Major changes to Cayman’s transparency regime in 2016

But no central register of beneficial ownership, government says. 

Cayman’s much-debated and at times deemed controversial Confidential Relationships Preservation Law will see major changes and could be replaced altogether this year.  

In addition, government proposes a technology-based centralized platform to access information about the beneficial owners of companies and other entities registered by service providers in the Cayman Islands, according to Wayne Panton, minister of Financial Services. 

The minister said Cayman is not forced in connection with ongoing transparency initiatives to change the Confidential Relationship Preservation Law, which criminalizes the unlawful release of private financial information by service providers. 

“However, we have considered over a period of time whether the law itself is one which is necessary. It has attracted some unfortunate attention,” he noted. “We are very likely to make some changes, either replacing the law entirely or making some significant changes.” 

The beneficial ownership platform, in turn, is designed to meet the demands of U.K. Prime Minister David Cameron that the Overseas Territories set up centralized registers of beneficial ownership to provide U.K. tax authorities and law enforcement with direct access to this information.  

The U.K. government considers transparency of the owners and ultimate beneficiaries of corporate vehicles an important element in the fight against corruption and financial crime. 

At a Joint Ministerial Council Meeting between U.K. and Overseas Territories government representatives in December 2015, Cayman and other offshore centers linked to the U.K. agreed that they would implement centralized beneficial ownership registers or “similarly effective systems,” but that access to these systems would not have to be public.  

Up to that point, the Cayman Islands government had maintained that its existing system whereby service providers collect, update and maintain beneficial ownership data was working well. A centralized register would throw up new security and privacy issues in addition to greater costs, it had argued.  

However, Cayman’s existing system, which relies on bilateral agreements and multilateral treaties governing the exchange of tax information and other data relevant to criminal investigations between the authorities of different countries, is arguably much slower than a centralized register that is accessible online would be. 


Centralized platform 

Minister Panton told journalists at a media roundtable in December that Cayman is not going to have a central register, but instead is exploring a centralized platform that would enable government officials to access and interrogate the beneficial ownership databases of all financial service providers in Cayman.  

“And we will be able to do it without the service provider being aware to address the concerns about tipping off,” he said. “They would of course have to sign off on that.” 

The system would be accessible from within the ministry’s Department of International Tax Cooperation and work in the exact opposite way the general registry operates by reaching out to financial services companies and their systems rather than registrants submitting information to a registry. 

The minister claimed that Cayman’s system has far better information that is checked and updated than the U.K.’s own beneficial ownership register, which is based on an “honor system,” and will come into effect in April. Unlike the British system, it would also prevent identity theft, he noted. 

Dax Basdeo, chief officer in the Financial Services ministry, confirmed that government is working toward an action plan which over the next six months will require changes to systems, policy and potentially legislation. 

“By the middle of [2016] we will have made great strides in terms of our standards and regulatory framework.” Yet the technical issues of accessing beneficial ownership information maintained by service providers from a centralized platform will take much longer to resolve, he said.  

The relevant deadline for the centralized platform would be in line with the implementation of EU Fourth Anti-Money Laundering Directive, which will see the creation of beneficial ownership registries across the European Union by the end of 2017. 

Talks with the private sector have been ongoing for months, and “in principle, the private sector is OK with the idea,” Panton said, but he acknowledged that the necessary technology does not yet exist. 

The National Crime Agency and the Serious Fraud Office gave no indication that there was a problem with Cayman’s system in the approximately 10 investigations during the past two years where requests were made to Cayman’s Financial Intelligence Unit and other authorities, he said. In addition Cayman had shared unsolicited information in four or five case. 

However, the U.K. government demanded to have “someone on the ground here looking at that information in order to create the perception that they were going to access this information directly, and I suppose give some of their public the confidence that it was all being done properly and information was accessed properly.” 

But, Panton argued, Cayman has financial intelligence professionals “who are as dedicated and as committed as anybody in the U.K.” 

The government says it prefers the technically rather cumbersome and untested way of creating a centralized platform to using a centralized register for privacy and security reasons. 

The minister said he believes that a centralized platform could be similarly effective to a central register without compromising the privacy proposition on which Cayman’s financial system is based. 

“We feel strongly that there are privacy rights, and we share information in line with international standards. Not all information is relevant for everybody.” 


Additional resources and changes to eligible introducer regime 

Nevertheless, the government is prepared to make concession to the U.K. and has invited U.K. law enforcement agencies, and in particular the U.K. National Crime Agency and the Serious Fraud Office, for talks in the Cayman Islands to discuss how collaboration can be improved to ensure that Cayman is not abused to facilitate serious crime transactions, including corruption and serious fraud. 

“We do not wish to be a jurisdiction through which tax evasion occurs,” Panton said. “And we do not wish to be a jurisdiction that facilitates serious crime or fraud.” 

Government is contemplating either having a dedicated person as an exclusive resource or prioritizing U.K. law enforcement requests to minimize response times. Now these response times vary from hours and days to weeks in some cases. 

Another system that will be changed, the minister announced, is the eligible introducer regime in Cayman’s Anti-Money Laundering regulations. 

In order not to unduly restrict transactions with AML provisions, service providers are allowed to rely on professional intermediaries, such as lawyers and accountants, in third countries with similar AML requirements, to confirm the identity of new clients. 

It is a pragmatic approach in cases where other service providers have already carried out the necessary due diligence on a prospective client and have those records on file. 

Service providers who want to rely on an eligible introducer will typically ask for a comfort letter from this intermediary which assures that the introducer has information that clearly establishes the identity of the relevant person and that the introducer will provide copies of these documents on request. 

“We are proposing to change that so that the information has to be brought into the Cayman Islands within a specified time period,” the minister said. “The [eligible introducer] would have to obtain the information and send it to within three months. It could be shorter than that. We are going to a process of having industry experts participating in working groups to understand the practical implications.”  

The period during which no beneficial ownership information is stored in Cayman is therefore shortened, while the transaction can still be carried out. 

This proposal has been welcomed by the U.K., the minister said.  


Tax information exchange 

Cayman’s resistance to a centralized beneficial ownership registry stands in stark contrast to the exchange of tax information which will be automated with at least 97 countries from 2017.  

Cayman has already started to automatically exchange bank account information, tax identification numbers, bank balances and other assets relating to U.S. taxpayers with the United States under the Foreign Account Tax Compliance Act.  

A U.K. equivalent to FATCA governing the automatic exchange of similar data concerning U.K. taxpayers follows this year, before the implementation of the common reporting standard, an OECD initiative based on a multilateral agreement with more than 90 countries. 

The various systems of automatic exchange of taxpayer information will run concurrently with information exchanges based on individual request.  

These information requests made under tax information exchange agreements have very specific limits, narrow in scope, to fall within what is allowed under the law and the agreement itself. But they are expected to be used much more once taxpayer information is exchanged each year en masse with most countries in the world, a process that will potentially trigger further tax investigations. 

The information exchange on request was a process designed to prevent “fishing expeditions” – the attempt by tax authorities to gather as much information on as many taxpayers as possible even if there was no reason to believe the vast majority had done anything wrong.  

With automatic exchange of information, these fishing expeditions will become the norm and give tax authorities a trove of information.  

Although the process erodes the system of privacy that underpinned Cayman’s financial services industry until now, the information that is exchanged through various methods of tax information exchange is information that should be declared to the relevant tax authorities anyway, says Duncan Nicol, the head of the Department for International Tax Cooperation. 

Minister Panton believes it won’t affect the financial services industry. “We think it adds credibility. We don’t see this as a threat to the jurisdiction. Unfortunately, it does mean added costs for everybody across the board, but it is consistent in the jurisdictions that we regard as our competitors.”  

In contrast to the multilateral automatic exchange of tax information, which will be an international standard, the accessibility of beneficial ownership information is not likely to become standard anytime soon. In particular, the United States is unlikely to participate, according to Panton.  

And while automatic tax information exchange ultimately hands over much more information, including bank account information, names, addresses, tax identification numbers, bank balances, and bank payments of foreign resident individuals, rather than just the name of the beneficial owner of an entity, the concern is that Cayman would suffer competitive disadvantages if it were to introduce a centralized register first. 

“It is not simply sufficient for us to override all of the obligations and the rights that exist with regard to privacy to go out on a limb and do it ourselves at this point because even legitimate business is going to move from any jurisdiction where there is an undue invasion of privacy from their perspective,” the minister said. 

“It does not serve anyone’s agenda if businesses move from a well regulated jurisdiction to a less well regulated one.” 

But if there was a global standard for central registers with public access, then Cayman is going to implement it too, he added. “As soon as competitors like Delaware open up to centralized public registers, we are going to do the same.” 


Financial Services Minister Wayne Panton