Chairman's Blog

There is a good deal of comment these days about the role of offshore financial centres in the global economy. But what comes across loud and clear is the high level of misunderstanding not only outside of the Cayman Islands, but as importantly from within.  Capital flows, macroeconomics, cross border transactions and legal and regulatory structures are not necessarily easy concepts to understand, but just as one does not have to be a mechanical engineer to know how drive a car, you do not have to have a PhD in Finance to become conversant on the fundamentals of how the offshore financial centre model works.  A better national understanding of it is vital – for example, Cayman’s financial services industry contributes 54% of the GDP  of the Cayman Islands.

The globalisaton phenomenon has made the world a much smaller, more accessible place.  Lightening speed communications mean that investment opportunities in an emerging economy can be simultaneously considered by institutional investors sitting anywhere in the world – London, New York, Bejing or Frankfurt, for example.  The question then becomes – how are the funds pooled efficiently, so that capital can be put to work in the chosen project or investment?  How are funds from investors across the globe collected so that the investor sitting in Germany does not subject himself to additional tax or regulation for a project that will be carried out in the United States?  The Cayman Islands provides this function simply:  a tax-neutral platform for pooling the investment funds; a well-practiced process of incorporation; and compatibility with securities listing requirements on most of the world’s major stock exchanges, including those in New York, Hong Kong and Dublin.  What does all of this mean?  It means that the capital invested will be maximised by minimising the tax bite in accordance with all applicable tax laws and thereby creating more jobs and economic activity.

For those who might mistakenly believe that investors are not paying their share of tax, remember that the dollar invested was taxed when earned, and will be paid on profits made.  Further, when funds are repatriated (in the form of dividends, or other capital gains) to the investors, they will be taxed on receipt.    It should also be said that an additional layer of taxation does only one thing:  it removes wealth and productivity from an economy. The essential feature of the offshore structure is that it does not add an additional layer of taxation.

Those who support the “higher tax” argument (i.e. those Governments that are facing insurmountable deficits and no idea of how to pay for them) like to insinuate that root of the financial crisis can be found in offshore financial centres.  It is important to note – the financial crisis originated in the largest of the G-20 economies in areas that were already heavily regulated.  Mounting academic research is available to support this fact,  not least of which was the report on all the British Overseas Territories and Crown Dependencies by Michael Foot on behalf of the Chancellor of the Exchequer in October 2009.  In truth the capital flows that have already been described through jurisdictions like Cayman are now fueling the global economic recovery – the largest recipient of funds flowing out of Cayman is the United States.  Emerging markets are also beneficiaries, where the introduction of capital is the most effective tool for reducing poverty in these poorer nations, providing jobs and opportunities where none had existed before.

Cayman’s regulatory and transparency standards are amongst the very best in the world and are the benchmark by which other countries are measured.  Cayman has full income tax transparency with the United States and proactive tax reporting with the 27 European Union member states.  The US Department of Justice has had full authority to conduct a criminal investigation regarding any file in the Cayman Islands since 1990.  As a member of the International Organisation of Securities Commissions (IOSCO), Cayman has full “regulator-to-regulator” disclosure with all IOSCO regulators.  The anti-money laundering legislation of the Cayman Islands has been evaluated by the International Monetary Fund and by the Financial Action Task Force and is found to be superior to that of the United States and most EU jurisdictions.  Cayman continues to look at effective, commercially-minded regulation and the Cayman Islands Monetary Authority sits on several committees of international regulatory bodies to ensure progressive action on the issue of anti-money laundering and transparency.

So why is Cayman the target of so much negative criticism?  One answer is that politics is constantly at play.  Cayman’s success has brought attention from competitor jurisdictions which have been working very hard to increase their market share at the expense of our offshore financial industry.  But the biggest slice of the mud pie comes from G-20 politicians who are working very hard to get nods of approval from voters who want to believe that the trillions of dollars of government debt can be paid for by ‘shutting down a tax haven’.  What will be harder for politicians to explain, should more protectionist legislation be enacted, is why big business located in their jurisdictions found alternate places to domicile, with the result that highly coveted tax dollars did not increase at all but rather reduced.  How do they then explain to those voters that the only thing that increased is the length of the unemployment line?  The fact is that constant mischaracterisation cannot defy gravity forever.  The best part of the Cayman story is that eventually the truth about it must come out.


This entry was posted on Thursday, August 12th, 2010 at 10:48 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.