Friday, September 22, 2017

After record player transfers, football’s rules for financial fairness are left in disarray

While 222 million euros has a nice ring to it, the largest-ever transfer fee for a football player – Brazil’s Neymar – has also caused a ringing in the ears of owners and managers at the world’s top clubs.

Not only did Paris Saint Germain manage to attract the Brazilian star to the French league, a much less glamorous club competition than Spain’s La Liga or the English Premier League, it also did so by prying him from the hands of Barcelona, one of the most highly regarded and most successful teams.

The fee, prescribed by the buyout clause in the player’s contract, was by all accounts a miscalculation. The buyout clauses were conceived to function as a stick rather than a carrot. The fact that PSG was not deterred by it shows that Barcelona’s management seriously misjudged how quickly transfer fees would evolve.

On the face of it, Barca and others were right to be surprised. The roughly $260 million more than doubled the previous transfer record set only last year, when French player Paul Pogba moved from Juventus Turin to Manchester United.

Moreover, only 14 of Europe’s top club generated a higher revenue from their operations in 2015/2016 than the cost of this single player.

But most importantly, European football clubs are governed by so-called Financial Fair Play rules, a set of guidelines and penalties designed to improve the financial management of football clubs and to prevent distorted competition from rich benefactors who care very little about burning through their cash, as long as it produces wins and titles.

The rules were perhaps prompted by the arrival of new owners such as Russian oligarch Roman Abramovich at Chelsea FC or Middle Eastern investors at Paris Saint Germain and Manchester City, another club that spent nearly $300 million on new transfers this summer.

Following the Neymar deal, Liverpool FC coach Jürgen Klopp questioned the seriousness of financial fair play. “I always thought Financial Fair Play had been conceived to prevent something like [the Neymar transfer], but evidently financial fair play is more of a suggestion than a hard and fast rule,” he said at a preseason tournament in Munich.

Javier Tebas, the head of Spain’s top domestic league La Liga, even accused Paris Saint Germain and its Qatari owners of “financial doping.”

One explicit objective of the fair play rules for UEFA club competitions, according to the football body’s licensing regulations, is “to introduce more discipline and rationality in club football finances” – an apparent allusion to a much different reality.

However, the Neymar transfer may not be as crazy as it initially appears.

Although the 222 million euros fee is unheard of, relative to the buying club’s revenue, the transfer of Neymar to Paris Saint Germain was only the third largest in history at around 40 percent of PSG’s turnover.

According to research by the Economist, Zinedine Zidane’s move to Spanish giants Real Madrid in 2000 came in at more than 50 percent of the Spanish top club’s turnover at the time. 

But what about the fair play rules?

The Financial Fair Play (FFP) rules, introduced by the UEFA in 2011, prescribe in simple terms that football clubs should not spend more money than they earn.

In practice, a club is allowed to incur a “small” deficit of 5 million euros over a period of three years.

In response to concerns that this system would preserve the status quo of rich and poor clubs, a 2015 revision allowed sponsors or owners to inject an additional 30 million euros over the same period. In theory, financial assistance of sponsors or owners can even be higher if the spending is accompanied by a UEFA-approved, sustainable business plan that would put the club on a more solid financial footing in the long term.

The break-even assessment not only takes into account the balance of player transfers, but also other club revenues and expenditures. However, spending on youth teams and infrastructure is exempt from the FFP calculations because UEFA wants to incentivize such investments.

Because of the structure of the rules, potential financial fair play infringements can only be assessed for three-year periods.

Even an outsized transfer fee like 222 million euros for Brazil’s Neymar can therefore not lead to an immediate violation of the FFP rules.

Moreover, a club’s spending on a player transfer is amortized over the life of the player’s contract – in Neymar’s case five years.

The transfer fee will therefore show up in Paris Saint Germain’s books as an annual expenditure of 44.4 million euros for the next five years. The club would also have to include Neymar’s salary.

To compensate for the additional expenditure, PSG will need to generate additional revenue, either from players sales, gate receipts, merchandise or sponsorship.

Some media reported that the deal would be fully financed by Qatari Tourism Authority for whom Neymar would act as an ambassador in the run-up to the World Cup in Qatar. Such financing would be covered under UEFA’s rules for related party transactions and scrutinized for any fair value that is exchanged.

The last time PSG agreed to a sponsorship deal with Qatar’s tourist body for more than $200 million, the club was sanctioned under UEFA rules because it did not produce sufficient value in return for the fee.

Given that the club has agreed to another mega deal with rising French star Kylian Mbappé, it is unlikely to pass a financial fair play break-even test in the next years.

If the Paris club is found to have violated financial fair play, the catalogue of potential sanctions ranges from financial penalties to the disqualification from the lucrative Champions League competition and even the revocation of any won titles.

In 2013, FC Malaga was excluded from European competitions. One year later, Manchester City and Paris had to pay heavy fines and were allowed to use a squad of only 22 players, instead of the typical 25, in the Champions League.

But commentators considered the fines for Paris and Man City a slap on the wrist.

Whether Paris Saint Germain’s management is speculating that once they have built a star-studded team any potential sanction will be tolerable is anyone’s guess.

UEFA’s president Aleksander Ceferin hopes that the Paris club has learned its lesson. “If that is not the case, then we will teach them. I am not talking only about Paris Saint-Germain. … You can be sure that we are working on all of this. I don’t want to make a specific case of PSG. But we have many possible sanctions. We can exclude teams from competitions, we can deduct points,” he said.

He also revived the idea of a salary cap.

“Some years ago [then-UEFA president] Michel Platini and [then-European Clubs Association president] Karl-Heinz Rummenigge said it was impossible to have a salary cap in football. I’m not so sure. We have a meeting in September and we will see. Something has to be done. Perhaps not an American-style salary cap but there are strictly sporting measures we can take. For example, limiting or forbidding loans or limiting the number of players under contract.”

Either way, measures to support financial fair play appear to be needed.

Inherent unfairness of tax rules

Yet, even if they are implemented, inherent discrepancies between European countries will remain and lead to distortions in the financial competition between clubs.

Taxation of footballers’ salaries, for instance, varies greatly across European countries. Most footballers’ contracts are negotiated on a net salary basis. For a player to earn 1 million euros after tax, clubs will have to pay, including tax, about 1.19 million in Turkey, between 1.9 million and 2 million in Germany, Italy and Spain, but 2.12 million in England, 2.46 million in Portugal and a whopping 2.74 million in France.

For top players, the differences are even more significant because of progressive tax rates.

To pay a star player a 5 million euros net salary, a Turkish club incurs about 5.9 million in costs. German, Spanish and Italian clubs have to pay between 9 million and 10 million before tax. Clubs in the English Premier League have to pay 10.71 million, and the French face the highest company cost burden at nearly three times the net salary (14.22 million), a KMPG analysis found.

Riccardo Rosa of KPMG Italy’s Sports Advisory business said, “We can see that compared to, for example, Turkey, where tax wedge is around 20 percent, France almost triples figures in terms of overall company costs. In other words, for 1 euro spent per player, the club actually spends 3 euros.”

Rosa told Sky Sports that this creates issues in terms of the competition for players between clubs from different countries, UEFA’s Financial Fair Play rules and transfer pricing problems as far as joint ownership of players is concerned.

The importance of wages, and their distortion by taxes, in the business models of clubs cannot be overstated. The dissimilarities in wage costs have an important effect, said Rosa, because staff costs are the most important cost item. European clubs generate aggregate operating revenue of nearly 17 billion euros, but at the same time clubs pay 10.5 billion euros in wages, according to the accounting and consulting firm.

Rosa believes that the different tax treatment of footballers’ wages in the past not only had an effect on a club’s finances, but also on the competition itself. Spanish clubs, which have been very successful on the pitch, have benefited for quite some time from favorable tax treatment.

From 2005 to 2010, the so-called “Beckham law” allowed foreign players to pay an income tax rate of 23 percent instead of 43 percent. The law was designed to attract the best foreign players to the Spanish league. “This created the possibility of attracting players such as the likes of Kaka, Ibrahimovic and Cristiano Ronaldo, who certainly gave a competitive advantage to Spain,” Rosa said. For the time being, however, Paris Saint Germain appears to defy this reasoning. The club’s acquisition of Neymar is expected to earn 30 million euros per year after tax in the most expensive league as far as domestic taxes are concerned. 

Few stocks consistently create value for long-term investors over 20 years

Investors who deal intensively with the stock market are always looking for stocks whose value continues to rise over long periods of time. The “value creators” ranking provides guidance in the search for exactly those kinds of stocks.

The list with the best value creators has been published every year since 1999 by the Boston Consulting Group (BCG). The ranking is determined on the basis of Total Shareholder Return (TSR) over the previous five years.

According to the Boston Consulting Group, TSR measures the combination of share price gains and dividend yield for a company’s stock over a given period. The management consulting firm believes it is the most comprehensive metric for performance in shareholder value creation. Thus, the firm defends the TSR against criticism that it would be a time frame–dependent metric and that a company’s TSR performance would depend on the starting point and the length of the period measured. According to the management consulting firm, the TSR – and especially the relative TSR – is valuable because it reflects shareholders’ true bottom line, which is the total return they receive from the moment they buy the stock.

Attractive returns from tech, media, telecoms

The 2017 rankings reflect an analysis of TSR at approximately 2,350 companies worldwide (of which some 30 percent are U.S. based) from 2012 through 2016. In these rankings, U.S. companies again dominate the list of the world’s top value creators, taking six of the top 10 spots for global large-cap companies. Technology, media and telecommunications have replaced the pharmaceuticals industry as the primary value-driving sectors in the top 10. Technology, media and telecommunications companies hold down seven places on this year’s list, while pharma, which claimed four of the top 10 slots in 2016 (including the top three) and five in 2015, is absent.

“Companies such as Amazon and Netflix from high-growth technology fields are the clear winners in the ‘Value Creators’ ranking, but growth alone is not enough to be future-oriented,” explains Axel Roos, senior partner at BCG and one of the study’s authors. “The key is that companies are expanding their business portfolios with new, profitable business models while at the same time flexibly adapting their strategy as well as their capital allocation.”

In addition to providing the large-cap ranking of five-year TSR at the world’s 200 largest companies by market valuation, the 2017 Value Creators rankings include the top 10 value creators in 32 industry sectors. The top 10 large-cap value creators for the years 2012 through 2016 delivered an impressive average annual TSR of 41 percent. By way of comparison, the average annual TSR for the next 10 best companies was a still impressive 29 percent. The overall average annual TSR for all of the companies in this year’s value creators database was 16 percent, well above the long-term average of about 10 percent for the S&P 500.

Among industry sectors, mid-cap pharma ($4 billion to $17 billion in market cap) ranks first in average value creation, as it did last year. Other top-five sectors are consumer durables, automotive components, financial infrastructure providers, and medical technology. (See Charts 1 and 2.)

A look at 20-year TSR success stories

In addition to assembling the five-year rankings, BCG looked at long-term and consistent value creation. From 1996 through 2016, nine companies among the largest 200 were top-quartile value creators in at least three of the four years in a five-year period. They top the consistent value creators list for the past two decades because they generated average annual TSR numbers of 17 percent to 32 percent over 20 years. The list of Value Creators with the highest TSR over the past 20 years is topped by U.S. pharmaceutical companies Celgene and Gilead Sciences. Two others are tech firms and two are tobacco companies. One comes from media and publishing, and one from healthcare. Amazon straddles tech and retail. Seven are based in the U.S., one in the Netherlands, and one in South Africa.

A notable conclusion from the rankings is that growth- and non-growth-companies can make the cut. Celgene and Gilead Sciences, for example, have ridden blockbuster-producing research and development programs to dizzying heights, and along the way they also used mergers and acquisitions strategically to reinforce their innovation efforts. They have managed to outperform even the outsize expectations that fairly consistently become priced into such companies, BCG concludes.

Two other top companies, Altria and Reynolds American, have taken a very different approach. They have hardly grown at all. Both are in the tobacco industry, which has long been in decline, but they have managed to beat expectations and expand margins (largely by raising prices). Further, they have consistently returned cash to shareholders through generous dividend yields, BCG notes.

“For consistent value creators, the strong tailwinds of a growth industry help. But far more important are management’s understanding of different value delivery models, its willingness to adapt its strategy and capital allocation to meet evolving conditions, and its ability to balance short-term targets and longer-term TSR goals,” said Jeff Kotzen, a BCG senior partner. “Regardless of time frame, top performers set their sights on winning in their industry or peer group – and they deliver.”

Adds Gerry Hansell, a BCG senior partner: “The likelihood of beating the market – especially by a wide margin – year in and year out, is low. For companies in mature industries, the challenge is even greater because growth is such an important driver of long-term TSR. That said, companies in mature industries still can drive value creation by improving efficiency, allocating capital prudently and returning cash to shareholders rather than investing it in low-return growth opportunities.”

These views are underscored by the view of Hady Farag, co-author of the study and stock expert at BCG: “Top value creators are characterized above all by the fact that they find the right balance between short-term business requirements and longer-term TSR targets, even under volatile market conditions.” (See Chart 3.)

In addition to the methodology of the “Value Creators” ranking, it should be noted that the ranking of the large caps, measured according to their market valuation, includes the 200 largest companies worldwide. Also in its 2017 study, for the first time, BGC has included “Value Creators” lists for 32 industries with the 10 most profitable companies.

Shining the spotlight on socially responsible investing

Turbine construction under way at Invenergy’s McAdoo Wind Energy Center in McAdoo, Texas. - Photo: Invenergy

Monique Frederick, Butterfield

Socially responsible investing has been referred to by many names, including sustainable, responsible and impact investing. In essence, socially responsible investing is an investment approach that considers environmental, social and governance (ESG) factors in portfolio selection. An estimated $23 trillion in assets are currently managed under responsible investment strategies, and this is only expected to grow.

Baby boomers and Gen Xers still favor traditional investment strategies, while millennials and female investors are increasingly focusing on ESG factors alongside investment returns. Individuals in this demographic want their investment dollars to be aligned with their personal views and they spend more time considering how they can have a positive impact on the world.

Admittedly, there is no lack of skepticism as to the ability of sustainable investments to keep up with traditional investment returns. Although the results from studies comparing SRI versus traditional stock performance are mixed, there are recent studies emerging suggesting that the inclusionary method of ESG implementation could result in superior performance in the long-run. As SRI implementation methods are refined, clear quantitative measurements are developed and, as more data becomes available, better research and analysis will undoubtedly emerge in the future. What is of importance today is the growing demand from investors and asset owners for socially responsible investment options.

So what’s driving this demand?

Investors cite various reasons for adopting ESG investing goals. Some include trying to end business practices that are deemed morally or socially problematic, avoiding possible legal and adverse publicity, and lowering risk. The primary motivation, however, appears to be alignment with one’s own ethical values. Investors – more so in Europe – are demanding that the investment decisions being made by investment managers are congruent with their societal views. It has also been widely reported by banking behemoths like Bank of America Merrill Lynch and others that companies with higher ESG scores tend to have lower stock price volatility.

So maybe millennials are idealistic; will they change their tune as they get older? I firmly believe that our past experiences greatly influence our future behavior. Having experienced the financial crisis and climate change, it should not come as a surprise that the younger generation approaches investing from a different perspective. Additionally, a number of mainstream firms have already started answering the call by launching sustainably managed products or funds.

Not all SRI funds are created equal, as there are various ways of implementing an ESG strategy. The exclusionary method focuses on excluding companies from a portfolio based on certain factors. Excluding tobacco companies from a portfolio is one example of utilizing this approach. Another method gaining greater popularity is the positive screening approach where companies are selected based on how well they manage environmental, social and governance issues versus their peers. Selecting a company for its high marks for gender diversity in management is an example of an inclusion strategy, as is selecting a company which has implemented best management practices to avoid environmental risks.

In addition to exclusionary and positive screening, sustainable investment strategies also include norms-based screening, ESG integration, sustainability-themed investing, impact investing, and corporate engagement and shareholder action. The Global Sustainable Investment Alliance (GSIA) provides more detail on these classifications in its Global Sustainable Investment Review report. Out of this list, retail investors may be most familiar with impact or community investing, where capital is specifically directed to solving a social or environmental problem or to underserved communities.

Demographic changes as a result of the intergenerational transfer of wealth suggest a shift to younger investors and greater female participation in the future. Consequently, the demand for ESG investment mandates will only gain more momentum. Not only is this demand driven by individual investors, but pension and endowment funds are also starting to show interest, with Europe leading the way. Furthermore, as the forecasts for lower future expected returns in both fixed income and equity markets become a reality, investors may very well demand that their investment dollars deliver more than just a financial return. Needless to say, I believe this trend is here to stay

Sources: Global Sustainable Investment Alliance, Barclays, Alliance Bernstein, U.S. Trust – Bank of America.

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.

Business Excellence awards to honor local contributions

A nine-category “Academy Awards” for business excellence is scheduled for Oct. 14 at The Ritz-Carlton, Grand Cayman, celebrating the best of local entrepreneurs and a single individual singled out for a lifetime achievement honor.

Created by the Cayman Islands Chamber of Commerce and event partner Digicel, the Business Excellence Awards will honor businesses and their owners – drawn from the organization’s 700-plus members – that have contributed most to the Cayman community in the past year.

Chamber CEO Wil Pineau told the Journal that local businesses, especially Chamber members, are “not getting the recognition they deserve. The business community in Cayman is vibrant and constantly giving back to our community, so we wanted to create an event to celebrate and recognize their achievements.”

The Chamber has often marked member contributions in private “Chamber Champions” ceremonies at the annual general meeting.

Pineau said the organization had considered a broader program several years ago, but this “has been a year or so in the making.”

For years, he said, “Chambers of Commerce around the world have introduced awards programs to acknowledge best business and community initiatives … so the [Cayman Chamber’s] Council felt it was a perfect time to introduce a similar program for our membership.”

“Many of them,” he said, “contribute discreetly to community initiatives, invest in workforce and education projects and support efforts to protect and preserve the environment by adopting green practices. We want to share these practices and celebrate these contributions and successes.”

Pineau said the executive committee, Chamber staff, and partner Digicel, created the categories after “considerable deliberation.”

“We wanted to celebrate best-business practices. We wanted to focus more on the aspects of corporate-social responsibility rather than pitting businesses against one another.”

An eight-member Board of Review, including a member of the Chamber council, a representative from one of the event or award sponsors, an expert in the particular field under scrutiny and other individuals selected by the executive committee, will review unlimited nominations in each category: small business of the year; community service project of the year; the eco warrior award; innovation award; outstanding workforce development initiative; commitment to education award; marketing campaign of the year; lifetime achievement award; and business of the year.

According to the event’s website,, the lifetime achievement will go to an individual “who has shown outstanding support to the Cayman Islands Chamber of Commerce and local business community,” and has been associated with the organization for at least 10 years.

The business of the year, the material says, will reward the enterprise that has “shown outstanding corporate social responsibility, has excelled in treatment and training of staff, has provided unrivalled customer service, and has proven commitment to the development of the Cayman Islands community,” between Jan. 1, 2016, and Sept. 1, 2017.

Pineau says nominations – closing in mid-September – have attracted significant support.

“There has been a lot of interest in applying. The great thing is that there is a category for everyone, meaning that all [Chamber] businesses eligible to participate have an opportunity to get involved.”

He said the submissions remain confidential until the list of applicants is announced after the deadline.

The awards vary across the categories. Pineau says the two finalists in each will receive a Grand Award, and a trophy will go to the company “that has completed the best project.”

“Some awards will also have additional prizes,” he said, pointing to Yellow Pages publisher Yello, which is sponsoring the small business of the year award.

Yello will award the winner a “comprehensive media and marketing package,” he says. “We also plan to promote the winners during the year and to share details of the best practices so that all businesses can learn about them.”

The Chamber hopes the Business Excellence Awards will be an annual effort “as we feel that businesses should be celebrated and acknowledged regularly,” Pineau said. “The hope is that the BEAs maintain a permanent spot on the calendar,” he said.

Behind the scenes, Maritime Authority excels in yachting industry

The Maritime Authority of the Cayman Islands licenses yachts, cargo ships and other vessels around the globe to world-class regulatory standards.


Tucked away on the third floor of the Government Administration Building, the Maritime Authority of the Cayman Islands does much of its work out of the public spotlight.

Even when the territory’s maritime sector is involved in high-profile events – such as last month when Goldman Sachs seized the Cayman-registered luxury yacht of a Texas billionaire who defaulted on a loan with the financial firm – the Maritime Authority plays very little role in such affairs.

“If there’s need for courts to have access to the information, we’d step in,” said Maritime Authority CEO Joel Walton, explaining that his department otherwise stays out of the high-profile disputes that make international headlines.

While Mr. Walton said his department does not need attention for the work it does, the lack of prominence has contributed to misconceptions both locally and abroad about the Maritime Authority.

Locally, perhaps because the statutory body is also commonly referred to as the Shipping Registry, “most people think we’re actually in the business of shipping products,” he said.

Internationally, the misconception is more critical: People abroad understand that the Maritime Authority facilitates the registration of yachts, but many of them think that millionaires and billionaires register their yachts here because “they’re trying to hide their assets,” said Mr. Walton, adding that such a conception is “nonsense.”

What the Maritime Authority actually does is far different from the conventional wisdom, he said. With some 50 employees and 40 subcontractors spread in more than 20 locations throughout the world, the department is primarily focused on conducting safety and other regulatory inspections on many of the hundreds of yachts under construction.

“We focus heavily on technical competence,” said Mr. Walton. “That’s what we sell.”

The authority has a large client base, being involved in the construction process of roughly 40 percent of all the yachts being built at any given time, according to Mr. Walton. Owners can build their yachts to several different passenger codes, which allows them to charter 12 to 36 passengers, depending on the code.

So many shipyards choose to build their yachts to Cayman standards for good reason: The territory was recently ranked first on the “white list” of the 2016 annual report for the Paris MOU on Port State Control – the administrative agreement between 27 maritime authorities that deals with enforcing safety, environmental, and other regulations.

“That means the vessels we regulate were considered by 26 European countries and Canada as the highest quality in the world in terms of all things regulatory,” said Mr. Walton.

The high-quality standards offer yacht owners multiple potential benefits, including lower insurance premiums, higher resale values, and the option to conduct commercial charters, said John Aune, the deputy director for the Maritime Authority’s Global Commercial Services division.

Moreover, registering with Cayman should give owners peace of mind knowing that their vessel is built with extreme care to attention, he said.

Cayman developed a world-class shipping registry out of necessity. With comparatively few natural resources to compete with the natural sailing destinations of the world, the territory’s public policymakers were forced to innovate in order to attract business, said Mr. Walton.

“We said, ‘We don’t have marinas; we don’t have shallow water or beautiful islands.’ So we said, ‘What can we do to make an impact?’ And we chose yachting,” said Mr. Walton, who has been CEO of the authority since 2004. “We said, ‘We’re going to go in as a niche market, we’re going to hire the best people we can afford, we’re going to put them in all the major ship-building yards in the world, and we’re going to make sure we can answer the questions and grow with the industry.”

But like most of the territory’s economic pillars, the Maritime Authority is still largely dependent on the ebb and flow of the global economy, even with a registry that was second to none. And while other industries have at least partially recovered since the 2008 financial crisis, the yachting sector remains largely stagnant, said Mr. Walton.

“To put things in context, in February 2009 we had 289 yachts under construction with us. That was 40 percent of the world market,” he said. “Today it’s 130. But both numbers represent 40 percent of the market.”

The slowdown has impacted the authority not only because it has impacted the shipping industry – with fewer shipping and cargo vessels being licensed – but also because it has spilled into the yachting sector, he said.

“It’s an inter-related industry: You’ll find that people in shipping a lot of times own a yacht,” said Mr. Walton. “It’s all a part of the same cycle. So once shipping is down, it’s a ripple effect all the way through.”

“And the ones that still do have money, for them it can be difficult to spend money on a new yacht if their clients are hurting,” added Mr. Aune. “People basically get more careful with spending money all around.”

Nevertheless, according to its latest public annual reports, the Maritime Authority managed profits of $924,671 and $275,740 in 2013/14 and 2014/15, respectively – though its revenue entails an annual stipend from government of some $430,000. These profits came after the department lost about $1.3 million from 2009 to 2013 – losses Mr. Walton attributed in part to when central government “dumped” the Maritime Authority’s employee retirement benefits onto its books when the authority was made a statutory body in 2005.

To further boost those profits, government could grab some “low-hanging fruit” in terms of policies that would increase the number of revenue generators available to the Maritime Authority, said the authority’s CEO.

Simple policy changes

One of the simplest policy changes would be to loosen marriage laws in order to allow ships to have marriages aboard without the presence of a Cayman certified marriage officer, said Mr. Walton. The current legislation is a major barrier to having cruise ships register under the Cayman flag, he said, because cruises would be required to have a Cayman marriage officer on board in order to conduct weddings throughout the world.

Another simple reform would be to make Cayman a “one-stop shop” for registration, much like some of its competitors.

“Right now, to register a vessel with us, you have to come here, you have the [Certificate of British Registry], then you have to go to [Utility Regulation and Competition Office] for your ship radio license, and then you have to go to get your company registered,” explained Kenrick Ebanks, the executive director of the GSC. “But in the Marshall Islands, for example, it’s a one-stop shop.”

Data protection coming to Cayman in 2019

At an unspecified date in 2019, the Cayman Islands will introduce far stricter privacy protection rules affecting every business that processes customers’ or clients’ personal information.

The Data Protection Law was approved in the 11th hour of the previous government administration. The legislation and accompanying regulations will have major implications for local businesses and international firms in Cayman. The law is seen as a boon to the financial services industry, which is keen to access European markets – most of which have been operating under data protection laws since the mid-1990s.

Acting Information Commissioner Jan Liebaers, who is responsible for the training program leading up to the law’s implementation and for enforcement of the law once it goes into effect, said all of the specifics of the data protection regulations have not been worked out yet. That will be the main task of the data protection working group, which Liebaers leads, for the next 18 months.

The Data Protection Law applies to everyone in the Cayman Islands, public and private sector alike. It also applies to a number of entities outside the Cayman Islands that have certain data processing functions in the jurisdiction.

“No country wants to export information to another country if it … doesn’t know what the rules are [for data processing] in that country,” Liebaers said. “[The legislation] has an impact on so many different levels and contexts … an impact on education, health, finance, tourism, churches, strata, sports organizations … any of those are very likely to be ‘data controllers’ under the Data Protection Law.”

Those data controllers are given the responsibility of using an individual’s records “fairly,” processing that information only for the legal purpose for which it was provided. For instance, a bank teller giving out details of a person’s accounts to a third party, or an accounts receivables clerk leaving records of personal information out in a space where they can be viewed by other individuals, could land their employer – the “data controller” – in trouble under the new law.


Cybersecurity is vital to anyone receiving or processing a customer’s information online and becomes even more critical with initiatives such as e-government that Cayman is now moving toward, Liebaers said. He said a number of entities would probably have to look at basic encryption methods for data kept on computers and flash drives.

Compliance with the law can be particularly important in instances of data breaches that are largely beyond the control of the company or entity involved, according to Maples attorney Martin Livingston.

“The law requires that a data controller has appropriate organizational and technical safeguards to ensure that there is no unauthorized use of personal data, or loss, damage or destruction of personal data,” Mr. Livingston said. “Therefore, [a company] will have a duty to implement such safeguards.

“Any liability for a hacking would therefore presumably depend on the extent to which the company has complied with such a duty and is able to demonstrate steps taken for the purposes of such compliance. It should also be noted that there is a duty to report any personal data breaches and what steps have been taken to mitigate against the adverse effects of the same.”

The law sets punitive measures for those who mishandle data, but protections have also been inserted for companies or public entities to allow them to make representations in their own defense to the information commissioner/data protection commissioner. Violations of the data protection requirements can draw up to $250,000 in fines, according to the law.


The legislation raises concerns, not only in the protection of business or public sector data, but in the publication of those records if they are disclosed.

One example where data protection laws could have been invoked – if they existed at the time – involve the April 2016 leak of thousands of documents held by Panamanian law firm Mossack Fonseca, excerpts of which were published in various news media around the world. Panama does not have data protection legislation.

Liebaers said the “leak” of those records would likely be punishable under the Cayman Islands version of the law, if it happened here, but he declined to speculate about whether the journalists who reported the data would be taken to task.

The Cayman legislation creates, for the first time, a formal complaints process that can be used against news organizations, as well as against other public and private entities that process personal information. Complaints of data misuses or violations would first go to the newly created ombudsman’s office and, on appeal, to the Grand Court.

However, the law also sets out a number of exemptions from its application, including national security, police and court matters and certain functions of the Crown. Included among those is a “special purpose” exemption for the sake of journalism, literature or art. That means certain requirements under the Data Protection Law, such as turning over someone’s personal records kept by the organization or person that holds them, would not apply to journalists or artists.

There are some caveats to that exception. The person or organization processing the personal data must ensure that task is “undertaken with a view to the publication by a person of any journalistic, literary or artistic material.”

Also, the person or organization processing the information must “reasonably believe” that publication of the matter would be in the public interest and that compliance with data protection legislation is “incompatible” with the special purpose exemption.

Going forward

A working group consisting of both private sector leaders and government employees will review the law to help draw up plans to implement the paradigm shift in local privacy protection.

The seven-member working group, chaired by Liebaers, will include local attorneys Peter Broadhurst, Tim Dawson and Peter Colegate, as well as Cabinet Office staffers Nadira Lord and Garfield Ellison, and Paul Morgan of OfReg, Cayman’s utilities and commodities regulator.

“In the course of drafting the regulations, the working group will likely consult with a wide variety of stakeholders, and we are also anticipating a general public consultation, subject to approval by the Cabinet,” Liebaers said. “This is an important initiative that will protect the privacy rights of individuals and bring Cayman in line with its international business competitors.”

Liebaers said Cayman businesses should start preparing now for the advent of data protection, but noted that many of the larger financial firms and law firms are already quite familiar with the concept and adhere to international best-practices. However, many smaller, locally operating companies may be unfamiliar or entirely unaware of what is required.

Mr. Liebaers said he hopes the legal changes will generally be viewed as positive.

“We’re at a point where … either individuals, by means of good laws and regulations, are going to retain some control over their personal information, or that control is going to be entirely lost and be entirely in the hands of private business and big government,” he said.


Driving the data protection project has been a behind-the-scenes push by the territory’s financial services sector to obtain “adequacy status” – as determined by the European Commission – for personal records.

In the EU, businesses or government are allowed to export personal data only to a country that provides adequate protection of that data. Without obtaining adequacy status, multinational companies that want to do business with European entities – which in financial services terms generally involves customers’ sensitive financial and personal details – must either create legally binding corporate rules or potentially be shut out.

The issue has obvious ramifications for the future of the financial services industry here, which has been seeking inroads to European markets for a number of years. Once data protection is implemented, a group of EU regulators known as the “Article 29 working group” would have to come to Cayman and review its data protection processes, write a report to the European Commission and state whether the territory has adequate privacy protections.

The adequacy status requirement has been the subject of some legal battles between the U.S. and Europe in recent years, and many countries outside the EU do not maintain that status, including the U.S., China and India.

All three British Crown dependencies, Guernsey, Jersey and the Isle of Man, have EU adequacy status with regard to privacy protection. None of the British overseas territories has enacted similar legislation, although both Cayman and Bermuda are expected to implement their own versions of the legislation before the decade ends. 

Cayman’s new nonprofits legislation aims to prevent terrorist financing

Nonprofit organization officials participate in a seminar held last month by government to discuss changes to the legislation governing NPOs.


The idea that people in the Cayman Islands could attempt to finance terrorist organizations may seem strange to some, but the risk is very real.

Just ask Paul Inniss, a former officer in the police service’s Financial Crimes Unit and the current head of compliance for the General Registry.

When Inniss was still with the Royal Cayman Islands Police Service, a group of workers came here from a jurisdiction they said didn’t have a developed banking sector, he said. As such, the workers asked their employer to pay all of their salaries into one bank account, which would then be disbursed to their families back home.

However, it was soon discovered that the money instead was being funnelled to the Turkey- and Iraq-based terrorist group, the Kurdistan Workers’ Party, known as the PKK.

“The issue is that the intelligence coming from the homeland said the money wasn’t really going to the families, it was going to an organization called the PKK,” said Inniss. “This is real, this isn’t made up. It’s something I investigated.”

To curtail this kind of activity, government this year passed the Non-Profit Organisations Bill, which requires the territory’s nonprofit organizations to register and submit their financial information to the General Registry. While the incident described above did not entail NPOs being used for terrorist financing, such entities are susceptible to being used for just that, according to Inniss.

Moreover, he said, he has seen Cayman NPOs used for all types of other nefarious activities.

“I’ve seen it all,” he said. “I’ve seen the unfortunate abuse and misuse of the NPO sector – sporting organizations, churches, sporting groups, you name it.”

Indeed, a 2015 national assessment on money laundering risks identified the regulation of charities as a significant vulnerability for Cayman.

That assessment was carried out to prepare the territory for an inspection later this year by the Caribbean Financial Action Task Force, an intergovernmental body that develops and promotes policies to combat money laundering and terrorist financing.

The new NPO legislation will help Cayman prepare for this inspection by establishing tighter regulations for Cayman-based nonprofits, which are defined in the bill as any entity that receives donations to be used for the public benefit.

The information NPOs have to submit to the registry includes their directors, controllers, owners and financial information. The extent of the financial information that has to be submitted depends on the size of the entity – smaller organizations may be able to submit just a bank statement, while larger ones may have to provide more detailed financial statements.

Nonprofits that take in more than $250,000 and send at least 30 percent of that overseas also must have their financial statements reviewed by an accountant and report the results to government. (“If it were me, it would be every percent [because] it is the small transactions that are the most dangerous because of lone wolfs,” Inniss said of this provision.)

All entities will be subject to investigations by the attorney general or general registrar if suspected of wrongdoing.

However, the law gives Cabinet the discretion to exempt NPOs from being subject to the new rules. This was a concern brought up while the bill was being considered by lawmakers last year.

“[The bill] gives Cabinet the authority to override the regulatory body that’s created within law,” opposition legislator Alva Suckoo said last October, adding that such a provision “is going to make us a laughingstock.”

Speaking on this concern at a seminar last month on the new law, Ministry of Financial Services and Home Affairs Policy Officer Wilbur Welcome said the exemption power is intended to be used only in “extreme situations,” such as when an outside NPO is coming here to assist in a disaster.

“When the bill was discussed, this provision was discussed in length,” he said last month.

Other exempted entities include government bodies that are overseen by a financial regulator such as the Cayman Islands Monetary Authority, as well as trusts that are registered under the Banks and Trust Companies Law.

The exemption does not extend to churches and schools, though.

When asked why schools regulated by the Department of Education Services and churches registered under the Churches Incorporation Law have to go through that added step, Welcome explained that the NPO legislation is primarily concerned with preventing terrorist financing – something that’s not on the radar of the other regulators.

“The education department isn’t concerned with terrorist-financing measures,” he said. “They’re concerned with your teachers, what your curriculum looks like – they have no concern if the school has raised $10 million and sent $5 million to Syria to an organization they never heard of to start a school, and that school turned out not to be a school, but to fund ISIS.”

While the new legislation imposes new requirements that some entities may find onerous, Welcome said it also should make it easier for many NPOs to operate in the territory.

For instance, NPOs registered as limited companies will no longer be subject to a $500 fee each time they change an officer, as is required by the Companies Law. Instead, they will be subject to a fee of $25 under the NPO Law, said Welcome.

Entities that were previously required to undergo financial audits will now be able to undergo a financial review by a “duly qualified accountant” instead, he said.

Inniss added that being registered may make it easier for NPOs to open accounts with banks, which have put such entities under especially intense scrutiny in recent years.

Perhaps the most important aspect of the new legislation, Inniss said, is that it will be an added protection against Cayman-registered NPOs being used for the financing of terrorism, which would cripple the territory’s reputation.

Government held a series of seminars last month to inform NPOs of their obligations under the new law. Those entities will now have to register by July 31, 2018, after which they will be subject to fines.

“We’re expecting the good NPOs will report the bad ones,” said Welcome.

CAL poised for longer-haul aircraft, new destinations

- Photo: Matt Lamers

The delivery of four 160-seat fuel-efficient Boeing aircraft late next year will at last allow Cayman Airways to consider new routes throughout Canada, the U.S. and potentially South America and Central America.

Cayman Airways will lease the new 737-8Max aircraft rather than pay the US$110 million purchase price, counting on economies from their 15 percent fuel savings compared to the airline’s aging 737-300 and single 737-800 fleet. In fact, says CAL President and CEO Fabian Whorms, the 8Max’s 160 seats – 40 more than in the 300 series – will ultimately yield fuel savings “in excess of 30 percent – on a per-seat basis.”

He explains the acquisitions: “In 2016, Cayman Airways was operating a fleet of B737-300 aircraft, which would need to be retired between 2017 and 2020. The airline was therefore tasked with finding a replacement fleet and it was concluded that the larger ‘next generation’ B737-800 was the logical choice to replace the B737-300 aircraft.”

The “next generation” designation is Boeing’s third generation of 737 aircraft and includes the 800 series. Produced since 1996, the new aircraft are narrow-body, short- to medium-range jets, seating between 110 and 210 passengers.

“The airline then embarked on a search for the most affordable and suitable used B737-800 available for lease,” Whorms says.

The effort turned up a “once in lifetime” opportunity for a used B737-800 on a 2016-2018 lease, to be followed by the introduction of four new Boeing 737-8Max aircraft between 2018 and 2020, marking retirement of the B737-300s.

The calculations are complex, but mark the slow evolution of Cayman Airways from a tiny carrier flying a DC-3 turboprop to the Sister Islands in 1968 to a greater enterprise connecting a dozen cities in North America, Jamaica and Cuba, and newly ambitious plans for expansion.

Whorms hinted at 2018 and 2019 plans: “The new fleet will bring with it excellent opportunities for route expansion as the new fuel efficient B737-8Max aircraft have tremendous range, which puts most of North America, all of Central America and much of South America within the airline’s nonstop reach.”

He did not name destinations, but on Jan. 3 this year, the Department of Tourism announced “development of a Latin America business strategy to promote tourism to the Cayman Islands,” studying potential gateways in Bogota, Panama City and Rio de Janeiro.

A 2014 document by the Cayman Islands Airports Authority, which operates Grand Cayman’s Owen Roberts International Airport, Cayman Brac’s Charles Kirkconnell International Airport and the Little Cayman Airport, names 737-800 routes to Toronto, Calgary and Sao Paolo.

Whorms said Cayman Airways wants to determine “which new gateways will benefit our tourism industry the most, so as to take maximum advantages of the new fleet’s capabilities.”

Cayman Airways’ inaugural 737-8Max flight, he said, could come on Dec. 1 next year and would “likely combine … with an inaugural flight to a new gateway.”

The airline occupies a major slot in Cayman’s transport mix, making the islands a world-class tourist destination, boosting an industry that contributes approximately 70 percent of the island’s $2.5 billion GDP.

Whorms says CAL earns “approximately US$60 million/year in [passenger] revenue, $10 million in other sources and $20 million in services provided to, or on behalf of, government.”

He cites studies indicating Cayman Airways “on average, contributes in the region of $200 million to the local economy, from its local direct and indirect spend and from the expenditure of tourists that Cayman Airways brings to our shores.”

Government annually subsidizes the airline with a similar sum. Whorms notes that Cayman Airways “serves as a strategic competitor to most if not all of the airlines serving the Cayman Islands,” ensuring strong price competition and preventing “the monopolistic airline pricing that many small Caribbean nations struggle with. This in turn helps to keeps our tourism product competitive with other Caribbean tourist jurisdictions and also benefits our local consumers at the same time.”

The airline’s annual economic contribution, he says, justifies government’s annual subsidy as a “tenfold” return on its “investment.”

The airline also employs some 400 Cayman residents, he says, 95 percent of whom are Caymanian, in a variety of specialized professions “which would not be otherwise available within the Cayman Islands.”

CAL’s origins are anchored in the October 1945 creation by Pan American World Airways, the Costa Rican government and local private interests of Costa Rica’s national airline, LACSA, based in San Jose. LACSA launched operations June 1, 1946, and was designated Costa Rica’s national carrier in 1949.

In the mid-1950s, LACSA served Grand Cayman as an intermediate stop on its route between San Jose and Miami and occasionally Havana.

Whorms picks up the narrative: “In 1955, LACSA started a subsidiary company, Cayman Brac Airways, operating domestic passenger air service between Grand Cayman and Cayman Brac.”

In the early 1960s, LACSA added a Little Cayman “flag stop” – only when needed to service passengers or freight – on the 10-square-mile island’s grass airfield.

Cayman Brac Airways later added limited service between the Brac and Montego Bay, Jamaica, its sole international flight, Whorms said.

In August 1968, the Cayman Islands government bought 51 percent of LACSA, “as part of a strategic plan to improve connectivity to/from the islands. Limited service had been provided over the years … but only through the airline becoming truly Caymanian-owned could the focus of the airline be to strategically benefit the islands,” Whorms said. It boosted traditional seafaring links among regional, Central American and U.S. ports, encouraging trade, tourism and family connections.

Cayman Brac Airways was renamed Cayman Airways, operating a single DC-3, later serving Kingston, Jamaica, with an 119-seat British Aircraft Corp. 1-11, leased from LACSA.

In 1972, CAL inaugurated services to Miami; in December 1977, government bought LACSA’s remaining shares, designating CAL as the national flag carrier.

The airline acquired its first jet in 1978, launched service to Houston, and in 1982 gained its first Boeing 727-200, allowing introduction of first-class service.

During the 1980s Cayman Airways offered scheduled and charter service to Atlanta, Baltimore, Boston, Chicago, Detroit, Minneapolis, Newark, New York, Philadelphia, St. Louis, Kingston, Montego Bay and later, Panama City.

Through the years it has also served Miami, Tampa, Fort Lauderdale, Washington, D.C., Havana, Honduras’s La Ceiba and Roatan and, at one point, non-George Town-based services linking Miami and the Turks and Caicos. On Jan. 5 this year, CAL launched 737-800 charter service to Los Angeles.

Cayman Airways Express operates two Twin Otters and two Saab 340Bplus turboprops to the Sister Islands. Introduced between 2015 and 2016, the Swedish-built aircraft will ultimately replace the older Canadian-built planes, joining the 8Max aircraft as part of CAL’s fleet modernization.

“The importance of the air bridge to the Sister Islands should also not be underestimated,” Whorms says, “as this is an essential service necessary to keep the islands connected with each other,” providing both employment and economic activity.

The longer range of both the 8Max and 737-800 – compared to the 737-300 – has implications for Owen Roberts International Airport’s 7,008-foot runway.

The Cayman Islands Airports Authority planning document for 2014-2032 says the runway “is poised for a major redevelopment for completion in 2018,” indicating a preference for a 1,000-foot, $20.5 million westward extension and accommodating the longer hauls and heavier loads of the next generation aircraft.

A further 1,200-foot extension, creating a 9,200-foot runway, would mean an additional $21.5 million construction into North Sound.

Whorms said Cayman Airways “looks forward to this infrastructure improvement, which will allow the new B737-8Max fleet to capitalize on the aircraft’s long-range capabilities to the fullest while using lower thrust levels for takeoff, which has the economic benefit of reduced fuel consumption and extended engine life.”

New roads, new roles for the National Roads Authority

The National Roads Authority has an annual budget of $10 million for construction and repair projects. - Photo: Taneos Ramsay.

Ambitious construction and repair plans by the National Roads Authority will easily consume its $10 million annual budget – providing neither the weather nor highway damage intervene.

Despite ongoing economic and financial constraints, the agency said it hopes for an additional $5 million annual infusion “to build additional capacity on the road network,” according to its 2015-2020 Corporate Strategic Plan,

The NRA was founded in July 2004 under the National Roads Authority Law “to administer, manage, control, develop and maintain the islands’ public roads and related facilities,” which also includes lighting, signals, storm-water facilities and signage, the report says.

Before 2004, however, NRA Transportation Planner Marion Pandohie says, “It’s first challenge was building roads between five districts using the muscle power of men and mules to meet the demand of some of the first-ever automobiles.”

Grand Cayman’s single inter-district roadway was even then called Shamrock Road, she says, and it was mainly a coastal road in the Bodden Town area. It was developed through the widening of what were essentially donkey trails near the coastline.

“Government took land from owners to create roads wide enough to facilitate two-way vehicular-traffic movements,” she says. “It is important to note that vehicular traffic on the island prior to the early 1980s was extremely low, and Caymanians tended to stay more confined to their districts.”

Most of Cayman’s roads were – and still are – built not by government, but by private developers, at least within the districts, Pandohie says.

“In recent years the standards [to] which developers have to build these roads has increased through the NRA inspection of both the base and the hot mix.”

The result has been that developers own many the roads in Grand Cayman, meaning that “the NRA in a lot of cases does not maintain these roads or the infrastructure on them, such as lighting, drainage, etc.,” she says.

A growing population in 1988 sparked development of a Master Ground Transportation Plan, a corridor study of short- and long-term road-building needs, but the costs, social impact and more-pressing issues of drugs and crime derailed the project.

A sort of “buyer’s remorse” set in, however, in the early 2000s as planners recognized the master plan would have enabled at least some developmental guidelines – and government leaders acknowledged the need for a system of trunk roads for economic growth.

The result was the NRA, charged with creating a long-term plan, followed by Cabinet’s 2005 “corridor plan.”

Government annually allocates the NRA’s $10 million budget from its road fund, the Corporate Strategic Plan notes. Expansion and reconstruction are separately funded by government’s $5 million capital works program or – like the Butterfield roundabout-Camana Bay expansion of the Esterley Tibbetts Highway – through a public-private partnership.

The 52-page report discusses the evolution of the NRA and plans through 2020 for road-building and repair, costs and investment in equipment and personnel.

Public pressure on the agency is constant, spurred by rising GDP, per capita incomes and expectations for comfort and convenience: “Citizens desire connections to more places, to get there faster and to get there in more comfort,” the authors say.

Recognizing Cayman’s 76-square-mile land mass, the NRA “cannot infinitely add to the road network,” they write, forcing planners to seek “the best use of all transport modes,” including regulation of vehicles.

While specific regulations are not detailed, the report suggests expansion of the NRA to become “a land transport management agency” looking after all public and private transportation.

The recommendation is consistent with the planning axiom that you cannot build your way out of traffic congestion. As vehicles clog roads, commuters turn to alternative transport, buses and trains in most cities, leaving their vehicles at home.

New roads release what is called “suppressed demand,” as owners resume old habits, returning to their private vehicles.

Resolving traffic congestion requires management measures such as restricted car ownership, controlled use of vehicles and even electronic road pricing schemes – billing drivers according to the hours and location of road use. Local suggestions have often relied on duty waivers for smaller, quieter electric vehicles.

“Serious social decisions will have to be made by government in future years,” Pandohie says, such as restrictions on vehicle importations; vehicle-size limitations; promotion of more scooters, motorbikes.

Bermuda “is already experiencing these realities,” she says.

In mid-July, Minister of Commerce, Planning and Infrastructure Joey Hew appeared expressed support for the NRA recommendations, telling a gathering, “We can only build so many roads. At some point we are going to run out of space.”

Better public transport and ride-sharing programs, he said, would rapidly become critical. “At the end of the day, we are going to have to focus on implementing a proper public-transport system and encouraging people to use greener, smaller vehicles as well as car sharing … in order to reduce the size, speed and amount of vehicles on our roads.”

Pandohie recommends “promotion of accessibility and mobility options by providing integration and connectivity; preservation of existing facilities and promotion of an efficient management system and operations by encouraging land-development patterns that promote transportation efficiency (e.g. encourage land-use patterns that promote safe and convenient walking, bicycling and transit); establishment and preservation of rights of way to support and promote future expansion for not only roads, but transit, bicycle and pedestrian use.”

Grand Cayman has 313 miles of road, supporting more than 36,000 registered vehicles. More than one-third of the street network, 36 percent, is in George Town, 27 percent in Bodden Town, 20 percent in West Bay, 9 percent in East End and 8 percent in North Side.

The agency pegs average “pavement condition index,” a measure of road-surface health, at 74, out of a target rating of 80, crediting East End with a top score of 78.

“This means, with the exception of East End, [the] majority of the roadwork will require maintenance intervention over the next 1–5 years,” the report says, adding that most roadwork in the last decade has been in George Town.

Every quarter, the authority uses that index to propose “work packages,” involving maintenance or other strategic priorities.

The packages are financed from the $10 million Road Fund, itself derived from 100 percent of the duties paid on imported fuel, 100 percent of duties on vehicle licensing and 100 percent of fees paid to government’s infrastructure fund.

Still, worries persist. For example, the report says, in mid-2015, 71 percent of the NRA’s 297 assets – valued at $5.8 million – had “exceeded their estimated useful life.” Further, “based on the usage of the property, plant and equipment,” the agency “should have an asset replacement fund of … $4.4 million,” but counted only $4.1 million “total cash balance from all sources.”

The report pegs plant and equipment at 65 percent of the authority’s $5.8 million asset value, followed by 27 percent in vehicles, 4 percent in leasehold improvements and another 2 percent each in computers, furniture and hardware.

Other concerns focus on three high-risk areas: asphalt costs, local availability of aggregate and other materials, and ongoing concerns with funding.

Asphalt costs depended on a local monopoly, global oil prices and growing costs of doing business.

Aggregate supplies could be compromised by poor quality material available locally and the “inability of the supplier to produce asphalt.”

“Reduced quarrying activity on Grand Cayman leads to greater reliance on imports,” the report concludes, adding the NRA has no alternative if the asphalt supplier’s machinery breaks down.

Finally, the authors fear Cayman’s road network will not significantly increase without more money.

As the national road network expands and the NRA faces increased unscheduled maintenance demands, the report says, “current funding is inadequate to meet maintenance needs, [and] there are no commitments for additional funding.”

On March 21, a solution for aggregate may have appeared in the form of “tire-derived aggregate,” produced at the George Town landfill under a Department of Environmental Health contract.

Six trucks will spend the next year feeding half-a-million discarded tires into a shredder, reducing each steel-belted radial to two-inch rubber chips, ideal as all-purpose fill for construction, drainage works, road-building, erosion control and landfill cover.

Local home builder Davenport Development and planners at Frank Sound’s mixed-use Ironwood community will take this aggregate for their projects, and DEH has already named the NRA a prime candidate for the material.

The authority will have plenty of opportunity to test the aggregate, Dozens of projects fill the authority’s six-page schedule through 2020, the highest-profile of which is the 1.6-mile, $6.5 million Esterley Tibbetts Highway expansion between Lawrence Boulevard and the Butterfield roundabout, scheduled for completion in 2018.

Other jobs include a possible 2017-2018 $900,000, 0.23-mile connector road linking West Bay’s Willie Farrington Drive to Reverend Blackman Road; and a simultaneous $700,000, 0.41-mile reconstruction of the intersection with Reverend Blackman Road.

Still on the schedule is the $34 million, two-mile airport connector road from the new roundabout near Camana Bay on the rebuilt Esterley Tibbetts Highway.

In George Town, for 2017 and 2018, planners are looking at a $1 million, quarter-mile link between Elgin Avenue and Eastern Avenue, and another $1.3 million, 0.3-mile connector between Eastern Avenue and Mary Street.

The long-delayed 0.3-mile, $2.4 million widening to four lanes of Bobby Thompson Way, including the roundabout at Linford Pierson Highway, may start this year, while the $6.4 million, 1.5-mile widening – also to four lanes and with a new roundabout – of the highway is scheduled for completion this year.

A $1.7 million, 0.9-mile reconstruction of Shedden Road from the Mango Tree to Elizabethan Square is scheduled for 2020/2021.

Finally, in a move likely to please Minister Hew, transport planners and environmentalists, the NRA this year will launch an island-wide program to build bicycle lanes, although no details – or costs – are listed.

Pandohie says Cayman’s road network is indispensable to its prosperity and economic development at large. While difficult to quantify precisely, “transportation benefits to the economy are widespread,” she says.

“Cost benefits are most often measured in travel-time savings dollars. In simple terms engineers place an average dollar value on the average number of persons per vehicle that are stuck in traffic. In the U.S different states estimate that hourly dollar figure to be between $10-$15 per hour per person stuck in traffic.

“Efficient roads in general contribute to the economy through … greater access and mobility; decreased travel time to and from destinations; and enhancement of the movement of people for work-home trips; leisure trips; tourist and tourism-related travel throughout the island,” she says.

Roads also enable essential emergency services as ambulance, fire and police; industrial spin-offs such as cargo and service workers in construction and other trades; and basic public benefits as garbage collection, school buses, etc.

“It’s hard to measure in real dollars,” Pandohie says, the boost to business development, creation of housing and neighborhoods and ever-growing demand for more vehicles and, in turn, more roads.

“That’s why growth (land use) and road development must be planned and managed,” she says, “especially in a closed system like Cayman with limited space. A long-range transportation plan is essential, one which is not just focused on building highways, but providing interconnectivity between neighborhoods; street hierarchy with traffic, weight and speed limits; [and] roads designed not just for cars, but buses, cyclists and pedestrians.”

In a preface to the Corporate Strategic Plan, the authors write that “a lasting solution that makes the best use of all transport modes is important for the long-term health and prosperity of our economy.

“This may require a broader discussion on a land transport management agency with overall responsibility for the regulation of all public and private vehicles on the transportation network.

“In the short to medium term, as the road network expands and the cost of raw-material input increases, it will be become necessary to review the funding model of the NRA to ensure that the country’s road standards are maintained.”

Hopes for more engagement in US-Caribbean relationship

The Caribbean region is poised to benefit in several sectors, including banking, energy and health, says an official from the Caribbean-Central American Action, a nonprofit organization based in Washington, D.C.

Six months into the Donald Trump U.S. presidency, countries around the world must adjust to a new U.S. policy strategy and an altogether different way of doing business by the U.S. administration.

For the Caribbean region, this brings uncertainty, but also an opportunity for more engagement with the United States.

Sally Yearwood, executive director of Caribbean-Central American Action, a nonprofit organization based in Washington, D.C., that deals with economic and trade issues that relate to the Caribbean region, says times have changed.

“A lot of us have not seen a president like this. He works differently, he moves differently. That means that a lot of the issues that are on the agenda, we don’t necessarily know where they are going.”

Speaking at a Cayman Islands Chamber of Commerce event in June, she pointed to various initiatives, such as the U.S.-Caribbean Strategic Engagement Act and efforts to reduce financial services regulations as examples for potential changes in the relationship between the region and its North American neighbor.

De-regulation and de-risking

For the Cayman Islands, the reduction by U.S. banks of correspondent relationships with Caribbean clients has the been most noticeable change in recent years.

Wil Pineau, CEO of the Cayman Islands Chamber of Commerce, said, “We remain fully aware of how our relationship with our North American neighbors has changed. In particular, we want to remain informed about the changes in the U.S. banking system after many banks cut their ties with the Caribbean in a process known as de-risking.”

The reduction of correspondent banking relationships has increased in response to tougher anti-money laundering regulations, as well as harsher penalties for banks that fail to identify their customers or infringe on banking regulations. As a result, correspondent banks have blamed both a decline in margins and an increase in reputational and financial risks associated with this type of banking service for cutting ties with bank clients.

In 2015, Western Union had to temporarily stop remittance services in Cayman after Fidelity Bank decided to stop offering correspondent banking services to remittance companies. Jamaica National, which operates MoneyGram and several other cash transfer brands in Cayman, also lost its correspondent banking service provider Cayman National Bank, leaving the remittance companies in a position where they could accept only U.S. dollars instead of Cayman dollars. The fall in remittances from Cayman and a U.S. dollar cash shortage on island became visible signs of the economic impact these types of banking services have, especially for small economies.

A survey by the Financial Stability Board released in July concluded that “the decline in the number of correspondent banking relationships is continuing” as banks that are concerned about falling afoul of anti-money laundering regulations cut their correspondent relationships by 6 percent worldwide between 2011 and 2016. The number of active correspondent banks for U.S. dollar and euro transfers fell even further, by 15 percent.

The Trump presidency raised some hopes that the new U.S. administration’s desire to deregulate the financial markets would help improve the deteriorating cross-border banking services for Caribbean countries.

Wil Pineau, CEO of the Cayman Islands Chamber of Commerce, and Sally Yearwood, executive director of Caribbean-Central American Action, address regional issues at a Chamber event in June.

Banking regulation legislation

The U.S. Financial Choice Act was the first piece of legislation that impacted banking regulation this year. But de-regulation does not necessarily mean a reversal of current de-risking initiatives by U.S. banks.

Yearwood said that in her conversations with representatives of U.S. banks she gained the impression that big banks “are going to stick to the higher standards.” Because they have invested millions to manage risk and to comply with anti-money laundering and know-your-customer requirements, they are probably not going to change, she said.

However, smaller banks may offer some hope to alleviate the reliance of Caribbean countries on an ever-shrinking number of correspondent banks in the U.S.

Yearwood said, within a less regulated financial sector, smaller banks that previously have been much more risk averse, may be willing to take on more risks and consider offering correspondent banking services.

In addition, she noted an opportunity for the Caribbean to step into the Fintech space, to deal with current cross-border payment issues.

The U.S.-Caribbean Strategic Engagement Act

An important initiative for the wider Caribbean is the U.S.-Caribbean Strategic Engagement Act that was signed into law by former President Barack Obama at the end of last year.

Since the 1980s, very few pieces of legislation have focused on the Caribbean as a region.

In June, the U.S. State Department submitted a report to Congress that outlined the areas in which the U.S. wants to cooperate with the Caribbean.

The six areas of engagement are security, diplomacy, prosperity, energy, education and health.

The document states that on security, the U.S. will work with its Caribbean partners to fight terrorism, dismantle illicit trafficking networks, enhance maritime security, confront violent and organized crime, and increase the sharing of threat information among countries.

Diplomatic efforts will focus on raising the level of political dialogue with the Caribbean especially where one of the six priorities is concerned.

The U.S. promises further to increase its own “and our neighbors’ prosperity by promoting sustainable growth, open markets for U.S. exports, and private sector-led investment and development.”

The economic cooperation will extend to the energy sector, where the U.S. government believes that exports of U.S. natural gas and the use of U.S. renewable energy technologies “will provide cleaner, cheaper alternatives to heavy fuel oil and lessen reliance on Venezuela.”

In terms of education, the U.S. aims to focus its resources on exchanges and programs for students, scholars, teachers, and other professionals; and in the area of health, the U.S. will continue to partner with countries in the region in the fight against infectious diseases, like HIV/AIDS and Zika.

The report only scratches the surface in terms of where the relationship is going, Yearwood said. “But in a way that is a good thing because it gives us a lot of operating room.”

Although the act defines the Caribbean as the members of CARICOM and the Dominican Republic, the agreement may still be important for the Cayman Islands.

All of the issues that are important to U.S. policy in the region, from banking and trade facilitation to the Paris Climate Change Agreement, are probably going to impact Cayman as well, Yearwood said.

“Our push from the beginning has been that you cannot have a U.S.-Caribbean Engagement Act without including the entire Caribbean,” she said, including the English, Dutch, U.S. and French Caribbean.

“Let’s look at this as a holistic effort.”

Especially in terms of trade, the Caribbean is a very important market for the U.S., she noted.

In 2016, the Caribbean imported $21.6 billion in goods and services from the U.S., more than Russia or India.

As a result, the Caribbean has more political clout than the U.S. policy focus may indicate. The Caribbean is not inconsequential to the U.S., the CCAA director said, but the question remains: “How do we make our voices heard?”

Grounded BVI Airways has checkered past

Ken Silva

To reach the British Virgin Islands from the U.S., travelers generally have two options: They can fly to Puerto Rico and make a connecting flight to the BVI, or they can take the less expensive but longer route of flying to the U.S. Virgin Islands and taking a ferry.

This needs to change for the territory to compete with more-easily accessible offshore centers like the Cayman Islands and others, according to industry practitioners.

Government officials there tried to make that change happen when they provided local carrier BVI Airways with a US$7 million subsidy agreement in January 2016 to establish a direct route to Miami by October of that year. However, BVI Airways has yet to conduct a single flight to the U.S., and with the company laying off its entire flight crew last week, citing financial difficulties, many doubt whether it ever will.

BVI Premier Orlando Smith faces a motion of no confidence by opposition legislators in the territory’s legislative assembly this week due in large part to his role in driving the BVI Airways agreement, which provides no apparent way for his government to recover more than US$7 million his administration pumped into the airline.

Unsavory history

The history of BVI Airways – which is marred with lawsuits, financial woes and allegations of impropriety – raises questions about why government partnered with the company in the first place.

The airline was founded in 2009 by two U.S. businessmen and a company owned by the family of former longtime BVI legislator Cyril Romney. At the time, it offered flights between Tortola, Dominica, Antigua and St. Maarten, but after amassing hundreds of thousands of dollars of liabilities over the next five years, BVI Airways stopped conducting flights in 2014.

Allegedly owing the BVI Airports Authority US$176,758 in various fees, the airline was sued by the authority, and a judge issued an order allowing the BVIAA to seize the airline’s aircraft until the company paid at least US$75,000.

Despite the fact that BVI Airways never paid what it allegedly owed, according to Premier Smith, its executives were in discussions with government throughout 2014 and 2015 about starting a publicly subsidized route to Miami. Those discussions culminated in the January 2016 US$7 million subsidy agreement, which was touted by both parties as a “partnership” and an “investment” that would be a “game changer” for the territory’s financial services and tourism sectors.

At the time, residents were told that direct flights would begin by October.

When October came and went with no applications submitted to any of the required U.S. regulatory authorities, opposition legislators and others in the community began questioning whether their “investment” would yield any results.

More questions

Questions became more frequent and furious in March, when more details were uncovered about the checkered past of the airline and some of its executives by weekly newspaper The BVI Beacon.

For instance, it was made public that BVI Airways CEO Jerry  Willoughby, Executive Vice President Pauline Jones and Safety Director Joseph Pampalone all worked with a New York-based corporation called Baltia Air Lines, which has never operated a commercial flight or generated revenue despite being in existence since 1989, according to a U.S. Securities and Exchange Commission filing from March 2016 (Baltia rebranded to USGlobal Airways earlier this year, but still has yet to launch).

Willoughby denied playing a significant role with Baltia at the time, stating through his publicist that he was a “paid consultant” for a short period in 2010, but was never an executive or in senior management.

That statement, however, was contradicted by 2009 company filings with the U.S. Department of Transportation, which named him as a shareholder and director of flight operations. Willoughby’s own LinkedIn page also stated at the time that he was Baltia’s director of flight operations from April 2009 to October 2011 – the page was apparently taken down shortly after the BVI Airways CEO was questioned about his role with Baltia.

Another finding revealed at the time was that the company is partially owned by a Delaware-based entity named Colchester Aviation, shielding the identity of 25.9 percent of the BVI Airways shareholders. Premier Smith has declined to name all the BVI Airways shareholders on the grounds that such information would be “prejudicial” to the airline if it were public, but has not explained why that is.

Allegations of insider trading

BVI Opposition Leader Andrew Fahie has also made allegations that the company conducted insider trading and owed the government of Dominica money – though he has not provide any evidence to back these claims, which BVI Airways called slanderous.

BVI Airways was further hampered in March by objections filed by two other airlines with the U.S. Department of Transportation, asking the department to deny BVI Airways’ permit on the grounds that they were never served with the airline’s application, which they claimed was legally required. They also argued that BVI Airways’ relationship with government presents a conflict of interest and gives the airline an unfair competitive advantage.

The DOT granted the permit application over the objections of the rival airlines, and BVI Airways looked ready to launch after receiving U.S. Federal Aviation Administration and U.S. Transportation Security Administration approvals in late June and early July, respectively.

Layoffs in July

However, the airline laid off its entire flight crew soon after receiving those approvals.

In a written statement, BVI Airways executives attributed its financial woes to unfulfilled obligations by the government, as well as recent efforts to expand the territory’s airport.

The airport-expansion efforts, the executives claimed, hampered their ability to raise private capital because an expanded runway would attract competing airlines that would also offer direct flights to the United States. This claim was made despite the fact that the airport expansion project has been a priority for the BVI administration since it took power in 2011.

The executives also stated that government has “unfulfilled obligations” with the company, including promised updates to the airport’s terminal and additional Customs Department personnel.

The government, for its part, strongly disputed those claims.

“The government has provided all the financial support agreed between ourselves and BVI Airways, and furthermore, the Airports Authority has put in place most of what was agreed to enhance the arrivals and departure experience of BVI Airways passengers, including an office, additional seating, air conditioning and two ticket counters,” stated Premier Smith. “Having provided the agreed support, this government and people are awaiting the commencement of the much-anticipated direct Miami-BVI flight.”

Along with the motion of no confidence, the premier is also scheduled this week to be questioned by opposition members about whether government can recover its investment – now at some US$7.2 million – and whether the airline would require more public funding to launch.

Port Authority envisions Grand Cayman as regional hub

As plans are considered for increased cargo space in Grand Cayman, the Port Authority will first need to address the issue of tariffs. - Photo: Chris Court

As the Port Authority of the Cayman Islands celebrates its 40th year, the organization is preparing for a future that promises to bring much larger vessels, greater foot traffic and more cargo to the George Town waterfront.

In anticipation of immense infrastructure demands, port Director Clement Reid described renovation plans intended to transform Grand Cayman into a central stopping point and a regional transport hub. One of the first lines of order will be expanding the capacity of the Berkley Bush Cargo Distribution Centre at Airport Industrial Park to accommodate larger cargo loads.

“This is going to change the way we do business at the distribution center,” Reid said. “The plan will call for a new entrance gate, expansion of our existing warehouse and it will be totally computerized. Customers will be able to actually book when they want a container in advance.”

The addition of four, fully automated Boxhunter cranes from Finland’s Konecranes will take stacks nine-stories high and is expected to increase storage capacity from 900 20-foot containers to 3,000.

The expansion plans come in anticipation of changes mandated by the International Maritime Organization that will mean larger cargo vessels sailing internationally. As of September 2017, ships that carry ballast water will be required to have on-board treatment systems before discharging water into a port of call.

“We are aware that the lines are getting bigger, the cargo vessels are getting bigger. The current fleet of feeder vessels that service the Caribbean and small ports are becoming redundant,” Reid said.

“It’s not feasible to retrofit those old vessels, so most of the companies now are changing to larger vessels. So with the increase in vessel size and the population growth in Cayman and the increase of the tourism product, we need to be able to be efficient in order to deliver the cargo to our consumers on a timely basis.”

Transshipment from Grand Cayman

With the expansion of the distribution center, Reid hopes Cayman’s improved storage capacity will serve a much larger, long-term plan: transforming Cayman into a regional cargo hub.

“What the board is investigating right now is the idea of transshipment for perishable cargo out of Central America,” Reid said. “Some of the lines are asking our port if we could take that cargo that’s coming out of Central America, position it here for a 24-hour period, and then they would send other vessels to pick it up and take it in to South Florida.”

Currently, most perishable cargo that arrives in Cayman is first shipped from Central America to Port Everglades, Florida, where the cargo is repackaged and redistributed for the Caribbean. Under the Port Authority’s scheme, much of that redistribution could take place in Grand Cayman.

“The island benefits because we have created a new revenue stream that doesn’t currently exist. It also provides a new market for the importers and consumers to tap into. It will allow you, then, to bring fresh produce out of Central America at a lower cost and a longer shelf life than you currently get,” Reid said.

The port will first need to address the issue of tariffs, which currently render transshipment too expensive for Cayman. Reid said tackling this legislative issue will be a top priority for the Port Authority.

If cost and capacity barriers can be effectively addressed, Reid anticipates a robust, recession-proof addition to the port’s revenue stream.

“The interest has been unbelievable from companies that want to do business. … The trade that actually happens on our southwest coast between Panama and South Florida, it’s literally thousands of vessels per day. They pass by us,” Reid said.

“This type of business is pretty much recession-proof because the cargo doesn’t stay in Cayman. … It’s a new revenue stream for the economy. It generates more jobs because it will mean the port will take on new personnel to handle the volume. You’d open up the whole of Central America and the Panama Canal to Grand Cayman.”

He anticipates shipments could be brought directly from Honduras, where the government already has had trade talks, Panama, Costa Rica or Nicaragua.

Direct shipments from Central America would come with their own regulatory questions, however. Currently, produce that passes through Florida is subject to inspection by the U.S. Department of Agriculture. Averting Florida would also avert such inspections, which reinforce food safety in the Cayman Islands.

“The Department of Agriculture would have to step up their legislation in terms of manning the produce and whatever is coming out of Central America. They do have a division in the department now that does inspections of containers that come with perishable cargo,” Reid said.

By leveraging volume across the region, however, Reid anticipates that the port’s plan would lower freight costs and ultimately the price of consumer goods in Cayman.

Central bankers rise again

Hawkish comments from Mario Draghi at the end of June boosted bets the ECB is preparing to unwind stimulus.

It was supposed to be the year interest rate differentials between the U.S. and other developed nations grew, and rising U.S. interest rates were meant to put a floor under the strong dollar. Certainly everyone agreed at the beginning of 2017 that the U.S. Fed was going to continue on their path of increasing interest rates and they have not disappointed, raising rates at a measured, quarterly pace in both March and June.

What markets had not bargained for, however, was that other central banks around the world might also start to think about normalizing interest rates. It is early in the process, to be sure, but several central bank governors in the major economies have begun to hint that the era of ultra-low or below zero interest rates may be about to be curtailed. For now, low interest rates and quantitative easing (QE) are still flooding the world with excess liquidity, central bank balance sheets remain bloated and markets remain complacent, but times may be changing more quickly than expected.

The U.S. has always been on the vanguard of the developed economies when it comes to the extraordinary stimulus project. They were the first sovereign to inject capital into their banking system, among the first to get to the zero bound of interest rates, and the first to institute a large-scale QE program. Similarly, they have been the first central bank to begin to raise interest rates, and recently have become the first to address the issue of tapering the reinvestment of their bond purchases, thereby (very) slowly shrinking the size of their balance sheet.

Initially, just $10 billion of Treasury and mortgage-backed securities will be allowed to run-off monthly, although the pace will increase incrementally on a month-by-month basis. Despite a higher Fed Funds rate and the requirement for the market to fill the hole created by the gradual wind down of QE, market expectations for further interest rate increases are below the level indicated by the Federal Reserve’s own forecasts. This appears to be driven by near-term inflation numbers, which have been weaker than anticipated, as lower oil prices and limited wage increases (despite near full employment) weigh on both demand and supply.

Perhaps emboldened by the reaction to the U.S. bond market to floating the idea of balance sheet reduction – the reaction was zero – other central banks are testing the waters and gauging the reaction of bond markets.

In Europe, Mario Draghi attempted to explain the “evolving” monetary policy stance of the ECB, but markets only listened to his relatively upbeat views on the economy, its lower unemployment rate and the recently reduced political uncertainty. The result was a strong move higher in the euro to put it 4 percent above the ECB’s 2017 forecast and a near doubling of 10-year German government yields from 0.24 percent to 0.47 percent at the end of June.

In Canada, Governor Stephen Poloz of the Bank of Canada sent an even stronger message that they are considering raising interest rates from the record low level that was instituted in the wake of the collapse in oil prices in 2015. This was a significant departure from a statement made only a month ago that “uncertainties continue to cloud the global and Canadian outlooks.” Short-term interest rate markets instantly doubled the probability of a hike in Canada, the 10- year Canadian government bond rose by 0.29 percent, and the Canadian dollar rose substantially versus the USD. The Bank of Canada followed its rhetoric with an interest rate increase in early July in admission that Canada now has one the highest growth rates in the developed world (along with the hottest property market).

In the U.K., the Bank of England (BoE) split and voted only 5-3 to keep rates steady at its last meeting. Mark Carney, the Governor of the BoE, then signaled that U.K. base rates may have to rise in the coming months. His comments ran completely counter to his words of only a week prior, and as with the European and Canadian markets, long-term interest rates rose and Sterling strengthened. We tend to believe that the thoughts toward higher rates in the U.K. are too early. In the first instance, the BoE has started to increase cyclical capital requirements for domestic lenders, which should ease unsustainable growth in domestic lending, a key concern for the central bank. In addition, a number of key indicators in the economy appear to be rolling over. The data seem to be pointing toward a weakening economy at the same time as Brexit negotiations and an unstable coalition government are starting to weigh on sentiment.

For now, our baseline view is that any move toward less accommodative global monetary policy will be very gradual, but it is a dangerous time to invest in the bond markets, with very little cushion for error.

Andrew Baron, CFA is Chief Investment Officer, Butterfield Asset Management.
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.

‘Brexit’ and tax transparency discussed at AIMA Cayman event

Jiri Krol

Dominic Tonner

The potential impact on Cayman’s financial services sector of Brexit, tax transparency proposals and financial market regulatory reforms were high on the agenda when a leading advocate for the global hedge fund industry visited the island recently.

Jiri Krol, deputy CEO and Global Head of Government Affairs for the Alternative Investment Management Association (AIMA), The global trade body for the alternative investment sector, told a gathering of senior industry figures that structural changes and tax transparency reforms in Europe could have implications for Cayman.

Krol is a former European Commission official who helped to frame the hedge fund industry’s contribution to the policy discussions that followed the global financial crisis of 2007-2008.

He focused in particular on four issues and themes: the European Union Directive on Alternative Investment Fund Managers (AIFMD), which has regulated hedge fund, private equity and venture capital fund managers in the EU since 2014; the EU’s updated Markets in Financial Instruments Directive (MiFID II), the cornerstone of European securities law that comes into effect in January 2018; the U.K.’s pending exit from the EU; and tax transparency proposals.

On the first of those, Krol said that the future extension of the EU-wide “passport” to Cayman-domiciled funds and investment management outsourcing provisions appear to have been placed on hold for the foreseeable future due to Brexit, although that is not the official line from the European authorities.

In terms of the European Union’s MiFID II, Krol explained that many of the rules, including payment for research, transparency requirements and position limits, will have global impact, affecting managers established outside the EU.

On tax transparency, he said the European Commission’s examination of what it regards as “noncooperative” jurisdictions could have an impact on Cayman and other international financial centres. A list is expected to be published before the end of 2017. It is not clear what the immediate implications would be for jurisdictions deemed to be noncooperative, but it is certain that, gradually, jurisdictions on the list would end up losing access to EU investors and markets. Krol said AIMA would continue to engage with the commission on the issue and urged the Cayman industry and government to intensify their efforts during the assessment phase.

Krol’s comments were made at AIMA Cayman’s annual luncheon at The Ritz-Carlton, Grand Cayman during the GAIM Ops Conference, one of the global hedge fund industry’s largest events.

“This was a timely debate and we are very grateful to Jiri for taking the time to brief the local industry about these developments, which clearly have the potential to impact Cayman for years to come,” said AIMA Cayman’s chairman, Colin MacKay, the managing director of Intertrust Cayman, a trust and corporate services provider.

“We look forward to working closely with AIMA globally, as well as government and Cayman Finance and other industry representative bodies to ensure Cayman’s position as the preferred domicile for international capital aggregation is secured,” he said.

Dominic Tonner is global head of communications at AIMA.

Sharing is hip, disruptive and a potentially lucrative investment theme

These are hard times for materialists – because sharing rather than owning is trendy. That makes it more difficult to impress others by possessing many material things. And it is quite possible that it will become even harder in the future. At least, if forecasters are correct, since they expect that sharing instead of possessing will continue to grow in popularity.

In a comprehensive report, BofA Merrill Lynch (BofAML) addresses the topic of the sharing economy, which stands behind the above-mentioned trend. The authors of the report show that the term is not only an increasingly popular buzzword, but that it is also really starting to transform the world, which leads also to a growing investment opportunity.

With respect to the sharing trend, it is important to understand that this is not a vision of the future, but that it is already long in progress. According to BofAML, the emergence of the Sharing Economy – an umbrella term for a range of activities transacted over online platforms – is already transforming 21st century business. This happens via disruptive business models like on-demand (Uber), rental (Airbnb), gig (TaskRabbit), access (Spotify), collaboration (WeWork), platforms (Amazon), circular (ThredUP) and peer-to-peer (Lufax). As BofAML points out, these tech-focused models are unlocking the value of unused and under-used assets, driving a shift from asset-heavy to asset-light businesses and enabling access over ownership.

Thematic investing strategist Felix Tran estimates that the potential addressable Sharing Economy market is $2 trillion globally. He values the current market at $250 billion. The addressable market, according to him, is $785 billion in the U.S., $645 billion in Europe and $500 billion in China. Furthermore, he refers to a PwC forecast, according to which the Sharing Economy market opportunity could grow to $335 billion by 2025E (estimated). The consulting company expects transport, home sharing, streaming and staffing to be the fastest-growing verticals, with 2013-25E compound annual growth rates of 17 percent to 63 percent.

Sharing Economy attracts a pile of money

These are impressive numbers, and this also applies to the money invested in the theme. Quoting CB Insights 2017, BofA Merrill Lynch mentions that the Sharing Economy attracted $45 billion in global financing and investment in 2012-16. Of the funding, 75 percent has been allocated to only five companies (Uber, Airbnb, Lyft, Ola, Instacart). As a consequence of this, eight out of 10 of the largest startups in the world by valuation are Sharing Economy companies. On top of this, BofAML analysis shows that there are 40 potential unicorns (startups with a valuation $1 billion+) and 10 decacorns (startups with a valuation $10 billion+) in the space.

The decisive driving force behind all this is consumers, as they hit “peak stuff” and embrace a “shift to thrift” and the “experience economy” as BofAML explains. That thesis is underpinned by the fact that 72 percent of Americans have already used more than one Sharing Economy service, and two-thirds of consumers worldwide are willing to share or rent out their personal assets. Key drivers here are millennials and Gen Z (five times more likely to share than Boomers) and Emerging Markets (600 million involved in China). The Chinese Sharing Economy, for example, is expected to grow at an average annual rate of 40 percent over the next few years to account for more than 10 percent of the country’s GDP by 2020E ($1.7 trillion) and 20 percent by 2025E ($4.4 trillion).

Against this background it does not come as a big surprise that BofAML assumes that the Sharing Economy will eventually disrupt most sectors. According to Tran, an increasing number of companies will potentially fall victim to the creative destruction of a “Kodak moment.” Only 64 out of 1,600+ companies have been on the S&P 500 for 50 years. The “life expectancy” of S&P companies has fallen from 33 years in 1990 to 20 years today, and is forecast to shrink to 14 years by 2026E. Up to 50 percent of S&P companies are set to be replaced in the next 10 years. BofAML believes that the rise and eventual IPOs/M&A of Sharing Economy leaders such as Airbnb, Dropbox, Spotify and Uber, among others, will trigger even further disruption.

BofAML analysis has identified 12 broad industry sectors, which account for an aggregate $6 trillion, or 8 percent of global GDP, that are at risk of disruption over the long term. The 12 sectors are education, energy/waste, financials, food, logistics, storage and equipment, healthcare, cloud, staffing and services, media, retail, and travel/ leisure/work/transportation. It is believed by BofAML that many Sharing Economy companies could eventually address trillion+ rather than billion+ dollar markets in the most bullish scenario. Winners in the Sharing Economy space will include first settlers (companies that reach “liquidity” first), consolidators, technological leaders and content curators.

High risk and a high reward profile

For investors wishing to invest in the Sharing Economy theme, BofAML has mapped opportunities across several entry points, including transportation (Alphabet: Waymo autonomous vehicles, Waze P2P traffic sharing data; Yandex: “Uber of Russia,” launching carpooling); travel, leisure and workspace (Expedia: HomeAway is the No. 2 vacation rental actor; Priceline: vacation rental via; Workspace: #1 London co-working office space provider); food (GrubHub: No. 1 U.S. food delivery; Seamless, launching own delivery riders; Ocado: No. 1 pure-play eGroceries, pioneer of online/on-demand model; EU online takeaway food marketplace); retail (eBay: secondhand and new goods, GumTree, StubHub, Twice resale; media (No. 1 social network Facebook, No. 1 photo-sharing Instagram, No. 1 message sharing WhatsApp); marketplace, workplace; Match Group, No. 1 dating, Tinder “on-demand” matchmaking, Netflix, No. 1 subscription video on demand, Vivendi, universal music content, music streaming); Cloud services and equipment (Ashtead, U.K. equipment rental supplier to live events like Glastonbury and Superbowl; Box, consumer cloud file sharing, expanding into enterprise; IAC, the “Uber of home services” with HomeAdvisor / Angie’s List merger; Intuit QuickBooks consumer tax assistance for gig economy workers); and platforms (, new and secondhand goods, AWS, delivery / logistics (Prime / Flex), food groceries via Fresh; music / video, Kindle; Alibaba, food (, Ant Financial, Alipay, P2P wealth management, crowdfunding, social credit scoring Sesame Credit; Tencent Holdings transport, Didi, WeChat QR code payments).

Besides all the changes, BofAML states that there will also be many losers among the Sharing Economy disruptors. The Sharing Economy is also seen to face a significant number of challenges and obstacles, including regulation, workers’ rights and inequality. The space is under increasing scrutiny by the U.S. Department of Commerce, the European Commission, and the U.K. Parliament, among many others. Last but not least, there are also major labor and human resources challenges that have to be addressed. Altogether that sounds like an interesting playing field for investors searching for opportunities with a high risk and a high reward profile.

Cayman’s cybersecurity specialists work across borders

Members of Deloitte's cybersecurity team meet in the forensic lab. Alexandra Simonova, Glen Allan Mernett, Kyle Parsons and Nick Kedney assist clients all over the world. - Photo: Alvaro Serey

When the cybersecurity team at Deloitte’s Grand Cayman office describes its workload, the stories sound more like those out of a spy novel than a risk assessment department.

Protective cases holding hundreds of phone connectors, wires, imaging equipment and other tools sit ready to grab and go at a moment’s notice to assist clients in the Caribbean, North America or Europe.

Forensic manager Glen Allan Mernett laughed as he described explaining the heavy cases of wires to airport security personnel when he travels on assignment. Not surprisingly, the equipment often attracts scrutiny from officers.

The logistical headache of transporting security equipment comes with the territory, however. The international nature of cybercrime means this team must work across borders.

While the company has cybersecurity specialists all over the world, the George Town office hosts a comprehensive forensic lab, outfitted to address a broad range of cyber and data threats from hackers to natural disasters. The team members from this office are equipped to deploy and address major breaches almost anywhere in the world.

Given the sensitive nature of certain cases, Mernett often works through the night to go undetected.

“We’ve had fraud cases where only the board of the company knows we’re there. We’ll come in after all of the employees, including management, have left and we will start at 8 p.m. for imaging and be out of there by 6 a.m. We’ll have five, six computers getting the images,” Mernett said.

In one such board-approved case, Mernett found himself locked out of the office he needed to access.

“We couldn’t get into an office. We didn’t have the keys for it, but the board approved us to take images of the computer,” he said.

“We were able to take (the glass partition) out, go into the office, image the computer and then when we left, we put the glass in place and put everything back in place so no one would know we were there.”

No longer the domain of IT

The nature of Mernett’s work reflects the high-level and often cross-border demands placed on modern companies. Cybersecurity no longer falls exclusively in the domain of the IT department, says Deloitte Discovery partner Nick Kedney.

To ensure smooth and secure operations, cybersecurity must remain top of mind in the executive suite as well.

“That’s still a challenge getting board members to understand that this is not something you can delegate to your IT department. You need to have a security officer and you need to have sufficient understanding about these challenges. This is a prima facie business continuity issue. It’s no different from a hurricane in many ways in terms that it can blow your business down,” Kedney said.

Gone are the days of stereotypical teenage hackers exploiting systems for the fun of it. Cyber threats now emanate from a wide range of fronts. From hacktivists to disgruntled employees, businesses face daily pressure on their digital assets.

Hacking as a career

For many cyber criminals, hacking is a career that provides paychecks and pensions. Companies that fall victim to ransomware attacks demanding payment must grapple with the implications of funding organized crime.

“You’ve got to remember, if you pay the ransom, you are funding an industry. They are going to develop new tools, new methods to extract more value. It is an organized industry. It’s not random people or kids in bedrooms. It’s an industry and if you go onto the more obscure parts of the internet, you’ll see discussions about attacks and how to monetize,” Kedney said.

Risk advisory senior manager Alexandra Simonova warns that companies that comply with hacker demands and pay ransoms may find themselves subject to repeat attacks. Payment sends a message to criminals that more funds may be available.

After all, organizing an attack can be as easy as hiring a service, she added.

“You don’t necessarily need to be very sophisticated in the cyberattack anymore. You can go on the dark Web and rent the whole service, just pay for a subscription, provide your targets and that service will attack whoever you want it to attack and they will take a percentage of the revenue,” Simonova said.

“They have really good customer support as well. They have call centers. They make it really easy for you to pay the ransom. There is a 24/7 line, so that if you have issues with paying the ransom, you call them, they help you through the process. It’s very customer friendly.”

Increase in ransomware attacks

In recent years, ransomware attacks have increased dramatically. The first six months of 2016 brought a spike in attacks that outnumbered all of 2015.

“It’s progressing because this type of attack is easily monetizable whereas other types of attacks, like stealing credit card data, you need to go further to monetize your hacking efforts,” Kedney said.

Simonova recommends companies assess their risk profile to determine their vulnerabilities and better understand where threats might arise. Hackers can be motivated by money, personal or business gain, or even revenge. Staff from marketing to legal departments must be briefed on their responsibilities.

“It’s a corporate culture and education issue. It is very important that employees are educated. There shouldn’t be any blame attached to being duped. … People need to understand to the extent possible ways they can recognize a genuine from a fake email,” Kedney said.

In the meantime, security teams face an arms race of sorts against the dark Web. Risk teams like Deloitte’s must remain on the ready.

As Simonova put it, “Unfortunately, most companies will eventually be breached. It’s not a question of if, but when.”

Privy Council decision provides certainty, but creates surprising commercial results

Chris Keefe

Matthew Goucke and Chris Keefe

A recent judgment of the Judicial Committee of the Privy Council1 (Privy Council), the ultimate appellate court of the Cayman Islands, has provided certainty for investors and insolvency practitioners with respect to the enforceability and priority of investors’ claims for unpaid redemption proceeds in the winding up of Cayman Islands investment funds.

The Privy Council decision is the most recent in the ongoing liquidation proceedings of Herald Fund SPC (Herald), a segregated portfolio company incorporated in the Cayman Islands which was one of the largest so-called feeder funds into the Madoff Ponzi scheme.

The case involved an important point of statutory construction, namely how section 37(7) of the Companies Law operates in the context of significant unpaid redemption proceeds sought to be enforced several years after the discovery of the Ponzi scheme notwithstanding that, with the benefit of hindsight, those redemption claims, valued at almost $200 million, were clearly based on a wholly fictitious net asset value.

The issue is one that has rarely confronted the Grand Court of the Cayman Islands and this was the first time it had been considered at the highest appellate level.


Affirming the rulings of the Grand Court and the Cayman Islands Court of Appeal, the Privy Council found that, as a matter of construction, section 37(7)(a) of the Companies Law does not apply to the claims of certain classes of Herald’s unpaid redeemers in circumstances where, at the commencement of the winding up, the relevant redeemable shares had been “redeemed” in accordance with the terms of Herald’s memorandum and articles of association. In other words, the redemption date had occurred prior to any suspension being implemented, notwithstanding that payment had not been made and was not due to be paid at that time.

The Privy Council found that “redemption” occurs on surrender of the status of shareholder, which is entirely a function of the terms of the contract of membership between a company and its members among themselves – expressing the freedom that shareholders and a company have to shape their relationship as regards redemption or purchase of a company’s shares.

The Privy Council did not accept the appellant’s argument that “redemption” ought to have an autonomous statutory meaning (being the completion of the entire process of redemption, including payment). As a result, the enforceability of a claim for unpaid redemption proceeds is now entirely dependent on how “redemption” is defined under the relevant articles of association of a particular company.

Regrettably, the Privy Council did not address in its judgment a number of the arguments advanced by the appellant in support of a consistent statutory definition at the hearing of the appeal.

The appellant was, however, successful in opposing the claims of intervening investors who had submitted redemption requests after Herald’s board had implemented a suspension of redemptions in December 2008 and who asserted that they had enforceable claims arising under section 37(7) of the Companies Law. The Privy Council rightly rejected these claims on the basis that the suspension meant that the terms of redemption provided for it to take place at a date later than the commencement of the winding up (in circumstances where Herald’s directors never lifted the suspension prior to that date). In terms of the application of section 37(7), the Privy Council in its judgment did not refer to the various academic texts cited by the appellant which suggested that redemption for the purposes of the section meant the completion of the entire process of redemption, including payment. It instead found that section 37(7) envisages situations where shares are, or are liable to be, redeemed or purchased, but where a company had for any reason wrongly failed to take steps necessary to enable the redemption or purchase at the applicable date in accordance with the terms of the relevant articles of association.

Acknowledging the very limited practical application of the section, which must arise given the construction favored by the Privy Council, the board noted that “the likelihood in practice of successful section 37(7) claimants may well be slight.”

Essentially, in the context of the articles of most contemporary Cayman Islands investment funds, this decision means that redeeming shareholders have valid claims for the payment of redemption proceeds as at the relevant redemption day, which claims are enforceable in a winding up regardless of (i) whether those claims are based on a net asset value which has been wholly misstated as the result of a pervasive fraud (as was the case with respect to Herald); and (ii) a company’s ability to make payment out of either share capital or share premium at any time prior to the commencement of a winding up.

The Privy Council also appears to have gone a step further than it did in Fairfield Sentry v Migani where, in the context of an action by the liquidators of Fairfield Sentry seeking to recover redemption proceeds which had already been paid to investors based on a wholly fictitious NAV, the Privy Council found those proceeds could not be clawed back in circumstances where payment had already been made prior to the commencement of the winding up. In this case, the Privy Council sought to draw “a precise line” (or rather extend the line) so as to allow investors to escape loss (and perhaps with significant fictitious profit) in a liquidation where they have ceased to be a shareholder under the terms of the relevant articles of association prior to the commencement of the winding up, notwithstanding that no payment has in fact been made (nor could it have been made as a matter of fact at the relevant time).

It is an unfortunate consequence that unredeemed investors will ultimately bear the loss in a liquidation once claims which are based on a misstated NAV have been paid, simply because certain investors submitted redemption requests a matter of days before others and in circumstances where the resultant suspension was due to no fault of the company or its directors, but solely based on the exposure of the Madoff fraud.

This decision means that, in times of uncertainty, boards of investment funds will need to act quickly in deploying suspension or gating mechanisms to ensure that, to the extent possible, any unforeseen loss is borne by the investor base as a whole.

Importantly, however, the Privy Council reaffirmed the Cayman Islands Court of Appeal’s finding that the claims of unpaid redeemers rank behind the claims of ordinary third-party creditors; although it left open the seemingly difficult question as to the priority to be afforded between claims for unpaid redemption proceeds that sit outside section 37(7) and those claims arising under the section.


While the Privy Council’s decision provides finality as to the appropriate treatment of claims for the payment of redemption proceeds in a winding up, it is likely that new and existing funds alike (together with their respective investors and prospective investors) may reconsider new formulations of what “redemption” means under their individual constituent documents in order to navigate the unfortunate loss-allocation consequences which may arise pursuant to this judgment. The door of course remains open for legislative reform in light of the very limited practical application of section 37(7) of the Companies Law.

Matthew Goucke and Chris Keefe act for Mr. Pearson, the additional liquidator of Herald.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Hi-tech: Telecoms, 5G and ‘the internet of everything’

From left, Flow's Reynaldo Ysaguirrie, Victor Salgado, Daniel Tathum and Jonathan Martin.

Everything seemed to move into high gear when the pocket-size, internet-connected, multifunction cellphones arrived.

The little beeping, blinking – some might say “infernal” – machine has moved us so far, so fast that it’s quaintly prehistoric to recall the early ‘90s when “portable phones” were the size of your foot, fax machines were the rage and U.S. Vice President Al Gore had not yet claimed to have “invented” the internet.

Today, the given wisdom is that the computing power used by the U.S. National Aeronautics and Space Administration in 1969 to put Neil Armstrong and Apollo 11 on the moon is less than that inside a 2017 cellphone.

According to, the Apollo Guidance Computer “was more basic than the electronics in modern toasters that have computer controlled stop/start/defrost buttons.” says compared to Apollo 11, an iPhone has 130,000 times more transistors, is 32,600 times faster, processes instructions 80.8 million times faster and overall, is 120 million times faster.

“Apollo 11 was landed on the moon using a computer that had 1,300 times less processing power than iPhone5s,” said ComputerWeekly, while Britain’s “The Guardian” weighed in that Apollo 11 had “less computing power than a washing machine.”

Corporate embrace of technology

The moon landing was 48 years ago. Private, corporate embrace of technology came virtually at the same time, locally in 1966, according to executives at Flow.

A three-member technical team, joined by Managing Director Victor Salgado, said “Cable & Wireless” started in 1966 with five-digit telephone numbers, switchboard operators and a single analog “handset” serving an entire residential neighborhood.

“People came around to your house to use the telephone. It was usually the same people that had the television” centrally serving nearby residents, said Senior Product Implementation Specialist Reynaldo Ysaguirrie, Customer Experience Director Daniel Tathum and Technology Operations Manager Jonathan Martin, preferring to speak collectively.

Significantly, this nascent network predated Cayman’s financial services industry, illustrating a familiar synergy as emerging technology shaped a fledgling industry, and that industry in turn shaped the technology.

“We laid the undersea ‘Cayman-Jamaica Fiber System’ coaxial cable to Jamaica,” the engineers said, “allowing us to call outside the country. Telex came later, in the late-’70s, early ‘80s.”

The cable boosted banking and business, they said, quickly compelling legal acceptance of the products of those communications. Facsimiles were still in the future, and mail “took weeks and weeks,” driving development of telex, which quickly “appeared in every office, maybe a couple of hundred in Cayman.”

“Telex service,” the team recalled, “was assigned by a number code for access.”

Fax finally appeared in the ‘80s, transmitting on analog telephone lines using a dial-up modem, disabling any calls while data moved.

Furious pace of development

As crude as the technology appears in retrospect, the furious pace of development was – at least initially – driven by financial and legal services. The pornography industry drove secure payment platforms, enabling companies like Amazon, Napster and eBay to thrive, encouraging general economic development.


Author Don Tapscott coined the term “digital economy” in his 1995 book of the same name, subtitled “Promise and Peril in the Age of Networked Intelligence,” speculating on the explosive economic effects created by convergence of digital platforms across telecommunications and computers.

Six years later, the U.S. Census Bureau identified three main components of a digital economy: the hardware, software, telecoms, networks and human capital necessary to e-business; the processes by which e-business is conducted on those networks; and the actual transfer of goods.

Today, estimates of the digital economy range wildly from $3 trillion to $16 trillion to $20 trillion, according to a report completed as long as three years ago by Oxford Economics, quoting Massachusetts-based research group International Data Corporation.

“The size of total worldwide e-commerce, when global business-to-business and [business-to]-consumer transactions are added together, will equate to $16 trillion in 2013,” the Oxford report said. “When added to the global market for digital products and services – which IDate, the French technology research firm, estimated at $4.4 trillion in 2013 – the total size of the digital economy is estimated at $20.4 trillion, equivalent to roughly 13.8% of global sales.”

Even at the low, $3 trillion end, the sum is 30 percent of the S&P 500, six times the U.S. annual trade deficit or more than the GDP of the United Kingdom, all generated in the last 20 years.

The figures are startling, underscored by Flow’s Salgado, Ysaguirrie, Tathum and Martin, noting that cellphones did not even appear until the ‘90s, followed by carphones and a 1994 “CJFS” cable upgrade to fiber.

Old and slow analog systems, however, largely restricted cellphone coverage to high-population areas and crowded frequencies, though ultimately driving investment in an island-wide network of towers, further evidence – were it needed – of industry and technology driving each other.

The arrival, however, of “TDMA,” time-division multiple access, enabled users to share a network by separating signals into different time slots and transmitting them in fast succession, one-after-the-other.

TDMA was quickly incorporated into the new and wider frequency GSM – European-originated Groupe Speciale Mobile, later renamed Global System for Mobile Communications. The digital-standard GSM replaced old analog networks, and this, said Flow, broke the logjam.

“It allowed smaller phones that could fit into your pocket, and because more manufacturers produced more phones as a result of demand, prices went down,” the team said.

Lighter, cheaper, faster phones

Lighter, cheaper and faster phones meant more sales and exponentially more calls. At the same time, Internet technology began to spread, bringing “elementary websites and the first web browsers,” and the start of interface between cellphone and Internet.

GSM enabled the “asymmetric digital subscriber line,” a single line to handle computers and telephones simultaneously, followed by General Packet Radio Service, creating “2G” and “3G” networks.

And now, said the technical team, “we have LTE,” long-term evolution, which isn’t so much a form of technology as a path to 4G, and even, the group said, “advanced LTE and 4½G.”

The telecoms business is both wildly competitive and constantly moving, the group said, “and with technology development in the last decade, anything we do will be obsolete in about five years,” meaning Flow has “about 3½ years to go before we start talking about 5G.”

In the last decade, Flow has invested $150 million in infrastructure, a pace that will remain undiminished for at least another five years.

“The possibilities are endless,” said Salgado.

Endless possibilities

Endless possibilities are, in fact, what has driven local computer networking company Netclues, founded in 2008 by sales executive brothers Kartik and Jay Mehta.

Kartik himself refers to those early “elementary websites and first browsers,” saying “people did have websites, people did know what the worldwide web was, but people were not aware of the potential of the Web.

“Big corporates and companies did have websites, but [they] only meant a presence for the company. They did not talk to the visitor, they did not interact with the viewer – they did not engage the viewer,” intending only to inform, he says.

Only in 2009 and 2010, he says, “things started changing, and this was around the same time when mobile phones entered the mainstream consumer market and started becoming readily available to people.”

This, he said, “was the tipping point which revolutionized the IT industry.

“People started browsing websites on their Blackberry phones and in no time, people started connecting with each other via the internet, and the world became a small place.”

Like Flow – on a smaller scale – and very like Alice in Wonderland who recognized that “we must run as fast as we can just to stay in place – and if you wish to go anywhere you must run twice as fast as that,” Netclues struggled to stay abreast of a fast-moving market.

“We started with a team of web developers only as they were enough to meet with what was required in the website. But with this change brought by cellphones, there was increasing pressure on interacting with the website visitor – to give them more than just information … when they visit your website.

“With growing demand from our clients and from industry norms, we added a special graphics team with senior designers who had experience in working with not only websites, but also in other varied areas of graphic design and animation.”

Mehta observed that the new team itself faced rapid evolution of graphics and animation software, which moved seamlessly into the websites themselves, again marking the mutual development of technology and the industries it served.

The convergence conditioned how graphics and websites engaged viewers; and viewers realized the power of the Internet and interactive possibilities.

“As the world started becoming smaller and smaller, people started realizing that there are others out there that were looking for them, their business or their services. Everyone was waiting to discover something or someone out there,” Mehta said – and Netclues added two teams of programmers, working 24/7.

“We realized at this point the importance of customer care and after-sale services, so we added a customer-service team,” he said.

More changes

More changes arrived in 2009 and 2010, he said, as Google took over the world. Clients started treating websites as investable assets and demanded “SEO,” search engine optimization, by which their site would head Google results. Netclues had to maximize SEO functions and place ads across the worldwide web, sparking another iteration of “corporate tech,” digital marketing.

“We could foresee that people would slowly move away from traditional means of marketing and spend money on digital marketing,” Kartik said, conceding that while traditional advertising remained effective, digital was attractive because “everything is highly and precisely trackable.”

A digital marketing team comprised SEO and Google-trained experts, he said, and “after that, it has been a constant uphill climb.”

You can almost hear him sigh.

A website has become a virtual office and marketing tool, he says, connected to social media, customer relationship management systems, accounting systems, “even your bank account.”

This, says the Flow team, is 5G, “the internet of everything.”

“What is coming,” Salgado says, “is that every device in your home will have connectivity. Your fridge will tell you when you run out of milk – and will place an order for more. 5G will make every device able to connect to a system, much like technology made Uber successful.”

Every device connected to every other device sounds like infinite connectivity – and that sounds like science fiction – and Flow is determined to be ready.

The 5G potential for business, Salgado says, is just one concept. Another is “broadband-based infrastructure,” and that relies on larger “pipes” to move ever-larger bundles of information ever faster. A technology called multi-protocol label switching enables users to download 50 full-length films in one second.

“One thing is quite certain: The future is digital,” Mehta says, contemplating the arrival of that science fiction: “Artificial intelligence is slowly and steadily taking over the various walks of life. ‘Siri’ and ‘Alexa’” – not to mention “Watson,” “Cortana” and newest voice assistant “Bixby” – “have already entered our houses and people are asking [them] for information and to connect to businesses.

“It won’t be long before we all have a personal AI robot who talks to us, takes care of us and our family and becomes one of us. It’s scary to think,” he says, “but future means growth and technological advancements – so I can’t complain. Only time will tell how much we will grow, but we will add to our expertise and make sure we walk hand-in-hand with the world and with the latest advances in technology.”

Cayman house hunters step into virtual world

Tracie Watler speaks about virtual reality at a Cayman Islands Marketing Professionals Association workshop. - Photo: Chris Fletcher

On Cayman’s high-end real estate market, agents are stepping into the virtual realm to guide would-be buyers through immersive, 3D home tours.

Through increasingly accessible virtual reality headsets, house hunters can now peruse their island dream home without ever touching Cayman’s shores. Instead, shoppers can tour their potential abode from the comfort of their current one.

IRG Real Estate’s Tracie Watler said the technology has already assisted in the sale of one multimillion-dollar home in Cayman. When the buyers’ children in the United States asked to view the house before purchase, IRG set up a personal, virtual walk-through.

“They were very keen on the house, but they wanted to show it to their children, who were in the States at the time,” Watler said.

“So basically we sat down with them in the Ritz bar and sent the link to their family. They were all able to go through the house together and talk about it. On that basis, the family ended up buying the house, which was great. So for us, it’s already been worth the investment.”

Watler, who does not have a photography background, said the technology has been easy to take on. With a tablet and 360-photo camera, she is able to fully document properties and quickly generate a 3D archive.

“I just hit the download button and it loads to the cloud,” she said.

While a large property may take several hours to photograph, an application automatically processes and formats the content, Watler explained. Once online, viewers may access the content using VR goggles or on their Web browser in a standard, 2D format.

“There are the VR goggles, which is a very immersive experience. There is also the computer version, so anybody can do it. You don’t necessarily need the goggles. They can do it from the comfort of their own home and walk through a house as if they were actually there,” Watler said.

As 360-photo and virtual reality technology become more accessible, she anticipates an array of applications for businesses beyond high-end real estate.

Tanya Wigmore of Meticulosity, an e-commerce development and design firm in Cayman, envisions using the technology for tourism, construction projects and the medical sector.

“Travel is a huge industry. Say you are Disneyland and want to give a feel for your park. You could have people virtually walk through the park. If you were a resort here and wanted to show off your hotel rooms, you could,” Wigmore said.

In the medical sector, she said, virtual reality can help address patient anxiety from jitters at the dentist to much larger disorders like post-traumatic stress.

“There has been some good research to show how submersible VR really is. You have suspended disbelief. You can put yourself there and feel like you are in the environment and let yourself work through a lot of those built-up emotions and trapped feelings,” Wigmore said.

As more consumers buy into virtual reality, Wigmore said, one of the top challenges will be generating enough content.

“The real gap right now is on our side. The businesses are not producing enough content,” she said.

“It’s so easy to use, though. There is no reason to be afraid of it.”

Cybersecurity 101: 2017 edition

Cybercrime is not just the stuff of Hollywood movies, like this scene from 'Zero Days.' - PHOTO: Magnolia Pictures

You would have to be stuck on an island with no internet connection to not be aware of cybersecurity issues in the news. But just in case, here is a recap of what is noteworthy:

In May, the WannaCry ransomware infected an estimated 230,000 systems in more than 150 countries. Technology vendors reacted with patches, updates and other mechanisms to detect and prevent further spread of the threat. More recently, in June, a variant of the Petya ransomware, Notpetya, started making the rounds of the internet. Initial assessments suggested that Notpetya was simply more ransomware but evidence emerged indicating that Notpetya was actually a cyberweapon designed to take down the infected systems.

And, in very local news, very well crafted and formatted emails purporting to come from several Cayman companies, were being circulated. The bad guys even compromised the websites and domains of other Cayman companies in their efforts. If you wait a few more days, there will be more cybercrime in the news.

Cybercrime is big business

While there are many kinds of cyberthreats, such as data theft, website defacement and hactivism, ransomware remains the poster child for the cybercrime industry due to its immense popularity and success. We need to face the reality that cybercrime is a very big business. Like any business, they need to be profitable to survive. Cybercrime is not just surviving but is a thriving industry with ransomware reaping an estimated $1 billion in 2016. If no one paid the ransoms, the business model would fail. Clearly, people are paying the ransoms.

So, you might think that cybercrime is alive and well in Cayman, but instead, recognize that Cayman is actively being targeted by cybercriminals. They have done their research and carefully copied the email templates and crafted the language in reasonable and unbroken English. Now that we know we’re actively being targeted and that bad things are constantly happening, what can we do about it?

I’m not going to bore you with yet another discourse on having board-level investment in cybersecurity or having cybersecurity policies. You can Google that for yourselves or just talk to an IT auditor. Instead, I would like to offer you some practical guidance for you and your organizations.

Moving with the times

“Best practices,” in reality, is a marketing buzzword. Instead, I like to borrow a term from Gartner: “useful practices.” These are processes or practices that the leaders in the field are implementing today, and generally lead to useful results with cost effectiveness.

Let us start by accepting that firewalls, antivirus, web and email systems are insufficient. Firewalls and antivirus tools were invented over 25 years ago to address problems from 25 years ago. Just as we cannot expect a delivery service today to run on horse and carriage, we cannot expect yesterday’s tools to protect against tomorrow’s or even today’s threats.

You can be sure that in every headlining breach or attack, every one of those organizations had those tools in place, and yet they were still impacted. Insanity is doing the same thing over and over and expecting a different result. Please, let’s stop the insanity!

Organizations should look to invest in complementary and advanced tools. IT or cybersecurity staff are collectively groaning at this point thinking great, more things to manage. This is key. It is possible to not only provide additional layers of security, but do so in a way that is easy to use, can save time and reduce work.

Look for terms like “automation,” “Artificial Intelligence,” “machine learning” and “mathematics. Do not just believe the sales and marketing hype either. Take the time to evaluate and test these in your organization. You have little to lose and everything to gain. These tools can be endpoint, network or cloud-based. Partnering with a cybersecurity service provider for these tools is cost effective and beneficial, due to collaborative nature of service providers.

Answer key questions

Compliance does NOT equal security. Compliance is more about doing your defined job correctly. The real question is: are you doing the right job? An organization that can accurately and consistently answer the following questions will be in a very good position to address cybersecurity issues and concerns.

What or who is connected to your organization?

What applications or processes are running in your organization?

Who has administrative rights?

How are you continuously monitoring your organization?

How are your tools working together to correlate, integrate and automate threat detection/prevention/containment?

Accept that every organization will suffer a breach or significant cybersecurity event sooner or later. Short of gross negligence, it isn’t going to be anyone’s fault – it just is. As a potential customer of said organization, I accept that. However, I would want assurance that the event was quickly detected, contained and mitigated. It is paramount to learn from the event to help prevent a similar recurrence. Ensuring cybersecurity staff/groups/teams are regularly informed and stay abreast of the industry trends is the key here.


Seek local and regional networking opportunities for cybersecurity. This can be at levels such as board members developing policies or technical means for security staff to interact with peers. Perhaps the most important networking aspect is for threat sharing. Obviously, most organizations cannot disclose details about a breach or tools employed, but there is a middle ground somewhere. This is often through a trusted third party such as common cybersecurity provider. It may be simply a matter of allowing the transmission of a new malware file or phishing email/url. The more people know about a threat, the better the chances of prevention. An ounce of prevention is worth a pound of cure.

Lastly, you will note that I have always used the term cybersecurity and not IT or network security. Cybersecurity is only partially an IT issue. It is first and foremost a business issue but also falls under human resources, training, legal, public relations, marketing and yes, compliance. Cybersecurity, part of information security, is its own discipline. While seemingly a trivial detail, it is an important one and change has to start somewhere. Why not have it start with the readers of The Journal.

Sean Slattery is founder and CTO of Caribbean Solutions Lab, a cybersecurity service provider that helps businesses throughout the Caribbean and North America to defend and protect themselves from cyber threats. Based in Cayman for nearly 20 years, Slattery has spent the last nine years focused on cybersecurity, holds a U.S. government secret security clearance, is an FBI Infragard member and regularly delivers cybersecurity presentations.

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