Law firm Hunter and Hunter reviews recent developments in the Cayman Islands and concludes that all is well.
If you believed all the doomsayers and gloom merchants two years ago, when the offshore world was reeling under a bombardment of international initiatives, you may be surprised how things have turned out for the Cayman Islands.
In September, Moody's Investor Service released its annual report on the Cayman Islands. The highly respected rating organisation maintained the country's Aa3 foreign currency country ceiling and described the outlook for the Cayman Islands as stable, despite the disturbances to the economy caused by September 11 and the US recession, and thanks, it said, to a large and diverse offshore financial services industry.
Among the factors cited by Moody's in support of the rating was precisely the fact that the Cayman Islands has taken legal and regulatory measures to satisfy the concerns of the Financial Action Task Force (FATF) about the possibility of money laundering through the financial services industry. In July the FATF announced that as a result of the Cayman Islands' commitment to international anti-money laundering efforts, it was no longer formally monitoring the territory.
The government has also moved to satisfy the Organisation of Economic Co-operation and Development (OECD) in relation to information sharing issues and what the OECD terms "harmful tax practices". According to Thomas Byrne, vice president of Moody's and the author of the report, "the Government's cooperation with these organisations has reduced reputation risk that could otherwise arise".
As well as the regulatory position, the report cites prudent economic policy and a favourable external debt position, along with a "stable political system and favourable social indicators". It pointed to the country's strong legal and accounting systems, attributed in part to its status as a British Overseas Territory. The report points out, however, that tourism, the Islands' other key sector, has yet fully to recover and, not surprisingly, that "fiscal capacity ... remains constrained by a limited revenue base, which stems from the jurisdiction's tax regime".
Certainly, the economic indicators are not showing the meltdown in the Islands' financial services industry that some were predicting at the height of the OECD/FATF debate. In fact, exactly the opposite is true. Mutual funds established in Cayman now number 4,172 - up by 15% on the year so far. Following the introduction of a requirement for local auditing of mutual funds, a number of leading accountancy firms have opened, or announced plans to open offices in Cayman.
Company registration now exceeds 63,000, up 13% on a year ago.
Cayman has consolidated its position as the world's leader for captive insurance companies in the healthcare sector and as one of the top two jurisdictions for captive insurance overall. Forty-eight new captives were registered during the first eight months of the year, half of which were in the healthcare sector.
Shipping, too, is flourishing. For some years the Cayman Islands has been the number one offshore register for super yachts, with some 20% of the world's total fleet. As well as some 1,265 such vessels, over 200 commercial vessels, totalling 2.25 million tonnes, are registered in Cayman and this sector is growing at about 30% per annum.
Whether all of this results from the official recognition that Cayman now justifiably enjoys as a well-regulated, reputable financial centre, or whether other factors are at work, none can tell. But it seems that someone, somewhere has got something more or less right.
Local auditor sign-off requirement
Further to a decision made in June by the Cayman Islands Monetary Authority to require local auditor sign-off on all types of entity regulated by the Authority, including mutual funds domiciled in Cayman, 11 major accounting firms have chosen to set up operations in the Cayman Islands.
The local press recently quoted Government officials, saying that some of the 11 were in the `very advanced stages' of setting up operations in Cayman, either in the form of a physical presence or by forming associations with major existing local firms. Licences have yet to be granted, but it is expected that the reputation of the Cayman Islands as the premier jurisdiction for funds work will be endorsed by the addition of names such as RSM Robson Rhodes, BDO Binder, Eisener LLP, Winer & Evens, Arthur J. Bell Jr. & Associates and others.
Some 60% of offshore hedge funds worldwide are registered in the Cayman Islands and Cayman funds are currently audited by approved auditors Deloitte & Touche, Ernst & Young, KPMG, Moore Stephens, Morris Brankin & Co, PricewaterhouseCoopers and Rothstein Kass & Company (Cayman). Cayman looks set to strengthen its position further with the impending new arrivals.
In November 2001, the Cayman Islands Government introduced a temporary reduction of stamp duty - the tax charged on the market value or price paid on transfers of real estate - from the usual rates of 9% or 7.5% (depending on location) to only 5%.
Aimed at stimulating the property market, the reduced rate applied across the board, so the greatest reduction was on conveyances or transfers of property in registration sections that normally attract stamp duty at the higher rate.
Though usually thought of as a property tax, stamp duty is actually a tax on documents. It is not only levied on documents transferring land, but on other instruments, such as cheques.
Where real estate is concerned, it is the conveyance or transfer of land that attracts the charge. To qualify for the reduced rate, this document had to be signed and delivered to the Registrar of Lands on or before 13 November 2002.
Where the purchase was not as far advanced as the completion and transfer, there was another way to take advantage of the lower rate: the law allowed duty to be assessed and paid on the contract for the purchase of property. If this were done on or before 13 November 2002, the lower rate applied, even if the transfer itself took place after that date. When it was then registered, the Transfer of Land would not attract further stamp duty.
If the experience of the UK following the enactment of the Human Rights Act is anything to go by, the pending adoption of a chapter on fundamental rights and freedoms into the constitution of the Cayman Islands may be expected to lead to interesting legal debate in and out of the courts. The fact that these provisions will be introduced into the constitution itself, however, will give that debate a rather different dimension. It also makes it timely and appropriate to consider the likely attitude of the courts to constitutional interpretation.
In general, the English courts and the Privy Council have adopted a broad and purposive approach, taking into account the influence of the European Convention for the Protection of Human Rights and Fundamental Freedoms and the United Nations' Universal Declaration of Human Rights. We expect the Cayman courts will largely follow that lead.
A particular issue that is likely to be specifically addressed in the Constitution itself is the relationship between the powers of the legislature and the provisions of the constitution. Purported laws that contravene the provisions protecting fundamental rights and freedoms will be rendered invalid.
This may well mean, for example, that in criminal trials the concept of fairness will be absolute and "not something which is capable of modification according to circumstances", as it was put in one 1990 case.
It is to be noted that the protections afforded will be subject to express limitations to ensure that the enjoyment of constitutional rights by an individual does not prejudice the rights and freedoms of others or the public interest. However, the Privy Council has been that such limitations are not to be interpreted expansively. Limitations that are shown not to be reasonably justifiable in a democratic society will not be upheld.
It must be remembered also that these provisions will be matters of public not private law and will concern the acts of the State or of other public authorities endowed by law with coercive powers. In other words the fundamental rights and freedoms guaranteed by the amended Cayman Islands constitution will not be intended to protect purely private rights. In this respect in particular, the Cayman experience will depart from that of the UK, but significant litigation regarding constitutional issues may nonetheless be predicted.
The foregoing is distilled from submissions made by law firm Hunter and Hunter to the Constitutional Review Commissioners as part of the review process that concluded earlier this year.