Offshore Financial Centres - Treasury Contents


Memorandum from Maples and Calder

  We refer to the Treasury Committee Press Notice No. 42 dated 30 April 2008 inviting written submissions to assist the Treasury Committee's enquiry into Offshore Financial Centres.

  Maples and Calder is an international law firm with over 200 lawyers and a total staff of approximately 750 worldwide. We have offices in the Cayman Islands, Ireland, London, Hong Kong, Dubai and the British Virgin Islands and have been practising Cayman Islands law in the Cayman Islands for more than 40 years. Consequently, we believe that it might be helpful to the Treasury Committee for us to share our views on the role of the Cayman Islands as an Offshore Financial Centre.

EXECUTIVE SUMMARY

  The role and importance to the international financial community of Offshore Financial Centres is often misunderstood and misstated. It is our submission that rather than being a threat to the world's financial stability, the Cayman Islands provides the international business community with a stable and neutral jurisdiction through which to facilitate international and cross border business for the benefit of the global economy.

  We have sought to confine our comments to the specific questions raised in Press Notice No. 42, but the reader should feel free to contact us with further written questions if required (our contact details are set out at the end of this submission).

SPECIFIC QUESTIONS

1.  To what extent, and why, are Offshore Financial Centres important to worldwide financial markets?

  1.1  The Cayman Islands financial industry has grown significantly over the last 30 years directly as a result of the corresponding growth in the worldwide financial markets and in particular the alternative investment fund industry. The development of the global alternative investment fund industry is well-documented in many books and journals and this submission is only designed to provide a very brief overview of this topic.

  1.2  The Cayman Islands as an Offshore Financial Centre have been successful in attracting the following types of financial business:

    (a) investment funds—principally hedge funds and private equity funds marketed to institutional investors. The Cayman Islands are widely recognised as the leading jurisdiction for hedge fund formation;

    (b) capital market transactions—such as securitisations, capital raising corporate finance subsidiaries and note issuing programmes;

    (c) structured investment products—note repackagings, credit linked transactions such as credit derivatives and credit linked notes and structured and derivative products;

    (d) insurance companies and related products, such as captive insurance companies, catastrophe bonds and other alternative risk transfer products;

    (e) commercial aircraft and ship finance;

    (f) joint venture companies and corporate subsidiaries for international businesses; and

    (g) international commercial banking.

  1.3  Many of these transactions are arranged and managed by well-known fund managers, investment banks and companies based around the world and in which sophisticated institutional and high net worth investors (including pension funds, insurance companies, university endowment funds and sovereign funds) invest in order to place a part of their portfolio in a variety of "alternative investment strategies". Consequently, only a small percentage of Cayman Islands investment funds (probably less than 1%) are marketed to retail investors and substantially all capital markets debt issuance is through the global clearing systems such as DTC and Euroclear/Clearstream. There is a growing trend for big institutional investors, such as pension funds, insurance companies, university endowment funds and sovereign funds, to allocate larger proportions of their investment portfolios to alternative investment funds, many of them established in the Cayman Islands. It is well-documented that almost all the major developed countries have ageing populations and in the medium term it is anticipated that both private and state-run pension plans will struggle to finance their pension fund obligations based on traditional investment strategies. Consequently hedge funds, private equity funds and other investment funds based in Offshore Financial Centres with global investment strategies may play an increasingly important role in generating enhanced returns for pension fund investors.

  1.4  The alternative investment fund business, capital markets and commerce generally are becoming increasingly more global. Many large multinational companies have separate and diverse businesses in many different jurisdictions. Most major investment banks and many of the bigger investment fund managers now have global investor client bases and investment management teams in more than one of the main financial centres, including New York, London, Tokyo and Hong Kong. These investment banks, investment fund managers and multi-national companies must compete globally for capital, investors and customers to build their businesses. To give you some examples:

    (a) a fund manager based in London or New York with expertise in investing in European or US equities might seek investors from outside the UK or US, including Europe, the Middle East or Japan, who are looking to invest in European or US equities. The same US or UK based fund manager may also have expertise through branches in other countries to offer investment funds which specialise in investing in investments in countries outside the UK or the US (eg emerging markets);

    (b) a multinational corporation may wish to enter into a joint venture with investors from many different jurisdictions to manufacture a power generation plant or other infrastructure project in a developing country;

    (c) an entrepreneur in a developing country may wish to start a business with a view to eventually raising capital by way of a public share offering in the UK or the US;

    (d) a commercial airline (again perhaps based in a developing country) will need the ability to raise significant capital sums from international lending syndicates to finance its aircraft fleet;

    (e) a financial institution based in one jurisdiction may wish to issue notes or bonds to investors in different jurisdictions through the international capital markets allowing it to access new sources of capital whilst at the same time providing international investors with new investment opportunities with diversified risk profiles;

    (f) a business may wish to insure against natural disaster risk by way of issuing bonds into the international capital markets; and

    (g) an international bank may maintain a branch or subsidiary in the Cayman Islands to provide multi currency accounts for corporate customers in order to facilitate trade financing or to provide sweep facilities and an internal treasury function to the group.

  1.5  The challenge for multinational companies, investment banks and fund managers is often how to create an investment fund or business structure which is able to accommodate investors from all over the world within the complex parameters of existing tax and securities laws that apply to the investors, the management team and the business or investment activities, all of which could be based in multiple jurisdictions.

  1.6  The global financial system needs, and will continue to need, legal entities which are formed (whether in the Cayman Islands or elsewhere) to facilitate such international transactions. In many cases, investment managers, investment banks and multinational companies will, on advice of their onshore legal counsel, use companies based in the Cayman Islands and other Offshore Financial Centres to build their investment fund structures or other business vehicles. The international business community thus benefits by being able to form such legal entities swiftly and efficiently in a stable jurisdiction and on a tax-neutral basis. This can be of particular benefit to developing countries in Africa and other regions, where the facilitation of inward private investment is critical to their economic development (See also paragraph 1.8 (d) and (e) below).

  1.7  It is not the case that it is just offshore jurisdictions such as the Cayman Islands which provide a tax-neutral location for finance transactions: Offshore Financial Centres compete as a business matter with onshore jurisdictions. Certain onshore European jurisdictions, such as Ireland, Luxembourg and the Netherlands have picked up a lot of this business and overcome the structuring difficulty of establishing special purpose vehicles in taxing jurisdictions by adjusting their domestic tax rules to achieve an effective zero tax rate for vehicles participating in such transactions. In Ireland, for example, changes were made to the tax legislation so that structured finance vehicles qualify as "section 110" companies, meaning that their cost of funding and related expenditure will be tax-deductible, as will many other types of payment, with the result that Ireland is, effectively, a tax-neutral jurisdiction for these sort of companies.

  1.8  Some of the reasons why the international business community use offshore companies based in the Cayman Islands are as follows:

    (a) Political Stability. The Cayman Islands are politically and economically stable. Unemployment is low and the standard of living one of the highest in the Caribbean. The favourable economic situation of the Cayman Islands is reflected in its political stability. This stability is also reflected in Moody's country ceiling rating of "Aaa".

    (b) Cayman Islands Legal Infrastructure. The laws of the Cayman Islands are substantially based upon English common law and a number of "key" English statutes, although Cayman Islands statutes have been specifically adapted to assist the international business community. This gives Cayman Islands law and legal system a common origin with those of many of the jurisdictions of its users. It also means that the business entities (such as Cayman Islands companies, limited partnerships and unit trusts) and the types of securities which Cayman Islands entities offer are well recognised and accepted around the world, and particularly by Fund managers and investors in New York, London, Tokyo and Hong Kong. Bankruptcy-remote vehicles established in the Cayman Islands are also recognised worldwide and major rating agencies have published specific criteria for Cayman Islands companies. The final court of appeal is to the Privy Council in London. All the major audit firms have offices in the Cayman Islands and there are several major Cayman Islands law firms to give legal advice to support the financial services industry.

    (c) Quality of Service Providers. The quality of the service-providers (attorneys, auditors, mutual fund administrators, trust companies, company managers, etc) in the Cayman Islands is very high. The majority of the Islands' professionals are recruited from the top law and accountancy firms and financial institutions in London and other major financial centres. In response to client demand, the Cayman Islands have therefore developed an expertise and level of service in the financial service industry which meets the standards set by major onshore financial centres.

    (d) Investor requirements. By using a Cayman Islands company to make an investment into foreign jurisdictions, investors are able to better realise their investment by either selling their shares or in an initial public offering (IPO) of shares in the Cayman Islands company. The Cayman Islands legal infrastructure, with which most international investors are familiar, makes it easier to effect such sale or IPO. If the investment was directly into a company in the foreign jurisdiction, the investors would need to understand what rules applied to such investment and a floatation could be more complex and expensive in ensuring that the listing and relevant securities registration rules and local rules are complied with on the IPO. As many Cayman Islands entities have been listed on major stock exchanges such as London, New York and Hong Kong, investors can have confidence that a flotation should, from a legal standpoint, be possible in due course.

    (e) Lender requirements. In some cases, an investment fund or a multinational company will need to borrow significant sums of money to leverage its investment activities or finance its business activities. For example, a multinational business might need to borrow to finance a business based in a developing or an emerging market country. Many lending institutions would prefer to organise the lending and related security interest arrangements offshore through a Cayman Islands company rather than in a developing or emerging market country. Such lenders take comfort in having this important element of these transactions facilitated through corporate vehicles based in the Cayman Islands since the Cayman Islands offers (a) a legal regime which recognises security interests (eg created under English or New York law) most commonly utilised in international cross-border financings, (b) a creditor friendly system where lenders can easily enforce security interests, (c) a legal system which has been scrutinised and approved by all major credit rating agencies, and (d) corporate and partnership entities created under legal principles with which lenders are familiar. These transactions can be extremely complex; indeed some would be difficult and in some cases impossible to structure directly under the legal regimes of the relevant developing or emerging markets. It is for this reason that governmental and quasi-governmental agencies such as OPIC, a US governmental agency, and the International Finance Corporation ("IFC"), a division of the World Bank, will support lending to investment fund structures using Cayman Islands companies; and in the context of aircraft finance deals, the export credit agencies, including the ECGD do likewise.

    (f) Exchange Control and Cash Flow Neutrality. A Cayman Islands company is not subject to Cayman Islands foreign exchange controls and there are no significant restrictions on the payment of interest or dividends, the repayment of capital or the ability to repurchase shares or redeem or repurchase debt. This is important because some cross-border transactions would be rendered uneconomic if cash flows are interrupted by foreign exchange controls or such payment restrictions.

    (g) Tax and Exchange Control Neutrality. Cayman Islands companies provide a tax-neutral platform so that investors from multiple jurisdictions are not subject effectively to double taxation by virtue of the investment fund or offshore company adding extra layers of foreign taxation at different levels of the structure in addition to the investors' home country tax. This neutrality is important because it provides a level playing field for all investors; in other words it avoids creating a vehicle in a jurisdiction that may provide more benefits to some investors than others. The fact that there are no direct corporate or income taxes levied on a Cayman Islands company in the Cayman Islands and that accordingly transactions can be structured on a "tax-neutral" basis, unfortunately often leads to a misconception that investors in offshore companies are free from all forms of taxation. This is not the case at all. Investors based in onshore jurisdictions are likely to be taxed on dividend and other income received from the offshore company and on any capital gains realised on the sale or redemption of shares in the offshore company. Many onshore jurisdictions have also introduced anti-avoidance tax rules that tax income and gains which are rolled up in the offshore vehicle as if they had been distributed. Additionally, the offshore company may itself be subject to withholding taxes imposed in respect of income or gains on its investments by tax authorities in the onshore jurisdictions in which the offshore company's businesses or investments are located and such withholding taxes are frequently not creditable against taxes paid by the investor in the offshore vehicle in respect of the same income or gains. Furthermore, a Cayman Islands company may have a branch or a place of business in an onshore jurisdiction or be centrally managed and controlled in an onshore jurisdiction and be subject to the taxing regime in that onshore jurisdiction.

    (h) Jurisdictional Litigation Risk, Tax and Regulatory Mitigation. International investors and businesses are often concerned that a direct investment in investments based in jurisdictions outside their home territory might expose them to jurisdictional litigation risk or make them subject to additional complex tax or regulatory requirements in multiple jurisdictions. Investments through offshore companies can therefore be a valuable risk management tool for international businesses. To highlight some examples:

    (i)  Some non-U.S investors prefer to invest in US investments through an offshore fund and not directly in the US because of the perceived increased litigation risk of being deemed to be present in the US by virtue of their passive investment activities. International investors are well aware of the highly litigious business environment in the US and the often vexatious litigation commenced by US class action lawyers. Many investors are concerned about the risk of being subject to a jury trial in the US and the unpredictable damages claims which might ensue. This concern was highlighted by a McKinsey report prepared for the Mayor of the City of New York in 2007 as a reason why the New York financial service industry was losing business to other major international financial centres, such as London. On a similar theme we have seen more offshore companies being formed by non-US businesses and listing on the AIM stock exchange in London rather than the NASDAQ as a result of the increased regulatory risk and costs involved with compliance with recent US regulations, such as the Sarbanes-Oxley Act.

    (ii)   In some cases US investors in fund limited partnerships prefer to see the partnership hold non-US investments through offshore holding companies to reduce the risk that their limited liability status might be jeopardised by an investment by the fund in other jurisdictions.

    (iii)  In order to encourage passive inward foreign investment into some jurisdictions, we understand that the onshore tax codes in some countries may seek to create certain safe harbours for foreign investors whose activities are restricted to passive investing in the onshore jurisdiction. These foreign investors may be deemed not to be engaged in a trade or business in the onshore jurisdiction for tax purposes solely by virtue of their passive investment activities and therefore are not generally subject to tax in that jurisdiction generally on their other worldwide business revenues, save perhaps for a withholding tax on certain dividend payments on some investments. However, foreign investors or businesses may still prefer to invest in investments managed by an onshore fund manager through an offshore fund to reduce the risk that the foreign investors could unnecessarily be held to be engaged in a trade or business within the onshore jurisdiction and inadvertently become subject to onshore tax on their foreign-based assets because their investments are managed by an onshore-based fund manager. In this way the use of offshore investment funds helps onshore fund managers compete globally for international investors.

2.  To What Extent Does the Use of Offshore Financial Centres Threaten Financial Stability?

  2.1  The Cayman Islands have been the subject of several major reviews by international bodies such as the International Monetary Fund ("IMF") and the Financial Action Task Force. We do not believe that the use of Offshore Financial Centres threatens global financial stability. On the contrary, we would argue that the use of Offshore Financial Centres for the financial products developed by onshore financial institutions actually helps spread risk on a wider basis globally.

  2.2  In 2005, the IMF conducted a review of the financial sector regulation and supervision in the Cayman Islands with regard to the assessment of the supervision in the Cayman Islands of the offshore banking, insurance and securities sectors on the basis of the Basel Committee's Core Principles for Effective Banking Supervision, the IAIS's Insurance Core Principles and IOSCO's Objectives and Principles of Securities Regulation and evaluated the Cayman Islands anti-money laundering and combating of terrorist financing legislation using a common methodology based on the FATF 40 + 9 Recommendations. We enclose a copy of the IMF report on the Cayman Islands.

  2.3  In summary, the IMF Report did not conclude that the use of the Cayman Islands companies in world wide financial markets threatens financial stability. On the contrary, whilst the IMF made some useful observations as to how the Cayman Islands government can continue to improve regulations it concluded, amongst other things, that:

    (a) the Cayman Islands financial industry and regulators have developed an intense awareness of the measures to combat money laundering and the financing of terrorism;

    (b) banking supervision is largely in compliance with Basel Core Principles; and

    (c) securities regulations are largely in accordance with the IOSCO principles.

  2.4  Although Cayman Islands entities have been connected with some major collapses of corporate enterprises, for example Enron and Parmalat, it should be noted, that the Cayman Islands entities are usually the victims of the fraud, with the fraudulent activity having taken place onshore (in those cases, the United States and Italy, respectively). In addition, the fact that Cayman entities are in a jurisdiction which is creditor-friendly and have a English law based legal system has, in the case of Enron, enabled the sale of assets in an efficient way that had assisted in increasing the realisation for creditors in that liquidation.

  2.5  It is also worth noting that in relation to the recent credit crisis, whilst there have been well-publicised examples of Cayman Islands hedge funds experiencing difficulties, according to recent statistic produced by the Cayman Islands Monetary Authority, only 0.1% of the 9,400 hedge funds registered with CIMA have suffered difficulties which have led to a suspension of trading.

  2.6  We would also observe that many frauds that really have threatened the worldwide financial system, such as Barings and more recently Societe Generale, have not in any way been perpetrated through offshore entities.

  2.7  Finally, we would refer you to several articles written by The Economist published on 24 February 2007 which give a balanced view of why offshore financial centres are beneficial for the global financial system. We enclose copies of those articles.

3.  How Transparent Are Offshore Financial Centres and the Transactions That Pass Through them To the United Kingdom Tax Authorities and Financial Regulators?

  3.1  The Cayman Islands have invoked numerous statutory measures to cooperate with and assist foreign governments, authorities and courts with the provision of information held in the Cayman Islands. Such laws override any statutory or common law duties of confidentiality.

  3.2  Mutual legal assistance for criminal matters has been covered under the Criminal Justice (International Cooperation) Law from 1997 and, with particular regard to US criminal matters, under the Narcotics Drugs (Evidence (United States of America) Law from 1984 and the Mutual Legal Assistance (United States of America) Law ("MLAT") from 1986. Extradition between the Cayman Islands and other jurisdictions, including designated Commonwealth countries, is provided for by a variety of Extradition Orders, by extension from Her Majesty's Government.

  3.3  The Misuse of Drugs, Proceeds of Criminal Conduct Law ("PCCL") and Terrorism Law also contain provisions for the sharing of information with authorities in relevant circumstances. Of 23 requests made to the Cayman Financial Reporting Authority by US authorities since 2003 in relation to money laundering and predicate offences, 22 have been granted.

  3.4  The Cayman Islands are also a party to the Hague Convention 1970 on the taking of evidence abroad, the principles of which are followed in the Evidence (Proceedings in Other Jurisdictions) (Cayman Islands) Order 1978.

  3.5  As a regulatory matter, the Cayman Islands Monetary Authority ("CIMA") is empowered under the Monetary Authority Law to entertain requests for information from any recognised overseas regulatory authority exercising equivalent functions. CIMA does not consider requests from fiscal authorities in relation to tax matters, which are more appropriately dealt with by the Tax Information Authority (see below under 3.6). If certain criteria are met, CIMA will direct a local financial service-provider or connected person to disclose information they hold which is responsive to the overseas regulatory authority's request.

  3.6  In relation to disclosure for tax matters, the Cayman Islands made a commitment to the OECD to cooperate with tax information requests. In 2001 the Cayman Islands signed a Tax Information Exchange Agreement with the United States. This provided for information in relation to criminal tax matters from the 2004 tax year and civil matters from the 2006 tax year and does not require a dual criminality test (ie that the matter constitutes a criminal offence in both the US and the Cayman Islands). When it was signed, the US Treasury Secretary at the time, Hon. Paul O'Neill, commented "We commend the Cayman Islands for emphatically demonstrating that those who seek to engage in tax evasion or other financial crimes are not welcome within its jurisdiction". The following year, US Treasury officials were reporting to the Senate that the agreement would be "an invaluable source of information to the IRS". Since then, the Cayman Islands have introduced the Tax Information Authority Law, 2005 which creates and empowers the Tax Information Authority ("TIA") as the competent authority to deal with requests and responses and which schedules the Tax Information Exchange Agreement with the United States. This Tax Information Exchange Agreement conforms to the model developed, with US participation, by the OECD Global Forum on Taxation, and is a form of an agreement which both the G-8 and G-20 countries have endorsed as reflecting "high standards of transparency and exchange of information for tax purposes".

  3.7  In 2005, the Cayman Islands implemented exchange of information measures similar to the EU Savings Directive and has introduced the Reporting of Savings Income Information (European Union) Law, 2007 (and related Regulations) (together, "ROSII"). As with the United Kingdom, the Cayman Islands chose the more transparent automatic reporting of interest payments rather than opting (as did certain onshore EU jurisdictions whose transparency must be questioned) to apply a withholding tax system in which the identities of the persons having bank accounts etc are not revealed. The ROSII also designated the TIA as the competent authority to deal with disclosures under ROSII and to act as the local liaison with the relevant foreign fiscal authority. We understand that the TIA has over the last two reporting periods, passed to the UK HM Revenue and Customs reports of relevant interest payments that are required to be made pursuant to these obligations.

  3.8  The Cayman Islands Government and CIMA have had ongoing dialogue with foreign national and international agencies such as the FSA, US Securities and Exchange Commission and International Organization of Securities Commissions ("IOSCO") to ensure that the Cayman Islands is viewed as cooperative and responsive in relation to requests for information on regulatory and criminal matters. The Cayman Islands Monetary Authority has entered into a number of memoranda of understanding ("MoU") with respect to exchange of information (For a full list please go to www.cimoney.com.ky/section/regulatoryframework/default.aspx?id=150). The most relevant of these for the purposes of this submission, is the recent MoU that CIMA has entered into with the Financial Services Authority in the UK. In addition, the Cayman Islands have applied for membership of IOSCO pursuant to which they have agreed that they would be bound by the IOSCO multilateral MoU. We understand that, at present, several EU regulators (eg Austria, Sweden and Ireland) have not as yet agreed to sign this new initiative to assist in the global co-ordination of exchange of information between regulators.

  3.9  Outside of these statutory measures, there is also in practice a large number of transactions that involve Cayman Islands entities which are identifiable onshore due to the fact that either (a) the counterparties to the transaction are regulated onshore (eg a swap counterparty to a Cayman Islands bond issuer) and the relevant transaction is reportable; (b) the securities issued by the Cayman Islands entity are publicly listed on a stock exchange in the EU or elsewhere; (c) the transaction may be reportable under relevant accountancy rules by a party to the transaction; or (d) the transaction may be reportable by a party that has sponsored or originated the transaction under tax structure reporting rules.

4.  To What Extent Does the Growth In Complex Financial Instruments Rely on Offshore Financial Centres?

  4.1  This is difficult to answer as it is not clear what is meant by "complex financial instruments".

  4.2  If this alludes to the issues that have arisen in connection with the US sub-prime market and the use of complex financial instruments to pass on the risk of those securities into the market, it is absolutely not the case that such growth relied on Offshore Financial Centres. Although a large number of special purpose vehicles ("SPVs") which contained sub-prime asset backed securities in their portfolios were incorporated in the Cayman Islands, these transactions were arranged by major US investment banks and could have been structured through several other jurisdictions, including EU jurisdictions such as Luxembourg, Ireland and the Netherlands (and indeed a large number of such SPVs were incorporated in those jurisdictions[239]). The growth of these complex financial instruments was driven by market appetite for such instruments and many of the offshore structures, as is evident from the above, can easily be replicated onshore. The major reasons for using offshore structures are often cost and investor preference.

5.  How Important Have the Levels of Transparency and Taxation In Offshore Financial Centres Been In Explaining the Current Position In Worldwide Financial Markets?

  5.1  Cayman Islands entities are used for a wide range of legitimate business purposes and for a variety of reasons, the respective weighting of which will depend on the circumstances. Secrecy (in the sense of concealing information that would otherwise be available to appropriate parties, such as auditors, investors, lenders, counsel, counterparties and regulatory authorities) is not a driving motivator for reputable business coming to the Cayman Islands. Indeed, press articles which focus on the way in which multinational corporations use group companies in jurisdictions such as the Cayman Islands to conduct their international businesses are usually written based on information which a journalist has been able to obtain by reviewing the publicly-available audited accounts or regulatory filings of those multinational corporations which list their offshore subsidiaries.

  5.2  Equally though, people and businesses the world over rightly are entitled to an appropriate level of privacy (which is, after all, enshrined in the United Nations Declaration of Human Rights) with a presumption that this is the starting position and that private information will be protected against disclosure save when there are proper reasons to override such duty of confidentiality through well-ordered gateways and subject to the application of the rule of law and suitable protections against abuse. It should also be borne in mind that many of the transactions that involve in part a Cayman Islands vehicle are either (a) listed on a major stock exchange; (b) consolidated for accounting reasons on the books of the parent entity, which in turn is publicly listed; or (c) been rated by a credit rating agency and information is freely available for the investors party to the transaction (eg in the case of a securitization, the notes trustee or an agent of the notes issuer is required to give financial information on the cash flows to the investors on a monthly or quarterly basis).

  5.3  As was noted in paragraph 1.8 above, tax neutrality is only one of the many reasons why international investors and other participants choose to use Cayman Islands vehicles as part of their transaction and such tax-neutrality can often be obtained through the use of onshore vehicles (eg UK residential mortgage backed securitisations).

6.  How Do Taxation Policies of Offshore Financial Centres Impact on UK Tax Revenue and Policy?

  6.1  As we are not experts on UK tax revenue and policy, this is difficult for us to say other than to note the following points.

  6.2  As an initial point, the Cayman Islands have never had, during their 500 year history, any form of direct taxation (ie income tax, capital gains tax or corporation tax) and therefore do not have a "taxation policy" as such which can be changed in order to impact on UK tax revenue.

  6.3  Secondly, the use of Cayman Islands vehicles are essentially tax neutral as was stated in our response at paragraph 1.8 with UK investors being required to pay tax on any income or capital that may arise for the transaction (either at the time of receipt if the vehicle is a pass through vehicle or if the payments are held in the vehicle by virtue of the vehicle becoming subject to controlled foreign corporation rules and so the UK investor is often taxed on that basis). Therefore in that sense, there is no impact.

  6.4  Thirdly, to the extent that Cayman Islands vehicles are doing business in the UK or are UK managed and controlled, they will be liable to UK tax in the normal way.

  6.5  Since the Cayman Islands, like most other offshore financial centres, do not have the infrastructure to support the relocation of the tax domicile of major UK companies, the fact that there is no direct taxation such as income tax or corporation tax is unlikely to lead to the loss of UK companies to the Cayman Islands. Indeed in light of the recent changes to the non-domicile and capital gains regimes, it is interesting to note that Shire's recent move was to Ireland, not to any offshore centre, and that Switzerland is being mooted as the other major alternative.

  6.6  It should also be borne in mind that while the Cayman Islands do not have a direct tax system, there is an indirect tax system collected mainly through stamp duty on real estate and import duty of 20% on most items with higher rates for certain other item. Therefore the idea of Cayman Islands resident individuals and/or businesses having a "tax free" existence is misconceived.

  6.7  It should also be noted that one of key factors in identifying and assessing jurisdictions as being a "non co-operative" jurisdiction as set out in the Organisation for Economic Cooperation and Development ("OECD") 1998 report on "Harmful Tax Competition—an Emerging Global Issue" was so called "ring-fencing" of tax regimes, whereby preferential regimes or policies were applied for taxation of "offshore" companies but taxation was applied domestically. This has never been the case in the Cayman Islands as the no-direct-tax regime applies domestically in the Cayman Islands and there is no distinction for tax purposes between onshore and offshore companies. The Cayman Islands was also one of the first of the Offshore Financial Centres to be placed on the OECD "white list", ie categorised as being co-operative.

7.  Are the British Overseas Territories and Crown Dependencies Well-Regarded As Offshore Financial Centres, Both In Terms of Comparison To their Peers and International Standards?

  7.1  For the reasons specified earlier in this submission, in particular the response to Question 1 and Question 3, we are of the view that the Cayman Islands are regarded by investors, rating agencies and service providers in all the major financial centres as a world class jurisdiction for the formation of hedge funds, private equity funds, capital markets and structured finance companies, business and joint venture vehicles and insurance companies.

  7.2  Another important area that relates in part to the response to Question 8, is the current Cayman Islands anti-money laundering ("AML") regime. In that regard, the Cayman Islands underwent an evaluation by the Caribbean Financial Action Task Force ("CFATF") in June 2007. The Report was published in November 2007 and can be accessed on the CFTAF website at http://www.cfatf.org/profiles/media/Cayman%20Islands%20MEV%20-%20Final%20Report%20_2_a.pdf.

  The evaluation reported a "strong compliance culture" in the Cayman Islands' financial services sector. The evaluation rated the Cayman Islands "compliant" or "largely compliant" with 38 out of the 40 Financial Action Task Force AML recommendations and the nine combating of financing of terrorism special recommendations. This compares very favourably with third-round evaluations to date of FATF countries and, using the same ratings, places the Cayman Islands 4th out of the 26 jurisdictions reviewed so far. The Cayman Islands have achieved better results than other FATF members, including Denmark, Finland, Greece, Ireland, Italy, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

  7.3  The Cayman Islands have had AML legislation since 1989. The Misuse of Drugs Law criminalised, among other things, dealings with the proceeds of drug trafficking. All crimes AML legislation was introduced in 1996 with the Proceeds of Criminal Conduct Law ("PCCL"), which has been regularly amended and revised to meet international standards. The Cayman Islands were the first Caribbean jurisdiction to introduce such legislation and the PCCL has been used as a legislative model for other regional jurisdictions. The PCCL essentially provides for the criminalisation of various forms of money laundering, a mandatory reporting obligation and tipping off offence, the empowerment of the police and courts to search, freeze and confiscate the proceeds of crime and the ability of the courts and relevant authorities to assist in the enforcement of foreign confiscation judgments.

  7.4  The Money Laundering Regulations (the "Regulations") were introduced in 2000 and essentially codified the basic procedural AML requirements which the financial services industry had been applying voluntarily for over a decade. The Regulations require that financial service providers conducting relevant financial business must maintain the following procedures when entering a business relationship or conducting a one-off transaction:

    (a) client identification and verification;

    (b) record keeping;

    (c) internal controls and communication;

    (d) suspicious activity reporting; and

    (e) training and awareness.

  7.5  Client identification and verification procedures will normally include obtaining information on the controllers and principal beneficial owners of client entities. In 2001, the Regulations were amended so that the requirement to maintain client identification and verification procedures would apply to all relationships established prior to the introduction of the Regulations (ie an obligation was imposed to perform retrospective due diligence on all relationships pre-2000). To date, the Cayman Islands are the only jurisdiction in the world to have completed the retrospective due diligence exercise across all industries.

  7.6  The Regulations apply to all licensed trust companies, corporate service providers and company managers, as well as those entities registered and licensed to conduct securities investment business, amongst others. In contrast, the UK and other EU member states have only recently extended their Money Laundering Regulations to trust companies with the introduction of the EU Third Money Laundering Directive. In this regard, the Cayman Islands can be considered to be more regulated than most onshore jurisdictions.

8.  To What Extent Have Offshore Financial Centres Ensured That they Cannot Be Used In Terrorist Financing?

  8.1  Since October 2001, the Cayman Islands have applied the Terrorism (United Nations Measures) (Overseas Territories) Order, which provides for the fundamental offences against dealings with terrorist property and the support of terrorist financing. The Terrorism Law was introduced in 2003, which clarifies and extends the terrorism and terrorist financing offences, in particular providing for the forfeiture of terrorist funding, prohibition of terrorist activity, money laundering, and mandatory disclosure of information to appropriate authorities on the same lines as the anti-money laundering legislation.

  8.2  As noted above in paragraph 7.3, the Cayman Islands were highly commended by the CFATF report in November 2007 for the steps it had taken in relation to maintaining global standards on money laundering and terrorist financing. The Cayman Islands is currently contemplating the adoption of a new Proceeds of Crime Law, which will replace the current Proceeds of Criminal Conduct Law and will harmonise the offences and reporting requirements under that law, the Misuse of Drugs Law and the Terrorism Law.

9.  What Are the Implications for the Policies of HM Treasury Arising From Offshore Financial Centres?

  9.1  It is not really possible for us to answer this as we are not fully aware of what HM Treasury's policies are. If the Committee is familiar with them and would care to share them with us, we would be happy to revisit this question.

10.  What Has Been and Is the Extent and Effect of Double Tax Treaty Abuse Within Offshore Financial Centres?

  None, as the Cayman Islands are not party to any double tax treaties.

11.  To What Extent Do Offshore Financial Centres Investigate Business and Individuals That Appear To Be Evading UK Taxation?

  11.1  In addition to the reporting obligations under the ROSII and Tax Information Exchange Agreements, under the PCCL any person that knows or suspects (in the course of their business, trade etc.) that another person is engaged in money laundering must disclose such information to the Cayman Islands Financial Reporting Authority as soon as reasonably practicable.

  11.2  "Money laundering" is essentially defined under the PCCL as any act constituting an offence under the PCCL, the Misuse of Drugs Law or the Terrorism Law, or an act done outside the Cayman Islands that would have constituted such an offence if it had been committed within the Cayman Islands. An offence or criminal conduct to which the PCCL applies refers to an indictable offence. As such, a reportable act should be an indictable offence in the Cayman Islands, whether committed in the Cayman Islands or not.

  11.3  As the Cayman Islands have no income, capital gains, corporation, estate, gift or inheritance taxes, there are no direct tax offences and foreign tax evasion per se (ie omissions to pay income, capital gains or corporation taxes to the requisite overseas taxing authority) may not form a predicate offence for the purposes of the money laundering legislation in the Cayman islands.

  11.4  However, it is likely that the actual conduct (or some part or aspect of it) could constitute an ancillary indictable offence under the Cayman Islands Penal Code or common law. Possible offences under the Penal Code could include, for example, false accounting, forgery, fabricating or destroying evidence, perjury in relation to proceedings or conspiracy to defraud. If the alleged act may include any of these criminal elements, a duty to report may arise.

  11.5  As a matter of practice, most financial service providers will enquire, as part of their anti-money laundering procedures, whether the source of funds is legitimate and, in certain circumstances, whether onshore tax advice was obtained. Maples and Calder operates a group policy that where instructions are not received through an onshore law firm, financial institution or accountancy firm, confirmation of compliance with local laws, including tax laws, must be provided.

June 2008






239   Based upon statistics compiled by Dealogic, 61% of global CDO deals in 2007 used a US domiciled vehicle and a further 15% used a vehicle domiciled in Ireland or the Netherlands. Back


 
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