A review and update of the top Journal stories of 2011
Overcoming intra-regional competition throughout the Northern Caribbean area
More than 160 public officials and private sector delegates convened at the Ritz-Carlton Grand Cayman to explore areas for collaboration during the Northern Caribbean Conference on Economic Cooperation, organised by Jamaica National Building Society.
At the first staging of the conference, Jamaica’s Prime Minister Bruce Golding said countries such as the Cayman Islands, Bahamas, Cuba, Dominican Republic, Haiti, Jamaica and Puerto Rico should work together, not compete against each other, to have success in the markets of other countries, such as the United States. Golden suggested, for example, joint ventures between companies across the region.
Golding and Cayman Premier McKeeva Bush highlighted the gradual opening of Cuba as posing challenges and opportunity. Bush said, “Cuba is not to be feared, Cuba is to be embraced.”
At the conference, Bush announced plans to implement visa exemptions for Jamaican nationals who hold valid US, UK or Canadian visas or a US green card. He also announced the impending creation of a “Science Council” in Cayman to deliver “research assistance” by commission research locally, regionally and internationally.
Bush followed through on his intention to implement visa exemptions for certain Jamaican nationals. In August, he and Cabinet proposed easing visa requirements for Jamaican nationals with US, UK or Canadian visas, and also Jamaicans under age 15 or over age 70. In September, Governor Duncan Taylor refused to endorse certain provisions of the Cabinet proposal, citing security concerns, specifically around forged and counterfeit documentation. In November, Cabinet approved regulations easing visa requirements only for Jamaican nationals younger than 15 or older than 70.
The slow thawing of Cold War-era Cuba has continued, with Fidel Castro’s name missing from the list of official leaders of the Communist Party for the first time in its 46-year history. His brother Raul Castro has continued to implement reforms, including allowing the sale and purchase of cars and private property in Cuba. Additionally, US President Barack Obama has continued attempts to ease restrictions on US citizens wishing to travel to Cuba; however, a bloc in Congress, led by Cuban-American politicians from Florida, still vehemently oppose any measures that could further empower the Cuban government.
Economic Zone for Cayman
The Cayman Islands government signed a Memorandum of Understanding with Hon Cayman Properties to create a special economic zone to attract businesses to Cayman that do not have a presence here.
Premier McKeeva Bush said the zone was of particular importance because it would be the first such zone in the Caribbean to focus on science and technology-oriented companies.
The developers, California-based Hon Cayman Properties, previously developed the HSCB building on West Bay Road, and partnered with Design Cayman Ltd to create the special economic zone campus. Bush said legislative changes would be required to make the zone a reality and estimated that phase one of the project would become operation by 1 January 2012.
The project, officially called Cayman Enterprise City, has progressed throughout the year. Enterprise City CEO Jason Blick has said developers have been courting many Fortune 500 companies, and the venture has hired additional staffers, including Caymanians.
The location for Enterprise City has been determined, and neighbours are being notified of the campus’ footprint and potential impact on the area. As of press time, however, developers will only say publicly that Enterprise City will be somewhere east of George Town on Grand Cayman.
Legislators approved the primary special economic zone bill in September, and immigration exemptions for the zone were approved in November. Other necessary amendments, including to the Companies Law, Stamp Duty Law and Registered Lands Law, are still forthcoming.
Additionally, a section of the law enables Enterprise City to attract tenants before the actual campus is built, allowing zone tenants to rent office space from local landlords while the campus is under construction.
School redesign causes Education debate
Debate was continuing over modifications to the designs of the new high schools being built in Grand Cayman. Prakash Nair of Fielding Nair International, originally hired as chief consultants for the Clifton Hunter High School campus in North Sound, said his firm examined all Cayman schools, not just the high schools, before creating the design for Clifton Hunter. Nair said Cayman’s education system was a “disaster”, and it needed to be reinvented “from the ground up”. He said the way of educating in Cayman “is very 20th Century, in fact maybe even 19th Century”.
Former Education Minister Alden McLaughlin disagreed with changes to Clifton Hunter’s original design authorised by current Education Minister Rolston Anglin after he took office in 2009. The design changes brought additional costs to the school’s construction, but Anglin said they were necessary according to feedback from teachers and educational professionals.
Construction on Clifton Hunter is nearing completion, with an opening date projected for 2012. In September, Anglin said the other new campus, John Gray High School in George Town, will be constructed in phases over a three-year period, per discussions with the UK government. He said the first phase of John Gray should be finished sometime during the 2012-2013 school year.
Anglin said each of the new high schools entails about $100 million in capital investment.
Additionally, as part of the ForCayman Investment Alliance agreement between Dart Cayman and the government, Dart is to provide US$18 million for community projects, part of which will go to improving schools. Before that funding rolls in, government is already performing $10 million worth of construction on Grand Cayman’s primary schools.
Projects have been completed, are ongoing, or are planned at East End, Sir John A. Cumber, George Town, Savannah, Bodden Town, Prospect and Red Bay primary schools.
Mr. Anglin said the purpose of the primary school projects is to ensure there is adequate space for students for the next five years.
Japan: the nuclear, economic fallout
The 11 March earthquake and tsunami in Japan was estimated to be the costliest natural disaster in history, with rebuilding costs estimated by the Japanese government as much as US$309 billion. The high cost reflects not only the size of the disaster but also the relative wealth of the country where it occurs.
Nevertheless, experts estimated that Japan’s economy would recover swiftly, although US$309 billion represented about 6 percent of the Japanese GDP. That compares to the CI$2.8 billion of damages to Cayman caused by 2004’s Hurricane Ivan, equivalent to 183 per cent of the Cayman’s GDP.
The disaster caused nuclear meltdown at the Fukushima Daiichi power station, spurring immediate safety reviews of nuclear plants in Japan and around the world. Germany immediately took its older nuclear power plants off the grid.
The Japanese earthquake and tsunami was one of about 240 catastrophic events around the world in 2011. Disasters include severe flooding in Australia, the New Zealand earthquake, tornadoes in the United States, Hurricane Irene raking the US east coast, and severe flooding in Thailand.
In December, Greenlight Re’s Bart Hedges said insured losses could reach US$100 billion for the year, making it the worst year on record for world catastrophes. The effect for Cayman is an expected increase in local insurance rates, despite Cayman not being hit by a hurricane this year.
While countries across the globe are re-evaluating the role nuclear power will play in future plans for alternative energy, at least some people in Cayman are still bully on nuclear fission.
In October, National Energy Policy Committee members discussed the topic of nuclear power during an information session at the Cayman Islands Chamber of Commerce. One member, James Tibbetts, said nuclear energy “is a very attractive and economic solution for the future”. Another member, Louis Boucher, said a small nuclear reactor on Grand Cayman is a “viable alternative”.
However, Boucher and Tibbetts said that laws in Cayman forbid nuclear energy here, and also that international law forbids Cayman from buying nuclear reactors. With nuclear being but a small tangent to the main presentation, the most feasible sources of alternative energy are seen to be wind and solar power.
The National Energy Policy is set to go before Cabinet in the first quarter of 2012.
Financial institutions face US tax reporting pressure
The Cayman Islands Government and Cayman Finance organised a tax seminar for financial institutions and US persons in Cayman about new US tax legislation that will force foreign financial institutions to disclose information regarding US taxpayers directly to the Internal Revenue Service.
Dan Scott, regional partner with Ernst & Young, said the Foreign Account Tax Compliance Act will impact every financial institution in Cayman and every Caymanian tied to the US through residency or citizenship.
FATCA uses a 30 per cent withholding tax on all payments between the US and non-compliant US persons and foreign financial institutions as leverage to obtain the information that can then be used for tax enforcement purposes.
The new law will pose an inconvenience for US individuals, but will carry significant costs to the institutions themselves, which will have to implement systems to ensure compliance with the law.
Financial institutions are hurrying to prepare for the implementation of FATCA, in anticipation of the mid-2013 registration deadline. The 30 June, 2013 deadline, had been pushed back from the original deadline of January 2013, and tax professionals said they do not think the US government will delay FATCA implementation any further.
Other FATCA provisions, such as withholdings, will be implemented in phases through 2015, according to an IRS guidance released in July.
In December the IRS announced it would be unveiling a new information reporting form to assist individuals in disclosing specified foreign financial assets for tax year 2011. According to an IRS news release, the thresholds for taxpayers who reside abroad are higher than individuals living in the US with financial assets abroad.
For example, a married couple living abroad does not need to file the new Form 8938 unless the value of their specified foreign assets exceeds US$400,000 on the last day of the tax year or exceeds $600,000 at any time during the year.
Form 8938 will be filed along with the Report of Foreign Bank and Financial Accounts, also called FBAR, not in lieu of it.
The big offshore debate
The annual Offshore Alert conference in Miami pitted representatives of the offshore world against anti-offshore proponents.
Some argued that tax havens enable uncontrolled growth of the financial industry and significantly contributed to the financial crisis. Large financial centres, such as the US and UK, will held culpable along with small territories such as the Cayman Islands.
Bob Roach, senior investigator with the US Senate’s Permanent Subcommittee on Investigations, said the US respects other countries’ rights to implement their own taxation or regulatory regimes, but when US citizens exploit them to evade legal obligations in the US, it is the US’ right to take steps to enforce its own laws.
Former Cayman Islands Monetary Authority Chairman Tim Ridley took issue with suggestions that overseas territories contributed significantly to the global financial crisis, saying it was the larger countries who built onshore financial systems that allowed the meltdown.
The broad debate on the relative usefulness and harmfulness of offshore financial debates continues unabated. Meanwhile, the US government is still striving to capture tax revenue it believes is escaping to offshore jurisdictions.
The Foreign Account Tax Compliance Act is set to be implemented between 2013 to 2015. Additionally, the main provisions of the far-reaching Dodd-Frank Wall Street Reform and Consumer Protection Act, signed in July 2010, went into effect in July 2011.
At the end of 2011, Wisconsin-based Johnson Bank is closing its Cayman Island branch, citing Dodd-Frank’s effect on US banking laws as one reason for the closure. The departure of Johnson Bank raised concerns about whether this is a sign of things to come for Cayman’s banking industry.
Meanwhile, in efforts to signal transparency and compliance with international standards, the Cayman government signed a Tax Information Exchange Agreement in October with Argentina – the 27th country with which Cayman has an agreement to exchange information for tax purposes.
The agreements spring from the OECD and are geared to promote international cooperation in tax matters through exchange of information. Cayman’s first such agreement was signed with the US in 2001.
In 2011, Cayman signed tax information exchange agreements with the following countries: Argentina, China, Guernsey, India, Japan and South Africa.
Dart deal aims for economic stability
The Cayman Islands Government and the Dart Group forged the ForCayman Investment Alliance to make several major infrastructure projects a reality and bring a new high-class hotel to Seven Mile Beach.
When announcing the public-private partnership, Premier McKeeva Bush said Cayman was “ill-prepared to face the local impacts of the world’s economic fallout” and as a result, the local economy was hard hit, particularly starting in the summer of 2010.
The genesis of the deal was a dilemma faced by Dart at Camana Bay, whose growth is restricted by the proximity of the George Town Landfill. Dart approached Government with a proposal to cap and remediate the landfill and to find an alternative location for a new solid waste facility.
Government and Dart had greater needs, however, as Government faced incredible financial difficulties and Dart had purchased a network of properties from embattled developer Stan Thomas, including the former Courtyard Marriott.
Government seized the opportunity to discuss expanding the deal, which in its final form involves the closing of a portion of a West Bay Road, expansion of the Esterley Tibbetts Highway, enhancement of West Bay Road Public Beach, redevelopment of the former Courtyard Marriott, and $18 million in funding by Dart for community projects and education, plus other land swaps between Dart and the Government.
The ForCayman Investment Alliance has progressed on multiple fronts, most significantly regarding the Courtyard Marriott redevelopment, Esterley Tibbetts Highway extension and relocation of the landfill.
The first phase of the Courtyard Marriott took place in the fall, consisting of the interior demolition of the hotel building. The second phase of the project will involve the redesign and renovation of the building into a new hotel.
Cabinet approval of the highway extension was granted in early September, followed immediately by a ground breaking ceremony on the new road. In December, Cabinet approved an agreement that enables the commencement of a large portion of the ForCayman Investment Alliance. The agreement allows for the closing of a section of West Bay Road, the Esterley-Tibbetts Highway extension and the redevelopment of the Courtyard Marriott.
In October, Dart received approval from the Central Planning Authority to subdivide 561 acres of land east of Bodden Town, near Midland Acres and the quarries, into six separate lots. That area has been selected as the location of the new solid waste management facility.
Cayman’s budget surplus (deficit)
The Cayman Islands government and the United Kingdom’s Foreign and Commonwealth Office were at odds as to whether Cayman’s 2011/12 budget would result in a surplus or a deficit.
Cayman Islands Premier McKeeva Bush said in his June budget address that the territory should have a $12.1 million operating surplus by 30 June, 2012. However, the UK foreign office calculated that Cayman would have a $61 million deficit, when factoring in items such as project losses in government-run entities and spending on capital projects.
The Cayman government insisted that the $61 million deficit would be made up before the end of the fiscal year by drawing on cash reserves. Bush’s surplus figure of $12.1 million did not include a projected $8.4 million loss by statutory authorities and government-owned companies. That means the official projection by the government is a more modest $3.7 million surplus.
Years of burgeoning debt and financial missteps goaded the UK to take a more direct role in Cayman’s finances. This year, the UK disallowed Cayman from borrowing any money until at least July 2013.
In late November, Bush signed a Framework for Fiscal Responsibility document published by the UK. The finalised plan requires Cayman to meet debt limits set out in the country’s law by the end of the 2015/16 budget year.
According to Cayman’s current spending plan, the government is out of compliance in three of six areas that measure responsible financial management. In short, Cayman is paying too much each year to service its debts; its overall debts are too large compared to government revenues; and it does not have enough cash reserves to comply with legal requirements.
A former external consultant to the Ministry of Finance, Paul Byles of Focus Consulting, said Cayman’s government will face some tough decisions if it is to meet the deadline set by the UK.
He said the divestment of certain government assets may be the only way to raise enough revenues to pay off Cayman’s existing debts.
Under the UK framework agreement, Cayman will be required to publish reports on all contingent and actual liabilities, including those in the public pensions and healthcare systems. The pensions system performs actuarial evaluations on its investment funds at least once every three years, but has not published the results of its two most recent reviews done in 2008 and 2010. The last time any actuarial evaluation of Cayman’s healthcare liabilities was done occurred in 2004.
Additionally, the framework agreement requires Cayman to have public projects with a lifetime value of more than $10 million to be evaluated for performance, published in the government’s annual Strategic Policy Statement and have input from independent financial and legal advisors.
One immediate result of the framework agreement, according to the Premier’s Office, was the pushing back of the November deadline to strike a deal with China Harbour Engineering Company to construct cruise berthing facilities in George Town. The new deadline is 31 March, 2012.
Cutting the ties that bind
LIME introduced a technological leap to Grand Cayman, launching a 4G network to bring high-speed mobile Internet access to the Island. Cayman Brac and Little Cayman were expected to see the new network by the end of September.
The new 4G network is capable of data download rates up to 21.1Mbps or 60 times faster than the EDGE network it replaces. The network is also compatible with 3G devices, meaning many customers can take advantage of the faster network with their existing phones.
Around the time LIME launched 4G in Cayman, a report by Deloitte predicted that 4G technology could create more than 700,000 jobs and produce up to $151 billion in GDP in the US by 2016.
Deloitte’s study focussed on the synergies created by concurrent advances in wireless technology and cloud computing, comparing the job-creating effect to what has occurred in the PC industry.
More than 150 carriers in 60 countries are committed to developing 4G technology and networks, with the leaders coming from South Korea, Sweden and China, according to the report.
LIME successfully implemented 4G across all three Islands by September. Not to be outdone, Digicel Cayman soon followed by announcing the arrival of its 4G mobile network, which joined its 4G broadband network launched in late 2010.
In other telecommunications news, local number portability should be available to Cayman Islands customers at the end of January 2012. That will allow consumers to retain their current phone numbers when switching service providers.
After a lengthy process, the Information and Communications Technology Authority signed a contract with Porting XS to provide database services to enable local number portability in Cayman. The four local providers involved in the consortium are Digicel, LIME, Logic and TeleCayman.
Rollover suspension generates kudos
To the approval of local businesses and chagrin of Bermuda’s politicians, Cayman Islands legislators voted in favour of a two-year ‘suspension’ of the immigration ‘roll over’ policy, in order to allow a committee to study the policy’s impact and make recommendations for future laws.
The committee is tasked with releasing its findings by April 2012. Specifically, the law created a Term Limit Exemption Permit for which a foreign worker’s employer could apply so that the worker can stay a maximum of two years beyond the current seven-year term limit.
Following Premier McKeeva Bush’s announcement of the immigration policy change, the Cayman Islands Tourism Association and Cayman Islands Real Estate Brokers Association issued a joint news release praising the initiative. Likewise Cayman Finance Chairman Richard Coles sent out a statement expressing support for Bush’s proposal.
Immediately after Bush proposed the change, Bermuda Premier Paula Cox jumped to the defence of her country’s immigration policy, which was the original inspiration for Cayman’s rollover policy. Cox’s political opponents seized the opportunity to attack.
More details have been finalised regarding the Term Limit Exemption Permit, which can be granted for one year at a time for a maximum of two years. The grant of the exemption from the rollover policy does not count toward continuous legal residence requirements for individuals wishing to apply for permanent residence.
According to the regulations, applications for the term limit exemptions will cost $100 per application. Adding dependents to the permit will cost $200 per year for domestic workers or unskilled labourers, and $500 per year for any other work category.
Annual fees for maintenance of the term limit exemption permits are the same as for yearly work permits. Companies can receive 50 per cent of the annual fee back from the Immigration Department if the worker leaves the Islands at least six months prior to their permit expiring.
An analysis by Appleby lawyers concluded that the changes to the Immigration Law did not constitute an actual ‘suspension’ of the rollover policy, rather it created two new types of work permits, the Term Limit Exemption Permit and the 10-year work permit.
Legal questions remain as to whether individuals denied Term Limit Exemption Permits who stay in Cayman past the eight-year mark while appealing the denial will qualify for permanent residency, or whether individuals granted Term Limit Exemption Permits can really be denied the right to apply for permanent residency as the new law states.
In addition to the Immigration Law changes, Bush stirred up the Bermuda political scene once again by announcing that Cayman will actively seek to lure reinsurers to Cayman’s shores. Cox fought back in Bermuda’s House of Assembly, saying Cayman lacks the infrastructure, “human capital”, stability, reputation and geographical advantage needed to poach Bermuda’s key offshore sector, according to the Bermuda Royal Gazette.
Survey seeks input on UK-Cayman relationship
Local residents, both Caymanians and non-Caymanians, had the opportunity to weigh in on the future of the relationship between the UK and Cayman Islands via a survey distributed in print and on several websites. The re-examination of the governing relationship follows the approval of Cayman’s Constitution in 2009.
The survey could be filled out by anyone in the world and was made public by the UK Foreign & Commonwealth Office, Cayman Cabinet Office, the Governor’s Office Grand Cayman and Cayman Islands Chamber of Commerce. A printed copy of the 17-question survey was also distributed in the Caymanian Compass.
Broadly speaking, Cayman has three options, remaining a UK territory, independence from the UK and “free association” with the UK. However, the last option, defined by the United Nations, has never been recognised as valid by the UK.
Premier McKeeva Bush defended the few weeks given for public comment and consultation on the topic of UK-Cayman governance strategies, claiming that the short timeline was the result of the British government’s actions.
While the comment period ended in late November for surveys distributed by Caymanian entities, people were still able to weigh in via the UK Foreign & Commonwealth Office through 31 December.
Ahead of the annual Overseas Territories Consultative at the end of November, Bush met privately with Minister for Overseas Territories Henry Bellingham to discuss financial reforms and other matters. The outcome of that meeting was the UK’s Framework for Fiscal Responsibility setting deadlines for Cayman’s government to address its financial problems.
Spotlight: Fund Governance
Panellists at the Cayman Fund Focus explored the different expectations of fund managers and investors, in light of the Grand Court finding two fund directors of the Weavering Macro Fixed Income Fund guilty of wilful neglect or default in discharge of their duties.
Some predicted the Court’s August 2011 decision would shake up fund governance; in contrast, many fund directors used the verdict as a marketing tool to argue that professional fund director services have been superior all along.
Panellists said that in the US where funds are structured as a general partnership, there is the notion that there is no real need for an active fund director. However, in light of the economic crisis and high-profile financial crimes, investors are now insisting that stronger corporate governance functions be in place.
While panellists argued over the extent of the role the fund director should play, they agreed investors need to do their own due diligence on the fund.
On the whole, panellists concurred that the Weavering decision has not really changed much for directors in Cayman, saying that the Weavering case was an exceptional example filled with blatant wrongdoing and glaring red flags.
The fallout from the Weavering decision is far from being settled, and parties to the case have filed appeals. However, proponents of Cayman’s financial industry point to the Court’s decision as evidence of a strong regulatory framework existing in Cayman.
They say precedent-setting decisions such as Weavering belie Cayman’s reputation in the global media as a tax haven of ill repute. For example, Cayman’s role in the Olympus Corp. debacle is highlighted in nearly every article produced about the Japanese company’s billion-dollar sleight of hand, where advisors on acquisitions were paid severely inflated fees in order to hide losses dating back more than a decade.
While the actions by Olympus’ top executives took place largely in Japan and the UK, money was routed through Cayman-based vehicles. While Cayman is mentioned prominently in most media accounts, the territory’s proponents argue that Cayman’s role could have easily been played by other offshore jurisdictions or even onshore jurisdictions such as London or Delaware.