Saturday, December 10, 2016

Planned economic stimulus packages could benefit infrastructure equities

Juergen Buettner

Despite being exceptionally aggressive, monetary policies do not bear fruit as hoped anymore. As a result, fiscal policy as a means of stimulating the economy once again gains popularity worldwide. Should the concept find support in general, it will also have noteworthy consequences for the financial markets.

infrastructure-2On closer examination, one thing cannot be denied: Economies and financial markets have diva-like characteristics. They constantly need to be kept in a good mood by some kind of action. Without it, they sulk and slip into recession or a bear market. The job of entertainer was mainly left to the central bankers in recent years. They used much more of their firepower than in the past, with the only goal to keep the economy and the stock market running.

Unfortunately, the positive response seems to subside more and more. This is not surprising. Bank of America Merrill Lynch has counted nearly 700 rate cuts globally since 2008.

Despite these massive efforts, the world economy is expected to grow by less than 3 percent in 2016. That would be the lowest growth rate since the last financial crisis. For political leaders, that is not sufficient, as confirmed by the wording of the final declaration of the recent G20 summit in Hangzhou, China. In their communiqué, the leading industrial and emerging countries classified growth worldwide as still weaker than desirable.

Fiscal policy as a tranquilizer

The search for more growth momentum, however, is limited by a lack of alternatives to stimulate the economy. Reforms are certainly the best choice. But this is usually connected with steeper cuts, and therefore politicians most commonly want to make use of that tool only when it is really unavoidable. Compared to that, it is much easier to open the cornucopia of the state and to hand money to the people through an expansionary fiscal policy.

The reason why this option is preferred in the current situation is explained by Julius Baer chief economist Janwillem Acket: “The combination of central banks running out of options to stimulate growth and governments simultaneously imposing fiscal austerity measures has fuelled concerns over globalization pressure in more and more economies. Frustration levels among private households are rising, which is challenging the legitimacy of the ruling political parties and spurring radical factions. Instead of prioritizing structural reforms, which tend to hurt many in the short term, the ruling authorities are increasingly eroding fiscal austerity for deficit and even debt-financed spending.”

The pressure increases

The enthusiasm in terms of expansionary fiscal policy, however, is often slowed by empty state coffers. The debt of the industrialized countries is expected to reach 107 percent of annual economic output this year, the highest level since the end of World War II, cites Stefan Scheurer, capital markets expert at Allianz Global Investors, in data from the International Monetary Fund. But that does not stop influential institutions, such as the IMF, the Federal Reserve or the European Central Bank, as well as leading investment banks, from calling for new government stimulus.

It seems as if their proposals are met with approval with increasing frequency. China has already implemented such measures. Japan and the U.K. are on the verge of doing it. In Europe, the austerity provisions are already interpreted less strictly, once again the authorities work on an EU infrastructure fund, and for the first time in five years EU fiscal policy will turn expansionary in 2017. In addition, in the United States the campaigns of the two presidential candidates include infrastructure spending to the tune of 1.5-2.5 percent of GDP.

Separate from the funding issue, there is undoubtedly a need for action. In terms of government spending, U.S. public fixed investment as a share of GDP is running at a 60-year low, while in the eurozone a ratio of private capital expenditure to GDP reached record lows in 2014 and has not improved since, J.P. Morgan writes in a research paper.

“Today, the 20 largest economies in the world, grouped together in the G20, face an infrastructure spending gap of about US$20 trillion over the next 15 years,” adds Joachim Klement, head of thematic research at Credit Suisse. That is a big chunk of money, and without government involvement not easy to stem. In summary, all of that ultimately makes a new wave of fiscal stimulus measures quite likely.

Whether the upcoming fiscal spending will make a difference depends on sensible use of these resources. The way it should not be done can be seen in China. According to a study from the University of Oxford’s Saïd Business School, more than half of China’s infrastructure investment has destroyed economic value instead of generating it. Furthermore, the slow progress of implementing these projects has to be taken into consideration too. The proposed plans have to be passed by legislation and put into practice – a process that can drag on for years.

Stock market has smelled a rat

Nevertheless, the consequences of the emerging realignment of economic instruments should not be underestimated. No one knows this better than the investment banks. How much they have already picked up the scent is reflected in the numerous research reports they have published on this issue in recent weeks. But of course the masters of money do not only act as paper tigers. If they write something currently about fiscal policy and infrastructure spending, then sooner or later capital also flows in that direction, either because they invest themselves or because customers implement the recommendations made in these research papers.

In the current case, the consequences could be serious and extend to all segments of the financial markets. It therefore makes sense for all investors to deal with the issue. The problem is various scenarios seem to be possible and this means it is unclear how it will eventually play out. There is some disagreement, for example, about the impact on the bond market. On one side, Jeffrey Gundlach can imagine a sustained upturn in bond yields. The “king of bonds,” as the founder of the investment firm Doubleline Capital is called by media, underpins his view with the following explanation: “There will be two effects of an increase in fiscal spending and both will push rates higher. The supply of bonds will increase, and GDP growth will be higher.”

On the other side, Patrick Artus, the chief economist of the French investment bank Natixis, simply cannot imagine a more expansionary fiscal policy without continuously low interest rates. That has to do with his belief that most countries cannot afford higher borrowing costs. Both approaches sound plausible, which is why prudent market participants do not jump to hasty conclusions. They prefer a wait-and-see approach and observe closely which forces will finally become prevalent.

Construction, infrastructure and industrial benefit

Less controversial is the question which sectors would benefit most should the future really bring more public stimulus. Should that happen, construction companies and building materials manufacturers would profit, as well as industrial companies and infrastructure service providers in general. Also, some commodities, such as base metals, can expect a certain positive impact.

Merrill Lynch says in reference to the “Greenspan Put” (former U.S. Federal Reserve Chairman Alan Greenspan responded to every crisis by cutting interest rates) from a

“Keynesian Put.” This in turn refers to the economist John Maynard Keynes, who is considered the mastermind of economic and fiscal policy. Compatible with this, Chief Investment Strategist Michael Hartnett advises to switch the investment strategy:

“Cyclically, we recommend investors rebalance portfolios away from the “QE winners” and toward assets and sectors that should benefit from more fiscal largesse, such as companies with exposure to Main Street, infrastructure, defense, and real assets.“

His advice which sounds reasonable, especially if investors concentrate on companies in the mentioned sectors that are in a good shape now. These stocks have proven to be able to cope well with the status quo, and if expansionary fiscal policy was added on top of that, it would be a welcome addition. Then the existing upward trends in earnings and stock prices of these companies should be prolonged further.

Offshore: ‘Wealth preservation, asset protection more important than tax reduction’

Hans-Lothar Merten

Hans-Lothar Merten, trained in banking and business administration, is known in Germany as an insider in the offshore world. He has written books about tax havens for more than 20 years, and he also publishes articles on finance and taxes as a freelance journalist. According to the German financial newspaper Handelsblatt, his guide “Steueroasen” has cult appeal in relevant circles. His new book “Vermögen richtig schützen,” co-authored with German inheritance law expert Markus Schuhmann, will be published this month.

978-3-89879-988-1_4c_hiresQ. Many people are concerned about the stress in the global political, economic and financial systems and worry about their savings. Where is our money still safe nowadays, in your opinion?

A. In Europe, there are the classic examples: Switzerland, Luxembourg, Austria, as well as Liechtenstein or the Channel Islands. In Asia, Singapore and Hong Kong should be mentioned; in Africa, Mauritius; and in the Caribbean, the Bahamas or the Cayman Islands.
The deciding factor in these financial centers is not zero taxes. In addition to the quality of the respective financial industry, investors value political stability, legal certainty and access to their assets, either directly or via offshore structures.
Central Europeans, for example, should stay away from offshore destinations like Liberia or Sierra Leone in Africa; Panama or Paraguay in the Americas; or the financial centers in the Middle East.

Q. What do you think about the headlines around the Panama Papers?

A. The Panama Papers or LuxLeaks prove that customer data is no longer safe. There will be more whistleblowers. For tax evaders there is always the risk of getting caught. The media attention on the subject of tax havens in recent years has increased the public awareness around the topic.

Making billions in profits without paying taxes as Apple does currently with the help of Ireland and the Cayman Islands is not accepted by taxpayers anymore. Even less so since the coffers of treasuries in industrialized countries are empty, and at a time when in Europe hundreds of thousands of refugees have to be taken care of and many more are waiting behind the border.

Q. Does the increased media attention on offshore issues have a negative effect on the ability to avoid tax?

A. In any case, the tax savings practices of individual countries and companies, as well as offshore structures, are now in general under the microscope.

Q. Given the increasing criticism, does the “tax haven” business model still have a promising future?

A. In the light of empty state coffers in many industrialized countries, it is understandable that their finance ministers in recent years have targeted tax havens in their attempt to search for additional income sources. Bank customer data purchases by governments, LuxLeaks or the Panama Papers came at the right time.

Tax havens simply for tax evasion or for tax savings are no longer viable. Offshore destinations have to find new business models. The protection of assets will be the topic of the future. This applies to wealthy families and to businesses alike.

Only on this basis will offshore financial centers be able to successfully compete for wealthy individuals and companies.

Should the Caymans Islands succeed in preserving its more positive offshore image of the recent past and be able at the same time to develop solutions for the current changes in the offshore world, then there is a future. Here the offshore industry has to play its part.

Q. Where do you see the strengths and weaknesses of the Cayman Islands in the struggle for international capital?

A. Assistance in tax evasion is off the table. For wealthy individuals the topics of the future are wealth preservation as well as asset protection and that should be the direction of the business model of the Caymans Islands. The use of offshore companies is part of these topics.

For companies like Apple and Facebook, the new business model is still to be found. Their tax saving detours via Cayman and other offshore places in the Caribbean have no future in the face of impending back payments of taxes for previous years. Here the offshore industry in Cayman is also required to break new ground.

The required infrastructure for an offshore financial market is in place. Hedge funds and banks feel in good hands in the Cayman Islands with the customer money they manage because of the weaker regulations and capital requirements compared to other regions like Europe, for example. As a result, wealthy people feel well protected at the multinational financial institutions which are active in Cayman. They also make use of the local Trust Law in order to safeguard assets and to circumvent the often strict inheritance regimes in their home countries.

While other offshore places in the Caribbean have to fight for international clientele, the Cayman Islands remains an attractive destination in the offshore world.

Q. Where exactly has Cayman done things right or wrong lately in the rivalry with the competition?

A. Cayman has managed in the last few years to stay largely out of the global debate about tax havens. However, they are now required to adapt to new developments in the business of companies. The good image of the past years could otherwise be burned quickly. You only have to look at Panama to understand how quickly that can happen.

Q. The number of registered companies in the Cayman Islands has exceeded the 100,000 mark for the first time. That does not give the impression that offshore centers lose traction in that respect?

A. The Cayman Islands has developed quite late into an international financial center compared to other offshore centers in the Caribbean. The numerous hedge funds and branches of international banks contributed to that evolution. But in recent years the process was also helped by the flight capital that left Southeast Asia or Europe in reaction to the introduction of withholding taxes. That money is usually incorporated in offshore companies. That is one reason why now the 100,000 mark for registered companies has been exceeded. But compared to the more than 600,000 registered companies in the British Virgin Islands, there is still room for improvement.

Another contributing factor is the tax-saving models such as the “Double Irish” in Ireland, which is used by U.S.-companies like Apple and Facebook to channel their global earnings into the Cayman Islands because of the zero income tax regime there.

Q. How important are all the tax transparency initiatives like FATCA, the OECD common reporting standard, etc.?

A. Initially these treaties achieved little. It was only due to the mounting pressure of public debt in industrialized countries that political decision-makers saw the need to jointly combat the harmful tax practices of tax havens.

Q. How much value does the proposed agreement for automatic information exchange have, if even leading countries do not fully participate in it?

A. Whether it is the United States or others, unless all states around the world cooperate in the information exchange, gaps and tax havens will always exist. Taxes are typically still national law and therefore many different tax rates exist worldwide. In other words, international tax and corporate law firms will continue to find new loopholes and then try to design tax-saving models for the wealthy. The experts are always one step ahead of the regulators.

Q. What do you think about the accusation that the U.S. is the largest tax haven?

A. The United States is indeed a significant tax haven. While on the one hand they brought, for example, Switzerland to its knees in tax matters, they offer themselves, in states like Delaware, Nevada, Wyoming and Florida, many possible ways for companies, wealthy people, tax evaders and criminals from abroad to save taxes, hide or launder money, at the expense of their resident countries. The banks involved usually do not care about the origin of the money they manage.

What once was Zurich’s Bahnhofstrasse in Switzerland for many German tax evaders, is now called Brickell Avenue, Miami’s financial district. For the more than 300 banks there, business with undeclared money is still thriving. That means, instead of increasing the pressure on other tax havens and offshore centers, it is about time for the United States to question the tax practices foreigners can use in their own country. Here the OECD and the EU should also finally show their colors.

Q. After the Brexit vote, the United Kingdom has announced it will reform its tax system. Could this lead to the emergence of a new haven for foreign capital?

A. Well, the Channel Islands, which belong to the United Kingdom, for decades have been an attractive haven for wealthy foreigners. Why should Great Britain not make itself more attractive for international companies as well? In 2013, the so-called “patent box” with a profit tax of just 10 percent, was introduced. And neighboring Ireland demonstrates how companies can be attracted.

Q. What functions must a legal entity fulfill nowadays to be attractive to potential founders?

A. Foundations, trusts, asset managing companies or special funds for large assets usually provide tax advantages to some extent. But that is not necessarily the most important feature anymore. Much more important for them is wealth preservation and asset protection.

This also applies to the protection from increasing state repression, against systemic risks in the financial system, against creditor claims and against claims from family members. By moving assets into such legal entities, risks can be avoided, and the legal entities can also assist in structuring assets in a sustained way across generations.

Q. How have the entities typically used in offshore jurisdictions changed over time?

A. The stronger international control measures against tax avoidance are, the more complex the constructs become that are used in the attempt to minimize the tax burden of wealthy people and corporations. It is a global race with new offshore destinations and the constant search for new loopholes in national laws, as well as bilateral and multinational agreements. But that is also always connected with new pitfalls in the international tax jungle. Without expert advice, nobody can navigate these anymore.

Q. How cost-effective are the available structures?

A. The transfer of assets or income into low- or zero-tax countries, just because of lower taxes, is often a zero-sum game given the costs connected with it.

And it is – as the recent examples of Apple or Starbucks demonstrate – more and more just a matter of time until the tax savings backfire in the form of billions of dollars in back tax demands. Due to the increased international information exchange, it seems as if this calculation will no longer add up.

Q. What should one consider with regard to moving inheritable assets abroad?

A. These assets can lead to unwanted pitfalls that adversely affect their value. There is a significant need for advice in advance. Asset holders with undeclared assets abroad, out of deference to their heirs, should in good time before their death report to the tax authorities. It saves their heirs a lot of trouble.

If untaxed inheritance money was stashed in the Caymans Islands in the past, this was usually done via offshore companies. This money is easily passed on to the heirs via the transfer of shares. The relevant tax authorities usually did not learn anything about that.

Hedge funds and banks feel in good hands in the Cayman Islands with the customer money they manage because of the weaker regulations and capital requirements compared to other regions like Europe, for example. As a result, wealthy people feel well protected at the multinational financial institutions which are active in Cayman.

Offshore destinations have been the topic of a lot of headlines in 2016, as in most every year. This is reason enough to ask German tax expert Hans-Lothar Merten for a European point of view about the controversial topic in general and about the prospects of the Cayman Islands as an offshore jurisdiction in particular.

Tackling the decline of correspondent banking relationships in the Caribbean

Dr. Warren Smith, president of the Caribbean Development Bank (CDB), Onika Miller, government relations and public policy executive at the Jamaica National Building Society, Gaston Browne, prime minister of Antigua and Barbuda, Earl Jarret, general manager of JNBS, and Ian Durrant, deputy director in the economics department at the CDB, at a meeting in September.

Correspondent banking, the collective term for banking services provided by a bank in one country to a financial institution in another, has been the backbone of international banking operations and payments for some time. Smaller banks without a large international network of their own, in particular, rely on their relationships with correspondent banks in other countries to make cross-border payments.

For the past two to three years, however, correspondent banks in the United States, Europe and Canada started severing ties with banks in the Caribbean.

The Caribbean Association of Banks warned in August that the decline of correspondent banking relationships among financial institutions in the Caribbean undermines trade and business activity and threatens the economies in the region.

At least 16 banks in five Caribbean countries have lost all or some of their correspondent banking relationships.

Worldwide the situation is similar. Although the overall volume of payments increased between 2011 and 2015, the Committee on Payments and Market Infrastructure of the Bank for International Settlements determined that the number of active correspondent banks declined in 120 of the 204 countries it examined.

According to a May 2016 IMF report, there are several reasons for the decline in banking relationships.

On the one hand, banks are more broadly reassessing the cost benefits of their business lines, including transaction banking activity like correspondent banking. On the other hand, the IMF stated in its research paper, banks are uncertain about their regulatory obligations and fear large penalties and reputational risks in connection with the enforcement of sanctions, tax transparency and anti-money laundering, which have significantly increased the compliance costs for global banks.

The confusion and uncertainty is in part related to the U.S. Justice Department’s Operation Choke Point, which in 2013 identified certain industries, such as money remittance services, as high risk for fraud and money laundering.

Although the Federal Deposit Insurance Corporation later clarified that U.S. banks should use a risk-based approach to determine the risks rather than cut business ties with all potentially risky sectors, banks have been exiting unprofitable business lines and businesses they perceive as risky, amid a general decline of cross-border activity.

Jamaica’s Minister of Foreign Affairs and Foreign Trade, Kamina Johnson-Smith, addresses members of the Congressional Black Caucus Foundation's legislative forum on de-risking and correspondent banking in Washington, D.C., on Sept. 16.
Jamaica’s Minister of Foreign Affairs and Foreign Trade, Kamina Johnson-Smith, addresses members of the Congressional Black Caucus Foundation’s legislative forum on de-risking and correspondent banking in Washington, D.C., on Sept. 16.

As a result, correspondent banking has been high on the agenda of both the Cayman Islands Bankers Association and Cayman Finance for some time.

Responding to questions by the Journal, both associations said in a joint statement that Cayman’s retail banks enjoy strong and long-standing relationships with U.S. correspondent banks.

“But as large correspondent banks exit business lines globally in the region, primarily due to ‘de-risking’ driven by regulatory obligations and pressures, it is important to proactively engage to ensure there are no unintended consequences that could affect efficient and effective access to the global financial payments and settlement systems,” they said.

The Cayman Islands Bankers Association, Cayman Finance and the Ministry for Financial Services therefore continue to work closely and proactively “to reinforce the message that the Cayman Islands is a well-regulated and key international financial center for the global economy which gives international correspondent banks comfort both at an institutional and jurisdictional level,” they added.

The effect in Cayman

In the Cayman Islands, the pressure on correspondent banking relationships has shown its effect in two ways.

Money service businesses, essential for sending remittances by migrant workers, found themselves cut off from all banking services after Fidelity Bank told its money service provider clients that it had decided to “de-risk” and exit the business of processing payments on their behalf because it had been made unprofitable by increasing regulatory obligations.

Other banks followed suit, also citing the anti-money laundering risk profile of this type of business.

This resulted in significant disruption with money service businesses closing operations until they were able to secure suitable alternative arrangements. “In that situation the Cayman Islands Bankers Association, Cayman Finance and the Ministry for Financial Services and the Cayman Islands Monetary Authority worked very hard to ensure an appropriate solution was found,” the financial services associations said.

In addition, Cayman Islands class B banks, which rely on correspondent banks to make international money transfers on behalf of their clients, have also encountered greater difficulties in maintaining their correspondent banking relationships.

The number of class B banks in Cayman has dropped to less than 200 from a high of 600 some 10 years ago. While this may be largely due to consolidation in the industry, correspondent banking difficulties are a contributing factor.

“There have been many global factors affecting the banking industry such as consolidations, increasing compliance and regulatory costs and de-risking by correspondent banks,” CIBA and Cayman Finance said. “The result of some of these global issues is that it is becoming increasingly difficult for class B banks to obtain new local correspondent banking facilities and also difficult to establish direct correspondent relationships with international banks, In addition, Cayman correspondent banks are finding it difficult to provide correspondent banking facilities to class B banks due to pressure from their own correspondent banks that prefer not to have ‘nested accounts.’”

So far, no Cayman banks have been completely cut off from the international payment system, but problems with sending remittances has already resulted in a greater consolidation of services.

A regional and global threat

In areas where correspondent banking relationships have ceased, the Caribbean Association of Banks said in August, the de-risking exercise of large global banks threatens to lead to financial exclusion, shrinking financial sectors, the thriving of underhand economies, the increased use of unregulated payment options and slower economic development.

In Jamaica the de-risking issue is at the top of government’s concerns. Jamaica’s Foreign Affairs and Trade Minister Kamina Johnson-Smith said at a conference in Washington, D.C., on correspondent banking problems, “Given the severity of the challenge of de-risking by international banks, the government has accorded the highest priority to this matter.”

Prime Minister Andrew Holness considers this issue to be “a clear and present danger to the growth and development prospect of Jamaica,” the minister said.

Jamaica is tackling the problem through diplomatic channels and by strengthening financial oversight and regulatory frameworks to ensure compliance with international banking standards.

“Jamaica has raised the issue in a number of international forums and will continue to let its voice be heard on this important subject. We are also exploring the feasibility of strengthening our anti-money laundering and counter-terrorist financing (AML/CTF), due diligence and monitoring infrastructure,” Kamina-Johnson said.

Meanwhile, the Caribbean Community (CARICOM) has deepened its partnerships within the region in order to strengthen its efforts to address the withdrawal of correspondent banking services from some regional institutions.

Prime Minister of Antigua and Barbuda Gaston Browne, who is leading CARICOM’s advocacy on the matter, met with the heads of the Caribbean Development Bank and the Jamaica National Building Society to discuss CARICOM’s high level advocacy in response to the emerging de-risking practices by correspondent banks.

“De-risking of correspondent banking services is an existential threat facing the Caribbean region which has the potential to decimate our living standards. We must work collectively as a region to address this threat to our survival,” Browne said following the meeting in St. John’s.

Earlier this year, CARICOM members appointed Browne to lobby policymakers in the United States, Canada and the United Kingdom on the threat to Caribbean economies from the withdrawal of correspondent banking services.

Browne says the Jamaica National Building Society and the Caribbean Development Bank will provide technical assistance to advance CARICOM’s advocacy efforts and work with CARICOM to identify solutions to the challenges. They will also be assisting CARICOM to coordinate implementation efforts and to strengthen monitoring mechanisms.

“Correspondent banking services are a public global good that is essential for participation in global trade, and is particularly important for small island economies,” Prime Minister Browne said.

The general manager of the Jamaica National Building Society, Earl Jarrett, pointed to the threat to services such as remittances, on which the region depends. Highlighting challenges faced by his organization’s remittance company in the Cayman Islands, he said that the value of remittances was equivalent to a significant percentage of gross domestic product for many receiving countries in the region.

“Remittances are the lifeline for migrant communities across the region. And, Jamaica alone, with a diaspora population of some 3 million, represents one of the largest recipient countries in the region, accounting for amounts equivalent to approximately 17 percent of our gross domestic product,” he said.

Last year, the IMF highlighted the challenges for banks in the Caribbean, concluding that while the impact had been contained, the risks related to correspondent banking relationships have strongly increased for all banks, and remittances and other payment flows may have been affected.

If all correspondent banking relationship were lost in one country, the IMF said, the consequence would be systemic risks for the financial system.

This has not gone unnoticed by the Financial Stability Board, the organization that deals with financial systemic risks globally.

The FSB presented a plan to leaders of the 20 largest economies in November 2015 to address the decline of correspondent banking. The plan consisted of further analysis, the clarification of regulatory expectations, including more guidance from the Financial Action Task Force, domestic capacity building and the strengthening of due diligence tools used by correspondent banks.

In March 2016, the FSB established a Correspondent Banking Coordination Group to implement the action plan. An initial report on the progress was published in September.

The FATF has since updated its guidance in areas where it affects correspondent banking. In February the organization clarified its guidance for a risk-based approach for money transfer services, and in June it updated one of its anti-money laundering recommendations in relation to nonprofit organizations.

U.S. regulators, concerned that banks have gone too far, have also pledged to be more clear in terms of what they expect from banks. In September the U.S. Office of the Comptroller of the Currency, which regulates large banks, said it will offer guidance on how banks evaluate foreign banking risks and make decisions on whether to shut down accounts.

Agency head Thomas Curry told a Las Vegas anti-money laundering conference, “The global financial system cannot be paralyzed by risk.”

The de-risking by banks could “lead to entire regions being cut off from the positive effects of modern financial systems and broader financial inclusion,” Curry said. “This is not the solution.”


A report by the FSB suggests a number of measures to improve the situation. For instance, several service providers have developed KYC utilities, which store customer due diligence data in a single repository. The idea is to give correspondent banks more transparency and the ability to identify and mitigate the risks associated with respondent banks and their underlying clients.

In particular, for banks that err on the side of caution in the absence of clear regulatory guidelines, additional information about the risks in foreign banking partners could tip the scales.

Grada, a Cayman Islands-based company, is in the process of offering such a solution to local banks. Owner Peter McKiernan says large banks want to make money with transactional banking business in the Caribbean because they are not making money on interest anymore. “But they are stifled by their Treasury departments which think it’s too risky.”

Grada’s solution provides these banks with more transparency in the risks associated with their Caribbean client banks and the customers of those clients. Grada’s service consists of conducting the due diligence on all of a bank’s underlying customers and validating that the information, such as passports, is correct.

The U.S. correspondent bank would not have access to details of each customer, but it would see a statistical breakdown of the customer types, where they are based, where they conduct business, the percentage of enhanced due diligence and due diligence completed for the bank’s customers and so on.

Based on the analysis, U.S. correspondent banks may have more comfort in their ability to assess the underlying risks. They may also establish certain rules or ask their respondent banks to exclude specific customer types.

Overall this combination of due diligence and KYC outsourcing and validation across several banks would help lower the compliance costs for banks.

The FSB believes that in addition to cost savings, KYC utilities would reduce the amount of information that needs to be collected several times, for example when customers have accounts with a number of banks. The information would also be more standardized and reliable, and the process would be faster.

Cayman’s financial services associations confirmed that the issue is being discussed by the banks as a potential option in the future to supplement internal compliance programs. However, they pointed out that all banks have to meet international and local regulatory requirements and head office requirements, so that a minimum standard must be met by the banks that would not be covered by an outsourcing or independent external validation process at this time.

The FSB also promotes the use of unambiguous Legal Entity Identifiers as an improvement that could help make correspondent banking more transparent.

Another Grada solution focuses on money service providers and the ability to verify the identity of the person sending a payment via a smartphone app. Before the money transfer is carried out, the customer will take a selfie using the app. In combination with the time stamp and the geolocation of the phone placing the customer near the money store, the payment is approved for a limited time, as long as it is in line with pre-approved parameters such as maximum transaction amounts and the designated country the payment is going to.

In sum, these efforts could increase the comfort of onshore correspondent banks doing business with the Caribbean and other alleged “risky” business regions.

In addition, Cayman banks will continue to maintain strong systems and processes that meet global AML standards. And they will maintain their ongoing regular communication with CIMA to ensure they are aware of all regulatory requirements and expectations, Cayman Finance and CIBA said.

“The jurisdiction will maintain its robust regulatory and supervisory framework and ensure that correspondent banks are aware of the strength of our regulatory regime,” they noted.

Paul Byles, CEO of First Regents Bank in Cayman, agrees that the issue has to be tackled directly with banks and regulators onshore.

The banks should already know that the Cayman Islands and its regulator the Cayman Islands Monetary Authority adhere to very high global standards, he said. “But apparently that is not sufficient. So the only way to tackle the issue is to meet directly with the major institutions onshore and educate them on the nature of the regulatory regime for banks in Cayman. It would also make sense to go a step further to ask these banks to be specific about what types of systems and risks they wish to see managed better from an operational perspective, so that local banks facing this challenge can consider adopting such practices,” he argued.

A similar approach should be pursued with onshore regulators to better educate them on Cayman’s banking supervisory regime. There should also be more regional meetings and coordination to tackle the issue.

CIMA has been engaged in correspondent banking discussions by attending international working groups with entities such as the IMF, FSB, World Bank, global banks, regional regulators and law enforcement agencies including the IRS, the SEC and the FBI, Cayman Finance and the Bankers’ Association confirmed. In addition, CIMA has reached out to local associations to provide guidance on enhanced regulatory requirements and expectations.

Although there have been some industry surveys to better understand the nature and magnitude of the problem, Byles said, “The truth is, there has been very little progress in terms of getting U.S.-based banks to change their current approach.”

In the meantime, some banks are turning to other options such as finding more “lenient” institutions that will open correspondent accounts for them. That may be effective in the short term, Byles said, but generally this approach also poses some risks, so each bank will have to carry out its own due diligence on these options.

Globally and locally there is also a certain amount of opportunism within the banking sector, he noted, with some banks “hiding behind the ‘de-risking’ excuse knowing full well that they stand to gain because the lack of correspondent banking accounts means fewer banks and therefore less competition.”

This works well from an individual bank’s perspective, Byles said, but regionally or globally, it is not the best long-term solution because it encourages a very high concentration of client assets in a smaller number of institutions.

“Those institutions then fall into the ‘too big to fail’ category which itself leads to a host of other problems. That result can’t be good for anyone,” he said.

Legally Speaking: Proposed amendments to the Trusts and Property laws

Morven McMillan and Maxine Bodden

Morven McMillan, Maxine Bodden
Maples and Calder

The proposed amendments to the Trusts Law (2011 Revision) and the Property (Miscellaneous Provisions) Law (2011 Revision) are part of a tidying up exercise to correct long-standing deficiencies in both statutes. Other proposed amendments are to correct technical errors made in the original legislation which have been identified or have emerged over time. Although the proposed amendments do not reflect any significant change of policy or new products for the Cayman Islands trusts industry, the amendments are timely. They reflect changing technology and the changing marketplace in the international trusts industry and are designed to make the Cayman Islands more attractive as a possible location for commercial or private wealth trust structures.

Trusts Law

Ten amendments are proposed to the Trusts Law and are contained in the Trusts (Amendment) Bill, 2016. The more significant of the proposed amendments are:
Sections 6(c) and 8: Appointment, retirement and discharge of trustees

The first amendment corrects a transitional provision made under the Trusts (Amendment) (Immediate Effect and Reserved Powers) Law, 1998. While the actual changes made in 1998 were largely correct, they applied only to trusts created on or after May 11, 1998, or if the relevant section was expressly extended to apply to the trust by deed executed by the trustee. Unfortunately, when the amending legislation was consolidated with the then-existing Trusts Law, the distinction between trusts made before or after May 11, 1998, was not preserved.

Accordingly, s6(c) as it appears in the current Trusts Law is incorrect and the proposed amendments are aimed at correcting this error. Section 6(c) as amended will contain express reference to trusts created on or after May 11, 1998.

The second part of this amendment concerns the retirement of a trustee where there is no simultaneous appointment of a new trustee. When the changes were made in 1998, they applied only to changes of trustee where a new trustee was appointed under s6(c); an equivalent change to s8 – when there is a retirement but no new appointment – was overlooked. The two conflicting procedures have thus existed since 1998, and so the proposed amendment of s8 is designed to resolve this conflict in a way that achieves the original intent.

Reserved powers

An amendment to s14 will allow a settlor of a trust to reserve to himself or to a third party, such as a protector, the power to appoint both trust income and capital. Under new s113(3)(a), the amendment will apply to all trusts whenever created.

Validation of appointments where objects are excluded or take illusory shares

This section will reflect s158 of Law of the Property Act 1925 of England. It will overturn an old rule of equity that required the trustee of a discretionary trust (but not of a discretionary power) to appoint at least something to every object of the power. Experienced Cayman Islands trust practitioners know how to draft around this. However, by introducing this new section, we are not only bringing Cayman Islands law into line with English law, but providing for certainty in the law. Under new s113(3)(b), s23A will apply to all trusts, whenever created.

Trusteeship of STAR trusts

The proposed amendment to s105 will correct a technical defect (inserted in 2008) in relation to the trusteeship of STAR trusts. This correction will allow a controlled subsidiary to be the trustee of a STAR trust as well as a registered private trust company. Under the new s113(5), the amendment to s105 will be deemed to have had effect on and from Aug. 7, 2008.

Property (Miscellaneous Provisions) Law

Seven amendments are proposed to the Property (Miscellaneous Provisions) Law and are contained in the Property (Miscellaneous Provisions) (Amendment) Bill, 2016. The more significant of the proposed amendments are:

Legal assignments

Section 9 of the Statute of Frauds 1677 still applies in the Cayman Islands, and prohibits the assignment of an equitable interest except in writing and signed by the transferor. Most other jurisdictions, including England, repealed s9 many years ago and replaced it with a more modern alternative that allows an agent of the transferor to execute the assignment. The newly inserted s8C will repeal s9 of the Statute of Frauds 1677 as it applies in the Cayman Islands and will bring us into line with the regime prevalent in most other common law countries.

Construction of expressions used in deeds and other instruments

Because the Cayman Islands adopted the English statutes on trusts and succession but did not adopt the English conveyancing statutes, this useful set of definitions is missing from our legislation, but the defined phrases are used in our statutes. The newly inserted s6A will provide for the construction of commonly understood terms in deeds, contracts, wills, orders and other instruments.

Execution of powers not testamentary

This useful relaxation of some of the more extreme formalities sometimes imposed on the execution of certain trust powers has been in place in English statute since 1925 but has not found its way into the laws of the Cayman Islands. Not having this provision has on occasion caught out lawyers unfamiliar with the detail of Cayman Islands law who may have complied with the execution formalities for a Cayman Islands deed but not necessarily with any additional formalities imposed in the power itself. Section 8B will facilitate the exercise of powers by deed or another type of non-testamentary instrument.

US elections: What really matters from an investor’s perspective

Juergen Buettner

The U.S. presidential election not only produces controversial headlines in the media, but also raises concerns for many investors.

The question of who will be the next U.S. president and what the election result could mean for the financial markets brings the kind of uncertainty that often rattles investors.

There is a saying that “political stock markets have short legs.” But it seems many investors doubt whether this applies to the November election. The uncertainty has to do with two things: First, the U.S. is in difficult times economically, and despite a low unemployment rate, its society seems to be increasingly more divided. Second, the presidential candidates are not very popular with the electorate, to say the least. The Pew Research Center found in a survey conducted in August that only 31 percent expected Hillary Clinton to be a “great” or “good” president, while 45 percent expected her to be “poor” or “terrible.” As for Trump, only 27 percent of respondents said he would be “great” or “good,” while 55 percent expected him to be a “poor” or “terrible” president.

Heidi Richardson, head of investment strategy for U.S. iShares, noted: “Judging by the frequency of questions we are asked these days about the implications of the upcoming U.S. election, it has become top of mind for many – if not most – investors.”

What bothers investors are the personal profiles of the candidates, as well as their campaign platforms. Johnny Bo Jakobsen, U.S. chief analyst at Nordic financial services group Nordea, considers the contest between “Dangerous Donald” and “Crooked Hillary” as a race between perhaps the two most unpopular candidates and polarizing figures in modern U.S. history.

Looking at the candidates’ campaign promises, there is a risk that after the elections more populism and protectionism will emanate from the White House. While both candidates favor more spending on infrastructure projects, there are significant differences in other areas. With regard to environmental policy, for example, the proposals of Clinton and Trump are polar opposites, says Hendrik König.

“While Clinton wants to transform the U.S. into a clean energy superpower, Trump prefers to focus on conventional energy sources,” explains the strategist at the German private bank B. Metzler seel. Sohn & Co.

A lot is pure speculation

Against this background, it is not surprising that investors are thinking hard about the impact of the election outcome on individual industries. Among the big questions they ask themselves is whether a President Trump or Clinton would be better for the stock market. If history is any guide, based on data since 1928, S&P 500 returns have been stronger under Democratic presidents than under Republicans (see graph). After a more detailed analysis, Merrill Lynch quantitative strategist Savita Subramanian concludes that historically, returns have been strongest in election years with a leadership change but not a political party change. A Clinton win would represent such a leadership change with no party change. If Trump were elected, the combination of both a leadership change and a party change, historically, has resulted in the lowest returns, Subramanian writes in a study.

With regard to a potentially more populist government in the future, James Butterfill, head of research and investment strategy at ETF Securities, says that would likely mean trade policy changes, rising government deficits, increased inflation and market volatility. In that environment, he prefers defensive equities, inflation-linked bonds, precious metals and infrastructure. As far as sectors are concerned, Christoph Riniker ranks infrastructure as the winner, regardless of whether Clinton or Trump wins. According to the analyst at the Swiss bank Julius Baer, this also applies to the aerospace and defense sectors. The impact on the pharmaceutical industry, however, could be mixed, depending on the industry segment.

For financials, he believes both Clinton and Trump could have a positive effect. A Clinton presidency should turn out positive for immigration, he says, but negative under Trump’s leadership.

Recession risks and regulatory trends matter

All of this is highly speculative and most of all, it should not be forgotten that U.S. policy largely depends on which party controls the House of Representatives and the Senate.

“The U.S. presidency may still be the most powerful job in the world. Except for foreign policy, however, there is little a president can do without congressional support. When it comes to the things investors care about most, notably fiscal policy, Congress is key,” says Stefan Kreuzkamp, CIO at Deutsche Asset Management.

The fact that the stock market has performed better under Democratic presidents than under Republicans should not be overestimated, if only for statistical reasons. Ed Clissold, chief U.S. strategist at Ned Davis Research, points to the fact that this is only the 30th presidential election since 1900. When one divides the elections into categories such as political party or incumbent winning or losing, there are even fewer cases for study.

In addition, stock prices are ultimately more influenced by the development of the economy and most of all by the health of corporate earnings. The first question investors should ask themselves is: In what direction is the economy heading?

To find reliable answers, market participants should follow the ISM Purchasing Managers’ Index. If that indicator of the economic health of the manufacturing sector falls below 45, it coincides with an official U.S. recession in 11 out of 13 times since World War II. That, in turn, according to Bank of America Merrill Lynch, was historically associated with a minimum drop in profits of 5 percent to 10 percent.

Since stocks usually suffer under overregulation, the future direction of the markets also depends to a high degree on what will happen in terms of regulation. Developments since the year 2000 have led to significantly greater regulation, and small and medium-sized U.S. companies currently consider overregulation and taxes their main problems.

Long-term investors stick to their strategy

Based on these findings, it is important to closely monitor the recession risks and the regulatory trends. As long as the lights on the stock market are not flashing red, it is also advisable to continue to bet on those winning stocks that move within existing long-term upward trends. These marathon runners, whose prices rose ideally over decades have proved that they can deliver price increases regardless of which party and which president is in office.

This approach is backed by findings of Capital Group analysts, who point out that in 17 out of 18 presidential election years, a hypothetical $10,000 investment in the index made at the beginning of each election year would have grown larger 10 years down the road. Given that past results are no guarantee of future results, the following advice of the Capital Group rings true: “Presidential campaigns draw the public’s attention to bad news, which can be a serious distraction for investors. But those who tune out the noise, focus on long-term goals and avoid trying to time the market have tended to reap the rewards in the long run. That’s true during presidential elections – and any time of the year.”

Region of the Americas is declared free of measles

The region of the Americas is the first in the world to have eliminated measles, a viral disease that can cause severe health problems, including pneumonia, blindness, brain swelling and even death. This achievement culminates a 22-year effort involving mass vaccination against measles, mumps and rubella throughout the Americas.

The declaration of measles’ elimination was made by the International Expert Committee for Documenting and Verifying Measles, Rubella, and Congenital Rubella Syndrome Elimination in the Americas. The announcement came during the 55th Directing Council of the Pan American Health Organization/World Health Organization (PAHO/WHO), which is currently under way and is being attended by ministers of Health from throughout the Americas.

Measles is the fifth vaccine-preventable disease to be eliminated from the Americas, after the regional eradication of smallpox in 1971, poliomyelitis in 1994, and rubella and congenital rubella syndrome in 2015.

“This is a historic day for our region and indeed the world,” said PAHO/WHO Director Carissa F. Etienne. “It is proof of the remarkable success that can be achieved when countries work together in solidarity towards a common goal. It is the result of a commitment made more than two decades ago, in 1994, when the countries of the Americas pledged to end measles circulation by the turn of the 21st century.”

Before mass vaccination was initiated in 1980, measles caused nearly 2.6 million annual deaths worldwide. In the Americas, 101,800 deaths were attributable to measles between 1971 and 1979. A cost-effectiveness study on measles elimination in Latin America and the Caribbean has estimated that with vaccination, 3.2 million measles cases will have been prevented in the Region and 16,000 deaths between 2000 and 2020.

“This historic milestone would never have been possible without the strong political commitment of our Member States in ensuring that all children have access to life-saving vaccines,” Etienne continued. “It would not have been possible without the generosity and commitment of health workers and volunteers who have worked so hard to take the benefits of vaccines to all people, including those in vulnerable and hard-to-reach communities. Indeed it would not have been possible without the strong leadership and coordination provided by PAHO, Regional Office for the Americas of WHO.”

Measles transmission had been considered interrupted in the Region since 2002, when the last endemic case was reported in the Americas. However, as the disease had continued to circulate in other parts the world, some countries in the Americas experienced imported cases. The International Expert Committee reviewed evidence on measles elimination presented by all the countries of the Region between 2015 and August 2016 and decided that it met the established criteria for elimination. The process included six years of work with countries to document evidence of the elimination.

Measles is one of the most contagious diseases and affects primarily children. It is transmitted by airborne droplets or via direct contact with secretions from the nose, mouth, and throat of infected individuals. Symptoms include high fever, generalized rash all over the body, stuffy nose, and reddened eyes. It can cause serious complications including blindness, encephalitis, severe diarrhea, ear infections and pneumonia, particularly in children with nutritional problems and in immunocompromised patients.

As a result of global measles elimination efforts, only 244,704 measles cases were reported worldwide in 2015, representing a significant decline from earlier years. However, more than a half of these reported cases were notified in Africa and Asia.

To maintain measles elimination, PAHO/WHO and the International Expert Committee have recommended that all countries of the Americas strengthen active surveillance and maintain their populations’ immunity through vaccination.

“I would like to emphasize that our work on this front is not yet done,” warned Etienne. “We can not become complacent with this achievement but must rather protect it carefully. Measles still circulates widely in other parts of the world, and so we must be prepared to respond to imported cases. It is critical that we continue to maintain high vaccination coverage rates, and it is crucial that any suspected measles cases be immediately reported to the authorities for rapid follow-up.”

Process to eliminate measles

In the 1990s, a decline in cases was recorded, but the most notable decrease was observed after the Region had launched its initiative to eliminate measles in 1994. That year, the countries of the Americas established the goal to eliminate indigenous transmission of measles by the year 2000, through the implementation of surveillance and vaccination strategies recommended by PAHO/WHO.

PAHO/WHO’s elimination strategy had recommended three lines of action for countries: 1) conduct a one-time national campaign to bring children between 1 and 14 years of age up to date with measles vaccination; 2) strengthen routine vaccination to reach a minimum of 95% of children every year; and 3) undertake massive follow-up campaigns every four years, to reach a minimum of 95 percent of children aged 1 to 4 with a second dose of vaccine.

Following this strategy, the last indigenous measles outbreak was registered in Venezuela in 2002. However, some countries in the Region still notified imported cases. Between 2003 and 2014, 5,077 imported measles cases were registered in the Americas.

After declaring the elimination of rubella and congenital rubella syndrome in 2015, the International Expert Committee waited for evidence of the interruption of a measles outbreak in Brazil, which had begun in 2013 and lasted for more than a year. After a year of targeted actions and enhanced surveillance, the last case of measles in Brazil was registered in July 2015.

With this achievement and considering that the region has sustained elimination for more than 12 years, the International Expert Committee accepted the evidence presented by the countries and declared the elimination of measles in the Americas.

Key partners involved in in the effort to eliminate measles and rubella include the ministries of health of PAHO/WHO’s member states, the U.S. Centers for Disease Control and Prevention, the U.S. Department of Health and Human Services, Health Canada, the Canadian International Development Agency, the Spanish Agency for International Development Cooperation, the Sabin Vaccine Institute, the Serum Institute of India, March of Dimes, the Church of Jesus Christ of Latter-day Saints, and the Measles-Rubella Initiative, a coalition of global partners that includes the International Federation of Red Cross and Red Crescent Societies, the U.N. Foundation, UNICEF, and WHO.


Tax non-transparency: The truth will out

Anthony Travers

Anthony Travers, Travers Thorp Alberga

It has become conventional wisdom to lay the “blame” for lawful tax avoidance firmly at the feet of the offshore financial centers. In the April 2016 edition of Alternative Domicile Intelligence, Simon Osborne goes further and attributes the fault for the latest round of negative publicity to which they have been subjected firmly at the feet of those centers, which, he asserts, have failed to explain their role as “tax neutral cogs” in the global economy. Easier said than done. We can agree, at least, about the publicity he is referring to.

Ian Birrel, sometimes Guardian journalist and former speech writer for former British Prime Minister David Cameron, writes:

“Ordinary tax payers are right to be infuriated by the sleazy antics of super rich tax dodgers aided by a greedy army of pinstriped pimps. Empty talk of transparency is no longer enough.”

Respected veteran Simon Jenkins (also a Guardian contributor), similarly offers his view of offshore financial centers:

“What is surely plain is that flows of surplus cash around the world are wholly distorted by a necklace of puny havens, cheating national tax payers out of vast sums of money.”

And we should not now exclude the newest unguided missile launched by the angry left: Jacques Peretti (unsurprisingly also a Guardian contributor) who introduces no less than a BBC documentary on the Cayman Islands by describing it as “One of the most secretive places on Earth,” after which his mischaracterizations actually manage to get worse.

So we have the case for the Left Wing Anti-Capitalist Movement succinctly stated. If we needed more, and possibly we do not, we could turn to the always highly entertaining Nicholas Shaxson of Tax Justice Network for his latest mischaracterization, this time of the relevant provisions of the United States Tax Code. This from his most recent effort in the Washington Post:

“As US corporate tax rates have plunged over the past 40 years, corporations have shoveled ever rising quantities of money offshore … The solution is not to cut taxes but to crack down.”

Simon Osborne is correct in that insufficient intellectual and financial resources have been deployed in the offshore world to counter what are evident mischaracterizations. But in part, this is based on a prevalent disbelief that distortions of this sort could withstand a moment’s scrutiny. We can distil these distortions down to two fundamental propositions. Firstly, they seek to conflate illegal tax evasion with lawful tax avoidance. But complete transparency in the Cayman Islands and the other Overseas Territories has been secured for well over a decade by the Tax Information Exchange Agreements with, among others, HMRC and the IRS. As a result, professionals and institutions in these Overseas Territories know for a fact that suggestions of routine tax evasion are invented. And the statistical evidence entirely supports that conclusion. With the unrestricted ability to investigate any file maintained in the Cayman Islands, the 35 Tax Treaty jurisdictions have managed an average of 30 inquiries of the Cayman Islands Authority annually, which have resulted in statistically insignificant convictions for tax evasion. Law enforcement has been able to make inquiries since 1976, with similar results. We could well ask Mr. Birrel what greater level of transparency should the tax authorities have had? They obtained the standard requested by the OECD. (But do see further below for the answer).

The second distortion arises directly from the frustration of the high tax campaigners when the weapon of alleged tax evasion in offshore financial centers is removed from their armory. It has therefore also become conventional wisdom to blame the offshore financial centers for lawful tax avoidance. But from the technical perspective, this is a hopelessly flawed conclusion. The ability to lawfully avoid tax is, by definition, a function of onshore legislation not offshore legislation. Bemused by this proposition and the inability to control domestic legislative agendas and domestic budgets, politicians from President Obama to Senators Carl Levin and Bernie Sanders, and now Jeremy Corbyn resort to vilifying and demonizing the offshore financial centers. As cute as it may play in a sound bite, “It’s the biggest building in the world or a tax scam,” it is correct on neither point. But this is far more offensive than simple name-calling. It is a shockingly inaccurate mischaracterization of the United States Controlled Foreign Corporation and Sub-Part F Income Rules (by way of one example), which are not “loopholes” but detailed provisions of the IRS Code designed to ensure that U.S. corporations remain competitive in the global market place by being able to defer tax provided, and this is the point, they reinvest profits in genuine arm’s-length trading activities with non-related parties.

The classic left-wing mischaracterization of this perfectly sensible fiscal policy is that there is a mattress in the Cayman Islands with US$2 trillion stuffed under it, or to use Mr. Shaxson’s expression “shoveled.” But there is no such mattress. For the U.S. tax provisions to work effectively, the profits must be reinvested immediately in genuine trading activity. And we could add the fact that these monies necessarily appear on a consolidated accounting basis on the books of account of their U.S. corporate parents (which is why the left-wing journalists know the figure is US$2 trillion).

A genuine politician would have said this: “These provisions of the United States Tax Code should now be regarded as outmoded. We need this US$2 trillion to be repatriated as we appear to have very carelessly run up a very large budget deficit of some US$19 trillion and so I would be grateful if the Congress and the Senate would now pass amending legislation.” In fact, President Obama no doubt privately said something along those lines as amending legislation has been presented periodically for over 50 years. But the simple and unanswerable fact is that it has failed to pass in either House, and U.S. corporations therefore continue to defer taxation in accordance with United States law.

If the laws of defamation enabled a jurisdiction rather than an individual to complain of libel or slander, the Cayman Islands would by now be the richest country in the world.

Further fallacies in relation to lawful tax avoidance abound, but each industry requires specific analysis of the sort that is never undertaken by the media. As to the US$4 trillion hedge fund and private equity industry in the Cayman Islands, there is no tax deferral whatsoever; nor is there “light touch regulation.” As the recent AIMA paper “Transparent, Sophisticated, Tax Neutral – The Truth about Offshore Funds” makes clear, every dollar of these monies invested in the Cayman Islands vehicles is necessarily reinvested and regulated in onshore markets and therefore necessarily taxed and regulated in accordance with the laws of those onshore jurisdictions. A Cayman Islands hedge fund trading in New York or London in any given security is subject to precisely the same regulatory regime as a U.S. domestic fund and pays all of the taxes imposed by the laws of that jurisdiction.

So much for Mr. Shaxson’s further fallacy, in fairness originated by the OECD, that offshore financial centers drain capital from high tax jurisdictions. One hundred percent of the US$4 trillion of capital invested in the Cayman Islands hedge fund and private equity industry is reinvested into those onshore markets or investments and is 100 percent taxable in accordance with the laws of those onshore jurisdictions. No one’s tax laws are being avoided. The truth is simply that capital is flowing from the European and other jurisdictions to Cayman to benefit from the higher returns available from Cayman Islands funds’ investment in U.S. and U.K. markets. This then is simply a war about capital flows, higher quality investment management and financial returns dressed up as some kind of invented tax arbitrage and because on a fundamental comparative analysis of those core metrics, Europe (the City of London apart) comes a distant second.

So what then of US$1.4 trillion in the Cayman Islands’ banking industry? There are two material points. These monies are a by-product of international trade and require a sound well-regulated offshore banking environment to manage them. If someone in the U.S. imports something for a dollar, that dollar becomes a euro dollar and has to be banked somewhere. It could be a euro yen, the principle is the same. It is still called a euro-something because it is in circulation outside of its originating jurisdiction.

No doubt it upsets the Europeans that it is not now necessarily deposited in Europe, but then given the parlous financial condition of the European banking system, why would you deposit your dollar in a European-based bank when the offshore banking sector is, as the financial crisis established, more secure?

The second point is that over 90 percent of the monies flowing through the Cayman Islands banking industry are inter-bank bookings and therefore must be looked at in the context of a global banking network. But it is the same fallacy to suppose that these inter-bank bookings are not reinvested onshore; they need to generate returns and when they do, they will pay taxes in accordance with the laws of the jurisdictions where they are reinvested.

What should be clear to even the extreme left wing (because the information is publicly available) is that the Overseas Territories indeed ought to be lauded as their transparency arrangements have been world-leading for well over a decade and with statistically insignificant resulting inquiry by law enforcement and tax authorities.

But all of that is of historical interest only. We now have the FATCA initiative and the Common Reporting Standard suggested by the OECD, which will result in automatic tax reporting of every account maintained in the Cayman Islands to the tax authorities of the beneficial owners in over 80 jurisdictions (and certainly all of the significant ones).

The cost of these reporting initiatives, which for the time being at least is assumed by the private sector, runs into tens of billions of dollars annually. But in just the same way that the Panama Papers revealed no U.S. client base, so too, we in the Cayman Islands know that these OECD initiatives will generate nothing whatsoever in return for onshore revenue authorities and for two reasons. Firstly, the suggestions of the Tax Justice Network as to tax evasion in the Overseas Territories have been pure nonsense; there is no tax being evaded that cannot be collected; and secondly, in any event, Cayman Islands investment vehicles pay tax in accordance with the laws of the onshore jurisdictions in which they invest. So the net result of these mischaracterizations of offshore financial centers and the phenomenal regulatory burden imposed will be fiscally insignificant and statistically irrelevant.

At some future point, the balance here will have to be redressed; the costs of FATCA and CRS will have to be recovered from the relevant tax authorities to which the information is being provided. And when it is clearly seen that this information results in no additional tax revenue whatsoever, only at that point will a realistic evaluation of the continued need for these initiatives be undertaken on a cost benefit basis.

It remains open to onshore jurisdictions to change their tax legislation to deal with avoidance and the so-called “moral” issue. As matters stand, the guiding comment should be that of Angel Gurria of the OECD, who states plainly that “Corporations cannot be criticized for using the rules that are in place.” He does not dwell on the irony. The double tax treaty networks that are being “morally abused” are the work product of the OECD and all EU-centric. His acceptance that tax avoidance is lawful and socially and morally sound is at least philosophically consistent and technically correct. As an employee of the OECD, French law provides he pays no tax at all.

The nonsense spouted by the Tax Justice Network and others on the subject of non-transparency will simply have to stop. It is already unbelievable. This may well leave the moral indignation argument that taxes are being avoided. But insofar as the high-profile cases are concerned, Google, Starbucks and Amazon, the jurisdictions in which these taxes are avoided are exclusively the European Union jurisdictions, particularly Ireland (although from 2020 it has been pressured into introducing legislative change) and Luxembourg with its wholly secret “tax deals,” of which there were some 714 signed last year during Jean-Claude Juncker’s presidency of the EU. And so the criticisms are once again wholly misdirected. Eventually, no doubt, the truth will out, but that process would be greatly assisted by a higher standard of journalistic inquiry that than thus far exhibited by Messrs. Birrel, Jenkins and Peretti.

‘Modernized’ intellectual property laws bring big changes

A new copyright law is already in effect, and Cayman’s lawmakers hope to pass a trio of bills updating rules for trademarks, design rights and patents as soon as this month. More changes to the patent laws are also being drafted as the Commerce Ministry pushes to modernize protections for intellectual property.

When the United Kingdom extended its Copyright Act to Cayman last year, it replaced a law that was written in 1956. That law went into effect in June, updating protections for musicians, artists and other creators, in line with the digital age.

Reading from a written statement in the Legislative Assembly just after the U.K. extended the Copyright Act, Commerce Minister Wayne Panton said, “The protection of intellectual property is categorized in several key areas: patents, copyrights, trade marks, design rights and trade secrets. Basic protection in these areas is necessary for economic success; advanced protection is critical to allow creativity in an economy to really flourish.”

More than a year later as the law came into force, Mr. Panton said, “Local artists and investors have been frustrated for many years by the lack of modern IP protection in Cayman and clamored for improved rights. With copyrights, while previous legislation offered a level of protection, it was outdated to the point where local artists could not properly protect their digital music, images and other digital creations.”

Mr. Panton’s next push is for trademark and design rights.

The current trademark regime requires companies to register first in the U.K. and then have the mark extended to the Cayman Islands.

Mr. Panton, in an interview with the Cayman Compass last month, said the new trademark rules will give “better options for local trademark owners” and “ensure we have better control over local trademark protections.”

Sophie Davies, an attorney with HSM specializing in intellectual property, said the new rules will “cut out the middleman” from the trademark process. Local companies will no longer have to go to the U.K. to register trademarks.

“It’s very rare to have to go to another country to get protection,” said Ms. Davies, who helped draft the new intellectual property bills.

Trademark registry, design rights

The proposal would create a new trademark registry in the Cayman Islands.

According to the memorandum accompanying the Trade Marks Bill, “It has been observed too that the word ‘Cayman’ has been registered. This has resulted in businesses based in the Cayman Islands having a challenge in securing UK trade mark registrations where the trade mark includes the word ‘Cayman.’ A regime which provides for a system of local registration which prevents any one person having the exclusive right to the use of such words as ‘Cayman’ would address this matter.”

The Design Rights Bill, she explained, creates new protections for designs and the way something looks. She explained design rights as protecting “a new and novel look” for something, using the iPad’s unique style as an example.

Taking the opposite approach of the Trade Marks Bill, the Design Rights Bill “introduces a middleman where we didn’t have anything before.” The bill will allow designs registered in the U.K. or Europe to be extended to the Cayman Islands, the same way trademark is currently handled.


The last in the trio of intellectual property proposals coming up in the Legislative Assembly is amendments to the current Patents and Trade Marks Law. The amendments strip out the trademark provisions that will be in the future Trade Marks Law, but also make core changes to the way patent enforcement works in a bid to prevent “patent trolls” from taking advantage of the patent system.

“Patent trolls” are companies that use overly vague patents to claim ownership over broad technologies like podcasting or the ability to make purchases within a smartphone app.

The proposed amendments state that it would be unlawful to make claims for “patent infringement in bad faith.” The bill also states that courts in Cayman will not recognize patent rulings from other jurisdictions made in bad faith.

Countries of the Americas agree on plan to end AIDS by 2030

Based on 30 years of public health efforts to respond to the HIV epidemic, ministers of health from the countries of the Americas approved a plan to scale up prevention and treatment measures by 2020, with the goal of ending AIDS and sexually transmitted infections (STIs) as public health problems by 2030.

“We have powerful prevention and treatment tools to ensure that the public health response to HIV will overcome the epidemic,” said Marcos Espinal, Director of the Communicable Diseases and Health Analysis Department of the Pan American Health Organization (PAHO), Regional Office for the Americas of the World Health Organization.

The new plan seeks, by 2020, to reduce new cases of HIV in the Region by 74 percent, decrease annual AIDS-related deaths by 62 percent, lower the proportion of children with HIV born to infected mothers from 7 percent to 2 percent, and ensure that no more than children per 10,000 live births are born with congenital syphilis. The plan also aims for a 5% reduction in new cases of cervical cancer caused by human papillomavirus, which is easily transmitted through sexual contact.

“We must provide a more accelerated, focused, innovative, effective, and sustainable response based on a public health, human rights, gender equality, and intercultural approach,” said Massimo Ghidinelli, Chief of PAHO/WHO’s HIV, Hepatitis, Tuberculosis and Sexually Transmitted Infections Unit.

To achieve this, the plan establishes the need to expand and ensure equitable access to HIV/STI prevention, care, and treatment services through integrated health service networks and with the active participation of civil society. It also calls for improving and expanding public funding for programs.

The plan also seeks to eliminating discrimination and other barriers that prevent timely access to health services and targets special efforts toward the populations who are most affected by HIV in the region, such as transgender people, gay men and other men who have sex with men, and male and female sex workers.

The plan, approved during PAHO’s 55th Directing Council, is based on other plans and strategies implemented by PAHO and the countries of the Region. As a result of these efforts, the region has steadily increased the proportion of people receiving antiretroviral treatment to 55 percent of those who need it and has prevented an estimated 28,000 new cases of HIV in children in the last five years. In 2015, Cuba became the first country in the world to receive WHO certification for having eliminated mother-to-child transmission of HIV and syphilis.

Despite this progress, an estimated 2 million people live with HIV in Latin America and the Caribbean, 100,000 people are newly infected with HIV annually (with a spike in the number of new cases in recent years), and 50,000 die from AIDS-related causes. In 2012, easily curable STIs affected 51 million adolescents and adults in the Region.

The new action plan is aligned with the global strategies of WHO, UNAIDS, and the new United Nations Sustainable Development Goals, as well as the global Fast Track strategy.

‘It’s regulation, stupid’

Brendalee Scott-Novak, Butterfield

The spike in LIBOR (London Interbank Offered Rate) for much of 2016 resurrected well-buried fears foreshadowing the 2008 financial crisis. Following the collapse of Lehman Brothers and the run on money market funds that left the prominent Reserve Primary Fund a distant memory, fears surrounding the insolvency of financial institutions came into fair play.

Far from the pandemonium surrounding 2008, the sharp rise in borrowing cost among financial institutions is enough to make investors stop and wonder! With no sign of distress in the financial system and policymakers’ hesitancy in moving rates higher, why does LIBOR continue to spike?

Some have pointed to changes in the calculation of LIBOR, growing expectations for rates to move higher, as well as increasing demand for U.S. dollar-denominated assets abroad as reasons for the move. Notwithstanding, the most significant driver of the recent spike appears to be the impending money market reforms effective Oct. 14.

In anticipation of these changes, prime money market funds that invest primarily in corporate debt securities are rapidly reducing their investments in floating rate debt and commercial paper. As broad-based selling intensifies, coupled with the frequent supply from banks and corporations operating in this very liquid market, LIBOR rates shot up.
So what are these new rules transforming the way banks borrow and institutions invest?

Post the collapse and near-death experience of many financial institutions in 2008, the U.S. Securities and Exchange Commission set out to create stability and resiliency around money market funds. The proposed amendments came in the form of liquidity fees and redemption gates, making them less susceptible to runs. One of the most significant changes to the new rules, however, is the requirement for prime money market funds to maintain a floating rate NAV (net asset value) vis-à-vis a fixed $1 price per share. This move will unquestionably expose invested principal to potential losses, a stark contrast to the primary objective of money market investors. The new rules also lend themselves to suspend redemptions up to 10 business days within a 90-day period with liquidity fees of 1 percent or 2 percent if liquid assets fall below certain thresholds.

While these changes do not directly impact retail money market funds per se (which can still maintain a fixed NAV), they have significant implications for institutional investors. Those investors must now reassess the role money market funds play in their portfolios and choose between increased risks (accepting the potential for principal impairment inherent within prime funds) or invest in lower yielding government money market funds. Another option for investors is to switch their exposure from prime funds to government funds, which are not subjected to the new reforms. Societe Generale SA reported that more than 133B were redeemed out of prime money market funds versus subscriptions of c. 135B into government money market funds for the month of June. This shift has undoubtedly reduced one of the seismic financing options available to banks and corporations that depend on commercial paper and private placements as their primary source of unsecured financing. Providers of prime funds must also decide on their own course of action to mitigate the flowing tide from their funds.

Impact on secured loan markets

A further corollary of rising LIBOR is the significant impact on the secured loans markets. Most mortgages and car loans are based on a variable rate tied to LIBOR and comprise a minimum floor rate plus a spread. With LIBOR shooting from 31 basis points in 2015 to a 12-month high of 86.5 basis points, floor levels are easily breached, converting these loans into higher floating rate obligations. In much the same way that these obligations move in line with LIBOR, the potential returns on investments in this segment will also increase.

While the impending money market reform led to an increase in borrowing cost for banks and retail consumers, and an investment dilemma for institutional investors and fund providers, it also poses a conundrum for policymakers. The rise in LIBOR resulted in tightening of financial conditions similar to that of a rate hike, tempering the actions of the Federal Reserve for any imminent increases. With the effective date of the reform mere days away, the question then arises, is this shifting dynamic finally over? The LOIS Index, which is the spread between LIBOR and OIS (Overnight Index Swap) still points to elevated levels of bank funding stress. This spread now stands at 43 basis points versus a mean of 21 basis points for the last 12 months. Consequently, if prime funds continue to face an exodus in redemptions post the effective time line coupled with any exoteric shocks to the banking sector, spreads could once again spike beyond levels not seen in almost five years.

Disclaimer: The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. This document is for illustrative purposes only. It neither constitutes investment advice nor is it an offer or an invitation to acquire or dispose of any securities and should not be relied upon as such. Prior to making any investment decision a financial adviser should be consulted.

The data sources for this document are listed below. It is believed to be accurate as of the date of publication and may be subject to change without notice. While every care has been taken in producing this commentary, neither the author nor Butterfield Bank (Cayman) Ltd. shall be liable for any errors, misprints or misinterpretation of any of the matters set out in it. Past performance is not necessarily a guide to future performance.

Men’s health, everyone’s health at stake in healthcare conference

Dr. David Greenberg and Dr. Wael Barsoum

The solutions are neither dark nor mysterious, but like so much else require exertion, and the literature on how to change bad habits is as old and as predictable as the habits themselves.

The good news is that the advice is straightforward, even if “no one is particularly good at it,” according to Dr. David Greenberg, lecturer at the University of Toronto and member of the Department of Family and Community Medicine at St. Joseph’s Health Centre in Toronto. But the advice is readily available.

Greenberg will speak on Oct. 21, the second day of the seventh annual Ministry of Health healthcare conference, subtitled “The Chapters of a Healthy Life.” He will address an audience at The Ritz-Carlton, Grand Cayman from 2-3 p.m.

The formal title of his talk is “Development and Implementation of Men’s Health Guidelines for Family Practice and the Alpha Male – How to Care for the Man Who Doesn’t Think He Needs Your Care.”

Men’s health has gained significant attention in the past decade, but the same issues continue to plague the demographic. Greenberg, director of the Canadian Society for the Study of the Aging Male and director of the Canadian Men’s Health Foundation, which promotes the health of men of all ages, says “there are 56 million people in Canada – and $27 billion is spent for lost time and productivity at work.”

Men at risk for a variety of conditions

He also notes that Canada has 8 million men over age 40 who are “at risk for a variety of conditions” that are either unique to men or who are subject to specific issues requiring management – and “there are loads and loads of issues.”

He lists: Loss of sex drive leads the list, followed by anemia, low energy, depressed moods, high blood pressure and obesity.

Others are: sleep deprivation and sleep apnea, osteoporosis, loss of muscle mass and pre- or full-blown diabetes. All, he said, are associated with the condition generally diagnosed as low testosterone.

Low – and lowering – levels of the hormone begin to affect men as they turn 40 years old. “When you hit that age, two things start to happen,” Greenberg says. “You lose 1 percent of your testosterone every year, and the body uses less.”

He points to the 10-point ADAM [Androgen Deficiency in the Aging Male] questionnaire, developed in September 2000 to assess “low-T.”

“We use it as a screen to figure out if men have an issue,” Greenberg says, as an empirical counter to what he describes as typical male attitudes toward their health.

“Real men don’t go to doctors; real men don’t talk about their problems; real men are invincible and real men cannot NOT go to work because the system cannot function without them.”

The questionnaire is a series of yes-or-no propositions such as “do you fall asleep after dinner,” “are you sad or grumpy,” “do you have a decrease in libido” and “do you have a lack of energy.”

“Yes” to more than three of the queries – or to numbers 1 and 7 in the list – may indicate low-T, and a need to visit the doctor.

“I have a picture of what the post-40 guy looks like,” Greenberg says. “He has trouble concentrating, he falls asleep on the sofa and isn’t interested in having sex with his wife, and this makes him neither a great spouse nor employee.”

The solutions

The solutions, he says, involve more than just a conversation. Pointing to the diversity of the Cayman Islands, for example, he says the 130 nationalities generally comprise small and wealthy groups of people.

“I have 3,000 patients,” he says, and Canada comprises every economic and social class – talking to them alone is an enormous undertaking. His degree in sociology, he says, means that unlike most physicians, he has thought about social and psychological backgrounds, “cultural perspectives,” and how he can most effectively speak to a patient.

“You learn how to size them up very quickly,” he says, identifying broadly general “archetypes.”

“You need to know how to talk to them and what is the right thing to say.” Sadly, he says, “no one is particularly good at it. There is a Nobel Prize waiting for whoever figures that out.”

Mostly, he says, the conversations regard “basic lifestyle changes: eating properly, for example,” he says, which is not necessarily counting calories as much as embracing guidelines about fiber, fruit, vegetables, avoiding sugar and achieving an overall balance; “quitting smoking,” which most guidelines indicate must embrace total abstinence to be effective; exercising and not drinking too much.

As such, his conversations about male health are “not so much about transferring information, but about changing behaviors.” He points to the “transtheoretical model,” marking stages of change, developed from 1977 by James O. Prochaska, professor of psychology and director of the Cancer Prevention Research Center at the University of Rhode Island.

Prochaska’s model suggests five stages to behavioral change: Precontemplation, meaning the subject is unready to change for any number of reasons; contemplation, meaning the subject intends to change in the next six months; preparation, meaning the subject intends to act, probably in the next 30 days and may have taken steps in the previous year; action, in which people have made specific modifications within the previous six months; and maintenance, in which the subject has made modifications and is trying to prevent a relapse.

“We try to move along one step at a time,” Greenberg says, “and that means, for example, not moving from smoking and drinking straight to Olympic athlete, but taking ‘baby steps.’”

Behavior modification

Behavior modification is exactly what Cleveland Clinic’s Dr. Wael Barsoum plans to discuss as the final speaker at the conference.

Titled “The Chapters of a Healthy Life: Change your Chapter by Modifying your Behavior,” Barsoum’s one-hour talk, at 11:30 a.m. on Oct. 22, will confront the origins and treatment of chronic conditions, the factors driving costs in the U.S. healthcare system and preventive measures that can reduce a patient’s costs by reducing exposure to the most expensive care.

Like Greenberg, Barsoum says health management must be the future of medicine, reducing costs and improving the patient experience.

“The issues are that we have a healthcare system that is designed to be disease-focused,” says Barsoum, who is president of Cleveland Clinic Florida and vice chairman of the Department of Orthopedic Surgery, where he specializes in reconstructive and minimally invasive surgery of the hip and knee, including arthroscopy, and primary and revision joint replacements.

America’s healthcare system, he says, becomes involved “only when someone is sick, and that is an expensive way to practice healthcare. We are a system that is reactive rather than proactive in treating and managing chronic disease.”

While he indicates solutions are not complicated, they require personal discipline and even political will: “If you drive health management, obesity management [and] reduce visits to emergency rooms, you will reduce healthcare inflation and reduce costs.

“In the United States, the top causes of death are heart disease, cancer and respiratory diseases. In the Cayman Islands, the top causes of death are cancer, cardiovascular disease and diabetes.”

If risk factors can be modified, he says, quality-of-life issues will improve and longevity increased.

“We empower our patients to focus on wellness and healthy living,” Barsoum says, pointing to financial models correlating prevention and reduced costs.

He lists some of the more obvious modifiable factors – obesity, high blood pressure and diabetes – and says they “will play a major role in the life of the individual and the overall cost of healthcare to society. “

Proactive healthcare

To combat this, he says, “We have to start thinking more about proactive healthcare. Patients have to take an active role in managing their health more and more,” echoing longtime Health Services Authority admonitions in Cayman about “personal responsibility.”

“With healthcare providers and patients working hand in hand,” Barsoum says, “and with strong care coordination, we can make a real difference in bringing better value to healthcare.”

He proposes two steps to achieve the outcome: “First, we must continue the shift in our nation’s healthcare system from fee-for-service to pay-for-performance,” linking cures and restored health, rather than simple treatment, to costs.

“We must place value and quality over quantity, moving to value-based care [and] focusing on quality, safety, efficiency and outcomes.”

Second, he says, “empowering patients to practice wellness and healthy living” means fewer demands on doctors, less-expensive medical treatments and better-controlled costs.

Clinic administrators, demonstrating the efficacy of what Cleveland’s doctors preach, have implemented health-management principles in their own employment practices, resulting in the astonishing loss of a collective half-a-million pounds of excess weight, Barsoum says.

“Many years ago, we made the decision to stop hiring smokers, and we offered smoking-cessation programs to help our existing employees stop smoking,” a risk factor for heart and lung disease.

“We provide our caregivers with gym memberships, an on-site fitness center, yoga classes and Weight Watchers – all free. We also offer a weekly farmers market where employees and patients can purchase locally grown fresh fruit and vegetables.

“Since we began our wellness program,” he says, “our caregivers have lost a combined 500,000 pounds and our employee health costs have plateaued.”

Old models disrupted

Contributing to the changes, many traditional healthcare proscriptions have shifted, disrupting old models and forcing re-examination of old assumptions.

“For decades, we have been given the wrong information,” Barsoum says. For example, “We were told that all fat was the culprit. The traditional food pyramid as we know it does not work for most people because there is a direct correlation between simple carbohydrates and obesity and diabetes.”

Placing responsibility on physicians and, more explicitly, their patients, means better prevention, management and control: “The type of diet and exercise habits we have are the drivers that lead to optimum health.

“Carbohydrates are a huge part of the obesity epidemic. We now know that avoiding some carbohydrates and sugar stabilizes insulin levels. Diet and exercise have a direct effect on modifiable risk factors, which are high blood pressure, cholesterol and diabetes. Smoking, which puts people at risk for many types of cancers, heart disease and lung diseases, is a modifiable risk factor that we can control,” he says.

Physicians can inspire their patients, and it is here that Barsoum echoes some of the themes articulated by Greenberg. “Forty percent of the risk factors for premature mortality are behavioral, which means there are specific behaviors a person chooses that directly contribute to chronic disease.”

He names obesity, poor diet, a sedentary lifestyle and smoking as four clear problems, but observes that no single solution addresses all of them. The implication is clear: Changes must be holistic – and that is where physician support is critical.

“You can’t exercise yourself out of a poor diet. Shifting exercise habits from spending one hour on a treadmill to short bursts of high-intensity interval exercise reduces insulin resistance and reduces hunger. Changing your diet to one that is plant-based, includes healthy fats, lean protein and vegetables has been shown to reduce cardiovascular disease, maintain weight control and blood glucose levels.

“By shifting our focus from managing acute episodes to managing patient populations and shifting from sick care to wellness and prevention, we will provide better care while at the same time empower patients to reduce the environmental risk factors that contribute to chronic disease,” he says.

Barsoum says alternative medicines and treatments are not always effective, and that no single entity – such as the processed-food industry – can be blamed for modern health challenges. Acupuncture, moxibustion, ayurvedic medicines, even vegetarian alternatives may have a value.

“There is conflicting data in the medical community about the efficacy of various types of nontraditional medical alternatives,” he says. “I would encourage people to follow the advice of peer-reviewed data that is science- and evidence-based.

“However, if someone wants to try an alternative, even if it provides a placebo effect and does not harm them, I say go ahead.”

The healthcare conference runs Oct. 20-22.


Conference theme explores health maintenance

Jennifer Ahearn

Ministry of Health officials predict record attendance at the this month’s healthcare conference, the seventh consecutive year government has staged the gathering, drawing on speakers and audiences from around the region and North America.

The conference, subtitled “The Chapters of a Healthy Life,” is at The Ritz-Carlton Grand Cayman from Oct. 20-22 and will feature at least 10 speakers, breakfast, coffee and cocktails, and a handful of breakout sessions with panels, more speakers and an opportunity for audience participation.

“The theme of the conference will focus on optimal health during the various stages of life,” said Jennifer Ahearn, chief officer in the Ministry of Health. “Speakers will cover a range of topics over the entire life span to include children’s and adolescent health, women’s and men’s health, and the health of older persons.”

The speakers are drawn from a variety of backgrounds: yoga instructor and authority on aging Louis Tenenbaum from Washington, D.C., will ask if aging is a book or a screenplay; Senior Public Relations and Marketing Manager for Maples and Calder Chelsea Rivers, mother of a “differently abled” son, will look at “Children with Disabilities: When Hugs and Band-Aids are not Enough”; Trinidad’s Dr. C. James Hospedales, executive director of the Caribbean Public Health Agency since February 2013, and previously responsible for the Pan American Health Organization’s program for prevention and control of chronic noncommunicable diseases, will discuss “Achieving Goals for a Healthier Caribbean Region.”

Dr. Verna Brooks McKenzie of Jamaica, an honors graduate of the University of the West Indies in obstetrics and gynecology, will address “Women’s Menopausal Health” to kick off the second day of the conference.

She is followed by countryman Dr. Fitzroy Henry, speaking on “Nutrition: The Preface to a Healthy Life.” A Ph.D. in health and nutrition from the University of London, Dr. Henry was an associate professor for five years at Harvard University, two years in Nigeria, seven in Bangladesh and two at the London School of Hygiene and Tropical Medicine.

He is currently professor of public health nutrition in the College of Health Sciences and the School of Public Health and Health Technology at Jamaica’s University of Technology. For 18 years he was part of PAHO as director of the Caribbean Food and Nutrition Institute.

Among local speakers, Sophia Chandler Alleyne, a master’s-level practitioner in the Outpatient Department of Psychiatry and Behavioural Health Services at the Cayman Islands Hospital – working as a psychologist with children who have been abused or are at risk – will speak on “Victims or Survivors: Possible Outcomes Over the Lifetime of Those Who Have Experienced Childhood Trauma.”

Canadian author and educator Michael Reist will speak on “Promoting Emotional Health through Childhood and Adolescence”; men’s health specialist Dr. David Greenberg will take on Canada’s 8 million post-40 male population in a talk titled “Development and Implementation of Men’s Health Guidelines for Family Practice and The Alpha Male/How to Care for the Man Who Doesn’t Think He Needs Your Care”; Dr. Wael Barsoum of the Cleveland Clinic will discuss “The Chapters of a Healthy Life: Change your Chapter by Modifying Your Behavior”; and Dr. Colin Higgs of Canada’s Memorial University of Newfoundland will explore “A New Approach to Increasing Population Physical Activity.”

The “Chapters of a Healthy Life” theme, says Ahearn, “aims to encompass a wide range of health issues that may affect the local population at different stages of life.

“We also aim to educate the public in the various ways that they can stay on top of their health and fitness in order to maintain a healthy lifestyle no matter their age,” she says.

Ahearn expects attendance to exceed 2015’s record 800 delegates.

The event kicks off Thursday evening at 5 p.m. with registration and refreshments, followed by opening remarks, and by Dr. Hospedales. Closing remarks and a 7:15 p.m. cocktail reception complete the day.

Friday’s sessions begin at 7:45 a.m. with registration and breakfast, followed by Dr. Brooks McKenzie on menopausal health, Dr. Fitzroy on nutrition, a coffee break, and Mr. Reist on childhood and adolescent emotional health.

Sophia Alleyne, Chelsea Rivers and David Greenberg follow in steady succession, before three two-hour breakout sessions in the afternoon offer attendees a more intimate setting to discuss “Tech-ing up your health,” “Saving Face: Teeth, Eyes and Ears” and “Understanding the Ageing Brain.”

Attendees are on their own for the evening, but expected back on Saturday at 8:15 a.m. for registration and breakfast. At 9 a.m. Louis Tenenbaum takes the dais, followed at 10 a.m. by Dr. Higgs and a coffee break at 11 a.m.

Rounding out the conference, Dr. Barsoum will speak at 11:30 a.m., followed by 30 minutes of “closing remarks.”

Ahearn describes how the “Chapters” theme and speakers were selected: “The conference has a designated planning committee, chaired by Lizzette Yearwood, CEO of the Cayman Islands Health Services Authority, with representatives from the Ministry of Health and Culture, Public Health, Tower [Marketing, handling public relations and press liaison] and the HSA.

“Potential topics and theme are shaped by the committee, based on feedback from previous years and suggestions from the post-conference attendee survey [from 2015 and earlier] in regards to what delegates would like to see represented at future events.

“Speakers for the conference are strategically chosen based on those submitted presentation synopses [which] best fit within the conference’s theme,” she says.

Having established a solid reputation after six years, and carving out a regular slot on the healthcare calendar, the conference is ready to consolidate its gains, built on its open invitation and free admission.

“As a free-to-attend and open-to-all event,” Ahearn says, “the conference is not just restricted to members of the medical community alone. One of the most successful elements is the opportunity to educate the general public about matters that may affect their health as well as ensuring that key stakeholders such as [human resource] managers and insurance companies are also invested in supporting the health of Cayman’s community.

“We strive also to feature a dynamic and engaging lineup of local and international speakers,” she says.

For hackers, humans are easiest targets

A DEFCON badge holds secrets too.

At the annual gathering in Las Vegas for hackers and cybersecurity experts, people got a look at the newest hacks and vulnerable technologies, from breaking into Tesla cars to holding hostage a fancy new home thermostat until a homeowner pays a ransom. Despite the digital skills hackers showed off for taking control of computer systems, humans remain the single easiest way to break into any computer network.

The back-to-back Black Hat and DEFCON conferences are annual events in the glittering desert city, bringing together researchers, government, big private firms and digital scofflaws to showcase the latest in how to break – and fix – computer networks.

Cayman’s Micho Schumann, a principal with KPMG and a computer security expert, made his annual pilgrimage to the week of conferences. Schumann described the first conference, Black Hat, as always “more buttoned-down and corporate.” The second, DEFCON, is not so formal, and “is disorganized in a good way,” he said, more a reflection of the freewheeling hacker culture in the popular imagination.

These conferences, especially DEFCON, always make a splash in the world media, with researchers from academia and private labs showing how to hack into everything from phones to cars.

“There’s always lots of forward-looking stuff – what’s going on and where are the risks,” he said.

The demonstrations during the week show just what’s possible as people try to poke security holes in anything that is connected to the Internet. Even the routine boarding pass to get on an airplane is open to attack, Schumann said. Based on a demonstration from the week, he explained, “all I need is your boarding pass number and I can probably cancel your ticket.”

A cancelled boarding pass would be annoying, but could probably be fixed after a couple of hours in line or on the phone. One of the hacks Schumann highlighted in an interview after the conference was on a new state-of-the-art electronic safe. He said researchers demonstrated how they could pick up the frequencies of the electronic signals in an expensive new safe and figure out the combination to break in.

“This ties back to physical security,” Schumann said, which is something he preaches to clients who hire him to make sure their networks are locked down as tightly as possible.

He said this is why companies need to train staff to think, what is this guy doing in my server room? Or, why is this person calling to ask about my operating system?

Kevin Mitnick, left, an infamous hacker who served five years in prison and now consults on computer security, with KPMG's Micho Schumann at the Black Hat conference in Las Vegas earlier this month.
Kevin Mitnick, left, an infamous hacker who served five years in prison and now consults on computer security, with KPMG’s Micho Schumann at the Black Hat conference in Las Vegas earlier this month.

People are the weakest link in any cybersecurity program, he said. They can steal data like Edward Snowden took from the U.S. National Security Agency, or they can unwittingly give away key security details to a caller pretending to be from the company’s IT department. Evidence of human error is all around the conference.

Schumann said that for a week at the conference hotel – this year it was Paris on the Las Vegas Strip – becomes “the most hostile WiFi network in the world.” Essentially, he said, “The hotel WiFi is condemned for the week.” But that doesn’t stop some from using it. During DEFCON, he said, there is the “Wall of Sheep,” a large monitor listing in real time the usernames and passwords of people logging into their accounts over the hotel’s wireless network.

This shows that even at the world’s largest gathering of hackers each year, people are still not practicing basic computer security.

There’s even a social engineering competition at DEFCON where people are assigned a company, do a little background research, and then call up the company and see how much information they can get out of whoever picks up the phone. Competitors sit in a soundproof booth at the conference while the audio is played to the raucous crowd.

A USA Today story highlighted some of the “social engineering” hacks from the competition this year. The second-place winner, the newspaper wrote, “called a large financial services firm and posed as a young, new employee coming to headquarters for training. She needed information about the company’s security to reassure her overprotective parents she’d be safe in the big city, she said.

The newspaper reports that the contestant, Rachel Tobac, was so effective that “the person she got on the phone ‘even put me on hold and went out to ask the name of the security guard.’”

The human element, Schumann said, is always the most vulnerable. He noted, however, that in his daily work of firming up computer networks for clients in the Caribbean and around the world, executives are starting to take notice and put more resources and attention to the technology and employee training needed to keep a network as secure as possible.

Cayman, Florida square off against Zika

Dr. Renaud Lacroix, Oxitec’s on-island project manager for the GM mosquito-release effort. - Photo: Taneos Ramsay

Frank Bentayou

Both the Cayman Islands and its neighbor to the north, Florida, are fighting the Aedes aegypti mosquitoes that can infect people with the Zika virus, in similar ways – up to a point.

The Cayman Islands Mosquito Research and Control Unit, which has long instituted measures to eradicate the Aedes aegypti mosquitoes, immediately stepped up its efforts once it learned of the emergence of the virus in other countries this year – now numbering around 70. After a public education campaign, aerial and ground-level fogging and a trial run of releasing genetically modified mosquitoes, Cayman to date reports just five locally transmitted cases.

Meanwhile, the most recent figures for the state of Florida indicate a total of 46 locally transmitted cases statewide, with at least 29 linked to Miami’s artsy Wynwood neighborhood, the Miami Herald reports. Since then, the newspaper states, additional locally transmitted cases have been reported in the Miami Beach area, across the bay from Wynwood.

In each case, leaders in those jurisdictions, working with state and national public health leaders, including from the Florida Department of Health and the U.S. Centers for Disease Control and Prevention, have positioned their communities on a kind of sudden war footing against an emergent epidemic of Zika virus cases.

“Controlling this epidemic absolutely depends on our determining one of those sources of infection for each new case,” said Diana Martinez, a medical technologist in Miami/Dade County.

In Cayman

When the time came to ramp up Cayman’s control effort, MRCU Director William Petrie was ready with a three-pronged approach. Step one was to remind citizens how serious the epidemic is and begin educating them about ways to discourage mosquito breeding by cleaning up puddles and removing scrap and debris that could hold stagnant water, as mosquito eggs and pupae thrive in standing fresh water. Adult mosquitoes emerge from their pupal stage in one to three days.

An old coffee can full of water might release hundreds of mosquitoes a week. A discarded damp tarpaulin in a vacant lot could produce tens of thousands, the MRCU says.

The second step was to provide information on protection, by covering up as much as possible with long sleeves, pants and hats, and using insect repellant containing DEET.

“You have to repeat those messages over and over in fresh ways for them to stick,” Dr. Petrie said.

The third step is eradication. For the MRCU’s part, they:

West Bay residents and Oxitec employees Giselle Johnson and Heidi Groves release GM mosquitoes Thursday. - Photo: Taneos Ramsay
West Bay residents and Oxitec employees Giselle Johnson and Heidi Groves release GM mosquitoes Thursday. – Photo: Taneos Ramsay

Walk the turf where reports of infestation are the highest, collecting or destroying anything that can hold water.

Break up and spread bundles of organic waste – tree limbs, leaves, piles of mown grass and weeds – that could get damp and enable mosquito-friendly pools to develop.

Spray dense foliage and swampy areas as well as garbage cans, using backpack insecticide dispensers.

Drive the streets and alleys in motorized vehicles carrying industrial-sized sprayers trailing a fog of poison.

Releasing all the insecticides onto street-level neighborhoods is not the most effective way of protecting the community, Petrie knows. It’s hard to predict what effect the fogs and sprays might have on people and the environment in the long term.

In Miami/Dade

So far, the Miami/Dade approach seems to mirror the traditional mosquito-control methods of Cayman’s MRCU – with a couple of differences. One is that South Florida is using aerial spraying more extensively, as of course it must over a greater landmass.

“It’s a necessity,” according to a manager in the Solid Waste Management Department. “Dade is a huge county in terms of area. And consider that a big part of it is in the Everglades. A swamp.”

Dade Waste Management also reflects Dr. Petrie’s vigorous public information approach, and the department’s website offers plain talk: “Miami-Dade County is currently working to combat the Zika virus. Florida Gov. Rick Scott declared a public health emergency in February 2016, and the County is working with the Florida Department of Health to address the issue.”

Role of Oxitec

Above and beyond the traditional public health standards, the MRCU has partnered with Oxitec, a British biotech company that has developed a way to control mosquitoes by using genetically modified mosquitoes.

The company is releasing hundreds of thousands of GM mosquitoes each week through a small defined area in West Bay.

Oxitec’s Tali Cohen and Heidi Groves were out in a modified van last month to release the GM modified male mosquitoes in hopes that the insects will mate with female Aedes aegypti mosquitoes. When a female mates with a GM male mosquito, the next generation is unable to survive to adulthood, and the hope is that this will kill off the population of mosquitoes responsible for spreading Zika and other viruses.

The World Health Organization has been monitoring Oxitec’s field trials, including extensive efforts in the Cayman Islands, hoping to determine whether the selective release of male mosquitoes bred so that they pass down a fatal gene to their offspring will substantially wipe out insect colonies.

Oxitec’s approach relies upon what decades of basic research has shown about these species, including that males do not bite. Releasing hundreds of thousands of GM males to an existing regional populations means that females will breed, but the offspring of the GM bugs will get the genetic poison pill and die. Repeat the process over and over again, as Oxitec has done in Cayman and other test venues, and the total number of mosquitoes can decline by as much as 90 percent.

In Florida, “Oxitec’s efforts to test and bring its ‘mutant’ insects to the U.S. to fight the Zika virus have been blocked by opposition in the Florida Keys. The issue is now headed to the November ballot for voters to decide,” U.S. news outlets, including National Public Radio, reported last week.

But the U.S. Food and Drug Administration ruled in the closing days of August that a field trial in the Keys is permissible. The FDA said a fresh study “will not have significant impacts on the environment.”

The company is working with the Florida Keys Mosquito Control District on the project and has a lab in the Marathon, Florida, office of the agency. Oxitec and the agency have been working together since a dengue fever outbreak in 2010, according to a report in the Tampa Bay Times.

Fight the disease or control its transmission?

The greatest concern about the Zika virus is that when it infects pregnant women, it can cause severe birth defects, including underdeveloped skulls and crippling brain damage.

Dr. Lyle R. Petersen, the CDC’s Zika Response Manager, said, “This could lead to hundreds of infants being born with microcephaly or other birth defects in the coming year. We must do all we can to protect pregnant women from Zika and to prepare to care for infants born with microcephaly.”

Zika can also be transmitted sexually.

Dr. Samuel Williams-Rodriguez, Cayman’s head of public health, said in a statement last month that he is confident that with the MRCU, government and the public working together, “a large outbreak of the [Zika virus] disease will be prevented” on island.


Market Watch: The search for yield

Shoppers walk past a sign advertising a sale in New York City. With low inflation expectations, the likelihood of a Fed rate hike this year is still up in the air. - Photo: The Washington Post

Monique Frederick, Butterfield

Whether you believe the performance of certain asset classes is logical or not, exponential growth and demand for high yield assets best characterize current market trends. After numerous rounds of quantitative easing and years of accommodative central bank policies, the rise in emerging markets and high yield, and to a limited extent U.S. equity markets, is simply fueled by a search for yield.

Immediately following the financial crisis, investors were content with low yields while patiently waiting for markets to stabilize. That patience ran out quite some time ago. After seven years of a zero interest rate policy, the Fed only managed to raise rates 25 basis points last December. What’s holding the Fed back? Lack of inflation is one influential element.

The Phillips curve suggests that as an economy reaches full employment, inflation should emerge as a corollary of wage growth. Instead, despite the fact that unemployment has fallen steadily in most advanced economies over the past three years, significant slack remains in labor markets. If you were to ask investment professionals, economists and the Fed if inflation currently exists, they could all point to statistics confirming that inflation has been significantly below the Fed’s 2 percent medium range target and essentially non-existent. The Fed’s preferred inflation gauge, which excludes food and energy costs, has hovered between 1.31 percent and 1.7 percent in the last three years, most recently settling at 1.57 percent. As long as inflation remains below the target, the Fed is more comfortable focusing on other economic forces, delaying an interest rate hike even further.

With a 50 percent probability, the likelihood of a Fed rate hike this year is still up in the air. Even if it did occur, a 25 basis point hike barely moves the needle. Consequently, conservative fixed income investors are faced with some genuinely unattractive investment options, including low or even negative yielding government bonds. These negative yielding fixed income instruments have surged tenfold to $10.84 trillion from a mere $1.66 trillion at the start of the year. With that kind of proliferation of negative yielding assets and the fact that time and patience are two very uncommon attributes, it is not surprising to see a shift in capital flows. The relentless search for yield has propelled both high yield bond ETFs and emerging market funds higher, with the latter experiencing nearly $19 billion in inflows year to date. Emerging markets are further showcasing their best performance in years contributing to their irresistibility even more. The JPMorgan EMBI Global Core index is an excellent case in point, rallying 15 percent year to date, the most since 2009.

The equity bull market we experienced in the last seven years previously enticed investors to adjust their risk profiles in favor of greater equity allocations. However, for those institutional investors with a high fixed income allocation and a restrictive mandate, a marginally greater allocation to equities may not have been enough to attain their investment objectives. Naturally, investors are willing to adjust their appetite for risk by climbing up the proverbial risk curve.

Despite the current state of the market, we know that all good things do eventually come to an end. By now, we also know that the unexpected sometimes lasts a lot longer than expected – zero interest policy is an excellent example. In 2008/09 few market participants would have anticipated a federal funds rate below 1 percent five years later, let alone in 2016. Yet, here we are today with a Fed funds rate at 50bps and a 61 percent cumulative five-year return in what could be considered the lowest risk and lowest expected return instruments – U.S. Treasuries 10 years and up. So, while emerging market and high yield funds are the stars of 2016 year to date, when this trend reverses, the fallout could be quite painful. At this stage in the cycle “caution over courage” is the prudent, pre-eminent philosophy, with limited doses to these asset classes versus jumping in with both feet.

Sources: U.S. Department of Labor – Bureau of Labor Statistics, Bloomberg L.P.

Disclaimer: 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.


Emerging market debt benefits from the search for yield

The long-shunned emerging markets are back in favor among investors, as documented by record-high inflows into emerging market bonds. From an investor’s point of view, this raises the question of whether that is a new long-term trend or just a flash in the pan.

Chasing changing investment trends is traditionally a part of the business of financial markets. Watching these shifting trends, even for old stagers among the market participants, is always interesting – especially since the question automatically comes up as to the reasons for that trend and whether it makes sense to participate.

Currently, such thoughts turn toward the emerging markets, since investors have recently started to pour money into that segment. That brings back into favor a part of the financial markets that many investors mostly tried to avoid in the past few years. The change of heart is reflected in the performance of leading emerging market bond indices. So far this year, they have locked in double-digit percentage point gains, both in hard currency and in local currency. The strength of this development is also demonstrated by a recent seven weeks of record-high inflows into emerging market debt.emergening-market-debt-to-gdp-read-only

Yield advantage lures

There are several reasons for the huge inflows. The main argument is clearly the pressure to search for yield in a low-yield environment. In a time when many bonds from highly rated issuers carry a negative yield, the average yield premium of emerging market bonds of around 400 basis points looks highly attractive to many investors. The current prevailing mindset in that regard is summarized by Gordian Kemen, global head of EM Fixed Income Strategy at Morgan Stanley: “The global hunt for yield, supported by dovish G3 central banks and extremely low core market yields, is incentivizing investors to seek higher-yielding assets, including emerging market fixed income.”

In addition to that, market experts also point to other positive changes in the environment. The world’s largest asset manager, Blackrock, for example, speaks about reversing cyclical challenges that led to poor emerging markets returns in recent years. According to them, weaker currencies with a lag have led to improving trade balances. Further plus points for them are stabilization in the oil price and China’s slowing economy. Also mentioned are ousted market-unfriendly governments in key economies such as Brazil. Besides this, Blackrock forecasts room for further upside for the resumed portfolio flows into emerging markets because most investors would still be underweight in the asset class.

“The Great Migration to Emerging Markets debt has kicked off. People are flocking to the asset class when yields are zero or less elsewhere,” says Sergio Trigo Paz, head of BlackRock Emerging Markets Fixed Income.

Not to be underestimated as a support for the economy are monetary conditions in emerging markets, which are currently the most expansionary since the last three years. A monetary policy stance indicator calculated by Dutch asset manager NN Investment Partners has risen sharply recently. According to Senior Emerging Markets Strategist Maarten-Jan Bakkum, central banks in emerging countries will continue to loosen their monetary policy, as long as the global liquidity environment remains benign and inflation in the emerging world continues to decline. Another important point is that emerging market growth has accelerated for the first time in four years, while developed market growth has decelerated. This leaves the emerging market and the developed market growth differential to pick up this year and into 2017. Despite the turmoil in Turkey, the sentiment around emerging markets was also helped recently by political considerations: among them, a staggering EU, whose fragile status is documented by the British Brexit vote, a U.S. presidential campaign which looks more like a reality TV show than a serious political contest, or a Japan, whose fiscal and monetary policy is reckless.

Don’t forget the risks

Despite the current friendly mood around emerging markets, investors should not close their eyes to the risks. One of the biggest is addressed by the Financial Stability Board of the Bank for International Settlements. In a recent note directed at the G-20-leaders of the 20 most important industrialized and emerging countries, the bank rang the alarm bells. According to internal statistics, the debt of non-financial corporations in the major emerging markets increased on aggregate from less than 60 percent of GDP in 2006 to 110 percent at the end of 2015. That is well above the corresponding ratio in advanced economies, and the high level of corporate debt has contributed to overheating in some of these economies, thus increasing the risk of financial distress in the coming years. Also critical in that context: In the years 2016 to 2018, bond repayments of $340 billion are due. That’s 40 percent more than in the previous three years.

How difficult it will be to serve the debt depends on the U.S. dollar, which is often used as a financing currency. That brings the U.S. federal reserve into play, since its monetary policy influences the value? of the dollar. The dependence on such an external factor leaves the emerging markets in an uncomfortable situation, especially since the correlation between the worldwide bond markets and that in the US is still very high. But at least the emerging markets have managed it to reduce their vulnerability by introducing more flexible exchange-rate regimes. Unfortunately, that step would probably not help to avoid new stress in the system if the tendency toward more protectionism in the world should prevail, since exports make up 23 percent of the GDP generated by emerging markets.


After weighing pros and cons, it is clear that investments in emerging market assets like bonds still carry significant risks. But that is no reason for investors to shun them completely. That view is backed by the fact that there are hardly any risk-free investments left in the world, and that the risks are compensated by a yield premium considered to be less risky compared to other assets. Also, emerging markets bonds can contribute to the diversification of a portfolio. But that does not mean that one should become too greedy, only because an asset class carries a comparable high yield. Investors should instead lean back and remember that in order to earn higher returns, you have to take greater risk. Although this is a very basic rule, it pays off to follow it, and it will probably also help now to put the recent rush into emerging markets into perspective.

Legally Speaking: The Confidential Information Disclosure Law is in force

martin_livingston__web_-read-onlyMartin Livingston, Maples and Calder

The Confidential Information Disclosure Law, 2016 was gazetted on July 22 and is in effect. The law has been under consultation in the Cayman Islands for a number of years and has been enacted to dispel the misconception that the Cayman Islands is a secrecy jurisdiction. The CIDL better reflects the principles of transparency and cooperation which the Cayman Islands has committed to for well over a decade, including for tax information exchange and mutual legal assistance.

Repeal of CRPL

Among other things, the CIDL repeals the Confidential Relationships (Preservation) Law, which has been in force since 1976. In essence, the primary purpose of CIDL was merely to remove the criminal sanctions that attached to the disclosure of confidential information under the CRPL.

The main objective of the CRPL was to highlight the different ways that confidential information could be disclosed without breaching the offense provisions, including: (i) the codification of some of the common law exceptions to the duty of confidence; (ii) by compulsion under specific Cayman laws; and (iii) seeking the court’s direction for disclosure in proceedings.

Disclosure of confidential information

These sections continue in force under the CIDL, and exceptions to the duty of confidence include disclosure of confidential information in the normal course of business, with the implied or express consent of the principal, where such disclosure is compelled under law to a specific authority, and upon direction of the court pursuant to an application under CIDL.

Any breach of the common law duty of confidence shall still give rise to a right of remedy, including a claim for damages or an injunction.  Furthermore, offense and penalty provisions shall also exist for the unauthorized obtaining or disclosure of a data subject’s personal data under new data protection legislation that is currently under final consultation.

The CIDL defines “confidential information” as information, arising in or brought into the [Cayman] Islands, concerning any property of a principal, to whom a duty of confidence is owed by the recipient of the information. The term duty of confidence is not defined, but will be interpreted in accordance with common law at the time.

Section 4 applications

As with the CRPL, the CIDL retains the ability to seek the court’s direction where confidential information is to be given as evidence in relation to any proceeding, whether within or outside of the Cayman Islands. Many of the conditions and much of the jurisprudence in relation to these applications will continue to apply, but the CIDL makes provision for the ability to amend the Grand Court Rules in relation to the procedures for making these applications.

Expected evolution of statutory confidentiality and data protections

The CIDL was expected to be introduced in tandem with the enactment of a data protection law in the Cayman Islands. Accordingly, there may still be some comments from the industry to be taken into account in order for the two laws to align, which may result in further amendments to the CIDL in due course.

Residency vs. domicile for UK citizens: What’s the difference?

Kevin Loundes, senior tax manager at Abacus, explains the differences between residency and domicile for U.K. citizens.

Many people confuse tax residence and domicile. In particular, it is common for individuals to assume that because they have ceased to be tax resident in the U.K., it must follow that they have also ceased to be U.K. domiciled. But is this necessarily the case? In short, the answer is definitely no.

What is domicile?

Domicile is a common law concept rather than a matter of tax law. In simple terms, a person is normally domiciled in the country that he/she regards as his/her “home.” This is not necessarily the country where they are currently living temporarily. It is perfectly possible, therefore, for a person to emigrate to the Cayman Islands, live there for many years, but still retain a U.K. domicile. The key point to note is that domicile and residence are not interchangeable concepts.

At any one point in time, an individual has one country of domicile. While it is possible to be tax resident in more than one country, you can only be domiciled in one country at a time. When determining an individual’s domicile position, there are three concepts that need to be considered:

Domicile of origin

Domicile of dependence

Domicile of choice.

I do not propose covering each of these concepts in detail, as the analysis would be too lengthy for the purposes of this article. Nevertheless, a brief summary of each follows:

Domicile of origin

Everyone is born with a domicile, your domicile of origin. This is normally your father’s domicile at the time you were born (note, this is not necessarily the country you were born in). A domicile of origin can be displaced. However, it never goes away.

Domicile of dependence

The domicile position of a “dependent person” (e.g., a minor/child or mentally disabled person) will normally follow that of the person on whom they are dependent. Typically, this will be the father of the child. If a father changes his domicile position, any minor children will adopt his new domicile.

Domicile of choice

Once an individual has reached the age of 16, he/she is entitled to obtain a domicile of choice. In order to displace an existing domicile (e.g., a domicile of origin) with a new domicile of choice, an individual is required to move to another jurisdiction with an intention to remain there permanently or indefinitely. On the face of it, obtaining a new domicile sounds relatively simple. However, it is notoriously difficult to acquire, and two key factors are required:

The intention to reside in the new country (e.g., the Cayman Islands)

Living in the new country as an inhabitant.

The key point is the individual’s intention. Have they formed an intention to remain in the new country permanently or indefinitely? If the answer to this is no, they have not adopted a new domicile of choice.

So how does this apply to the person who has relocated to the Cayman Islands?

Let us consider a typical scenario. An individual is born with a U.K. domicile of origin and later in life decides to relocate to the Cayman Islands, perhaps for work purposes. If the individual in question remains in the Cayman Islands for many years, at what point, if at all, do they cease to be U.K. domiciled? As noted above, the key is their intention. If the individual is only in the Cayman Islands for work purposes and they plan to return to the U.K. upon retirement, their U.K. domicile of origin will remain (even if they spent their entire working career in the Cayman Islands!) If, however, at some point they decided they wanted to stay in the Cayman Islands permanently and never return to live in the U.K., they will displace their U.K. domicile of origin with a new domicile of choice in the Cayman Islands.

It is important to note that significant evidence is required. Proving an intention to reside in the Cayman Islands (or any other country, for that matter) permanently or indefinitely is notoriously difficult. Simply buying a burial plot and drafting a will under Cayman Islands law will not be sufficient. Also, an individual simply stating his/her intention to remain in the Cayman Islands permanently will not be sufficient if it is not supported by significant evidence.

What is the significance of domicile?

The reason domicile is a key U.K. tax concept is that it determines an individual’s liability to U.K. inheritance tax. If an individual is U.K. domiciled, all of his/her worldwide assets are within the scope of U.K. inheritance tax upon death (and since the rate of tax payable is 40 percent, this can be a significant cost). Also, if an individual is U.K. domiciled, there can be inheritance tax costs as a result of undertaking estate planning measures, such as establishing an offshore trust to benefit future generations.

It is crucial, therefore, for an individual to consider their domicile position carefully and obtain appropriate tax advice. Tax advice on an individual’s domicile position should be obtained as a matter of course when considering how assets will be passed on to future generations or if establishing an offshore trust is being considered.

What is the benefit of ceasing to be U.K. domiciled?

If an individual is able to displace a U.K. domicile with a domicile of choice in the Cayman Islands, then this can result in significant inheritance tax savings. Any non-U.K. situated assets would be outside the scope of U.K. inheritance tax (i.e. U.K. inheritance tax at a rate of 40 percent would not be payable in relation to these assets). Furthermore, an individual who is not domiciled in the U.K. can establish an offshore trust if they wish without there being any U.K. inheritance tax consequences, provided they settle non-U.K. assets (tax advice should be sought to ensure there is no U.K. tax leakage). This should mean that assets can be passed down to future generations without the U.K. government taking a 40 percent cut first.

Other points to note

There are a couple of other key points which should be borne in mind. First of all, the U.K.. has rules which deem an individual to be U.K. domiciled. For example, if an individual were to displace their U.K. domicile with a new domicile in the Cayman Islands, they would continue to be deemed U.K. domiciled for a further three years. If the individual were to die within this three-year period, their entire estate would continue to be subject to U.K. inheritance tax.

The second common misunderstanding to note is that the burden of proof falls on the taxpayer or the executor of their estate. If Her Majesty’s Revenue and Customs challenges an individual’s claim to be non-U.K. domiciled, it is up to the individual (or the executor of their estate) to prove they are non-U.K. domiciled. HMRC is not required to prove the individual’s domicile of origin remains in place.

It is, therefore, crucial that significant evidence to support the individual’s non-U.K. domicile status is collated. Having a pre-prepared package of evidence to support a claim to be non-U.K. domiciled is especially important from the perspective of the executors of an estate. After all, proving the intention of the deceased is extremely difficult if they are no longer alive to speak to!


Hopefully what is clear is that an individual’s domicile position is crucial to establishing liability to U.K. inheritance tax. Furthermore, should an individual want to evidence that they have adopted a new domicile of choice (displacing their U.K. domicile of origin), perhaps in the Cayman Islands, significant evidence will be required. That said, adopting a domicile of choice in the Cayman Islands is possible and in the right circumstances can result in significant U.K. tax savings.

Health City surgeries save impoverished children

Makinson Jeudy holds his year-old daughter Miloury, who underwent a complex heart surgery last month at Health City Cayman Islands. - Photo: Taneos Ramsay

Health City Cayman Islands Chief Pediatric Cardiologist Dr. Sripadh Upadhya has performed thousands of heart surgeries during his career with the India-based Naryana health system, but he has seen only a handful of patients with problems like the one found in year-old Miloury Jeudy of Haiti.

The child is one of three heart patients who were picked up at Port-au-Prince airport on Aug. 6 via a cooperative program managed by Health City hospital, nonprofit Have a Heart Cayman and the Haiti Cardiac Alliance.

Since December 2014, private planes have been shuttling patients back and forth between Cayman and Haiti for surgeries funded partly by donations to Have a Heart and partly by what amounts to nonprofit work for Health City Cayman Islands.

It’s unlikely a child with Miloury’s condition would have lived to see her 16th birthday without undergoing the complex surgical procedure that is, at least at the moment, impossible to perform in Haiti.

“There’s a hole in her heart, but it’s in a very unusual location,” Dr. Upadhya said. “It’s in between two arteries. We use a device to close [the hole] … it’s very rarely done. This defect is very rare … it’s maybe the third or fourth one I’ve done.”

Miloury came out of the operation healthy and happy, according to reports from the hospital, and will be headed back to Haiti – as of this writing – as soon as travel arrangements can be made.

The three children on this latest trip, Miloury, 15-year-old Benjamin Baptiste and year-old Mchaendel Gilot, all had surgeries at Health City on Aug. 18-22, about two weeks after a private aircraft owned by the Dart group dropped them off at Owen Roberts Airport.

Dr. Upadhya said the other two surgeries he performed were not nearly as complex as Miloury’s, but they did present their own challenges – in particular, Benjamin’s surgery. The teen has lived with what Dr. Upadhya termed a “restricted” pulmonary valve which has limited blood flood to his body and brain and limited his development.

The procedure Benjamin underwent, called a balloon pulmonary valvotomy, is trickier to perform the older a patient gets. Dr. Upadhya said the same valvotomy procedure was used on year-old Mchaendel, but would be much more difficult for someone of Benjamin’s age.

Benjamin’s mom said she hoped her son would be able to speak words following the surgery at Health City, which he has never been able to do, but Dr. Upadhya said, unfortunately, that would not be a result of the surgical procedure.

“He has Down syndrome, which is independent of the cardiac issues,” the doctor said. “His mental development difficulties are permanent. He has to go to speech therapy.”

While they stay in Cayman, the Haitian children and their guardians – some of them parents, some close relatives – stay in two rooms of a hospital ward at Health City Cayman Islands on Grand Cayman’s eastern district. An interpreter from Port-au-Prince travels with the group and stays with them to translate the French-derivative patois spoken by the Haitians.

“They are very much comfortable and they are quite happy to spend the time here in the hospital,” Dr. Upadhya said. “They don’t feel like their families are away from them … with the interpreter here. They like going out and enjoying the beach.”

Surgery success story: From left, Jean Frantz Jean Baptiste and his son, Jean Christiano, age 2, Have a Heart Cayman’s Jennifer McCarthy, Elizabeth Jean-Julien, Sherly Delva and her son Anley Valcourt, age 19 months, Barnabas Rinvil and his nephew Makendy, age 2, and Dart security chief Derek Haines made the trip back to Haiti recently. – Photos: Brent Fuller
Surgery success story: From left, Jean Frantz Jean Baptiste and his son, Jean Christiano, age 2, Have a Heart Cayman’s Jennifer McCarthy, Elizabeth Jean-Julien, Sherly Delva and her son Anley Valcourt, age 19 months, Barnabas Rinvil and his nephew Makendy, age 2, and Dart security chief Derek Haines made the trip back to Haiti recently. – Photos: Brent Fuller

Haiti heart patients

To send young patients to Grand Cayman, a Haitian social worker, Kessy Acceme, and his employer, the Haiti Cardiac Alliance, contacts Health City doctors and Jennifer McCarthy, the director of Have a Heart Cayman.

McCarthy, former executive director of HospiceCare Cayman, now works from an office in Health City on fundraising and logistical efforts for the heart surgeries. The medical professionals make an annual trip to Haiti to pre-screen potential patients. On the most recent trip to Haiti, McCarthy said she went along with Dr. Upadhya to screen about 150 potential patients for surgery in Cayman.

McCarthy said it was heartbreaking to watch. Some of the children attending these screenings have such severe conditions, mostly requiring heart replacement surgery, that Health City is unable to assist. Other children aren’t chosen because they are too young; doctors hope they will “grow out of” their heart ailment.

Among the 150 potential patients, about 60 were chosen. They are the ones who will hope to attend Grand Cayman for medical procedures within the next several months, if they can make it in time.

“Once they’re prioritized, then it’s down to who can get a passport and [which cases] are most urgent,” McCarthy said.

Watching Dr. Upadhya’s skill and professionalism as he handled some 40-50 screenings per day [typically U.S. or Canadian heart specialists would not handle more than a dozen or so in a day] was exceptional, McCarthy said.

“He’s used to seeing that many patients from practicing in India,” she said.

Lives saved

Not all patients will get to go, and even some heart patients who are “on the list” to receive surgeries at Health City or elsewhere do not survive long enough to arrive for the life-saving procedure.

Speaking to the Cayman Compass at the Port-au-Prince airport on Aug. 6, Acceme was well aware that a few of those kids – some just toddlers or babies – had already missed their chance.

“In the past few months, we’ve had five kids die waiting for surgery,” Acceme said. “But it’s just beautiful when kids go to the Cayman Islands for surgery and they come back healed and happy. They can do anything they want in life.”

Saturday’s visit to Port-au-Prince brought the happier version of this story.

Ultimately, Acceme said, the Haiti Cardiac Alliance wants to open its own “center of excellence” for these types of surgeries in the home country.

The bureaucratic and logistical problems in the impoverished Caribbean nation make getting children out in time to receive life-saving treatment a monumentally difficult task.

Acceme said almost all of these families have never left Haiti, some have never even left their ancestral villages, and acquiring a passport through the current processes may take more time than the young patients have left.

Nonetheless, the Haiti Cardiac Alliance has managed successful medical procedures for about 200 children around the world, with about one-third of those (64 surgeries) having been performed at Health City Cayman Islands since late 2014.

Emigration and immigration

Warren Coats

During the height of the Cold War, the Berlin Wall was built to keep the citizens of East Germany from leaving. We cheered as it and similar barriers to emigration from the Soviet to the Free World fell in 1989. But the right to leave awkwardly confronts the right of countries to choose who may or may not enter. The right to leave has little meaning if you have no place to go.

Immigration, especially in the U.S. and Europe, has become a very divisive and difficult public policy issue. Individual freedom and economic efficiency call for the free movement of people. The common market of Europe, the European Economic Community, requires the free movement of labor, capital, goods, and services among its members. This is a desirable and worthy goal, but in typically “take no prisoners” fashion, the European Union has applied this requirement without serious attention to the needs and sensitivities of recipient countries with regard to who enters and works in their country.

During the cold war, when our sympathies were with those behind the Iron Curtain wanting to get out, the East-West participants in the Conference on Security and Cooperation in Helsinki in 1975 agreed to: “Make it their aim to facilitate freer movement and contacts, individually and collectively, whether privately or officially, among persons, institutions and organizations of the participating States, and to contribute to the solution of the humanitarian problems that arise in that connection, […].

Declare their readiness to these ends to take measures which they consider appropriate and to conclude agreements or arrangements among themselves, as may be needed, […].”

The emphasis at that time was on “cultural exchange” and cross-border employment. The right to emigrate, however, was a step too far.

Aside from the political dimension of a “right to migrate,” there are clear economic efficiency benefits from the free movement of labor, supplementing those of the free movement of goods and capital.

Leaving aside the special case of war refugees, people generally move, whether within their own country or to a new one, in order to take better jobs. One exception is the Brits who vacation or retire to sunnier parts of Southern Europe. They obviously bring their pension incomes with them. The Polish plumbers in England and the Filipina nurses throughout the world increase their own incomes but fill worker needs in their host countries as well. In short, immigration is generally a win-win scenario.

Within the overall annual limits, the U.S. has placed on immigration, the number of H-B1 work visas (those requiring high skills or education) has been squeezed by preferences to extended family members of existing green card holders, thus depriving American industries of the skilled workers they need. If foreign workers are not allowed to immigrate here, capital will tend to move abroad in order to produce what is needed overseas and import it. Opposition to immigrants by workers who fear that they will lose their own jobs are generally misinformed or motivated by other concerns.

Immigration can also ease the economic problems associated with an aging and shrinking population. Japan’s population is now smaller than it was in 2000 but more problematic is that it is also older. The percentage of those over 65 in Japan’s total population has increased from 17 percent in 2000 to 24 percent now. Its working age population has declined 9 percent. As a result, a growing share of income from those working is required to support those who have retired.

This problem has been partially addressed by an increase in the number of Japanese women entering the labor force, but it has not been enough. Relaxing Japan’s very restrictive immigration laws would also help. As a general rule most Japanese are quite insular and not comfortable living and working with foreigners.

According to The Economist: “The country has remained relatively closed to foreigners, who make up only 2 percent of the population of 127 million, compared with an average of 12 percent in the OECD.”

But Japan’s demographic crisis is leading to a gradual liberalization of immigration requirements.

Workers who worry about immigrants taking their jobs are generally confusing the impact of technology on some existing jobs and job skills, and to a lesser extent the impact of increases in cross-border trade. The disruptive, but income enhancing, impact of ever changing technologies does impose costs on those who must learn new skills, but it is the relative openness of Americans to such innovation and growth that has made America the wealthy country that it is.

However, there are limits to the pace of change, and the pace of immigration, that societies can comfortably absorb. The backlash of public concern with immigration, which played an important role in Britain’s recent vote to leave the EU, seems to reflect the upsurge in the pace of immigration in recent years. It also seems to have reflected misinformation about the extent of British control over that pace. While EU membership carried an obligation to accept the free flow of labor into the U.K. from other EU member countries, only half of the U.K.’s immigration was from that source. The U.K. government fully controlled the other half.

Donald Trump has linked his anti-immigration rhetoric to public concern with terrorism. His campaign website states that “Trump is calling for a total and complete shutdown of Muslims entering the United States until our country’s representatives can figure out what is going on.”

This statement, dated Dec. 7, 2015, has been followed by increasingly nuanced, if that word can be used for Trump, formulations of Trump’s anti-terrorist immigration “policy” proposals.

On April 16, 2016, “Donald Trump’s speech on foreign policy Monday focused in large part on his proposal to suspend immigration from dangerous parts of the world and impose a new system of “extreme vetting” that would subject applicants to questions about their personal ideology.

“We should only admit into this country those who share our values and respect our people,” said Trump, proposing what he called an “ideological screening test.”

Typical of Trump’s campaign, he is either ignorant of existing visa requirements or deliberately misleading his audience. At least since 9/11, visa applications from all but a few countries, whether work or tourist, require an extensive background check.

All green card recipients swear to uphold the American Constitution and its laws. These are reasonable and appropriate requirements and they have been in place for a long time.

And then there are concerns about the preservation of a country’s culture, a legitimate goal. And then there is plain old racism and protectionism (the protection of monopoly returns to jobs from entry restrictions via closed shop unions or licensing requirements and to firms from import tariffs).

So what should a country’s immigration policy be?

Aside from war refugees, whom the U.S. and most countries have taken a moral/humanitarian obligation to accept, a country’s immigration policies should serve the economic needs of the country and respect the cultural traditions and security concerns of its citizens. The United States has benefited enormously and famously by accepting all people seeking a better life who are committed to our laws and values. However, pragmatism calls for regulating the rate of immigration to numbers that can be readily assimilated and limiting it to people of good character committed to abiding by our laws and values.

U.S. immigration laws suffer from a number of defects. The overall number of immigrants permitted per year has not kept pace with the growth in our population and economy. But more important, as noted earlier, the number of actual workers, and especially high skilled workers, has been seriously crowded out by a preference for extended family members of existing residents (not core family, but extended family).

The U.S. has a special problem because of a relatively large number of illegal immigrants who have become an important part of our labor force for some time. It is important for our laws to effectively limit immigration to legal channels while enlarging those channels. It is also essential to resolve and normalize the status of those who came here illegally in the past. Several years ago a bipartisan group of U.S. Senators, the so-called Gang of Eight, fashioned immigration reform legislation that addressed these issues – the Border Security, Economic Opportunity, and Immigration Modernization Act of 2013.

No one was happy with every provision of the draft law but it enjoyed broad support as a compromise and was passed by the Senate. It was never brought up in our dysfunctional House of Representatives.

The Senate immigration bill is a good basis upon which to renew the discussion of immigration reform in the U.S. Hopefully, following the November elections in the United States its Congress can return to the important business of fashioning laws that promote economic growth, well-being, and fairness. This should include adopting a comprehensive immigration reform law.

Warren Coats, a former director of the Cayman Islands Monetary Authority, and former senior monetary policy adviser to the Central Bank of Afghanistan, Iraq and Kenya for the International Monetary Fund, is on the Editorial Board of Cayman Financial Review.

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