Saturday, June 23, 2018

Economic Forum highlights concerns over cruise pier project

Cruise ship passengers board a tender to return to their ship in George Town harbor. Government officials are touting a cruise pier project as a way to boost Cayman’s tourism sector and diversify the territory’s economy. - Photo: Taneos Ramsay

Regular readers of the Cayman Compass and other local media are surely used to seeing headlines over the years such as “Cruise dock deal on track,” “Government gives green light to George Town cruise dock,” and “Government plans to go ahead with cruise dock.”

Months later, those headlines are inevitably followed up with new ones such as “Cruise pier project faces delays,” “No cruise berthing contract before election,” and “Port won’t develop anytime soon.”

Nevertheless, government insists that it’s close to selecting a bidder to build a $180 million cruise and cargo dock in George Town Central.

After putting the project out to bid last September, government narrowed down the potential companies to undertake the development to five in April. The Central Tenders Committee met on May 9 to draw up a shortlist for a final round of bidding, and the deadline for those detailed final submissions is in July.

A contract is expected to be awarded in September.

Government officials have long touted the cruise pier project as a way to boost Cayman’s tourism sector and further diversify the territory’s economy, as well as a measure that would help revitalize central George Town. The number of cruise passengers coming here would likely increase from the usual 1.7 million to well more than 2 million per year, and those passengers would be able to come to shore much more easily and reliably.

Currently, passengers have to be ferried in from the cruise ships anchored offshore, and bad weather can hamper this. For instance, stormy seas in January and February 2016 cost Cayman an estimated $5 million in revenue when some 54,000 passengers were prevented from coming ashore.

At last month’s Chamber of Commerce Economic Forum, some tourism officials also pointed out that bringing in millions of cruisers serves as a marketing tool for the jurisdiction.

The Ritz-Carlton, Grand Cayman General Manager Marc Langevin added that cruisers sometimes “window shop” on their trips and return later.

However, wide swaths of the community oppose the project for a variety of reasons. Many of those concerns were expressed during the economic forum.

“There seems to be a general trepidation over what ‘getting it right’ entails, and whether the country can manage a far greater number of visitors when government still struggles with management and enforcement issues at the current levels of visitation,” Cayman Islands Tourism Association President Theresa Leacock-Broderick said of the port project.

The primary concern expressed was about how an influx of cruisers would impact the experience of overnight tourists. With a limited amount of beach space and other tourist attractions, an influx of cruisers runs the risk of crowding out the overnight tourists paying thousands of dollars to come to Cayman for a high-end vacation.

“There are days in high season where we’re already at carrying capacity in terms of beach access and road infrastructure,” said Pilar Bush, the executive vice president of marketing and communications at Dart Enterprises. “Certainly, there are days in February and March where there’s a conflict.”

Oneisha Richards, the deputy director of international marketing and promotions at the Department of Tourism, said a study will be conducted about what the territory’s true carrying capacity for tourists is. However, she said she could not provide a number right now.

Carrying capacity is also an issue that affects the territory’s environment. Environmentalist Guy Harvey brought this up during the Economic Forum, asserting that Cayman is already at its carrying capacity.

“We’re already there in terms of the resilience of some of our main attractions,” he said. “Sand bar is already oversubscribed, especially on Tuesdays, Wednesdays and Thursdays.”

Cruisers have also been criticized for contributing little to the island’s economy once they are here. Chamber of Commerce CEO Wil Pineau mentioned that cruisers have often been referred to here as “peanut butter and jelly tourists” because they pack their own lunches before going onshore instead of patronizing local restaurants and bars.

Along with the traditional concerns, a new one was also mentioned during the financial services portion of the Chamber of Commerce Economic Forum. With the jurisdiction facing a number of attacks from anti-offshore, non-governmental organizations like the Tax Justice Network, government bodies such as the European Union, and intergovernmental agencies such as the Organisation for Economic Co-operation and Development, Cayman needs to marshal all the resources it can to defend itself, some people asserted at the forum.

“This is the time to rally the troops and put all other projects on pause – i.e., a $300 million cruise berthing project – at a time when you’re going to lose between 15 and 30 percent of your financial services revenue,” said an audience member during the question-and-answer portion of the event.

Cayman Finance CEO Jude Scott and Financial Services Ministry Chief Officer Dax Basdeo were on the panel, and did not comment on the audience member’s comment. However, Chamber of Commerce President Paul Byles was not shy in voicing his agreement.

“Those are good points for people to hear, especially those outside this room.” Byles said in response.

The economic forum is far from the first place these concerns about the port project have been aired.

When the idea of building a cruise pier was first seriously discussed by government in 2003, then-Opposition Leader Kurt Tibbetts opposed the idea right away, warning against the negative impacts of “huge volumes of cruise ship visitors on the environment, the community and the number of stay-over visitors.”

“[T]he government seems intent on a course of action to encourage even more cruise ship visitors,” he said during a June 2003 budget debate. “It seems like the government is pursuing this course of action despite the overwhelming evidence across the region that concomitant with an increase of cruise ship visitors is a drop in the number of stay-over visitors. Statistics prove that and on reflection it is easy to understand why.”

Criticism has been maintained over the last 15 years, including at an August 2015 public hearing on the matter, when nearly 350 of the 473 comments received contained objections to the plan, arguing that the project would harm coral reefs and historic shipwrecks. Retailers mostly support the project; opposition came mainly from visitors and diving companies.

Despite that opposition, government is pressing full-force ahead on the development this time, having determined a financing model and other details about the project.

And despite some criticism over perceived lack of transparency in the project, the Tourism Ministry has insisted that the process, though slow, had been handled according to international standards.

“While it is a lengthy, methodical and complex process, we believe in its efficacy and are satisfied that by taking this approach, we are doing everything possible to deliver a world-class and affordable cruise berthing facility that will be owned by the people of the Cayman Islands,” the Tourism Ministry stated in April.

The threat of public beneficial ownership registers

Even for jurisdictions that are used to moving goalposts in terms of international regulatory pressure, the passing on May 1 of a cross-party amendment to the Sanctions and Anti-Money Laundering Bill in the House of Commons, effectively ordering British Overseas Territories to establish public registers of beneficial ownership, was unique.

It stood out not only because the U.K. government had in the past fended off similar attempts to amend various bills in both houses of parliament, but also because the issue simply did not seem important enough to warrant the extreme measure of an order in council, a method that disregards the independent democratic mechanisms of the overseas territories.

This time, however, the U.K. government relented, faced with numerous defectors and a possible defeat, had the amendment gone to a vote.

During the debate, British lawmakers blamed offshore companies in the overseas territories, in a maelstrom of NGO advocacy and Russian paranoia, for anything from poverty in Africa to Russian kleptocracy and money laundering for organized crime.

Feeble attempts by the government had little effect to emphasize that the overseas territories had all signed agreements with the U.K. only two years ago and subsequently set up beneficial ownership registers that provide access to U.K. law enforcement and tax authorities.

Members of parliament on both sides of the argument acknowledged that the measure would have a negative economic effect for the territories, but most simply suggested that in response the territories should diversify their economies.

As a result, the overseas territories have been told that they have until the end of 2020 to set up publicly accessible registers disclosing the owners of companies and other entities in their jurisdictions or the U.K. government will issue an order in council forcing them to do so.

Orders in council, a relic from the colonial days, have been used before but typically only in the promotion of significant human rights issues. In Cayman, for instance, these extraordinary measures, which bypass the Legislative Assembly, were used to abolish the death penalty and decriminalize homosexuality. Suggestions the U.K. government could institute same-sex civil unions in the territories in the same way, however, were recently rebuffed by Foreign Secretary Boris Johnson.

So how could it come to this? The relentless pressure of the British press over the Panama and Paradise Papers was certainly a factor. The poisoning of former Russian spy and double agent Sergei Skripal and his daughter Yulia in Salisbury in March – allegedly at the behest of the Russian state – created, in addition, a fertile ground for new anti-money laundering measures.

The U.K. parliament’s Foreign Affairs Committee issued a report in May on Russian financial influence in Britain under the title “Moscow’s gold: Russian corruption in the U.K.” In it, the Foreign Affairs Committee stated the overseas territories “are important routes through which dirty money enters the U.K.”

The authors of the report appear fully aware that an order in council dictating public registers would disenfranchise elected representatives in the territories in an area of domestic responsibility for their local governments.

But the report claimed, “While the Government should continue to respect the autonomy and constitutional integrity of the Overseas Territories and Crown Dependencies on devolved matters, money laundering is now a matter of national security, and therefore constitutionally under the jurisdiction of the U.K.”

Unsurprisingly, the move provoked ire in the overseas territories, with many territory leaders describing the action as reminiscent of the colonial era.

Cayman Premier Alden McLaughlin said the position of his government is clear: “[T]he attempt by parliament to legislate for this territory … is unlawful and we do not accept it.”

However, challenging the Sanctions and Anti-Money Laundering law itself is difficult and unlikely to succeed. The Cayman government will therefore wait until an order in council is issued.

Legally, Cayman’s constitution grants very wide reserved powers to both the governor and Her Majesty The Queen. While section 81 of the Constitution gives the governor the right to publish a bill in any area of the governor’s constitutional responsibility, if the Cayman government is reluctant to do so, section 125 grants Her Majesty full power “to make laws for the peace, order and good government of the Cayman Islands.” This is the same catch-all wording used in the constitution for the powers of Cayman’s legislature.

“Cayman’s best course of action is to challenge any decision of the U.K. government by order in council to amend local legislation … which will render the issue to our courts here,” McLaughlin said. “That [challenge] will never happen if the U.K. doesn’t make the order in council.”

If an order is made, the premier argued that a legal challenge would be necessary irrespective of the underlying issue, as it could otherwise open the door to other kinds of legislation by the House of Commons in areas of responsibility that are devolved to the territories. Even then, the matter could take years to resolve.

In the meantime, Cayman would not make its beneficial ownership register public, unless it becomes a globally accepted standard – a position the Cayman government has always maintained.

“When this becomes a global standard, Cayman is there,” the premier said.

Aside from the political arguments over constitutional powers, the debate over public registers centers on two key points: the effectiveness of public registers and their conflict with privacy rights.

Unlevel playing field

Simply opening up the registers in the overseas territories alone risks that any illicit money would simply flow to other jurisdictions with less transparency. This would be detrimental for U.K. law enforcement, who would lose access to critical information that under the existing beneficial ownership registries in the territories is available to them.

More importantly, there is a danger than an unlevel playing field with public registers accessible in only a handful of jurisdictions would lead clients with legitimate privacy concerns to choose other jurisdictions, effectively driving business away from the overseas territories.

But Cayman’s government assures that the fallout from the threat of public registers will not be the “death knell” of Cayman’s financial services industry.

The Chamber of Commerce agrees.

“There is no material impact at this stage given there have been no actual changes to our framework. The Government has also made it clear that they do not accept the U.K.’s right to impose the legislation in 2020 so the industry’s clients will be partly comforted in knowing that,” said Chamber President Paul Byles. “We still have some way to go before assessing any direct impact. It’s possible that some clients may be deterred due to the potential loss of their legitimate right to privacy in the future, but I don’t belief there is much fallout there either.”

Tim Ridley, former chairman of the Cayman Islands Monetary Authority, in turn, believes the stakes are high.

“Failure to find a solution that protects legitimate privacy will lead to a great outflow of quality business to jurisdictions that still respect data privacy (and there are many),” he said.

Clients with legitimate privacy concerns may well be willing to switch service providers if necessary.

But it is hard to put numbers on the potential economic impact from the threat of, or the actual implementation of, public registers, said Ridley, a former senior partner at offshore law firm Maples and Calder.

“Cayman is fortunate that its financial services business is of a high quality and very broadly based, much of which is and will not be affected by these moves. Having said that, uncertainty is very unhelpful, even if the outcome is no public registers,” he said.

Ridley expects the first to suffer will be quality business that would otherwise have come to Cayman.

There are indications that Cayman in recent years has already lost trust business to the United States because of the common reporting standard, a global tax information exchange system that Cayman participates in but the U.S. does not.

It is also not inconceivable that even clients who do not expressly seek privacy would select, given the choice between two identical services, a service provider in a jurisdiction that does not mandate that their client information is put on the internet.

“After all, it is simpler for the client not to have the headache of potential public registers if he can find a solution elsewhere. Or the potential client may decide that going ‘offshore’ anywhere is too burdensome and costly,” Ridley said.

Most well-advised existing clients have come to accept, albeit reluctantly, non-public registers open to law enforcement, tax authorities and regulators.

“But the aggregate of public registers, common reporting standards and the push for greater transparency generally may very well lead many clients, who are fully compliant, nevertheless to seek jurisdictions where their affairs are not subject to the same level of unjustified and irresponsible media and other scrutiny as is possible with public registers,” he added. “Many will wait to see the outcome of the issue; but others may decide it makes sense to plan for the worst and relocate during the uncertainty.”

The places that offer the greatest long-term stability for the confidentiality of client information combined with a respect for privacy rights and the rule of law are the likes of Hong Kong, Singapore and the U.S. In the short term, Cyprus and Malta may also be attractive candidates but given that both are EU members, that may well change. And there is always the possibility that other offshore centers that are not subject to the U.K. mandate will be able to maintain an advantage, until public registers become a global standard.

Effectiveness of public registers

Other criticism of public registers aims at the unreliability of the information available in the U.K. register of persons of significant control, which the territories are now ordered to emulate.

Even public register advocates recognize existing weaknesses in what the U.K. government claims is the “gold standard.” In an October 2017 briefing on the lessons learned from the U.K. public register, advocacy groups OpenOwnership and Global Witness noted that the existing threshold of 25 percent for beneficial owners to be identified is too high.

In many cases, companies used for illegal activity can simply name five shareholder companies in different jurisdictions with each owning less than 25 percent of the shares to circumvent the disclosure requirements. Others report looped ownership chains with companies seemingly owning themselves.

“One of the most significant weaknesses of the U.K. register is that the data submitted is not verified, it is solely self-reported data from companies. This means that data can be submitted that does not comply with the requirements of the register or is inaccurate,” the briefing said.

In a particularly egregious case, first reported by investigative journalists from the Organized Crime and Corruption Reporting Project, members of the southern Italian mafia, Camorra, used U.K.-based companies, often providing fictitious information. One address for the directors of such a U.K. company was located in Via Dei 40 Ladroni, Ali Babbà, Italy, a reference to the folk tale “Ali Baba and the Forty Thieves.”

To verify or improve the accuracy of the data, OpenOwnership and Global Witness suggested a different system should be put in place. They concluded that entities that carry out customer due diligence should be required to file reports to the register, regulators or law enforcement if the beneficial ownership data they find does not match the public register.

In addition, they called for a system to submit identity documentation; the cross-checking of data against other government data sets; and systems for members of the public to easily highlight or report suspected inaccurate data in the registry.

“It is important to note,” the advocacy groups stated, “that all but one of these measures are only possible when the information is available as structured data, and that two are only possible when that data is available to members of the public to use and re-use.”

In other words, to make the U.K. public register work effectively, more personal data is required and that data must be more widely shared.

Data privacy

This puts the demands for public registers further at odds with individual privacy rights.

There is a certain incongruity that as the European Union, including the U.K., is tightening rules to protect the data of its citizens with its General Data Protection Regulation, which came into force on May 26, it completely disregards privacy rights when it comes to beneficial ownership data.

It is more than just an academic question whether it is necessary for the general public to know beneficial owners, especially when law enforcement and tax authorities already have access to the information.

The advocates of open registers think so. They believe that there is simply too much information for law enforcement and tax authorities to sift through, a job that could conveniently be supported by journalists and NGOs.

Conservative MP Andrew Mitchell, who brought the amendment of the Sanctions and Anti-Money Laundering Bill that forces overseas territories to have public registers of beneficial ownership, said, “It is only by openness and scrutiny, by allowing charities, NGOs and the media to join up the dots, that we can expose this dirty money and those people standing behind it. Closed registers do not begin to allow us to do it.”

Mitchell explicitly named the Panama Papers coverage as evidence for the effectiveness of this approach.

Another question is if the mandate of open registers is legal. Privacy rights are not absolute but laws or government actions infringing those rights must be proportionate.

When French lawmakers decided in June 2016 to make information on the settlors and beneficiaries of trusts with French connections available to the public, the public register of trusts was provisionally suspended only three weeks later. In October 2016, the Conseil Constitutionnel, the French Supreme Court, decided that the public trust register was unconstitutional because it represented a disproportionate breach of the privacy rights of individuals that are part of trust arrangements.

The court did not decide against trust registers per se but held that making the information public was a step too far, given that relevant authorities already had access to the information.

The register was subsequently revised and now grants access to law enforcement, regulators and certain groups of professionals if their access to the register is regulated under French law.

The European Data Protection Supervisor, the EU’s independent data protection authority, is also critical of efforts in Europe to make beneficial ownership information public. In an opinion on amendments to the 5th Anti-Money Laundering Directive, Wojciech Wiewiórowski, head of EDPS, recommended that access to beneficial ownership information should be designed in compliance with the principle of proportionality, and that access is only granted “to entities who are in charge of enforcing the law.”

Linking access to beneficial ownership information to the purpose of fighting money laundering by stating that beneficial ownership transparency is needed to trace criminals who could otherwise hide behind a corporate structure explains why competent authorities should have access to the information, the EDPS said.

But the data protection supervisor questioned the proportionality of granting wider access to beneficial ownership data to “any person with legitimate interest.”

EU member states will define what legitimate interest means but, the EDPS said, they must balance the public interest of combating money laundering and terrorist financing and the protection of fundamental rights of individuals, in particular the right to privacy and protection of personal data.

In 2014, the European Court of Justice shocked European legislators when it shot down the EU Data Retention Directive. In the Digital Rights Ireland case, the court established that the fight against international terrorism and serious crime constitutes an objective of general interest that allows the interference with fundamental privacy and data protection rights, but it concluded that the measures must be proportionate.

The court adopted a two-pronged proportionality test, by considering whether a measure was appropriate to achieve its objective and if it did not go beyond what was necessary to achieve this goal. The ruling suggested that general and blanket data retention is no longer possible under EU law.

Under the 5th Anti-Money Laundering Directive, the public will be granted full access to information on the beneficial owners of firms operating in the EU. The corresponding information will also have to be collected for trusts, but access to it will be limited to those with a “legitimate interest.”

Member states can also insist on registration and the payment of a small fee, so that the access of such information would be traceable. Restrictions on access will be allowed in certain circumstances, including where there is a risk of fraud, kidnapping, blackmail, violence or intimidation, although the ability to create exceptions is limited.

If the experience with the U.K. beneficial ownership register is anything to go by, there should not be much hope for those in the wealth management industry, who argue that their clients’ details should not be disclosed publicly for security reasons.

Of the more than one million U.K. companies analyzed by OpenOwnership and Global Witness, 270 individuals applied to have their information withheld claiming that it would put them at risk and only five requests were granted.

If a legal challenge of public registers for infringing privacy rights could be successful in a Cayman court is anyone’s guess. The register of shareholders has traditionally been a public document in many jurisdictions, often to enable creditors and business partners to make an informed decision about their dealings with company owners who enjoy limited liability.

In Cayman, the same principle applies to ordinary resident companies but not to exempted companies, the traditional choice for offshore business.

It could be argued that it was always the intention that dealing with offshore companies should be a case of “buyer beware.”

It is pure speculation to anticipate how a court in Cayman, the U.K. or the Court of European Human Rights would apply the constitutional or convention right to privacy, which is not unlimited, to the issue of public registers, said Ridley.

“These are uncharted waters. One would expect a court to conduct a balancing of interest analysis. And one would hope that a court would decide that general and unrestricted public disclosures is too broad, that there should be a public interest test to be met in order, for say, media access to be permitted,” he noted. “One also hopes that the U.K. can be persuaded to accept at minimum a public interest test in the local Cayman legislation and thus not to pursue the order in council, sledgehammer solution, which itself would likely spawn expensive and protracted litigation.”

EU may force the issue earlier

Rather than being resolved through legal challenges of a potential order in council, the issue may come up sooner than anticipated. The EU is already planning to add the existence of public beneficial ownership registers as one of the criteria to avoid its blacklist of uncooperative countries in tax matters.

In 2017, Cayman avoided a blacklisting by committing to remedy, before the end of this year, what the EU called a lack of economic substance of Cayman-based entities. Minister for Financial Services Tara Rivers visited Brussels in May to talk to EU policymakers about the details of how economic substance is going to be defined.

Even if Cayman can meet EU demands on the question of substance, public registers look set to become the next EU hurdle.

Booming real estate industry reflects economic growth

Tower communications specialist Ben Meade, left, moderates as CIREBA treasurer Tony Catalanotto, Chief Planner Haroon Pandohie, Cayman Contractors Association David Johnston, and Dart Real Estate executive Justin Howe discuss the state of the local real estate market. - Photo: Ken Silva

Finance Minister Roy McTaggart has recently touted the 2.9-percent economic growth Cayman experienced last year, but to many that number is just an abstraction.

To get a real sense of how the economy is performing, take a drive from George Town to West Bay, according to Tony Catalanotto, the treasurer for the Cayman Islands Real Estate Brokers Association.

“Construction is booming. Anyone that takes a drive from West Bay through Governors Harbour, we’re seeing renewed activity,” Catalanotto said during a presentation on the local real estate industry at the Chamber of Commerce’s Economic Forum.

According to data from CIREBA, there are 40 major real estate developments that are under way or about to begin. Projects range from major developments by the Dart group, government and Health City, to residential neighborhoods and gated communities.

“In the old days, you’d see a sign for pre-sale. Then the sign [would] come down and you’d see nothing but cow pastures. Today, if you see the sign, it’s only a matter of time before the actual sales have been executed,” he said.

The construction is being largely driven by an exploding demand for property in the Cayman Islands, said Catalanotto.

CIREBA data state that the number of properties sold in 2017/18 took a slight dip from 748 in 2016/17 (158 homes, 342 condos, 196 land, and 52 other properties) to 732 (158 homes, 312 condos, 210 land, and 52 other properties). However, increased demand and limited inventory has led to the value of the properties sold to increase by about 14 percent during that same time, from a total of $442,857,186 in 2016/17 to $503,541,484 in 2017/18. The year-over-year value of homes sold increased from $726,698 to $982,445; condos increased from $574,386 to $758,826; land decreased from $437,215 to $366,946; and all other properties decreased from $882,788 to $663,514.

To date in 2018, 313 properties have been sold for $221 million, an average of $706,000 per property. This is an increase from the value of the average property sale of $660,000 in 2017, according to CIREBA.

While the average value of properties sold has seen a major uptick, some areas have seen more of a boost than others.

The Seven Mile Beach area has seen the biggest explosion in value, with 112 properties sold in 2017 for $150 million (an average value of $1.34 million), and 38 properties sold to date this year for $72 million (an average value of $1.89 million). Currently, there are 1,489 property listings in Cayman, valued at a total of $1.83 billion, with 202 listings on Seven Mile Beach for a total value of $439 million (an average value of $2.17 million).

If you are looking for property on Seven Mile Beach, you are probably too late, said Catalanotto.

“There’s virtually no land left on Seven Mile Beach that’s available for redevelopment,” he said.

The lack of remaining land on Seven Mile Beach is starting to drive demand for high-end properties elsewhere in George Town, including just south of George Town Central and into the South Sound area, said Catalanotto.

“We’re seeing a movement from Seven Mile Beach corridor, [which] became a bit unaffordable, to the other side of George Town. There’s a complex called Kisha that’s now 100 percent sold out, followed by the old Sea View site, Oceana; now you got Fin,” he said, explaining that many people would rather live in those areas than among tourists on Seven Mile Beach. “Most of these properties are catering to that [affluent] demographic.”

In terms of buyers, Catalanotto said there is an emerging, younger demographic.

“Cayman is becoming very trendy, catering to the 35- to 50-year-old wealthy set,” he said, adding, “Cayman Enterprise City is a part of this.”

The CIREBA treasurer added that the market is seeing more interest from young Caymanian first-time buyers, many of whom are coming back from school abroad.

“They don’t want to miss the opportunity,” he said.

One of the territory’s lagging areas is downtown George Town, which has been stagnant in recent years.

“If you go down there …, there’s not a lot that goes on there after 5 p.m.,” Catalanotto said. “A lot of the office buildings have been vacated, moving to Camana Bay …. If you go down Cardinall Avenue, if you’re on ground level, that’s great, but above that is largely vacant space.”

However, the abundance of real estate downtown is an opportunity for investors who want to buy properties they would not otherwise have access to, he said. Central George Town could be turned into a residential area, he explained, with old retail and office buildings repurposed into condos, loft-type apartments and boutiques.

One major project that would help rejuvenate the area is government’s plan to construct new court facilities, Catalanotto added.

Along with a depressed central George Town, another challenge facing the territory includes a lack of industrial land. Catalanotto said there is little to no property left in the industrial area behind the airport, and more is needed for warehousing, container storage, and tile companies.

“We need to repurpose some of the swamp land we have on the island into industrial land,” he said.

Non-real-estate challenges affecting the market include hurricanes, the U.K.’s recent move to force its British Overseas Territories to make their company registries public, rising crime rates, and public infrastructure than needs improvement, he said. While there’s nothing much residents can do about the first two challenges, he said, the second two need to be addressed if Cayman’s real estate market is going to continue to improve.

“By comparison to South Miami, we’re still relatively cheap. There’s an opportunity to attract high-net-worth individuals – people who don’t ask for a lot but spend lots of money,” he said. “We have some of the real estate, but do we have the infrastructure, do we have the right immigration policies? I think we’re missing the boat.”

The Department of Planning’s Chief Planner Haroon Pandohie said his department is in the process of updating Cayman’s 1997 development plan, and should release the first part of that document this summer. The plan will address many of the issues mentioned above.

The first part of the plan will be a policy statement about the general vision for the territory, said Pandohie. From there, more detailed studies will be undertaken, he said.

Maritime and Aviation City welcomes first zone company

CHC Helicopter, a company that operates a search and rescue network, and transports offshore oil and gas workers, is the first company in the maritime and aviation part of Cayman’s special economic zone. - Photo: CHC Helicopter

Cayman Maritime & Aviation City and The Civil Aviation Authority of the Cayman Islands announced the registration of its first special economic zone company in May.

Cayman Enterprise City, of which Aviation City is a part, hopes the arrival of CHC Helicopter, a global offshore transport company, will mark the beginning of a transportation services cluster in the Cayman Islands.

CHC Helicopter runs one of the most extensive search-and-rescue networks in the world, and transports offshore oil and gas workers in the North Sea, the Caspian Sea, the Atlantic Ocean, both sides of the Indian Ocean and the Timor Sea.

Signing a company that has been in the transportation business for 70 years is an auspicious start to a transportation services hub, Cayman Enterprise City said.

“We are very excited to welcome CHC Helicopter to Cayman Maritime & Aviation City,” said Cayman Enterprise City CEO Charlie Kirkconnell.

“CHC is an industry leader with decades of experience and an excellent reputation in the offshore transport industry. They are a perfect example of the type of business that the special economic zone was set up to attract and we hope that their decision to set up in Cayman will motivate other aviation industry players to consider Cayman Maritime & Aviation City as well.”

The Cayman Islands has a reputable aircraft registry for private, corporate and commercial operations, and the new arrangement with CEC provides additional opportunities for commercial air transport operations to be conducted offshore with operators establishing their principle place of business in the Cayman Islands.

Cayman has had only limited success in attracting the segment of the aviation market that caters to commercial aircraft operations, including those that require an air operator’s certificate. For the Civil Aviation Authority to grant an air operator’s certificate to an aircraft on the Cayman Islands Aircraft Registry, the operator must have its principal place of business in the territory. The aviation park will help the CAA in fulfilling this need and expanding its offering.

The Aviation Authority’s Director-General Richard Smith said the new addition to Aviation City and the CAACI is a very positive development for the Cayman Islands.

“It has shown that multi-faceted international aviation industries can be established here. Operators of Cayman Islands registered aircraft now being able to establish their principle place of business within the jurisdiction to obtain an Air Operator’s Certificate for offshore commercial air transport is a wonderful addition to our benefits,” he said.

CAACI and CEC are jointly marketing the Cayman Islands to the aviation industry by highlighting Cayman’s robust regulatory environment, neutral tax status, sound legal and finance systems and first-world lifestyle.

Clients that qualify to be part of the special economic zone are aircraft owners and brokers, technology companies and start-ups engaged in aviation research and development, the head offices of aviation industry businesses, aircraft manufacturing and repair businesses, and businesses that provide management consultancy and other specialized services to the aviation industry.

Cayman Maritime & Aviation City also recently became a member of the National Business Aviation Association. It will allow Aviation City to be part of an organization with more than 11,000 industry members that also hosts the world’s largest civil aviation trade show – the NBAA Aviation Convention and Exhibition.

CEC and CAACI created the aviation services park in the special economic zone one year ago by combining it with the Maritime Services Park, so that aviation services providers can be licensed in the zone. CEC’s Maritime Services Park was established in 2015 when the government paved the way for a physical presence of maritime services companies in the special economic zone.

The goal is to attract ship owners, brokers and financiers, freight trading, operations, logistics, vessel management, consulting and research companies operating in the shipping industry.

In 2014, Premier Alden McLaughlin called Cayman an ideal hub for the shipping and maritime industry, but take-up of the new offer was slow, not least because of the difficult economic situation in the shipping industry in recent years.

Economy grows, but questions remain over regulatory pressure

Cayman’s economy expanded more than anticipated in 2017. Gross domestic product grew by 2.9 percent in real terms following similar growth of 3 percent in 2016 and 3.1 percent in 2015.

Economic expansion was significantly higher than previous forecasts of 2.1 and 2.4 percent throughout last year.

The GDP growth of 2.9 percent is also more robust than the growth of the U.S. economy last year, said Finance Minister Roy McTaggart.

At $59,748 per capita, Cayman’s economy now ranks seventh in the world, again ahead of the U.S., which ranks eighth, and many other G-20 countries, the minister noted during an economic update at a Cayman Islands Institute of Professional Accountants training event in May.

The construction industry and tourism were the main drivers of the economy last year.

Construction activity, which showed growth of 7.2 percent, dropped off slightly after even stronger growth years in 2016 (7.6 percent) and 2015 (7.9 percent), but this was due to the completion of the Kimpton Seafire resort in late 2016.

Nevertheless, construction activity saw a $800 million-record high of project approvals.

“The construction sectors growth reflects the infrastructure capacity of the islands keeping pace with the demand for residential, commercial and public facilities arising from a growing population base that was estimated at 63,400 persons at the end of 2017,” Minister McTaggart said.

Meanwhile, tourist arrivals reached 2.15 million visitors last year as Cayman benefited from the misfortune of other holiday destinations in the Caribbean that were forced to close after they were hit by hurricanes Irma and Maria.

As a result, tourist arrivals in Cayman were 2.4 percent higher than in 2016 and stay-over tourism increased by more than 8.5 percent, especially coming from the U.S. and Canada.

Tourism-related services such as hotels, restaurants and bars also showed a combined growth of 8.5 percent during the year.

The financial services industry, which includes banking and insurance and makes up 41 percent of the economy, grew 1.4 percent, partly due to the low demand for domestic credit by the public and private sector.

Combined with professional services, such as corporate registration, legal and accounting services, which are largely finance-related but classified separately under international statistical standards, the finance sector in Cayman contributes more than half of the economy – 55.6 percent of GDP.

The professional services sector grew by 3.6 percent last year.

Mr. McTaggart said the government expects Cayman’s economic strength to persist in the medium term with GDP growth projections of 3 percent in 2018, 2.7 percent in 2019 and 2.2 percent in 2020. The slight downward trajectory is a reflection of growth forecasts by the International Monetary Fund for the U.S. and other advanced economies that Cayman relies on.

Government’s optimism for the economy is mainly based on the continued strong performance of the construction sector, with many tourist accommodation and residential projects already well under way.

Two hotel developments in George Town, as well as the continued expansion of Camana Bay, are only a few of the examples, the finance minister noted. In addition, approved public sector projects such as the expansion of the Owen Roberts International Airport, the Linford Pierson Highway, a long-term residential mental health facility, a solid waste management system, and a cruise berthing facility in George Town are a sign of government’s commitment to invest in infrastructure, he said.

As far as the financial services sector is concerned, Minister McTaggart pointed to the strong new company registration statistics as an indication that Cayman remains an attractive destination for offshore services.

There were 99,327 Cayman-registered companies active at the end of 2017, a 3.2-percent increase over 2016.

Key challenges

However, two key challenges remain and could put economic projections in jeopardy.

Firstly, the threat of instituting a public register of beneficial ownership in Cayman through an order in council could have an effect.

“We do not accept the decisions of the U.K. parliament with regard to the forced implementation of public beneficial ownership registers,” the minister said.

For the time being, government must wait until an order in council is made before it can challenge it. This is unlikely to happen before the year 2020. In the meantime, government will consult with its legal advisers about the necessary steps, involving judicial review and a potential appeal, should it be necessary, Mr. McTaggart said, but he made clear: “We will fight this ‘til the end.”

The second key challenge is the ongoing risk that Cayman may still be placed on the EU blacklist of non-cooperative countries in tax matters, which could attract punitive measures. To avoid such a blacklisting, Cayman has committed to resolve any issues concerning a lack of economic substance among Cayman-registered entities, identified by the EU.

What exactly constitutes economic substance is unclear as the EU has still to define its requirements. The Cayman government is engaged with EU policymakers to influence that process, Minster McTaggart said.

“Individually, the ongoing risk to an unfavorable outcome of any one of the two issues is unlikely to mean the death knell or the crippling of the financial services industry. But collectively, and even individually, they could have a significant effect.”

Given that revenue from financial services funds 42 percent of government’s revenue and the sector employs 18.3 percent of all workers in Cayman, any downturn of financial services could have “significant ramifications” for Cayman and the continuing growth of the economy, he said.

“And the potential does exist for our country to move into a recession if both of these issues play out as their proponents intend.”

Where there’s no will – there’s a way

Robert Mack, HSM Chambers

Most people know that making a will is the “adult thing” to do, especially when children and other dependents are involved. However, like most unpleasant things in life, we tend to put it off for as long as possible.

In some tragic cases life can end suddenly and unexpectedly, or a person can be struck down by illness and lose their mental capacity which would otherwise prevent them from creating a valid will. So, when there is no will, what is the way?

When an individual dies without leaving a will, or if they leave an invalid will, what happens to their property in the Cayman Islands and is responsible for administering their estate?

The law dictates the following people in order of priority, are entitled (but not compelled), to apply to the court to administer the estate:

  • The surviving spouse;
  • The children of the deceased (or the grandchild where a child has died before the deceased);
  • The father or mother of the deceased;
  • The full-blood brothers or sisters of the deceased (or their children if they have died before the deceased);
  • Those persons entitled to a share of the estate; and
  • A creditor of the deceased, or any other person who may have a beneficial interest in the estate.

While the above group of people may be perfectly appropriate in some cases, in others, they may be wholly unsuitable. For example, the surviving spouse may have become estranged from the deceased, or old sibling rivalries might bubble to the surface following the death of a parent, which could paralyze the administration of the estate with expensive and protracted litigation.

If the individual had stopped to think about it for a moment, they probably would have nominated a trusted friend or an impartial professional to act as their executor. The problem is that unless you make the choice during your lifetime while you have full mental capacity, the law makes the choice for you after you die.

Let us now turn our attention to who gets what. This will depend on the personal circumstances of the deceased, so I will set out a few of the most common scenarios below:

Deceased dies leaving a spouse and children (and grandchildren)

  • The spouse takes 100 percent of the personal chattels such as vehicles, furniture, household articles, etc.;
  • If the estate is valued under CI$20,000, the spouse takes 100 percent of the “residue” of the estate (meaning all the assets which remain after the debts and administration expenses are paid off);
  • If the estate is valued over CI$20,000, the spouse takes 50 percent of the residue of the estate and the remaining 50 percent of the residue is divided equally between the deceased’s children. If a child of the deceased has died before their parent, leaving children of their own, then those children will inherit the deceased parent’s share equally between them.

Deceased dies leaving no spouse but leaves children and/or grandchildren

  • 100 percent of the residue is split between the children equally;
  • If a child has died leaving children of their own, then those children will take the deceased parent’s share equally between them.

Deceased dies leaving a spouse but no children (or grandchildren)

  • The spouse takes all the personal chattels;
  • The spouse takes 75 percent of the residue;
  • The parents take the remaining 25 percent of the residue; however, if they are not alive, then the surviving spouse takes 100 percent of the residue.

Deceased dies leaving no spouse, no children and/or grandchildren, but leaves a parent or parents

  • 100 percent of the residue is split between the surviving parents;
  • If only one parent is alive, the surviving parent takes 100 percent of the residue.

The law strives to be as fair as possible to those left behind. What the law cannot do, however, is to take into account the personal circumstances of each beneficiary, which is why it is crucially important to make a will during your lifetime to take into account your unique personal circumstances.

One of the other main advantages of creating a Cayman Islands will is that you have complete freedom to benefit any persons or charitable causes you wish. This is even the case where you may have a moral obligation to provide for certain people such as minor children. So long as all of the legal formalities are observed, you have sufficient mental capacity, and you are not acting under duress or the undue influence of somebody, it is very difficult for any person to successfully challenge your will in court.

The other main benefits of having a will is that you can dictate how and when your beneficiaries will receive their entitlements. For example, if you have minors or people who are vulnerable due to physical, mental, or social problems, a trust can be established in your will to stagger the benefits your beneficiaries receive over the course of time, or to impose conditions on them (e.g., completing school, or attaining a certain age), rather than receiving a lump sum shortly after your death which could prove detrimental to their overall welfare.

Lastly, where minor children are involved, a will allows you to nominate a guardian (or guardians) of your choice. Failure to do so could result in unsuitable persons being appointed by the court as guardians of your minor children.

In conclusion, although the law provides a framework in the event you die without a will, or if you die with an invalid will, the only way to ensure your loved ones are cared for as you wish is to “bite the bullet” and get your will done – and done correctly by a suitably qualified attorney. The old expression, “if you fail to prepare, you prepare to fail,” is easily applied here.

Is global growth stuttering?

After policymakers around the world were quick to shrug off weakness at the start of the year as a temporary phenomenon, their economies are keeping them in suspense, with purchasing managers indexes from Japan to the euro area hinting at a more protracted slowdown. - Photo: Bloomberg.

2017 can be characterized as a year that should be celebrated. The world’s economy enjoyed synchronized global growth, with all major developed economies reporting positive GDP growth. The Eurozone reported 2.3 percent real GDP growth, Japan nearly doubled its GDP from the year prior, while emerging markets managed to make quite a comeback. The forecasts for 2018 were also very optimistic with the International Monetary Fund initially estimating 3.9 percent global growth. Although the IMF subsequently revised its forecast down to 3.8 percent, it is still anticipating synchronized growth across nations. Disappointingly, Q1 data was not very supportive of this optimistic view.

With both the Eurozone and the U.K. decelerating, and Japan falling into negative territory, economic growth for 2018 does not look as promising. Emerging markets have been hit the hardest, a direct result of rising U.S. rates and a strengthening U.S. dollar. With almost 80 percent of emerging market debt denominated in U.S. dollars, the region has come under significant pressure. Capital outflows only serve to exacerbate the problem, further strengthening the U.S. dollar and leading to even greater outflows and increased economic weakness.

Policymakers described the first quarter GDP weakness as a temporary soft spot, attributed to severe weather conditions and other temporary factors. However, recent economic data suggests that hopes of a strong rebound in growth in Q2 may not materialize.

Surveys of purchasing managers across the globe indicate lower overall growth. Recent retail sales, property sales and fixed investment in China are all declining, suggesting the world’s second largest economy is also slowing. Lower global trade figures provide further evidence of less economic activity overall, and particularly in emerging markets.

Heightened geopolitical risks only add to the uncertainty of the positive global growth story. Trade tensions between China and the U.S., despite recent agreements, continue to simmer below the surface. China agreed to increase agricultural and energy imports from the U.S., in addition to reducing import tariffs on vehicles, in response to President Trump softening his stance on $150 billion in import taxes on Chinese goods. Although an all-out trade war seems to have been avoided at the moment, the agreement does not solve the U.S. president’s campaign promise to reduce the bilateral trade deficit. Therefore, a resurgence of trade tensions is highly likely.

Other geopolitical issues, including the Iran deal, tension between North Korea and the U.S., as well as the Italian elections only add to the general market uncertainty.

The U.S. story is undoubtedly very different as the world’s largest economy is much better positioned than its peers. Economic growth prospects for the U.S. remain buoyant, supported by the lagging effects of the 2017 tax cuts and fiscal stimulus package. Furthermore, leading economic indicators suggest that this position of relative outperformance will continue for some time. The attractive U.S. growth rate has resulted in increased interest rate differentials between the U.S. and its counterparts, bolstering the greenback. If the Fed increases rates at a faster pace than currently expected by markets and if the U.S. continues to outperform its counterparts, the dollar could strengthen even further.

Notwithstanding economic weakness in the first quarter of the year and the myriad challenges ahead, global output is expected to hold up for this year. Second quarter data will be of great importance in assessing the validity of current consensus forecasts. While recent weakness does not necessarily confirm an impending slowdown in 2018, it does require diligence on the part of the investors as risks to growth forecasts have increased to some degree.

Sources: Bloomberg LP, BCA Research, Capital Economics
Disclaimer: The views expressed are the opinions of the writer and, while believed reliable, may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.

Post-Irma, BVI financial sector propping up struggling territory

Traveling to the British Virgin Islands for the first time since the territory was devasted by Hurricane Irma last September is an eye-opening experience for those familiar with what was once a flourishing, high-end tourism destination.

Where dozens of taxis used to await incoming passengers from the main airport on St. Thomas, United States Virgin Islands, only five were present on March 31. And while the waters between St. Thomas and Tortola, BVI, used to be bustling with yachts, speed boats, and other vessels, only a few ferries traversed the ocean on that day.

Tourism data from 2017 reflects the relatively quiet, somber atmosphere.

According to BVI Premier Orlando Smith’s 2018 budget address given in March, the total number of visitors declined by 33 percent from 2016 to 2017, cruisers declined by 41 percent, day trippers declined by 33 percent, and overnight visitors declined by 18 percent. Smith said the 2017 totals were roughly equivalent to 2013 numbers.

The premier added that daily hotel occupancy declined from about 2,700 rooms before the storm to 336 as of March 1, and the number of charter and bareboat yacht berths at sea declined from 3,800 pre-storm to 1,584 as of March 1.

People in the territory are quick to talk about how things haven’t been the same since Irma.

“We have a long, long way to go,” said BVI resident Julian Willock, a member of the territory’s opposition Virgin Islands Party. “We are open for business – schools are open, courts are open, ferries are running again – but we’re not back on our feet yet.”

Still, while the islands have struggled over the last seven-plus months, they have also avoided total economic catastrophe. This is largely due to a financial sector that barely skipped a beat, despite dealing with the most powerful storm ever recorded in the Caribbean.

Within days of Irma, the BVI Financial Services Commission announced that its online portal was back up and running, allowing firms to incorporate companies and make regulatory filings.

The territory’s major law firms were also able to evacuate their employees from the islands. Many of those employees came to Cayman on temporary work permits to continue carrying out BVI-related business.

“Our financial services business was built to allow people to do BVI business from anywhere in the world, and to continue business regardless of the physical conditions in this jurisdiction,” stated a Sept. 11 announcement from Elise Donovan, the head of the Hong Kong-based BVI House Asia. “BVI has proven success with, and continues to be the go-to jurisdiction for, Asian and Chinese foreign direct investment. More than 40 percent of BVI corporate vehicles are owned and used successfully by Asian business leaders and high net worth individuals.”

Financial data from the third quarter of 2017 shows that the BVI even experienced a slight uptick in company incorporations – the sector’s main service – with 7,621 companies forming in Q2 and 7,639 forming in Q3, when Irma struck. Data for Q4 of last year still has not been released.

The territory’s commercial court also continued operating throughout the immediate aftermath of Irma, though hearings took place at the Eastern Caribbean Supreme Court headquarters in St. Lucia. After several months, court finally reopened in the BVI in mid December – one of the reasons for the delay was because government did not insure the commercial court building, requiring some US$255,000 of “donations” from law firms to fund repairs there.

The steady performance of the financial services industry, which accounts for nearly two-thirds of the territory’s public budget, allowed government to keep revenue losses to a minimum.

“Thankfully the financial services industry was all able to engage their business continuity plans and could continue to operate remotely from abroad,” said Smith during his budget address. “We thank God that VIRRGIN – our business incorporations platform – remained intact to accommodate this and thereby ensure an important revenue stream for the territory at its most critical time.”

According to Smith, government’s revenue was about US$293 million last year, a decrease of some US$30 million from the year prior.

“This means that even with revenue from financial services performing well above expectation, we brought in thirty million dollars or 9.3 percent less than was budgeted,” Smith said. “This demonstrates the significant impact of the storms in the months following their landing.”

Despite the relatively small revenue dip, government will still have to borrow heavily to help fund an estimated US$722 infrastructure repairs and other recovery projects.

Government has begun borrowing, inking a US$65 million loan with the Caribbean Development Bank in March.

“It is time to get our livelihoods back on track. It is time for us to get on with the several projects and initiatives that are identified for each ministry in the loan agreement. And, it is time to weather proof our infrastructure and rebuild it in a way that offers some resiliency to unprecedented weather patterns,” BVI Premier Orlando Smith said when his government finalized the loan. “Today’s project launch signals that we are moving full steam ahead, and getting on with it, so that we can put this territory in a much better place tomorrow than it was yesterday, and is today.”

Government is looking to borrow about $400 million more, with the help of loan guarantees from the United Kingdom.

The subject of the loan guarantees was controversial due to the accompanying U.K. requirements In exchange, the U.K. government will establish an agency to monitor the BVI’s spending of that money, and will also conduct an audit of the territory’s public finances – and require reforms based on the results of that audit.

The requirements sparked outcry from some residents, with one opposition legislator even likening the U.K. mandates to “economic slavery.” A prominent billboard was installed downtown, reading, “We Virgin Islanders do not support the U.K. framework for the BVI recovery plan.”

Nevertheless, BVI Premier Orlando Smith maintained that the U.K. guarantees are vital because they will allow government to save tens of millions of dollars by borrowing at 1 percent interest rather than the higher rates that would be charged with non-guaranteed loans.

“It is time for the raw sewerage to stop running in our streets and ghuts [gutters]. It is time for us to build a stronger and more resilient electricity grid. It is time for us to restore our criminal justice system, including rebuilding accommodation for our judiciary,” Smith urged in a March speech in favor of taking the U.K. guarantees. “It is time for our prisoners housed in St. Lucia to be back at Balsam Ghut where they can be in touch with their families and friends. It is time to find shelter for those made homeless.”

Over the protests of the opposition and some in Smith’s own administration, government passed legislation at the end of March to accept the U.K.’s loan guarantees and accompanying requirements. Government is currently in discussions with potential creditors to borrow the funds.

Brexit, Silk Road and de-risking – the future of offshore centers

It is difficult to see a bright future for offshore financial centers amid media attacks, international tax information exchange, initiatives to curb cross-border profit shifting by multinational companies, anti-tax avoidance measures, transparency efforts that erode financial privacy and more extensive compliance rules.

There has been relentless pressure from international standard-setting bodies and onshore governments, which have made operating in the offshore world more onerous and expensive.

Yet, at the same time the world is filled with a growing number of increasingly wealthy people who lead complex multijurisdictional lives and more multinational companies with complex cross-border supply chains, who are as such key target clients for the offshore industry.

The rapid pace of regulatory change is not new to offshore centers, which are used to moving goalposts and unlevel playing fields in terms of the rules they are forced to follow.

Perhaps the most significant difference compared with previous decades of offshore evolution is the heightened level of media attention after the so-called “Panama Papers” and “Paradise Papers“ revelations.

For Dan Wise, head of litigation at Martin Kenney & Co., the Panama Papers leak, especially, caused a “media maelstrom” for his home jurisdiction, the BVI.

He says there is no doubt there was “a great deal of very bad behavior revealed by the Panama Papers.” But he points out as noteworthy that even though it involved “a less reputable player,” in the form of Panamanian law firm Mossack Fonseca, the data was available and could have been obtained through existing legal and judicial channels.

The Paradise Papers, based on information allegedly stolen in a cyber hack from offshore law firm Appleby, are much less dramatic, Wise said at the Offshore Alert conference in April in Miami.

“As far as I have seen, there has not been the same media maelstrom. It seems to me that it essentially revealed that rich sophisticated people engage in lawful tax avoidance advised and assisted by capable persons,” he said. “I would not see that as that remarkable.”

However, public opinion has clearly evolved. Helen Hatton, managing director at BDO Sator Regulatory Consulting in Jersey equated it to how attitudes have changed over time toward smoking in public spaces, like airplanes or restaurants.

“Public opinion changes and it has changed against us,” she said in another session at the Miami conference.

She believes that offshore centers are well placed to provide wealth management and other services, but they will have to do so “in a manner that is acceptable to the rest of the world.”

This involves finding a “zone of tolerance” in a regulatory world that is constantly changing.

To survive, she argued, OFCs must have the ability to meet international standards, whether they are set by the Basel Committee on Banking Supervision, by the International Association of Insurance Supervisors, the International Organisation of Securities Commissions, the Financial Action Task Force for anti-money laundering or the Organisation for Economic Co-operation and Development for tax issues.

Offshore centers must have the capacity to conduct the legal analysis and fill in the necessary forms. “[OFCs] have to get good at passing exams,” Hatton said.

They must also have the capacity for international cooperation by having sufficient staff and budget to commit regulators and law enforcement.

“For many jurisdictions that means trebling the number of public servants in these institutions,” she noted.

Most importantly offshore centers will have to adapt their service offering.

Hatton said secrecy and tax dodging are dead and have been for 20 years. Small financial centers now have to compete on skills, a tall order when the competitors are London, New York, Frankfurt or Luxembourg.

Some jurisdictions may not be prepared to accept the necessary influx of expatriate workers or to give up ownership of local businesses. This can be respected, Hatton said, but it will not build an international financial center that attracts complex international clients on the basis of skills.

The financial centers that open up to foreign workers, in turn, have to update their infrastructure in terms of properties and transport as well as high-quality schools.

At the same time, regulatory pressures focus on the provision of substance.

The tax residency of any entity is generally recognized on the basis of where the management is based or where its economic activity takes place. Hatton said, “A brass plate won’t do it.”

Rather than serving 4,000 companies with only six people, substance will be reflected in a larger number of people serving fewer companies in the top financial centers. This requires higher service fees which in turn elevates the value of the business.

“Jersey trust companies sell for 11 times revenue,” she noted.

Hatton believes the OECD pressure has culminated in a watershed moment, where some offshore centers find it difficult to comply because they lack the critical mass in terms of the size of the industry and capacity to comply.

Some OFCs will simply give up. The Seychelles recently took that step to focus on tourism and Malta relinquished OFC status to become a member of the European Union.

Hatton predicts that “fewer jurisdictions of higher quality are going to have a bigger slice of what globally is a smaller cake.”

The cake is getting smaller, because the growing compliance burden not only leads to a consolidation of offshore centers, it also reduces the number of clients that have enough money to make wealth planning that complies with international standards commercially viable for them.

The number of high net worth individuals who have liquid asset of $1 million or more may be growing. In 2016, more than half of the world’s high net worth individuals came from the U.S., Japan and Germany. In total there were more than 16.5 million HNWI worth $16.35 trillion.

But it is really only the ultra-high net worth individuals, who have liquid assets of more than $30 million, and the cross-border conglomerates that are the target markets for OFCs, Hatton said.

However, high regulatory hurdles will also create new openings. Banks are de-risking as they are more reluctant to deal with the type of clients and jurisdictions that attract costly compliance.

Hatton said, “That is a great opportunity for our jurisdictions who understand complex cross-border structures.”

Wise sees other opportunities in Asia, especially for firms in the BVI and Cayman because of the effort that has been made to establish a footprint in Hong Kong and the People’s Republic of China.

While it is already a significant part of the business, the planned construction of the New Silk Road, a large-scale communications and transportation network including new roads and rail to support Chinese exports, is a $1.5 trillion project that will rely largely on funds raised from private investors.

“I foresee and hope that a significant part of that business will come through BVI companies, probably acting in conjunction with Cayman companies,” Wise said.

Geopolitical events like the British decision to leave the European Union will also have ramifications for offshore financial centers such as those linked to the U.K.

Wise believes the EU is going to be fiercer on the British territories after Brexit.

“I think, however, that the straight end of the business in places like Cayman, the BVI, Channel Islands and Bermuda working in conjunction with what is still going to be a very important financial center, the City of London, is going to mean that these tax planning services continue to be a big part of the offering from these territories.”

Fellow panelist Arthur VanDesande, CEO of Concorde Associates, noted that although London is rumored to lose some of its financial services workforce to continental Europe, the EU will drive business the other way if it squeezes too much and creates too many regulatory hurdles.

“OFCs, especially the Crown dependencies will be invigorated by Brexit. After everything has settled down, clients will rethink tax rates, legal systems etc.”

Hatton agreed that changing patterns can provide new opportunities and said that the Crown dependencies had “an enormous lift in business since the Brexit decision.”

The uncertainty present in London does not exist in Jersey or Guernsey, which were never part of the EU. The Channel Islands’ existing relationships with the EU are treaty-based and well-known.

“If you are setting up funds, strategies or structures which have a four or five-year life span, are you setting up in London where you have no idea where the position will come down after Brexit or will you set it up in Jersey or Guernsey where those relationships are already clear?” she asked.

The normalization of market volatility

The recent sharp equities correction was merely a return to more normal levels of market volatility, compared to the abnormally low levels seen last year. - Photo: Bloomberg

Andrew Baron, Butterfield

The return of market volatility over the first four months of 2018 has come at an interesting time in the global economic cycle. Over the last several years, and more particularly in 2017, volatility across a wide range of financial assets was extremely low. One commonly used indicator of equities market volatility, the Vix Index, averaged just above 11 in 2017. The figure 11 can be used as a proxy for a percentage annual volatility in stocks. So, in other words, if the Vix Index sits at 11, it means investors view the potential for upward and downward movement in stock prices to be around 11 percent. At no point in 2017 did the Vix Index close above 16.1. The essential problem with the market’s assumption of potential volatility last year is that it was very far below the actual historical volatility of equities, which have averaged approximately 16 percent over a very long time period, depending on which index one chooses to measure.

The unlimited liquidity provided by the developed world’s central banks, the likes of which the world has never seen, drove most of the low volatility phenomenon. Put simply, the Federal Reserve, the European Central Bank and the Bank of Japan bond buying programs were specifically aimed at forcing investors into risky assets and away from very low yielding “risk free” government bonds. Ultra-low or negative interest rates across the developed economies, coupled with these quantitative easing, or “QE”, programs that removed trillions of government bonds from the market, did not just suppress interest rates, they drove cross-border flows to other return-producing assets. This phenomenon contributed to the directionally positive markets for risky assets (equities, high yield bonds, etc.) that we have seen over the last five years, culminating in 2017, where equities rose on nearly every trading day.

Some of this excess liquidity is now being withdrawn, mostly via the U.S. Federal Reserve’s resolve to gradually reduce its asset purchases in order to shrink its oversized balance sheet. Financial markets, always forward-looking, are also beginning to handicap the end to the ECB’s bond purchase program, which by some accounts may start to shrink later this year. The reduction in central bank support is undoubtedly a fundamental change to the investment horizon, but it is important to put that change into perspective. Interest rates in the developed economies, although rising in the U.S., have not really changed in Europe and Japan and are still historically very low in the U.S. and elsewhere. Rates markets, in short, are still supportive of economic growth. The scale of any reduction in central bank purchases is also small in comparison to the sheer size of their bloated balance sheets. Any proper reduction in central bank bond holdings is measured in trillions, not tens of billions, and is many, many years from being complete.

There are also fundamentally positive reasons that central bank liquidity is being withdrawn. One should expect to see emergency stimulus being withdrawn at a pace appropriate to the global economy’s ability to continue on a self-sustaining growth path. This is just what is happening in the U.S. and what is being planned for Europe. Economic projections are for very healthy growth in 2018, both globally and in the U.S., which is still the largest economy in the world. The forecast for employment, again with particular emphasis on the U.S., is for continued positive momentum both in the quantity of jobs and in earnings. Corporate earnings are very strong and company guidance for 2018 has been pointing towards operating earnings growth figures we have not seen in many years. The U.S. economy has more recently been further supported by a highly stimulative tax regime for corporations and other fiscal measures. It would appear that Germany is also loosening its fiscal purse strings, although not in the massively under-funded fashion of the U.S. stimulus; this is Germany after all. The inflation forecast, whilst being materially higher than the past several years, is not for inflation to run rampant either globally or in the U.S.. Despite the gradual withdrawal of monetary stimulus, macroeconomic conditions do not suggest an imminent end to the business cycle, nor recession on the visible horizon.

Without the spectre of global recession on the medium-term horizon, increased two-way trading in equities – they actually do both rise and fall – does present some opportunities going forward. In addition to reasonable growth and earnings in developed market equities being supportive of looking through volatility and remaining invested there, emerging market equities outperformed substantially and managed small positive returns over the previous quarter, in U.S. dollar terms. While it is tempting to associate good emerging markets performance with good commodities performance, the reality is that their reliance on commodities has fallen and technology now represents 28 percent of the emerging market equities index. Investing in the emerging markets is no longer a bet on commodity price strength. Other historical myths regarding emerging markets exist as well. Emerging economies are still believed to be some of the most exposed to increased protectionism like those presently threatened by the U.S.. More recently, emerging markets have ignored this threat and for good reason. Most countries, save Mexico, do not derive the majority of their trade from the United States anymore. Indeed, China’s stated economic policies are specifically targeted at reducing their export reliance on the United States, with much greater emphasis on trade routes through Asia to Europe (overland) and intra-Asia (via sea). We believe that relative performance cycles are generally long and that we are only part way through this period of emerging market outperformance.

In summary, while the recent equities correction was notably sharp, when we look at the last several months in a historical context, what we have seen is a return to more normal levels of market volatility, compared to the abnormally low levels seen last year and a return to a more normalised interest rate environment. Investors would do well to follow the economic and earnings strength in the data and remember that higher equities volatility is a natural state of equilibrium, not a fear-inducing trigger to sell.

The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. The Bank accepts no liability for errors or actions taken on the basis of this information.

Not for love or money

Simone Proctor

Simone Proctor

The next time you meet your Money Laundering Reporting Officers (MLRO), spend a moment to chat with them and to fully understand the demands of their role, the conditions under which they work, and try to assess how enviable or not, their job is. Some would say their role is thankless but essential.

There has been a recent flurry of activity around the appointment of MLROs and their deputies. Recent changes to the Cayman Islands Proceeds of Crime Law, 2017 (POCL) has clarified that persons conducting relevant financial business, whether a non-profit or an unregulated investment fund vehicle, are now required to appoint an MLRO, and an alternate, and to have a AML/CFT compliance program in place.

It should come as no surprised to discover that the Cayman Islands Monetary Authority has already been paying keen attention to the suitability of MLROs appointed by its licensees, recommending changes where it considers there is a need. It is anticipated that the Department for Commerce and Investments will ultimately do the same, once its enforcement powers over certain members of the Designated Non-Financial Businesses and Professions and Non-Profit sector, is enlisted.

Under section 136 of the POCL, a person commits an offense if he does not make the “required disclosure” to the FRA or his MLRO or deputy, of a suspicion or actual knowledge of terrorist financing or money laundering that has come to his attention in the course of doing relevant financial business. Section 137 sets out the circumstances in which an MLRO commits an offense for failures to make appropriate disclosures. At the serious end of the stick, persons (including your MLRO) could find him or herself imprisoned for five years so there are real consequences.

Information disclosed to a country’s financial intelligence unit (FIU) or in the case of the Cayman Islands, the Financial Reporting Authority (FRA), often provides an invaluable tool with which various forms of financial crimes can be fought.

But for this to be the case, an MLRO must ask the right questions and provide useful information on the suspicious activity report (SAR). Put another way, it is essential that the MLRO understands the intricacies and vulnerabilities of the product, service, or activity that comprises the relevant financial business that they oversee, so that intelligent questions could be asked and relevant information gathered, accordingly.

In articulating suspicion of a crime to the FRA or any FIU, or indeed in articulating actual knowledge of such crime, the information provided in a SAR should be easy to read, clearly and logically set out.

At minimum, and extrapolating on section 136 of the POCL, the following details should be provided to your MLRO and by the MLRO to the FRA should it consider a report appropriate:

  • Why you are suspicious or how you did you come to have knowledge?
  • Who is involved?  Give names and sufficient information to identify those involved
  • How are they involved? Provide specific information on the roles of those believed to be involved, e.g., trustee; investor; settlor; donor; beneficiary; property owner; real estate agent, banker, investment manager; country coordinator for charity; forced labor.
  • What is the criminal/terrorist property? State a type if possible, e.g., gift or store cards; diamonds; expensive watches; gold coins; cash; real estate; trust funds; cryptocurrency, shares, vessels, motor vehicles; drugs; watermelons; software.
  • What is the value of the criminal/terrorist property? Provide details where known.
  • Where is the criminal/terrorist property? Give the location last known to you.
  • When did the circumstances arise or when are the circumstances planned to happen?
  • How did the circumstances arise?  For example, we know that what may be suspicious in the insurance sector, may not be cause for concern in the oil and gas sector, or vice versa.

Every MLRO, whether appointed in any organization licensed by CIMA or within a church or charity, must understand the profile of its customers, and the nature and purpose of any transaction. In the absence of this, obvious matters that should be reported may be overlooked, and routine operational issues may raise an unwarranted red flag.

A properly prepared SAR can help the FRA to develop an initial picture of criminal activity or intent. Alternatively, it may provide additional information to a picture that was already developing through, the analysis of previous SARS received, or information shared via other FIUs and international agencies.

There is an open discussion as to whether documents should be appended to the SAR. Where the suspicious activity report is properly documented, it would seem unnecessary to append documents to the report.

Indeed, certain jurisdictions like the U.K. specifically instruct that no documents be submitted along with the SAR. An additional consideration is that FIUs, including the FRA, are equipped with the statutory authority to request further particulars and documents from the filers of SARs. It may be in the best interest of all involved to ensure that any supporting documents provided to the FRA, is properly provided in response to a lawful request, and not volunteered, potentially in breach of other confidentiality obligations.

Regardless of whether the incumbent is an employee or an independent third-party service provider, those taking up the role as an MLRO should understand their core function and legal duties, and possess or acquire, the relevant know how and correct levels of access to information, in order to function effectively.

Training is critical since not every unusual activity is suspicious, and not every suspicious activity is unusual. Context is important, and vigilance will only bear fruit if staff and MLRO alike fully understand the nature and purpose of transactions they are involved in, know where to look and how to interpret what they are seeing or presented with.

Where an outsourced MLRO service is utilized, it is essential that clients satisfy themselves that the service provider understands the intricacies of the relevant financial business, or the financial product, that they offer.

An MLRO must have the ability, and inclination, to ask the difficult questions at the highest levels in any organization, no matter how exhausting or unappealing it may appear. It is unacceptable for lip service to be paid to the statutory requirement to have a nominated officer, by appointing a staff member into the role, but with no autonomy or real access to pertinent information, and with a substantial concern about reprisal.

This may be particularly relevant in organizations that have very strong personalities in senior management positions, and even in law-firm settings where the MLRO is often not an attorney and may be subject to direct line management of a senior partner, who may also be involved in the particular transaction.

The importance of the MLRO’s role cannot be overstated. They have a leading role to play in our efforts to prevent and detect money laundering and to counter terrorist financing. The holders of this role should be empowered, properly trained and supported by the senior management in the execution of their duties.

MLROs are required to be increasingly vigilant in an age of rapidly advancing financial technology and require access to similarly advanced technology to truly keep up. What should be trending is a commitment and willingness to provide the tools these professionals need to do their jobs effectively.

Simone Proctor is a regulatory and listings consultant and co-founder of Emerold Grace LTD, a regulatory consulting firm in the Cayman Islands.

UK pressure causing water companies to leave Cayman

A Thames Water publication that explains the company’s corporate structure states the company’s Cayman entities were established in 2007 to raise funds, and to work around U.K. regulations that were in place at the time. - Photo: Thames Water

The “tax haven” stigma has come back to bite Cayman again, this time in the form of recent announcements by a handful of United Kingdom water companies that they will be shutting down their Cayman-based subsidiaries.

The shutdowns are in response to demands for more transparency made by U.K. regulatory and government officials, who have criticized the companies’ use of “opaque financial structures.”

The firms, for their part, have maintained that their usage of Cayman entities is for legitimate reasons, and have pointed out that the use of such financial structures has always been publicly available information.

Cayman Finance, the organization that promotes the territory’s financial services industry, also has come to the defense of the water companies, stating that their use of Cayman has helped channel investment into the U.K.

“Investment in U.K. infrastructure through Cayman-domiciled investment vehicles is an excellent example of how the Cayman Islands is an extender of value for Great Britain, channeling billions of dollars of foreign investment into the country,” Cayman Finance stated. “Water and other major infrastructure companies choose the Cayman Islands to access capital from international investors, because Cayman is a premier global financial hub, efficiently connecting law abiding users and providers of investment capital and financing around the world.”

Nevertheless, with mounting pressure in the U.K. – members of the country’s left-leaning Labour party have reportedly proposed nationalizing the companies – at least four water suppliers intend to withdraw from Cayman this year.

The issue first made headlines last summer when the Daily Mail’s business publication, This is Money, ran an article titled “Thames Water turns its back on Cayman Islands after paying no corporation tax for a decade,” reporting that Thames was considering closing two of its Cayman-based subsidiaries, Thames Water Utilities Cayman Finance Ltd. and Thames Water Utilities Cayman Finance Holdings.

This is Money stated that the closures could be part of an overall effort to repair the reputation of the company, which was fined 1 million pounds (about US$1.3 million) in January 2016 for polluting the Grand Union canal with sewage from a faulty treatment plant – the latest of 106 convictions for environmental offenses committed by Thames Water, according to the BBC.

Thames Water, which serves about 25 percent of the population in England and Wales, initially disputed the report.

“We haven’t turned our back on the Cayman; we have a couple registered entities there,” a Thames spokesman told the Cayman Compass at the time, adding that the company is reconsidering its corporate structure as a part of an overall review by its new CEO. “They may open more [entities] in the Caymans or they may close it down.”

But in November, Thames acknowledged that it is indeed shuttering its Cayman entities, saying that they are no longer necessary for the company’s operations. A publication that explains the company’s corporate structure states that they were established in 2007 to raise funds, and to work around U.K. regulations that were in place at the time.

“In 2007, it was not possible for a U.K. company to issue public bonds to repay debt provided by investors to help finance its acquisition,” the publication states. “These restrictions have now largely been amended or removed.”

Around that time, the country’s fifth-largest water provider, Yorkshire Water, also announced that it too would be closing its Cayman subsidiaries due to issues of “public concern.”

“There is a real challenge to the water industry’s legitimacy at the moment, and complex financial structures only add to public concern as to the way in which companies are financed,” stated Yorkshire Director of Finance Liz Barber in an October press release.

“We have some offshore companies in our structure which are no longer necessary or appropriate and we’re taking steps to remove these as soon as possible.”

In December, Thames again made headlines when the Daily Mail reported it had issued bonds from Cayman despite announcing that it would be withdrawing from the jurisdiction.

In a statement sent to the Cayman Compass, Thames officials stated at the time that they still plan to shutter the Cayman entities and establish a holding company in the U.K. in about six months. In the meantime, Thames may continue to use the subsidiaries to issue bonds, according to the officials.

Thames Finance Director Brandon Rennet explained that the Cayman entities will still be used because, “If we wanted to issue it through another vehicle, we would need the bondholders’ permission, which would take time.”

Even though restructuring Thames could cost in the “single-digit millions” of pounds, Thames stated that it is making the move in part because the Cayman entities have become “toxic.”

“Even if it’s entirely symbolic, there’s a point when you have to say it’s just time to reverse the noise,” Thames CEO Steve Robertson stated last December.

But those statements and promises did not stop government from increasing its scrutiny on the industry.

In January, Environment Secretary Michael Gove wrote an open letter to Jonson Cox, the chairman of the U.K. Water Services Regulation Authority (Ofwat), asking him to investigate the issue of water companies having “opaque” financial structures.

“The water sector has rightly come under even closer scrutiny in recent months with growing concern about the behaviour of water companies,” Gove stated in the letter. “The use by some water companies of opaque financial structures based in tax havens and high gearing is deeply concerning.”

Cox responded on behalf of the regulator earlier this month, telling Gove that “most” U.K. water companies have pledged to remove their Cayman-registered entities.

That looks to be the case, as two more water companies have recently announced their intention to close Cayman subsidiaries.

On April 9, Anglian Water filed a petition in the Grand Court to reduce the capital in its Cayman subsidiary from £300,000,000 ($348,000,000) to £1 ($1.16), with the goal of removing the subsidiary from its corporate structure.

“Ofwat and the U.K. Government have expressed a strong desire for the Anglian Water Group to remove this Cayman Islands-incorporated company from its corporate structure as soon as possible (the company being the only Cayman Islands incorporated company in the Anglian Water Group),” Anglian states in its Grand Court petition, which is posted on the financial services site OffshoreAlert. “The transaction is intended to effect that removal.”

Anglian, which operates in the East of England, explains in its petition that the U.K. regulator and government have made “certain comments” on the complexity of the corporate structures built by the country’s water companies, referencing the letter written by Environment Secretary Gove to the regulator’s chairman, Cox.

Four days later, Southern Water stated that it has been working to close its subsidiary finance company in Cayman since late 2017.

“Southern Water and all Southern Water group companies pay taxes in the U.K. and have never offshored their tax obligations,” stated Southern Water, which provides water and wastewater treatment services across Kent, Sussex, Hampshire and the Isle of Wight. “However, we know that our subsidiary financing company in the Cayman Islands contributes to misconceptions about our business practices and this is why we are working towards closure by the year end.”

The announcement of the Cayman closures, as well as other intended reforms, seems to have satisfied government. Gove wrote Cox again on April 18, congratulating the regulator on his work.

Gove also warned that government may act if the water companies do not follow through on their promises.

“I therefore hope that you can implement your proposals in full without the need for government intervention or legislation,” the legislator stated. “However, if you find that water companies are not fully and promptly cooperating with your proposals, we are ready to revisit how government can give Ofwat stronger powers to amend licences, through legislation if necessary.

“Moreover, if you find there is any need for government intervention or legislation beyond your current proposals, we will carefully consider any further recommendations.”

Rapid technological advances outpace risk management

Risk management processes are not sufficiently taking account of the business risks associated the rapid adoption of emerging technologies, according to a report by insurance broker Marsh and RIMS, the risk management society.

The study of the level of knowledge among risk professionals about technology innovation, found that 59 percent of survey respondents said their organizations are currently using or exploring the use of the Internet of Things (IoT) systems; 47 percent said their companies are looking into artificial intelligence (AI), although only 12 percent knew what it was being used for; and 24 percent are investigating the business use of blockchain.

Despite these trends, only 14 percent strongly believe they have a clear process in place for addressing disruptive technology risks and nearly half said there was no process at all.

The annual report “Maintaining Relevance Amid Technology Disruption” highlighted that most risk professionals would benefit from understanding how digitization changes the ways of doing business and how companies interact with their customers.

When it comes to their organization being “digital,” most risk managers tend to think mainly of operational improvements, such as automating core processes or the ability to deliver goods faster. But few consider the resulting growth opportunities and new ways of doing business and as a result do not fully grasp their organization’s risk profile.

“Emerging technologies like AI, blockchain, and IoT are fast becoming the new normal, yet risk management is not keeping up,” said Brian Elowe, chief client officer, North America, Marsh.

“Only by asking questions and understanding the underlying technologies and their uses throughout the organization can risk professionals truly appreciate their risks and respond accordingly.”

About a third of survey respondents whose organization’s have cross-function risk committees said they discuss disruptive technologies at every meeting.

In their own view, most risk executives regard their role as supporting and promoting innovation or acting as “a needed break.” Only 11 percent believe risk management has no effect or slows the process altogether.

The report notes that risk managers generally do not need to understand every new technology in detail but they should feel comfortable talking to experts to understand which technologies are used in their organizations and how they potentially affect risk management.

“Risk management professionals can add tremendous value and insight, supporting organizations’ ability to make strategic decisions regarding disruptive technology,” said Carol Fox, vice president, strategic initiatives, RIMS. “Engaging in innovation that impacts our companies, customers, industries, and even the practice of risk management itself is a giant first step. While risk professionals do not need to be ‘experts’ in the intricacies of these technologies, they can certainly advance the performance benefits that each new technology brings.”

In other technology areas risk professionals have developed a deeper understanding of the risks. More than three-quarters of survey respondents for instance noted that their company understands how legal liability from cyber risks would affect them, and how their insurance would apply. Only less than 10 percent said their organization did not understand these issues.

The focus on cyber risk is also reflected in 62 percent of respondents stating that cyber is among their organization’s top 5 risks overall.

The Excellence report, Maintaining Relevance Amid Technology Disruption, is based on 450 responses to an online survey and a series of focus groups with leading risk executives in January and February 2018.

Regulating cryptocurrencies

Cryptocurrencies like bitcoin, blockchain technology and initial coin offerings (ICOs) have been the buzzwords in the tech sphere for the past couple of years.

With a rapid speculative bubble developing around bitcoin, the topics have not only transcended the limited space of the technophile but also created a mainstream investment buzz.

Yet public knowledge about blockchain, the technology on which cryptocurrencies are based, and its potential uses and risks is still limited.

Opinions are divided as to how successful blockchain technology and cryptocurrencies will be in the long run and if practical, real-world applications will live up to the hype.

Jude Scott, the chief executive officer of Cayman Finance, differentiates between cryptocurrency and the underlying blockchain, also known as distributed ledger technology.

“The technology itself is absolutely amazing, it is revolutionizing and will fully revolutionize the financial services industry,” he told the Caymanian Bar association in April at a CBA seminar on the new technology.

Scott believes cryptocurrencies will ultimately become a separate derivative asset class that hedge funds and other investors will invest in. However, he does not think cryptocurrencies will ever fully replace regular, government-issued fiat currencies.

The head of Cayman’s financial services association said some larger banks are currently using cryptocurrencies internally for cross-border transfer as a temporary “stop gap.” In the future this will be replaced by peer-to-peer transactions to take full advantage of low costs, no intermediaries and the borderless nature of the technology.

The next big use will be in closed groups, Scott predicts.

“This could be islandwide in Cayman, with something like a Caycoin that can be used to pay for services locally,” he says.

The hypothetical Caycoin would pay electronically for services in different industries like any other currency, he said. Alternatively, its use could be confined to specific industries like healthcare, where tokens or coins could be exchanged for value in a specific sector of the economy.


The current limitations of cryptocurrencies and blockchain technology are based on their anonymous and unregulated nature, which makes it difficult to enforce regular compliance, like anti-money laundering and know-your-customer measures. It also creates uncertainty for investors who do not know if and when regulators are going to clamp down on the new technologies.

Scott said regulation attempts have come in waves. In a first wave, countries tried to apply existing legislation to the new technologies. In the current second wave, countries are actively adopting the technologies and attempting to adjust legislation and regulations.

Bermuda, for instance, is proposing standalone legislation that will introduce a statutory framework for the offering of digital assets, including legislation for virtual currency businesses, a digital identification platform and a virtual currency exchange.

Scott believes new legislation alone will not be enough.

“I think we have to get to Wave 3, where we accept that aspects of the technology do need to change,” Scott said. “Our regulation cannot work in this current environment because it is based on regulating transactions through intermediaries.”

Changes could include having a single point of entry requiring certified identification to use cryptocurrencies. This would solve a number of problems from a regulatory and enforcement standpoint and create an attachment point, which also solves the issue of taxation, the Cayman Finance chief executive said.

There is so far no international consensus on the prudent regulation of cryptocurrencies. They have been treated as a commodity, a currency, a security and even as legal tender. Meanwhile, central banks are trying to create a central bank digital asset.

Cayman’s government has not yet made a definitive statement as to how it will designate cryptocurrencies under the law. However, the Cayman Islands Monetary Authority has created a working group with members from government and the private sector that has made certain recommendations for government’s consideration, said Rayford Britton, CIMA’s deputy head of policy.

What is clear, said Britton, is that anti-money laundering standards apply.

“Financial services providers that touch virtual currencies should make an assessment of the product and the activity against the Proceeds of Crime Law and the Money Laundering Regulations,” he said.

Initial coin offerings

In April, the Cayman Islands Monetary Authority cautioned investors over the potential risks of investments in initial coin offerings, and all forms of virtual currency.

ICOs are a type of fundraising in which a startup company creates new virtual coins or tokens and sells them to the public to raise capital.

Cayman’s financial regulator said while initial coin offerings promise high returns, they also have a high potential for financial loss and fraud.

In contrast to a share offering, ICO’s do not provide equity or ownership rights in a company.

Harneys partner Matt Taber likened the sale of coins or tokens in an ICO to elements of a traditional Kickstarter campaign, in which investors help fund the development of consumer product and in return will be the first recipients of the product together with other perks.

In an ICO fundraising, tokens are sold on a blockchain, most commonly Ethereum. In many cases, the tokens represent future access to a company’s product or service and are not designed as investments.

As a result, these utility tokens could be exempt from securities regulations. However, the price explosion and increasing tradability of bitcoin and Ethereum has attracted many new investors and bad actors.

In its advisory, CIMA warned that certain ICOs may be in breach of regulations which could cause investors to lose all their money. There is also the risk of incomplete information, exaggerated expected returns, price volatility, limited opportunities to resell the virtual currency, hacking attacks, fraud and limited regulatory protection.

In some documented cases, the regulator said, money raised through an ICO disappeared without a trace.

Echoing CIMA’s concerns, Samuel Banks, a partner at Appleby, noted that what started out as a method of raising capital for start-ups without giving up control has now increasingly given rise to fraud.

Speaking at the Caymanian Bar Association seminar, he said the days of the utility token, which gives access to a network or certain functions that “may or may not ever eventualize” are almost gone.

Instead, he believes, we will see a rise in the sale of securities tokens, tradable assets that represent a share in a company.

The security token model would raise capital from accredited investors by making a pitch directly to the market and bypassing venture capital. It promises immediate capital for the fundraisers and immediate liquidity for investors who would be able to sell on their security tokens to other accredited investors.

However, for that to happen, there has to be an element of identity verification, Banks said. “KYC is a necessary impediment.”

As a foundation of regulation, he suggested a local infrastructure, for example at the company registry, that would allow for the issuance of physical and digital identification.

‘Med Tech’: Spending as fast as you can just to keep up

Magnetic resonance imaging machines are among the largest tech investments for hospitals. - Photo: General Electric

The April classified advertisement is a little scary, seeking a “systems engineer,” listing a dozen profoundly technical skills an applicant should have in order to gain the $65,000-$77,000 position at the Health Services Authority.

Managing patient and doctor records; databases; pharmacies and labs; an inventory of assets from furnishings to equipment and medicines; financial accounting; labor; scheduling; kitchens; laundry; a vehicle pool; repair and maintenance of an enormous physical plant and ensuring uninterrupted power supplies – and doing it for not just the Cayman Islands Hospital, but also the Brac’s Faith Hospital, the Little Cayman Clinic, five district health centers, a dental clinic and an eye clinic, means an HSA “systems engineer” has to navigate a host of complex technologies.

The ad mandates an “in-depth technical knowledge of managing server computing in an enterprise environment of at least 400 PCs,” and requires a candidate to have a university degree, eight years’ post-graduate experience and industry certification in at least two areas: “Cisco networking, Microsoft systems, IP telephony and storage systems engineering.”

And lest applicants take these antecedents too lightly, the ad says they “must have above-average interpersonal skills.”

The technology making modern medicine possible is not just systems management, but, of course, encompasses continually evolving, increasingly sophisticated and often wildly expensive equipment – for diagnostics, for operating theaters, for critical treatments like dialysis, and for relatively standard procedures like imaging, IV infusions and blood pressure.

Dr. Yaron Rado, radiologist and chairman of the board at CTMH Doctors Hospital, says it costs “millions” annually to stay abreast of the technology driving both healthcare and marketplace competition.

“We do a lot of everything to stay abreast,” he says. For example, when he and his group of doctors and independent investors bought the hospital for approximately $30 million in mid-March 2016 – after four years of due diligence and planning – “every patient file was on paper, and we invested more than $1 million in ‘Medworx,’” a high-speed server infrastructure for patient and materials management.

“It was a lot of work, not just in terms of money, but the time of staff. We are planning to upgrade to a 10-gigabit network,” he says, adding “we run a full antivirus and high-security firewall system to protect our patient’s data,” acknowledging that “hospitals are in focus to phish data from and we have a proactive program to undermine the threat.”

To upgrade accounting systems, Dr. Rado says, required a team of accountants working “double time” for “over a month.”

The task, he says, was “immense, to change the infrastructure and focus.”

At East End’s Health City Cayman Islands, Director of Business Development Shomari Scott says “the hospital is run by several systems in various areas. There are bespoke technological solutions that run the medical records and billing departments, for example, as well as appointments and other administrative functions.”

He pointed to computer control systems making the hospital itself a “smart building with regard to energy consumption, and several conservation features,” offering a broad concept of integrated networks: “The vision of Health City is to become a medical ecosystem, in that we will have many integrated touch points.”

Looking specifically at medical technology is an entirely separate job, largely handled at Doctors Hospital by an eight-member Digital Transformation Committee. The panel’s decisions determine not only levels of investment, but – for years into the future – the direction the hospital will take.

“We are looking at where we are and what is right for us,” Dr. Rado says, from the 2015 $5 million purchase of a 3 Tesla, 3-D magnetic resonance imaging machine to a ”Genius” 3-D digital mammography machine – costing between $400,000 and $450,000 and using half of the radiation of more traditional machines – to simply ensuring stable online connections between patients, their doctors and hospital administration.

Health City clinical director, chief cardiothoracic and vascular surgeon Dr. Binoy Chattuparambil says, “It is vital that every hospital stays up-to-date in all of the medical specialties that they offer. It is very much the same for us.

“Major expansions and acquisitions are built into our capital-expenditure budget, which is developed via a process with the senior executive team and the doctors in which they project which new technology and procedures they intend on offering in the coming year based on our strategic plans.”

Those plans are shaped by Health City’s mission as an advanced tertiary-care center, designed for multinational medical tourism “so we have always had to have the technology and medical expertise on board to meet that expectation,” Dr. Chattuparambil says.

While the CTMH Doctors Hospital committee reviews purchases of equipment, Dr. Rado goes out and finds it. As a radiologist, his focus is mammography, both 2D and digital 3-D, CT scanning, MRI and interventional radiology; though, according to his Doctors Hospital profile, “he strives to implement the latest and most advanced state-of-the-art technology in the hospital.”

“Conventions,” he says. “I’m a radiologist, and I attend conventions.” Annually, he goes to “one big one in Vienna,” the European Congress of Radiology, and “the biggest one” in Chicago.

“I see 50,000 radiologists, and 250,000 others” in Chicago, he says, studying computed radiography, computed tomography, magnetic resonance imaging, ultrasound, nuclear medicine and angiography – and newer technologies such as PET/CT, diffusion weighted MR, cardiac CT, and virtual colonoscopy.

In East End, the roster of equipment and technology is startling, an April 24 press release, marking the hospital’s fourth anniversary, offers an indicative list.

Last year, it says, “the hospital became the Caribbean’s only regional center for an advanced form of life support called extra corporeal membrane oxygenation,” essentially an artificial respiratory and circulatory machine, “allowing the patient’s organs to rest while natural healing of the affected area takes place.”

Health City doctors performed the Caribbean’s first “cryoablation,” treating atrial fibrillation by “introduc[ing] a deflated cryoballoon into the heart,” then circulating a liquid, which cools and dilates the balloon, and then freezes whichever structure it is put into.

Also in 2017, the release said, Health City was the first healthcare facility in the Caribbean, Central and South America to implant a cardiac contractility modulation device for heart failure.

“Currently offered in the U.S. on a clinical-trial basis only, CCM does not affect cardiac rhythm directly. Rather, the aim is to enhance the heart’s natural contraction sustainably over long periods of time,” the release says.

“This is the first time we have introduced this device in the entire Caribbean,” said interventional cardiologist and electrophysiologist Dr. Ravi Kishore. “In the U.S., it’s an investigational device so it’s not routinely implanted in patients in the U.S. and none has been implanted in Central America and South America.” Shomari Scott adds that the procedure is approved in Europe and Australia, so is not “experimental.”

Elsewhere, he says, Health City orthopaedic surgeons used a telescoping magnetic nail device in the region’s first limb-lengthening surgery, making it “less invasive and painful for the patient.”

“We are continually striving to improve both the outcomes and the experience for our patients through medical innovation and technology,” Scott says.

CTMH Doctors Hospital’s 20-plus doctors and medical staff also keep up with industry journals as “part of their continuing medical education, something we need to be part of,” Dr. Rado says.

But it all requires “a lot of investment.” He is reluctant to specify what the hospital spends annually, saying only “it’s millions.”

“Medicine,” he says, is relentless, “and if you stop investing, you go nowhere. Capital investments are huge if you want to do first-class medicine and we are looking at every financial model to raise more money.”

At last month’s board meeting, he says, “it was all we discussed.”

Scott laments how difficult it is “to describe how Health City remains current and on the leading edge in healthcare, as it is just a core aspect of what we do. If you are committed to providing high-quality care and excellent outcomes, it is just something you have to do.”

Like Dr. Rado, Scott hesitates to reveal investment figures or equipment budgets, saying only that Health City’s financing from its Bangalore, India, parent company Narayana Health “has been substantial,” reflecting “the confidence” of founder Dr. Devi Shetty.

“Of course,” Dr. Chattuparambil says, “Health City has an annual budget for equipment and acquisitions, as well as further developments to the hospital complex. For example, one major project currently on the horizon is the development of a cancer center to include radiation therapy – which we do not currently offer. The cancer center is perhaps one-and-a-half to two-and-a-half years off.”

Most of CTMH Doctors Hospital’s equipment is supplied out of the U.S. According to, a leading chronicler of medical-device manufacturing, eight of the globe’s top 10 medical-equipment manufacturers are American, led by joint Ireland-Minnesota Medtronic, with divisions addressing cardiovascular disorders, diabetes, spinal and biologics, neuromodulation, surgery and cardiac-rhythm disease.

No. 2 is New Jersey’s consumer-goods and medical-device giant Johnson and Johnson, which manufactures orthopaedic, cardiovascular, diabetes, vision-care and surgery products.

No. 3 is joint Netherlands-Massachusetts-based Philips (Healthcare), which creates medical lighting and products for anaesthesia, oncology and cardiology.

No. 4 is Chicago-based GE Healthcare which makes diagnostic equipment – including CT image machines – and makes patient-monitoring systems and biopharmaceuticals.

The No. 5 and 6 spots belong to Germany’s Fresenius Medical Care and Siemens Healthcare.

No. 7 is Ohio-based Cardinal Health, which supplies pharmaceutical and medical-device products directly to hospitals internationally, specializing in wound care, surgical, laboratory, over-the-counter and home-healthcare products.

No. 8 is New Jersey’s Becton Dickinson, which makes medical devices, laboratory instruments and diagnostic products for hospitals, laboratories and clinics globally.

No. 9 is Illinois-based Baxter International, a Fortune 500 healthcare company specializing in renal diseases, haemophilia and immune disorders, complemented by IV and irrigation products, surgical care, blood-purification therapies and infusion pumps.

Finally, No. 10 is Michigan-based Stryker Corporation, another Fortune 500 company, and specializing in medical technologies, marketed directly to doctors and hospitals. The company started manufacturing hospital beds 60 years ago, ultimately expanding into medical, surgical, neurotechnology and spine products, including implants for joint replacement and trauma surgeries; surgical equipment and surgical-navigation systems; endoscopic and communications systems; patient handling and emergency medical equipment; neurosurgical, neurovascular and spinal devices.

Dr. Rado says equipment is procured in two ways – and both through the hospital board, which also works in two ways: As part of a regular procurement program, a sort of “recurring investment, just to keep up-to-date,” he says, citing new software as an example; or as a “one-off” whereby the hospital takes advantage of spot markets in fresh technology.

The board’s two options play into the tandem choices for procurement itself: standing arrangements with a single manufacturer – such as software updates for existing equipment – or on a sort of freelance basis, a “best of breed,” Dr. Rado says, as the hospital seeks “top-of-the-line equipment.”

CTMH Doctors Hospital’s 3-D digital mammography system, for example, comes from Massachusetts-based Hologic, ranked at 33 among global med-tech suppliers, and its MRI machine comes from GE Healthcare, No. 4 on the global list.

By going through #33 Hologic for its mammography system, however, instead of, for example, GE Healthcare, Dr. Rado says the hospital procured the machine “two years ahead” of everyone else.

The hospital’s top-ranked ultrasound machine is GE’s “LOGIQ E9 with XDclear,” which claims to “deliver extraordinary image quality on a broad spectrum of patient body types,” enabling doctors to “visualize blood flow without the limitations of Doppler,” to “enhance work flows,” and to “integrate real-time ultrasound with previously acquired CT, MR, PET or ultrasound images.”

Health City appears largely to embrace the “freelance basis” and “best of breed” option employed by CTMH Doctors Hospital.

“There is no one region, country or company that supplies most of Health City’s medical equipment,” Scott says. “We maintain good relationships with global suppliers of medical equipment and work with them to acquire the best of available new technology.”

Companies from Switzerland, the U.K., France, Sweden, Spain, Germany and Japan comprise 14 of the world’s 35 largest medical-technology manufacturers.

And, again, Scott says, “the training and expertise of the doctors and surgeons involved is vital in these partnerships.”

Dr. Rado says financing the acquisitions, that “millions annually to remain up-to-date,” is funded by the hospital itself.

“We are investing all the profits back into the hospital,” he says, rebuffing rumors of financial problems: “The word on the street is that we are in trouble,” he says. “We are not.

“We bought the hospital in a profitable state and it’s making money.”

He is tight-lipped about plans, saying only that “we are investing heavily in all products and are looking into different services that are not yet on the island.”

Both he and Scott reject fears that equipment and technology investments are among the chief drivers of rising costs for healthcare – estimated at 10 percent per year. Dr. Rado pointed to his $5 million MRI machine.

“I would say it makes it a little more difficult,” he says, “but, for example, with this MRI, we get paid through insurance fees, so we really don’t charge any more than with the old equipment.”

The hospital is aware of a free market for medical services, both next door and in East End, so controls its patient fees, hoping that state-of-the-art equipment will draw consumers, and that, he says, “gives us an edge over the competition.”

“And that, “he says, “is why we do it. In the end, it’s all about patient safety.”

Scott refers to one of Dr. Shetty’s founding aphorisms: “It’s not a solution if it isn’t affordable.”

One of Health City’s principles, he says, “is to make world-class healthcare both accessible and affordable. To increase our costs would run contrary to that mission. Rather than pass our costs on arbitrarily to patients, we employ several methods to keep our services affordable.

“For example, we use the economies of scale at our disposal due to being a part of the Narayana Health chain of hospitals. Over 30 hospitals have far more purchasing power than one small facility in the Caribbean, and this works to our advantage.”

Broadly speaking, Dr. Chattuparambil says, in the next decade Health City hopes to become “the dominant brand and player in the Caribbean from a medical perspective. We want to work with our brothers and sisters in medicine to fill all existing medical gaps from an accessibility and affordability standpoint.”

He cites another Shetty aphorism, this regarding cost controls: “In healthcare, you can’t do one big thing and reduce the price. We have to do 1,000 small things.”

Forget left and right – the new political divide is between open and closed

Major political events in recent times, from Brexit to the U.S. presidential elections, have been framed in the context of a debate between “open” and “closed” rather than “left” or “right.”

In a changing political landscape where President Donald Trump is a nominal Republican but runs on an anti-establishment “drain the swamp” platform; tears up trade agreements; institutes new tariffs on aluminum and steel; and famously advocates the construction of a wall on the border to Mexico, voter categories of “open” and “closed” can in fact better explain his election success.

In the U.K., a growing divide between open and closed voters was equally used to interpret the result in the British referendum to leave the European Union.

A new study by U.K. think tank Global Future claims that the “political axis is rotating” and that the elections of the future will be decided in the battle over a growing group of voters that favor “openness.”

Open voters, the report argued, consider multiculturalism, diversity and immigration favorably and would like their country to take an internationalist outward-looking approach to the world. Closed voters, in contrast, see these issues more skeptically.

A survey that measured voter attitudes found a significant generational divide between 18- to 44-year olds who tend to favor “openness” and those aged over 45, who were more inclined to support the “closed” argument.

The survey showed that under-45s strongly believe that immigration and multiculturalism have changed Britain for the better. The majority of over-45s say they have made Britain worse. Younger people regard overseas aid and the European Union as “forces for good,” while older voters on balance consider them “forces for ill.”

Younger survey participants expressed that increased diversity had a positive effect on the U.K., whereas the older group believe the effect is negative. The same applies to the views on the right of free movement for EU citizens. Again, younger people overwhelmingly consider it favorably, whereas those over 45 regard it negatively.

Three in five people under 45 describe themselves as internationalist/globalist rather than nationalist, while the majority of the older group say they are nationalists.

The same stark generational divide appears in social values such as attitudes toward gay marriage, feminism, measures to promote equality and human rights laws.

In short, the two age groups have considerably different world views.

In the past, simple economic characteristics like profession, home ownership and income were sufficient to determine whether someone was more likely to vote Tory or Labour, right or left, in the U.K. Age only became a factor because property assets, higher income and senior positions are typically attained later in life.

For Conservative Party strategist Lord Andrew Cooper, these political certainties started to change a few years ago and the political axis has turned to such an extent that the way people vote is now increasingly determined by cultural rather than economic characteristics.

“These days, a far better way of predicting how someone will vote is to discover whether they live in an ethnically and religiously diverse area, the density of the local population around them, how they define their national identity, or what their feelings are toward minority communities,” he writes in the report.

Cooper states that the referendum on EU membership was, for most voters, not just about whether they and their families would be better off with Brexit but a “binary choice between two fundamentally different reactions to the realities of globalization: nationalism or internationalism?”

A year later, the U.K. general elections were more influenced by voter feelings toward Brexit than by the political platforms of the parties.

“The political axis is rotating not just because of the referendum vote for Brexit, but because that vote connects directly to a spectrum of deep values that add up, for many people, to their whole worldview. This explains why the gulf between Remainers and Leavers has tended to widen, not narrow since the referendum,” Cooper notes.

Analyzing voting behavior according to “value tribes,” groups of people who share similar values and outlook on life is not new.

British political commentator David Goodhart has a distinct take on the notion of open and closed by separating the Anywheres from the Somewheres. In his book “The Road to Somewhere,” Goodhart described the main political faultline in the U.K. and other places as between those who are rooted in a specific community and socially conservative and the urban, socially liberal and typically university educated.

For Goodhart, Anywheres have “progressive individualist politics, which prioritize openness, autonomy and cognitive ability, have dominated policy for more than a generation and promoted, among other things, the two ‘masses’ – mass immigration and mass higher education.” The Somewheres in turn are “people who value stability, familiarity and more parochial group and national attachments and have experienced the declining status of so many non-graduate jobs.”

Goodhart’s analysis explains the Brexit vote outcome equally well but in his view Anywheres only make up a fifth to a quarter of the U.K. population.

Global Future, on the other hand, claims in its analysis that open attitudes are far more common and will grow over time.

Internationally applicable

The approach to analyzing voter behavior based on open and closed attitudes is not confined to the U.K.

The model used by Global Future combines economic factors such as income, occupation, home ownership, health and benefit claims in a dimension labeled security.

The security score is contrasted with a diversity dimension which aggregates factors such as ethnicity, immigration, age, and urban or rural location.

In the U.S., this model reveals that age is a key variable for a range of attitudes and values.

Authoritarian and socially or culturally conservative and nationalist attitudes correlate very strongly with the demographics of low security/low diversity scores, while socially and culturally liberal and globalist attitudes are more likely to be shared by those with high security/high diversity scores.

Naturally, the model does not predict the attitudes of everyone within these categories but indicates general trends.

When the model is applied to U.S. presidential elections since 1980, it shows that over time the average Republican voter has rotated from a high security/low diversity rating to a low security/low diversity score. The average Democrat voter meanwhile has shifted from a low security/high diversity score to a high security/high diversity rating.

In other words, open and closed factors are a much more stable indicator than economic factors for whether someone votes Republican or Democrat.

“Similar shifts, with traditional parties of the left increasingly appealing to more affluent, more diverse voters while traditional parties of the right increase their support from less affluent, less diverse voters, are apparent in other recent elections around the world,” the report concluded.

In the U.K., for instance, the average voter who switched to Labour in the last election was relatively better off, middle class, well educated and living in an area of high ethnic diversity. The Conservative Party in contrast increased its share of votes in many working class Labour heartlands.

In Europe, traditional parties of the left, such as the Social Democratic Party of Germany and the Socialist Party of France, recently suffered their worst election results as right-wing parties made significant gains among low income voters with a preference for “closed” attitudes.


Not everybody is buying into the effectiveness of open and closed categorization.

Adrian Wooldridge, columnist in The Economist, says that many people who claim to have open attitudes are in fact very much closed when it comes to their own personal lives.

The typical argument is that the more educated people are, the more they are in favor of globalization, because they are much more able to adapt to its pressures.

Professional groups like lawyers or doctors, in addition, use licenses to restrict competition.

“Many of the supporters of openness thus occupy the best of both worlds: they live in fortified islands when it comes to their jobs and the value of their most important asset, with formal and informal barriers reinforcing each other,” Wooldridge writes. “But they can also benefit from competition when it comes to employing nannies and cleaners, getting their dry cleaning done or going out to dinner. Attitudes that look virtuous and open-minded from one perspective look opportunistic and self-interested from another.”

For Wooldridge, middle class people are more open about globalization because they tend to be in service industry jobs that are more insulated from international competition than manufacturing jobs.

He predicts “middle-class protectionism will be the wave of the future,” stating that “middle-class support for open economies will change radically in the future as middle-class people find themselves challenged by two forces – clever machines that reduce the supply of cerebral jobs, and clever people from the emerging world who compete for their jobs.”

Changing attitudes with age

One key issue in the open versus closed debate is whether younger “open” people will change their attitudes as they get older.

“As the generations of young people who have grown up comfortable with a diverse, multicultural Britain get older, we can expect to see Open voters becoming the majority in older and older age groups in future,” Global Future says in its report.

Wooldridge disagrees, stating that young people with few responsibilities are likely to be more tolerant to “drugs, loud music and general social mayhem than older people who are bringing up children” and people who have not bought their first house “are more hostile to the greenbelt.”

Conservative strategist Cooper in contrast says the “patronizing” line that younger people vote with their hearts and older people with their heads simply does not apply.

Cooper contends that open and closed attitudes are a function of the fundamentally different worlds in which the two groups have grown up.

The under 45s have spent “their entire adult lives in the post-Soviet rapidly globalizing internet era – the world of free movement of people, the age of Amazon, Google, Apple, a time of growing transparency and ever more openness.”

The people who remember the world before this “economic, political and cultural upheaval are much more likely to feel insecure about the breadth and pace of change,” he says.

Teaching the next generation about ‘money’

In this Sept. 24, 2013 file photo, cut stacks of $100 bills make their way down the line at the Bureau of Engraving and Printing Western Currency Facility in Fort Worth, Texas. - Photo: AP

Alessandro Sax

As individuals we all hold our own preconceptions of “money,” most of which were formed through our childhood and adolescent experiences. In today’s world most toddlers are able to navigate an iPhone long before being able to count a jar of loose change. In an age where the world is literally at your fingertips and shopping is as easy as the click of a button. How do we educate our children on the value of money?

Start young. As with most skills, the earlier in life you are taught the more it becomes second nature. A child’s foundation of money begins to develop as early as three years old, with studies suggesting that kids’ money habits are already formed by age seven. Knowing this, parents should take advantage of the everyday teachable money moments.

The earliest exposure to savings traditionally includes a piggy bank with kids rummaging under couch cushions for loose change. Instead of leaving savings up to luck, take an opportunity to implement a small regularly scheduled allowance. It will go a long way in keeping kids engaged in learning about money. Implementing which chores, duties or behavior parents require in exchange for allowance is a choice for every family to decide on. The concept of saving becomes even more powerful when linked to a short, medium or long term financial goal. Have your child set a goal, something that motivates them and is achievable in a reasonable time frame. Setting up your child for success is the main aspect of the exercise, leaving them feeling empowered and not frustrated is the desired outcome. For those larger goals encouraging your child with either a matching program or offering simple interest is a fantastic way to demonstrate the power of compounding. These exercises although simplistic should not be overlooked as goal setting and delayed gratification translate into successful spending habits and budgeting skills later in life.

Moving from a piggy bank to your first bank account is an important step in creating awareness and a comfort level surrounding money. Unfortunately, our schools still do not teach children about money, which is why many young adults find banking intimidating. Early exposure to the banking system can help alleviate these emotions down the road. Most large banks offer little to no fee banking services to those under the age of eighteen which helps to encourage savings at a young age. Exposing kids to financial transactions and even online banking early will give them the confidence later in life to, say, apply for a student loan or open up their first investment account.

Educating children of the concept of money is one thing, but creating an appreciation for the value of it is an issue with even greater complexity. There is no better lesson or self-satisfaction for a young adult than earning money through a part-time or summer position. The introduction of responsibility, independence and disposable income are key factors when it comes to future financial success. This also presents another perfect opportunity to educate on the power of investing and compound interest. Illustrate how small amounts of money invested over time can easily grow to substantial sums.

Including charitable giving or sharing throughout a child’s life can go a long way in understanding the true value of money. For young children “sharing” can be as simple as donating a small amount of change to a local coin drive. For young adults charitable giving can include the combination of a donating and volunteering.

Helping the next generation avoid financial missteps begins with creating comfort and understanding surrounding money. When it comes to instilling the importance of financial literacy never forget that parents hold the most influence over the future behavior of their children, implementing structure will raise long term awareness and prepare the next generation to be a financially savvy one.

Alessandro Sax, CFA, is an Investment Advisor at Milot-Daignault & Sax Team of RBC Dominion Securities Global.

Secular market cycles: What’s your strategy for your portfolio?

Brendalee Scott-Novak, Butterfield

Global financial markets have revelled in somewhat of a sweet spot over the last eight years. Most striking are the significant positive returns across major asset classes that historically exhibit strong negative correlation. The Standard & Poor’s 500 Index (SPTR500N), a broad measure of U.S. equity markets, returned 176 percent cumulatively to the end of February 2018, even as the bull market run in bonds defied investors’ expectations and entered its eighth consecutive year. Ten-year U.S. Treasuries during the same period returned almost 30.3 percent. With the U.S. economy now well into its ninth year of expansion, how long can this sweet spot last?

As expected, markets experienced several bouts of heightened volatility during the period. The TED spread, the difference between three-month U.S. Treasury bill rate and three-month London Interbank Offered Rate (LIBOR) and is indicative of perceived risks in the global banking system, recently ballooned to levels not seen since October 2016. These latest readings are baffling investors as to whether the spike is related to technical factors or a sign of the usual culprits: looming monetary illiquidity, global economic risk or deteriorating credit conditions. The question now remains, is this recent volatility indicative of an end to the current expansion? Exactly where are we in the expansion phase?

Admittedly the phases of a business cycle are not always linear. It is possible to have cycles where an economy skips a phase or even reverts to a previous one. There is also no fixed time frame for a phase to last, making the length of the current expansion which began in 2009 anyone’s guess. Irrespective of the answers to the questions above, one thing is certain, business cycles are extremely difficult, if not impossible, to predict. Consequently, the key to achieving optimal portfolio performance is to be cognizant of the characteristics inherent in each phase and maintain the flexibility to adjust your portfolio when key pivot points occur.

It is quite evident when an economy is in the expansion phase. Gross Domestic Product (GDP) typically grows 2 to 3 percent per annum, with stocks entering a bull market run. Developed markets stocks and fixed income instruments historically do well, with smaller companies providing some of the greatest growth potential given their flexibility to take advantage of changing market dynamics. Emerging markets (EM) also tend to grow at a faster pace during the early phase of an economic upturn. While developing countries’ equity and debt are generally considered riskier investment options versus developed markets, the risk/reward ratio can be very attractive at this phase. Furthermore, emerging markets have proven to be an attractive complement to developed market exposures as they provide an effective hedge against a falling U.S. dollar. Mid and large capitalisation developed market stocks, however, tend to perform better in the later stages of an expansion.

During the peak phase of the business cycle, the economy forges full steam ahead to operate at its maximum capacity. Investors often achieve and exceed lofty returns expectations late in this cycle. As euphoria sweeps across asset classes, GDP growth exceeds 3 percent, asset bubbles begin to form and inflationary pressure rears its ugly head. As markets climb to new highs, the consensus view of a ‘new normal’ becomes commonplace with returns expectations appearing absolute or almost guaranteed. At the end of this phase, cash and fixed income assets tend to outperform the general market, while stocks, commodities and junk bonds underperform. Cash market instruments such as money market funds, short-term assets and corporate bonds tend to make great investments at the end of an economic peak. Incorporating some gold exposure can also provide a good hedge against inflation including strong downside protection in the event of a market crash.

When fundamentals finally return to markets, investors are typically caught off guard. With bated breath, they anxiously anticipate every market action overreacting to any news that falls short of their lofty expectations. Anxiety swiftly manifests as fear, panic sets in and selling pressure begins to mount. As the economy contracts to a halt, equities enter a bear market (characterized by a reduction in prices of 20 percent or more) and panic selling becomes prevalent. During this phase, far too many investors sell into the downturn after it’s too late. In an economic contraction, fixed income instruments and the cash market tend to outperform the general market. Paradoxically, because markets are forward looking, a moderate exposure to equity is recommended in this phase.

With markets experiencing a free fall, consumers and business confidence sink to a low. After the economy contracts (negative GDP readings), recessionary indicators become more prevalent with experts predicting years of economic distress. During an economic trough stocks, real estate and commodities including gold and oil tend to be the more attractive investments.

Empirical evidence suggests that financial markets are indeed cyclical in nature. Consequently, addressing the ebbs and flows inherent in a business cycle should be a crucial tenet of any investment policy. Awareness of secular and cyclical market cycles, committing to a diversified risk/reward strategy and taking the emotions out of steep market movements are fail-safe ways to optimize your portfolio in any phase of the business cycle.

Disclaimer: The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.

Statistics and Data Source: Bloomberg LP, Bureau of Economic Analysis, The Canadian Encyclopaedia

Sea level, temperature rise threaten Cayman in just 80 years

Grand Cayman's Seven Mile Beach

The most-startling prediction is that a quarter-meter rise in sea levels, less than 10 inches, will swamp 33 buildings in Grand Cayman, among them 17 private homes and two apartment blocks.

Apart from the shock value, the striking thing about the forecasts are that they are nine years old, published in 2009. Yet little has changed. If anything, says Nick Robson, head of climate research organization The Cayman Institute, sea level rise has accelerated.

“The institute’s report on SLR predicted a one-meter rise by 2100,” he said last week. “However, SLR appears to be escalating and may well be more than one meter.”

Pointing to Government Information Services maps, Robson says, the flooding from a sea level rise of only one-quarter meter, 9.94 inches, rapidly becomes “progressively worse from there – and if you model an Ivan-type storm surge on top of the SLR, it quickly becomes frightening.”

Cayman’s population, his report says, has been growing at 4.73 percent annually. “The construction industry is booming with new condominiums, homes and apartments … and … new hotels flourishing.

“Rising sea levels … will affect construction of infrastructure such as roads, aircraft runways, port infrastructure, on fresh water lenses, on agriculture, on sewage and refuse disposal and on disaster management” and utilities.

As if to underline Robson’s worries, real-estate industry leaders last month predicted local population growth to nearly 85,000 in the next decade.

More and better roads and utilities, including a rebuilt Owen Roberts International Airport runway and cruise berthing, and new long-haul flights already planned by Cayman Airways from U.S. gateways in Denver and Los Angeles, were likely to boost Cayman’s population as much as 40 percent, 25,000 more people, who will need accommodation, transport, food and utilities, they predicted.

While an economic boost, however, the growth may come with a dark side. Cayman was lucky in 2017 when late-August “Ivan-type” storms Irma and Maria missed George Town, but destroyed a dozen Caribbean islands. Indicating the magnitude of damage climate change can wreck, however, mid-August’s Hurricane Harvey roared off the Gulf of Mexico, dumping 50 inches of rain on Houston in three days, causing $125 billion in catastrophic-flood damage.

Climate researchers subsequently reported – in the New York Times, Scientific American and National Geographic, among others – that Gulf waters, warmed by rising temperatures and infused with moist air, had boosted Harvey’s rainfall by 15 percent.

Robson said he was dismayed by a failure to plan for boosted storm surges and local infrastructure protection.

“One of the things that I have highlighted is the lack of long-range planning,” he told The Journal, pointing to his 2017 University College of the Cayman Islands TED talk.

“Successive governments have done no long-term planning. We pride ourselves on having been great seamen, however, no seaman would leave harbor without plotting a course on his chart to the desired destination. We today do not even pick up pencil and paper to jot down a note or two.”

Local government, however, has not been blind to the implications. Hazard Management Cayman Islands says, “Climate change is real; it is occurring and will have a major impact on the Cayman Islands.”

The “Cayman Islands Climate Change Policy,” originally written in 2011, says Caribbean jurisdictions “are amongst the earliest and worst affected by climate change,” citing “their small size, relative isolation, concentration of communities and infrastructure in coastal areas, narrow economic bases, dependence on natural resources, susceptibility to external shocks and limited financial, technical and institutional capacities.”

Exposure to extreme weather hazards such as Ivan – which caused $2.8 billion of damage, 183 percent of GDP – and Irma, Maria and Harvey “compound these vulnerabilities,” made the worse, it says, echoing Robson, “by inappropriate development policies and practices.”

Cayman Islands National Weather Service Director John Tibbetts has already said that climate change has boosted average local temperatures by 1.2 degrees Fahrenheit between 2012 and 2016, and now pegs average levels at 82.9 degrees, up from 80 degrees. Sea level rise, he says, is 0.12 inches per year, putting Cayman squarely on track for a 9.6-inch rise in 2100.

More dire predictions, based on Paris Climate Agreement projections, suggest a 2100 minimum sea level rise of 1.7 feet and a maximum of 2.3 feet.

Climate Change for the Cayman Islands predicts an outright threat to food security as temperatures and sea levels rise, and both inland and seawater flooding swamp fresh-water supplies.

Increased flooding of homes – Robson’s 33 buildings at immediate risk – and other “critical facilities,” including roads and developable land, both inland and in low-lying coastal areas, is also likely, while operational disruptions “are likely to airports, seaports, utilities, waste management including sewage, water and electrical-distribution systems.”

On March 20, under the headline “Tougher climate policies could save a stunning 150 million lives,” the Washington Post cited a recent NASA-funded study that said compliance with the Paris Agreement could save vast numbers of lives.

An “overlooked benefit” to lowering carbon emissions, according to the Post’s Darryl Fears, is that “it would probably save more than 150 million human lives.”

The study, published March 19 in the journal Nature Climate Change, said, “Premature deaths would fall on nearly every continent if the world’s governments agree to cut emissions of carbon and other harmful gases enough to limit global temperature rise to less than 3 degrees Fahrenheit by the end of the century,” a figure about a degree lower than the target set in Paris.

Estimates are that the benefits would accrue largely to badly polluted Asian cities, saving 13 million lives in India alone. The country has nine of the 19 most air-polluted cities in the word, according a measure of airborne particulates by the World Health Organization. China has four and Saudi Arabia three.

The study indicates, however, that another 330,000 lives would be saved in eight U.S. cities, including Los Angeles, New York, Philadelphia, Atlanta and Washington.

“Americans don’t really grasp how pollution impacts their lives,” said the study’s lead author Drew Shindell.

The Paris agreement seeks to limit global temperature rise to 3.6 degrees Fahrenheit, although hoping for a lower 2.7-degree threshold. Few experts believe either level can be achieved, however.

Shindell’s study expected 7 million deaths per year if governments fail to work toward zero emissions by the end of the century, starting today.

“There’s got to be a significant amount of progress within the 2020s or it’s too late,” the author told the Post. “Even for the researchers, it’s a pie-in-the-sky goal, given that South Asian nations such as India, where pollution is among the worst in the world, argue correctly that their per-capita use is small compared with historical use in the Western Hemisphere and that they should be allowed time to develop just as other countries did.”

The changing landscape of telecommunications

Logic technicians lay fiber-optic cables near the Government Administration Building in George Town. - Photo: Taneos Ramsay

Just several years ago, companies like Digicel were largely known as mobile phone providers.

But with the exploding popularity of WhatsApp and other applications that allow people to text and make voice calls over the internet, telecommunications companies can no longer rely on selling prepaid and postpaid bundles of minutes to make the bulk of their revenue. Instead of minutes, consumers are clamoring for data.

This has affected the region’s various telecom providers in various ways.

At first, around 2014 and 2015, Digicel and Flow allegedly blocked WhatApp and other “voice over internet protocols” in many jurisdictions, including Barbados, Jamaica and the British Virgin Islands – no reports about this were found in Cayman. However, pressure from consumers and regulators forced those companies to reverse that practice.

Rather than “swimming against the current,” as Flow Interim Managing Director Danny Tathum put it, Digicel and Flow have diversified their products and services.

“We started diversifying about five years ago, but in the last 12 months we’ve taken far more aggressive approach,” said Raul Nicholson-Coe, the CEO of Digicel’s Cayman branch. “We can’t rely on just voice anymore.”

Nicholson-Coe said one of his company’s main areas of growth its is “cloud-based telephony” services, which allow a business with multiple locations to communicate via a secure off-site server. Digicel also provides data-storage services, with a data center in Camana Bay that serves major law firms and accounting firms in the territory.

“Enterprise customers are looking for value-added features. Can you provide advanced security solutions, resiliency, routing solutions?” said Nicholson-Coe. “We sit with the customer and find what their needs are.”

Flow provides similar services, with its three-story building on the corner of Eastern Avenue and Shedden Road housing millions of dollars of equipment that stores untold amounts of information of some of Cayman’s largest trust companies, law firms, and other financial institutions – along with Flow’s own data.

Both companies also provide video streaming services, and Digicel has even gotten into the journalism business with its “Loop News” websites for jurisdictions across the region.

While Digicel and Flow have taken a hit from WhatsApp and other voice over internet protocols, those bandwidth-consuming apps have been a blessing for other firms that focus on providing broadband internet services, such as Logic and C3.

And with bandwidth requirements doubling about every year due to other data-intensive products like Netflix and YouTube and WhatsApp, the importance of acquiring bandwidth from off island is growing exponentially.

“Bandwidth is a scare resource everywhere in the world, even in New York City,” said Nicholson-Coe.

To solve their hunger for data, telecom companies are looking for ways to directly buy off-island bandwidth instead of relying on Flow, which has historically had a corner on this wholesale market.

Flow’s parent company, Cable & Wireless, has been the dominant provider of subsea cable access since 1972, when it first completed the construction of a submarine cable link from Cayman to the Prospect Pen Earth Station at St. Thomas, Jamaica.

However, that could change soon.

C3 owner Randy Merren said it is his company’s intention to join Cable & Wireless in connecting straight to the Maya 1, which is owned by a consortium of more than 30 telecoms companies.

“Right now, if we want to buy capacity, we have to negotiate it through [Cable & Wireless],” Merren said. “We want to get into the Maya 1 cable to cross-connect into our cable system.”

Another option for telecommunications companies could be the planned “Deep Blue Cable,” an ambitious plan by billionaire Digicel founder Denis O’Brien to lay a new, 7,456-mile subsea cable that will connect to 12 markets, including Cayman, Jamaica and Puerto Rico.

The Deep Blue Cable’s website states that the company hopes to begin manufacturing and installing the cable in 2019 and 2020, respectively.

That is good news for Flow’s competitors.

“It will revolutionize the market because you’ll be getting additional capacity, and there will be competition,” said Nicholson-Coe.

“When you boil it down, we’re in the business of buying and selling megabits,” said C3’s  Merren. “The more choice we have to buy those, it will ultimately bring down costs of internet access in Cayman.”

Even Flow officials said they see the potential to benefit from having another subsea connection.

“If the Deep Blue does come, we would probably be interested in buying capacity from them, too, just to build resiliency and redundancy,” said Flow Technology Operations Manager Jonathan Martin.

While telecom providers are looking for ways to acquire more bandwidth from off island, government’s main focus is on making sure that data can be speedily transferred to customers throughout the territory.

Public officials hope to accomplish this by ensuring that fixed-line internet services are transmitted over fiber-optic cables everywhere. Currently, most residents in West Bay and George Town receive fixed-line internet over fiber cables, but the eastern districts mostly must rely on decades-old copper cables.

To accomplish this, Premier Alden McLaughlin proposed in March that government achieve universal broadband access by building its own fiber network in the eastern districts.

The premier said this is necessary because the telecoms companies have been dragging their collective feet in fulfilling their licensing requirements. All the telecommunications companies, besides Flow, have deadlines in their licensing agreements to expand their fiber networks across Grand Cayman and the Sister Islands, and those deadlines passed more than a year ago.

“All these years, we keep struggling unsuccessfully to get [the telecom companies] to deploy the fiber they agreed to, so we’re going to abandon that approach,” McLaughlin said on March 16 in the Legislative Assembly. “We’re going to build the fiber network and we’re going to charge the licensees for it.”

Just how that will be completed is not clear. OfReg published a press release last month stating that the regulator “has been formulating a plan and considering timelines for the installation of the [universal service network] accordingly,” but does not provide any other details about the project.

Currently, the regulator is in the consultation process of formulating a broadband policy, which will define the term broadband and set a target for licensees to make broadband available to all residents by a certain date.

That consultation period ends on April 18, and is a precursor to OfReg determining exactly how it will implement universal broadband service.

“Once this new definition of broadband is finalised [as a result of the consultation], if we as the regulator feel, that the local providers are unable or unwilling to build out their networks to meet the specified targets, OfReg is willing to leverage its powers under the [Utilities Regulation and Competition] Law to build a [universal service network] to achieve the desired end result,” OfReg stated in its Thursday press release, adding that it expects to make a final determination on this issue by the end of September.

If implemented correctly, many telecoms officials think that a universal service in the eastern districts would be more efficient than having multiple telecom companies build out their networks separately in a sparsely populated area.

“There are only so many homes here, which means that there’s a limited amount of sales available for the service. If you have multiple providers putting up multiple networks, you’ve got a lot more costs involved, when one network could be sufficient,” said Sacha Tibbetts, the CEO of DataLink – the firm that telecom companies go through to install their fiber cables on Caribbean Utilities Company-owned telephone poles.. “So the universal service can make a lot of sense if it’s done correctly.”

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