Cayman Islands: Sharing Financial Information: The Cayman Story Worth Telling

Last Updated: 14 March 2017
Article by Dorothy Scott

Over the last 40 years, the Cayman Islands has matured into one of the world's most sophisticated and successful international financial centres, providing a competitive, effective, transparent, cost-efficient and tax-neutral platform for international capital flows underpinned by an environment of legal, political and economic stability.

Although the Cayman Islands has worked hard to secure its position as a fully co-operative and well-regulated jurisdiction, much to the annoyance of those of us who actually live and work in the islands and understand the regulatory environment, tired stories of shady deals and cloaks of conspiracy persist.

The reality on the ground in George Town is much more interesting and, I dare say, aspirational. Rather than being a dark hole in which shady deals fester and proliferate, the Cayman Islands' modern legal and regulatory framework shines a light on suspicious activity that sends proverbial rats scurrying.

The story worth telling about the Cayman Islands is that few are aware of the lengths to which the Cayman Islands go to cooperate with other jurisdictions to provide accurate and verified information to facilitate the global fight against money laundering, terrorist financing and unlawful tax evasion.

A quick review of Cayman's current cross-border information sharing regulatory and legal framework will demonstrate that rather than being the whipping boy for all manner of ills, the standards designed and implemented in the Cayman Islands should be the yardstick to which all others should aspire and be judged.

CONFIDENTIAL INFORMATION DISCLOSURE LAW

The backbone of any proper information sharing regime is the clarification of what confidential information may be disclosed and the protection of those who seek to disclose wrongdoing in good faith.

A mere five pages long, Cayman's Confidential Information Disclosure Law, 2016 (CIDL) is short but mighty. CIDL re-affirms pre-existing gateways through which confidential information may be legitimately shared domestically and internationally, and protects those who would disclose wrongdoing.

CIDL expressly protects disclosures made (a) pursuant to requests by local tax, law enforcement and regulatory authorities, (b) in response to an order from a Cayman Islands authority pursuant to its international obligations, (c) in the normal course of business and (d) pursuant to any other rights or duties under Cayman Islands law.

CIDL goes a step further and includes common-sense provisions to protect "whistle-blowers" who make disclosures of confidential information on wrongdoing, or in relation to a serious threat to the life, health or safety of a person or in relation to a serious threat to the environment. Whistle-blowers must act in good faith and in the reasonable belief that the information was substantially true and discloses evidence of that wrongdoing.

DATA PROTECTION

The Data Protection Bill, 2016, published in April 2016, introduces a rigorous data protection regime on par with the extensive regime in place across the European Union and is currently working its way through the legislative process to become law.

No doubt, Cayman's detractors will be tempted to accuse the Cayman Islands of some sinister conspiracy to manipulate data protection legislation to facilitate bank secrecy and unlawful tax evasion.

The reality is that the legitimate right to privacy is one that is rightfully defended as a human right and is entirely distinct from so-called "bank secrecy" used to facilitate unlawful tax evasion, money laundering and terrorist financing. In fact, the right to privacy is enshrined in the European Convention on Human Rights and is incorporated into English Law under the Human Rights Act. Similar provisions appear in the 4th Amendment to the United States Constitution and in the domestic legalisation of numerous democracies across the globe. If the right to privacy is protected abroad it must be protected in the Cayman Islands.

AUTOMATIC EXCHANGE OF TAX INFORMATION

Whether or not they know it by name, everyone working in the industry or attempting to access financial services is aware of or has been effected by the implementation of FATCA. In 2014 the Cayman Islands Government entered into an intergovernmental agreement with the United States to facilitate and standardise the exchange of information relating to taxes. The agreement gave effect to the provisions of the United States' Foreign Account Tax Compliance Act (FATCA) which is concerned with obtaining information on accounts held outside of the United States for domestic United States taxation purposes. FATCA, which by no coincidence sounds remarkably like "fat cat", requires foreign financial institutions to report on certain United States financial accounts with non-compliant institutions being frozen out of global capital markets and significant withholding taxes being imposed on the recalcitrant.

The US-Cayman intergovernmental agreement is now enshrined in Cayman law and requires, for example, Cayman Islands investment funds and banks to register directly with the United States' Internal Revenue Service and to disclose details of financial accounts owned by reportable US persons to the Cayman Islands Tax Information Authority which may then provide such information directly to the United States Internal Revenue Service.

A similar intergovernmental agreement between the Cayman Islands and the United Kingdom quickly followed and is also enshrined in local law with similar effect for certain UK accounts being reportable to Her Majesty's Revenue and Customs.

The Cayman Islands was also one of the first jurisdictions to commit to implementing the Organisation for Economic Cooperation and Development's (OECD) Standard for Automatic Exchange of Financial Account Information – Common Reporting Standards (CRS). CRS is akin to a global version of FATCA and will also require financial institutions to identify the tax residency of account holders and to report on details of specified accounts to the tax authorities in relevant jurisdictions. Almost 100 jurisdictions have now signed up.

The implementation of automatic exchange of tax information legislation was a sea-change in the way financial information is disclosed to global tax authorities. While complying with FATCA and CRS has quickly become "business as usual" in George Town, the expense of doing so should never be understated. Huge government and private sector resources have been diverted to studying and implementing the requirements of this new regime and, as one of the earliest adopters, the Cayman Islands bore this expense and created the formula for compliance and implementation which has now been largely copied and rolled-out by other jurisdictions.

ANTI-MONEY LAUNDERING

Collecting the information necessary to classify reportable accounts under FATCA and CRS is typically conducted in the same way and at the same time that "know your client" due diligence information is collected and vetted for compliance with anti-money laundering regulations.

In fact, with all of the international press given to the new automatic exchange of tax information legislation, it is easy to overlook the fact that Cayman Islands financial service providers have been complying with anti-money laundering (AML) requirements since the 1990s.

The Cayman Islands' Proceeds of Crime Law, Money Laundering Regulations and the Cayman Islands Monetary Authority's Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands have created a solid framework for the implementation of the Cayman Islands' robust anti-money laundering regime. The Cayman Islands also adheres to the Financial Action Task Force (FATF) 40 Recommendations on Combating Money Laundering and the Financing of Terrorism and Proliferation.

Cayman's AML framework does not just require the mindless collection of photocopied passports which are then locked away in a dusty vault after the appropriate box has been ticked on an account opening form.

Rather, Cayman has adopted a risk-based approach which requires the identification and verification of the beneficial ownership of Cayman entities and the intended nature and purpose of relevant financial business. In addition, the AML framework requires service providers to confirm the source of funds used in financial transactions, provide ongoing staff training and report suspicious activities. Non-compliance with the AML framework, including "tipping off ", is a criminal offence and is punishable by significant fines and custodial sentences – and ultimately, the obliteration of an offending person's professional reputation.

As anyone who has successfully opened a bank account or engaged a law firm to conduct relevant financial business in Cayman will attest, the requirements are onerous and far exceed those typically required onshore. The volume and nature of the information needed and the subsequent verification process admittedly steers those who cannot or will not comply away from the jurisdiction – and that is precisely the intended outcome.

REGULATORY OVERSIGHT

As the Cayman Islands' independent financial regulatory authority, the mission of the Cayman Islands Monetary Authority ("CIMA") is to "protect and enhance the reputation of the Cayman Islands as an international financial centre by fully utilising a team of highly skilled professionals and current technology, to carry out appropriate, effective and efficient supervision and regulation in accordance with relevant international standards."

CIMA regulates over 11,000 investments funds with net assets in excess of US$3.5 trillion and supervises 176 banks with total international assets and liabilities as at June 2015 (cross-border positions in all currency and domestic positions in foreign currency) of US$1.39 and US$1.44 trillion. The Cayman Islands benefits from CIMA being the sole financial services regulator as CIMA is able to consistently apply regulatory requirements across various sectors of the financial industry and is able to monitor and respond to trends across the industry.

What is less well known is that CIMA has entered into memoranda of understanding with various overseas regulatory authorities and with domestic public sector and industry bodies to facilitate information exchange and regulatory assistance.

What must now be understood is that there are clear information sharing gateways under Cayman law (specifically, the Confidential Information Disclosure Law and the Monetary Authority Law) through which CIMA shares information with overseas regulatory authorities. In the context of the operations of foreign banks' branches and subsidiaries located in the Cayman Islands, Cayman's existing legislative framework facilitates the sharing of relevant information with foreign financial regulators for the purpose of consolidated supervision in accordance with the relevant Basel Core Principles for effective banking supervision.

BENEFICIAL OWNERSHIP AGREEMENT

As financial service providers have been collecting and verifying beneficial ownership information and CIMA has been legitimately sharing information with overseas regulatory authorities for decades, the Cayman Islands Government was able to enter into a reciprocal framework agreement with the United Kingdom to allow designated Cayman Islands officials to directly obtain and provide details of beneficial ownership of companies incorporated in Cayman to the United Kingdom.

Under the terms of the agreement, beneficial ownership details will not be made public but would remain with the service providers managing them and information would be accessed via a central technical platform.

Over the next year, the Cayman Islands has committed to making changes to legislation and to complete details of how the new regime and protocols will work. Any keen reader will immediately recognise the circuitous and repetitious nature of this latest agreement. The Cayman Islands' existing legislative and regulatory framework already accomplishes what the United Kingdom has tried to "negotiate."

This quick review of Cayman Islands' legislation and regulation and the application of a little critical thinking has demonstrated that beneficial ownership information is already required to be collected and vetted under the AML framework. Information about the operations of foreign bank branches and subsidiaries is already legitimately shared by CIMA with overseas regulatory authorities.

The UK-Cayman intergovernmental agreement on the automatic exchange of tax information is already enshrined in local law and requires the disclosure of the financial information on UK reportable accounts to Her Majesty's Revenue and Customs and similar provisions will apply to accounts of the nearly 100 countries that have signed up to CRS. The US-Cayman intergovernmental agreement on the automatic exchange of tax information is already enshrined in local law but its requirements are even more stringent.

CONCLUSION

What is clear to those of us who work in the Cayman Islands financial services industry is that the truth about Cayman's transparency and cooperation regime is very simple – it exists, it is more sophisticated and robust than many of its peers, it is constantly being improved and it works.

The weakness in the Cayman story is that the jurisdiction has been so focused on the delivery of world-class financial services and reinforcing its role as the standard setter for transparency and global financial security that it has been less focused on defending itself from misrepresentation from would-be detractors.

Rather than being a global whipping boy, the standards created and upheld in the Cayman Islands are the yard stick to which other jurisdictions should aspire and be judged. But in order to move forward, the Cayman Islands must not only do right by its clients but must now do right by itself and vigorously and unapologetically defend its reputation.

It is time for the tired and factually incorrect view of the Cayman Islands as a paradise for money launderers, terrorist financiers and unlawful tax evaders to be put to bed.


About the Author

Dorothy is based in Walkers' Cayman Islands office where she is a partner in the firm's Global Investment Funds Group. She specialises in advising on the formation, ongoing operations and wind down of Cayman Islands investment funds, including unit trusts. Dorothy has particular expertise in re-structuring work and a strong background in general corporate work.

Dorothy is also a lead member in Walkers' Global Latin American Group and regularly advises some of the largest Latin American investment management firms and financial institutions on their Cayman Islands funds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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