A View From the Cayman Islands

The Lawyer
28 May 2001

Where precisely do the Cayman Islands stand now that the dust has settled following the Organisation for Economic Cooperation and Development's (OECD) and the Financial Action Task Force on Money Laundering's (FATF) supranational initiatives on tax harmonisation and anti-money laundering?

The short answer is that the legislative and regulatory amendments are sympathetic and so the Cayman Islands seem well positioned for their core institutional business - collective investment schemes, capital markets and structured finance transactions, aircraft financing, hybrid financing vehicles and specialised private client vehicles. There remain users of the Cayman Islands' financial system who are entirely reliant on non-disclosure. Such arrangements will need to be unwound or moved to less transparent jurisdictions. For example, if users insist on witholding tax rather than exchange of information, Luxembourg or Switzerland are possible locations.There are several situations that lead deals to other jurisdictions. Well before the US decision to withdraw support from aspects of the OECD initiative, the Cayman Islands secured that there would be no change to their indirect system of taxation. There is still no income, corporation, capital gains or withholding taxes. The OECD's only slightly hidden agenda in promoting EU tax harmonisation, almost certainly at the highest rates, clearly overreached itself. As a result of amendments to the Proceeds of Criminal Conduct Law, the Cayman Islands must report suspicious transactions in line with the provisions of the UK's Criminal Justice Act 1993. There are ancillary provisions enabling cooperation between the Cayman Islands Financial Reporting Unit and similar organisations such as the National Criminal Intelligence Service (NCIS), in FATF jurisdictions.`Amendments to the Monetary Authority Law meet the concerns expressed in the Financial Stability Forum (FSF) report with regard to the provision of regulator-to-regulator cross-border disclosure by the Cayman Islands Monetary Authority (CIMA). In enabling the CIMA to liaise effectively with overseas regulators, the necessary element of cross-border transparency is introduced. In practice, little change will result given that the typical Cayman Islands structure is promoted by institutions for institutions and that those concerned are invariably based in the financial centres and are subject to onshore regulations.`All financial service providers are required to "know their customer", and must undertake appropriate source-of-funds enquiry and maintain due diligence records with regard to "relevant financial business". Again, it is unlikely that these provisions will cause any change to the fundamentals of cross-border financing or investment structures. Reliance may be placed on any funding through the US, UK, Japanese, European and other FATF-approved jurisdictions. These are the originator jurisdictions for Cayman Island structures.`So what, if any, are the deal flow indications as a result of this? Banking deposits and inter-bank bookings have increased substantially throughout the year to something in excess of $800bn (£562bn) and regulated mutual funds and incorporations have increased by approximately 20 per cent in 12 months. It seems right to conclude that compliance with the OECD and FATF initiatives has been well received in the institutional marketplace.

In April 2001, the FATF Americas Review Group travelled to the Cayman Islands to analyse the latest legislative enactments and the operation of the regulatory regime. If it is the intention of the FATF to ensure that all jurisdictions legislate in accordance with the Vienna Principles, then the FATF should be obliged to conclude that the Cayman Islands' legal and regulatory regime meets the principles and all recognised international standards.