Cayman Islands banking and financial information

This section details why and how Cayman became a global tax haven and provides some background information on Cayman's financial services industry. We have written an overview of the banking, fund management, captive insurance and trust industries, companies, structured finance, currency and the Cayman Island's Stock Exchange.

After weathering the most recent financial crisis of 2008 and early 2009, the past year has proven to be one of steady growth for the Cayman Islands as an international financial centre. The Cayman Islands has emerged from the crisis and remains the domicile of choice for offshore funds with approximately 100 new funds being launched on a monthly basis during the past year. The many benefits of the Cayman financial sector and regulatory environment remain in place and both continue to successfully evolve with global changes. In the coming year, we can look forward to continued steady growth in the Cayman Islands’ financial services industry.

History
On the dark and moonless night of the 8th of February 1794, a navigational error resulted in ten British Royal Navy ships being wrecked on the treacherous coral reefs off East End, Grand Cayman. The local people saved everyone aboard the ships, including, so the story goes, a royal prince. When Britain’s King George III heard of this act of gallantry, he is said to have decreed that the people of the Cayman Islands should forever be free from taxes and war conscription. There is no doubt that the Wreck of the Ten Sails actually took place but there is no documented evidence of the royal decree.

The real reason for the Cayman Islands being a tax-free jurisdiction is rather more prosaic. Until the mid 1960s, the population was less than 8,000 and most Caymanians made their living from subsistence farming, fishing, turtling and making thatch-rope, while many of the men served as merchant seamen on ocean-going ships, usually flying the American or Liberian flag.

This basically meant that most of the residents in Cayman were living on meagre earnings, there were few companies and capital gains were virtually nonexistent, so there was nothing worth taxing. But in 1952, an aircraft runway was constructed and the following year Barclays Bank opened a branch on Grand Cayman. In fact, Cayman’s status as an international financial centre derives from the foresight of some early legal practitioners and a receptive government who, in the mid 1960s, together drafted and enacted legislation to build on this modest beginning and take advantage of the absence of any form of direct taxation on individuals and corporations based on income or wealth.

In the following decades, more international banks were attracted to Cayman, together with law and accounting firms. When the Bahamas became independent from the UK in 1973, a number of expatriate workers from that jurisdiction were attracted to Cayman as a stable place to do business.

It is notable that cooperation between the Government and the private sector has continued to this day. This, combined with a policy of welcoming expatriates with special skills to the Islands and a growing population of well-educated Caymanians, has propelled the Cayman Islands into the forefront of the international financial industry.

To this day there are no income, inheritance, sales, corporation, capital gains, property or withholding taxes in the Cayman Islands.

Jurisdiction of Choice
The Cayman Islands is currently the world’s sixth largest international banking centre in terms of both total liabilities and total assets held in financial institutions.

To be successful in this competitive industry requires political and economic stability, tax neutrality, a responsive legal system, a stable banking environment, a sound regulatory regime, absence of exchange controls and the presence of highly sophisticated service providers. All these factors, as well as Cayman’s status as an overseas territory of the United Kingdom and its international cooperation regimes in the areas of tax information exchange, regulation and law enforcement, provide the necessary level of confidence to ensure a hospitable financial environment.

Cayman continues to attract service providers such as lawyers, accountants and administrators of the highest calibre, making the jurisdiction attractive to foreign investors. The wealth of international expertise available in Cayman is one of the key factors making Cayman a jurisdiction of choice. Clients have access to a wide array of services including banking, trusts, funds, company management, structured finance, vessel and aircraft registration, insurance and stock exchange listings.

Taxation
It has been suggested unofficially, that a tax haven is somewhere that has little or no taxation, protects personal financial information through laws blocking the sharing of information and exhibits an obvious lack of transparency. Although the Cayman Islands are often referred to as a ‘tax haven’, this does not mean it is an uncooperative jurisdiction with regards to tax matters or other criminal matters. On the contrary, during 2009, the Cayman Islands were added to the ‘white list’ of countries (along with the UK and the USA) using internationally recognized tax standards in their laws (the ‘white list’ is issued by the Organization for Economic Cooperation and Development or OECD).

Indeed, the Cayman Islands have been making large efforts to be transparent and to sign laws that benefit foreign governments in the sharing of information and this has paid dividends. In 2000, the Cayman Islands Government signed up to the OECD’s project to eliminate harmful tax practices and join the Global Forum on Taxation. In 2001, as a demonstration of the OECD commitment, the Cayman Islands signed a tax information exchange agreement with the US which is in force for all civil and criminal matters. A few years later, the Cayman Islands agreed to implement the European Union Savings Directive, automatically reporting bilaterally to each of the 27 EU member states the interest income earned by EU citizens in Cayman Islands bank accounts.

Since then the Cayman Islands have also signed numerous tax information exchange agreements with G-20 and/or OECD countries modelled on the OECD standard for bilateral tax information exchange and continues to actively negotiate additional agreements. Furthermore, the Cayman Islands has pioneered a unilateral mechanism, which provides for precisely the same range of tax information exchange in relation to tax information matters without a bilateral treaty and thereby provides access to a further 22 countries including the United Kingdom, Japan, India, South Africa and Germany among others.

The willingness of the Cayman Islands to be an open and cooperative jurisdiction resulting in it being added to the OECD ‘white list’ perhaps demonstrates that the label ‘tax haven’ is somewhat outdated and simply unfair. The professional service providers based in the Cayman Islands prefer (in recognition of the efforts undertaken) that a modern term of being a ‘tax neutral jurisdiction’ be used.
These efforts on the part of the Cayman Islands have been rewarded by an increase in transactional flows; this is no doubt because of the institutional business which was attracted to the Cayman Islands as a result of its tax neutrality and its improved reputation internationally as a cooperative financial jurisdiction.

Banking
Regulated by the Cayman Islands Monetary Authority (CIMA), banking in the Cayman Islands is a major part of Cayman’s financial sector, with 250 banks (June 2011) licensed and CI$1.78 trillion in international assets booked through the Cayman Islands as of March 2011. The majority of these banks are branches, subsidiaries and affiliates of established international financial institutions conducting business in the international markets. More than 80% of this US$1trillion in international assets represents inter-bank bookings between onshore banks and their branches, subsidiaries, affiliates and other Cayman Islands licensed banks. 40 of the world’s top 50 banks hold licences in Cayman. This is a testament to the worldwide recognition of the quality of Cayman’s financial industry. Cayman Islands banks are bound by strict anti-money laundering laws, which together with know-your-customer (KYC) regulations, are recognised as meeting or exceeding those of all major onshore jurisdictions.

The 250 banks licensed in Cayman are split into A and B classes, with the former licence permitting banks to carry out local and international business. There are currently 16 Class A licensed banks in the Cayman Islands, with seven of those carrying out retail services (June 2011). The other banks hold Class B licences and are mainly restricted to offshore transactions with non-residents.

Investment Funds
The prominence of hedge funds (or ‘mutual funds’ as defined in the Mutual Funds Law (2009 Revision) in the Cayman Islands), and the growing investment interest in them by sophisticated and/or high net worth investors has steadily risen in recent years. The Cayman Islands funds industry has risen from small beginnings (since the enactment of the Mutual Funds Law in 1993) to become the jurisdiction of choice for new fund authorizations by investment managers, representing over US$1 trillion in net assets. Even in these uncertain times, the Cayman Islands funds industry remains robust not only in terms of new fund formations but also in net assets held by those funds. At the end of the first quarter of 2011, there were 9,261 funds registered with CIMA as compared to 9,438 at the end of 2010 and 9,523 at the end of 2009. This small net decrease demonstrates the continued confidence in the Cayman Islands hedge funds industry by managers, even during difficult market conditions.

The success of the Cayman Islands is not due to one factor alone but a number including its reputation, freedom of investment decisions for hedge fund managers, tax free status, highly regarded legal system and the availability of professional service providers. The mutual fund industry is an important part of the Cayman Islands economy, employing hundreds of people directly. These advantages will ensure that the Cayman Islands will continue to lead the way as the jurisdiction of choice for hedge funds despite the worldwide economic crisis.

Captive Insurance
The Cayman Islands remains the second largest offshore centre for captive insurance with a total 720 companies licensed (March 2011), and the number one jurisdiction for healthcare captives with 257 authorised entities.

Medical malpractice liability makes up the largest line of business within the Cayman captive insurance sector, accounting for almost 36% of captive licences as at March 2011. The second largest line of business is workers compensation, which accounted for 158 licences (22%) at the end of March 2011. Premiums for licensed captives came in at US$8.7 billion with total assets being reported at US$58 billion. The most popular region of origin of Cayman captives is North America, with 90.56% originating from there.

Domestic Insurance
The number of Class A insurance companies operating in the Cayman Islands stood at 28 as of March 2011. Their combined net premiums was almost CI$231 million (unaudited) for the calendar year ending 31 December 2010, with a combined net income of CI$81 million for the same period.

Trusts
The Cayman Islands are well regarded for instituting a modern and flexible trust regime. The laws and framework governing the establishment and administration of trusts are respected worldwide.
As of 31 March 2011, there were 222 licensed trust companies, 50 registered private trust companies and 21 registered controlled subsidiaries.

Companies & Partnerships
Cayman’s Companies Registry shows a total of 91,712 active companies registered as of March 2011, a 1% decline on the previous year. However, in line with the global recovery, figures for the first half of 2011 show a significant increase in company incorporations, suggesting this is a thriving part of Cayman’s financial services. Governed by the Companies Law, the Registry also registers limited partnerships and segregated portfolio companies. There are many highly qualified professional firms licensed to provide company services in the Cayman Islands and the provision of these services is a regulated activity requiring either a Trust licence or a licence under the Companies Management Law. In addition to incorporation and management of ordinary and exempted companies and the establishment of limited and exempted limited partnerships, these firms provide services such as registered offices, directors, officers and nominee shareholders as well as the maintenance of corporate records, accounts and financial statements.

Structured Finance
Several of Cayman’s law firms specialise in capital markets and structured finance transactions for international clients. The Cayman Islands have become one of the world’s leading providers of Special Purpose Vehicles (SPVs) for structured finance transactions. The majority of these SPV’s purchase groups of loans issued by main street US and European banks and re-sell them as a form of investment to institutional investors.

The main attraction of the Cayman Islands for these SPV’s is that Cayman is truly ‘tax neutral’, so that purchasers of the debt issued by the SPV’s can participate regardless of their location, in the knowledge that they will only have a tax liability occur in their home jurisdiction. One might think that the global financial crisis which almost froze the secondary debt market (that these SPV’s operate within) was the end of the Cayman Islands SPV, however some of the investment in the US Toxic Asset Relief Program was funded indirectly through Cayman Islands SPV’s. The regulators in the US and Europe are now appreciating the vitally important role that Cayman Islands SPV’s play in allowing global financial loan markets to flow freely, directly impacting the availability of loans for individuals and job creation for small businesses in Europe and the US.

Independent Directors in Cayman
A growing sector of the Cayman Islands financial services industry is the provision of independent directors. Many new businesses have been and are being established offering professional directors.This of course reflects the concentration of hedge funds located in the Cayman Islands.The concept of being an independent director as a profession is somewhat unique to the Cayman Islands and during the recent financial crisis it became apparent that independent directors from the Cayman Islands were indispensible when hedge funds were faced with making difficult decisions. In particular they ensured that all decisions made during that time were made in accordance with the fund documents and that all shareholders were treated fairly. This has not been lost on the institutional investors who are, for the most part, making it one of their investment requirements that there is an independent board of directors. This is also borne out by the 2010 Cayman Islands funds statistics which show that the vast majority of all new hedge funds have at least a majority of independent directors on their boards.

Cayman Islands Stock Exchange (CSX)
The CSX was founded in 1997 and is now a well established and internationally recognised stock exchange. The CSX is a member of the Intermarket Surveillance Group, an affiliate member of the International Securities Commission (IOSCO) and has been granted recognised status by the UK HMRC, which enables UK resident investors to receive interest and dividend payments without the deduction of withholding tax.

The CSX provides a specialised and well-regulated listing and trading facility for mutual funds, hedge funds, structured debt securities, Eurobonds, Shariah compliant products, preferred shares, depository receipts, derivative warrants and local and international equity.

Cayman Islands Department of Commerce and Investment (DCI)
This organisation encourages and supports local and foreign business development in the Cayman Islands. It provides business planning advice and training to Caymanian entrepreneurs and provides investment market data and facilitation services to overseas investors wishing to establish a business here. The DCI also oversees the Cayman Islands Film Commission (CIFC) which is mandated with the promotion and development of the Cayman Islands film industry and processes applications for trade and business licences.

Currency
The legal tender of the Cayman Islands is the Cayman Islands Currency (denoted CI$) and the sole issuing authority is the Cayman Islands Monetary Authority (CIMA). However, the United States Dollar, with a fixed rate of exchange, is widely used in local finance and commerce.

In April 2011, CIMA introduced a new series of bank notes, the first complete redesign of Cayman Islands bank notes since local currency was introduced in 1972. All six denominations – the $1, $5, $10, $25, $50 and $100 banknotes – have been redesigned and incorporate innovative features to significantly increase protection against counterfeiting and to make the notes more durable.

Visually, the new series (the D series) places heavy emphasis on the Cayman Islands’ environmental heritage. The jurisdiction’s expansion from its seafaring tradition into a modern financial services centre is also depicted. Each note bears an updated portrait of Her Majesty Queen Elizabeth II, along with the Cayman Islands crest, and all the notes now carry an outline of Grand Cayman, Cayman Brac and Little Cayman.

Aircraft Registration
The Cayman Islands Aircraft Registry provides a system for those persons or companies wishing to register aircraft in Cayman. Based on UK legislation, the Civil Aviation Authority of the Cayman Islands (CAACI) is responsible for safety oversight and the economic regulation of the aviation industry throughout the Cayman Islands in order to ensure compliance with the recommended practices of the International Civil Aviation Organisation.

Any person or company wishing to register an aircraft in the Cayman Islands must meet the exacting standards of the CAACI. It is these standards and the number of professional law firms and governmental authorities specialising in aircraft matters that have resulted in the Aircraft Registry being internationally recognised and respected throughout the aviation industry.

For those wishing to get involved with aircraft finance, the CAACI also provides a system whereby mortgages can be registered against aircraft. Fees for registering an aircraft mortgage are set at 0.1% of the value of the aircraft but are capped at CI$25,000 (US$29,761.90).

Ship Registration
The Cayman Islands has a seafaring history that goes back more than a century. This tradition is preserved by the Maritime Authority of the Cayman Islands (MACI), which has oversight of the Cayman Registry (formerly known as the Cayman Islands Shipping Registry).

The MACI maintains its headquarters in Grand Cayman and is a first-class international organisation with a world-wide reputation for excellence and efficiency in global shipping. The Registry is staffed by a worldwide team of shipping professionals with many years of experience in the world of international shipping.

As a Category One British Registry, the Cayman Registry is qualified to register vessels of all sizes and classes, from yachts to supertankers. In the super yacht range, the Cayman Islands are the world’s leading offshore luxury yacht registry.

Cayman also has several law firms that specialise in ship registration; a modern maritime legislation based on UK common law providing first rate mortgage protection provisions for mortgagees and vessel owners alike; a full range of registration options including full, interim, provisional, under construction and demise charters. Last but not least, registering your vessel in the Cayman Islands grants you protection and assistance from the UK Royal Navy regardless of location and full British Consular services for all Cayman flagged vessels.