On June 23, a referendum will be held in the U.K. for voters to decide whether the country should leave or remain in the European Union. The potential move, dubbed “Brexit,” has been the subject of much debate as the referendum nears, and neither the “in” nor the “out” camp can feel confident at the moment as opinion polls show that voters are split down the middle.
While supporters of the exit argue that the U.K. is better off economically if it leaves the EU, those who favor of staying in the 28-country union – including leaders of the British banking sector, Prime Minister David Cameron and President Barack Obama – warn that the future of the U.K. post-Brexit is a high-stakes gamble that could impact jobs, the cost of living and family finances, in addition to trade relations and capital markets.
Largely absent from the Brexit debate, however, has been any discussion as to how it might affect British Overseas Territories, such as the Cayman Islands.
According to Caribbean Council consultant David Jessop, writing for the Jamaica Gleaner in March, there is much uncertainty about what would happen in the overseas territories if the U.K. votes to leave the EU. Several territories, including Cayman, have issued a study to review the effects of such a move and to explore whether there might be alternative options in relation to the territories’ status with the U.K. and the EU.
The territories’ concerns, Jessop writes, “in part relate to ambiguities of their relationship with Europe,” because although they are “linked to the EU,” they are not technically part of the European Union. Most overseas territories, he notes, are regarded as “third countries” in their dealings with the European Commission, the EU and its many institutions.
“This means there is no automatic process that causes EU decisions to apply to them,” Jessop said in his article. “Should the U.K. decide to leave, this ambiguity would immediately become apparent if the overseas territories wished to continue their existing relationship with Europe, or develop a new one of their own choosing.”
Sebastian Dullien, senior policy fellow at the European Council on Foreign Relations, told The Guardian newspaper recently, “After a vote for Brexit, the British financial industry would certainly have more difficulties selling financial services in the continental market.”
Financial services firms in Cayman could potentially face new regulatory hurdles to marketing hedge funds across EU member states.
Dullien continued, “The question is what kind of new business model Britain would try to construct. One option would be to move closer to becoming a tax haven itself and try to attract international capital that way. Britain is already seen by many as a tax haven for multinationals, and its overseas territories such as the British Virgin Islands feature are often criticised as being locations for tax avoidance.”
A vote to leave would also raise issues such as free movement within the EU’s Schengen area, Jessop writes, and “perceptual uncertainties might also emerge about financial services as there is still a significant lack of understanding in many EU capitals about the centrality of the industry to the economies of the BVI and Cayman.”
Panos Koutrakos, professor of EU Law at City University London, told The Guardian that the EU has been pressuring member states, including the U.K., to strengthen rules on tax avoidance and make beneficial ownership information more available.
“Being inside the EU, therefore, not only puts pressure to keep fighting tax avoidance, but it also gives the U.K. considerable leverage in its tax dealings with large corporations,” he said.
The view from Cayman
While senior Cayman Islands civil servant Eric Bush, soon to be Cayman’s representative to the U.K. as head of the London Office, said he thinks it is “too early to understand if or how Cayman will be affected by a Brexit.” He said his personal view is that Britain should remain in the EU.
Tom McCallum of global business coaching firm Shirlaws, who came to Cayman from Scotland in 1989, also opposes an exit. He said, “If a Brexit happens, it will be devastating to the U.K.”
“I believe that there is an overwhelming economic argument for the U.K. remaining in the EU,” he added.
However, whichever way the vote goes, he said, people will be searching for stability, and Cayman is a very stable and highly regarded jurisdiction.
“If Cayman is regarded as a stable place to move global capital, then it will only strengthen the Cayman Islands,” he said.
While some see Cayman as stable, Travers Thorpe Alberga Senior Partner Anthony Travers, said, “We have seen recently increased hostility with regard to the passporting of Cayman Islands hedge funds in Europe and we are threatened now by the EU with the preparation of a further ‘tax haven blacklist’ as the outcome from the Panama Papers.”
If the U.K. is no longer part of the EU, European regulators could make it difficult for hedge fund managers to get permission to do business across the zone and instead force them to register to sell securities in each state separately.
“What is reasonably clear, however, is that the Cayman Islands will find it increasingly difficult to operate in the light of growing EU hostility towards offshore financial centers,” Travers said.
“If we look at the macro picture, it is reasonable to conclude that one agenda of the EU policymakers is to rule out the marketing of hedge funds proper in the EU for fear that price discovery in an open market would sabotage the valuations attributable to the sovereign debt held on the books of EU banks. If this is right, then there can be no long-term future for the marketing of hedge funds in the EU which should be left to its own devices,” he said.
But on the other hand, Travers said, Brexit could have some positive impacts for Cayman.
“The corollary of that is that the Cayman Islands could once again strengthen its relationship with the asset managers in the City of London – a relationship which has been declining, not increasing, since the introduction of the European Fund Managers Directive – and that would clearly be a net positive for the Cayman Islands fund industry over the longer term,” he said.
What is more certain is that Brexit would likely have a limited impact on human rights in the Cayman Islands, since the European Convention on Human Rights (ECHR) is separate from the EU.
“Accordingly, the U.K. leaving the EU would not result in it automatically leaving the ECHR,” Cayman Islands Human Rights Commission Chairman James Austin-Smith said.
He said the ECHR has “direct application in Cayman, and everyone in Cayman has the right to take a case to its court in Strasbourg.”
More importantly, Austin-Smith said, human rights in the Cayman Islands are “enshrined in Part One of the Cayman Islands Constitution Order 2009 and as such are protected regardless of the U.K.’s position in, or out of, the EU.”
“Whilst the Cayman Islands relies heavily on U.K. jurisprudence, the implementation of the Bill of Rights in the Cayman Islands has provided for local case law to be developed by local judges.”
Austin-Smith said human rights in Cayman are also protected by the common law, which predates the ECHR and has developed alongside it.
“Regardless of any international legal developments, the common law will remain and continue to develop and to protect the rights of all individuals within the jurisdiction of the Cayman Islands,” Austin-Smith said.