Saturday, October 1, 2016

For hackers, humans are easiest targets

A DEFCON badge holds secrets too.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cayman, Florida square off against Zika

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

Frank Bentayou

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

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

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

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

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

In Cayman

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

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

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

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

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

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

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

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

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

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

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

In Miami/Dade

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

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

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

Role of Oxitec

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

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

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

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

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

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

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

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

Fight the disease or control its transmission?

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

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

Zika can also be transmitted sexually.

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

 

Market Watch: The search for yield

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

Monique Frederick, Butterfield

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

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

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

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

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

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

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

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

 

Emerging market debt benefits from the search for yield

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

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

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

Yield advantage lures

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

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

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

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

Don’t forget the risks

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

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

Conclusion

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

Legally Speaking: The Confidential Information Disclosure Law is in force

martin_livingston__web_-read-onlyMartin Livingston, Maples and Calder

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

Repeal of CRPL

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

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

Disclosure of confidential information

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

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

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

Section 4 applications

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

Expected evolution of statutory confidentiality and data protections

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

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

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

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

What is domicile?

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

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

Domicile of origin

Domicile of dependence

Domicile of choice.

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

Domicile of origin

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

Domicile of dependence

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

Domicile of choice

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

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

Living in the new country as an inhabitant.

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

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

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

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

What is the significance of domicile?

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

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

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

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

Other points to note

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

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

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

Summary

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

Health City surgeries save impoverished children

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Haiti heart patients

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

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

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

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

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

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

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

Lives saved

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

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

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

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

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

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

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

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

Emigration and immigration

Warren Coats

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So what should a country’s immigration policy be?

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

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

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

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

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

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

KPMG analysis: Record football transfer fees in line with clubs’ revenues

Paul Pogba’s value increased again over the weekend. - PHOTO: AP

Each year transfer fees in Europe’s football leagues appear to be spiraling out of control. Ever larger television and sponsorship deals have injected more cash into the game and inflated the price clubs have to pay for football’s biggest stars.

This year the transfers of Paul Pogba from Juventus Turin to Manchester United for a record 115 million euros (US$130 million) and Gonzalo Higuain’s move from Naples to Juventus for 90 million euros (US$101.5 million) stood out.

For the sports consulting arm of KPMG, however, these transfer fees are not unduly high and still in line with the clubs’ operating revenues and the general market trends seen in previous years.

KPMG Football Benchmark, an Internet platform for football financial data, compared the fees spent by clubs with their respective operating revenues and found that since 2007 major clubs have been prepared to spend about 20 percent of their operating revenue on a single star player signing.

While some transfers are clearly the result of the sale of another player, such as Higuain replacing Pogba at Juventus, the analysis shows that for the past 10 years, clubs were willing to wager a significant portion of their balance sheet for the acquisition of individual marquee players.

In fact, during the analyzed period, only two of the most expensive signings of the year were significantly below the 20 percent revenue mark. David Villa’s signing by FC Barcelona in the summer of 2010 represented not more than 10 percent of the European giant’s operating revenue at that time.

football-transfersAt the other end of the spectrum, Robinho’s move to Manchester City, the first after the club’s takeover by the Abu Dhabi United Group in 2008, exceeded 40 percent of City’s operating revenue in 2007-08.

“When compared to Manchester United’s 2014-15 operating revenue [2015-16 data is not yet available], the transfer fee paid by the club for Paul Pogba seems in line with the industry standards of the past decade,” said Football Benchmark. “Moreover, once adjusted to take into account expected operating revenue growth to be published for the football season 2015-2016, the transfer fee to operating revenue ratio of the Pogba transaction seems likely to be well below 20 percent.”

Higuain’s 90 million euro transfer to Juventus, meanwhile, is equivalent to 28 percent of the club’s 2014-15 operating revenue. However, once adjusted to the 2015-16 figures, Football Benchmark said in its analysis, the ratio of the Argentinian striker’s move is more likely to be comparable to that of Cristiano Ronaldo when he moved to Real Madrid in 2009 (23 percent) and certainly above 20 percent.

Commercial revenues are growing

Both Manchester United and Juventus Turin reported that as of March 2016 they have grown their revenue by 31.6 percent and 28.4 percent, respectively, year on year.

And they are not alone. Larger TV and commercial deals have grown the football industry as a whole.

While new TV deals such as in the U.K. have grabbed the headlines, it is the expansion of sponsorship and merchandizing agreements that have primarily driven the growth.

As a result, the revenue structure of the largest European football clubs, which includes match-day revenues such as gate receipts, broadcasting revenue from domestic and international matches and commercial revenue through sponsorship deals and merchandise, has evolved over the past 10 years.

The biggest difference between the largest clubs and those further down the food chain is the size of the commercial revenue and for all clubs, commercial revenue is taking up an ever-growing share of total turnover. In 2005, Manchester United made most of its money from gate receipts (42 percent), followed by TV revenue (31 percent) and commercial activities (27 percent).

Ten years later, exactly half of all revenue comes from sponsorships and merchandise, and even though broadcasting revenues have more than doubled, they only make up 27 percent of the club’s total revenue. Correspondingly, the share of match-day revenue has dropped 15 percentage points to 23 percent.

The top 20 teams in Europe followed similar trends. The commercial revenue expansion is no surprise given the global brand appeal of the top European leagues and the efforts made by the large clubs to widen their fan base, particularly in Asia and North America.

Financial fair play

Although transfer fees are increasing and expected to grow further, this is largely the result of the game’s overall growth and the boost that star players can have on commercial revenues via the sale of football shirts and other merchandise.

Since the European footballing body UEFA agreed to financial fair play rules in 2009 to prevent clubs from spending more than they earn and endangering the long-term health of the game, the ratio of record transfer fee to turnover has come down.

Zinedine Zidane’s move to Real Madrid in 2001, for example, still accounted for more than half (53 percent) of Real’s operating revenue at the time.

However, outside of Europe, where UEFA’s rules that limit excessive spending don’t apply, sensible financial decisions have not yet prevailed as clubs in the Chinese Super League are likely to spend significantly more in relation to their means. One of many examples is Shanghai SIPG’s splashing out a sum that is likely to be higher than its overall revenue with the signing of Brazilian player Hulk, KPMG Football Benchmark noted.

CIMA, industry work to firm up computer networks

More than a dozen people from government, the Cayman Islands Monetary Authority and private companies gathered for a weeklong cybersecurity boot camp last month hosted by Cayman’s eShore.

The group sat through five days of training with Jay Ranade, a computer security expert with dozens of books on the subject to his name, to prepare for taking the test for the Certified Information Systems Security Professional certification.

“Cyberattacks on business email and data breaches continue to rise at an unprecedented rate. This is our way of giving something back to the community to ensure that regional businesses not only recognize the increasing threats, but have access to the gold standard in security certification,” said eShore Managing Director Polly Pickering, who attended the class.

CIMA earlier this year issued new guidance for its licensees to place more attention on cybersecurity and to put financial services companies on notice that it will review data security risk management as part of the process when it grants and renews licenses.

In a May memo to licensees, the regulator wrote, “We are well aware of the escalating attacks targeted directly at the Cayman Islands in general and our financial industry in particular. While the Authority recognizes that many of our licensees have robust data security systems, we also recognize that there may be others that may have systems that are improper or inadequate.”

Isabel Gumeyi, a senior manager with PwC, attended the training in George Town. She said cyberattacks are “becoming more sophisticated, more complicated. You can’t have a one-size-fits-all solution.”

She said mobile security is one of the bigger challenges she is working with now, and in her experience it is leading company expenses in computer security now. Bank customers want to be able to get their balances, transfer money, and anything else they can do from a computer, now from their phones. That presents new challenges for banks to make sure they can keep their networks secure. The question, she said, is “How do we secure from end to end?”

Bob Stanier, a partner with PwC, said, “Cybercrime has surpassed the global drug trade in terms of activity.

“Because Cayman is one of the biggest financial centers,” he said, “the threat is certainly here.”

Protecting people, systems and data

Deloitte's disaster recovery center is housed in Citrus Grove.

The corporate disaster recovery team at management consultant and financial adviser Deloitte & Touche are proud of what they have created, locked away inside Cayman’s humble five-story, hurricane-proof Citrus Grove office block.

Established just prior to Hurricane Ivan in September 2004, the company’s disaster recovery center – and its associated cyber-risk and crisis management practice – leads the region in data protection, while the cyber operation is “widely acknowledged as the leading security-consulting practice in the world,” says Raymond Swarts, risk advisory and consulting manager, citing research reports from Gartner Inc.

“The services that we offer to our clients are complemented by our IT managed-service practice,” he says, which offers “holistic” IT services including infrastructure and network management and strategy development.

The locally based risk advisory team is managed by 11 specialists in a range of disciplines: controls, transformation and assurance; governance, risk and regulatory; crisis management and disaster recovery; business-continuity planning; and cyber risk.

The 11 specialists are aided by five information systems security professionals and two “ethical hackers” in the Cayman office. Ethical hackers, also known as “white hats,” are computer security experts certified in penetration testing, seeking vulnerabilities in a network, using the same skills as a malicious invader, but ultimately employed to ensure the security of an organization’s information systems.

Already, for example, GM and Tesla this year inaugurated “bug bounty” payouts to hackers who uncover and report security flaws in a vehicle’s computer systems, while Google will pay $20,000 to anyone who can remotely take over another user’s Google account.

The Cayman group is aided by the company’s “global cyber-risk team,” which, says Swart, “includes more than 900 certified information systems security professionals” – expert in a handful of skills including security and risk management, operations and engineering – and another 1,500 certified information security auditors – themselves expert in audit, control and security of information systems.

“Our unique cyber risk practice covers the full spectrum of information security offerings including security, vigilance and resilience,” he says.

Cyber risk is just one part of the company’s corporate disaster recovery practice, however.

“The DRC practice supports all three aspects of client security by providing a secure, monitored and tested location to protect our clients’ people, systems and data,” Swart says. Physical and electronic records are protected by media storage facilities which offer electronic backup such as tapes, CDs and laptop computers, and both primary and back-up servers.

A set of data suites are customized for particular clients, who can avail themselves of “recovery seating,” an alternative working space for staff when a company’s main offices are unavailable.

Citrus Grove itself, he says, was built to withstand hurricanes and other natural disasters and “has been the location of choice” not just for Deloitte, but also for the governor’s emergency office, international banks and the 911 operations center.

The DRC, he says, “features two factor authentication-access control,” including biometric access control to all data suites. Twenty-four hour closed-circuit television sweeps the facility, which boasts advanced fire detection, gas-based fire suppression, a redundant power source with a 1,200 kilovolt diesel generator and 4,000-gallon fuel tank 18 feet above sea level.

“The data suites are protected by uninterruptable power supplies to ensure our clients’ servers are never without power,” he says.

Deloitte created the center “to help clients prepare for, respond to and emerge stronger from major disastrous events, “ensuring day-to-day security in the face of a hurricane, a telecommunication outage or a cyber incident.

“Being resilient allows an organization’s operations to rapidly adapt and respond to internal or external dynamic changes – opportunities, demands, disruptions or threats – and continue operations with limited impact to the business.”

Swart is a reluctant to name Deloitte clients, acutely aware that information security includes protection of a client’s people and data, the systems, overall confidentiality and the integrity and availability of operations.

However, he acknowledges the Cayman Islands Monetary Authority as a key client that for years has been “leading by example for the financial institutions in Cayman in ensuring their operational resilience and partnering with the DRC to accomplish their strategy.”

CIMA has launched an industry-wide survey of cyber resilience, inevitably exploring disaster-recovery systems, themselves inevitably dependent on telecommunications resiliency, which was dealt a setback on Aug. 23, when the entire Flow network went down for 10 hours without explanation, drawing the ire of local regulator the Information and Telecommunications Authority.

Deloitte’s DRC, Swart says, offers resilience in that regard because it has “access to all telecommunications providers in Cayman as well as being on the Cayman Islands government fiber network,” meaning, whether there is a hurricane, a telecommunication outage or a cyber incident, a client can readily activate their particular system, seeking either recovery or a transition to their secondary network as a temporary replacement for their primary systems.

“Deloitte integrates our broad functional capabilities – which can be augmented by hardware and software systems owned, used by, or provided by the client – in order to cover the entire crisis-management life cycle,” Swart says, enumerating “readiness, response and recovery.”

“Being resilient allows an organization’s operations to rapidly adapt and respond to internal or external dynamic changes and continue operations with limited impact to the business.

A comprehensive enterprise-resilient program, he says, requires a combination of both traditional and new processes, existing and fresh technology, and that requires firm oversight and practiced governance to gain integration “across business operations, technology, strategy, and risk and compliance environments.”

Swart is particularly proud of Deloitte’s cyber-risk efforts, which he calls “one of the priority services within the Deloitte service portfolio.”

The Gartner endorsement looms large in this regard, underscoring three major components of data recovery.

The cyber-risk enterprise is, secure, he says, “enabling enterprise business innovation by protecting critical assets against known and emerging threats across the ecosystem; it is vigilant, reducing detection time and developing the ability to detect the unknown; and it is resilient, strengthening your ability to recover when incidents occur.”

Most organizations consider security and – increasingly – resilience as chief imperatives for data protection, he says, but the third, vigilance, waxes critical to security efforts “as it becomes increasingly difficult to prevent infiltrations and unauthorized activity … organizations need threat awareness and advanced detection and analytic solutions to rapidly identify unauthorized or anomalous activity in their environments,” Swart says.

Deloitte’s “vigilant services,” he says, “leverage deep experience with analytic and correlation technologies to help clients develop monitoring solutions focused on detecting threats to critical business processes.”

Data protection, recovery critical to Chamber members

The “TechTarget” website is adamant about the five components of disaster recovery and business continuity – and the last ranks among the most critical: “The care and feeding of your plan.”

Disaster recovery and business continuity (referred to as DR/BC), TechTarget says, “should be considered ‘living documents,’ which need to be periodically reviewed and updated to ensure the plan is accurate, and the procedures defined in the corporate disaster recovery plan will facilitate recovery when performed.

It seems obvious, but not everyone understands it, so TechTarget makes the point several times, starting with: “You can’t restore what you don’t protect.

Part of the DR/BC at the Cayman Islands Chamber of Commerce is on behalf of government, preserving and protecting information that enables departments to function.

“We are, in a sense, an extension of government,” says Chamber CEO Wil Pineau. “They send us documents that need protection, that need to be secure, sure that no one is looking at them.”

The Chamber plan was created by local experts Ronco Cayman Communications Ltd. and, internationally, by Quickbooks – accounting software developed by Intuit for small and medium-sized, businesses. The former is developed with Weblink, which offers a server-based program specifically designed for Chambers of Commerce “for managing your members, prospects, financial data, events and communications,” according to its website.

The Quickbooks program relies on “cloud” storage and backup, readily retrievable and beyond the reach of local disruptions.

Pineau says the organization’s databases “are our most valuable assets so we take data protection and recovery very seriously.”

Ronco provides IT support, preventing “outside hackers from gaining access to our data, including financial records,” and the Quickbooks partners “ensure that we have several backups in case one is corrupted due to natural or human disasters.”

He describes three database levels – “core areas” – the Chamber holds: membership records in all their detail; email, on an exchange server; and financial data, “on the Quickbooks system that we need to protect.”

A rising tide of malicious invasions requires robust, ongoing protection.

“Spammers and hackers are becoming increasingly sophisticated in their attempts to access sensitive information,” he says. “Our IT and software partners monitor the … threats, and have put in place email filters and website-protection measures. It is an ever-changing process that requires constant attention and is an important aspect of our operations.”

The Chamber needs only a modest system for its 700 members – as opposed to the demands of, say, a multinational corporation with thousands of employees. The importance of efficient protection and recovery is no less, however.

“Our system is multi-dimensional,” he says, acknowledging the “relatively small system compared to larger companies,” but anyone entrusting their data to the Chamber needs to know that “we take data protection and recovery very seriously.

“You always have to be prepared for the next attack.” Invaders, he says, “are always attempting to find the back door into your system. A business must always be working to ensure that there are redundancy systems in place in case forced entries occur, particularly if the business collects sensitive information such as credit card and personal identification information.

“An effective data protection and recovery strategy incorporates multiple processes to ensure there are back-up measures,” Pineau says.

He cites a lightning strike at one point that compromised a local server. It took “a couple of days,” he says, to “get the full system back up and running,” although TechTarget points out that is not necessarily a problem.

“For most organizations,” author George Crump of Storage Switzerland, says, “resuming critical day-to-day operations involves recovering less than 5 percent of the servers and 5 percent of the data.

“These are typically critical databases and the applications used to access those databases. The remaining 95 percent of data is reference or archival data. While often important, it is not critical to resume immediate operations. This data can be recovered later as time allows.”

The Chamber’s cloud storage remained unaffected by the strike, Pineau says, and recovery of the server-based information was relatively efficient.

“We had several backups that we could access to prevent loss or interruption, ensuring, he says, “the ability to work remotely from anywhere in the world.”

Backup, in fact, is the fundamental strategy for disaster recovery, but that means data must be copied and sent – at the least – to a second on-site system, although, ideally, it should go offsite in case of a local outage or disaster.

A U.S.-based example was the widespread havoc from Hurricane Sandy on the East Coast in 2012. The storm spanned more than 1,100 miles, suggesting that disaster recovery services may best be located at considerable distance from the origination site.

Lending weight to that admonition is Hurricane Ivan, which wrecked most local infrastructure in 2004, jeopardizing any local backup. Intuit – and its Quickbooks application – was founded in California in 1983, and boasts offices in Canada and the U.K.

This can cause its own problems, however, as retrieval of data across a public – as opposed to a private – network can expose the DR/BC company to issues of bandwidth, latency and jitter if transmitted at a distance.

“The network link and bandwidth that enabled you to copy data to the remote site in dribs and drabs may prove woefully inadequate to the task of transporting all of your data back to you in a short time frame following a disaster,” according to TechTarget author Jon Toigo, president of Florida-based Toigo Partners International.

The Chamber’s lightning strike briefly compromised email functions, Pineau says, “but the servers had backup and we got on line,” reasonably quickly.

At least for the moment, data protection forms a greater priority for the chamber than recovery, but Pineau is cognizant of his members’ needs.

“The Chamber works with our members to offer courses and seminars on this subject. We also share information that we receive from our members who specialize in this field of work. It is important to provide regular tips since data protection and recovery is an essential component for most businesses today.”

The issues involved are sufficiently critical that the Chamber, while hoping to expand its services to online payments, is moving cautiously, seeking the right partners.

Cayman’s small business owners have long lamented the lack of online payment facilities, pointing to loss of customers and revenues, making commercial survival harder in an already difficult environment.

“We are thinking of moving in that direction,” the CEO says, “but it’s not an easy process,” relying critically on protection and recovery networks.

“Once we get this, we need to protect it and we need robust systems. We just are not comfortable with it right now.

“Our software company in the U.S. has proposed a U.S.-based clearing bank, but we don’t want that. We want to go through a Cayman bank – and we’re not there just yet.”

Managing that change brings questions of continuity and recovery full circle.

“Change management is a formal process that ensures changes to a product, process or system are introduced and implemented in a controlled and coordinated manner,” Paul Kirvan writes for TechTarget, cautioning that disaster recovery often takes a back seat.

Plans for corporate disaster recovery need to be kept up-to-date, he says, “as part of the overall change-management process.” The lesson: “Plan the work, then work the plan.”

Protection, recovery at Camana Bay’s Data Centre

The roster of clients is modest, but Dart’s Disaster Recovery and Data Centre is immense, sophisticated and considers itself among the region’s leading data-protection facilities.

Purpose-built in 2007, the multimillion-dollar Forum Lane unit is category 5 hurricane-rated, providing redundant power, security, data communications connectivity and seven private disaster recovery suites with 40 workstations customers can use to maintain business continuity.

The suites, according to Dart IT department operators, “house employees and staff where workstations are ready for use, [and] phones and IT equipment are activated for network connectivity.”

His/her bathrooms, shower facilities and a kitchenette and conference room complete the facilities.

“There are a couple of other facilities on island that offer similar capabilities,” says Nadege Parent, Dart Realty marketing manager for client services, “but the Data Centre’s strengths are the robustness of the physical building, a back-up cooling system and 24-hour security. It’s one of the most technologically advanced and physically secure of its kind in the Caribbean.”

Its communications infrastructure, she says, is designed for international banking, financial services, legal, insurance, accounting and retail businesses.

As robust as any disaster-recovery network is, however, a business owner ultimately hopes never to have to use it at all, preferring comprehensive continuity and data-protection services.

In fact, leading computer security research and education organization, the SANS Institute points out that “the most successful disaster recovery strategy is one that will never be implemented.”

SANS, officially known as the Escal Institute of Advanced Technologies, says never using a disaster recovery plan means “risk avoidance is a critical element in the disaster recovery process.”

The group offers some startling statistics: “Only 15 percent of midrange data centers would be able to recover more than 30 percent of their applications in any time frame; just 3.8 percent could recover their applications within the same day; only 2.5 percent could recover within four hours.”

As a counterpoint, in late July, the Basel, Switzerland-based Committee on Payments and Market Infrastructure, a 25-member group of central banks, 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 any cyberattack.

The goal is ambitious, and the SANS statics indicate full recovery may be unachievable, and that makes data protection and resiliency all the more critical.

Information availability is key to the success of most businesses, says Parent. The Data Centre’s back-up, recovery, co-location and managed-hosting services allow continuity of computer and network operations, providing “routed and switched infrastructure.”

The description of the Data Centre’s IT services is likely to baffle most business owners, but a rough translation is the network is able to use multiple routes to move information to a destination that is secure – and probably distant – from outages, storms or other emergency events.

“The network layout promotes client and network segmentation,” says Parent, meaning software can segment email, telephone and website data, then send it through a variety of “virtual local area networks.”

“That allows clients to set up their own independent, managed networks – for example,” she says, “between an office in Camana Bay and overseas.”

The description continues: “The network consists of an external public facing routing table and an internal facing routing table, offering 180 routed switch ports for client access.”

The phrases simply mean that the network has a list of destinations for each client’s information and a route map to get it there.

That network, Parent says, is “a fiber-to-the-premise solution,” providing high speed and high bandwith, “a superior communications infrastructure,” suited to the kinds of high-profile clients that use the Data Centre.

Japan’s Sumitomo manufactures the air-blown fiber, called “FutureFlex,” which, according to its website, allows scalability – network capacity and shifting bandwidth requirements – and efficient use of conduit space, lower costs and the ability to upgrade as new technologies become available.

Data Centre clients will keep excellent company with such FutureFlex users as the Pentagon in Washington, D.C., Cable News Network and sports programmer ESPN, Johns Hopkins University, the Mayo Clinic, at least two international airports, Intel and Nissan.

The 4,421-square-foot Data Centre, Parent says, uses the MAYA-1 and Cayman-Jamaica Fiber System submarine cables; it boasts dedicated, onsite technicians, 24/7 monitoring of customer equipment and infrastructure, 10 co-location racks and 25 customer-dedicated racks, redundant communications connections with Cayman’s four service providers, redundant air-conditioning units, fire suppression and environment controls, and redundant power supplies and backup generators.

“The availability of this commercial infrastructure,” Parent says, “lowers the cost of doing business in the Cayman Islands as companies wishing to provide internal systems applications and online client services do not need to bear the cost of creating [their own] data center.

“The disaster recovery suites offer the ability to co-locate all critical business functions in a facility which can be used full time or part time” at competitive costs, which she pegs provisionally – “we tailor the fees to individual requirements” – at US$1,500 for a half rack of servers, and $3,000 for a full rack.

“They can be leased on a short-term basis, e.g. before, during or after a storm.

“The facility provides a much-needed service for companies requiring a cost-effective business infrastructure for nonstop computing,” she says.

Data Centre facilities fall nicely in line with SANS recommendations, which start with a “crisis management plan,” dependent on “the ability to handle high-level coordination activities surrounding any crisis situation.”

Development, maintenance and testing of a disaster recovery plan is next, and that involves precisely the kind of external routing the Data Centre provides: “To be strongly considered,” SANS says, “is a recovery strategy for alternate processing,” which it calls a “hot-site.” Any recovery plan must identify a hot-site “if the primary location is not available to provide disaster recovery services for the various system environments.”

Parent is careful to stipulate that Data Centre does not itself perform data recovery, that the center is a “secure physical space to locate a server providing redundancy in the event of a natural disaster,” but “back-up and data recovery are the responsibility of the client.”

The center offers the requisite technology and services; using them is up to the client.

Mindful of security, Parent hesitates to name Data Centre clients, although she enumerates “around 10,” and offers a testimonial from law firm Ogier, headquartered at Camana Bay’s 89 Nexus Way.

“We went through Hurricane Ivan in the Cayman Islands in 2004, so we really wanted to move somewhere where we had secure backup power, particularly for our IT connections,” said partner James Bergstrom.

In the event corporate disaster recovery becomes necessary, says the SANS Institute, “recovery activities will be conducted in a phased approach,” starting with activation of a disaster recovery plan, moving operations to a back-up site and an emergency operations center within 24 hours.

Phase 2 seeks to reverse the process, “to recover critical business functions, restor[e] critical applications and critical network connectivity.

“The goal here,” SANS says, “is to recover the systems and network so that … customers can continue business.”

Phase 3, finally, is “return[ing] data-processing activities to the primary facilities or another computer facility.”

In sum, a successful recovery effort comprises “restoration of critical applications to the most current date available on backup tapes stored off-site.

“It is understood that, due to the emergency or disaster, response times will probably be slower than normal production situations,” SANS says. “The plan provides recovery procedures to be used at the present data center site after repairs have been made or at the disaster recovery back-up site and the emergency operations center.”

The institute offers a final caution to businesses, saying, “Those that have adequately developed, maintained and exercised their contingency plans will survive,” and warns corporate executives who “take the uninhibited operations of their companies for granted.

“They remain complacent, assuming that the power will always be available, the telephone system will not fail, there will be no fire or earthquake – everything will always be normal.

“The final corporate contingency plan is the lifeblood of corporate survival. A fundamental premise of successful contingency planning is that plans are developed by those who must.”

Population, economy grow; voter increase expected

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

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

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

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

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

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

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

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

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

Wesley Howell
Wesley Howell

Work permits

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

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

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

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

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

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

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

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

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

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

Voters

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

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

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

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

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

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

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

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

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

Company registrations 2012-2015. - Source: ESO

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

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

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

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

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

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

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

Banks and trusts

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

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

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

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

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

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

Insurance

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

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

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

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

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

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

Mutual funds

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

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

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

Stock exchange

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

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

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

Companies registry

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

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

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

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

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

Partnerships

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

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

Investors: How followers can become millionaires

By Juergen Buettner

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

Buy low, sell high

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

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

Price trends more helpful than ego

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

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

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

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

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

Combine technical and fundamental considerations

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

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

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

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

Cut losses and let profits run

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

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

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

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

British exit and economic reality

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

By Andrew M. Baron

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

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

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

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

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

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

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

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

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

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

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

Andrew M. Baron, CFA, is the chief investment officer at Butterfield Bank. The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. The bank accepts no liability for errors or actions taken on the basis of this information.

Sharks worth more alive than dead

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

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

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

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

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

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

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

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

The value of a shark

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

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

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

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

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

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

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

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

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

Protecting sharks

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

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

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

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

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

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

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

 

Tracking storms, saving lives

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

By Frank Bentayou

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

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

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

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

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

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

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

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

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

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

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

Super new satellites and supercomputers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cayman Islands storm vulnerability

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

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

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

Business valuations: measuring the local economy

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

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

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

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

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

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

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

Jim Andrews
Jim Andrews

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

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

B2B-related properties

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

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

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

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

Reasons vary

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

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

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

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

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

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

Local connection

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

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

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

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

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

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

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

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

 

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