Tuesday, August 30, 2016

Population, economy grow; voter increase expected

The Cayman Islands resident population was estimated at more than 60,000 people during 2015, the highest number the British Overseas Territory has reported and the first time population totals for the tiny, three-island chain have officially exceeded 60,000.

The population estimate for 2015, presented in the Cayman Islands Compendium of Statistics, was 60,413, eclipsing the previous high mark set in 2014 of 58,238 residents.

Estimates are based on a survey of about 1,400 residents, with a 5 percent margin of error – about 3,000 people in either direction.

Since 2008, population figures were reported to be in decline following the international markets’ collapse which, in Cayman, led to fewer jobs and a significant drop in work permits held by non-Caymanian employees. The numbers, which were averaging around 55,000 to 56,000 between 2010 and 2013, hitting their lowest point in 2010, started coming back up two years ago.

The population increase was fueled largely by non-Caymanian workers, who were estimated at 24,791 (42.6 percent) of the local population in 2014, and 26,176 (43.3 percent) of the population in 2015. The Caymanian population also increased slightly during the same time but lost its overall share of the local population. Caymanians made up 57.4 percent of the islands’ residents in 2014, while in 2015 that fell to 56.7 percent.

Other than an estimated population drop of about 300 residents in North Side district during 2015 and a gain of a few hundred in neighboring East End, things stayed about the same in Grand Cayman’s main population centers, according to the report.

George Town remained, by far, the largest district in the islands, accounting for about half of its population, eclipsing 31,000 residents for the first time.

Bodden Town and West Bay were neck-and-neck for the second-largest district population, with Bodden Town retaining its status of second-largest island district by about 100 people, the statistical report noted.

Population estimates for the Sister Islands, Cayman Brac and Little Cayman, increased sharply, going from 1,839 in 2014 to 2,196 last year.

Wesley Howell
Wesley Howell

Work permits

As its population increased in 2015, the territory’s overall unemployment rate fell to 4.2 percent, its lowest levels since 2008, according to the Office of the Premier.

The drop in the jobless rate was entirely due to a decrease in unemployment among Caymanians.

That decrease came against the backdrop of a work permit increase in the islands.

All non-Caymanians who do not have permanent resident status must obtain permission from the government to work in the islands.

In fall 2014, when the Caymanian unemployment rate was 7.9 percent, the Immigration Department reported about 20,500 active work permits and government contracts.

In fall 2015, with the Caymanian unemployment rate at 6.2 percent, the corresponding number of work permits was nearing 22,500. As of February 2016, the total number of work permits and government contracts held in the islands was put at more than 23,000 by immigration officials.

Over the past five years, work permit numbers have seen a steady increase in Cayman, from a low of about 18,500 in the 2011-2012 era.

The ESO statistics revealed that just more than 1,200 Caymanians were jobless in the fall of 2015, compared to 1,562 Caymanians without employment in the fall of 2014.

Conversely, the number of unemployed non-Caymanian permanent residents rose during the same period. There were just 129 (2.8 percent) permanent residents jobless in the fall of 2014, compared to 283 (6.6 percent) in the fall of 2015.

The unemployment rate among non-Caymanian workers also rose slightly, going from a miniscule 0.9 percent to 1.4 percent during the same period. Typically, the unemployment rate for work permit holders is quite low because they are not allowed to stay on island without a job.

Voters

The number of registered voters in the Cayman Islands is also expected to rise to its highest-ever level before the next general election, set for May 2017. However, the numbers show that has not occurred just yet.

The official Cayman Islands voter list for the May 2013 election stood at 18,492 people. On July 21, 2016 – a little more than three years later – there were 18,457 registered voters.

However, if past experiences are any guide, the number of registered voters will increase drastically before the next election.

“When the Electoral Boundary Commission did their work [in 2015], the [voter] list was at 18,297. So to have the list where it is now, subtracting deaths, folks sentenced to more than 12 months [in prison], while adding new voters is actually a good sign, before most candidates declare,” said Elections Supervisor Wesley Howell. “We projected to have our highest level of voter registration by the time registration closes before the May 2017 general elections.”

The list of registered voters stood at 15,386 in May 2009 and dropped to 15,136 prior to a referendum on the one man, one vote/single-member constituencies issue held in July 2012. By the May 2013 general election vote – less than a year after the referendum – the number of electors soared to 18,492.

Cayman made it easier for prospective voters to register following constitutional changes that took effect in November 2009. Those allowed anyone holding Caymanian status to register to vote, regardless of citizenship in other countries.

Still, members of the 2015 Electoral Boundary Commission noted in their own estimates that some 25 percent of Caymanians who were eligible to vote simply had not registered.

The Compendium of Statistics for 2015 puts the total number of Caymanians age 15 and older at 25,906. It is estimated that at least more than 24,000 of those voters are age 18 or over as so are eligible to vote.

Cayman’s financial services industry had ‘mixed performance’ in 2015

Company registrations 2012-2015. - Source: ESO

In its final economic report for 2015, released last month, the Cayman Islands Economics and Statistics Office cited “mixed results” over the year for the islands’ financial services industry.

With technologies such as blockchain, steeper regulatory burdens for offshore finance, and increased competition among jurisdictions, it remains to be seen whether the slowdown is a cyclical change for the industry or if there is a structural shift going on.

Cayman’s economy overall saw growth last year, with gross domestic product rising 2 percent. The GDP growth rate slowed from 2.4 percent in 2014, following global trends of slowing growth.

Financial services, a cornerstone of Cayman’s economy, “continued to exhibit mixed performance,” the ESO writes in its Annual Economic Report 2015. The report states, “The financial services industry continued to exhibit mixed performance. New company registrations and partnership registrations grew while mutual funds registration (including master funds), insurance licences, stock exchange listing, and banks and trusts declined.”

Financial Services Minister Wayne Panton, responding to questions by email, said financial services have held steady despite movements in the global economy. “In recent years, we’ve had increases in financial services revenue. However, we ended 2015 with a very slight decrease in overall financial services revenue, from $239.9 to $234.9 million. This is not unexpected, because global markets are reacting to economic and political developments worldwide such as pre-Brexit, Brazil, Cuba and China.”

Finance Minister Marco Archer said in a statement upon release of the report, “Despite challenges from the global economy, I am pleased that the combined performance of all our productive sectors achieved a growth rate that is higher than expected.”

Insurance companies 2012-2015. - Source: ESO
Insurance companies 2012-2015. – Source: ESO

Banks and trusts

Marla Dukharan, RBC’s group economist for the Caribbean, said the drop in banking licenses with the Cayman Islands Monetary Authority is part of a structural change that pre-dates the 2008 financial crisis.

“There is a steady downward trend. This is a secular decline,” she said in a phone interview from Trinidad.

Figures from CIMA show the number of licenses and other entities supervised by the authority’s Banking Supervision Division has dropped from 477 in 2002 to 209 in the first quarter of 2016. Dukharan said that amounts to an average 5.6 percent drop per year since 2002.

The ESO notes in the annual report, “Amidst sustained challenges in global banking, the registration of banks and trust licenses maintained a downward trend, falling by 7.1 percent to 184 in 2015 relative to a year ago.”

The government report notes losses in Class A local banks and Class B banks that are restricted to offshore business. The number of Class B banks dropped 7 percent to 172, which, the ESO states, reflects “recent loss and increasing difficulties of Caribbean banks in maintaining correspondent banking relationships with global banks engage in ‘de-risking’ behaviour.”

De-risking occurs when banks pull correspondent relationships because the regulatory burden or the perceived risk is too high to make it worthwhile to deal with a bank in another country.

Insurance

Licensing in the insurance sector weakened last year, following a plateau in the year before. The number of insurers registered in the Cayman Islands, most notably in captives, dropped by 48, about 6 percent, to 739 at the end of 2015.

Licenses for captives dropped from 724 to 679. But, the ESO writes, “Despite the slowdown in license registration, the financial performance of captives as measured by key variables strengthened in 2015. Net premiums totalled US$12.8 billion, 5.4 percent higher than a year ago and in contrast to last year’s 4 percent decline. Total assets improved by 14.7 percent to total US$59.1 million and overall net worth rose by 25.6 percent to US$15.5 billion.”

The makeup of the captives industry in Cayman stayed about the same as in earlier years. “North America remains the dominant risk location, accounting for 89.8 percent of insurance captives registered,” the ESO states, with the rest coming from the Caribbean and Latin America (3.1 percent), Europe (2 percent), and the remaining 5.1 percent from the rest of the world.

Cayman added Class A domestic insurers in 2015, ending the year with 31, up by three domestic insurance licenses from the year before. The ESO says this is the highest number of Class A insurance licenses in 10 years.

Gross premiums for domestic licensees, according to the ESO and CIMA, totaled $357.9 million for the first three quarters of 2015, according to unaudited consolidated financial statements. Health insurance accounted for 46.1 percent of that total. Net insurance claims totaled $157.7 million, with 67.9 percent of those claims for healthcare.

Bank and trusts 2012-2015. - Source: ESO
Bank and trusts 2012-2015. – Source: ESO

Mutual funds

The number of registered mutual funds dropped slightly last year by 0.6 percent from 2014. The drop in registered funds was tempered by a 4.5 percent growth in master finds.

The ESO explains: “The number of registered funds maintained a downward trend, falling by 2.3 percent from 7,835 in 2014 to 7,654 in 2015. Administered and licensed mutual funds also followed a similar pattern of decline falling, respectively, by 1.6 percent to 380, and 2.9 percent to 101 in 2015.”

The report continues, “The number of terminated mutual funds totalled 1,642 exceeding the 1,416 new registrations. According to the Investment and Securities Division (ISD) of Cayman Islands Monetary Authority (CIMA), higher terminations are partly attributed to a ‘clean-up’ following enactment of the new Director Registration and Licensing Law (DRLL) in June 2014. Other reasons cited by the ISD include liquidation, the culmination of the fund, transfer to other jurisdictions, the fund never having carried on business, and the fund no longer being economically viable.”

Stock exchange

Listings on the Cayman Islands Stock Exchange dropped by 20 last year to end the fourth quarter at 1,046 listings.

“Growth in the listing of sovereign debt securities (up by 36) was offset by declines in the mutual funds listing (down by 33) and insurance linked securities (down by 24),” the ESO states.

Total market capitalization, despite the drop in listings, hit a record last year at US$195.3 billion, up by more than 15 percent from 2014. According to the ESO, “The increase was due to higher specialist debt and sovereign debt securities, which combined to account for 91.8 percent of the total market value of traded shares, increasing respectively by 5.9 percent and 32.0 percent.”

Companies registry

The number of companies registered in Cayman dropped last year after a high in 2014 that almost hit 100,000. The total number of companies registered “declined marginally by 0.6 percent to 98,838.”

The registry added 11,864 companies last year, but removed 12,062 companies. The number of exempt companies in the registry grew by 0.8 percent. The ESO states, “Exempt company remains the preferred vehicle for the conduct of business accounting for 84.4 percent of all incorporated companies.”

The number of foreign companies registered in Cayman but incorporated elsewhere went up more than 9 percent. Non-resident and resident companies dropped by more than 12 percent.

“In the aggregate, new company registrations expanded by 7.8 percent to 11,864 in 2015 as growth softened from the 19.0 percent recorded a year earlier,” according to the ESO.

Despite the new registrations, the report notes, “The number of terminated companies accelerated in the review period, rising from 7,602 in 2014 to 12,062 in 2015. Of these terminations, 71.6 percent were removed by the Registrar, which originated mainly from the exempt category, 24 percent were voluntarily dissolutions primarily from the exempt category, and 2.2 percent were voluntary cessations of foreign companies.”

Partnerships

New partnership registrations grew by 16.5 percent last year from 2014. Active partnerships increased by 16 percent to end the year at 18,041.

The ESO states, “Foreign partnership, a new class of partnership introduced in 2014, climbed from 32 to settle at 77 in 2015, a 140.6 percent increase.”

Investors: How followers can become millionaires

By Juergen Buettner

Pro-cyclical investment strategies, unlike advice often preached by supporters of , show that it can be financially rewarding to swim with the current. Here’s how this approach works, and which U.S. stocks allow it to put it into practice.

Buy low, sell high

That is the mantra, fundamentally, of anti-cyclical-oriented investors. It sounds like a plausible approach, but investors who trust only in that “rule” risk never getting the chance to invest in some of the world’s top shares. This means those winning stocks, which apart from some temporary exceptions have risen continuously for several years or even decades.

These marathon runners are seldom really cheap, but their upward drive seems nearly unstoppable. Basically, these are precisely the stocks every long-term investor should own, since, after all, these are the real stocks that can make you rich – at least when it comes to sustainably earning money with shares. This investment philosophy is underpinned by historical data. Analysts at the French bank Société Générale examined the development of so-called trend-following CTA hedge funds from 1990 to 2016. The results show that the average annual performance of 9.5 percent was clearly better than that of the MSCI World Index and slightly better than that of the S&P Total Return Index. At the same time, volatility and setbacks were lower.

Price trends more helpful than ego

Calculations from past data, in general, should be treated with some caution because by choosing certain parameters, many desired results can be shown. However, in this case, stocks with decades-long upward trends present credible evidence. Despite that, most investors must first overcome some mental blocks to get ready to conduct a trend-follower strategy. On the one hand, these mental obstacles have to do with the fact that stock market newcomers usually from the very beginning are told repeatedly to invest anti-cyclically.

On the other hand, and perhaps even more difficult, trend followers must overcome their own ego. After all, an investor who bets on a trend follows only the signs created by the market and not his own instincts. Many investors lack a humble attitude, as behavioral psychologists have proved numerous times.

Mensur Pocinci, technical analyst at Swiss bank Julius Bär, says, “The real luxury for investors is to have no ego. Since at the end, often enough investors are their own worst enemy. The fact that our ego is our greatest investing enemy has to do with the problem that we do not want to admit our mistakes. As a consequence, investors hold on to loss-making, unprofitable investments because otherwise they would have to admit a mistake. The best way to overcome these psycho-social traps is to stop trying to predict the future. The risk of dying with such a prognosis is too high compared to the occasional hits.”

Very confident alpha leaders, of which many seem to be active on the stock market, especially should think about this, as well as what Pocinci has to say about the best prevention tactics of expensive investment mistakes:

“In order to not invest against an established trend, we are not allowed to listen to ourselves. One way to escape our personal inFollowers-1clinations is to refer to graphs or to classify the financial markets by historical performance.” The Julius Baer analyst demonstrates how well this can work by referring to a back-test, in which on the basis of 52-week highs the performance of the top regions was compared with that of the bottom regions. From 1998 to 2015, the stock market with the top rating achieved an increase of 11 percent per year compared to an increase of 6 percent per year for a buy-and-hold-strategy, and an increase of 2 percent for the worst-rated stock market.

Combine technical and fundamental considerations

Investors who consider the trend-following approach plausible should focus on stocks with an intact upward trend when they search for potential candidates to buy. Preference should be given to shares where those upward trends exist for years or, even better, decades. Also suitable are stocks that have broken out of a temporary sideways trend and have thus confirmed the long-term uptrend as intact. It sounds simple, but putting it into practice is difficult, since only a relatively limited number of shares fulfill that condition. Especially, if on top of that, fundamental factors are also taken into consideration. Simply by doing this, the circle of potential buy-candidates gets even smaller. This in turn has to do with the fact that many long-distance runners are no longer bargains after all the price gains they posted.

At the same time, winning shares only attain this status permanently if the business model is robust and the ability to make money has proved sustainable. Therefore, demanding valuations are reasonable as long as the business path to success holds on.

Companies with a functioning business model have the following characteristics: Strong brands with high customer loyalty, high barriers to entry, high switching costs for customers, high sustainable returns on capital invested, highly sustainable free cash flow, protective network effects, good chance of stable growth, responsible management, pricing power, economies of scale, a solid balance sheet and low investment costs to ensure the ongoing operation.

But even for long-distance runner shares with a proven business model, not every price should be paid. This has to be considered, especially in the current environment where the valuation of many safe-haven stocks has been driven to high levels by the abundance of liquidity and the strong safety thinking among the investors. This applies especially to consumer staples, utilities and defensive dividend payers. U.S. utility stocks, for example, on average now have an even higher average price-earnings ratio than those in the technology sector.

Cut losses and let profits run

It should be emphasized, despite all the advantages, that the trend-follower strategy is not a free ticket for share price gains. Such a flawless working investment strategy simply does not exist. However, the chances that the trend-follower approach will work can be considered good, whether the markets fall or rise, since trend-following strategies under these circumstances have worked out well in the past, according to Société Générale. However, no real protection exists if it comes to a sharp sudden market slump of more than 10 percent.

In such an event, even stop-loss limits do not really help, but since even previously winning stocks can get derailed someday, the use of this hedging technique should not be abandoned.

Ultimately, all of this is about implementing a philosophy the British economist David Ricardo relied on some 200 years ago. His motto was simply, “cut losses and let profits run.” This advice still carries weight, since Ricardo is considered one of the richest economists in history.

It is quite possible that the wise man would these days like the U.S. stocks Johnson & Johnson (pharma), Travelers Companies (insurance), UnitedHealth Group (health insurance), Raytheon (defense tech) and Southern Co. (utility), since they all have a long-term upward trend and an estimated price-earnings ratio of less than 20.

British exit and economic reality

Prime Minister Theresa May has indicated she is 'in no rush' to begin negotiations with the EU over Britain's exit. - Photo: AP

By Andrew M. Baron

I dislike the term “Brexit.” Some of you may agree with me, for a variety of reasons that may include the fact that the term has bombarded readers of the financial press over the last two months. My reason is simple: there appears to be a constant need to create a nickname or acronym for events that shape financial markets, economics and geopolitics (Global Financial Crisis becomes the cute “GFC”) and this phenomenon diminishes the seriousness with which one should be considering the effects.

Nicknames notwithstanding, the United Kingdom is in a position that most people frankly did not anticipate that it would be in. In fact, the British people themselves have reacted with palpable shock as the implications of the path the country has put itself on become more focused.

There is, of course, no way of knowing whether “Leave” voters understood the legal and political implications before arriving at the ballot box, but anecdotally we would guess that they did not. Indeed, as we write this, the situation in Whitehall is fluid. The U.K. has a new Conservative prime minister, with David Cameron having resigned in the wake of the referendum defeat, but the opposition is in a state of disarray. It is fair to say that there exists a vacuum of power that extends to both sides of the Commons, despite the reshuffled government.

At present, the best answer that Prime Minister Theresa May has been able to give regarding the timing of Britain’s exit plan is that she is “in no rush” to trigger negotiations with the EU. Thus far, politicians in the rest of the EU and the bureaucrats in Brussels have been unimpressed by that answer.

Lastly, there is a material risk that Scotland and Northern Ireland could call referenda to secede from the United Kingdom in favor of a Scottish attempt to remain in the EU and Northern Irish attempt to unify the isle of Ireland (the latter not particularly interesting to the Republic of Ireland itself!). One could be forgiven for being slightly confused by the political theatre of it all.

With all of these contingencies, it is exceedingly difficult to predict the real effect of the exit vote on the U.K. economy. There will likely be a dampening effect on growth, but a slowdown will not necessarily be transmitted through trade channels, which should exist in a status quo environment for at least two years after the U.K. formally notifies the EU of its intention to leave. The main channel through which a decline in growth in the U.K. is likely to progress is via a prolonged period of contraction in business investment. However, as business investment represents 10 percent of GDP in the U.K. and contributed exactly 0.0 percent to annual GDP growth in Q1 2016, it will take a severe contraction to push GDP negative in isolation.

A measurable increase in the personal savings rate and a shift to lower consumption is possible, but only possible as opposed to a certainty, contrary to the dire forecasts by the “Remain” camp. We do not believe that a two- to three-year process to negotiate withdrawal from the EU will have a permanent dampening effect on the consumer in the U.K. in the absence of actual large-scale declines in employment, which appear unlikely at present. Crucially, there is a high probability of further support from both the Bank of England and fiscal channels in the event that the U.K. economy enters a technical recession; avoiding a deeper downturn will be paramount.

We say all of this with a word of caution. No one has ever tried to do what the U.K. is going to attempt. Reversing 40 years of economic and social integration with the Continent has completely unknowable consequences, and assuming it will be easy (a la Boris Johnson) is not an informed assessment of the situation.

The results of the United Kingdom referendum to leave the European Union and the effect of the outcome on currency and stock markets a day after the vote. - Illustration: AP
The results of the United Kingdom referendum to leave the European Union and the effect of the outcome on currency and stock markets a day after the vote. – Illustration: AP

In terms of spill-over to the rest of the global economy, there is some good news. The U.K. may be the fifth largest economy in the world, but it represents only 4 percent of global GDP. It punches above its (GDP) weight in influence as a permanent member of the U.N. Security Council, a nuclear power and a “special” friend to the U.S. However, its influence on actual U.S. and global growth should be marginal. The U.S. is growing at a trend-like pace, is a relatively closed economy and is not showing many signs of fatigue at close to full employment. In short, consensus U.S. real GDP growth forecasts of 2 percent look attainable for calendar year 2016. The odds of continued tightening by the Fed indicate that only one increase (December) is possible in this environment, but is handicapped at only a 44 percent probability at present.

The not-as-good news is that the European economy can only properly be categorized as “in recovery” and is decidedly more fragile than that of the U.K. or the U.S. While Europe is growing at trend, or even slightly above trend presently, the ECB has pushed the limit of its monetary accommodation. Any weakness that is transmitted to Europe from the U.K. has the ability to expose further cracks in the union and renewed economic weakness. We do not believe that the vote changes the immediate fundamental economic climate in Europe, but the political landscape must be closely monitored for anti-establishment uprisings. Populist political uprising in Europe has an unpleasant history, and the economic and currency union only holds if the citizens in the EU are supportive of it. The baseline expectation is not instability, but one would be remiss not to consider the existence of emboldened fringe political leadership and populism’s potential for economic disruption in Europe.

Andrew M. Baron, CFA, is the chief investment officer at Butterfield Bank. 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.

Sharks worth more alive than dead

Most divers welcome the opportunity to encounter a shark. Several studies highlight the value of live sharks to tourism compared to if they are caught and sold.

Sharks may get a bad rap, but as top predators, they are vital to ocean ecosystems, keeping them balanced and helping to maintain the health of coral reefs and seagrass beds.

An estimated 100 million sharks are killed in commercial fisheries each year, and because of their role in the ocean ecosystem, their loss can also lead to the loss of commercially important fish and shellfish species. But there’s another economic argument to conserving shark populations: their value to the tourism industry.

“Studies have found that sharks can often be worth more alive, in the ocean, where they can generate millions of dollars for a country’s economy over the course of its lifetime from sustainable, well-managed eco-tourism, rather than a one-time value of $100 when caught and sold at market,” said Luke Warwick, director of The Pew Charitable Trusts global shark conservation campaign.

“Protecting sharks is vital,” says Alexandra Prebble of the Guy Harvey Research Institute. “Pretty much all shark species are on the decline with some down to less than 1 percent of their historical populations … the protection of all sharks in Cayman waters is a major step.”

At the Caribbean Shark Conservation Symposium in St. Maarten last month, government representatives from across the Caribbean discussed the steps they are taking – and intend to take – to conserve shark populations.

Sharks face the threat of extinction worldwide, primarily due to overfishing and shark finning. Representatives from St. Maartan and Cayman announced the steps they have taken to prohibit commercial shark fishing in their exclusive economic zones, and Curacao and Grenada announced they would establish legislation to protect sharks in their waters.

For centuries, shark fin, usually served as soup, has been a coveted delicacy in Chinese cooking. - Photo: Bloomberg
For centuries, shark fin, usually served as soup, has been a coveted delicacy in Chinese cooking. – Photo: Bloomberg

The value of a shark

A 2013 study published in Oryx, the international journal of conservation, found that nearly 600,000 shark watchers spend more than US$314 million a year, directly supporting 10,000 jobs.

The research team, comprised of scientists from the University of British Columbia, the University of Hawaii and Universidad Autónoma de Baja California Sur, compiled the reported economic benefits from 70 shark-watching locations in 45 countries.
In the study, “shark” refers to sharks, rays and chimaeras – all cartilaginous fish.

“Based on current observed trends, numbers of shark watches could more than double within the next 20 years, generating more than 780 USD million in tourist expenditures around the world,” the report states.

A bowl of shark fin soup – a delicacy in parts of Asia – still sells for as much as $100, and, according to the 2013 study, the “landed” value of global shark fisheries – primarily driven by demand for shark fins – is around $630 million. However, the report notes, the landed value has been declining for most of the past decade.

Additional studies highlight the value of live sharks to tourism compared to if they were caught and sold. A 2012 study of sharks around Costa Rica’s Cocos Island found that a single shark would bring $1.6 million to the country over its lifetime, in addition to supporting many jobs, because more than 85 percent of divers – who bring more than $7 million annually to the local economy – go to the island to observe the large predators, especially the schools of hammerheads. Comparatively, the study says, a caught shark is sold at the fish market for $200 on average.

Another study from the Australian Institute of Marine Science found that the value of an individual reef shark that visits shark-diving sites in Palau was $179,000 annually – $1.9 million over its lifetime – compared to the $108 it would bring if sold at market.

At the recent Caribbean Shark Symposium – co-hosted by The Pew Charitable Trusts, the government and nature foundation of St. Maarten, and the Bahamas National Trust – Cape Eleuthra Institute researcher Edward Brooks presented the findings of an economic impact study which found that sharks generated $113 million annually in direct expenditure and value added, through tourism, to the Bahamian economy.

“The results of our study illustrate the importance of the ongoing stewardship of sharks and rays demonstrated by The Bahamian Government over the last 25 years, for which they are now reaping the economic rewards,” Brooks said in the Bahamas National Trust’s July newsletter. “However, despite the actions of The Bahamas and the other Caribbean nations who protect sharks within their waters, more work is needed on a regional basis in order to effectively manage many of these economically important species which call the entire North West Atlantic and Caribbean home.”

Guy Harvey led an expedition to tag oceanic whitetip sharks in April. - PHOTO: JAMES WHITTAKER
Guy Harvey led an expedition to tag oceanic whitetip sharks in April. – PHOTO: JAMES WHITTAKER

Protecting sharks

According to Warwick, Pew’s global shark conservation campaign aims to curtail global shark mortality by taking a three-pronged approach: working with individual countries to establish shark sanctuaries within exclusive economic zones, reducing the supply of sharks available to fisheries; working to limit and regulate the trade of shark fins and other products through international conventions and governing bodies; and working to reduce the demand for shark fin and other shark products by “showing that sharks are vulnerable marine wildlife, who are slow-growing, late to sexually mature and have few offspring, so they should not be managed like other fish.”

Since 2009, 14 shark sanctuaries have been established around the world, with seven in the Caribbean region alone.

“A shark sanctuary is a strong step, but is precautionary,” Warwick said. “It can still raise concerns among fishermen [and] among other key groups if it impacts the way they have conducted business.

“Shark sanctuaries won’t be the right management mechanism everywhere, but where sharks are highly valued for tourism, or have been heavily depleted by overfishing, they are a strong, precautionary measure governments can take to safeguard their shark populations for future generations.”

Another effort to conserve shark populations worldwide is the inclusion of several shark species in Appendix II of the Convention on International Trade in Endangered Species of Wild Fauna and Flora. The convention requires that any international trade in the species included be sustainable. In 2012, five shark species including porbeagle, oceanic whitetip, smooth, scalloped and great hammerhead, as well as two species of manta ray, were added to the convention, Warwick said.

In September, convention member governments will meet in Johannesburg, South Africa, and vote to add silky shark, three species of thresher shark and nine species of mobula rays to the appendix.

“A ‘yes’ vote would mean double the percentage of the global shark fin trade that is regulated,” Warwick said.

 

Tracking storms, saving lives

Dolly Solomon's wattle and daub home stands firm during the cleanup along Bodden Town road after Hurricane Ivan in 2004. - Photo: Justin Uzzell

By Frank Bentayou

For the better part of a century, a beneficial alliance has linked the U.S. scientific enterprises that track and study tropical storms and extreme weather and the Caribbean nations that suffer most from their wind and flooding. Now the U.S. Weather Service is promising to “revolutionize” its forecasting ability with some $8 billion worth of technology upgrades.

The aim, according to meteorologists and scientists, is to make this partnership a world model for storm research and prediction to save lives and resources and reduce the suffering that can happen during the six months of hurricane season each year.

Susan Buchanan, acting director of the U.S. National Weather Service public affairs office, says forecasting has improved dramatically from when its basic information was: There’s a storm forming, it’s pretty big, and it’s heading our way.

“There used to be lots of surprises,” Buchanan said. “We know more now. And we’ve gotten a lot better with our predictions.”

The main sources of information about storm generation and their strength and paths through southern seas are the U.S. National Oceanographic and Atmospheric Administration (NOAA) and its agencies and partners, including the National Weather Service and the Miami-based National Hurricane Center.

As part of the multiyear phase-in, investment in technology, including almost $45 million more in computer and software power in 2016 alone, and a more than $7 billion investment in satellites, storm forecasting is on the verge of even greater improvement, scientists say.
NASA will launch a new generation of satellites in October from Cape Canaveral, Florida.

“If the images we look at today are like Super-8 film clips,” a U.S. government public information officer said, “in a year they will be more like IMAX displays.”

From this investment, NOAA and other weather agencies are likely to get dramatically better at observing and interpreting the intricate birthing process huge weather systems undergo, and then track them more precisely, better predict their intensity and disseminate all that information to trade routes in the sea, the commercial and private aviation industries and targeted points of landfall with more accuracy than ever before.

Caribbean and other regional states provide the raw material – in the form of millions of observations about the sea and atmosphere – that the U.S. agencies can turn into reliable predictions.

Observation and data processing stations dot the Caribbean, monitoring wind direction and speed, time and intensity of sunlight, water and air temperature, atmospheric pressure and moisture. A key station among them is the Kearney Gomez Doppler Weather Radar installation in Grand Cayman’s East End.

Image: U.S. National Oceanic and Atmospheric Administration
Image: U.S. National Oceanic and Atmospheric Administration

Super new satellites and supercomputers

NOAA’s super-mapping systems and greater, faster computer capacity are contributing to the improved forecasting process, Buchanan said.

“ … The new GOES-R [geo-synchronous] weather satellites will provide fresh images of a hurricane every 30 seconds, much faster than current satellites. Image generation will be four times faster,” she said, noting that the data-gathering process will be far richer, leading to a more complex understanding of storms.

NOAA will harvest endless data points from the region where storms begin, feed them to its supercomputers and then quickly distribute useful predictions back to its international partners.

“We’re going to be able to provide this information to local emergency operations in the path of the storm faster than in the past, and that leaves more lead time for emergency preparedness,” including dealing with infrastructure needs, getting food and water to where they will be needed and making decisions about evacuation, she said.

Cayman Islands National Weather Service Director General John Tibbetts said his experience with forecast information from the U.S. Hurricane Center in Miami is that “there has been a somewhat steady improvement in weather models … to accurately predict location and strength of any active storm or hurricane.”

But new features scheduled for 2016 should ratchet performance even higher in years to come. Philip Klotzbach, storm researcher at Colorado State University’s Tropical Meteorology Project, has been involved for years with annual Atlantic and Caribbean storm forecasts released each June.

“The forecasts have gotten better year after year,” he said. “That’s mostly because of improvements in modeling quality, the ability to know what the large-scale atmospheric conditions are. We have so many more observations than we used to. They’re on ships, in ground stations and, of course, on satellites.”

Years of study have yielded essential insights into weather and storm patterns including that in seasons when El Niño, a warm-water pattern in the Pacific Ocean, is active, Atlantic hurricanes tend to develop less fiercely than during times when no El Niño is detected. That circumstance was at play in 2014 and 2015, when relatively fewer big storms came to bear in the Tropics.

Klotzbach’s 2016 forecast showed a year in transition. The warm El Niño waters are less a factor this season, so hurricanes have a somewhat higher probability of gaining strength than in the recent past.

“The supercomputers NOAA now employs and advanced modeling software are able to create a far clearer picture than ever before out of the millions of observations around the globe,” Klotzbach says.

“You’ll be able to see the difference on your own home computer screen,” he said. “You know how those video loops of hurricane activity seem kind of jumpy? Once we troubleshoot everything over a month or two, you’ll see the rotations in much higher resolution.”

The smoother graphics also mean more data for Klotzbach and his colleagues to study more information about the forces hurricanes bring to bear against the existing forces in the atmosphere. And that means a chance of much greater clarity about whether a storm is strengthening or weakening, preparing to slide to the east or barrel north. “Our accuracy is going to improve a lot,” he said.

Part of Klotzbach’s certainty comes from his still brief experience with two new supercomputers NOAA put in operation in January. The promise is they will provide the most sophisticated analyses of weather conditions four times faster than the systems they replace. One unit, which NOAA refers to as Luna, is in Reston, Virginia, just outside of Washington, D.C.; the other, called Surge, is in Orlando, Florida.

Part of the job of the $44.5 million computer upgrade is to improve hurricane tracking, but they also are equipped to monitor both winter storms and extreme thunderstorms. In addition, they will analyze the water-carrying capacity of soil and help scientists better understand regional drought and flooding.

Tibbetts said the improvements “will bring better personal as well as community decisions, which can be the difference between life and death during a hurricane.”

NOAA’s aim is for forecasting to become 50 percent more accurate by 2021. The first five years have yielded 20 percent better accuracy, according to administrators.

The launch of the much-improved GOES-R series of satellites – aimed solely at the Western Hemisphere – is scheduled for mid-October. Scientists like Klotzbach foresee a spike in accuracy performance once the new technology gets fully integrated into weather agencies’ systems.

Hurricane Ivan left a path of destruction on Grand Cayman in 2004. New state-of-the-art technology is aimed at vastly improving forecasting storms in the Caribbean region and the entire Western Hemisphere.
Hurricane Ivan left a path of destruction on Grand Cayman in 2004. New state-of-the-art technology is aimed at vastly improving forecasting storms in the Caribbean region and the entire Western Hemisphere.

Cayman Islands storm vulnerability

HurricaneCitiy.com, a website that since 1997 has ranked cities and islands affected most by tropical storms and hurricanes, lists the Cayman Islands as the fourth most often hit or grazed in the Atlantic basin. The site tracks storm strikes back to 1871 and notes that over those 145 years, Cayman has been a target every 1.69 years. It also calls Cayman “the most affected area in the Caribbean Sea.” (The No. 1 Hurricane City, though, is Cape Hatteras, North Carolina, struck every 1.37 years.)

On the other hand, the website also noted that the Cayman Islands had a 13-year reprieve from big storms when it did not get a single landfall between 1955 and 1969. That ended a generation later, in 2004, when Hurricane Ivan swept past to the south with 155 mph winds and a storm surge of 8 to 10 feet. The islands sustained $1.8 billion in damage and counted two deaths.

Tibbetts has noted that there’s no controlling the birth of tropical storms or any way to guide them to remote corners of the sea once they appear. But the as the region’s vulnerable islands must prepare to protect residents and visitors however they can, an extra day or two or even a few hours’ cushion, could be a game-changer in the path of a killer storm.

Business valuations: measuring the local economy

A development in Turks & Caicos that Andrews's firm valued.

Among the highest-end business-to-business enterprises may be the valuations that determine the worth of businesses and “going-concern” properties such as hotels, spas, golf courses, marinas, restaurants and bars.

Almost as significant are similar valuations of resort-residential properties such as luxury villas and condominiums, and of commercial properties such as retail outlets, development sites, offices and industrial parks.

However, it is those business valuations – and related consulting – that are critical business-to-business enterprises: “The guy who owns an air-conditioning or wholesaling company and wants to sell it – or a partial interest – to someone and needs a valuation … or the guy who owns a metal-fabrication business and needs to buy out his Caymanian partner because he now has status,” says Jim Andrews, senior managing director at Integra Realty Resources.

IRR is described as the largest valuation and counseling firm in North America. Andrews, a 19-year resident of Cayman, in 2007 co-founded, with partner Paul Key, local property valuation firm Andrews Key, which in 2012 turned into IRR, the Manhattan-based valuer’s second overseas office after Mexico City.

Since then, Andrews has created his own small Caribbean theater of operations, opening additional offices in 2013 in the U.S. Virgin Islands and the Bahamas, while building a portfolio of valuation and consulting work in Turks and Caicos, Anguilla, Jamaica and Barbados – where he once valued the 80,000-square-foot U.S. Embassy for the State Department – and a handful of other islands.

“We appraise businesses, many of which are operating companies in Cayman. These appraisals are for a range of purposes including share sales/transactions; financial reporting and taxation for, as an example, U.S. citizens; estate planning; probate; litigation, divorce, partnership dissolutions, restruct

Jim Andrews
Jim Andrews

uring, insolvency/liquidation, etc.,” Andrews says.

“We have also performed consulting work pertaining to helping business owners with ways they can add value to their business, and I have spoken on this issue publicly, such as at SME [small and medium enterprise] training events at the Chamber of Commerce.”

B2B-related properties

A small proportion of Andrews’s business is private, residential “high-value homes and villas,” he says, but 50 percent is “businesses and business-related properties” and 30 percent “other types of commercial real estate.”

Andrews – with his four fellow IRR appraisers in the region – says the company has “valued hotels at the high end of the size range for the Caribbean; and large commercial properties such as Class-A office parks.

“Most business valuations we do of local companies are relatively small, from $1 million to $5 million in revenues,” he says, but the 48-item list of real estate around the Caribbean offers some Cayman-based surprises: The four-star, 300-room Marriott Beach Resort, valued “for an investor for restructuring”; the 343-room Westin Grand Cayman Resort, valued “for a private equity fund”; the 390-room Ritz-Carlton, Grand Cayman and its “remaining inventory of beachfront condominiums, villas and excess land,” valued on behalf of the Cayman Islands government; Exclusive Island, 16 villas on a “private peninsula with a five-star resort development,” valued for a mortgage lender; and both the 169,000-square-foot five-building Cricket Square office park – valued for a bank/lender – and the 127,000-square-foot Governors Square shopping center, valued for “asset valuation purposes.”

Andrews declines to name another half-dozen smaller Cayman businesses IRR has valued, but they comprise a variety of companies such as a rum distillery, a real-estate brokerage, equipment wholesalers and a private school. Across the region, he has valued grocery store operators, seniors housing and healthcare, a flour/rice/feed mill, aggregate mining and production, restaurants and bars.

Reasons vary

The reasons to value businesses vary, says Andrews: “We have performed these for attorneys assisting clients with shareholder disputes, parties to a divorce, owners wishing to sell shares to new partners or investors, owners for financial reporting, and to auditors to assist with marking assets to market value on a balance sheet.”

The market values of IRR-assessed properties and businesses range from the relatively modest – “often for partial interests held by minority shareholders – so these can be low in terms of the scale of values,” he says – to the internationally daunting: “We have valued hotel resorts up to $380 million, and collaborated on one assignment at over $1 billion in value.

“Companies buying hotels or business holdings for investment purposes tend to be larger transactions that are valued on a cash flow basis,” Andrews says, explaining the enormous costs of acquiring, for example, a five-star hotel in the Cayman Islands or a successful resort, all as “going concerns,” a formal term among several “premises of value,” and generally defined as “value in continued use as an ongoing, operating business enterprise.”

Other “premises” on which a business might be valued are “assemblage of assets,” defined as the value of a business’s assets that may be in place, but not used to conduct business operations; “liquidation,” in which the value of a business is calculated on a sort of “fire sale” basis, disposing of its assets in a forced liquidation; and “orderly disposition,” defined as the value of a business’s assets which will be disposed of individually and not used for business operations.

In the latter regard, the film “Wall Street” serves as one example, in which trader Charlie Sheen intends to dismantle his father’s aircraft manufacturer and sell its constituent parts.

Interpretations and agreement about the value of a business among the valuer and the owners or buyers can be slippery. As a stark illustration of what that can mean – and while Andrews does not say – his unnamed $1 billion valuation might well have applied to IRR’s assessment of the Bahamas wildly expensive, widely litigated, 2,200-room Baha Mar mega-resort. The deeply contested, China-financed project, with a checkered history and estimated cost of $3.5 billion, was initially scheduled to open in 2014. Construction is still suspended, although a late-May agreement with the Nassau government may have been enough to break the log jam.

Local connection

IRR’s business valuation function is vital to Cayman’s – or any – local economy because the work is intimate with the local community. In a sense, says Andrews, “business valuation and related consulting … is more consumer-based in nature than property because we are dealing with people who are business owners or investor/buyers in the local community.”

Property valuation, while still a “B2B” function, is more corporate-oriented, if equally relevant to a measure of a local economy: “The property-valuation side of our business is largely geared toward the lender/bank clients,” he says, “usually when a property owner or buyer is pledging the property as collateral for a mortgage.”

A property valuation is sometimes used for feasibility studies of a proposed project.

Underscoring the corporate orientation of property assessment, a bank’s corporate lending department will typically have a voice in who is engaged to undertake a valuation. On a good day, a corporate banking client might gain a vote in the selection of a valuer. In some cases, a court may appoint a forensic accountant as a joint expert in a business valuation.

Perhaps predictably, Andrews says IRR’s superior qualifications make it a preferred choice for valuations, but he justifies the remark by pointing to IRR’s U.S. roots: “Our training and qualifications are US-based, which means we are accepted by U.S. courts, the Internal Revenue Service, U.S. banks, etc. We believe our reports contain more detail, data and analysis than our competitors who do property valuations locally.

“This is typical for U.S.-style work versus otherwise, and is more and more appreciated by our clients who review our work … we make their jobs easier.”

For small-business valuations, he adds, IRR is probably less expensive than others: “We are affordable for small businesses. The big accounting firms often sub this work out to someone in the U.S. or Canada, and will charge a fortune, a fee that is out of range for small businesses to afford.

“Our business valuation is a widely needed specialty, and we have little competition for that service in the local market. But most people don’t know we do that. With regard to commercial properties, hotels, resorts, etc., we have a wide breadth of experience around the Caribbean and know this market well.”

 

Uploading B2B success and growing an economy

Standing, from left, Netclues staffers Mansi Patel and Rahul Choksi; seated, Kartik Mehta

In some respects, web design and IT expert Netclues presents a conundrum: With offices in Canada, India and Malaysia, the sliver of Caribbean real estate that is the Cayman Islands seems an incongruous location.

But founder Kartik Mehta has lived in Cayman for 15 years, and founded Netclues in 2008.
“We realized that there was a great need for giving exposure to the businesses on island, and by exposure I mean to put businesses out there in the global market with a unique identity-and-branding website,” he says.

By all accounts, Netclues’s success has been breathtaking. From a near-cliche storybook “humble beginnings” in a 200-square-foot office in his George Town home, Mehta, his four-member staff – including brother Jay – and Netclues now occupies 10 times that space in Industrial Park’s Mirco Centre – and globally boasts 120 employees.

The client list runs to nine pages – at 30 entries per page. If tomorrow the company sank beneath the sea, nearly every business in Cayman would be bereft of a website, a designer, a maintenance technician and an IT adviser.

A random sample of the company’s business-to-business work includes Fidelity Bank, The Security Centre Ltd, CUC, CIREBA, The Church of God Chapel, The International College of the Cayman Islands, Endless Energy, and VAMPT Motors. Even the business that is singer Andrea Rivera has a website.

The array is top-heavy with private enterprise – retail, financial services, private schools, restaurants and bars, real estate brokers and law firms. At the same time, however, listings also include quasi-government entities such as the National Roads Authority, the Water Authority-Cayman, CINICO, the Auditor General, the Complaints Commissioner, the Information and Communications Technology Authority, the Turtle Farm and Cayman Airways.

And those are just clients in the Cayman Islands. Mehta has done work for companies in the Turks and Caicos Islands, Brazil, Canada, the U.S., the U.K. and India.

“With the Internet doing wonders elsewhere in the world, we knew it wasn’t going to be long before it took over all the processes here on island,” he says. “We got hold of a niche and we worked with it; we took our chances and those chances paid off.

“Another advantage of being here, which any business here cannot deny, is that it helps a lot since Cayman is an upcoming market and is tax free.”

Most of Netclues’s work is B2B, and although Mehta has private clients, he declines to separate or enumerate them: “We do business with private and corporate clients alike. Sometimes our corporate clients become our private clients, and sometimes our private clients become our corporate clients.”

“We don’t like to differentiate … Every client is a client right?” he asks. “To us, the needs and urgency of a private client or a small business are as important as a corporate client. We make sure that all our clients get the same level of quality and professional work – and within the time line that we decide.

“We give our clients personalized attention and we are extremely passionate about our services. We don’t sleep if a website goes down for even an hour,” he says.

Apparently, the formula works: More than 350 local clients complement more than 600 globally, Mehta says.

“For the past eight years we have been constantly trying to push local businesses – no matter big or small – to the forefront and help them get noticed.”

Mehta’s website lists 12 broad areas of service beyond website development. Mobile applications involve interfaces and back-end management with iOS, Android, Blackberry, Symbian and Windows operating systems; tailored content management services use open-source platforms such as WordPress, Joomla, Drupal and X-Cart; web-hosting and maintenance preserves security, usability and functionality; customer relationship management systems promise efficiency and improved retention. Custom-built software; e-commerce and graphic design also feature – and that is only half the list.

“We are a full-fledged branding company,” Mehta says. His B2B efforts “range from logo design, graphic services, website design and development, online marketing, software development, mobile application development and more.

Netclues offers more B2B services through online advice and even public lectures such as June’s two-day Multiple Listing System training course for real estate brokers. A Netclues blog offers a seven-point program on “Best Ways to Monetize Your Business,” suggesting webinars, links to affiliated businesses, and creation of premium content and digital products boosting page views.

Branding, marketing, graphic design and the scramble for “clicks” are the visible, sexy end of the business, colorful, noisy and designed to attract attention. The other side of that coin, however, quiet and crucial, is cybersecurity … “and it’s not always money or credit card information that you are trying to protect, Mehta cautions.

“It can be something as simple as information … When we work on a website, the process is very stringent,” but presents challenges that must be balanced. A website must be not only user friendly, but search engine friendly … and secure.

“Any website is tried and tested in our Quality Assurance Department for at least a week where we try to test the website in every way possible, be it security, online marketing, search engine optimization, payment gateways etc.,” he said.

“We try to find as many and as in-depth loopholes as we can so that the website is 100 percent proofed for content, working and secure before it goes to the client for final testing.

“We do not outsource any of our work. All the work is done in-house, so also you have the security of your information being inside one premise at all times.”

Meta finishes by reflecting on the myriad relationships Netclues has cultivated, and which keep it healthy. “I strongly feel it’s the relationships we build and the local/global experience we carry. No client leaves us and we don’t leave our clients,” he says.

“A very positive thing about people here is that no matter how big a company someone runs or how important a job someone does, they still do not forget their roots. They are still grounded. This I think is something which has kept me in this place.”

B2B keeps the world running

They work in the evenings and often overnight; they clean kitchen floors, walls and equipment, enabling safe food preparation; they scrub the toilets and replenish soap and paper products, ensuring a hygienic environment.

You can hardly walk through the Cayman Islands Hospital without using a wall-mounted hand disinfectant.

The equipment, supplies and the labor – and the efficient, regular scheduling of service – are almost invisible. Dispensers and towels and tissues are magically restored daily; and few witnesses ever see the teams of cleaners and their equipment.

But their work allows each day’s onward press of business, and Chris Hew and Kristin Thomson quietly preside over the effort, operating two of the largest business-to-business enterprises in the Cayman Islands.

Hew’s Cleaning Services and Hew’s Hotel Restaurant Supply – the former an outgrowth of the latter, and the latter an outgrowth of the original, called Commodity Marketing – have both operated since the ‘70s.

Commodity Marketing, founded in 1973 by family patriarch Leonard Hew, was initially housed in an old wooden building opposite the Royal Bank of Canada in George Town.

As the business expanded, spinning off HHRS, which itself spun off Hew’s Janitorial Services, the headquarters moved to Industrial Park’s North Sound Road. Commodity Services actually became HHRS, and its managing director Leonard Hew’s third son, MLA and Ministry of Tourism Councilor Joey Hew, while the janitorial company changed its name to Hew’s Cleaning Services: “I was invited to get involved and we built this building about 18 years, maybe 19 years ago,” says Managing Director Chris Hew, speaking from his 335 Dorcy Drive office.

Chris Hew
Chris Hew

“We’ve been in business since 1976, 1977, starting with the company my father and uncle founded, supplying chemical and paper products,” he says. From the start, it was a business-to-business operation, servicing hotels, restaurants and other institutions.

In conversation, Hew still refers to the company by its old “Janitorial Service’s” name, although its shiny new multi-page, full-color website trumpets the “Cleaning Services” moniker.

“Say goodbye to dust, dirt and unwanted filth from your office space, home or business plant area. Presenting a hassle-free cleaning service that caters to your every need,” it says.
Hew himself is a little less breathless, offering details of the operation.

“Our clients are about 90 percent corporate,” he says, “and we have around 200 of them. They come and go at times, and we don’t see them all daily, but the 200 are those on daily or monthly contracts for one year or two years. We usually do five nights per week except those related to hospitals, for example, that run seven days per week.”

“We do banks, we do jewelry stores, we do a lot of larger clients. We don’t want to advertise who they might be. Some of them don’t even want us to wear our own uniforms. They want an image for their entire staff, even their entire building. Sometimes we wear something that just says ‘janitorial department.”

Thomson, however, says, “[There are] too many to count – we service the majority of restaurants and hotels, all of the hospitals and many other institutions, banks, the prison [Northward], etc., in one way or another.

“We have been involved in … commercial kitchen-equipment projects,” she says, in supply, installation and start-up phases: “Blue Cilantro, George Town Yacht Club, the Bistro, Health City Cayman Islands, the Lobster Pot fire reinstatement, Clifton Hunter High School to name a few.

“We are currently involved in the commercial laundry fit-out at the Kimpton SeaFire. We work regularly with The Ritz-Carlton, the Marriott, the Westin, Sunshine Suites, Comfort Suites, the Royal Reef, Fluff and Fold, Puritan Cleaners, the [Cayman Islands] Hospital, Chrissie Tomlinson, Eats Café, Calypso Grill, Blue Cilantro, Kaibo …”

Hew’s Hotel Restaurant Supply staff spruce up the kitchen at Blue Cilantro.
Hew’s Hotel Restaurant Supply staff spruce up the kitchen at Blue Cilantro.

She trails off in mid-list, saying “I do not want any of our customers to feel forgotten.”

HHRS largest job was $1.5 million, although Thomson declines to name the client. In the same breath, however, she says “the Kimpton laundry fit-out, the Health City Cayman Islands kitchen fit-out and Clifton Hunter High School” are the largest jobs she has done.

“The bulk of our business is ‘B2B,’ although we also provide installation, warranty support and service for our sister company Bon Vivant,” a Hew’s-affiliated, high-end Camana Bay kitchen-equipment showroom.

The list of services HHRS offers is daunting. “We like to say the list is endless,” says Thomson, and while she begins with what the company doesn’t do, even that isn’t quite so definitive because, well, they do some of it.

“We do not offer cleaning or laundry services – we don’t clean or wash linens. But we do support these operations.

“We specialize in the supply of paper products, hand towels, toilet tissue, etc., cleaning products/sanitation supplies, janitorial products such as mops, buckets and brooms.

“We have a dedicated service department with a team of technicians that provide equipment repairs, preventative maintenance and installation of commercial equipment – and some residential – including [industrial] kitchen equipment, commercial laundry equipment etc. Our technicians have a combined 65 years of experience and are some of the most talented in the business. We also sell commercial equipment and can do commercial kitchen design.”

Hew offers a list similar not only in scope, but also in function, overlapping HHRS at critical points, meaning the two companies will occasionally subcontract work to each other.

“Usually one or the other of us has the contract and then subcontracts the other,” Thomson interjects. “So, for example, Hew’s Cleaning Service gets a government contract to clean the schools. They may subcontract us to service the equipment in the cafeteria or vice versa. We support each other.”

The complexities of a “B2B” business also involve scheduling, when Cleaning Services and its clients have to operate simultaneously.

“Take a hotel kitchen, for example,” Hew says. “I have seen some that run 24 hours per day. We will start at 11 at night. The spas run seven days per week. With public areas, we start at 1 a.m. or 2 a.m.”

He explains that a commercial kitchen cannot be treated like a domestic kitchen. “Some of them have a barbecue grill and you have a stainless steel brush to scrape it clean. You can’t use it, though, in a commercial kitchen because metal scraps can come off. We need to be aware of safety and hygiene.

“We use a lot of chemicals and some of them, used to clean walls, can catch fire,” he says. “This isn’t just a mop-and-broom operation. We need to consider safety, health and environmental concerns and the health and safety of employees,” Hew says.

“Even cleaning products you might buy at the grocery store, you will use, say, once per week. The staff, though, are working with them eight hours and nine hours per day. That can have serious repercussions.”

Some of the solutions mitigating prolonged exposure to caustic chemicals are ingenious – and simple. “Ammonia is used to clean glass because it evaporates quickly,” Hew says. You can replace it “if you add a few drops of dish liquid into a bucket, and you get a shiny, streak-free surface.”

Similarly, a few drops of vinegar or baking soda in a wash basin cleans as well as any chemical.

Cleaning Services does not do as much private cleaning as it used to, he says, instead largely dedicating the 140 staff to larger contract work.

“We will do ‘one-off’ jobs sometimes, usually residential, but we stepped out of maid services because of all the costs involved. When we looked at it the maid service generated only about 10 percent of our income, but was 70 percent of our costs.

“We still do a little bit, though, but we had as many as 35 staff doing two clients each per day. Now we have only three staff doing about 90 minutes” at any particular job, then moving to the next.

Hew says, however, that he will not abandon the private side of the business and, in fact, is preparing a surprise: “We will launch a new service for home owners. We’ve been testing it for six months and we’re thinking about starting in November. There are a few complications with hiring though, and we may start around Christmas, maybe January.”

“B2B,” he explains, frequently overlaps with the personal and private, as on-site Cleaning Services staff encounter the owners of businesses – and even buildings – who commend Hew’s corporate work, and seek to extend the relationship from the workplace to the home.

Thomson, meanwhile, does little extra-corporate work, and the demands of HHRS’s B2B structure are entirely different from Hew’s, requiring a professional acquaintance with building standards and Planning Department regulations.

“We begin with a consultation with the client to gain a better understanding of their operational needs,” she says. “Using architectural drawings provided to us, we begin the kitchen-design portion taking into consideration not only the needs/wants of the client, but Department of Environmental Health and Building Control Unit requirements as well as our expertise.

“This process usually goes back and forth a few times until the final layout is approved by the client, at which point equipment is specified and final drawings (mechanical, electrical and plumbing) are provided. Typically, at this point the project goes out to tender for the equipment package.”

Ultimately, the “package” is supplied out of the U.S.

“We have some preventative-maintenance agreements in place where we are contracted to provide regular equipment maintenance,” Thomson says, “but otherwise our customers simply call in an order and we deliver.”

“Do we have competition?” asks Thomson. “Of course we do. Because the nature of our business and the diversity of the products we offer, we not only compete with other local businesses, but with U.S. business as well. The Internet has made the whole world a lot smaller.”

HHRS prevails, she says, because of “our commitment to our customers and our dedication to providing quality service.”

“When problems arise – and, let’s face it, there will always be problems in business – we are there to handle the issue and work with the client toward a speedy resolution. We stand behind our word, our products and our people and we do our best to make our customers feel cared about and to provide solutions to their problems, not the problems we think need solving.”

Hew points to the personal nature of his enterprise: “Each business has its own strength and its own culture. Our culture is that we are a family; our main asset is our staff.

“When we started out, we paid attention, and sometimes it was difficult, but it’s in the little details. We care. We don’t nickle-and-dime them to death. There are few opportunities for gratuities in this business, so we pay enough to support families, who can educate their children.”

He meets former staffers, he says, wherever he goes: In Florida at 3 a.m. in a Denny’s restaurant, on Facebook and Instagram, in random parking lots and sometimes when they walk through his office door.

“I’ve never been to a single country where I did not run into a former member of Hew’s Janitorial,” he says. “If you pay attention and you care for them, they will care for you.”

Camana Bay building boom just beginning

Despite uncertainly in the global economy, Camana Bay will see a dizzying amount of construction activity over the next several years.

Mark VanDevelde
Mark VanDevelde

In addition to ongoing major infrastructure projects in the area and the construction of a new Class A office building, Dart has plans to build even more office buildings at Camana Bay, expand the Cayman International School and develop a large shopping plaza with integrated residential units, as well as a residential tower.

Dart Realty (Cayman) Ltd. CEO Mark VanDevelde spoke extensively about the company’s ambitious plans that continue the massive investment in Camana Bay, which already totals more than a billion dollars.

Camana Bay office space

Camana Bay, the mixed-use, master planned development that is the epicenter of the Dart Group’s investment on Grand Cayman, has thrived, particularly as a Class A office location. Many of the Cayman Islands’ top financial services industry firms now call Camana Bay home, and more are on the way.

In January, the 18 Forum Lane building – the Caribbean’s first LEED Gold-certified mixed-use commercial building – officially opened, with global accounting firm PwC as its anchor tenant. Within days of its opening, construction began on another Class A office building – which will also be LEED Gold-certified – next to 18 Forum Lane.

“I think every building we build from now on will have some LEED designation or will at least be the equivalent of a LEED designation,” said VanDevelde, adding that building to LEED’s environmentally conscious standards is becoming almost a requirement in places such as the United States. “Certainly we see the benefits in … the direct savings you get from lower power consumption and efficiencies [like in air conditioning costs]. So there’s some real reasons and benefits for that.

“Even if you can’t directly connect the savings to your efficiencies and energy savings, or faster absorption [of capital outlay] or higher rental rates [to tenants], you do have the bigger picture or image. If it’s a differentiator … in that someone is going to move to that building versus another building because they feel better about it, then in a broader context, we think that’s a good decision.”

Once the sister building to 18 Forum Lane is completed, scheduled for summer of 2017, Dart will turn its attention to two more Class A office buildings, one of which will house its own employees, which, as of mid-June 2016, numbered 661. Both of those buildings will be constructed on land that will become available once the Esterley Tibbetts Highway and the current roundabout at Camana Bay are moved westward.

The need for these two buildings has been determined by increased demand, including demand for space in 89 Nexus Way, where the Dart Group’s offices are, VanDevelde said.

“We’re getting pushed out of our building here,” he said. “It’s a good problem to have, but a problem nevertheless. We’ve had four tenants now that are going to be leasing our space here and three of the four weren’t on the island before, so they weren’t planned.”

As a result, those working for the Dart Group’s real estate and construction division will temporarily move to the second floor of the 18 Forum Lane building while the company designs and constructs a large building for the group’s employees, with growth expectations in mind.

“We have a number of tenants now for the [building under construction], so we think we’re already behind the ball in getting another building designed,” VanDevelde said. “So … we’ll be designing two [additional] buildings and a parking solution … that will take a year of design and two years of construction.”

Camana Bay residential and shopping

It was always intended that residential offerings would be a big part of Camana Bay, but so far the only residential opportunities have been the for-lease apartments on The Crescent called The Terraces.

That is about to change.

Within the next year, projects which include for-sale condominium units in two places will start construction in the northern part of Camana Bay, VanDevelde said.

One of the projects is a residential tower called 10 North, which will be built just north of the 94 Solaris Ave. building on the Crescent waterfront. The tower, which will be between seven and 10 stories, will offer two- and three-bedroom condominiums for sale, with in-building amenities like a fitness center and pool.

“10 North is likely to be the first delivered,” said VanDevelde, nothing that simultaneously, a large project to the west – referred to for identification purposes at this point as “The Big Box” – will get under way and will also include residential offers.

The Big Box will also include two of Camana Bay’s most important retail components – a supermarket and a home goods store, both owned by existing local merchants. Both of those stores will be larger than the stores the merchants currently operate, VanDevelde said.

Those large anchor stores will be surrounded by smaller retail and complementing commercial businesses, with a large parking lot in the middle. Above the smaller retail stores will be more for-sale condominiums called the Market Street Flats. These units will be mostly, if not entirely, studios and one-bedroom apartments.

VanDevelde said Dart Realty sees the Market Street Flats units as investment opportunities for corporate professionals working at Camana Bay, who could buy at a relatively low price point and know that even if they move away or upgrade their housing here, they would have a property that could appreciate in value.

“You’ve got this continuing growth of Camana Bay for decades to come, so you could see more and more people living here, more and more people working here as we continue to build out additional office space, and it’s really going to be in a prime location,” he said. “You go down the elevator and you’re right in town … right next to a supermarket, within walking distance of work or The Paseo, The Crescent, the beach, etc.”

More than two years ago, Dart announced it was proceeding with building 101 condominiums and townhouses south of the Nexus Way building and then completed the preliminary site work. But that project, referred to as “2A,” was put on hold because of uncertainty over what will happen with the George Town landfill.

That uncertainly affects potential buyers, VanDevelde said.

“The top one, two or three questions [from potential buyers] is ‘What are you doing with the landfill?’ and we say, ‘It’s out of our hands’ and we can’t give them a good answer,” he said. “If I were a buyer there as well, it would be a question I would ask, and even if I am a buyer and I believe it’s going to get resolved at some point in the future, I don’t know when. And from my perspective as a seller, I know it’s going to impact my ability to sell at a premium price because I just don’t have an answer to it.”

In addition to building The Big Box and 10 North developments, VanDevelde said the Dart Group intends to continue improving on the commercial businesses that add to Camana Bay’s quality of life. One project planned is a significant investment in upgrades at the cinema, which will include refitting one or more of the theaters with luxury, reclining-chair seating with cup holders, a bar right outside the doors, hot foods for sale, and a complete upgrade of the cinema’s audio and visual technology.

The upgrade is a way of the Dart Group “not resting on laurels,” VanDevelde said.

“We’re not doing it because competitively we need to do it,” he said. “It’s really a continuation and the furtherance of increasing and improving the quality of life on the island as you see those technological changes or advancements. It may not be that we run and do all of those, or we do them whole scale, but we always want to be seen as adding to the experience, adding to the quality that we’re offering.”

School and recreation

Cayman International School at Camana Bay, which already serves more than 600 children, is likely to see “a massive expansion” that could increase its capacity to somewhere around 1,100 students, VanDevelde said.

“We’re in the third year of a three-year commitment to add some additional classrooms and the like this summer, but now we’re looking at something that might be much more expansive there, that could even see a doubling of the size of the school.”

In addition to the expansion of the school, VanDevelde said there is also a big focus on the quality of education. “We’re really pushing them to making it an extraordinary educational facility.”

Eventually, the students will also have access to more recreational facilities.

On the west side of the Esterley Tibbetts Highway, close to the National Gallery, the Dart Group will build two soccer/football pitches and maybe even two five-a-side soccer/football courts, next to where it has donated land for the Cayman Islands Rugby Club’s new home.

A pedestrian underpass will be built as part of the widening of the Esterley Tibbetts Highway between Lawrence Boulevard and the Butterfield roundabout so the students of Cayman International School will be able to safely get to the other side of the highway. VanDevelde said the plan would be to allow the students to use the soccer pitches during and after school hours, and possibly have some public access at certain times as well.

Infrastructure

VanDevelde said it had been hoped that the Esterley Tibbetts Highway widening project – which Dart is doing – was on schedule up to where the new Airport Connector Road roundabout will be built. However, getting the road built from there to the Butterfield roundabout will take longer than the year originally anticipated.

Work continues on schedule on the new underpass portion of the Esterley Tibbetts Highway through Camana Bay. That part of the road will be relocated westward. Members of the National Roads Authority board recently inspected the progress and are shown here walking through the underpass of the southbound carriageway.
Work continues on schedule on the new underpass portion of the Esterley Tibbetts Highway through Camana Bay. That part of the road will be relocated westward. Members of the National Roads Authority board recently inspected the progress and are shown here walking through the underpass of the southbound carriageway.

“It’s got to be gazetted because there’s some private property that it goes through,” he said. “Everything that we’re working on [right now] is on our property, so we can control that. The [National Roads Authority] approved the design, so we just get on with it.”

Even though the Esterley Tibbetts Highway was gazetted long ago, the widening project involves some differences in road width and shape than originally planned, so the government has to go back and gazette the changed design.

“They need to do that before we can actually work on it,” VanDevelde said. “That’s the only reason why [no work has been done on it]. And because we’ll be doing the works, we’ll go gang-busters on it as soon as they get the gazetting out of the way.”

Meanwhile, the relocation and widening of the Esterley Tibbetts Highway through Camana Bay is progressing on schedule. That relocation involves creating an underpass over which the Camana Bay Town Center can eventually expand, widening the highway to two lanes in both directions, and moving the Camana Bay roundabout north and west.

Originally, this massive infrastructure project was part of a larger plan that would have seen Dart build a five-star hotel near the beach, a plan that has since changed in favor of building that hotel north of the new Kimpton resort. Even though the idea of building a large hotel on the site was abandoned, at least for now, Dart decided it was a good decision to continue with the infrastructure project.

“Expanding [the Esterley Tibbetts Highway] to four lanes is going to be needed in the short term anyway,” VanDevelde said. “So then you’re looking at whether you would expand the existing road to four lanes, knowing that in the future you’d like to move it … that’s probably not the best money spend.”

By going ahead with the underpasses, Dart accomplishes its goal of having seamless pedestrian connectivity throughout Camana Bay, something that will have value from a future development perspective, VanDevelde said.

To get that connectivity all the way to the beach, Dart will still need to create an overpass over West Bay Road, something it still intends to do.

“We expect to submit something in the coming weeks,” VanDevelde said. “It’s pretty much designed. We were hoping to have it submitted [to the Central Planning Authority] the first of June. There’s a couple of things we still need to sort out, but it may be as early as July when we submit.”

Creating the underpasses that allow Camana Bay to have pedestrian connectivity across the whole development also creates elevation, which will not only allow for better views and more protection from storm surge in case of a hurricane, but also the opportunity for underground parking, something VanDevelde said would be increasingly valuable as the build-out of Camana Bay continues.

At some point, Dart will develop the beach front of Camana Bay, but the property was not right for the five-star hotel it was planning. Although VanDevelde said the unresolved landfill issue did play a role in the decision, other factors were bigger.

“It was more about land limitations,” he said, noting that the potential operators for the hotel wanted almost all of the beach for their property, something that, if granted, would have significantly limited the amount of meaningful beach access available for the broader Camana Bay residents.

Another infrastructure project that recently began with little fanfare is the building of a bridge from the Town Centre to the Festival Green. VanDevelde said the bridge was originally designed for the 101 condominiums project, and the decision was made to build the bridge now even though that condominium project was put on hold.

The bridge will replace the short dirt causeway that has been there and will accommodate vehicles as well as pedestrians. It will have a significant rise, enough to allow boats with 18-foot mast to pass underneath.

“It’s a piece of infrastructure that we’d already designed,” VanDevelde said, noting that as it was ultimately going to be needed in any case, the decision was made to just get it done. “It is an investment in the future now.”

Easing of US-Cuba relations could hit Caribbean tourism

Since the U.S. started loosening Cuba travel restrictions in January 2015, the opening up of Cuba to U.S. tourists spelled potentially bad news for other vacation destinations in the Caribbean.

An agreement between Cuba and the U.S. that allows commercial flights to resume between the two countries will see six major carriers, including American Airlines, Delta and Jet Blue, launch new routes, starting this fall.

In March, Starwood Hotels became the first U.S. hotel chain to sign a landmark deal with the Cuban government to take over and manage three prominent hotels in Havana. In May, Carnival Cruise Line became the first U.S. cruise operator to sail to Cuba in 50 years. And the home-sharing website Airbnb, which entered the Cuban market last year, is growing fast.

In Cayman, tourism officials have observed the developments and their impact on the local tourism product with an “it’s too early to tell” attitude. Yet, as U.S. tourists increasingly flock to Cuba, the growth of stay-over tourist arrivals in Cayman has largely stalled.

In mid-June, Cuba hit 2 million stop-over arrivals – a month earlier than when the number was seen last year. The 17.4 percent increase was the fastest rate of growth for stop-over arrivals in the Caribbean region, and it is growing from a large base, says Marla Dukharan, group economist for the Royal Bank of Canada’s Caribbean operations.

Cayman-stopover-arrivals-US-Cuba-rapprochement-(Read-Only)Between January and April, the number of American and Cuban-American visitors to Cuba nearly doubled compared to the same period in the previous year. Together, both groups represented 14 percent of all visitors to the country during that time.

“To think that this is happening and it won’t have an effect on the Caribbean is probably a bit naïve,” Dukharan said at an RBC-sponsored event in June about the economic impact of Cuba opening up to the United States.

Tourism figures for the Cayman Islands show that since President Barack Obama announced the rapprochement with Cuba, the growth of stay-over tourists has taken a dip. Cayman had about 0.76 percent growth in stopover arrivals last year, the lowest growth rate since the financial crisis in 2009.

“You can see how the growth has turned largely negative since [President Obama’s announcement],” Dukharan said. “Now, I am not saying that this has 100 percent to do with the increase in tourism from the U.S. going to Cuba, but I think it would be naïve to think that it has not been a factor.”

The International Monetary Fund has called the development a seismic shift, or a one-in-a hundred-year event in the tourism industry, and there are indications that CARICOM as a whole has already lost market share in tourism to Cuba since the turn of the century.

The Inter-American Development Bank identified Jamaica and the Bahamas as the two countries likely to suffer the most as a result of Cuba’s opening up to U.S. tourists.

However, Dukharan says, Barbados and the Eastern Caribbean could benefit, since some operators may choose not to compete with U.S. travel organizations and aim instead at other Caribbean destinations.

Whether Cuba’s tourism revival will lift tourism to the region in general, or whether it will lure visitors from other Caribbean destinations, is not clear. The RBC economist notes there has been some substitution effect, but overall, travel from outside the region has increased. For instance, in addition to attracting more U.S. tourists, Cuba has drawn many more visitors from Latin America.

An aerial view of Havana's Vedado neighborhood
An aerial view of Havana’s Vedado neighborhood

Investment

While rating agency Moody’s states that Cuba’s economy suffers from chronic underinvestment in general, at a rate of just 9.4 percent of GDP, the country accounts for the highest total tourism investment in the region. Between 2000 and 2013, Cuba reported an annual average of $1.1 billion invested in the tourism sector.

Expectations are that if Cuba joins the World Bank, tourism development is going to be one of the main focus areas for early stage lending. The Inter-American Development Bank is also active in tourism development and would likely fund new projects.

Occupancy rates in Cuba ranged from 45 percent in 2013 to 49 percent last year. “So Cuba can accommodate about twice as many people,” says Dukharan. “For all of those who say, ‘where are all the U.S. tourists going to stay?’ there is room, there is capital intensive activity taking place. They are investing in lots of buildings and construction. They will find somewhere to stay whether it is in a formal hotel or in an Airbnb.”

According to the World Tourism Council, tourism accounts for 10 percent of Cuba’s GDP, 9.3 percent of jobs, 14.3 percent of foreign exchange and 17.4 percent of total investment. Despite these figures, Cuba has one of the lowest levels of economic dependence on tourism in the region, where the sector typically represents 15 percent or more of the economy.

Economy

Before Cuba’s tourism product can become the success story it promises to be, political and economic roadblocks have to be overcome. First, the trade embargo still has to be completely unwound. President Obama has made clear that his successor will have to carry out many of the measures needed to complete the easing of relations between the U.S. and Cuba.

Depending on who wins the U.S. presidential elections in November, this may not be at the top of the list of priorities, Dukharan says. And a solution has to be found for dealing with claims on assets that were expropriated during the revolution.

More importantly, Cuba is still a planned economy. Simply opening up to the United States and eliminating the embargo will not cure all of the country’s ills.

Although the country is growing at 3 percent per year, transitioning the economy to free enterprise will be slow as the current five-year reform continues to stifle private sector development. The financial sector, which is largely state-run, is a particular concern.

Venezuela figures in the equation

Another major factor is the crisis in Venezuela. “The scary thing about Venezuela is that it is no longer just a political crisis, it is now a humanitarian crisis, where people are literally starving,” Dukharan says. “And even where there is money, there is nothing to buy.”

This has not only created a migrant crisis in neighboring Guyana, the Dutch Caribbean and Trinidad and Tobago, it also has very serious implications for the Cuban economy since Venezuela is Cuba’s largest trading partner, but it can no longer support the Cuban economy the way it used to.

Venezuela would send crude oil that Cuba would refine and either use domestically or export to acquire foreign exchange. Cuba was able to repay Venezuela without using U.S. dollars by paying in kind, for example, with agricultural produce or medical services.

“Now Cuba has to go in the open market to buy oil and supplies, so the U.S. dollar is increasingly becoming an issue for Cuba. With that and with the drought problems that Cuba experienced late last year and early this year, we are expecting growth to be cut by about one half this year,” Dukharan says.

And low inflation based on strict control, especially for wages, cannot continue.

But the economy of 11 million people with a labor force participation rate of 74 percent also has massive potential for growth.

The average salary in 2015 was just $28.67 per month.

“How that compares to the rest of the region boggles the mind,” says Dukharan. “When these wages start going up and these people have purchasing power and they can really buy things, and they need to import and consume, therein lies the opportunity for the rest of the region.”

Investment: Making the most of a digitized world

Market Watch
Brendalee Scott-Novak, Butterfield

At the close of markets on June 22, the Dow Jones Industrial Average was less than 3 percentage points from its all-time high, while the Standard and Poor’s 500 was much closer at less than 2 percentage points. The Fed funds rate, a popular gauge for fixed income markets, remains between 0.25 and 0.50 basis points, essentially truncated below half a percent, where it has stayed for much of the last seven years.

Given the seemingly high valuation gauge for equities, negative deposit rates in most of developed Europe and growing bond issuances returning negative yields (about 30 percent of all global issues), many investors are left wrestling for a safe place to hide.

Admittedly, we face a world riddled with uncertainty. From the Brexit decision and its potential implications, ongoing geopolitical risks, to a slew of impending elections with the potential to change our political landscape, where can investors find opportunities to create longer term value? This tripartite crossfire, unfortunately, has the ability to distort investors’ views on any potential for positive returns in a time-tested investment philosophy.

Financial markets have historically been a dynamic platform for retail investors to acquire, grow and protect wealth. By investing in publicly traded securities, investors are given access to ownership in world-renowned companies. So how do you navigate the maze of data to find well-run, innovative companies that warrant your investment dollars and which have the potential to provide positive returns over the long term?

It is hard to ignore the digital revolution transforming the way we shop, travel, communicate and conduct business. Economic transformation is a direct corollary of this revolution and can present great opportunities for investors with a 10- to 20-year time horizon. Companies that foster innovation, those with the flexibility to adapt fundamental shifts in strategies and create new revenue opportunities, and those that are courageous enough to undertake bold moves, are prime candidates for potential long-term investment dollars. In much the same way, individuals courageous enough to participate in these investment opportunities stand to gain significantly if a winner is chosen. Below are four quick ways to create a short list for further research:

First, start the search by looking for companies that are revolutionizing their industry or creating a new one. Companies such as Facebook and Twitter radically altered the way we communicate and stay in touch with friends and loved ones, essentially creating a new sub-sector within their industry. Other companies such as Tesla dared to push the boundaries of innovation, effectively creating products that connect with people in a very meaningful way. Tesla, like Apple, proves that first mover advantages can easily dissipate if companies are not flexible and dynamic enough to adapt to changing societal norms and stay ahead of the curve.

Second, review companies that are creating newer and more effective ways of achieving everyday tasks. Companies such as the retail behemoth Amazon, with its robust online platform and one-hour grocery delivery service, has made shopping easier than ever, threatening the entire retail spectrum. Starbucks, the ubiquitous coffee shop company, has made purchasing a cup of coffee a simple, non-cash event via the company’s mobile app.

Third, and perhaps the most powerful impact of the digitized revolution, are companies that are creating generational shifts in lifestyle. Companies such as Uber are redefining travel in metropolitan areas with their ride-sharing service, while Airbnb is disrupting the travel industry as its home-sharing concept has grown quite rapidly, especially among millennials. Other innovators, such as Netflix, have effected seismic changes in home entertainment, capturing the changing generational needs with its on-demand movie and video streaming model. For the fashion forward, companies like Lululemon have revolutionized the “athleisure” category, creating a sub-industry of sorts for the sport enthusiast.

Finally, assess companies that are creating sustainable ways of operating and maintaining their competitive advantages. These companies typically possess combinations of strong research and innovation, strong brand popularity, phenomenal reputation and superior product or customer support. Companies such as Kroger, Trader Joe’s, Adobe and Nintendo have ignored the competition to chart their own paths, shifting the course of their respective industries.

While these four factors are by no means exhaustive, there is much to be said when a digitized brand becomes so entwined in our daily vocabulary it becomes “verbified.” When we choose to “Google” our information, “Whatsapp” or “Facetime” our friends and “Tweet” where we are and what we are doing, marketers deem this “verbification” as connectedness and wide acceptance of a brand. Choosing an individual winner will undoubtedly require substantive research and analysis, but the clear winners will be those companies that embrace digital transformation and align their technology platforms with innovative and dynamic business strategies.

The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. Past performance is not necessarily a guide to future performance. Statistics and data source: Bloomberg LP., www.forbes.com, www.fastcompany.com, Federal Reserve, CNBC.

Free cash flow: Formula for investment success

Buying shares with the help of cash flow as a selection criterion has delivered convincing results in the past. This trend is likely to continue in an environment of low growth – and low interest-rates.

When looking for interesting stocks, a small but subtle difference can usually be detected in the procedure adopted by private and professional investors. While private investors often concentrate on the price-earnings ratio or how much a stock compared to earnings per share costs, many institutional investors focus on a different key ratio: They swear by the (free) cash flow as a selection criterion and by its relationship to the enterprise value.

Free-cash-flow-1-(Read-Only)That may sound somewhat abstract, but it is relatively easy to understand. Ultimately, it is the amount of money moving into and out of a business. The cash flow statement generally represents earnings before interest, taxes, depreciation and amortization. Finally, cash flow gives information about the internal financing power of a company. If the cash flow is high, that means the company is less dependent on capital from external sources.

The generated cash flow margin indicates, in percentage points, how much cash flow there was, compared to sales.

Free cash flow (FCF) is often even more popular with financial professionals as a financial indicator. This term refers to the cash flow from operations minus the capital expenditures. FCF is used as a key metric because it is considered a comparable accurate measure of how much cash a business actually has to service debt, pay dividends, buy back shares or invest in its operations. Another figure used for valuing companies is the free cash flow yield. It is calculated by dividing the free cash flow per share by the current market price per share. A higher number is typically a sign of undervaluation, based on the company’s ability to generate cash.

Two main advantages

Cash flow is popular primarily for two reasons: First, as an indicator it can be manipulated less than the earnings per share. This is an important factor, especially in the current environment. Many chief financial officers tend to artificially prop up their earnings, for example, by declaring negative earning components as special cases. Commenting on this trend, Bank of America Merrill Lynch strategist Savita Subramanian says, “Investors have been concerned about the quality of earnings, and while companies can manipulate earnings, they can’t manipulate cash.”

Second, cash flow is considered a valuable tool for identifying promising stocks. Backtested calculations about the historical performance of stocks underpin this impression. According to studies, shares of companies with a strong cash flow deliver a compelling performance. Applicable research was provided by such prominent resources as Ned Davis Research, Barclays and Bank of America Merrill Lynch. According to the latter, among the value-based stock selection criteria, a high free cash flow in relation to the enterprise value has delivered the best performance over the long run. Calculations for the period from Dec. 31, 1988 through Dec. 31, 2015 show an average annual performance of 18 percent for the S&P 500 Index members with the highest free cash flow compared to the enterprise value. In comparison, the second best shares with the highest estimated earnings per share yield delivered only 15 percent p.a., and the selection criteria of a high book value compared to the share price delivered an average annual performance of 12 percent. These results bring strategist Subramanian to a clear conclusion: “Investors are willing to pay for free cash flow. Therefore, when it comes to the valuation of companies, free cash flow is king.”

Free-cash-flow-2-(Read-Only)The results of a backtest conducted by Ned Davis Research are also impressive. “Investing in the companies with the highest free cash flow to enterprise value ratio has been the best strategy among the 188 quant strategies we track,” says Europe-Strategist Vincent Deluard.

Since March 31, 1999, with an average annual plus of 18.61 percent, it would have been particularly rewarding to go long with companies with a high free cash flow compared to the enterprise value, and at the same time to short the bottom decile of companies based on the same criteria.

On top of that, analysts at investment bank Barclays recommend paying attention to whether a company relies heavily on external financing for earning its money. This has to do with the fact that over the past 15 years companies with a high ratio of cash flow from financing activities to market capitalization delivered significantly lower returns compared to companies with a low ratio of cash flow from financing activities.

Interest rate environment gives support

Despite all the advantages, cash flow as a means of identifying lucrative shares is no guarantee of making money. Such a thing simply does not exist on the stock market, and anyone who promises something different either does not know or is a charlatan. General disadvantages include fluctuations in the investment cycle or date-related distortions, though these can be mitigated by longer observation periods than just one year. Moreover, the conventional calculation is based on historical data, and if one tries to estimate future cash flows and their current value, the question of the appropriate discount rate is usually a problem.

Among the available tools, however, cash flow nevertheless stands out, and in the future investors may expect quite good investment results based on that selection criterion. This expectation also has to do with the current, difficult environment. According to analyst Credit Suisse HOLT, in such a situation, high free cash flow helps a company to operate profitably and to cover dividends and interest payments. Furthermore, J.P. Morgan believes that “in the current environment of sub-trend growth, low inflation and low bond yields, stocks that deliver healthy FCF yields will continue to perform well.”

With regard to the Wall Street, the problem in an already long-lasting bull market is that the current valuation, on average, is higher based on a cash flow basis than in most other regions of the world. But a broad-based stock market like the one in the U.S. is big enough that stock-pickers can always find a few interesting candidates to buy.

Looking at the cash flow valuations or the cash flow growth rates, bioanalytical and electronic measurement solutions-provider Agilent Technologies makes a good impression, as does health insurer Aetna, wafer fabrication equipment supplier LAM Research, IT software-specialist CA Inc., and Hewlett Packard. Despite the fact that the charts of these companies look promising, as always, there is no guarantee that their share prices will finally perform well. To protect against negative surprises, the use of stop-loss-techniques is advised.

After the UK referendum: The impact of Brexit on non-European hedge funds

With the Brexit referendum decided and David Cameron’s resignation announced, we look at the key impact of the referendum decision on the non-European fund industry.

In the short term, the markets and currencies will see significant movements. Bank of England Governor Mark Carney has already gone on record to assure investors and pledge billions of extra funds for the financial system as they seek to calm market volatility. What the duration and consequences of this volatility will be remains to be seen.

From an operational infrastructure perspective, there should be no immediate impact on the day-to-day operations of the funds industry. EU law specifies that a country wishing to leave the EU must invoke Article 50 under the Lisbon Treaty, which would lead to a two-year transition period whereby the U.K. government, headed by a new Prime Minister, would negotiate their exit terms. However, whether this time frame is realistic is uncertain, with many market participants suggesting that this time frame is not reasonable. As previously highlighted on our pre-referendum article, there are three principle exit models: the EEA model, the Swiss model and the World Trade Organization model.

The EEA model

Should the U.K. agree to remain as a European Economic Area country, rules such as the Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive II (MIFID II) would continue to apply, although U.K. policymakers would have less say in their formulation.

The Swiss model

The U.K. could adopt the Swiss model, in which it would apply to join the EFTA, the European Free Trade Association (constituted of Switzerland, Iceland, Norway and Liechtenstein) and negotiate access to the single market on a sector by sector basis. The U.K. would be bound to follow the regulation in the covered sectors but would otherwise negotiate Free Trade Agreements.

The World Trade model

A complete withdrawal would designate the U.K. as a third country. This would have a more noticeable impact as Britain may have to rely on its World Trade Organization membership to negotiate additional trade deals going forward. However, this model is fraught with potential complications.

Depending on the transition arrangements, the non-EU funds industry would be affected in three principle areas, namely marketing, operations and legal.

Marketing

Reverse solicitation

Reverse solicitation is when EU investors actively solicit the manager about their product rather than the manager directly marketing to them. There is a fine line managers must tread when relying on reverse solicitation, and the punishments for breaching the rules can be serious. While this is one potential mechanism for gaining European investment, there are a number of global hedge fund managers for whom the European market is not a primary interest. They are therefore happy to just field calls from EU investors through the reverse solicitation framework. Clearly the impact of Brexit on these managers will be negligible.

National Private Placement Regime

General reliance on the reverse solicitation framework appears to have shifted as many lawyers warn U.S. hedge funds that the consequences of breaching the rules can be severe. A number of these managers are electing to use NPPR in markets where they are confident of raising meaningful capital. This subjects managers to aspects of AIFMD but not the obligation to appoint a full depositary subject to strict liability for loss of assets. While some hope the U.K. will scrap aspects of AIFMD in the event of the U.K. becoming a third country, this is unlikely for both political and practical reasons. The U.K. – should full Brexit occur – would want to still benefit from the pan-EU passport regime, and having equivalent rules is key to attaining this. Scrapping unpopular elements of AIFMD is a sure-fire way in which to scupper that ambition.

Passporting

The European Securities and Markets Authority is assessing third countries’ regulatory equivalence with the EU. Jurisdictions, including the U.S. and the Cayman Islands, the latter of which has made regulatory changes to bring its rules more into line with the EU, could very well be granted AIFMD regulatory equivalence by 2018. This would enable managers in these jurisdictions to freely passport into the EU once National Private Placement Regimes expire. It should be noted that both the jurisdiction of the manager and the fund must be deemed equivalent before they can passport. However, if the U.S. and the Cayman Islands received equivalence, it could be argued that a New York manager of a Caymanian fund would be in a better position to market to EU institutions come 2018 than a U.K. counterpart under Brexit.

Operational issues

Brexit will have undeniable operational consequences for managers with EU interests. U.S. managers who are fully AIFMD or UCITS compliant through management companies or by basing their AIFMs or UCITS managers inside the EU, specifically the U.K., could have operational issues. If the U.K. becomes a third country, U.K.-based AIFMs and UCITS could be forced to reorganize their business structures with a greater presence in Ireland or Luxembourg.

This could be an administrative headache. Simultaneously, those non-EU managers who have structured their businesses through an Irish or Luxembourg management company may be unable to passport their Alternative Investment Fund to the U.K. if the latter became a third country. While NPPR marketing options would remain for the U.K., using an EU management company to access the U.K. alongside the EU may not be viable.

U.S. managers using NPPR in certain EU countries (Germany and Denmark) are obliged to appoint a depositary-lite, some of which are domiciled and regulated in the U.K. Other managers have appointed full-scope depositaries, which are part of U.K. custodian banks. A legal briefing by Ashurst highlighted that AIFMD restricts providers that can act as depositary to EC credit institutions. If the U.K. became a third country, its custodians would not qualify as EC credit institutions. The banks could in theory apply for third country recognition, although Ashurst highlighted this could be “politically fraught.” As such, it could force banks and depositary-lites to relocate more of their U.K. operations to EU jurisdictions such as Ireland or Luxembourg.

The legal consequences are therefore very complicated. The interim period – depending on the nature of Brexit – could result in the U.K. setting legal precedents on a number of issues affecting financial services which would not necessarily be bound by the EU legislature. This could cause confusion, particularly if the U.K. took diverging views to the EU, which could result in practical problems for managers with U.K. and EU interests or locations.

Conclusion

Brexit could have an impact on the marketing and operational structures at non-EU hedge funds. Non-EU hedge funds should be considering the implications Brexit could have on their European interests.

About the author: Submitted by Laura O’Brien on behalf of Trinity, an independent global specialist hedge fund solutions company with offices in New York, Dublin, Cayman and Cyprus.

 

 

Legal ruling could impact strata developments

Several developers, including Chamber of Commerce President Paul Pearson, say a change in the law to regulate how and when they hand over control of strata developments to owners is unnecessary and would hamper their ability to build and sell.

Vacation home owners won a legal judgment last month against the developer of East End’s Castaway Cove in a landmark case that ensures stratas must be run as “community democracies.”

For-sale-sign-(Read-Only)Justice Ingrid Mangatal struck down bylaws that lawyers argued gave Thompson Resorts Ltd. a “permanent controlling interest” in running the beachside holiday resort.

In that case, the bylaws gave Thompson an automatic majority in all owner votes for 50 years or until all the units were sold to third parties. The judge ruled the bylaws were “ultra vires” – outside of the law – and that the intent of the Strata and Titles Registration Law was that owners should have a say in decisions impacting their property from the moment they buy a unit.

She recommended Cayman’s politicians look again at the laws governing strata ownership, particularly for resort properties, to more clearly define when and how a developer must cede a share of control to owners.

While most developers approached by The Cayman Islands Journal acknowledge that retaining control for 50 years is extreme, they say it is common and necessary for them to keep control during the building and sales phase to ensure consistency of design and operations. How long that period should be for different types of development, and whether legislation is required to guide the process, is a matter of debate. Under the judge’s interpretation of the current law, developers effectively cede total control once half the units are sold, though they would retain a significant voting block, proportionate to how many units they still owned.

Pearson, of Davenport Development – and the president of the Chamber of Commerce – said he does not think more legislation is the answer. He said buyers could read their contract and decide if they thought it was fair, and developers who didn’t do the right thing would face the consequences in the market place.

Davenport, which has completed a range of residential developments, including Lantern Point and San Sebastian, and is part way through building Vela on South Sound, typically retains control for at least five years or until 95 percent of the units are sold. Pearson said developers need to be able to ensure decisions don’t negatively impact future phases.

“If we are building Vela and the first group of people that move in decide they want to vote to paint it pink, then how can we sell the rest of them?”

He said running a strata is typically a headache for developers, but is necessary in the early stages to ensure everything runs smoothly and buyers get what they paid for in terms of quality of operations. He said developers that do not offer a fair deal would ultimately be punished by word-of-mouth damage to their reputation.

“This area is regulated enough,” Pearson said. “It is up to buyers to do their due diligence and read the strata bylaws before they buy, and it is up to developers to be very conscious of their reputation and don’t do anything that means no one will buy the next time you build.”

The issue is complicated by the diversity of types of stratas in Cayman. Realtor Kim Lund believes tensions arise most often in “condo-tels,” similar to Castaway Cove, where there are shared facilities between owners and guests, and in condominium stratas where some properties are in a rental pool.

He said the current law is a “catch all” that doesn’t adequately cater to the specific needs of each type of development.

“All of these stratas operate differently and the current law is too broad to deal with the differences,” he said. “The issues come from use and cost of maintenance of the common areas, for example a condo-tel with an elevator that has to allocate maintenance costs being used for hotel rooms and condominium residences.”

He said the judge’s decision leveled the playing field for owners, particularly in mixed condo, hotel, developments, empowering them to have a say in operations and dealing with conflicts of interest.

He said developers still need to have control over the build-out, but owners are entitled to a say in operations of the completed phases.

Dale Crighton said most developers cede control once the majority of the units are sold. But he said it is not always so simple, since they need to be sure decisions of the strata will not adversely impact future development or other planned phases. He said this is particularly relevant for timeshare developments.

“A timeshare development is a completely different animal than a standard condo development or land development. As the owners of most timeshare developments are vacationers who often make monthly payments, it’s usually the first luxury that is cast aside the minute the economy takes a negative turn. At that point, who will subsidize any shortfalls?

“If the onus is on the developer to ensure the continuity of the development and to fund shortfalls to protect his assets, why shouldn’t he have a vehicle of control?”

The Castaway Cove case was brought by U.S. resident Carl Clappison on behalf of multiple owners who believed they were being overcharged by Thompson Resorts’ Kel Thompson, who contracted his own company to run the resort, which forms one part of Wyndham Reef Resort, prior to the sale of any units.

According to an affidavit from Clappison, the vacation home owners felt they were being charged unreasonably high strata fees, essentially subsidizing the Wyndham Reef Resort, which Thompson operates on the same property with shared facilities.

When they questioned the fees and rejected the strata’s annual budget plan, Thompson invoked bylaws giving the developer an automatic majority in any poll, and pushed the budgets through, the court documents indicate.

Judge Mangatal did not make a ruling on whether the residents’ complaints were justified, but said they were entitled to a democratic say in how the strata was run. She suggested clearer rules are needed to govern the process.

“It is my considered view that the legislature should examine the specific concerns raised in this case and the tensions that undoubtedly exist between the interests of developers and proprietors of strata units in a strata development forming part of a resort. I would urge the legislators to decide if there is a need for an appropriate amendment to the legislation.”

Financial services making big bets in blockchain

A ship pulls into port with a big delivery. A GPS system confirms the ship is in port and triggers immediate payments to the shipping company and the supplier. The payment, instead of taking two to five business days to cross borders, shows up almost immediately in the supplier’s bank account, with all the agreements and transactions confirmed in seconds across a blockchain system, using cryptography and a distributed ledger instead of a correspondent bank.

Banks and the financial services industry are making big investments in blockchain technology, the same kind of cryptography software behind Bitcoin.

Blockchain is essentially a shared ledger of transactions, using complicated cryptographic algorithms to verify transactions as they occur. The ledger is stored in full across the different users, creating a more secure system because the data is distributed among many computers that verify what’s on one another, but each user can access only their own data. Think of the exact same ledger book at five different banks and each book is updated almost simultaneously; that’s what the blockchain does.

Banks and financial services companies are starting to develop their own blockchain software, and a host of new startups are trying to make their way into the market to make transactions faster and more secure using custom electronic “cryptocurrency” similar to Bitcoin.

Global impact

The future impact of blockchain technology stretches across every sector of the global economy and is sparking major investments across the financial services industry. When banks can take two business days or even up to a week to make a cross-border transfer, blockchain can do it almost immediately.

“Everything could be affected,” said Alexandra Simonova, a manager for enterprise risk services for Deloitte in Cayman.

Blockchain, she said, takes banks out of the equation. Transactions need a trusted authority like a correspondent bank, but blockchain creates trust by decentralizing the ledger so each node in the network verifies the others. “The efficiencies come from eliminating the central authority,” Simonova said.

Without the need for correspondent banks as middlemen, she said, blockchain can decrease the compliance burdens on financial institutions and increase transparency at the same time. With the distributed ledger, Simonova said, “all the transactions are right there.”

The technology opens the door for smart contracts that can trigger immediate payments. It can change how gift cards work at a store. It can change how insurance companies interact with each other and their customers. The Republic of Georgia is piloting the system for land titles with software from BitFury.

BitFury CEO Valery Varilov in April told Forbes, “First, it will add security to the data so the data cannot be corrupted. Second, by powering the registry with the blockchain, the public auditor will also make a real-time audit. So the auditor will audit the registry not once per year, but every 10 minutes [for example]. Third, it will reduce the friction in registration and the cost of property rights registration because people could do this in the future using their smart phones. Blockchain will be used as a notary service.”

From the lab to the market

Deloitte this year announced plans to staff a new blockchain lab in Ireland with 50 developers to work on the company’s own prototype, built in partnership with a group of blockchain startups.

Simonova said Deloitte plans to offer customized blockchain platforms for clients built on top of the consultancy’s core software.

Venture capitalists and major companies are starting to make big investments in blockchain startups and in-house development. A recent Greenwich Associates report estimates that financial services and tech firms will invest US$1 billion in blockchain technology for capital markets in 2016.

Nasdaq is testing blockchain software from Chain OS on the Nasdaq Private Market. Visa, Citi, Fidelity and many others have invested in Chain OS, a startup developing open-source technical standards for blockchains to handle a large transaction volume needed for a company like Nasdaq.

PwC has made investments similar to Deloitte, adding 15 developers to its lab in Belfast working on blockchain technology.

In a statement, PwC Partner Steve Davies said, “There’s clear evidence that banks, institutions and even governments are looking at blockchain technology as a secure storage and distribution solution.

“Now there is growing interest and a real demand from our clients to help understand the implications of blockchain and how to respond to it. So, as the blockchain juggernaut continues to gather pace, PwC will be well placed to service our clients’ needs at a global level,” he said.

San Francisco company Ripple in late June announced that the company had added seven banks to its online payment platform, including UBS, CIBC and the National Bank of Abu Dhabi. In May, Ripple client Santander became the first bank in the United Kingdom to use Ripple’s system for cross-border payments.

Ripple allows users to make international payments through an app based on the company’s blockchain technology. Santander’s in-house test allows its staff to make payments from a smartphone app to transfer from 10 pounds to 10,000 pounds into euros or U.S. dollars.

In a statement in June, Ripple CEO Chris Larsen said, “We’ve reached a tipping point where financial institutions are moving beyond blockchain experimentation and projects to real world applications that are driving significant bank-to-bank volume.”

New law brings Cayman copyright into the digital age

New copyright legislation came into effect June 30, replacing legislation from 1956, with the copyright protections coming from the United Kingdom’s 1988 Copyright Act, which has been updated several times to keep up with digital innovations over the past 28 years.

The new rules cover creative works from hardcover books to video games, and that includes the movies and music duplicated and sold in some shops in Cayman. The updated copyright is one of the new ways the Cayman government hopes to enhance intellectual property protections in the islands. Government officials say they plan to introduce new trademark legislation later this year.

Commerce Minister Wayne Panton said last month, “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.

“If entrepreneurs know their works will be protected in Cayman, they have an incentive to locate here, create jobs here, and spend money in our economy. Furthermore, businesses such as Health City Cayman Islands, Cayman Enterprise City and the entities operating within them, as well as other individuals and businesses in Cayman who also benefit from IP protection, will be able to attract more investment interest.”

The Copyright (Cayman Islands) Order 2015 is a customized version of the U.K. legislation, said Sophie Davies, intellectual property attorney with HMS. The new law “widens the scope and makes it clearer,” she said.

The new law does not necessarily mean police will start raiding stores that sell bootleg movies. In most cases, “it’s up to the copyright holder to enforce the law,” Davies said.

Copyright holders can apply to the courts to seize infringing work and can sue for damages. Companies can also apply to the Customs Department to have infringing goods seized on their way into Cayman.

Davies said it is common for companies like Nike to apply for this type of customs seizure if they find counterfeit products being shipped across borders.

It’s up to the director of Commerce and Investment to enforce the copyright law if there is no complaint. The law gives the director police powers to investigate copyright infringement, such as making test purchases and entering a premises to inspect and seize goods.

The law makes it a criminal offense to sell or rent infringing material, such as a pirated movie. It is also now illegal to play a song on the radio without a license.

Trademarks Bill up next

Minister Panton said in June that he hopes to introduce a new Trademarks Bill in September.

“Under our current legislation, persons are unable to register their trade marks in Cayman without first obtaining protection in the U.K.,” he said. “Also, design rights are not currently protected by law in Cayman.”

New trademark legislation could allow people and companies to register brands and logos directly in Cayman.

“Copyrights, therefore, are just the beginning,” Panton said. “By allowing persons to register a range of IP rights in a more efficient, cost effective manner, we are assisting them in exercising their rights if anyone infringes upon them.

“This represents a major improvement to our commerce legislation, and to our reputation as a leading jurisdiction for all types of businesses.”

Cybersecurity: Global, CIMA regulators spurred to action

It’s very much a work in progress as the financial industry finds its way along the information highway – too often, the “misinformation highway” – to keep pace with the “bad guys.”

Hackers and cyber criminals have already passed the highway markers, leaving the milestones and warning signs in their rearview mirrors, like the TV commercial featuring a sullen young man alone in a hallway bouncing a ball, telling us we do not yet appear to have spotted him hacking our IT systems.

He has already invaded, he says, taken what he wants and is long gone – and what are you going to do about it?

Sometimes life imitates art, and in February, cyber thieves invaded the New York Federal Reserve account of Dhaka’s central Bank of Bangladesh, stealing $81 million.

The invaders had tried to grab $951 million, but several of the transfers were blocked, including $20 million to a “Sri Lankan entity,” according to a Reuters news report. Four others, however, passed through the system, landing in the Philippines, where $81 million was laundered through casinos and casino agents.

Most of the money remains missing, and one U.S. Federal Bureau of Investigation agent said the FBI and authorities in Bangladesh, the Philippines and other countries have never officially identified the culprits in one of the biggest computer heists ever.

“They may never make [an arrest],” the agent told Reuters.

BAE (British Aerospace) Systems, a world-leading London-based defense and security agency helping lead the Bangladesh Bank probe, said malware used to erase the tracks of the hackers was similar to computer code used in a 2014 attack on Sony Corp. that compromised studio executives’ information and a handful of feature-film releases.

At the time, the FBI blamed North Korea for the Sony attack. The agent addressing the February bank heist said the thieves were likely either a sophisticated criminal group or a rogue nation, pointing out that both had an interest in making it appear as if the other were responsible.

The unsolved theft and futile pursuit of the hackers has triggered a global alert, including in the Cayman Islands, reputed as the world’s fifth-largest financial center. The alert took on additional urgency after an early June report from the Federal Reserve bank that its cybersecurity had been breached more than 50 times between 2011 and 2015.

A U.S. congressional committee expressed “serious concern” to Federal Reserve Chair Janet Yellen, invoking its authority under a 2014 law creating the National Institute of Standards and Technology, which develops federal cybersecurity standards and guidelines.

Yellen promised a response, while, at the same time, the Cayman Islands Monetary Authority is relying on NIST standards for its own cybersecurity survey of the local financial-services industry.

Cybersecurity ‘a fact of life’

“Cybersecurity is a fact of life in all large businesses, and CIMA recognizes that our licensees are a prime target,” a Cayman Islands Monetary Authority spokesman said.

“Licensees should consider adopting a security standard such as the National Institute of Standards and Technology Cyber Security Framework. This will assist them in identifying their weak spots as they go through the five areas required by the NIST which are: Identify, Protect, Detect, Respond, Recover.

“Licensees prepared with the proper policies, procedures, and practices encapsulated in these five areas will find themselves well protected against threats, but even more important prepared to recover from them,” the spokesman said. A 2014 10-page PwC report titled “Why you should adopt the NIST Cybersecurity Framework” says the scheme “represents a tipping point in the evolution of cybersecurity, one in which the balance is shifting from reactive compliance to proactive risk-management standards.”

Lead author and PwC Managing Director Jim Guinn acknowledged that “implementation may involve certain challenges,” observing that proactivity “demands a holistic view of the entire risk ecosystem, as well as the ability to be truly objective.”

It is a tall task, he writes, to “segregate management of back office IT systems and networks from their operational technology (OT) assets and process-control networks.”

Translation: “These organizational silos can make it difficult for a single person to assess the entire connected enterprise, since doing so will demand an in-depth understanding of all IT and OT assets,” Guinn says. “It may be more effective to seek assistance from a third party with deep experience across the risk ecosystem specific to your industry.”

Third-party assistance – reaching outside the company for help – creates its own problems, however. CIMA, for example, acknowledges the benefits of third-party vendors, but cautions they are subject to the same regulatory scrutiny as primary financial institutions.

“Many of our licensees do use third-party vendors to perform many of their IT functions,” the authority says. “In many cases, this makes good business sense. However, these vendors must be chosen and reviewed with security forefront in mind. CIMA will expect the same level of preparedness from our licensees whether they are on-premise hosted or third-party provided.” Third-party pitfalls were amply illustrated in 2013 when intruders compromised Target Corp. by stealing one of its third-party vendor’s credentials, gaining access to the company’s entire network of department stores.

In 2016’s second edition of “Cybersecurity for Dummies,” author Lawrence Miller describes what happened: “The retailer’s point-of-sale systems were not properly segmented from other systems (such as industrial systems) on the network, so the attacker was able to move freely from system to system on the network, installing malware on nearly all of Target’s point-of-sales devices in stores across [the United States], and gaining access to more than 70 million customer records and credit card numbers.”

And speaking of malware, Miller goes on to describe a “drive-by download,” which, he says, “delivers advanced malware or an exploit in the background, without the user’s knowledge, usually by taking advantage of a vulnerability in an operating system, web browser, or other third-party application.”

Once third-party software is tricked into running an attacker’s code, advanced malware can be installed and “software exploits” readily practiced.

Recommendations

PwC addresses the five NIST categories recommended by CIMA. “Identify” means to understand management of cybersecurity risks to systems, assets, data, and capabilities; “protect” means to weigh the controls and safeguards necessary to protect or deter cybersecurity threats; “detect” entails “continuous monitoring to provide proactive and real-time alerts of cybersecurity-related events”; “respond” is response planning, communications, analysis, mitigation and improvements; and “recover” requires business-continuity plans “to maintain resilience and recover capabilities after a cyber breach.”

Just last week, on July 29, the Basel-based Committee on Payments and Market Infrastructures, a global central bank panel, and the International Organization of Securities Commissions, a 100-nation, Madrid-based group of securities and futures regulators, issued their first global financial-sector “resilience and recover” anti-hacking guidelines.

By June 2017, the unit said, exchanges, banks, brokers and other institutions must be able to restore clearing houses, payment systems, trade repositories, and clearing and settlement houses within two hours of a cyberattack.

The guidelines also say institutions should plan for scenarios in which the two-hour resumption is not achieved, while identifying the status of all transactions and positions of members at the time of a disruption.

CIMA’s response

The Cayman Islands Monetary Authority is nonetheless determined: “We, as have other regulators, have become concerned over the rapid increase in cyber breaches being reported worldwide, both within our industry and others … As regulators, it is our responsibility to ensure that the customers of our industry are as well protected as they can be.”

The authority is “drafting an inspection questionnaire” to be distributed during CIMA’s annual review of “certain sectors of our industry,” although the document, according to officials “is not yet complete or ready for circulation.” CIMA conducts reviews throughout the year depending on the category of licensee.

“CIMA considers our licensees to be at risk from both ‘hacktivists’ and criminals,” a spokesman said. “The first are interested in making a statement by exposing confidential information or impacting the operation of the licensee. The second are interested in rerouting funds, or performing some activity for which they can charge a ransom. We consider that all levels of licensee should take both types of threat equally as seriously.”

The spokesman named a handful of immediate threats, pointing to Russia and the Middle East as particular regions of worry, but said “with the ability to control attacks from previously compromised systems, we see an equal number of threats coming out of the USA. It is not simply a matter of blocking a region.”

He raised particular worries about the growing threat from ransomware, in which data is essentially “kidnapped,” then returned to its owner after a payment: “Due to the success of this threat with hospitals and large companies publicly admitting that they have recently paid to recover their data, we expect to see this particular attack increase in both complexity and frequency.

“We encourage our licensees to take this threat particularly seriously and to ensure immediately they have backup and recovery procedures that are both workable and complete.”

He continued, “Too many times we have seen backup procedures put in place, but never tested. In most cases, the above ransom payouts were necessitated by the lack of recoverable data.”

Another growing concern, the spokesman said, is mobile devices, which he described simply as “definitely here to stay – and must always be considered in any threat mitigation plan.”

“Dummies” author Miller indicates the topic is of top concern because the devices exist outside the perimeter of a computer network, boosting the security challenge.

“Users simply expect to be able to connect and work from any location, whether at an airport, at a coffee shop, in a hotel room, or at home,” he writes. “Increasingly, organizations are accepting this new reality with permissive bring-your-own-device and bring-your-own-app policies.

“This change means that more and more workers and data may be beyond the physical perimeter of the organization, and thus also beyond the protections of traditional perimeter security solutions,” he says.

“The key is to build a security architecture that doesn’t treat these mobile or remote users as exceptions; they need the same application, user and content protections when they’re outside the perimeter that they would receive when they’re inside.”

The key, he says, is consistency in network architecture, and that requires “careful planning – and is a must for any security policy to address the realities of modern computing.” CIMA declined to say when its cybersecurity recommendations might be ready or, beyond that, if they would form part of licensing requirements for member institutions.

The authority did indicate, however, that strong emphasis would be placed on staffing, training and individual awareness.

“All institutions should pay particular attention to each of [the cybersecurity recommendations],” the spokeswoman said, “and not only have controls in place, but also procedures to test those controls on a regular basis to ensure that they are performing.

“Staff awareness and training should be an ongoing exercise. Ninety-one percent of all reported cyber breaches in 2015 originated with an email. Staff awareness is key.”

The consequences of failure may prove far greater than a compromise to any single institution, CIMA warned, rippling outward like a stone in still water.

“It is hard to quantify what level of impact a cyber breach can have,” the spokesman said. “However, it is easy to imagine the loss of capital through cyber theft that could leave an institution in a precarious financial position, or the loss of data that could result in a lack of confidence in the institution itself.”

Much graver would be a “widespread breach within our industry,” making it “very easy to consider reputational damage to the Cayman Islands as a whole.”

Speaking precisely to CIMA’s efforts, writes “Dummies” Miller: “Today’s cyber criminals are highly motivated professionals – often well-funded by criminal organizations or nation-states – who are far more patient and persistent in their efforts to break through an organization’s defenses.

“More and more attacks are increasingly coming to fruition, producing a steady stream of high-profile, sophisticated breaches and intrusions.”

While “a kid in a basement,” fueled by his own notoriety and “oversized cans of energy drinks” may represent one level of trouble, Miller says, he “doesn’t necessarily know what to do with, say, RSA source code.

“On the other hand, a rogue nation-state or criminal organization knows exactly what to do or [to whom] to sell stolen intellectual property on the gray or black market. “[C]riminal organizations and nation-states have far greater financial resources than independent individuals. Many criminal hacking operations have been discovered, complete with all the standard appearance of a legitimate business with offices, receptionists and cubicles full of dutiful cyber criminals.

“These are criminal enterprises in the truest sense, and their reach extends far beyond that of an individual. Not only do we face more sophisticated adversaries today, but the types of information of value to them are continually expanding as well. These groups can do interesting things with the most seemingly innocuous bits of information.”

Physical security: Think global, act local

Stuart Bostock’s Security Centre Ltd. has protected a dozen high-profile personalities, and continues to prosper in the face of global threats – bombings, personal attacks and multiple casualties.

In fact, those threats appear to be accelerating. The news is full of Istanbul, Orlando, San Bernardino, Paris and Brussels. The airwaves hum with warnings about holiday weekends and travel; politicians rant about immigration and porous borders; newscasters pontificate on “lone wolves” and unpredictability.

Stuart Bostock
Stuart Bostock

Bostock, president and CEO, is reluctant to list specific local security threats, calling it a daunting task in a market as diverse as Cayman. However, his company brochure names “natural disasters, accidents, terrorism, fraud and theft,” a broad menu that applies internationally as well as locally, noting that “our personal property and loved ones are always at risk to intruders and safety hazards in the home.”

“The world has experienced an increased demand for personal, corporate and national security,” Bostock says, adding it would be naive to suggest “the Cayman Islands … is immune to that.”

Jay Leno, Jamie Lee Curtis, Terrence Howard, Al Pacino and Tom Cruise are among celebrities who have been under his company’s protection on island at one time or another, although an observer might never see the rings of security, or notice the “onion layer approach,” as Bostock describes it, surrounding each individual.

“Security and protection is about building up layers and making the end target as difficult or complex as possible to reach, [and that] hopefully results in a failed attempt or a complete abandonment of the attempt altogether.

“By creating layers, we hope to prevent the incident in the first place. If we don’t, then we hope the layers will slow progress, and the more layers that are used, the more likely detection will occur,” he says.

He is reluctant to provide too much detail, of course, preferring broader generalities, but the CEO says the company is the “largest, most-diverse and only fully integrated physical and electronic security and life-safety company on the island.”

In its initial form, the company has operated since 1995, but Bostock says, “as a result of a merger of interests between existing local security companies, Five Star Security and Security Countermeasures International,” The Security Centre was formed in 2000.

“I joined the company as operations manager during its creation,” he says. He became CEO in 2002. Three years later, the firm launched Security Centres International Ltd., providing products and serviced in Bermuda, the Bahamas, Antigua, BVI and Jamaica.

His more-than 250 Cayman staff – and almost 1,000 across the Caribbean – do not just cluster around high-profile individuals, patrol fences and install burglar alarms, however. The range of protections offered includes “location-based (global positioning systems) asset-tracking systems, home automation, impact and perimeter protection, secure storage and aerial video surveillance,” the latter of which means drones.

His eight canine teams complete the company’s “tool kit” of protection.

The teams are posted to specific clients to patrol properties, primarily at night,” Bostock says, “but we do not just provide dogs for fence areas. Our dogs are assigned to specific handlers,” and are trained and regularly assessed.

They are specific to clients, tailored to particular needs at particular properties “to ensure a professional appearance and handling.”

The uniforms officers wear are not what an observer might imagine. They are without breastplates and names, feature no sharply creased trousers or smart, peaked caps.

“When conceived and introduced in Cayman, our uniforms (black slacks, white business shirt and black tie) were original, designed to look like business attire and not uniformed services,” Bostock says. “We are the island’s largest service provider with [more than] 200 full-time security officers and a total head count of [more than] 250.” The force aspires to remain discreet, providing an “understated presence.”

The Security Centre “has done nothing that any other security company on island could [not] have done. We just did it our way and responded to market demand by providing some level of reassurance and peace of mind, focusing on our reputation, not our competition,” he says.

The website even suggests awareness of cybersecurity, warning that “more stringent government regulations are increasing the need for greater compliance among corporations, forcing them to reassess security policies and procedures.” Developing technology is important to “make the workplace safer.”

Technology, Bostock says, has been the spur to recent growth. In August last year, the firm moved into its own headquarters adjacent to the Cayman Technology Centre, a collection of four two-story buildings at the Cayman National roundabout offering 33,000 square feet of commercial space.

“The new facility was needed to support our image in the modern technology market, critical to accommodate our existing resources, improve on efficiencies and position the company for rapid local and regional growth,” he says.

A small chart lists a 15-point range of services, including closed-circuit television, private investigations, uniformed officers and corporate and event security.

“Our goal is to provide a level of service that we would expect as a client. We may not always get it right, but when we don’t, the entire team takes it personally and wants to fix it,” he says.

“Proper security and protection is about being as discreet as possible under the circumstances, but effective as necessary when the situation changes,” he adds.

Locally, the company works with the Royal Cayman Islands Police Service when possible and necessary, Bostock says, drawing careful distinctions between the roles of security teams and police patrols.

“Local legislation and culture dictates how we respond to incidents and to what level,” he says. His company is “not meant to be – nor are we trying to be – an alternative private police force or, like in some countries, dispatched to do the dirty work that government employees can’t.”

As such, integration of security personnel and police is infrequent, he says, as each pursue largely separate segments.

The 2007 Private Security Services Law might have better integrated the two, he says, but “that has not been the case.

“Our presence in retail operations results in the regular detention of shoplifters, and as ‘expert witnesses,’ security officers should be able to provide respected accounts of incidents which further ensures prosecution in court.”

However, Bostock says, “It cannot be ignored that at any given time there are more security personnel on duty than law-enforcement officers.

“This must naturally means that the opportunity to commit crime is reduced as the likelihood of detection or apprehension is increased,” while “intruder alarms and CCTV systems not only act as a deterrent, but provide immediate response and critical evidence.”

Still, police statistics indicate that “volume crime” and “crimes of opportunity,” such as burglary, remain at persistent levels.

Bostock emphasizes that The Security Centre is not a police force, its personnel are not walking beats nor driving their 30 vehicles on patrol. In short, the company is not in the business of reducing crime.

“That is probably a question for our education and social-systems leaders,” he says, acknowledging that private security companies will neither eliminate nor reduce crime. “We will only build layers and make our clients a harder target, meaning the committed criminal will just move ‘next door’ to the weaker target.

“We do our best to protect the interests of our clients, and if that means moving the problem down the road, literally, not figuratively, then our goal was a success.”

The company’s staff are neither armed nor have powers of arrest, although the 2007 law allowed security officers to carry firearms, he says. “But to date, there is no desire to do so.”

He says the lack of firearms has never compromised security operations, and the ability to arrest lawbreakers is the same as any citizen’s right.

“Security personnel have no special powers of arrest outside of what is commonly known as ‘citizen’s arrest,’” he says. “This means that persons committing offenses of damage, assault and theft against property or persons – and when committed [with]in an officer’s view – can be detained and handed over to law-enforcement personnel for prosecution.”

Almost all Security Centre officers are drawn from a background in military, law enforcement, corrections or personal or corporate security.

“In addition to our traditional uniformed security services who are deployed in office buildings, financial institutions, hotels, condominium complexes and residential communities, we also provide close and personal protection details for VIPs.

“We employ professionals from [more than] 20 countries, which means we have access to knowledge and experience of products and services not only from the Cayman Islands, but also countries such as Jamaica, Cuba, Guyana, Columbia, Honduras, England, Scotland, Ireland, the USA, Canada, India, Nepal and the Philippines.”

As threats – and perceived threats – escalate, The Security Centre also seems set to grow.

While reluctant to number clients, both long- and short-term, Bostock says “90 percent of our business is contracted, long-term customers, and our client-retention rate is very high, which we are quite proud of.

“We measure our growth in terms of customer retention and award, new products lines and services, staff numbers, new ventures which support our core offering of security and life safety and by expanding our multi-jurisdictional presence across the Caribbean.

The company “offers a multifaceted approach to protecting people, property and profits,” he says. “What separates us from other industry players is our ability to consult on and provide several different options for our clients to consider. Electronic systems support traditional manned solutions. Advancing technology makes security systems more accessible to the everyday consumer.

“[Our] reputation for delivering projects on time and on budget is critical in such a small jurisdiction, and when we over-commit and under-deliver, as make sure we try our best to fix the issues or compensate our clients.”

American ‘hypocrisy’: Why the US is now the focus of transparency efforts

From left, Chief Minister of Jersey Ian Gorst; Chief Minister of the Isle of Man Allan Bell; Chief Minister of Gibraltar Fabian Picardo; Deputy Premier and Minister of Finance of Bermuda Bob Richards; and Cayman Islands Premier Alden McLaughlin at the Anti-Corruption Summit in London on May 12.

In the debate about offshore centers, one nation has quickly become the center of attention. Even though it is not considered to be “offshore” and it was hardly named in Mossack Fonseca’s leaked client files, better known as the Panama Papers, U.S. media have increasingly recognized that the United States is as much part of the problem as it must be part of the solution when it comes to anti-money laundering and financial transparency in the fight against crime.

In January, the New York Times featured the use of shell companies in real estate purchases in Miami and New York and their potential for money laundering; Bloomberg highlighted the shifting tides in the trust service industry that sees several U.S. states taking business from the Cayman Islands and Bermuda with the promise of “confidentiality;” and several other media outlets targeted anonymous shell companies in Delaware, Wyoming and Nevada.

Professionals in offshore centers have long argued that tax evasion, money laundering and other “problems” associated with tax havens and the offshore industry are typically caused onshore. And they can as easily be remedied there by changing tax legislation and other domestic laws.

At the very least, offshore proponents have advocated, international rules and standard should be applied uniformly to establish “a level playing field.”

Even seemingly straightforward objectives like the fight against corruption, which causes agitated finger pointing by NGOs and activist groups at small island financial centers, turn out to be blocked by the inability of the largest political power in the world to fully participate in global standards.

At the Anti-Corruption Summit in London last month, the United States was represented by Secretary of State John Kerry. At the event, Kerry forcefully remarked how corruption “tears at the entire fabric of a society” and “destroys nation-states.” Yet, the U.S. was unable to sign a communique negotiated by all conference participants on concrete measures to tackle corruption.

It is just one example of America’s ambivalent role in relation to financial transparency.

Tax transparency

On the one hand, the United States is a trailblazer for tax transparency, driven by the desire to uncover American tax cheats who use offshore bank accounts. On the other hand, its unilateral approach in the face of quickly evolving international transparency standards has caused new loopholes and made the United States more attractive as a secrecy jurisdiction.

A first effort to detect activity by its taxpayers abroad, the Qualified Intermediary regime in the early 2000s, under which foreign banks reported U.S. taxpayers who invested in U.S. securities, was unsuccessful. It failed because the account holders would go unreported if they simply blocked the account for U.S. securities or if they held the account through a corporate entity.

Then in 2008, whistleblower Bradley Birkenfeld provided an insight into how Swiss bank UBS actively helped U.S. customers evade tax.

Buoyed by the success in prosecuting UBS and its investigations, which were quickly extended to other Swiss banks, the U.S. government produced the Foreign Account Tax Compliance Act.

With the threat of punitive withholding taxes for non-participants, FATCA forces financial institutions worldwide to sift through their customer databases in search of U.S. taxpayers and their assets and report them to the Internal Revenue Service. It also plugged the holes that existed in the qualified intermediary regime.

The prospect of FATCA alone and Swiss banks falling like dominoes in their resistance to U.S. Justice Department investigations was enough for 50,000 Americans to voluntarily disclose their previously undeclared assets abroad. So far the U.S. government has raked in about US$7 billion in back taxes and fines under various voluntary disclosure programs.

The success of FATCA, in turn, caused the U.K. and other European governments to emulate the scheme. The Organization for Economic Cooperation and Development developed a standard, the common reporting standard, that is similar to FATCA. More than 90 countries have signed up to it and from 2017 will start to automatically exchange information on the taxpayers from other countries in their home jurisdiction.

The schemes put together should produce near complete global transparency around taxpayer bank accounts and other financial assets that are held abroad.

A major impediment to its success is that, in addition to Panama and Bahrain, one country is not participating: The United States.

The U.S. claims it does not need to sign on to the common reporting standard because to make FATCA work it has concluded international agreements with other nations that in practice would lead to the exchange of tax data comparable to the common reporting standard.

“The people in the tax planning world will tell you that these agreements are generally considered as something of a joke,” Bloomberg News reporter Jesse Drucker said at the Offshore Alert conference in Miami in May.

One such tax planner, Peter Cotorceanu, a lawyer with Swiss law firm Anaford, says in practice the U.S. had to severely restrict the information it can exchange on foreign taxpayers because current U.S. law limits the data that is collected by the banks and reported to the IRS.

Changes to the law, he added, are unlikely in the current political landscape.

“The IRS cannot promise to share information with other countries that it does not get from the banks.”

What the IRS gets is very sparse indeed. Banks will report interest bearing accounts and U.S. securities held by a foreigner. But if the interest bearing account is owned by an offshore entity, it will not get reported.

All a non-U.S. person has to do to avoid disclosure under FATCA is to hold a cash or a non-cash account through an entity, or block non-cash accounts for assets that produce U.S. source income, such as U.S. stocks.

Despite this significant shortfall in the amount of taxpayer information that can be exchanged by the U.S., the OECD has accepted the U.S. regime as equivalent to joining the OECD standard.

This refusal by the OECD to declare the United States a non-participating nation in the common reporting standard has produced another gaping loophole.

If a structure involves two financial institutions in countries participating in the common reporting standard, say a BVI trust that has a Swiss bank account, only one of the two – in this case the trust – will report under the common reporting standard to avoid double reporting.

Only if the trust was in a jurisdiction that is not part of the automatic tax information exchange, the Swiss bank would have to “look through” to determine who the beneficial owner of the bank account is and report it.

“Now if the U.S. is declared a participating jurisdiction, this means that U.S. structures can book their assets outside the U.S.,” says Cotorceanu. “It is really the best of both worlds.”

The bank that holds the assets does not need to report because the U.S. entity that owns the assets will do so, but the U.S. entity will disclose only what is required under current U.S. law: next to nothing.

Trusts

Cotorceanu has written a legal paper called “Hidden in Plain Sight” in which he explains how it is possible to legally avoid reporting under both FATCA and the common reporting standard. His conclusion: “A trust with a U.S.-resident trustee but structured as a non-U.S. trust for U.S. tax purposes is ideally suited for this purpose.”

It will avoid reporting under the common reporting standard and FATCA, and it avoids U.S. taxation.

“The result of all of this,” said Drucker, “is that a number of significant financial institutions, banks, trust companies and law firms are now actively marketing the U.S. as a secrecy jurisdiction or as they often call it, a confidentiality jurisdiction.”

Earlier this year, Drucker and Bloomberg were the first to report on trust companies like Rothschild or Trident Trust setting up shop in Nevada and South Dakota.

“These companies were moving dozens of accounts out of places like Switzerland and Cayman and other places offshore into South Dakota in December, ahead of a disclosure deadline which took effect in January,” he noted.

Drucker quoted an official of one of these trust companies he interviewed as saying, “Cayman was slammed in December, closing things that people were withdrawing. I was surprised at how many were coming across that were formerly Swiss bank accounts. But they want out of Switzerland.”

Anonymous shell companies

Trust companies are not the only product in demand in the United States. Anonymous shell companies have also been a staple, not least because 14 U.S. states do not require beneficial ownership information to be collected.

Global Witness, an organization that takes a journalistic approach to highlight the links between corruption, conflicts and environmental and human rights abuses, says it noticed the persistent and prominent role of anonymous companies in everything it investigated.

“There was not a single story that we dug up that did not involve a shell company,” Global Witness Director Shauna Leven said at the Offshore Alert event. “We think of it as the getaway vehicle for the criminal and the corrupt to clean their money that they have stolen.”

This sparked an investigation culminating in Anonymous Inc., a TV report for “60 Minutes” on CBS. In it, a representative of Global Witness posed with a hidden camera as a potential client representing a foreign official.

Dropping numerous red flags for money laundering, he asked 13 law firms how to move suspect money into the United States to buy the key components of a luxury lifestyle, such as houses, yachts or jets.

None of the lawyers broke the law or actually moved money for the client, but all except one provided advice on how it could be done.

One lawyer suggested buying a “New York LLC” and a combination of companies to conceal the ownership through several layers. “Company A is owned by company B which is jointly owned by company C and D and you own the majority or all of the shares of C and D.”

Another lawyer extolled the virtues of the U.S. legal profession. “A good lawyer knows the law and a great lawyer knows the judge,” he surmised. “Are they going to throw a case for you? No. But are they going to bend over backwards to be courteous to you. Yes, they are.”

For Ed Davis, a lawyer whose firm traces assets on behalf of creditors, an important element of the use of anonymous corporations is lawyers willing to set up those structures. “Many companies, whether in the BVI or Cayman, are set up by American lawyers,” he said.

While noting that many of these “are not illegitimate in any way, shape or form,” Davis was critical of the Limited Liability Company model, which does not have shareholders, but members.

If someone has a claim against a member who has put an asset, like a jet, into the LLC, it is only possible to access the income the member derives from it but not the asset itself, Davis said. “This is a very horrible concept that we have allowed to work its way into our corporate structure.”

International standards

When British Overseas Territories and Crown Dependencies were pressed to join an international standard for the automatic exchange of beneficial ownership information at the Anti-Corruption Summit in May, they pointed to the United States as the elephant in the room.

Cayman Islands Premier Alden McLaughlin said, “If those countries with real political clout on the world stage continue to focus only on jurisdictions that are smaller in size, while ignoring obvious jurisdictions that ought to be part of the conversation, the result will be continued failure.

“To seriously tackle corruption and not just pay lip service to it, we in this room must be committed to a standard that is truly global and to put behind us the shades of hypocrisy which are part and parcel of the global discussion of this issue for years and years.”

Contrary to Cayman’s position with regard to the common reporting standard, where it is a first mover in the automatic exchange of taxpayer information, government will not support a beneficial ownership standard that is not also supported by the United States.

The concern is that offshore companies that are subject to more stringent transparency requirements, to preserve the privacy that they have enjoyed so far, will likely follow the trend of the trust companies and relocate to any of the U.S. states that does not collect beneficial ownership data.

At the anti-corruption conference, the Chief Minister of the Isle of Man, Allan Bell, called the U.S. “a major secrecy jurisdiction and tax haven.” He pointed out that nearly 10 times more companies were registered in a single building in Delaware than in his territory.

“There is one building in Delaware which has 285,000 companies registered in that one building and they don’t know the beneficial owners of any of them,” Bell said.

Cayman Minister of Financial Services Wayne Panton said not counting the BVI, the same building in Wilmington contains more companies than all of the Overseas Territories and Crown Dependencies combined.

“I think that’s a clear illustration of the scale of the problem from a U.S. perspective.”

Speaking at a press conference after the summit, Panton said he thinks everyone is committed to developing the necessary standards to fight corruption. “The question is: Is it a global standard and is it a level playing field? That’s a necessity.”

If Cayman adopted a standard before others, “clearly that would drive some business away to jurisdiction that are less well regulated,” he said. “That in itself defeats the purpose.”

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