Euro Exim Bank

Storm in Tea Cup – OFCs Under Attack

Since the financial firestorm tore through the world markets there has been an inordinate amount of finger-pointing and scapegoating.  The stockbrokers and bankers have felt the crack of the whip, the hedge fund managers have had their swaggers beaten out of them, and now the offshore financial centres are being broadsided.

The Moody rating confirms the Cayman Islands’ status as one of the most highly rated financial services jurisdictions in the world.

With the global recession in full swing and government tax incomes plummeting on every continent, the countries in the OECD finally decided to get tough on tax havens.  

Sir Ronald Sanders, former High Commissioner to the UK for Antigua and Barbuda and business consultant specializing in the Caribbean is highly sceptical of the moves:

"Britain's Prime Minister, Gordon Brown, and the US Senate and Congress have both shown their intention to close down offshore financial services which they call "tax havens"," he says.  

Indeed, Brown delivered a tub-thumping speech to US Congress in March 2009, when he asked: "But how much safer would everybody's savings be if the whole world finally came together to outlaw shadow banking systems and outlaw offshore tax havens?"

‘Tax haven’ is the operative word here, Sanders points out.  The implication being that OFCs are effectively denying crucial tax dollars, pounds, or euros to government coffers around the world.  As well as, finger-pointing OFCs as co-conspirators of global economic meltdown into the bargain.  This is all just a little too convenient says Sanders, who believes the moves are a smokescreen to disguise the fact that poor banking and investment practices and inefficient regulation in the US and UK in particular were the real culprits behind the global financial crisis.  His suspicions aren’t without foundation.

"Mr. Brown has passed the buck and has fingered jurisdictions that offer offshore financial services as the culprits,” Sanders explains.  “The "Stop the Tax Havens Abuse Act" was reintroduced in the US Congress the day before Brown made his statement.  The intention is clear – if banks and other financial institutions in these jurisdictions are going to continue to operate, they will do so only at great expense. Few will be able to afford the additional costs of compliance."

A total of 15 Caribbean jurisdictions named in the US Act.  These include: Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Dominica, Grenada, St Kitts & Nevis, St. Lucia, St Vincent & The Grenadines and Turks and Caicos Islands.
In Britain, it seems the knives are being sharpened especially for the Caymans.  In September 2004 Hurricane Ivan pounded the main island with winds of up to 200 mph; it decimated the islands and a national disaster was declared.  

Now, the Guardian newspaper is joking about Hurricane ‘Lehman’ hitting the islands.  It leaves a sour taste in the mouth:

“The government of the Cayman Islands heads for bankruptcy — unable to pay its own staff and facing the prospect of introducing taxes as income from the world's shrunken financial system collapses,” The Guardian gleefully reported.

The Caymans' former political leader, Kurt Tibbetts, is shocked by the negative zeal.  “The Cayman Islands operates a financial services sector that, by any measure against global standards, is regulated, transparent and co-operative,” he recently pleaded to US President Obama.

“The fact is this country is one that doesn't have a lot of resources. We are just sea, sand and sun and our people. Without our financial sector, we'd be in much trouble to survive as a small island nation.”

The three islands that make up the Cayman archipelago are situated 150 miles south of Cuba and 180 miles west of Jamaica in the central Caribbean. The largest of the three is Grand Cayman; Cayman Brac and Little Cayman, are just a short flight northeast. Together all three islands are situated on the edge of the Cayman Trench, the deepest part of the Caribbean Sea at a depth of more than four miles

The tiny Cayman Islands are the world's fifth biggest financial centre, where hundreds of billions of dollars flow through the economy.  According to The Guardian, Cayman-based hedge funds looked after $2.3tn (£1.4tn) last year, and its GDP places it as the world's 12th richest jurisdiction, despite a population of only 51,900.  Tens of thousands of companies, hundreds of banks and at least 10,000 investment funds are based in Grand Cayman.  And to ice the Caymans’ cake with endorsements of the rich and famous, Microsoft's Paul Allen and golf champion Tiger Woods both have yachts birthed in Cayman waters.

“The presumption that Cayman has prospered as a "secretive tax haven" as a result of a lack of transparency is incorrect,” confirms Charles Jennings, joint managing partner of Maples and Calder, an international law firm advising on the laws of the Cayman Islands.

“International reports over the last 20 years confirms that the Cayman Islands has established itself as a leading financial centre for institutional and sophisticated international investors by encouraging the creation of a well-run and appropriately regulated financial services industry.”

The majority of banks based in the Caymans are branches of banks regulated in onshore jurisdictions under Basel II principles, Jennings points out.  In addition, many Cayman hedge and private equity fund managers are regulated by the UK Financial Services Authority and many funds are listed on recognised stock exchanges.  And this is the rub, says Jennings:

“Multinational companies routinely disclose their overseas subsidiaries in their public annual reports. The Cayman Islands Monetary Authority, which regulates financial services businesses, often co-operates with overseas regulators.

However, none of the G20 or OECD countries (including Britain and the US) currently automatically exchange information in this way with all countries. Furthermore, since the adoption of the EU savings directive in 2005, banks have been required by Cayman law to automatically exchange information on EU residents' accounts with the tax authorities of all 27 EU states.”

The current vogue for Offshore-bashing amounts to nothing more than a kangaroo court, Jennings says, scathingly referring to The Guardian and the widespread obfuscation of facts.

“The Cayman Islands has had a tax information exchange agreement with the US since 2001, is now on the OECD "white list". [Cayman] is negotiating further tax information exchange agreements with other member states, and has introduced a unilateral mechanism for sharing tax-related information with other nations.

“Since the beginning of the global financial crisis, Cayman has not needed to bail out any banks nor to ask for financial assistance from Britain.  All the Cayman government recently asked for was a consent to borrow funds already committed by commercial banks, to tide it over while it reassesses and adjusts its budgetary needs as a result of the unprecedented global crisis.”

Finally, Jennings points to the Moody ratings, which recently reaffirmed the Cayman Islands' Aa3 credit rating – .  The rating effectively refutes media reports that the Cayman Islands was bankrupt and confirms that the Cayman Islands remains one of the most highly rated financial services jurisdictions in the world.

Caymanians – more than anyone – know that the storm always blows over in the end…