Cayman: A global perspective

It does not take long for a visitor to the Cayman Islands to realise that the 1993 film The Firm still arouses the ire of those in the Cayman financial sector. Even today in certain circles Cayman is synonymous with money laundering and other financial misdeeds. Others however recognise that Cayman is far from the world’s money laundering haven and is in fact exploited by fraudsters because of its record of political and financial stability.

The Cayman Islands is certainly a financial success. A February 2010 International Monetary Fund paper titled Cross-Border Investment in Small International Centers reported that Bank for International Settlements statistics “indicate that banks resident in the Cayman Islands held over $1.7 trillion in assets at the end of 2008 (more than Italy, Portugal, and Spain combined).” And the March 2010 Global Financial Centres Index ranked Cayman as 28th in the world, tied with Edinburgh and Seoul and right ahead of Dublin, Hamilton and Munich.

Despite its negative image in certain circles, it is telling to review material where Cayman is found to be unremarkable or is not found at all.

A simple check of indexes of relevant books shows that the Cayman Islands is not listed in The Money Launderers: Lessons From The Drug Wars-How Billions of Illegal Dollars Are Washed Through Banks & Businesses (1992), Washed in Gold: The Story Behind the Biggest Money Laundering Investigation in US History (1994), nor in the recently published Infiltrator: My Secret Life Inside the Dirty Banks Behind Pablo Escobar’s Medellin Cartel (2009). Other significant books make little reference to Cayman.

And the NGO Global Witness’ 2009 report Undue Diligence: How Banks Do Business With Corrupt Regimes discusses numerous Caribbean and European countries but has nothing to say about the Cayman Islands.

In fact, despite its image problem, no Cayman entity or person has been responsible for any of the major and newsworthy financial crimes in years. While these major cases have been widely reported and the institutions heavily fined, contrasting them with cases where Cayman has been implicated is telling.

In 1999, the Bank of New York was found to have laundered $7.5 billion in Russian money. Other fines – in 2005, Riggs Banks for conducting transactions for former Chilean dictator Augusto Pinochet and for Equatorial Guinea’s ruling family, the New York branch of Jordan’s Arab Bank for failure to maintain proper AML practices, and ABN AMRO for improperly for processing approximately 20,000 transactions valued at $3.2 billion using shell companies in the United States, Russia and other former Soviet Union countries.

After a two year investigation in 2009, US and New York authorities fined Credit Suisse and Lloyds for conducting illegal transactions for Iran. Both banks deleted information from wire transfer documents to hide their Iranian origin and advised Iranian banks on how to avoid detection.

In addition to the Lloyds-Credit Suisse and Iran matter, a 17 July, 2008, Senate Investigations Subcommittee report titled Tax Haven Banks and US Tax Compliance focused on UBS and LGT. In this well-known case, UBS agreed to pay a US government fine after one of its private bankers, Bradley Birkenfeld, resigned in 2005 and informed the US government that UBS had assisted thousands of US citizens in evading US taxes. The subcommittee report cited UBS’ estimate that it held in Switzerland 19,000 accounts, which have not been declared to the IRS, totalling $17.9 billion. This report also dealt with the information revealed by former LGT employee Heinrich Kieber, who copied LGT files showing how it assisted 1,400 clients from numerous countries to evade taxes and provided them to several governments, first to Germany.

In March 2010, Wachovia Bank agreed to pay a fine for AML violations due to improper due diligence of transactions 2 million wire transfers amounting to approximately $374 billion on behalf of 13 Mexican correspondent customers. And in May 2010, Italian police announced they are investigating 7,000 account holders from HSBC Holding’s Swiss private bank after a former Geneva-based HSBC employee turned over a list of 127,000 accounts belonging to 80,000 people to French officials.

The fines for these incidents range from $780 million to $24 million.

Individuals as well have been in the news. In 2008 Hernan Arbizu, a native Argentinean and vice president JPMorgan Chase’s Latin American unit based New York was indicted for fraud. While at JPMorgan, Arbizu, a former UBS private banker, pretended to his UBS clients that he continued working at UBS and with the help of a willing accomplice at UBS sent documents with forged client signatures to UBS in order to transfer money to certain clients’ from the accounts of other clients. He was caught trying to send a UBS client money from a client’s account at JPMorgan.

Salah Ezzedine a Lebanese businessman, was arrested in Lebanon in 2009 and charged with conducting a $1 billion pyramid scheme. There is no need to detail the Madoff and Stanford Ponzi schemes.

But after all, the Cayman Islands does have its history with money laundering and other financial improprieties. Arrested in 1975, Frank Lucas, the drug dealer who monopolized the Harlem drug market in the 1960s and 1970s and played by Denzel Washington in the 2007 film American Gangster, had an estimated $52 million in Cayman banks (though at the time money laundering was not a crime in the United States nor in Cayman). Called Operation Coast, from 1981-1993 the South Africa apartheid regime tried to develop biological and chemical weapons in contravention of the Biological and Toxins Weapons Convention with their principal companies for this effort incorporated in the Cayman Islands.

In recent years, the Senate Finance Committee held a hearing on 24 July, 2008, titled The Cayman Islands and Offshore Tax Issues. The Wall Street Journal of 30 September, 2008, published an article written by former Manhattan District Attorney Robert Morgenthau titled “Too Much Money Is Beyond Legal Reach”. Morgenthau cited Long Term Capital Management, two collapsed Bear Stearns hedge funds, and BCCI as all being charted in the Caymans.

Senator Carl Levin entered this article in the Congressional Record two days later.

Estimates are that Enron established between 400 and 700 subsidiaries in Cayman. Parmalat’s books showed a balance of $3.9 billion in the account of its Cayman subsidiary, which in fact was empty. And much has been made of the Ugland House beginning in March 2004 with an article published in Bloomberg Market titled “The 150 Billion Shell Game”. North Dakota Senator Byron Dorgan stated from the floor of the Senate on 12 April, 2010, that the Ugland House is “in 2004 was the official home to 12,748 corporations … since that time, since 12,748 corporations used that little 5-story house to avoid paying taxes, it has now grown to over 18,000 corporate addresses.”

What then can be understood from the pejorative statements regarding the Cayman Islands, particularly in light of the numerous international frauds perpetrated by reputable institutions and ostensibly reputable individuals without any Cayman connection?

There are several indications that put the issue of financial crime in Cayman into perspective.

First, those who routinely insinuate that the Ugland House facilitates tax evasion do not present examples corroborating their assertion. Similarly, the aforementioned 2008 Senate Finance Committee hearing on the Cayman lasting about an hour and 40 minutes made scant reference to Cayman itself. Most of the witness statements and subsequent questions dealt with the overall issue of tax evasion, unrelated to the Cayman Islands.

In fact, one of the hearing’s witnesses, who is one of America’s leading authorities on financial crime and offshore centres, attorney Jack Blum said “I listened to the comments about Ugland House and must say to you that Ugland House represents the best of offshore”.

Second, a report titled Large US Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions, published by the GAO December 2008 found that according to 2007 revenue figures, 83 of the 100 largest publicly traded companies and 63 of the 100 largest publicly traded US federal contractors reported having subsidiaries in tax havens. In short, the report emphasised that the establishment of these offshore subsidiaries is itself legal.

In fact, the point of Senator Dorgan’s April 2010 statement was to highlight that US law allows offshore subsidiaries to be established and that the problem is their abuse (“It was a legal dodge by companies setting up an address in order to funnel revenue through that address to avoid paying taxes to the United States… How about helping me close those loopholes?”) Senator Levin similarly entered DA Morgenthau’s Wall Street Journal article for the same reason, stating “we have a lot more work to do to rectify” the problem of abusive offshore entities. And Morgenthau himself wrote “We have to learn from our mistakes” and warned of the consequences “if Congress and Treasury fail to bring under US supervisory authority the financial institutions and transactions in secrecy jurisdictions.”

Third, A July 2008 GAO report titled Cayman Islands – Business and Tax Advantages Attract US Persons and Enforcement Challenges Exist stated that “US officials consistently report that cooperation by the Cayman Islands government in enforcement matters has been good” and quoted a senior Justice Department official who “indicated that the Cayman Islands is the busiest United Kingdom overseas territory with regard to requests for information, but also the most cooperative” and that the Cayman is one of DOJ’s ‘best partners among offshore jurisdictions”. The report also noted Cayman’s “reputation as a stable, business-friendly environment with a sound legal infrastructure [which] also attracts business. This activity is typically legal.”

Even a FinCEN Advisory dated July 2000 reported Cayman’s “records of cooperation with criminal law enforcement authorities in the United States is excellent”.

Perhaps it is not a coincidence that the SEC chose CIMA as its partner for their April 2010 regional training programme. And a May 2010 review of the Cayman Islands by QFinance reported the following: “The ‘dark days’ of the Cayman Islands’ financial services and banking centre, when the Islands were a haven for money-laundering, are now well and truly over.”

What we can conclude therefore is as follows: Despite the numerous and significant international cases, there have been no major Cayman entities or individuals known as international fraudsters. Even in his 15 page whistleblower letter of February 2008, Rudolf Elmer, the former COO of the Cayman Branch of Bank Julius Baer & Trust Ltd, criticised the Swiss private bank for aiding clients to evade tax but alleged no wrongdoing on the part of any Cayman entity or person. His criticism of the Cayman Islands was directed against Cayman law, which allowed for certain financial transactions that he thought should have been prohibited; his letter made no claim that a Cayman entity or person violated Cayman law or conducted any other impropriety.

Many institutions and individuals are attracted to Cayman because of its political and financial stability and business friendly environment, accessible by Americans with a 60 minute flight from Florida. Cayman has a strong record of bilateral and international cooperation. And much of the abuse associated with Cayman is due to loopholes in US law that Congress has heretofore been unable to close.

It appears that the reasons for the negative view of the Cayman Islands may be best explained by public relations rather than financial and criminal analysts.

Richard Horowitz