For 2015, the Cayman Islands government has taken the initiative of introducing its own Action Plan, which will, among other things, streamline access to beneficial ownership information for tax, regulatory and law enforcement authorities. The Action Plan includes the introduction of legislation that will require corporate service providers to ensure that relevant information requested by law enforcement or regulatory officials is made available within a period of 24 hours from initial request.
Other proposals aim to further improve the quality of information collected, including a required annual filing of legal beneficial ownership for exempted companies – the most popular Cayman vehicle for international business – by corporate service providers to the General Registry, something already in place for all Cayman ordinary companies. Corporate services providers will also have to designate a person locally to be accountable to Cayman authorities for making the beneficial ownership information available and for the ongoing monitoring and testing at specified intervals.
Further, legislation will be enacted to allow the General Registry to wind up an entity, which has not complied with legal or beneficial ownership filing requirements within a specified timeframe.
While it remains to be seen whether a significant number of jurisdictions will line up behind the UK's plan for a public registry of beneficial ownership information, the Cayman Islands has said the steps it is taking to enhance its method of collecting and verifying this data will ensure it continues to provide an efficient platform for legitimate international business.
Collection, verification and recording of beneficial ownership information are areas in which Cayman can justifiably say it not only plays its part, but leads the way. The G8 and G20 nations would do well to not only take note, but learn from the Cayman Islands extensive experience in this area.
About the Author
David Roberts is the Managing Director of Cayman Management Ltd., a licensed Companies Management firm providing a broad range of corporate and Funds services in the Cayman Islands for over 40 years. David is a Fellow of the Institute of Chartered Secretaries and Administrators, a long standing Director of Cayman Finance and sits on a number of specialist finance sector boards and committees.
About the Author
Mark Lewis is the Senior Partner at Walkers and specialises in all aspects of the firm's mainstream investment funds practice, particularly hedge funds. He has in excess of 30 years post qualification experience, the last 20 of which have been with Walkers in the Cayman Islands. Mark is a Director of Cayman Finance, a member of the Council of the Cayman Islands Stock Exchange and a former Chairman of the Executive Committee of AIMA Cayman.
Originally published in Cayman Finance Magazine, 2015-2016, Issue 2
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