Cayman’s Financial Services Thrive Amid Transparency And Regulation

Yet, these statistics illustrate exactly how the Cayman Islands’ economy recovered in 2021 and 2022. 

Returning tourism workers are filling many of the jobs they had vacated when the sector came to a complete standstill during the pandemic. Other newly arriving foreign workers are supporting the ongoing construction boom buoyed by steady demand for residential, commercial and hotel real estate. 

The record-high population of 81,500 is also indicative of the wider economic growth that has seen all sectors expanding.  

Last year Cayman’s gross domestic product grew by an estimated 3.4 per cent, even though the tourism industry and flight connections had not returned to pre-pandemic capacity until the end of 2022.  

The financial industry and related accounting and legal services, which represent about 40 per cent of GDP and are responsible for about half of government’s revenue, remain a stable growth engine. 

Apart from a brief pandemic dip, global demand for Cayman’s financial services continued almost unabated.  

In 2021, the islands set new records for the total number of active funds, partnerships and companies.   

Last year, fees from the heightened activity in the industry helped lift government revenue for the first time above the CI$1 billion mark (US$1.2 billion).  

It ensured that Cayman’s government ended the year with a budget surplus – for the eighth time in 10 years.  

Continued Growth And Stability 

Industry statistics show how, over the decades, Cayman has pivoted from an offshore banking centre to becoming a world leading location for hedge funds, private equity funds and other investment vehicles. 

After a record year for new formations in 2021, Cayman company and partnership registrations kept growing last year. 

The total number of active companies increased by 1.8 per cent to 119,128 at the end of 2022, while the number of active partnerships on the register grew by about 7.9 per cent to 37,833.  

Mutual fund numbers declined marginally in the final quarter of 2022, but the year-end total of 12,995 still represented a 2.2 per cent increase over 2021. 

Although some have viewed the growing regulatory pressure with concern due to ever-rising compliance costs, the evidence shows that Cayman’s financial services thrived just as regulatory demands ratcheted up. 

Previously unregulated private funds are a case in point. Having been brought under the same regulatory regime as hedge funds in 2020, closed-ended private funds, such as real estate, venture capital and infrastructure funds, ended last year with an 8 per cent higher total of 15,854. 

The trusts sector is successfully navigating rising compliance costs, client demands and the need for more complex solutions in a similar vein.  A total of 94 new trusts in 2022 exceeded the 2021 figure of 83. 

Innovations like the foundation company, first introduced in 2017, have led to novel solutions as an alternative to trusts for private wealth, charitable or commercial purposes or in the virtual asset space, as a vehicle for decentralised autonomous organisations (DAOs).   

The Cayman Islands insurance and reinsurance industry, meanwhile, showed resilience with 33 new insurance licenses issued last year, the highest number of new licenses in a single year since 2013.   

2022 was the fourth consecutive year of growth, bringing the total number of insurance companies to 670 at the end of 2022. 

At The Forefront Of Tax Transparency 

A main challenge for industry and government remains the gap between depictions of the Cayman Islands as a tax haven or secrecy jurisdiction and the reality of the activity that takes place in one of the world’s leading specialised financial centres. 

Part of that reality is that Cayman has been at the forefront of global regulatory developments, transparency initiatives and tax reform efforts.   

International standard setters have long recognised Cayman’s tax transparency regime. 

Today, Cayman’s Department of International Tax Cooperation (DITC) is automatically exchanging tax information under the Common Reporting Standard (CRS) with up to 73 international partners around the world. In 2022 for example, the DITC transmitted financial account data on 550,000 Cayman accounts, from more than 19,000 Cayman Islands financial institutions, pursuant to the CRS.

Last year, the Organisation for Economic Cooperation and Development (OECD) reviewed Cayman’s system for the automatic exchange of financial account information, assigning it the highest rating possible.  

The peer review not only found that the required legal framework is in place but that reporting financial institutions are complying in a timely and effective way. 

The islands have participated in the global conversation around international tax cooperation for more than two decades.  

Cayman is currently a member of the OECD Global Forum’s steering group, a 20-member body that governs the work of the tax transparency standard setter. It previously served in that capacity from 2009 to 2016. Cayman is also a member of the peer review group which conducts member reviews. 

All regulated legal entities are subject to a beneficial ownership regime, which includes a centralised register. In 2019, the government committed to making that beneficial ownership registry publicly available, and it is monitoring developments in this regard.

Subsidiaries of large multinational corporations on island report their turnover, profits and staff numbers annually on a country-by-country basis under the OECD’s Base Erosion and Profit Shifting initiative.  

Companies, depending on the industry sector, must also demonstrate that they have sufficient substance in the form of physical offices or staff on island to be considered domiciled for tax purposes. 

The Cayman Islands continues to work toward being taken off the Financial Action Task Force’s anti-money laundering list of countries under increased monitoring.  

Having addressed 62 of the 63 FATF recommendations for implementing the global standard in practice, following a peer review in 2019, most industry experts believe Cayman’s delisting is a matter of time.  

The only remaining point to resolve is to demonstrate to the FATF that the islands are penalising AML offenders appropriately and sufficiently to deter future misconduct. Given that Cayman’s judiciary is naturally independent from government and lawmakers, it is largely down to due process in the courts when that will happen.   

The Cayman Islands is one of only a handful of countries and territories in the world that are compliant or largely compliant with all 40 of the global AML standard setter’s technical criteria.  

International Outreach And Engagement 

To spread the message, the Cayman Islands maintains its outreach to clients and engagement with regulators and standard setters worldwide.  

While Cayman’s financial services firms have established office networks in all key markets to service clients in their own language and time zone, Cayman’s government early in 2023 opened a representative’s office in Washington, DC, in addition to its UK office in London.  

Plans for up to two more offices, covering the European Union and Asia, are progressing well with launches expected soon.  

The offices will afford greater opportunities to provide a true and accurate record of the Cayman Islands to elected officials, industry representatives and the media.  

Global Minimum Tax Not A Threat 

In contrast to widespread speculation that the global corporate minimum tax could severely impact tax neutral jurisdictions like Cayman, the local government and the finance industry consider the topic with equanimity.  

Cayman has long argued that its financial services model does not rely on double taxation treaties, which are frequently claimed to be the preferred tool for corporate profit shifting, and that its services are not designed to erode the tax bases of other countries.  

The Cayman Islands government has always maintained that taxes should be paid where they are due.  

Cayman’s financial service proposition is about much more than just tax.  

Even when tax is an important factor, the inherent feature in Cayman structures is typically that they are not imposing an additional layer of tax onto a transaction and eliminate double taxation. 

Some of Cayman’s key financial industry sectors – funds, structured finance and trusts – are excluded from the global minimum tax, while the exposure in the banking, insurance and reinsurance industry is relatively low. 

The global corporate minimum tax is therefore unlikely to have a material negative impact on the financial industry in Cayman.  

Data collected under the country-by-country reporting regime indicates and academic studies show that much of the alleged profit shifting, especially involving European multinationals, does not take place in the Caribbean or Pacific small island nations the European Union prefers to blacklist for a perceived lack of tax cooperation. 

Instead, the taxable corporate profits are mostly “lost” to three EU member countries: the Netherlands, Luxembourg, and Ireland (E.g., see www.missingprofits.world). 

US multinationals, who have by far the largest number of subsidiaries in the Cayman Islands, have already been subject to a form of globally applied minimum tax since 2017, under the Global Intangible Low Tax Income (GILTI) regime and the Base Erosion and Anti-abuse Tax (BEAT). 

In addition, some specialised financial centres competing with Cayman, such as Bermuda, are contemplating levying the minimum corporation tax rate of 15 per cent themselves.  

This would leave Cayman as the only true tax neutral jurisdiction with a distinct competitive advantage.  

In any case, applying a minimum corporate tax rate worldwide should take one unjustified but often-levelled criticism - that “the Cayman Islands is helping companies avoid tax” - off the table for good.