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.
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
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 fundsprincipally 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 transactionssuch as
securitisations, capital raising corporate finance subsidiaries
and note issuing programmes;
(c) structured investment productsnote
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
(f) a business may wish to insure against natural
disaster risk by way of issuing bonds into the international capital
(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
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
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
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
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
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).
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
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
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 Competitionan 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
(a) client identification and verification;
(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
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.
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