Saturday, July 30, 2016

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.”

US presidential candidates vow to change offshore practices

Bernie Sanders

FRANK BENTAYOU

The Nov. 8 presidential election in the United States could cause the temperature to soar in the Caribbean and wherever international banks and businesses flourish, drawing American dollars.

Members of the financial community in the Cayman Islands, the Bahamas, Panama and many other jurisdictions all want to know: Will the next U.S. president risk alienating the nation’s biggest corporations and wealthiest citizens by clamping down on their use of overseas banks and shell corporations?

Beyond that is a second question: If the next president successfully flips off the switch on the longtime practice of avoiding taxation by moving assets to offshore financial enterprises, what will that mean to the economies of places where offshore financial services thrive?

‘Tax fairness’ a hot issue for U.S. voters

The next chief executive will most likely have to quickly address the issue of federal taxation. Tax fairness is a promise U.S. voters – especially middle-income citizens – have been hearing about for months from a long list of candidates, those defeated and the three still standing.

Polls have emphasized that enacting laws to keep rich people and corporations from avoiding U.S. taxes by transferring investments to offshore financial institutions has become a big concern to voters. The candidates, in one way or another, have promised to clamp down on what are widely viewed in the U.S. as “tax cheats.”

A March 3 report from Citizens for Tax Justice, a Washington-based nonprofit, found that scores of America’s largest corporations are avoiding almost $700 billion in federal income taxes by holding abroad $2.4 trillion of what CTJ calls “permanently reinvested” foreign profits.

The organization also said 27 companies revealed that their investments were likely in offshore jurisdictions where they pay no more than a 10 percent tax rate on profits, far less than the 35 percent the U.S. could charge if those profits were reported as part of American tax returns.

If all $2.4 trillion of the U.S. corporations’ offshore assets were reported in American filings, according to CTJ, the companies would owe the IRS $695 billion in federal income tax.

If all of these overseas investments had been repatriated in 2015, the nation could have increased its tax revenue from almost $2.7 trillion to nearly $3.4 trillion – a 26 percent jump – providing corporations paid the on-the-books tax rate.

As a consequence, what stateside voters have been hearing from the hustings these days is this: Ordinary Americans get burned when big companies and wealthy individuals move their profits offshore. Candidates vow to stop this practice and make everybody pay a fair share so the nation can flourish.

Donald Trump
Donald Trump

Trump’s proposals

Presumptive Republican presidential nominee Donald Trump has received some of his greatest applause for demanding that corporations repatriate their profits to America, where he promises to tax their gains much more modestly than at their current rates.

His scheme of more tax revenue (though at lower rates) from corporations that no longer need to seek relief through offshore accounts gives him the chance to promise middle-class taxpayers that they will not have to carry such a burden any longer for financing America. A Trump presidency will reduce rates for most Americans but especially for corporations, he says, promising to drop the current corporate rate from 35 percent to 15 percent.

For years, the Republican Party has taken the position that reducing tax rates on corporations and high earners would yield more tax revenue – in large part because the lower rates would encourage more investment in-country instead of abroad.

That has become one of Trump’s arguments too. He also posits a top marginal rate for individual taxpayers of 25 percent. Today, the top rates are, for a single taxpayer, 39.6 percent for income in excess of 406,751; married couples filing jointly pay that rate for income over $457,801.

Plus, despite the hue and cry about the tax advantages hedge fund managers enjoy, Trump’s plan calls for a rise in their rate on carried interest by a mere 1.2 percent – to 25 percent from the 23.8 percent now on the books.

The candidate’s tax plan also would allow hedge fund managers to structure their investment firms as small businesses so that partners in smaller enterprises would have a lower tax rate of 14 percent.

All of these proposals could reduce demand on offshore banking, as would the candidate’s suggestion to create a special repatriation rate of 10 percent on U.S. companies’ foreign profits. Such changes in the tax code, Trump says, will help bring more jobs and capital investment back to the United States from the Cayman Islands, Switzerland and many other jurisdictions.

Economists have found Trump’s future scenarios short on details, though.

“There’s not a whole lot you can hang onto there,” a CNBC commentator said this spring. “Little you can wrap your calculator around.”

The Tax Foundation, for instance, figures that Trump’s tax cuts might trim $12 trillion from what taxpayers owe the government, but such cuts would balloon the federal debt by more than $10 billion. Trump says he is less bothered by debt than most other Republicans.

Trump also has received deafening cheers at campaign events for promising to take the hardest line ever against American corporations that merge with overseas companies in lower tax jurisdictions, then move their headquarters abroad. He claims punishing measures, including government trade restrictions will stop such inversions.

Hillary Clinton
Hillary Clinton

Clinton’s campaign

Democratic Party presidential frontrunner Hillary Clinton’s plans base enforcement of anti-inversion measures on quite different means. When U.S. companies paint themselves as foreign enterprises in order not to pay U.S. taxes in this way, she would enact an exit tax that Citizens for Tax Justice and other nonpartisan groups have agreed could stop inversions “in their tracks.”

Clinton has published specific rules for such corporate efforts at evading income tax, including permitting inversions only when a smaller U.S. company merges with a foreign-owned outfit that would control a majority of the new enterprise’s holdings.

Clinton said flatly this year that she would move against offshore tax “schemes” in the Caribbean that she says are responsible for the loss of billions of dollars in U.S. tax revenue. She has focused on hedge funds that she says “misclassify income,” making earned gains look like capital gains, which the U.S. taxes at much lower rates.

A principal tool would be a surcharge on whatever income drawn from wherever in the world, based on a corporation’s or individual’s adjusted gross income. That, she has said, “would give us a chance to try to get around and end some of these abuses that area taking place in the tax system.”

High-earning taxpayers would get hit with a 4 percent surcharge on income in excess of $5 million a year, regardless of whether their income derives from capital gains or earnings.

Media reports quickly pointed out that focusing on the practices of tax-sheltered funds could negatively affect the Cayman Islands hedge fund of her own son-in-law, Marc Mezvinsky, husband of the Clintons’ daughter Chelsea.

Meanwhile, the conservative magazine National Review accuses Clinton of hypocrisy, in part because her husband, former President Bill Clinton, solicited millions in donations to the nonprofit Clinton Foundation from corporations that have substantial tax-protected offshore holdings.

Trump, too, draws criticism for perceived hypocrisy since, as CBS Money Watch has reported, “he owns millions of dollars in stock in the same companies that have been most aggressive with legal but controversial tax strategies” employed in offshore jurisdictions.

Democratic challenger Sen. Bernie Sanders has been more voluble about ending U.S. corporations’ use of offshore “tax havens” than Clinton. His plan actually looks a lot more like Trump’s. Sanders would tax corporations’ profits wherever they come from and in the year they are earned. That maneuver, accountants say, would stop companies from shifting profits offshore.

“We cannot continue to allow our nation’s wealthiest corporations to avoid paying their fair share of taxes. These companies stash tens of billions of dollars in overseas tax havens while at the same time receiving billions in subsidies,” Sanders’ policy statements say.

He uses copious examples of tax-sheltered investments in the Cayman Islands and Bermuda in his policy statements. Most of the criticism of Sanders’s proposals focuses on perceived gaps between what taxing policies would generate and what his many social programs might cost.

A Cayman Islands perspective

When economic, legal and banking leaders in the Cayman Islands weigh in on the U.S. candidates’ promises, they seize on one common thread: Politicians promise much during a campaign but usually deliver far less once in office. Populist positions, including the promise to make the rich pay more, often fade soon after elections.

Paul Byles, CEO and partner of First Regents Bank & Trust, strongly suggested Americans’ passion against offshore banking will cool over time.

“Every election cycle we [the Cayman Islands] become part of the U.S. and U.K. political campaign messages. It certainly doesn’t help in terms of the persistent negative perception of offshore centers,” he said. “In the end, the impact is usually short-term and quickly disappears as policymakers in those countries tackle the real domestic issues they face.”

Byles called it “dishonest” for politicians to conjure up a story “that ‘tax havens’ are a material source of their various domestic policy challenges.”

Anthony Travers, senior partner at law firm Travers Thorp Allberger, said, “The difficulty in predicting specific U.S. legislative change from the comments of any of the candidates in the current U.S. presidential race is that they are all based on fundamental mischaracterizations of the relationship between the Cayman Islands and the United States.”

U.S. laws and international agreements already demand a high degree of transparency in criminal investigations, he pointed out. “The IRS and U.S. law enforcement have access to all information in the Cayman islands pursuant to the relevant treaties and has had for over a decade.

“It has become politically expedient,” Travers said, “for politicians to blame domestic deficits on offshore ‘tax scams.’”

And in large measure, local leaders say, U.S. politicians have been creating a crisis and then patting themselves on the back for their solutions.

Gordon Barlow, former manager of the Cayman Islands Chamber of Commerce and a blogger, shares many U.S. commentators’ skepticism that any of the candidates will enforce what they so fervently espouse on the campaign trail.

There is general agreement in Cayman’s financial circles that Cayman and other low-tax jurisdictions face little economic risk from the public posturing of the U.S. candidates over offshore banking’s effects on U.S. taxation.

The threat? “Marginal and statistically irrelevant,” Travers said.

Byles said, “I believe that the threat of breach of privacy may discourage some investors and clients, but I don’t foresee any material repatriation of assets.”

In Barlow’s view, “The difference between tax-avoidance and tax-evasion is the price of a good lawyer. Rich people can afford the best lawyers, and the lawyer-politicians who pass the laws always leave loopholes.”

He added, “There will always be tax havens.”

 

Overseas territories fight reputation in ownership debate

Minister Wayne Panton

There has been a flurry of activity over the past six months in the halls of the Financial Services Ministry in Cayman and its counterparts in the United Kingdom and the other overseas territories on how and when to share company ownership information with law enforcement and tax authorities overseas.

The push culminated in a series of agreements and a summit meeting last month with world leaders from 40 countries in London agreeing to work together to create a new global standard for sharing beneficial ownership data.

Ministers from Jersey, the Isle of Man, Gibraltar and Bermuda joined Cayman Islands Premier Alden McLaughlin and Financial Services Minister Wayne Panton at the Anti-Corruption Summit hosted by Prime Minister David Cameron at Lancaster House in London on May 12.

The Cayman Islands has agreed to be part of the negotiations on the new global standards and committed politically to join any new standard that comes out of those negotiations. Cayman agreed last month with the United Kingdom to create a new system for sharing beneficial ownership information with a new platform so that local officials can access company ownership data held with financial services firms.

The new centralized system is not a public register and is not an automatic exchange, according to the premier, but instead will make it faster and easier for an as-yet-unnamed authority in Cayman to access information when it gets requests from foreign tax or law enforcement agencies.

“It certainly will not be available publicly or available directly by any U.K. or non-Cayman Islands agency,” the premier said during an April press conference.

The premier went further while speaking at the summit in May, offering to extend what is called the “Exchange of Notes” with the U.K. to other countries participating in the international effort to develop the new standard.

“My presence here, along with the Minister for Financial Services, is clear evidence of our willingness to engage and to help shape global standards in this fight,” the premier said. “But this is not new, not new for us at all. For over 20 years we have shown our leadership role in this fight.”

“In the fight against corruption,” Mr. McLaughlin said in a press conference after the summit, “it’s easy to see that law enforcement and tax authorities need access, in accordance with global guidelines, to beneficial ownership information because it helps them to detect and prosecute criminality such as corruption, tax evasion and other serious crimes. Cayman fully supports this goal. It is completely in line with our long-standing international engagements and local efforts that have enhanced our capacity to combat criminality. This is why, once the United Kingdom provided additional information regarding its initiative, and once certain language was accepted, we agreed to participate in the discussion.”

Many anticipate that discussion will result in some sort of automatic exchange of information or a public register.

The premier stressed that he has agreed to participate in the discussion but has not made any commitments beyond the new system laid out in the Exchange of Notes with the U.K.

“For the record, Cayman has not agreed to implement a mechanism. Indeed, there is no mechanism to implement. It doesn’t yet exist. Again, what we have agreed to is to participate in the global discussion to develop the mechanism,” he said.

In a letter to the U.K. Chancellor of the Exchequer dated May 6, Cayman Financial Services Minister Wayne Panton wrote, “Once this standard is agreed and adopted by all Overseas Territories, Crown Dependencies, G-20 and OECD member states, we will participate in its global implementation.

“The standard must ensure the full confidentiality and security of the data exchanged, and be subject to appropriate legal gateways.”

Cayman also pledged to repeal by September the Confidential Relationships (Preservation) Law, “which often has been misrepresented as Cayman’s ‘secrecy law.’”

In a statement released before the summit, the premier said the legislation would be replaced with a new data protection law and a new Confidential Information Disclosure Law that will “better clarify the mechanisms through which confidential information may be shared with appropriate authorities.”

Fighting reputation along with corruption

Cayman and the rest of the Overseas Territories and Crown Dependencies have taken a lot of heat in recent months with the release of the Panama Papers and other press coverage as places for tax dodgers and money launderers to hide cash. The territories have a reputation going back decades as a place for crooks to hide their money: Just think about the 1993 movie “The Firm.”

Places such as Cayman and the British Virgin Islands are called tax havens or secrecy jurisdictions. Some of that reputation is well deserved, but it also ignores other tax havens, such as certain parts of the United States, and legislative changes in places like Cayman or Jersey to make sure people aren’t using the jurisdictions to avoid taxes or launder money.

BVI figured prominently in the Panama Papers leak that documented hundreds of thousands of offshore companies, identifying many of the owners and calling out many world leaders and celebrities for keeping funds out of reach of domestic tax authorities.

Cayman’s premier, along with leaders from other territories and jurisdictions, has been touting Cayman’s initiatives for sharing tax information and preventing criminals from taking advantage of the small jurisdictions to hide assets or clean money.

Speaking at a press conference after the London summit, Mr. McLaughlin said, “These negotiations, and indeed the entire process, which began in 2013, has been difficult and complex, but again, it’s the outcome that’s important. The U.K. has recognized that our system of enhancements meets their criteria for the sharing of information; meets global standards; and is best for this jurisdiction.”

Jude Scott, CEO of Cayman Finance, said in a recent statement, “We are pleased the U.K. government has recognized that our licensed corporate services provider verified beneficial ownership system is a world-class system that provides for due diligence know-your-customer checks that are critical to proper law enforcement authorities conducting legitimate investigations and is superior to other proposed systems.”

The premier, the financial services minister, Mr. Scott and others have been out pushing the message that Cayman has a solid system in place to stop tax dodgers and money launderers from setting up shop in the territory. “We don’t want business which is tainted,” the premier said in April. “If there is bad business here, they would be well advised to migrate somewhere else.”

They have repeated the message of compliance and preventing financial crimes to local and international audiences dozens of times in recent months, from conferences in Cayman to the summit in London. But there is still a lot of work to be done to turn around a reputation that has stuck with Cayman for decades.

Shipping industry not buoyed by low fuel costs

A Sinotrans Shipping Ltd. container ship sits moored next to gantry cranes at the Port of Manila in the Philippines in November. Sinotrans & CSC Holdings will become a wholly owned subsidiary of China Merchants Group as the government steps up efforts to shrink industries plagued by overcapacity and create globally competitive businesses. Must credit: Bloomberg photo by SeongJoon Cho.

In February, the Baltic Dry Index, which assesses the prices of moving major raw materials by sea, dropped to an all-time low of 290 points. While such low freight rates may be good news for the global trade market and consumers overall, it is not good for the shipping industry, which has been facing numerous challenges in recent years.

Basil Karatzas, founder and CEO of Karatzas Marine Advisors & Co., an international maritime consulting and shipping finance advisory firm based in New York City, outlined the challenges facing the shipping industry during the Mare Forum at the Cayman Islands Shipping Summit last month.

“Expectations are getting lower by the day for shipping,” Karatzas said during his presentation, “Still Looking for Smart Investments in Shipping.”

As shipping finance becomes costlier and concerns rise about the industry’s regulatory regime and the obsolescence of current technologies in shipping, “bottom line, shipping is an out-of-favor industry from every point of view,” Karatzas said.

Ironically, a major challenge facing the industry is the low cost of fuel.

“Typically the cost of fuel is the higher cost that the ship has to pay; typically it is much more expensive to pay for the fuel of the vessel than for the vessel itself,” Karatzas said.

The faster a ship goes, the more fuel it consumes, but as fuel prices have dropped, ships have been speeding up, burning tons more fuel on average than even a year ago.

“They don’t have to be very economical at what speed they go because the cost is so low,” Karatzas said. “Let’s say from West Africa to the U.S. it would take 10 days at 11 knots. Now it takes only seven days [at 14 knots], so now the ship arrives there sooner, is discharged sooner, and is available to look for new cargo.”

With ships running at maximum speeds and arriving at their destinations earlier than what used to be standard, the problem of low demand for freight ships and too much supply of available ships is exacerbated.

“If the price of oil goes back up, on average, it would be a good thing for shipping,” Karatzas said.

The weak market for shipping is also affecting the longevity of vessels.

Typically, vessels are designed to run for 25 years, but these days they are being scrapped earlier.

“If the freight market is very strong, as it was in 2008, the maintenance goes up, but it makes sense to spend more money for maintenance and to keep a vessel for a long time,” Karatzas said. “But if the market is very weak, obviously you do not want to be spending money to maintain an old vessel.”

Now that the freight market is “very weak,” Karatzas said, vessels are being sold sooner for scrap.

“It doesn’t make any sense any more to spend money maintaining the vessels since you are not making enough money,” he said.

Also, when the market was strong in 2008, shipowners were asking shipyards to build vessels as fast as possible.

“They were compromising on craftsmanship, workmanship and the quality of the ships,” Karatzas said. “Shipowners didn’t really mind low quality because they were making a lot of money on the trade market. But now, 10 years later, you see that these vessels show their age and they age much faster than what you would expect from an average vessel over time.” Those who want to buy new ships now may have a tough time doing so unless they are large corporations. As traditional shipping banks are closing, those that are still financing ship owners are under pressure by the banking regulatory environment and low interest rates to lend to well-established corporate shipowners, ignoring the rest of the market, Karatzas said.

Institutional investors are steering away from lending to ship owners, leaving smaller, family-owned shipping companies in the lurch, creating a tremendous funding gap in shipping financing, Karatzas said – but one which smart investors can exploit.

“If you have money to finance or finance somebody to buy ships, basically you can ask for very onerous terms and most likely they are going to be accepted because there is not much alternative, and the shipowners do not have that many options,” Karatzas said.

Niche markets, he said, are where the current opportunities are in shipping investments.

His advice to investors includes focusing on good quality vessels and staying away from markets where competition is very tough, for example, large vessels whose routes are between Brazil and China.

“If the market does not recover any time soon, you know quick investments are not going to do very well in the short term. On the other hand, if people are desperate to borrow money to buy a ship and you can lend money at 8 percent to 10 percent interest, I think that’s a much more conservative investment and the risk to reward is much more favorable,” Karatzas said.

“There are always packets of opportunity to be found,” he said.

New independent director firm Calderwood launches

Calderwood’s Wade Kenny and Ronan Guilfoyle

On the face of it, this may not be the best possible time to start a new business offering corporate governance and independent directorship services for the hedge fund industry. Fund numbers in Cayman have been stagnant, and the cost of entry for new funds, especially smaller ones, has risen, at times, to prohibitive levels.

Meanwhile, the number of firms offering directorships has grown, and more and more lawyers and accountants have made the switch to become professional independent directors.

Cayman’s fund governance offering may well be near saturation level, and the profession itself has attracted greater attention from regulators.

Still, Ronan Guilfoyle and Wade Kenny, both formerly with DMS Offshore Investment Services, have taken the plunge and founded Calderwood.

Guilfoyle confirms that friends asked, “why did you not do this a few years ago?” But, he says, there are still new hedge funds launching, and “we have great relationships with many of the service providers in the industry.”

In an industry where new business comes mainly from referrals, being an insider with many years’ experience in financial services, including many years of serving on fund boards, is a distinct advantage.

“Business has started well and I predict we will see more of the same as we expand,” says Kenny.

While it is harder for small hedge funds startups due to higher regulatory costs and greater demands for institutional infrastructure from larger investors, he notes that the number of funds launching is still about the same, even if there are fewer smaller funds starting up these days.

New business for governance service providers is coming mainly from administrators, auditors, prime brokers, offshore and onshore legal counsel and also other directors.

The trend toward split boards, an attempt to create more diversity in fund governance structures with independent directors coming from different firms, means that even referrals from fellow directors, who are technically competitors, are not unusual.

After all, it makes sense to form a board of experienced professionals who know they have a good working relationship because they served together as directors before.

Guilfoyle says, “It’s easy to be complimentary with people who you have worked with before, who have been in the industry for a while, who are experienced.”

“Ultimately, once you become a director of a company we all share a fiduciary duty to that company,” Kenny adds.

Different business models

The independent director profession has seen many debates in recent years about the capacity of directors to serve on multiple boards, while dedicating sufficient time and attention to each appointment.

Depending on their business model, some have called for a cap on the number of board appointments for individual directors. Others maintained that the number itself is not significant, but that the support system of people and infrastructure around the director is what really determines their ability to serve on a large number of boards at the same time.

Guilfoyle believes that the market has room for everybody. “Firms don’t grow unless people believe in their strategy or their model.”

What makes Calderwood unique, says Kenny, is the level of experience coupled with a lower number of relationships. “There are not many directors out there who have the experience that we have, who have worked with the size of clients that we have and who have a very small portfolio.”

He says new managers will recognize this as an opportunity to get a very accessible service that adds value.

Although the firm expects to grow significantly, the principals say they aim to maintain a ratio of fund numbers to directors that ensures personalized service.

Infrastructure does play an important role in increasing the capacity of individual directors, they agree, but it can also increase transparency for investors by allowing directors to demonstrate that they are doing what is expected of them.

“That is something that we view as very important,” Guilfoyle states. “We wanted something that matches client needs and what the industry expects.”

This demand for transparency resulted mainly from the financial crisis, which was a turning point for the role of independent fund directors.

When funds were under stress, Guilfoyle says, managers and investors truly recognized the benefit that independent directors can bring.

“A lot of directors stepped up to the plate at that point, making sure that they did suspend redemptions and whatever was necessary to protect the fund and its interests.”

Subsequently, the attitude toward directors by managers, investors and lawyers changed. Institutional investors wanted to speak to the directors; they demanded more transparency around what directors were doing; and it became a key part of the role of the director to engage with investors.

Emerging trends

Institutional investors were also the main driving force for change in fund governance, and few would now invest in an offshore fund that does not have independent directors.

The same is not yet the case for onshore funds or in the private equity space, but Guilfoyle says a trend is emerging.

Many fund structures involve feeder funds that separate U.S. taxable investors onshore from U.S. tax-exempt and non-U.S. investors offshore and channel investments to a master fund.

According to Calderwood, investors are now starting to question why independent oversight exists on the offshore side but is lacking for the onshore fund.

“We are seeing a greater interest and need for our expertise with onshore funds, particularly if the master fund is an onshore limited partnership or limited liability company,” Guilfoyle notes. “Another trend that is emerging is for independent oversight to be utilized in the private equity space.”

While progress is slow, he believes it will eventually happen as onshore funds grow in size.

“After 2008, I thought every single fund would have independent directors on their master fund board, that it would be the standard.

“I saw, if I was an investor I would insist upon this, but it took time, and I think on the onshore side and private equity side it will as well. People are talking about it now and at some point someone will actually say: ‘I am not going to invest until you do this,’” Guilfoyle says.

Cayman disposes of bearer shares

Alric Lindsay, Higgs & Johnson

The Companies Law was recently amended by The Companies (Amendment) Law, 2016 (the “Amended Law”), published in the Cayman Islands gazette on May 13. The purpose of the Amended Law is to remove “bearer shares” from circulation, ultimately improving transparency in relation to beneficial ownership of companies in the Cayman Islands. In order to understand the reasons for the change, it is useful to set out a brief background on bearer shares.

Bearer shares

Most people are familiar with the concept of owning shares in a company and how ownership is transferred to another person. As a start (and generally speaking), the “owner” is the person recorded on the register of shareholders of the relevant company. In order to legally effect a sale or transfer, the parties would comply with the terms of the applicable documentation and follow the necessary procedures. Upon completion of the transaction, the register of shareholders would be amended to reflect the new owner.

When it comes to bearer shares, however, the normal question is “who is the owner?” The answer is hidden in the name i.e. “bearer.”

The “bearer” is the person who literally holds the bearer share instrument in his hands at any given moment. He cannot be identified on the register of shareholders because there is no entry reflecting his name. Where he wishes to transfer bearer shares, the simple action of delivery to another person would signify transmission.

In light of the threat of terrorist financing and global anti-money laundering activities, the existence of bearer shares grew as a concern to regulatory bodies and governments alike. This was because regulators were unable to identify the owners of bearer shares and, in failing to do so, could not determine whether ownership of such shares was for surreptitious reasons.

In order to combat this practice, global watchdogs established various policies to improve transparency. One such body is the Financial Action Task Force (FATF).

FATF

The stated objectives of FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. Its policies are intended to be implemented as regulations or laws in relevant countries.

Published policies include the series of recommendations developed by FATF (the FATF Recommendations), which lay out the framework that should be followed regarding the identification of beneficial owners. In particular, the FATF Recommendations require countries to ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities, and that countries that have legal persons who are able to issue bearer shares or bearer share warrants should take effective measures to ensure that they are not misused for money laundering or terrorist financing.

Cayman Islands compliance with FATF

In the case of the Cayman Islands, anti-money laundering and anti-terrorist regulations and legislation have been in existence for several years and comply with FATF Recommendations. This requires robust due diligence procedures (including background checks) to be completed prior to the acceptance of new business and on an ongoing basis. Due diligence must be in place for directors, officers, shareholders and ultimate beneficial owners of relevant entities. Unlike onshore locales like Delaware and Nevada, service providers in the Cayman Islands can be expected to “know their client.”

In addition to the know-your-client regime, the Cayman Islands is a signatory to U.S. FATCA, U.K. FATCA and the Common Reporting Standard, all of which have been implemented through domestic regulations and legislation in the Cayman Islands. Reporting Financial Institutions subject to the foregoing legislation and regulations must submit financial account and other information to the Cayman Islands tax authority, which may then be shared with the U.S., U.K. and, in the case of the Common Reporting Standard, certain partner jurisdictions. Therefore, full cooperation by the Cayman Islands is currently in place.

Collaboration (through understandings and undertakings) also exists between the Cayman Islands regulator and international regulators. These international bodies include the Guernsey Financial Services Commission, Finanzdienstleistungsaufsicht of Germany (BaFin), France Financial Markets Authority, Central Bank of Ireland, United Kingdom Financial Conduct Authority and Financial Services Authority U.K., Canada Office of Superintendent of Financial Institutions, U.S. Federal Deposit Insurance Corporation, U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission.

Where the Cayman Islands regulator is satisfied that a request for assistance from an overseas regulatory authority should be granted, the Cayman Islands regulator may disclose information necessary to enable the overseas regulatory authority to exercise regulatory functions, including the conduct of civil and administrative proceedings to enforce laws, regulations and rules administered by the overseas regulatory authority. In some cases, the Cayman Islands regulator may permit the overseas regulatory authority to carry out, in relation to an entity in the Cayman Islands that is subject to its supervision or regulation, an on-site inspection or visit in a manner agreed in writing by the Cayman Islands regulator and the overseas regulatory authority.

In this sense, the Cayman Islands has always sought to be FATF compliant, fully transparent and cooperative.

Beneficial changes

Notwithstanding the full compliance by the Cayman Islands with international policies, the Cayman Islands continued to pursue further improvements. The most recent evidence of the same is the statement by the Cayman Islands government that:

The Cayman Islands and the United Kingdom have signed an agreement on the enhanced sharing of beneficial ownership information.

The Cayman Islands will implement a central (non-public) platform that will allow designated Cayman Islands officials to directly obtain and provide details of beneficial ownership of companies incorporated in Cayman to the U.K.

Legislative changes will be made in connection with beneficial owner information.

As a result of new legislation, the Cayman Islands is demonstrating that it is not only open for business, but it is also open to transparency and committed to maintaining the integrity of the global financial system.

The Amended Law

Prior to the Amended Law, the register of shareholders of a Cayman Islands company was required to state the name of the custodian of any bearer shares and the fact that a certificate in respect thereof was issued to bearer. In addition, where bearer shares were held by an authorized custodian (approved by Cayman Islands authorities), a person holding the beneficial interest in those bearer shares was not permitted to agree to transfer or otherwise dispose of or deal in the interest in those shares without the approval of the custodian. The Amended Law ultimately eliminates all transactions in bearer shares. The implications and time line for bearer share removal are set out below.

No new bearer shares may be issued

Clients incorporating new companies must bear in mind that no new shares may be issued by a Cayman Islands company in bearer form after May 13, 2016. This means that all memorandum and articles of association must be carefully drafted and reviewed by a Cayman Islands lawyer in order to prevent a breach of the Amended Law. Any use of previously used “template” documents to save on legal costs must be avoided.

Conversion of existing bearer shares to registered form by July 13

With the prohibition of new bearer share issues being in place after May 2016, the July 13 stop date means that relevant companies in the Cayman Islands must now liaise with beneficial owners and custodians in order to arrange the conversion of any bearer shares into registered form. A company or custodian notifying a beneficial owner shall either obtain confirmation from the beneficial owner of a name in which a share converted is to be registered or register the converted share in the name of a custodian. The relevant name must appear in the company’s register of members by July 13, 2016.

Dealings in unconverted shares

Following the July stop date, any bearer shares which have not been converted pursuant to the Amended Law will be null and void and shall be without effect for all purposes of Cayman Islands law. This rule extends to Cayman Islands companies which were previously terminated by way of strike off, as no court of the Cayman Islands will be permitted to reinstate a company with bearer shares in issue (the Amended Law will apply if the company is reinstated).

Annual declarations

Clients will be familiar with the annual declarations required to be filed by them with the registrar of companies in the Cayman Islands. Previously, such annual filings were required to include a statement that all bearer shares are kept by a custodian. As a result of the Amended Law, all future annual declarations (commencing in January 2017) must confirm that any bearer shares issued by the relevant company have been registered in the form required by the Amended Law.

Any company that fails to comply with the Amended Law shall not be considered to be in good standing.

Alric Lindsay is an attorney and senior associate with Higgs & Johnson, a law firm based in the Cayman Islands and The Bahamas.

The purpose of the Amended Law is to remove “bearer shares” from circulation, ultimately improving transparency in relation to beneficial ownership of companies in the Cayman Islands.

Expertise in trust business gives Cayman an edge over US

News that U.S. states like Nevada and South Dakota have started to take away trust business from Cayman and other offshore centers late last year has hit the mainstream media, prompting claims that the United States is “a tax haven” and the “new Switzerland.”

Many trusts relocated just before a disclosure deadline came into effect in January. The United States states has not signed up to a standard developed by the Organization for Economic Cooperation and Development that aims to exchange taxpayer data globally. As a result, certain U.S. states will provide greater confidentiality, or as activists call it “secrecy,” than the rest of the world to family trusts.

The general trend was not news to the industry. Assets held in South Dakota, for instance, have jumped from $32.8 billion in 2006 to more than $226 billion in 2014.

Brian Taylor, managing director of trust company ZEDRA in Cayman, says the shift to the U.S. is an industry-wide issue, but he doubts the viability of such a move.

“People are already questioning why you might do.”

Tax planners are indeed contemplating whether it makes sense to move business to the U.S. to perhaps avoid the common reporting standard for the next year or so.

“But then you need to think: Is the expertise that you have in those jurisdictions the same that you have in Cayman?” he asks.

“Really, if you are the sort of client that Cayman wants to attract, which is the top-tier clients who are having their structures for family reasons because they have family members in many jurisdictions, just a short-term move is shortsighted.”

Clients appreciate their privacy and they don’t want their names made available unnecessarily, he acknowledges, but most are fully reporting, anyway, and there has been no reluctance to provide additional information under new transparency rules like the common reporting standard or U.K. FATCA.

“It is the way that the world is going and clients are recognizing that.”

Taylor endorses the position of the Cayman government to demand that transparency has to be for legitimate purposes such as law and tax enforcement, and not for transparency per se.

The issue is rather that the U.S. should be subject to the same rules.

Even though the pressure on Cayman is always greater because of “its success and notoriety,” he says, it is a jurisdiction that is based on good infrastructure and experienced lawyers and accountants.

“There will always be a requirement for that solidity and that expertise,” Taylor says.

“Cayman is well placed by continuing to follow the lead in adhering to global standards. When you have law abiding clients, they are entitled to their privacy, but we are ensuring that our clients are doing the right thing and doing things properly. And if Cayman continues to do that it can only continue to flourish.”

Asian growth

Growth for the trust business in Cayman is going to come from the Americas, which is ZEDRA Cayman’s main focus, and also from Asia.

“Asia’s use of Cayman is increasing. And the opportunities in Asia are increasing,” Taylor says.

ZEDRA recently opened an office in Hong Kong, which last year overtook Singapore in wealth management assets under management.

There is already a lot of familiarity in Asia with the use of Cayman funds. The next step for successful entrepreneurs who use Cayman funds is to consider how they can pass on their wealth to the next generation and determine the right structuring for their families and their companies.

Because firms like ZEDRA will offer multijurisdictional solutions, wealth management growth in Hong Kong does not necessarily have to be a detriment to Cayman to the extent that there are opportunities for Cayman trusts and funds.

“Which is why there are a lot of Cayman law firms expanding there as well,” says Taylor.

In addition, he notes, Cayman’s popularity in Latin America will continue.

Most trusts in Cayman are multijurisdictional trusts set up by families with family members and assets in different countries. Wealthy families, in turn, who live in a single country and have all of their assets there would derive no real benefit from an offshore trust, he notes.

“That is why Latin America has been so popular.” Many families send their children to college in the U.S. or Canada, who then might find a spouse and stay. “That’s when there are opportunities that places like Cayman can help with.”

Taylor says most families are not setting up trusts for tax reasons but for generational reasons. The aim is often to preserve wealth for subsequent generations in a way that they cannot spend it all. Other times, the desire is to keep assets separate to prevent family members from falling out.

“We are becoming more like historic U.K. and U.S. domestic trusts that are set up for those family reasons,” Taylor says.

While the family trust set up by a matriarch or patriarch is still the norm, younger people, who have become wealthy at an earlier age, are also using trusts. However, they will not put all their assets into a structure, and will use the trust more like insurance in case something should happen to them, for the benefit of their children, he notes.

Trust industry

The trust industry itself is also undergoing change. In the early 2000s, accounting firms and law firms sold their trust businesses to banks. More recently, banks have been disposing of their trust companies, by selling them off to private equity firms and other private investors. The result is a more dispersed market of smaller trust businesses.

ZEDRA is the product of a private buyout of the trust business of Barclays. Following the buyout in January and rebranding to ZEDRA, the group added offices in Hong, the Netherlands and London to its offshore companies in Guernsey, Jersey, the Isle of Man, Switzerland, Singapore and Cayman.

As an independent company, Taylor says, the advantage is being more flexible and entrepreneurial. It also means that ZEDRA can develop its business in the Americas, while Barclays’ private banking business had a stronger focus on the U.K., Europe and the Middle East.

Bank-owned trust companies sit on the balance sheet of the bank and are curtailed to some extent by group-wide risk management and country risk considerations.

“The banks are all about obtaining assets, and the independents are more about being a trustee,” Taylor says. “Now we are able to act independently for our clients. As only the trustee, you are trying to find the best investment managers for your client, the best credit options.”

In contrast to a bank which already has a natural client base that additional products and services can be marketed to, the challenge for ZEDRA is all about name recognition.

“As a global company, we are well placed. The challenge that we have is that we haven’t dealt with this part of the world for a while,” says Taylor. “We are a new company and a new name. We have to make people aware of our background and who we are.”

This does not mean that the company doesn’t have lofty goals. At its launch, ZEDRA said it would double in size within the next five years.

Although ambitious, it is achievable, Taylor believes, with the growth of the offices, the expertise that is in the group and the ability to grow as an independent company.

And of course, given the current landscape in the trust world with many smaller trust companies, he adds, “Clearly there is going to be consolidation.”

List reveals top value creators with persistently bright prospects

Juergen Buettner

Investors who put money into stocks hope for the greatest capital gains and dividends possible. Companies that have fulfilled this wish are included in the Value Creator List from the Boston Consulting Group, which recently published the rankings for 2016. These include the Total Shareholder Returns (TSR) of approximately 2,000 companies worldwide from 2011 to 2015. According to the results, the median company in the database achieved an average annual TSR (combination of share price gains and dividend yield) of 12.2 percent. This compares with an average annual TSR of 34.7 percent to 75.3 percent delivered by the top 10 large-cap value creators.

That sounds like an interesting source for investors in search of stocks worth buying. Some valuable conclusions can be drawn by looking at the large cap top 10 list. Seven of these global large-cap companies come from the U.S. The 28 industry groups also include a significant number of value creators headquartered in the U.S.

It is worth noting that the top 10 list is dominated by pharma/biotech-companies (4). The media and publishing sector is also strongly represented with three companies. Two technology companies and one communication service provider complete the list.

Large-cap-top-ten-timeConsistency is rare

More striking is the fact that few companies manage to permanently maintain their top position. Among this year’s 10 winners from the large-cap space, only the seventh-place social media company Tencent from China managed to be represented more than three times among the top 10. With Regeneron, Netflix, Visa, KDDI and MasterCard, five newcomers appear on the large-cap top 10 list for the first time. Allergan, Naspers and Biogen are in the top 10 for the second time, and Gilead for the third time.

Frank Plaschke, BCG partner and co-author of the study, explains why it is so difficult to maintain the position of the top performers: “Over time, companies tend to align with the average market performance. To become a top-value creator, a company must clearly exceed the expectations of investors again and again and deliver results that fundamentally transform the trajectory of the business.”

Altogether, in the 18 years the Boston Consulting Group has been publishing the Value Creator rankings, 89 companies have made it into the large-cap top 10, but more than half (46) have done so only in a single five-year period. Roughly 21 percent have appeared in the top 10 rankings for three years or more. The only company to surpass Tencent’s staying power (six times) has been Apple, with nine appearances. But in the last three editions, even Apple failed to make the cut.

“It’s not impossible for a company to ‘beat the fade’ to average performance, but it is a high-wire act that is difficult to sustain,” the Boston Consulting Group’s analysts say.

Defending their place among the top performers is also hard for those at the top of the list because as companies grow, it is increasingly difficult to find new areas of growth. That may also explain why it was not possible in the past to beat the overall U.S. stock market by simply buying the stock with the highest market capitalization. As data from Ned Davis Research shows, the S&P 500 Index not only has beaten the performance of the biggest company on the U.S. stock market in the long run, but has also outperformed the 10 biggest companies after they reached that status.

Large-cap-top-tenFive picks from the U.S.

These findings have implications for the right stock selection approach that investors should apply. To find the companies able to deliver superior results in the future, it is obviously not enough to simply buy the winners from the past. Fortunately, the likelihood of investing one’s money successfully can be improved by choosing top value creators with a completely intact stock price uptrend. It is also recommended that investors avoid stocks where the valuation has gotten out of hand. However, that is not so easy to follow, since the valuations in general are not really cheap nowadays.

Keeping these two recommendations in mind, the list with current interest among buying candidates out of the 128 top 10 members of the 28 industry groups examined by the Boston Consulting Group is getting quite short. From the U.S., for example, the following five companies make the cut: The world’s largest arms maker by sales, Lockheed Martin Corp.; the second largest U.S.-tobacco company, Reynolds American Inc.; the holding company for insurance, reinsurance and investment operations, Markel Corp.; off-price retailer of apparel and home fashions, TJX Companies Inc.; and the world’s largest generator of renewable energy from wind and sun, Nextera Energy Inc.

Nextera Energy has achieved a TSR of 18.8 percent p.a. in the past five years, and its expected growth rate of 7.2 percent for the next five years does not look too ambitious. The estimated price earnings ratio for 2017 is 18.

As for TJX, this valuation figure stands at 19.5, and it goes hand-in-hand with an expected yearly growth rate of roughly 10 percent for the next five years.

With an estimated price-earnings-ratio of 32.5 and an expected earnings growth rate of approximately 11 percent, Markel at first glance does not look too attractive, but this is offset by good management and a stock price that has appreciated with only temporarily interruptions since 1991.

With a stock price that went from $1 to $245 from 1997 until 2016, Lockheed Martin also looks like a top choice. The price-earnings-ratio for 2017 is 17.3 and the estimated earnings growth rate for the next five years is almost 10 percent. Reynolds American’s stock also has a long-term uptrend, with a price-earnings-ratio for 2017 of roughly 19 and an estimated earnings growth rate of 12.2 percent.

The risk of a negative development with a chosen stock, which can never be completely ruled out, can and should as always be minimized by the use of stop-loss orders.

From science fiction to reality

Monique Frederick, Butterfield

The world of driverless flying cars and automated gadgets, as featured in the classic animated cartoon “The Jetsons,” is closer than we think.

The insatiable appetite for cutting-edge automation and even greater and faster connectivity is the driving force behind the fourth industrial revolution. Characterized as the age of “extreme automation and connectivity,” this industrial revolution is disrupting every industry as it ushers in a world of wider implementation of artificial intelligence.

Admittedly, we have already witnessed the proliferation of robotics and automation within various industries. Perhaps the most popular are the recent changes in the automobile industry. This rapid speed of change may soon influence the Oxford dictionary to change the definition of a “vehicle,” “automobile” or “car” to “a computer on wheels with the ability to function as a communication and entertainment device, along with a myriad of other uses.”

Long gone are the days of taking your vehicle to just any mechanic, as automobiles have become technological devices requiring specialised proprietary tools and software to provide a diagnosis. It should, therefore, come as no surprise that tech giants Google (Alphabet) and Apple are entering the automobile space and are building prototypes for the first driverless cars. Tesla and Uber are also in the race for the first fully autonomous vehicle.

Other industries are also being impacted by the fourth industrial revolution as technology firms recognize the growth potential of venturing outside their sector. These companies already made their foray into the life sciences and healthcare industry during the last decade. Google’s partnership with Novartis to develop the smart diabetes lens is only one of the many collaborations taking place. The software-as-a-service (SAAS) industry and innovations in mobile technology are other sources which have transformed the healthcare industry. Similarly, traditional banking models are also under attack by small startups offering automated online lending and online investment advice.

What are the implications?

While these developments improve quality of life for most and increase productivity and efficiency in general, they will also result in challenges for others. The displacement of workers, as well as greater income inequality, is an unfortunate consequence of this shift. These social implications reach far and wide, and while no-one can predict exactly how this shift will play out, a few outcomes are inevitable. Technology has injected itself into every aspect of our lives so it’s fair to say that, while certain industries and skills may become obsolete, technology is not only a mainstay but will become a growing field as it permeates through every other industry.

Cybersecurity threats, copyright infringement and data privacy are just a few of the other challenges society and governments will have to grapple with as global connectivity continues to intensify. Ultimately, regulatory reform and crime prevention will have to play catch up.

Where are the investment opportunities?

From an investment perspective, there will certainly be beneficiaries and losers. Countries with a large lower-skilled demographic will be at a disadvantage as robotics and artificial intelligence displace these workers. Middle skilled workers are not immune from this phenomenon and are vulnerable as well. Conversely, developed countries are better positioned from an infrastructure and labor demographic perspective, as long as they remain flexible and quickly adapt to the new business model.

Another group which stands to benefit from these developments is pioneers in the field of robotics and artificial intelligence. Furthermore, the ability to identify consumer patterns or have immediate access to valuable customer data is becoming essential to achieve a competitive advantage. Big data providers – companies with the ability to mine large amounts of data to identify patterns and trends – are therefore ideally positioned to gain from this transformation. UBS estimates the software analytics market will experience mid-teens growth reaching US$75 billion by 2020.

Even though certain countries and companies are poised to benefit from the fourth industrial revolution, choosing the winners requires doing your homework. It would be a risky proposition to assume that every incumbent player or technology startup will provide stellar investment performance. Likewise it would be foolish to remain in denial and ignore the signs that the world of automation is upon us.

Sources: World Economic Forum, Sanford C. Bernstein & Co. LLC, UBS White Paper for the World Economic Forum Annual Meeting 2016

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

Corporate social responsibility critical to communities and governments

The most visible Island Heritage corporate social responsibility initiative is probably its annual charity 'drive,' during which motorists pass through the Island Heritage Roundabout on the Esterley Tibbetts Highway.

Though it may be labeled as “enlightened self-interest,” corporate social responsibility is almost obligatory in 2016, generating countless exhortations to industry and small business, pages of “how to” achieve the most efficient and effective community outreach, and the benefits likely to accrue.

Politically, corporate social responsibility appeals to governments – from the local level right up to the national level – as instances of public-private partnerships helping to address community needs and complementing official budgets too often constrained by competing demands.

So even while “enlightened self-interest” may be seen in CSR allocations, the needy are nonetheless served, aid is nonetheless provided, the community nonetheless benefits and a measure of social cohesion is achieved.

Business News Daily, which offers advice, tutorials and insights to small-business owners, names 22 global companies as outstanding examples of CSR, including Out of Africa, People Water, and Survey Monkey, which donates 50 cents from each survey completed to charity.

In 2013, Business News Daily says, Survey Monkey alone donated more than $1 million to such organizations as the Humane Society, Boys and Girls Club of America, and Teach for America.

Local examples

In Cayman, dozens of companies, including Scotiabank, Island Heritage and the The Ritz-Carlton, Grand Cayman, dedicate time, money and staff resources to community outreach.

The Ritz, for example, boasts a comprehensive program called “Community Footprints” that means Ritz staffers at all levels might be found on any given day donating time and effort to a dozen local causes.

“I personally have been a ‘reading buddy’ at Sir John A. Cumber Primary School for six years, a mentor with the Chamber of Commerce for three years, created a robust learning program for Caymanians in a summer internship program seven years ago, and am a board member for the Cayman Islands Crisis Centre … and more,” says The Ritz-Carlton’s Director of Human Resources Janette Goodman.

Goodman’s activities are not unique among the hotel’s nearly 800 staff.

Community Footprints, she says, “is our brand’s global social and environmental responsibility initiative,” aligning Ritz hotels and resorts “around issues that are important to the communities in which we operate.”

The program has “three distinct pillars: hunger and poverty relief, improving the well-being of children, and environmental responsibility. We have community partners in each of the pillars, and I actively contribute to all three, as do many of us,” she says.

The “ladies and gentlemen of The Ritz-Carlton,” she says, volunteered more than 4,000 hours at nearly a dozen Cayman social and environmental organizations in 2015.

“We honestly can’t pick a favorite,” she says, but lists Sir John A. Cumber Primary, John Gray High School, Cayman Islands Crisis Centre, Meals on Wheels, Save Our Youth Foundation, Big Brothers Big Sisters, Sunrise Adult Care, University College of the Cayman Islands, the Humane Society and Cayman Islands Cancer Society, among others.

“Additionally, the ladies and gentlemen of The Ritz-Carlton, Grand Cayman collaborated with the resort’s corporate group guests to donate more than US$100,000 to local initiatives in 2015.”

The 145 employees at Scotiabank – celebrating its 50th anniversary locally – focus chiefly on youth, health, sports, and arts and culture, according to Caribbean North Marketing Manager Jennifer O’Leary.

She offers a list of at least two-dozen of Cayman’s most-familiar charities that have benefited from the bank’s largesse through the years. Prime among them are Little League, Cayman Islands Cancer Society, the National Council of Voluntary Organisations, HospiceCare, Red Cross, The Pines, the Pink Ladies – themselves a charity fundraiser – and the Breast Cancer Foundation and the Cayman Heart Fund.

“In 2015 Scotiabank also launched its Student Bursary Program, providing US$5,000 bursaries to Caymanian students in financial need looking to pursue an undergraduate degree in business or finance at a college/university overseas,” O’Leary says.

The funds help defray tuition, fees, books and supplies, she says.

In 2015, the Toronto-based bank – with operations in more than 55 countries – contributed more than CAD$70 million globally in donations, sponsorships and other forms of assistance, while staffers registered more than 575,000 hours volunteering and fundraising for local causes.

“With [more than] 125 years in the Caribbean and 50 years in the Cayman Islands, Scotiabank,” O’Leary says, “is truly part of the fabric of the region. The Caribbean and Cayman have been good to us, and it’s in our DNA to give back to support the communities in which we serve.

“Our aim is to help these communities become better off. By giving generously to important community projects and recognizing employees who volunteer their time and energy to local causes, the bank strives to make a positive difference,” she says.

Island Heritage mascot Sonny presents Breast Cancer Foundation founders James Bovell, left, and Kim Lund with the CharityDrive and CharityPlunge proceeds, totaling $25,843.
Island Heritage mascot Sonny presents Breast Cancer Foundation founders James Bovell, left, and Kim Lund with the CharityDrive and CharityPlunge proceeds, totaling $25,843.

Charity ‘drive’

The most visible Island Heritage CSR initiative is probably its annual charity “drive,” during which motorists pass through the Island Heritage Roundabout on the Esterley Tibbetts Highway at the foot of The Ritz-Carlton bridge.

For every vehicle navigating the roundabout, Island Heritage contributes to a chosen charity. Each year in the five-year history of the “drive,” the company has supported three organizations, but in 2016 decided to focus on a single fund, the Breast Cancer Foundation, “so we could give them a little more money,” says Latina Young, assistant manager for marketing and communications.

“To date,” she says, “we have donated more than $200,000 to the community. Recipients include not just “drive” charities such as Save Our Youth, Feline and Canine Friends, and the Blue Iguana Recovery Program, but a host of others: Meals on Wheels, the Kiwanis Club, the Humane Society and the Cayman National Cultural Foundation.

In fact,” Young says, “In 2011, the CNCF named us as the sponsor of the year.

“We also support a host of community projects that are sponsored by various charity organizations,” she says, referring, for example, to the YMCA’s after-hours program at Red Bay school, Rotary Central’s “Little Libraries,” and the National Trust. Triple C School, several golf tournaments and a selection of 5K runs also feature on Island Heritage’s calendar.

The company regularly provides meals for as many as eight senior citizens in George Town, and at Christmas expands the program to include a score of residents across Grand Cayman.

“Our staff goes out to deliver in George Town, and we pay for others to do the distribution at Christmas,” she says.

The newest Island Heritage initiative is its island-wide support of Cayman Automotive’s network of electric-vehicle charging stations. The $1,500 cost of each new installation – the total number is close to 15 – is equally shared with car dealer John Felder. The insurer was the first to offer policies on electric vehicles; its first charging project was Lorna’s Rubis in Bodden Town, which offers free one-hour “top-ups.”

Island Heritage already owns the Governors Square station, Cayman’s largest, and will ultimately take a share in units at Kaibo, three Foster’s Food Fair installations and Sunshine Suites.

“We’re not just about insurance,” Young says, “but about people. We promise that we will be there for you. Our aim is to show a commitment to improve the lives of the people of the Cayman Islands.

“One of the things we realized is that the more you do for people, the more you get back. They trust us and they will come back to us,” she says.

Cheryl Strayed, author of New York Times best-seller 'Wild,' spoke at this year's Scotiabank 'Power of the Purse' lunch. Ticket sales and a silent auction raised more than US$29,000 for the Cayman Islands Crisis Centre.
Cheryl Strayed, author of New York Times best-seller ‘Wild,’ spoke at this year’s Scotiabank ‘Power of the Purse’ lunch. Ticket sales and a silent auction raised more than US$29,000 for the Cayman Islands Crisis Centre.

Community Footprints

Goodman says The Ritz-Carlton’s traditions of service underpin its Community Footprints program. That “legacy of extraordinary service,” she says, “deeply inspires us to impact the lives of others. Every contribution we make is an opportunity to leave an imprint on our communities. It is through this collection of imprints that we can make a meaningful difference in the places where we live, work and welcome guests.”

As an example, she cites Feed Our Future, a group supplying school breakfasts and lunches.

“Our executive chef and assistant director of food and beverage helped plan not only the event, but also its menu upgrades in order to maximize profitable donations to the organization. More than 90 hours went into planning, serving and cooking for the event, which raised enough money for more than 20,000 meals for schoolchildren in need.”

Feed Our Future President Stacey VanDevelde said the hotel has been “a driving partner” for the foundation, helping “develop our signature fundraiser into a world-class and sought-after event … This in turn has translated into more funds raised, enabling us to expand our reach and support more needy children [and] families in our community through our school meal and food programs.”

Goodman spoke of her own time as part of the Sir John A. Cumber “Reading Buddies” program, which started in 2009. Thirty-one Ritz staffers, including members of the resort’s executive team, visit the school each week to read with their young partners, and have spent more than 1,000 hours with the students.

“Additionally, our employees supported Commonwealth Day by sharing the cultures of the many countries of the Commonwealth, such as India, Britain, Scotland and more,” she says.

“The children were able to learn about cultures, languages, dance, food and more.”

“The Banquets and Engineering departments also helped beautify the primary school’s outdoor lunch area. It was a big project that lasted two weekends. The area was repainted, and the children got involved by … painting the local animals as well as the walls,” Goodman says.

School Principal Joseph Wallace complimented hotel staffers as “our closest corporate partners,” making “significant contributions to the lives of our children and our school.”

He offered thanks for “their commitment to our children and their continued support of our school. We look forward to maintaining and improving our relationship.”

Ritz environmental initiatives have included the long-established Ambassadors of the Environment, as well as beach and roadside cleanups, which, Goodman says, “are popular with our team.” They tallied 150-plus hours of participation during April’s Earth Day cleanup.

She also notes that Ambassadors of the Environment and 14 hotel volunteers led Sir John A. Cumber students to clean up Barkers Beach.

“Teaching children to become stewards of the land is important for us and for generations to come. Furthermore, 1,910.5 pounds of garbage were picked up in the second annual Dolphin Discovery Clean Up, which is a partnership between the Dolphin Discovery Centre and Ocean Conservatory.”

She offered a second reason that corporate social responsibility is critically important to The Ritz-Carlton: “Providing service and support to neighbors can be a life-altering personal experience for our own employees and guests. It inspires personal growth and a deeper understanding of local communities. It also provides the kind of real-world education and appreciation that you can’t always get in the workplace.

“In this sense, these activities and this sense of commitment can become enduring for all of us. It is not uncommon for employees who are serving an organization on behalf of the hotel to then take it up as an ongoing personal cause, often sharing their own volunteer enthusiasm with their own friends and neighbors.”

Putting people first

Scotiabank’s O’Leary detailed the organization’s two most recent corporate social responsibility projects: the annual “Power of the Purse” lunch and the “Caring for Life” Golf Tournament.

“The Power of the Purse luncheon was created in honor of International Women’s Day and Women’s History Month,” she said.

“The objective of the luncheon is to increase awareness of the importance of diversity and inclusion while giving back to the community.” Last year, Erin Brockovich addressed the group at its initial Cayman gathering, while this year Cheryl Strayed, author of New York Times best-seller “Wild,” spoke.

Ticket sales and a silent auction raised more than US$29,000 for the Cayman Islands Crisis Centre, O’Leary says.

The $41,000 raised though more than 70 company sponsors and supporters at the sixth Caring for Life Golf Tournament will help local residents gain “continually improving, world-class healthcare,” O’Leary says, enabling the Health Services Authority to “purchase much-needed equipment that improves patient care, help with building and property improvements, and recruit highly qualified medical professionals for the long term.

“Putting people first lies at the heart of Scotiabank’s culture in the Cayman Islands,” she says. “Scotiabankers have had a history of giving back to our communities in order to create better places to live and work. That’s why the bank contributes, organizes and participates in a range of community initiatives each year.”

Finally, Island Heritage’s Latina Young says the company’s flag football team sponsors an annual competition at West Bay’s Ed Bush Stadium, and provides volunteers to the Humane Society for dog-walking and labor services for the SOY Foundation.

“We also donate insurance cover,” she says, providing one-year blanket policies – including auto, building and public liability – to three major groups, including the Humane Society: “Whatever is needed, since everyone has their own needs,” Young says.

CSR defined

The Financial Times has defined corporate social responsibility as a wide range of activities “aimed at encouraging companies to be more aware of the impact of their business on the rest of society, including their own stakeholders and the environment.”
The practice, the organization said “is a concept with many definitions and practices. The way it is understood and implemented differs greatly for each company and country. Moreover, CSR is a very broad concept that addresses many and various topics such as human rights, corporate governance, health and safety, environmental effects, working conditions and contribution to economic development. Whatever the definition is, the purpose of CSR is to drive change towards sustainability.”

“One of the things we realized is that the more you do for people, the more you get back.”

Latina Young, Island Heritage

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