A call to arms

The Cayman Islands financial services sector has been caught lagging when it comes to its role in advancing the jurisdiction’s position within the global marketplace, content to complacently ride the wave of success when times were good, but slow to show a united front when the fundamentals of the relationship with Government changed, according to the Cayman Islands Financial Services Association Chairman, Anthony Travers. Battling for the continued success of Cayman’s financial services industry (and therefore the success of the entire country) Travers recently discussed a raft of new initiatives that CIFSA is undertaking and called for the private sector as a whole to join together in support. Business Editor Lindsey Turnbull reports.

The how and why of the current mystery

AIMA (the Alternative Investment Management Association) Cayman’s first luncheon of the year at the Westin Casuarina last month was the perfect venue for CIFSA Chairman Anthony Travers to unleash a stinging attack on those responsible for the current crisis. Commencing by quoting Romans 11:25 For I would not, brethren, that ye should be ignorant of this mystery, lest ye should be wise in your own conceits, he criticised those who had appeared content to reap the rewards from a system established over decades (initially by the pioneers Sir Vassel Johnson and William S Walker), without fully understanding what had led to that success and without recognising that a change in relations with government had necessitated the establishment of a fully funded authoritative private sector body to ensure the ongoing viability of the financial industry.

Travers described the history of the Cayman Islands financial services industry’s rise to its position of pre-eminence as being due to the efforts of a few individuals whose special relationship with a receptive government enabled a swift legislative process and the right international positioning and which had created a forward-thinking framework for financial success that was the envy of other jurisdictions.

“What occurred and highly successfully was almost the philosophical opposite of the current committee system,” he said.

While that structure very possibly could not continue indefinitely, when it ended it was imperative that it was replaced immediately by a unified all-encompassing, fully funded private sector association that could engage government on crucial issues with authority. But instead, financial industry participants appeared to have proceeded on the assumption that the level of prosperity would necessarily increase without any understanding of what was necessary strategically to maintain that prosperity or any awareness of the changing external factors that threatened it.

The mistaken assumption that the financial industry would simply continue as it had, with each organisation advancing its own interests, appeared to have prevented the private sector from establishing an effective all encompassing organisation that could speak with the benefit of collective responsibility for the entire industry.

“A single private sector body should have been created immediately to speak to the government with a clear, intuitive and authoritative voice,” he explained. “What occurred in fact was fragmented and incoherent.”

Travers alluded to the structure and success of the Jersey Financial Services Association and regretted that it had taken a crisis to establish and properly fund the CIFSA initiative “but about 1460 days late and $10 million short,” he added.

But the failings were not simply those of an overly self-interested private sector. There were other failings that had contributed to the current challenges.

According to Travers, the days of government being in a position to advocate on financial matters or instruct lobbyists without the Minister being an expert in the relevant area were long gone. Further, he added: “The days were also long gone when the government could introduce legislation such as the rollover policy that directly and adversely affected the financial industry without specific CIFSA input. And if all of the above is not clearly understood,” he added, “the financial industry as we have understood it will be long gone.”

The fact that Cayman is on the OECD’s grey list is, according to Travers, a direct sequential result of the OECD’s 1997 report on Harmful Tax Competition, which he urged all to read. He outlined the four characteristics adopted by that report to define a tax haven, according to the original OECD tests: no or low tax; lack of transparency; no effective exchange of information and, most importantly and troubling, the lack of substantial activity. “We are now suffering from a remanifestation of the OECD’s attack,” he said. “In truth, it was a mistake to have thought that it ever
went away.”

In the light of the substantial activity test Travers said the application of the rollover policy [Cayman’s term limit immigration policy which came into effect in 2004] to professionals in the financial industry was short-term suicide.

Travers explained further: “The frustration and bemusement demonstrated locally at US President Obama’s constant references to the 18,000 companies supposedly operating in Ugland House missed the obvious point. This was a well chosen metaphor for the substantial presence test and as such had gained traction in US legislative circles. The obvious problem with the rollover policy in this regard is that it had made the argument hard to refute in that it militated against the establishment of a high quality local financial service infrastructure and indeed an unintended consequence had been to send a large percentage of Cayman’s hedge fund administration business and the personnel that operated it to other locations, particularly Canada No doubt, too, it had and has disincentivised new financial service operations from setting up in Cayman. All of this increased the risk of Cayman being regarded as a brass plate jurisdiction rather than financial centre where transactions were originated which distinction would be critical to the next stage of the attack to which Cayman would be subjected.”

He furthered that the rollover was not originally drafted to include financial services industry professionals and the end result has been to “damage the economy and expose our flank so that there are simply not currently enough financial professionals in the Cayman Islands to be regarded as properly conducting the transactional flows that we claim are undertaken here, in accordance with what are regarded as appropriate ratios by onshore tax authorities and regulators.” On that ground alone Cayman would now face a long, uphill struggle.

The situation today

According to Travers, President Obama, British Prime Minister Gordon Brown and Lord Wallace of Saltaire deliberately conflate two key issues – tax evasion with tax avoidance, and the Cayman Islands with the non OECD-compliant, non-transparent jurisdictions Switzerland, Andorra, Monaco and others. The G20 politicians are greatly assisted in this deliberate confusion by the OECD’s arbitrary and politically motivated approach (i.e. not taking into consideration Cayman’s information exchange agreements with 27 EU countries under the EUSD.) Establishing both points was at the core of CIFSA’s media response.

“The underlying issue though is not about tax evasion,” Travers said, “It all now reverts to the original OECD thesis about who should be in control of flows of global capital and a well structured response needed to take full account of the ulterior motive. Bankrupt G20 countries have to increase their levels of taxation to meet deficits and are rightly concerned that mobile capital will flow to the lower tax jurisdictions. In terms of fund managers now leaving the UK due to recently increased levels of UK taxation, the grey listing and the ill-considered rollover policy has meant that institutions are not considering relocating to Cayman, but instead to Switzerland, Jersey and Guernsey.”

Travers said the Cayman Islands should have dealt with the situation proactively and short-sightedness has now left us behind the curve.

Turning to the better news Travers indicated that CIFSA has received significant funding and has engaged two heavyweight lobbyists and public relation firms: QuinnGillespie in Washington and Media House in London. Travers indicated he is due to visit Washington twice more to meet with various Senators involved in the legislative process and their staffers and would make a similar trip to London to meet with editors of the major financial press. Crucially, however, as indicated in the original press release in relation to lobbying efforts in the US CIFSA needed to be accompanied by representatives from Cayman’s new government or receive authority from the government to speak on behalf of the Cayman Islands in any meetings on legislative matters

“CIFSA and the Cayman government must proceed with a united front if we are now to successfully engage the US policy makers,” he said.

He continued: “Removing Cayman from this grey list is of immediate concern as we have already seen a troubling reduction in new deal flows.”

While this was no doubt attributable in part to the global credit crisis, the statistics, he said, should be of concern to all, especially when the government has a budget of $517 million and already has a $30 million shortfall. If this downturn were not reversed it was reasonable to suppose that the new government might inherit anything up to a $100 million budget deficit for fiscal 2009.

In terms of its advice to government, CIFSA had pointed out that while by rights it should do so relying on the OECD to approve the unilateral mechanism at the May OECD meetings was simply too high a risk strategy when Cayman was the only offshore jurisdiction to suggest it. Accordingly, the advice had been that resources should be applied to approving the bilateral or multi lateral mechanisms and to exceeding the stated OECD target of 12 bilateral treaties. It was important that Cayman not remain on the OECD list if the Senator Levin Legislation were to gain traction.

Of the two US bills currently introduced in the US, Travers assessed that the Baucus Bill was more favourable than that introduced by Senator Levin.

“The Baucus Bill is less problematic for the Cayman Islands and is intended to operate in a similar way to the current EUSD proactive reporting obligation. But we need to be in a strong position to negotiate some sort of compromise position.”

It is highly improbable, he thought, that Cayman institutions will not be subject at the least to additional reporting in respect of US individuals and corporations, but added that in so far as the US Treasury would, as a result, obtain hard statistics that exercise would of itself clear up misperceptions and, as such, should be regarded as a positive.

He also said that the consensus view within CIFSA was that the current bank secrecy legislation in Cayman “had outlived its usefulness.”

“Rather than repeal the confidentiality law in its entirety (which is often cross-referenced in transactional documents) CIFSA’s favoured approach is to simply remove the criminality provisions,” Travers said. Even though government was not now in session and unable to amend any laws at present, a press release to that effect would send the correct message and would be a simple enough to undertake.

In conclusion, Travers said he was cheered up by a report in The UK’s Daily Telegraph from the Institute of Economic Advisors which had as a result formed the basis of a major CIFSA UK press release that morning. The report laid the blame for this financial crisis fairly and squarely on central banks, regulators, the US government, the UK’s Financial Services Authority and the financial institutions themselves. The report recommended that no significant changes be made to the way hedge funds and offshore financial centres in general should operate as they had not been implicated in the financial crisis.