“The report of my death was an exaggeration.” Mark Twain
Just as Mark Twain was alive and well in 1897, when he wrote in a letter to the London correspondent of the New York Journal this often-misquoted sentence, the well-regulated financial services industry in the Cayman Islands is strong and energetic, even as rumours of the eminent demise of the offshore financial industry from those who do not understand it abound.
It is considered by many that the development of the financial industry in the Cayman Islands started with the enactment in 1966 of seminal legislation such as the Bank & Trust Companies Regulation Law and the Trusts Law and the establishment of the first professional and legal advisors in Grand Cayman, then called ‘the island time forgot’. Those facts engendered the first burst of growth for Cayman’s financial industry, helped in part by political and economic turmoil in competing (Bahamas) as well as neighbouring (Jamaica) jurisdictions. By 1976, after one decade, there were over 7,500 registered companies, 126 banks and trust companies with assets above US$21 billion and 1 captive insurance company.
Growth continued through the 1980s, when the first requirements for banks to obtain ‘Know Your Customer’ (KYC) information about their clients were put in place (as just a Code of Conduct voluntarily adhered to by the members of the Cayman Islands Bankers Association, mind you). After another decade, there were 16,791 registered companies, 456 banks and trust companies with assets of US$202 billion, 6 company managers and 107 captive insurance companies.
When cooperation with the US government matured into a Mutual Legal Assistance Treaty in 1986, the voices of doom proclaimed the end of offshore banking and, by extension, of the Cayman Islands as a viable business location. However, what in fact happened was another decade of growth and expansion into new areas, notably mutual funds. At the end of 1996, there were 37,919 registered companies, 575 banks and trust companies with assets of US$507 billion, 75 company managers and 378 captive insurance companies, 121 mutual fund administrators and 1,379 mutual funds.
In 1996, the Proceeds of Criminal Conduct Law introduced severe penalties for providers of financial services whose customers were found to be involved in the money laundering of proceeds of any criminal activity. That was a major departure from the previous ‘laissez-faire’ attitude of the financial industry in general, and again raised concerns about its survival under the new ‘draconian’ regime. In addition, the Cayman Islands Monetary Authority replaced the existing Financial Services Supervision Department, bringing the promise of strong and more active regulation.
By now, the reader should know what I will say next: after another decade, the numbers for 2006 showed again healthy expansion, with the incorporation of new companies exceeding 10,000 per year and the total number of registered companies surpassing 70,000; the number of banks and trust companies reduced, mostly due to consolidation in those industries, but the volume of assets surpassed US$1 trillion; 740 captive insurance companies licensed; and over 5,000 mutual funds with assets above US$2.3 billion.
Following the pattern, in the late 1990s, when the OECD launched its historic report on ‘Harmful Tax Competition’ and blacklisted the Cayman Islands and many other jurisdictions, the end of the world ‘as we (in the offshore centres) knew it’ was again proclaimed.
What in reality happened was that the Cayman Islands authorities and its financial industry (represented by associations like Cayman Finance, which I have the great pride of being a founding member and past chairman) undertook the tremendous task of explaining to the world why offshore centres are, contrary to popular misconceptions that they are harmful, beneficial to the economic growth of all countries, allowing for resources to be more freely and efficiently allocated into the development of better economic outcomes both for ‘rich’ and developing nations. Cayman also took part in many international initiatives to establish fair and sensible regulatory policies to combat money laundering, financial crime and terrorism finance. Ask any member of the many committees and task-forces created by the OECD, the Financial Action Task Force or the IMF (excluding those with a political agenda, of course) and they will bear witness that the Cayman Islands ‘punches well above its weight’ when it comes to contributing to the establishment of a more efficient and just environment for the international financial services industry to benefit the whole world population.
The next decade saw the Great Recession of 2008 and 2009 and the numbers in the Cayman Islands suffered as in any other financial centre, but by 2015 the indicators were nearing the pre-crisis levels of 2007.
Now, one would be tempted to consider that the year of 2016 will most certainly place quite high in the ranking of annus horribilis with electoral surprises, uncertainties in the financial markets and ever present concern with hacking and dissemination of private data held by large organizations. More alarmingly, many people believe that we may miss 2016 by the time we come to the end of 2017.
I would propose, contrarily, that the best is yet to come. Surely, there are challenges ahead of the Cayman Islands and other IFCs, extensively covered by sensible writers and analysts in this and other publications: the implementation of the BEPS initiative; the drastic reduction of available correspondent banking relationships for international banks; the pressure for the establishment of public registry of beneficial ownership of offshore companies and other entities; the FATCA/CSR automatic exchange of information.
However, as much as these new challenges are perceived to discourage clients from even considering bringing or keeping their businesses and investments offshore, they are also a strong indication that the onshore environment will become even more aggressive and belligerent against those that have funds to be (heavily) taxed and would prefer to have options.
Of course, the new rules will make the options more complex and elaborated, but that’s where the high level of professional expertise collected by service providers in the Cayman Islands and other prime IFCs will come into play. Prêt-à-porter solutions that are expected to fit the needs of any client that walks through the doors will be of little value, or even worse, will create irreversible damage to the long-term objectives of clients and institutions.
The time has come for truly bespoke solutions for financial intermediaries and their clients. New technologies are here to support that, with service providers being able to bring together the many sources of expertise they have around the world to, firstly, understand the client’s needs, evaluate the risks and opportunities in each particular situation and, finally, apply a holistic approach to the crafting of the best possible solutions.
Money moves permanently around the world these days in search of investment opportunities and security. Be it for a multibillion institutional investor or for an up-and-coming high net worth family, a solution must fit their most particular requirements, or it will not be a solution at all.
I am a strong believer that whenever a problem exists, the incentive (financial or otherwise) for finding the right solution will drive minds and resources to tackle the problem, propose innovations and eventually find a solution, which may simply require a new way of completing an old task. For instance, on the matter of the reduction of available correspondent banking relationships to international banks, this has been a consequence of the pressure applied by regulators on large brick-and-mortar banks in the large onshore financial centres like New York, Frankfurt and London, where clearing of international transfers of funds take place. Such changes are chocking the economies of small and underdeveloped countries who depend on selling their commodities and/or receiving remittances from their citizens who emigrated in search of work, as well as causing headaches to bankers in IFCs. Instead of expecting that the regulators become more sensible (if not to the plight of the bankers, at least to the hardship caused to people in Honduras or Vietnam and other developing countries), the real world is moving forward: new ways of transfer funds are being launched almost everywhere. The capital constraints on banks has given rise to alternative lending solutions and I am currently assisting a client with a Cayman funding vehicle designed to attract investors to alleviate the lending deficits in onshore jurisdictions (in this particular case, the United States). This is a nice example of how adaptability and innovation in a leading offshore centre, such as Cayman, can assist in ameliorating the unintended consequences of onshore regulators for the benefit of onshore borrowers.
The reporting requirements under FATCA/CRS rules do not create any major disruption to service providers in well-regulated IFC’s as most of the information necessary to comply with the reporting should have already been collected under domestic compliance rules. An opportunity to review and update information on file about the clients is always welcome in the financial industry. At the same time, many countries offered programs to allow their taxpayers to report previously undeclared international assets as a last chance before being reported under CRS and risking heavy penalties. All of this has created a new paradigm for offshore services being sought not for secrecy or tax avoidance, but for high quality, efficiency and access innovative products and structures not available in domestic markets.
The world will continue to grow and evolve, regardless of the restrictions and burdens imposed, and the financial industry must keep pace. In fact, some of these burdens may well be the drivers of the next leaps in the evolutionary progress of international financial services.
The next ten years will be glorious for the leading IFCs such as the Cayman Islands. Watch this space…