Panama Papers – Some Perspective from the Cayman Islands

“Cayman retains many secrecy features—not least a law that can put people in jail not just for revealing confidential information, but merely for asking for it.”

This quote comes from an article in the current edition of Newsweek, entitled ‘Panama Papers – Top 10 tax havens – where the money is hidden’. Although the Cayman Islands ranks below the United States in Newsweek’s top 10 ’tax havens’, the Newsweek article adopts the familiar mischaracterisation invented and routinely perpetuated by the extreme left wing organisation Tax Justice Network that offshore jurisdictions in general and the Cayman Islands in particular incorporate extreme measures to keep a person’s confidential information from the prying eyes of foreign tax authorities.

Nothing could be further from the truth. The Cayman Islands has adopted a regime of full transparency, based on the OECD Model Agreement that provides for the disclosure of all beneficial ownership information to tax authorities. The applicable Cayman Islands statute makes it clear that it is no answer to a request on request the information required is confidential. In many ways, as can be seen from the recent case discussed below in which Travers Thorp Alberga acted for the United States citizen concerned, it could be said that the Cayman Islands authorities have been too enthusiastic in their desire to assist tax collectors overseas that they may have lost sight of the need to respect basic civil liberties.

It is certainly not the case, as stated by the Newsweek article, that under Cayman Islands law even asking for confidential information to be revealed can put people in jail. Under the Confidential Relationships (Preservation) Law (CRPL) any person who wishes to disclose another’s confidential information (typically a client or former client) must obtain consent or the leave of the court. Disclosure to tax authorities is generally exempted from CRPL, though certain procedures must be followed to ensure fairness. In the case discussed below, in which Travers Thorp Alberga represented the United States citizen, the court refused an application under CRPL by four insurance executives to give confidential information in evidence against a former client in a criminal tax trial in the United States. Leave was refused not because of any requirement to keep the client’s affairs secret, rather because the correct procedure had not been followed by the Tax Information Authority in the Cayman Islands for obtaining the required evidence and the client’s civil liberties had not been respected.

The case underlines the need for there to be a balance struck between the desirability of assisting legitimate tax investigations and prosecutions overseas on the one hand and for a person’s fundamental rights to be respected on the other. The fundamental rights engaged include the right to a fair hearing, which will ordinarily bring with it a right to prior notice before orders are made which affect a person’s rights. Interestingly, the Federal Court in the United States reached similar conclusions in relation the manner in which the investigations and proceedings in the United States had been conducted, finding that there had been a violation of due process under United States law.

In the matter of the United States of America v Verna Cheryl Womack

Mrs Womack had been indicted for a series of tax related offences in the United States. It was alleged that she had opened a series of bank accounts and set up nominee companies and trusts in the Cayman Islands to conceal a portion of her wealth from the IRS. The prosecution case relied heavily on documents which had been obtained from a number of professional service providers in the Cayman Islands that Mrs Womack had engaged to establish and operate the bank accounts, companies and trusts in issue.

The documents had been obtained by the Cayman Islands Tax Information Authority (TIA) acting at the request of the IRS. The Cayman Islands have enacted legislation to put into effect treaty obligations to ensure the timely disclosure of information to overseas tax authorities. This is known as the Tax Information Authority Law (TIAL). The TIAL establishes the TIA and contains a framework to disclosure of information. The law incorporates some safeguards with the aim of protecting a person’s fundamental rights. These include a requirement to obtain a court order prior to requiring disclosure in criminal proceedings and the requirement to give notice to persons affected in certain civil cases.

The CRPL applies to “all confidential information with respect to business of a professional nature which arises or is brought into the islands and to all persons coming into possession of such information at any time thereafter whether they be within the jurisdiction or thereout”. It is an offence for confidential information to be disclosed without leave of the court. The practice in the Cayman Islands is to seek leave of the court prior to disclosing confidential information belonging to a third party principal, voluntarily or otherwise. There is no offence committed in asking for information to be disclosed. The onus is on the holder of the information to seek leave of the court in the event the principal does not agree to the disclosure.

Any tension between the two statutes is resolved by provisions in the TIAL which make it clear that no offence is committed under CRPL when disclosure is made of otherwise confidential tax information in compliance with the TIAL. The TIAL also contains provisions for the giving of testimony.

In Mrs Womack’s case, the IRS had obtain and relied on a substantial amount of disclosure which it had obtained from service providers in the Cayman Islands under compulsion via the TIAL. Contrary to the image of extreme secrecy that is sometimes projected, disclosure in TIAL cases is commonly provided, extending to bank statements, correspondence and other files. In Mrs Womack’s case, she had engaged the services of insurance professionals to assist her set up businesses in the Cayman Islands. These professionals (amongst others) gave extensive disclosure of Mrs Womack’s confidential documents to the IRS. Since the disclosure was given in accordance with requests under the TIAL there was no question of their having committed an offence under CRPL by disclosing Mrs Womack confidential documents.

The insurance professionals were then asked to testify at Mrs Womack’s trial. One was served with a subpoena. As a precaution however and prior to their giving testimony at trial they wished to obtain the leave of the court under CRPL. They first applied to court without informing Mrs Womack but the court required that she be told about the application before any order was made. Mrs Womack then opposed the making of an order on the grounds that the proper procedure for obtaining testimony under the TIAL had not been followed, amongst others. The court agreed with Mrs Womack and rejected the applications, noting that there was nothing stopping the IRS from instigating a request in the proper form under the TIAL requiring the individuals to testify. The proper procedures under TIAL should not be circumvented by making applications for leave under the CRPL.

The court also considered the question of to what extent a person under investigation or prosecution for tax offences is entitled to notice of attempts to obtain disclosure of their confidential records. In Mrs Womack’s case much of the disclosure had been given under compulsion by court order, no prior notice of which had been given to her. Noting that there will always be cases where notice is inappropriate (in particular where by giving notice the investigation risks being compromised) the court accepted the argument advanced by Travers Thorp Alberga on Mrs Womack’s behalf that the default position is for notice to be given in cases that come before the court. A person is entitled as of right under Cayman Islands law to a fair hearing and that is likely to be difficult to achieve in conditions of secrecy. The Judge explained that the right to a fair hearing is:     

“Consonant with the presumption of innocence, itself another fundamental right recognised by section 7(2) of the [Cayman Islands] Constitutional Bill of Rights in relation to persons charged within the islands with a criminal offence. As will be discussed further below, the presumption of innocence is a right observed by other regimes for mutual legal assistance where they impose a threshold test that request the showing of a reasonable cause to believe that an offence has been committed. The absence of this threshold test from the TIAL regime does not diminish but enhances the importance of notice”.

In the context of testimony, the requirement for notice provides the person affected with the right to be present when the information is disclosed and the right to test the appropriateness of the disclosure by cross examination. It is hard to ignore the double standards of a prosecuting authority claiming it is entitled to obtain evidence compulsorily in secret from a jurisdiction regularly (and wrongly) accused of being secretive itself.

There is clearly no valid basis to allege that Cayman Islands law contains any ‘secrecy’ measures in tax cases. It is not an offence to ask for disclosure of confidential information. The IRS and many other prosecuting authorities regularly seek and obtain disclosure of confidential records for use in tax investigations and prosecutions. If anything the Cayman Islands and the relevant authorities and professionals involved have been zealous in their desire to cooperate in international tax affairs. The Cayman courts have intervened where it is necessary and appropriate to do so to ensure fair play, due process and uphold the Rule of Law, which is surely an indication of a properly functioning society as well as a good place to do legitimate business. Both professionals facing such disclosure applications and persons affected by them would do well to take their own separate legal advice in deciding how best to deal with any such applications in accordance with the applicable laws both in order to ensure that the comply with the relevant laws and, in the case of professionals, that they do not leave themselves open to claims in negligence and/or contract by their clients.

About the Authors

Ian Huskisson (ihuskisson@traversthorpalberga.com) and Neil McLarnon (nmclarnon@traversthorpalberga.com) are partners in Travers Thorp Alberga’s dispute resolution team based in the Cayman Islands. They acted for Mrs Womack in this case.