Cayman Islands: International Law

As early as July 2000, Cayman legislators were considering four bills addressing money laundering, following the concerns raised by the FATF. The resulting new laws set out, among other provisions, to expand the role of the Cayman Islands Monetary Authority and to require service providers to strictly adhere to standardised anti-money laundering procedures for client identification, record-keeping and internal reporting. The legislation built on the Code of Practice issued in March 2000 under the Proceeds of Criminal Conduct Law.

The main areas of concern raised by the FATF at the time, and legislative actions taken by the Cayman Islands in response are outlined below, with details of actions undertaken to address them:

Customer Identification & Record-keeping Rules: The Cayman Islands has compulsory legal requirements, with respect to relevant financial business, for customer identification, internal reporting and record-keeping in the Money Laundering Regulations 2000, which contain criminal sanctions. These regulations were passed on August 7, 2000 and took effect on September 1, 2000.

Regulatory Cooperation: The Cayman Islands Monetary Authority was enabled by the Monetary Authority (Amendment) (International Co-operation) Law 2000 to readily access and share information with overseas regulators, including information regarding the identity of customers in appropriate regulatory circumstances. This law was passed on July 14, 2000, and took effect on July 24, 2000.

The Role of the Regulatory Authorities: The Cayman Islands Monetary Authority reviewed its resources and adopted a strategy for enhanced on-site inspections of licensees.

Suspicious Activity Reporting: A new criminal offence was added on July 14, 2000 by the Proceeds of Criminal Conduct Law (Amendment) (Money Laundering Regulations) Law 2000, making it a crime punishable by up to two years imprisonment to fail in the course of business to report any suspicious transaction. This exceeded UK Law, which has such an offence only in relation to drugs and terrorism. In addition, the Money Laundering Regulations require by law that financial services providers have systems in place to secure the reporting of suspicious transactions, punishable on a breach by up to two years imprisonment.

When the FATF met in January 2001, the Cayman government was disappointed to be told that it had to show that its new measures would be applied in practice, before it could be delisted. The FATF sent a nice letter, inviting the government to submit an implementation plan, and drew particular attention to the continued existence of anonymous accounts in the context of money-laundering.

While the Cayman Islands was busy amending its legislation to conform with FATF requirements, KPMG was compiling its report to the UK Government on Bermuda and the Caribbean dependent territories, as a follow-up to the Edwards Report on the Isle of Man and the Channel Islands. The KPMG report, published late in 2000, while generally positive, highlighted a number of relatively minor legislative and administrative aspects requiring further adjustment:

• Legislation was required to cover the regulation of securities/investment business beyond that relating to members of the CSX and mutual fund administrators;
• The Companies Law lacked many of the features found in a modern piece of companies' legislation and was in need of review; KPMG recommended a review of it should include insolvency provisions, control over the issue of prospectuses, protection of the interests of minority shareholders, enforcement powers, the disqualification of directors and auditing of public companies;
• KPMG were particularly insistent that bearer shares should be banned.

The report also suggested that the forming of limited partnerships and the provision of registered offices for partnerships should become a regulated activity; that where the accounting records of a limited partnership were not kept at its registered office, the registered office should maintain a written record of where they are kept; and that the Registrar of Companies (who is also responsible for the registration of limited partnerships) should have strengthened enforcement powers.

Improvements were also requested in the trusts sector, with an end to the exclusion from regulation of those who undertake trust service provision as an individual or partnership, more thorough on-site and off-site inspection, the introduction of an enforceable supervisory code of practice for licence holders; and an enhancement of CIMA's enforcement powers.

A team from the FATF then visited the Cayman Islands at the beginning of May that year, to review the progress of implementation of the legislation which had already been judged to be more than sufficient to ensure removal of the country from the list, and in June duly removed Cayman from its list when it released its annual report for 2000/2001, along with the Bahamas, Liechtenstein and Panama.

Following the FATF's announcement, the US Treasury issued revised instructions to banks and other financial institutions saying that its financial advisories against the countries concerned were no longer in force.

This effectively meant that US based banks and other institutions no longer needed to apply enhanced scrutiny to transactions involving those countries

September, 2001, saw the formation of the Cayman Islands Anti-Money Laundering Group (CAMLG), an industry-wide body established by the Cayman Islands Monetary Authority.

"There have been tremendous efforts on the part of both the public and private sectors in combating money laundering. However, CAMLG with its industry-wide perspective, will enhance our ongoing efforts in the area of training," explained CAMLG Chairman, Mr Paul Byles.

In November there was a less widely welcomed development when the Cayman Islands signed a tax information exchange agreement with the US. The tax agreement specified that the Cayman Islands would share with the US tax information to help the government trace financial criminals.

After criticism of the agreement, officials from the Caymans government held a press conference to quell fears on the Island that its financial industry had been 'sold out' as a result of the pact.

The Deputy Leader of Government Business, Minister for Planning, Communications, Works and Information Technology, Financial Secretary, Attorney General attended the conference to assure the public that the agreement would not lead to an 'open season' on the finance industry and 'it does not mean that the books and records of the Cayman Islands will be thrown open.'

It was confirmed that it could take up to two years to implement the relevant laws to make the Tax Information Exchange Agreement workable and the first stage of the agreement did not come into effect until 1 January, 2004.

It was also explained that a request for tax information from the US government had to be formally made to the relevant Tax Authority, and it must be backed-up by satisfactory evidence to convince the Cayman Authority that it is not a 'fishing expedition'.

It was additionally confirmed that the US would only seek out 'tax evasion wilfully done with a dishonest attempt' and the sum of money involved 'must be a significant or substantial amount.'

On close inspection, the agreement came across as less terrifying than its title. It covered information relating to 'the administration and enforcement of the domestic laws of the parties concerning the taxes and the tax matters covered by this Agreement, including information that may be relevant to the determination, assessment, verification, enforcement or collection of tax claims with respect to persons subject to such taxes, or to the investigation or prosecution of criminal tax evasion in relation to such persons'.

Information has to be provided by the Cayman Government: without regard to whether the person to whom the information relates is, or whether the information is held by, a resident or national of a party; and provided that the information is present within the territory, or in the possession or control of a person subject to the jurisdiction, of the requested party.

The taxes covered by the Agreement are federal income taxes, 'but the types of tax covered may be extended by agreement between the parties in the form of an exchange of letters'.

The agreement covers "criminal tax evasion", which means: 'wilfully, with dishonest intent to defraud the public revenue, evading or attempting to evade any tax liability where an affirmative act constituting an evasion or attempted evasion has occurred. The tax liability must be of a significant or substantial amount, either as an absolute amount or in relation to an annual tax liability, and the conduct involved must constitute a systematic effort or pattern of activity designed or tending to conceal pertinent facts from or provide inaccurate facts to the tax authorities of either party.'

Information must be provided even if the alleged criminal behaviour was not criminal in the Cayman Islands. The signatories agree to provide themselves with the authority to obtain:

• information held by banks, other financial institutions, and any person, including nominees and trustees, acting in an agency or fiduciary capacity;
• information regarding the beneficial ownership of companies, partnerships and other persons, including in the case of collective investment funds, information on shares, units and other interests; and in the case of trusts, information on settlors, trustees and beneficiaries.

For the US to make a request under the agreement, it must provide:

• the identity of the taxpayer under examination or investigation;
• the nature of the information requested;
• the tax purpose for which the information is sought;
• reasonable grounds for believing that the information requested is present in the territory of the requested party or is in the possession or control of a person subject to the jurisdiction of the requested party;
• to the extent known, the name and address of any person believed to be in possession or control of the information requested;
• a declaration that the request conforms to the law and administrative practice of the requesting party and would be obtainable by the requesting party under its laws in similar circumstances, both for its own tax purposes and in response to a valid request from the requested party under this Agreement.

US officials are permitted under the agreement to 'enter the territory of the requested party in connection with a request to interview persons and examine records with the prior written consent of the persons concerned', or 'attend a tax examination' in the Cayman Islands.

Information need not be provided if it is subject to legal privilege, or if it would not have been obtainable by the US under its own laws, domestically.

Taking into account the furore created by the US tax information agreement, the Cayman government promised to consult with the finance and private sector before entering into any new tax information exchange agreements.

Another, and far worse tax information exchange agreement did indeed rear its very ugly head in mid-2002, when the UK started to try to persuade its dependent territories to fall into line over the EU's Savings Tax Directive.

The Cayman government put up a spirited resistance to the Directive during 2003, but finally had to admit defeat in the face of the UK's implacable determination to impose the Directive on its dependent territories, as had been agreed in Brussels.

At first the government appealed to the European Court of Justice, and was partially successful. Although the ECJ's Court of First Instance dismissed the Cayman Islands' application for the formation of a Commission Working Party on the issue of the Savings Tax Directive, the ECJ said that the EU could not impose an obligation on the territory to implement the proposed Directive on the Taxation of Savings Income.

The European Parliament had proposed an amendment which would have included Member States' dependent territories in the scope of the Directive, but this was not adopted by the Commission. In addition, the court ruled that the UK was not legally required as a full member of the EU to impose the directive on the Cayman Islands. The Court also confirmed that the directive is a fiscal measure, which has favourable connotations for the Cayman Islands from a constitutional perspective.

The ECJ said that the question of whether the UK could constitutionally impose the Directive on the Cayman Islands via an Order In Council (as was being threatened by the UK Treasury) was something that depended on the exact arrangements between the UK and the Islands, and was outside the ECJ's remit.

Following the ruling, Paymaster General Dawn Primarolo repeated the UK government’s threat to force the Cayman Islands to abide by the terms of the European Savings Directive by means of legislation.

The UK government gave the Cayman Islands until January 31st, 2004, to formulate an acceptable compromise plan. A Caymanian delegation to London that was presented with the deadline asked for three major concessions in return including: recognition by the European Union of the Cayman Islands Stock Exchange; increased access for Cayman financial instruments to the European market; and investment in the country’s airport expansion.

At the turn of the year, the Cayman government began to accept the inevitable, although it persisted in saying that any commitment to implement depended on two conditions being met: First, all countries must implement at the same time - there must be a level playing field; and second, the British Government should develop detailed proposals to mitigate the Directive's detrimental economic impacts.

“We are continuing our discussions about offsetting benefits with HM Government. Progress is being made and both parties are co-operating warmly," said McKeeva Bush, then Leader of Government Business.

In March of that year, the Cayman Islands Legislative Assembly voted to accept the terms of the European Savings Directive, and later in the month, the United Kingdom government told the Ecofin Council that all of its dependent territories had accepted the Directive.

The Cayman Islands has applied the information exchange model under the Directive from 1st July, 2005, when it came into force. This means that information about interest on savings paid to citizens of European member states is being forwarded to the tax authorities of the member state in question.

In March, 2005, the Cayman Islands Monetary Authority welcomed the conclusions of a report by the International Monetary Fund concerning the regulatory progress made by the jurisdiction. In the executive summary of the two-volume report the assessment team noted that: “An extensive program of legislative, rule and guideline development has introduced an increasingly effective system of regulation, both formalising earlier practices and introducing enhanced procedures.”

In July 2006, the Cayman Islands Monetary Authority (CIMA) and the Office of the Superintendent of Financial Institutions Canada (OSFI) signed a memorandum of understanding to provide a framework for cross border cooperation between the two countries.

The MoU, signed in May of that year, established a protocol for the sharing of information and protection of information shared, cooperation regarding on-site inspections carried out by one regulator on supervised financial institutions in the other jurisdiction, and ongoing coordination.

OSFI is responsible for regulating and supervising all federally chartered, licensed or registered banks and insurance, trust and loan companies, as well as cooperative credit associations and fraternal benefit societies in Canada.

CIMA General Counsel, Mr Langston Sibblies, noted that the agreement was important since OSFI, as the federal regulator, has jurisdiction in all of Canada's provinces.

"The MoU will allow us to develop cooperative relationships in a structured and clear way and will further enhance supervision of Canadian entities operating here, particularly in the banking sector," he observed.

The MoU was subject to the domestic laws of both jurisdictions, as with other memoranda.

The Monetary Authority in mid 2006 had bilateral information exchange agreements with eight overseas regulatory authorities, and a multilateral MoU with eight authorities in the Caribbean.

CIMA's Managing Director, Mrs. Cindy Scotland, said that the latest agreement underscored the importance Cayman, as a major financial centre, placed on international cooperation.

Also in mid-2006, the Jersey Financial Services Commission added the Cayman Islands to its list of countries and territories considered to have an equivalent anti-money laundering framework.

The move was seen by the Cayman Islands Monetary Authority as being of significant benefit to Cayman-based financial institutions and their clients which do business with financial institutions in Jersey.

The recognition allowed Jersey's customer identification procedures to be satisfied if the client has met Cayman's customer identification requirements. This aimed to save time and resources that would otherwise have to be spent processing and supplying duplicate know-your-customer documentation to Jersey.

Then in December 2007, the Cayman Islands received high praise from the Foreign Affairs Committee (FAC) of the United Kingdom's Parliament for its financial sector legal and regulatory regime.

The commendation was given to Cayman Leader of Government, Kurt Tibbetts, as he and BVI Premier Ralph O'Neal gave oral testimony before the FAC on the Overseas Territories' relationship with the Foreign and Commonwealth Office (FCO).

Returning to money laundering matters, but also in December 2007, the Cayman Islands achieved a high compliance rating for its anti-money laundering and terrorist financing legislation, following an assessment of its legal regime by the Caribbean Financial Action Taskforce (CFATF).

The evaluation was based on the assessment team’s June 2007 visit, and it 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 (FATF) AML recommendations and the nine CFT special recommendations (known as the FATF 40+9). This compared favourably with third-round evaluations to date of FATF countries.

The Cayman Islands’ third-round evaluation, together with those conducted by the FATF and other AML/CFT bodies, used the latest version (February 2007) of the FATF 40+9.

The Cayman Islands’ evaluation was the first to include experts from FATF countries as part of the assessment team, in this case the US and Canada, together with CFATF experts from The Bahamas, Jamaica and the CFATF secretariat in Trinidad.

In March 2008, it was announced that the Cayman Islands Monetary Authority and the UK's Financial Services Authority had implemented a cooperation agreement.

The memorandum of understanding (MOU) for the exchange of information and investigative assistance between CIMA and the FSA, the UK's national regulator of financial services and markets, was signed on 21 February. The agreement provided a formal basis for cooperation between the two authorities.

The MOU outlined the types of assistance that can be requested and given by CIMA and the FSA. This included providing, confirming or verifying information; obtaining specified information and documents from other parties; discussing issues of mutual interest; questioning or taking testimony of persons designated by the requesting authority; arranging and/or conducting inspections of financial services providers, and permitting representatives of the requesting authority to participate in enquiries by or on behalf of the requested authority.

The MOU also outlined the procedure each regulator will use for making requests and how requests will be assessed to determine if the required assistance can be given.

In May 2008, though, the UK House of Commons Committee of Public Accounts published a report arguing that the Foreign and Commonwealth Office (FCO) was not doing enough to manage the risks arising from the UK's liability for the 14 Overseas Territories choosing to remain under British sovereignty, according to Edward Leigh, Chairman of the House of Commons Committee of Public Accounts.

Edward Leigh, Chairman of the Committee, observed that: 'In most of the Territories, the standards of regulation across areas such as banking, money laundering, insurance and securities are not as good as those in the Crown Dependencies. The FCO, actively supported by other relevant agencies, must do more to help the Territories, especially the smaller ones, strengthen regulation. Where necessary, this should include bringing in more UK investigators and prosecutors.'

The report, using evidence from the Foreign and Commonwealth Office and the Department for International Development, examined the oversight of offshore financial services in the Territories; the balance between UK and Territory funding and responsibilities; and governance and management of the Territories' external relations.

While the report noted that the UK government is attempting to increase capacity for oversight of Territories' financial services industries, it argued that regulatory standards in most Territories are not yet up to those in the Crown Dependencies (Jersey, Guernsey and the Isle of Man).

It also found that limited capacity reduced the ability of Territories to investigate and prosecute money laundering.

Echoing this, in late June 2008, the Commons Select Committee on Foreign Affairs in the UK published its seventh report addressing issues surrounding overseas territories and offshore centres.

On the subject of the regulation of offshore financial services, the Commons Select Committee (CSC) observed that the UK has strong reasons to ensure that Overseas Territories' financial industries are well regulated.

According to the Committee report, Bermuda, the British Virgin Islands (BVI) and the Cayman Islands were the largest financial centres. Bermuda is the international leader in insurance, BVI is a leading global player in licensing international business companies, and the Cayman Islands are a leading world player in financial services, particularly banking and hedge funds.

In addition to this, the CSC reported that it had received mixed evidence about the quality of financial regulation in these Territories.

It was found that Bermuda, BVI, the Cayman Islands, and Gibraltar, were "leaving in their wake the weaker regulatory capacity" of these three financial centres, according to the report.

The report further announced that the Public Accounts Committee had concluded that the FCO, the Financial Services Authority, the Treasury and the Serious Organised Crime Agency, needed to "deploy their expertise and capacity jointly to manage the risks better".

In particular it highlighted a lack of investigative capacity properly to scrutinise suspected money laundering activity.

Also in June 2008, the Caymanian government announced that the jurisdiction's legislature would shortly debate new legislation designed to strengthen the territory's anti-money laundering defences.

The bill in question was a completely revised version of the Proceeds of Criminal Conduct Law which, according to Attorney General Samuel Bulgin, proposed to further modernise Cayman's anti-money laundering legislative and institutional frameworks.

The bill would introduce a civil forfeiture component to allow for confiscation of proceeds, where evidence shows that such proceeds flow from some unlawful conduct but there is no criminal conviction.

Following the OECD's new set of lists issued in 2009, the Cayman Islands set about signing TIEAs, and in August 2009 signed its 12th tax information exchange agreement (TIEA) with New Zealand, moving onto the “white list” of countries that have “substantially implemented” the OECD’s internationally agreed tax standard.

The Cayman Islands’ Leader of Government Business/Premier Designate, McKeeva Bush, said: “For over four decades the Cayman Islands has steadily earned its place as a world-class international financial services center. The Cayman Islands Government sees the OECD’s recognition as a natural outcome of the country’s substantial commitment to uphold an equally world-class international cooperation regime in the exchange of tax information."

"The Cayman Islands Government is looking forward,” Bush continued, “to working in partnership with competent authorities in implementing agreements it has signed, concluding additional agreements with Cayman’s important trading partners in financial services, and continuing its active role in the OECD Global Forum, which it committed to in 2000."

Jeffrey Owens, Director of the OECD’s Centre for Tax Policy and Administration, welcomed the signing, and said that the OECD looked forward to working further with the Cayman Islands as it extends its network of agreements and works to implement them swiftly and effectively.

New Zealand’s Revenue Minister, Peter Dunne, said: “Recent months have seen a flurry of TIEA signings internationally, as low-tax offshore financial centers seek to achieve a sufficient number of TIEAs to allow them to be seen as meeting the OECD's standards.”

The TIEA allows the authorities in both countries to request direct tax records, business books and accounts, bank information, ownership information, and other tax-related information for the purpose of detecting and preventing tax avoidance and evasion by each other’s residents. Such information shall be that which is relevant to the determination, assessment and collection of direct taxes, the recovery and enforcement of tax claims, or the investigation or prosecution of tax matters.

The TIEA also includes an agreement for the allocation of taxing rights with respect to certain income of individuals (including pensions), and provisions to establish a mutual agreement procedure in respect of transfer pricing adjustments. It will enter into force after notification by both parties, after which it will have effect for taxable periods beginning on or after the following January 1.

In March, 2010, he Cayman Islands government said it had committed to the signing of a further 16 Tax Information Exchange Agreements (TIEAs) with jurisdictions of economic significance, in additional to the 14 TIEAs it had already concluded.

According to the Cayman government, the announcement further demonstrates the territory’s commitment to transparency and the exchange of tax information in cooperation with third country tax authorities, in the fight against tax evasion.

According to the government, the Caymans has already agreed to the signing of an agreement with Australia on March 30, and is awaiting dates for the conclusion of agreements with Aruba, Canada, Germany, Italy, Mexico and South Africa. Also, negotiations are in various stages with 9 additional OECD/G-20 countries.

The Cayman Islands was recently lauded by the Organisation for Economic Cooperation and Development for its role in the Global Forum Steering Group, and also its implementation of the OECD standard.

Commenting, Caymans Islands Premier, McKeeva Bush said: “The results of our negotiation programme along with the Negotiating Team’s deep involvement in helping shape international standards in tax transparency through active participation in key initiatives is commendable and has been recognized by the OECD and the global community.”

“We look forward to continuing this engagement and doing our part in demonstrating the effectiveness of our transparency regimes and our expertise as a jurisdiction.”

In addition to having input on OECD’s peer review process, the Cayman Islands has been identified in the first cohort of countries to undergo a peer review evaluation. This phase of the peer review involves providing comprehensive information on the implementation of Cayman’s tax transparency regimes to OECD assessors, including relevant laws, regulations and guidance notes.

In June, 2010, the Cayman Islands and Germany entered into a Tax Information Exchange Agreement (TIEA) following a signing ceremony held on May 27.

The agreement was signed by the Cayman Islands’ Premier, McKeeva Bush and by Germany’s Ambassador to Jamaica, Jurgen Engel.

Speaking following the signing, Bush stated: “The Cayman Islands’ long-standing commercial ties with Germany and the opportunity to host a distinguished member of its foreign service, Ambassador Engel, make this signing an important one. Not only have Germany’s leading financial institutions held operations in the Cayman Islands for decades, but our two governments have worked closely together for many years, most recently as part of our mutual participation in the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes’ Steering and Peer Review Groups. “

“We have had a bilateral agreement with Germany in effect since 2005 as part of our implementation of the European Union Savings Directive, under which we report interest income earned by German citizens in Cayman Islands accounts. “

“Today’s comprehensive tax information sharing arrangements reflect our countries’ commitment to upholding and implementing international standards in an important area of the global financial services sector.”

“We look forward to many more years of successful work with our German counterparts."

In the same month, the Cayman Islands government announced the signing of a Tax Information Exchange Agreement (TIEA) with the government of Canada.

Welcoming the signing, Caymans Premier McKeeva Bush said: “This is indeed an important day for as we have come together to mark a significant milestone in the long-standing relationship between the Cayman Islands and Canada through the tax information exchange agreement we have just signed.”

“The agreements that we have both signed provide for comprehensive tax information sharing arrangements, reflecting our countries’ commitment to upholding and implementing international standards in an important area of the global financial services sector.”

Bush noted that the signing of the agreement would have a positive effect on the development of mutual cooperation between the Cayman Islands and Canada. Specifically he noted that the TIEA will bolster economic flows, as a result of favourable tax treatment for active business income earned by Cayman subsidiaries of Canadian companies.

“We hope that through agreements like this one, we can increase and broaden the scope of our business relationships," the Cayman Premier said. "In regards to Canada specifically, I am also aware of an important result of our agreement, which will be favourable tax treatment under Canadian tax law for active business income earned by Cayman subsidiaries of Canadian companies. I am sure this will be a welcome benefit as many Canadian firms in the funds and private equity areas rely on the Cayman Islands’ stable, globally-connected, tax-neutral platform to help reach their business goals.”

“We look to forward more successful Cayman-Canada business for years to come,” Bush concluded.

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