Gravity defying rhetoric sure makes for unsound policies

In a rational world we may have anticipated that the US
regulatory response to the financial crisis would have established some cursory
reference to two of its fundamental causes. Yet the framers of the Dodd/Frank
Act did not see fit to restrict Fannie Mae and Freddie Mac’s ability to
guarantee mortgages to uncreditworthy borrowers nor to restrict the rating
agencies in granting triple AAA ratings to the repackaged toxic waste that
resulted, writes Cayman Finance Chairman Anthony Travers

In the political world it is supposed to therefore follow,
that if neither cause is sanctioned by the new regulation, the actual causes
lay elsewhere. Cue then the political attack on bankers’ bonuses a more assured
political bandwagon for the party currently in control of all three US Houses
than any attack that might cut across the laudable but blatantly populist
objective that everyone should own a home, regardless of their ability to pay
for the home they supposedly owned. By that simple expedient political history
and accountability is rewritten.   

So, too, we see hedge funds now targeted in Europe and
subject to a regulatory response that will restrict leverage and require fund
managers to receive 50 per cent of their remuneration after a deferred three
year period. And yet the average leverage in the hedge fund industry is around
two. Perhaps it is the threat that hedge funds pose to the political
aspirations of those driving a totalitarian federalist agenda that needs to be
curbed. European regulators may well remove sovereign debt risk from the stress
test evaluation of European banks how long would it take the hedge fund
industry to expose that delusion.  But is
that really what is meant by systemic risk?

In all of these legislative responses we find a troubling
gulf between the economic and the political reality, either to protect a sacred
political cow or to avoid responsibility for its rotting carcass.  These exercises in delusion require a
political mastery of the art of blame deflection and nowhere is that craft more
evident than in the continued references to the US tax revenue that is being
lost through the use of offshore financial centres like the Cayman Islands. But
In reality not only is this comment too 
a gross distortion but  it should
be a source of real concern to the US legislature and the public it represents,
that for political ends deliberate confusion is introduced  between what is illegal tax evasion and
lawful tax structuring.  This
mischaracterisation is not only unfair in describing the proper function of the
offshore financial centre and the benefits it confers on the United States, but
forms a wholly unsound basis on which to formulate United States tax policy.

It always helps to have an impressive sounding private
sector group support the political initiative and so we find this latest
falsehood supported by the hitherto unheard of ‘Business and Investors Against
Tax Haven Abuse’, which notably is supported by Senator Carl Levin (D-MI).  Senator Levin was a co-author (along with
then Senator Barak Obama) of the “Stop Tax Haven Abuse” bill, which was
supplanted by the altogether more balanced legislation known as the ‘Hiring
Incentives to Restore Employment’ (“HIRE”) Act (The response of Cayman
financial services industry was set out in the open letter to Senator Levin and
printed in the Washington newspaper Politico. The full text is available at

Some research on the ‘Business and Investors Against Tax
Haven Abuse’ group shows that it is supported by the ‘American Sustainable
Business Council’, ‘Business for Shared Prosperity’ and ‘Wealth for the Common
Good’, all of which are inter-related grassroots political organisations that
host website petitions for or against various policy initiatives. No
information as to how these organisations formulate policy, who or how many
people of organisations back them, is available.

What these bodies and the latest initiative seeks to do is
to promote the falsehood that US companies, which rely on legitimate provisions
of the US Tax Code properly and lawfully structured through the Cayman
Islands,  are in some way engaged in tax
evasion, or unlawful conduct. But, seeking to mis-describe lawful and proper
behaviour by painting it as illegal does not stand a moment’s scrutiny and is
wrong in principle.  

This particular heresy completely, and no doubt
deliberately, also misses the point that the US is the major recipient of the
capital flows from of the Cayman Islands – which is providing the liquidity
that is essential to the recuperation and ongoing health of the US

It is surprising that it has become necessary to state, yet
again, the obvious point that the laws complained of by these bodies under
which US companies use international financial centres, such as the Cayman Islands,
are US laws and changes to them are entirely a matter of domestic US tax

It also should go without saying that all Cayman Islands
companies are required to operate on the basis of full tax and anti-money
laundering transparency under our own domestic law and under existing treaties
with the US and many other G20 jurisdictions. Good arguments may exist as to
why these domestic laws should be amended and US multinationals double-taxed,
as a result but presaging the debate with deliberate obfuscations prevents the
real arguments from being heard on their merits.

The organisations filing the petition claim that low or
no-tax jurisdictions hurt the US economy through tax evasion.  This suggestion runs counter to the existence
of the tax transparency treaties in place and to the growing body of academic
reports that suggest that international financial centres such as Cayman are
well-regulated and neutral jurisdictions that facilitate cross-border business.

The Cayman Islands in fact provides liquidity to markets
around the globe by increasing investment into developed nations such as the
United States and developing economies, where project financing is desperately
needed to fuel job creation and alleviate poverty. The exercises in blame
deflection which emanate from US politicians are not only unfair to offshore
financial centres they cloud the basis for the debate in the US with falsehoods
which form an unsound basis for US
tax policy.