Cayman Islands: Money Laundering Initiatives

Last Updated: 18 January 2001
Article by Gavin Lowe

The Cayman Islands have recently been involved in various international initiatives which aim to raise professional standards and requirements in the offshore financial services industry. These initiatives include improving the anti-money laundering regimes, including formal know-your-customer requirements, providing increased co-operation with other jurisdictions and mandatory reporting of suspected money-laundering. This is a continuation of trends that started some years ago, and which began with the Mutual Legal Assistance Treaty with the USA.

The OECD produced a report in 1998 on what it regarded as "harmful tax competition", setting out what it regarded as harmful tax practices and harmful preferential tax regimes. The report made 19 wide-ranging recommendations to counteract such practice. In June 2000 the OECD published a list of 35 "tax havens" which would be subject to sanctions if they failed to comply with the OECD recommendations. The Cayman Islands were one of six jurisdictions that gave an "advance commitment" to the OECD and did not, therefore, appear on the list. The Cayman Islands Government gave a broad commitment to eliminate certain harmful tax practices and specified more clearly what measures would be implemented. The position may be summarised as follows:

  • No change will be made to the zero tax regime in the Cayman Islands. The Islands have a long history of no "direct" taxes (i.e. no income, capital gains, corporation, gift, estate or inheritance taxes). This regime applies equally to residents and non-residents, to individuals, partnerships, trusts and companies. The OECD has agreed that this system of taxation is not, of itself, harmful and the Cayman Islands Government is committed to its continuation.
  • The Cayman Islands government undertook to the OECD to introduce tax information exchange. On criminal tax matters the government agreed that effective exchange of information would be put in place for the first tax year after 31st December, 2003 and for civil tax matters for the first tax year after 31st December, 2005. Information will be provided in response only to a request pursuant to a Treaty, to be negotiated on a country by country basis. There will be confidentiality provisions to ensure that the information provided is adequately protected from subsequent unauthorised disclosure.
  • The Cayman Islands have no preferential tax regimes, but the government has made a commitment to harmonising the laws on companies, partnerships and laws of trusts for residents and non-residents. This will probably involve removing restrictions on offerings to, participation by, or activities of, local individuals and businesses.
  • It is the government's intention to phase out or immobilise private company bearer shares. Bearer securities in relation to institutional transactions will not be affected.
  • It is believed that the Confidential Relationships (Preservation) Law of 1976 (which regulates the law of confidentiality) will be repealed and replaced with modern legislation, which will be in line with the new European Union sponsored human rights legislation. The Cayman Islands Bankers Association's current code of practice already discourages marketing policies based exclusively or primarily on confidentiality or secrecy.
  • The Financial Action Task Force ("FATF") published a list of 15 non-co-operative jurisdictions in the international regime against money-laundering. The Cayman Islands were included on that list. Since the publication of the list, substantial amendments have been made to the Monetary Authority Law, the Proceeds of Criminal Conduct Law, the Banks and Trust Companies Regulation and the Companies Management Law. These amendments provide for regulatory access to client-specific information, compulsory know-your-customer requirements and compulsory reporting obligations where there is a suspicion of money-laundering. A FATF meeting is to be held in February 2001, where it is anticipated that the Cayman Islands will be formally de-listed.

    New withholding tax rules in the USA came into effect on 1st January, 2001. They are designed to prevent US taxpayers from evading taxes by receiving payments through offshore structures, whilst also respecting the confidentiality of non-US taxpayers. This is achieved through the IRS having a contact with a paying bank or financial institution (a "qualified intermediary"). In order to become a qualified intermediary an entity must be headquartered in a qualified jurisdiction or be a branch of one. The IRS has been individually evaluating jurisdictions to ensure that they have adequate know-your-customer and similar laws and regulations. In early November 2000 the Cayman Islands were approved as a qualified jurisdiction.

    The effect of the international initiatives has been generally beneficial for well regulated jurisdictions. In the Cayman Islands, the first nine months of the year 2000 saw measurably more economic activity in the financial services industry than in the whole of 1999, whilst less well regulated offshore centres have seen a significant decline in business.



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