It has been a long summer in the Cayman Islands, and it has nothing to do with the tropical weather. Like most offshore financial centres, the Cayman Islands have faced an alphabetical barrage of organisations casting a wary eye on their financial services industry. OECD, FATF, G7, EU, FinCEN – abbreviations and acronyms abound. So what is it all about?
There are two quite distinct issues underlying the recent onslaught on offshore financial centres: tax and money-laundering.
On tax, the world's rich – and high-tax – countries have been getting ever more bothered by the fact that businesses, individuals and capital are much more mobile in the global, technology-based economy. Which makes them harder to tax. The eye of those high-tax countries has fallen on the countries where businesses, individuals and capital are taxed at a low rate or not at all, and those countries have been accused of engaging in 'harmful tax competition'. No matter that in many of those countries, such as the Cayman Islands, there are correspondingly higher taxes on such things as land, and correspondingly lower government handouts.
Much criticism was levelled at the OECD report Towards Global Tax Co-operation, published in May 2000, for failing to distinguish between legal tax avoidance, or tax planning, and illegal tax evasion; for implying that the direct tax system of the OECD countries was the only acceptable system, and for undermining the sovereign right of nations to set their own taxes. At a recent press conference the OECD faced up to these attacks, confirming that there is nothing inherently wrong with low- or zero-tax regimes and indeed praising the Cayman Islands' decision to stick with their system, under which there is no tax on income, profits, capital gains or inheritance. It is only, says the OECD, when such regimes are combined with one or more specific features that the regime becomes "harmful". Those factors are: (1) inadequate regulatory supervision or financial disclosure; (2) a lack of effective exchange of information; (3) the 'ring-fencing' of offshore entities from the local economy.
It was on this basis that when the OECD published its list of tax havens in May 2000, the Cayman Islands were not included. The Cayman Islands government, which has long stressed its policy of ensuring that Cayman is recognised as a responsible and well-regulated jurisdiction, had already had detailed discussions with the OECD. It had given satisfactory commitments to eliminate any aspects of the legal and regulatory regime that did not meet the test, such as bearer shares in companies (which in practice were little used anyway) and to enhance information exchange arrangements.
Having had what to some around the world was an unexpected endorsement ("Official: Cayman Islands Not a Tax Haven"), the Cayman Islands were then taken aback by a finding of the Financial Action Task Force on the second issue – money laundering.
For many years, the Cayman Islands have been at the forefront of the fight against money-laundering in the Caribbean. Drug money laundering has been a serious crime since 1989, and so-called 'all-crimes' anti money laundering legislation (closely based on the UK's Criminal Justice Act 1993) has been in place since 1996. The country was the first to volunteer for evaluation by the Caribbean Financial Action Task Force of its system for the detection and prevention of money-laundering, and was given a clean bill of health. The authorities have given ready assistance to those of other countries with their investigations.
It was therefore a massive shock to be labelled by the FATF as one of 15 'non-co-operative' jurisdictions in the fight against money-laundering. Particular grievances of the financial community in the Cayman Islands were that the FATF refused to visit the Cayman Islands to carry out an on-site evaluation, that it gave very little time for the government to respond to its concerns (whilst allowing other countries that opportunity), and that the FATF appeared unaware of the commitments already given to the OECD, with which it is closely connected – they share an office in Paris. Suspicions soon emerged in the international press that a good deal of political horse trading lay behind the ultimate composition of the list.
The Cayman Islands government reacted strongly to the report, branding it 'astonishing and contradictory'. The contradictions were indeed startling: the section of the report dealing with the Cayman Islands devoted nearly half its space to generous praise of the Islands' legislation and past record. "The Cayman Islands", it said, "has been a leader in developing anti-money laundering programmes throughout the Caribbean region. It has served as president of the Caribbean Financial Action Task Force, and it has provided substantial assistance to neighbouring states in the region. It has demonstrated co-operation on criminal law enforcement matters, and uncovered several serious cases of fraud and money laundering otherwise unknown to authorities in FATF member states. In addition, it has closed several financial institutions on the basis of concerns about money laundering".
However, the report identified certain of the FATF's criteria that it said the Cayman Islands did not meet. These included the lack of a positive legal duty to report suspicious transactions (the Islands had followed the UK model, where generally reporting is not a legal requirement, but the making of a report provides a defence to a money-laundering charge). The FATF was also concerned about the inability of the Monetary Authority to access client information without a court order, and limitations on the extent to which it could pass such information to foreign regulators.
Rather than focus on the unfairness of the procedure or take issue with the details of the report, the Cayman Islands government reacted with alacrity. Within three weeks of the report, all the primary legislation necessary to address every one of the FATF's concerns was on the statute books. Within a further few weeks Money-Laundering Regulations were introduced to complete the legislative framework. The Islands now have a regime considerably tougher than that which exists in many of the FATF's 29 member countries.
The cornerstone of the criminal legislation remains an offence introduced in 1989 for drug trafficking proceeds and widened in the 1996 Proceeds of Criminal Conduct Law. It is almost identical to that which exists in the UK – being 'concerned in an arrangement' by which the retention by another person of his proceeds of criminal conduct is facilitated, knowing or suspecting that the other person has been engaged in criminal conduct. It is a defence to have made a report to the Reporting Authority providing certain requirements are met.
The new offence of failure to report a suspicious transaction goes very much wider: it extends to transactions in which the person making the report is not involved at all, and to suspicious transactions taking place anywhere in the world, providing the conduct in question would amount to an offence if it were done in the Cayman Islands.
The Money Laundering Regulations now give legal force to requirements (previously embodied in a Code of Practice) on such matters as customer identification, record-keeping, staff training and internal reporting. The requirements are extensive, and can be onerous, but there has been no sign of resistance to the principle of 'Know Your Customer', which has been accepted practice in Cayman for many years. This is in marked contrast to the United States, for example, where 'Know Your Customer' is seen by many as an affront to civil liberties: legislation on the subject was recently thrown out by the Senate in a decisive vote.
Another key weapon in the Cayman armoury is a wide power to confiscate the proceeds of criminal conduct. The Court can confiscate all of the assets of a convicted person up to the amount by which he benefited from the crime.
As in the UK, the burden of proof on a number of matters in this area is reversed. For example, it is for the defendant to prove that he did not suspect that the arrangement related to any person's proceeds of criminal conduct. In the UK, where the Human Rights Act 1998 now incorporates the European Convention on Human Rights into English and Scots law, similar provisions have already led to difficulties. In the recent Scottish case of McIntosh v Her Majesty's Advocate, three judges of the Appeal Court held that the confiscation provisions of the Proceeds of Crime (Scotland) Act were in breach of the presumption of innocence.
Although recent decisions of the Grand Court of the Cayman Islands suggest that regard will be had to the European Convention in interpreting Cayman legislation, the Human Rights Act does not apply here and the Grand Court has no power to strike down legislation. If the approach of the Scottish Appeal Court is typical of the attitude of the courts in other countries that adhere to the Convention, it raises the intriguing prospect of a number of FATF countries actually having to soften their anti-money laundering regime. That would be ironic.