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Cayman still the vanguard of offshore financial centres

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The Caribbean Financial Action Task Force’s mutual evaluation of the Cayman Islands at the end of 2017 led to a revision of the jurisdiction’s anti-money laundering (AML) regulations and was the catalyst for the new Cayman AML guidance. The CFATF report recommended enhancing international co-operation, broadening asset freezing powers and offences and expanding the scope of AML regulation. 

“These changes to the Cayman AML regime together with the implementation of the Cayman tax information exchange regulations and economic substance legislation are each directed at ensuring that Cayman remains at the forefront of international compliance initiatives,” says Matt Mulry, Partner at Dillon Eustace (Cayman). 

“The International Tax Cooperation (Economic Substance) Law was enacted to make sure that Cayman will fall into line with the OECD and EU’s initiatives on fair taxation and that Cayman participates in international efforts to ensure that its companies are not using the jurisdiction to avoid paying taxes elsewhere. The legislation contains similar international information sharing provisions and protections to those put in place to support the Cayman FATCA and CRS implementing regulations which facilitate the exchange of information between international competent authorities.” 

In some people’s minds, it doesn’t matter how much forward progress is made with regulation as it relates to the financial services industry, not just in the Cayman Islands but in all offshore financial centres. The perception is that these mysterious tax-free islands in beautiful parts of the world are nothing more than tax havens for the rich and powerful. 

Some political lobbying groups would even go so far as to say that offshore jurisdictions are responsible for poverty in developing countries and other ills of the world. There is an anti-offshore jurisdiction message being peddled by some of these groups, which doesn’t help the way jurisdictions like Cayman are portrayed in the mainstream media. There is a perception that IFCs are nefarious in some way. 

Even with a more robust AML regime, a beneficial ownership regime and greater compliance demands being placed on fund sponsors, service providers and boards of directors, and the introduction of the Data Protection Law to bring Cayman into line with EU data protection laws – which is expected to be introduced in Q3 2019 – does it really filter through into wider society? It’s difficult to think so. 

One organisation that is working hard to help to change international perceptions of the Cayman Islands is Cayman Finance, an industry body established with support from the Cayman Islands Government to spread a positive message about Cayman’s financial services industry. 

“Cayman Finance has made a significant impact in re-aligning international perceptions of the Cayman Islands with its CEO Jude Scott regularly supporting and defending the industry via global media outlets,” opines Mulry. “But there is no doubt that international pressure continues to be applied for Cayman to offer greater global cooperation and transparency to ensure it is not a place where money can be hidden from tax authorities or used in a way that gives rise to harmful tax competition. 

“The Cayman Government is addressing these international pressures with balanced legislation to ensure that the jurisdiction continues to be respected internationally particularly in its role in the global funds industry.”

Indeed, Cayman was home to 10,889 (as of September 2018) according to CIMA, of which approximately 75 per cent are CIMA-registered funds. 

A large number of global corporations pursuing a broad range of business and charitable activities use Cayman Islands’ investment fund vehicles to manage their capital. Among these, employee pension funds, university endowments and charitable organisations are major participants in Cayman investment fund structures, investing their assets safe in the knowledge that the lack of local Cayman corporate taxes will reduce the erosion of their assets over time. 

The use of Cayman investment funds vehicles does not mean tax is not paid in the jurisdictions where its investments are made or where its investors receive their returns. These taxes will still be paid. Cayman funds will only remove the potential additional layer of corporate tax if an investment fund in another jurisdiction were used. This fact tends to get overlooked in the mainstream media.

“There tends to be an assumption that Cayman benefits only the very wealthy without giving any benefits to the larger community but in addition to providing tax efficient returns to public institutions Cayman investment funds also provide capital to entrepreneurial businesses developing infrastructure projects, cost-effective healthcare alternatives and charitable initiatives. 

“A big part of the investment strategies of Cayman investments funds over recent years has been directing investment into commercial and charitable organisations in emerging markets and developing countries,” remarks Mulry. 

Cayman has become the de facto offshore jurisdiction of choice for global money managers. This is being recognised by fintech entrepreneurs as the world enters a new digital asset era. As they set up exciting businesses, typically with underlying blockchain components, jurisdictions like Cayman, located just 81 miles south of Miami, are well positioned to capitalise.

“One of the interesting applications of blockchain technology for the investment funds industry itself is as a potential solution to the problems of extensive duplication in the satisfaction of identity verification requirements under AML regimes,” comments Mulry. “A big cause of delays in international transactions is often the need to get multiple certified copy proofs of identity and residential address.

“We deal with investors, directors and investment mangers who often become frustrated at the duplication of identity verification documents required by all service providers across the industry. If blockchain technology alongside developing AML regulation can provide a solution that allows those service providers access to a confidential verified source of identity verification documents.

“That could be a very neat solution to these practical difficulties speeding up the regulatory process and reducing the costs burden on the end investors.”

Anything that can benefit the end investor should always be welcomed. Global banks are well aware of the disruptive potential of blockchain technology and have begun to develop their own technologies that are much more inclusive of the IT community. Understandably, banking groups have a vested interest in the direction these technology advances, led by blockchain, might take.

Leading fund administrators are also adept at developing and marketing new information technology solutions. 

There is growing demand among managers and investors for financial reporting to be customised for different fund strategies, assets and investor classes. To address these needs, Mulry says the most progressive fund administrators are building their own IT development teams “who are able to manipulate and design internal software in order to produce reports for their managers and investors in the precise format required”. 

All of this makes for a vibrant, energised climate in which to work, with Mulry and his colleagues in Dillon Eustace’s Cayman office taking a positive role in helping to shape and develop legislation in Cayman.

“There will certainly be further regulatory developments in Cayman driven by continuing developments in international regulation and by the emergence of new asset classes including digital assets and Dillon Eustace will continue to participate in industry consultations around these developments, making sure that the interests and insights of our clients are represented,” concludes Mulry. 

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