IFCs – governance, regulation and compliance

Published by Cayman Financial Review – October 2013

International Financial Centers have been in the spotlight for quite some time now. The media’s often negative focus tends to be on those that have reached a critical mass and service a customer base that is globally recognized, but interestingly enough, most of these IFCs have a governance and regulatory framework that has more to teach than to learn from the so-called onshore financial centers.

The Cayman Islands represents a clear example of an IFC with a mature regulatory infrastructure. The U.S., U.K. and France represent a few of the onshore financial centers that tend to criticize IFCs and their role.

Financial Action Task Force

The Financial Action Task Force provides us with a good example of the discrepancies between IFCs and traditional onshore centers and, to a certain extent, highlights the lack of appreciation for how far IFCs have come in terms of improved regulatory frameworks.

The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system. The FATF is therefore a “policy-making body,” which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.

Between 2000 and 2006, the FATF published a list of non-cooperative jurisdictions, based on a criteria decided in 2006 in terms of what was needed to properly prevent money laundering.

The initial list included the Cayman Islands, which was dropped just a year later, based on the enactment of all required laws and regulations. Bermuda and Jersey were never included on the now infamous FATF list.

Two years after the standard was more fully-established, the countries on the list were Cook Islands, Dominica, Egypt, Grenada, Guatemala, Indonesia, Marshall Islands, Myanmar, Nauru, Nigeria, Niue, Philippines, Russia, St. Vincent and the Grenadines, and Ukraine.

By 2006, all countries had been moved out of the non-cooperative list. Since then, the FATF has further reviewed countries based on its 49 recommendations grouped in nine categories.

The last General Report to the G20 Leaders, issued by the OECD Secretary for the September 5-6, 2013 meetings, provides in page 15 an excellent summary of the compliance of 98 jurisdictions, rating them green, amber or red for each category.

Cayman, together with other IFCs sometimes under pressure − Bahamas, Bermuda, Guernsey, Ireland and Isle of Man − are rated green across all nine categories. However, the table shows the sad reality that many of the countries, which often take the position of prosecutors or judges, cannot show the same results; e.g. Brazil has two ambers, Canada one, Germany one, Russia seven, Spain one, the U.K. one and the U.S. two.

Let’s see what the FATF had to say about the U.S.

“Customer identification requirements apply to most types of financial institutions; however, these could be strengthened, particularly in relation to the identification of beneficial owners.”

“Company formation procedures and reporting requirements are such that the information on beneficial ownership of legal persons may not, in most instances, be adequate, accurate, or available on a timely basis.”

The weakness in regulation of company formation in the U.S. to date does not seem to have been addressed. In addition, the approach to this sector taken by other countries, such as the U.K., does not match the strength with which this issue is managed in the Cayman Islands.

In Cayman all corporate service providers are regulated by CIMA and have to maintain beneficial ownership information of all entities. This exercise also has been conducted retroactively on all existing entities. Many of our onshore counterparts that advocate for the need to enhance the area of beneficial ownership cannot show what Cayman can for themselves. This brief comparison of the regulation of the corporate sector between Cayman and other major centers is but one example of the inconsistent application of international standards.

Fact vs. myth

As the simple comparison above demonstrates, while Cayman like many other IFCs has for many years now implemented global standards, there is little recognition of that fact by the mainstream media, which continues to depict a Hollywood fantasy that could not be further away from current reality.

As a relatively straight forward exercise in investigative journalism, any journalist trying to create a company and open a bank account in Cayman, vs. Delaware, or other onshore jurisdictions would come up with the truth regarding the significant regulatory systems in places such as the Cayman Islands.

However, the truth not always is the bestseller, and it certainly is not the most appropriate for onshore political speeches.

Is it better to tell the voting population the blame for the crisis is on the Cayman Hedge Funds? Or tell them the blame is to be put on the latest housing bubble, driven by reckless issuance of credit onshore and by a tax system that promotes ownership of houses to everybody, including those that cannot afford it, through different treatment of interest payments and rent and preferential treatment of capital gains on housing?

Is it better to tell the voting population the only two ways to resolve the fiscal deficit is by cutting expenditure − including social benefits − or increasing taxes that one way or another will be paid by the average voter? Or tell them there is a number of people and companies hiding money in offshore places and governments will go after them to resolve the deficit not impacting the voter or the economy?

Unfortunately while the answers to these questions are pretty obvious to the informed reader, the truth in these cases is not the most appealing to the media.

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