The higher an eagle soars…

The Cayman Government press release of Friday, 3 April, following the news of the inclusion of the Cayman Islands in the G-20 list of tax havens was, as usual, a model of courtesy and restraint but it did not mask the extreme disappointment that reverberated around the financial industry at the absurdity of including of the Cayman Islands at all; nor did the attempts to downplay the significance of Cayman’s inclusion by some ring true. Those with experience in the area of competitive marketing recognized the immediate truth. If you are not white you are black. There is no sanctuary in a shade of grey, writes Anthony Travers, Chairman of the Cayman Islands Financial Services Association Task Force and Chairman of the Cayman Islands Stock Exchange.

It had been hoped that the OECD would not yield to the political pressure exerted by a number of G-20 leaders engaged in a strategic exercise in blame deflection and would undertake an objective analysis of the tax transparency established by the Cayman Islands over the past decade.

But predictably, in the event, the groundswell of public opinion generated by formidable onshore treasury public relations machines seemingly proved irresistible. Without inclusion of the Cayman Islands as the most successful of the offshore jurisdictions on some form of list no doubt the success of the G-20 anti tax haven initiative would have been called into question by the public at large. The irony of the result is that in acting as it did the OECD raised fundamental questions about the value that is in fact attributed by international organisations and the G-20 countries to the quality of cooperation in tax and criminal matters that the Cayman Islands has demonstrated as a matter of fact. The OECD acted no differently than had the Financial Action Task Force in 2001 which, in analysing the risk of money laundering, turned a similar politically motivated blind eye to Cayman’s Mutual Legal Assistance Treaty with the United States and the existence of a rigorous suspicious activity reporting regime and concluded that Cayman did not comply with a different set of rules (the Vienna principles) and therefore posed a systemic risk. As we knew at the time and as everyone now knows, on the facts the FATF concerns were wholly misplaced. So too now the OECD has ignored the real effect of the Cayman Islands full and relevant tax transparency not only with the United States under the November 2001 Tax Information Exchange Agreement but since 2005 the proactive tax reporting with 27 European Union nations under the EUSD, the figures for which, not incidentally, show monetarily and fiscally insignificant deposits by European residents in the Cayman Islands.

Yet according to the OECD process the Cayman Islands found itself characterised with the wholly non compliant nations of Switzerland, Liechtenstein Monaco and Andorra whose absolute intransigence on the tax transparency issue has been driving global hostility and the anti tax evasion movement for decades. The determination by the OECD not to provide immediate credit for the Cayman’s unilateral mechanism, which is well respected by a number of OECD members and which included as scheduled countries the UK and Germany, revealed the OECD process to be one that clearly had nothing whatsoever to do with disclosure of information in tax matters, assuming that Cayman Islands financial institutions have anything of interest to disclose.

What might well cause a degree of despondency about the process is that no account was taken of the fact that the good faith efforts of the Cayman Islands Government, with respect to its endeavours to broaden the base of bilateral agreements, were often not met in good faith by prospective treaty partners.

Nor is any note taken of the fact that with the US and the EU covered by existing tax transparency arrangements further potential treaty parties are of decreasing relevance in any real sense and in many cases are irrelevant to the transactional flows undertaken in and through Cayman. However the illogical emphasis placed by the OECD on a purely numeric evaluation suggests once again that the goal posts can be moved off the playing field to secure the intended political result.

These are truly astonishing actions from an organisation the objects of which preclude undertaking conduct that may cause arbitrary and prejudicial economic harm.

The Cayman Islands Government now has a number of different options. Ironically one of these would be to evaluate the benefits that have arisen from cooperation to date. If the Cayman Islands Government were, understandably, to decide that there were no benefits whatsoever in further cooperation in tax matters the blame would be firmly at the door of the OECD for having taken a wholly unsympathetic approach that ignores the realities of tax evasion and where it is practiced.

Whilst there exists a certain irony in that thought no doubt more pragmatic action will rule the day. There are two better options that can be conducted in parallel .The first obviously enough is for CIG to continue to press the OECD to approve the unilateral mechanism. Given that that mechanism has been adopted by certain OECD members the failure by the OECD to approve its adoption by Cayman at the 11 May meeting would clearly be regarded as discriminatory.

The second is for CIG to execute immediately further bilateral treaties. The OECD having ex post facto now settled on the arbitrary number of required bilateral treaties (apparently 12) there surely must exist another four jurisdictions with which Cayman can enter into immediate arrangements to take its total to the relevant number. If, however arbitrary it appears, that is the test, it should be possible to meet it and in the current circumstances without necessarily seeking the maximum quid pro quo in the negotiations.

However there is still no guarantee that the Cayman Islands good faith efforts to obtain approval of the unilateral mechanism or to enter into bilateral treaties will be met with a good faith response .It evidently suits certain G-20 Counties to continue to demonise Cayman for as long as personal political position of a G-20 leader is dependent on perpetuating the myth that domestic deficits will be funded by the lost offshore tax revenues. (The total tax revenue from the Cayman deposits of European Union residents is running at $280,000 per year).

Then there is the timing issue.

There is no objective mechanism for getting off the list and the G-20 determination clearly colludes with Sen. Levins Stop the Tax Haven Abuse legislation, which as matters stand now has the benefit of an internationally agreed grey list of targets that can replace the questionable pedigree of the GAO’s less than compelling effort even though the current US legislation evidences a serious level of confusion about the abuse it is supposed to be preventing,

Thus by whatever combination of disingenuity and double standard Cayman was included on the OECD grey list the issue for Cayman now is how fast it can move to the white list. If indeed the past history of the OECD is anything to go by, notwithstanding the major initiative now launched by CIFSA in conjunction with the continued negotiations being conducted by GIG, a note of caution should be sounded. If the political imperative continues to rule then there may be no certain grounds for optimism. Ironically by way of collateral damage as a result of this listing the harm inflicted on the capital flows into certain G-20 nations may be at least as severe as the damage done to the Cayman Islands. But until such time as the understanding of G-20 politicians as to the mechanics of international capital flows and the role the Cayman Islands is properly understood that at least remains the risk. No doubt more should have been done to improve that understanding in recent years. But whilst that effort is now under way perhaps an evaluation should be also undertaken on the role the United Kingdom has played in this process and the question therefore asked again as to who is best placed, going forward, to control the destiny of the Cayman Islands?



Anthony Travers, Chairman of the Cayman Islands Financial Services Association Task Force and Chairman of the Cayman Islands Stock Exchange