Jack Lew’s confirmation hearing in the Senate Finance Committee was a bit of a surprise to the Cayman Finance blog. It’s not that we’re not used to hearing false allegations about what goes on in Cayman, especially regarding tax evasion. We’ve heard it all and pointed out the myths and false assumptions. But we’re surprised when people don’t learn from their experience.
In July 2008, the Senate Finance Committee held a hearing about offshore tax issues and heard from the Government Accountability Office. After hearing introductory statements from senators that were almost identical to their statements for Lew’s confirmation last week, the GAO witness introduced his report. The 2008 report shows that claiming tax evasion in Cayman simply because thousands of companies are registered at the same address is unfounded. Registered office services are used for legal process not to operate a business. GAO went on to describe the strict anti-money laundering and know-your -customer requirements in Cayman. We had hoped that having covered this same ground with the same senators before, they would have learned from the exercise.
Mr. Lew defended himself well. We are not his lawyers, so it was up to him to demonstrate that he has properly declared his holdings and income. But the charges of hypocrisy and wrong-doing at the hearing and during the 2012 elections assume that something wrong is going on here. What we try to do on this blog is to lift the horse blinders that most of the media place on the public, and explain why offshore funds exist in the first place.
Offshore funds do not free investors of their tax obligations, they provide a way for investors from different countries to co-invest together. Investors from all over the world can join together and pool their funds without subjecting each other to their home country’s taxes or legal process. US investors can co-invest with Saudi and Japanese investors and pay their taxes to the IRS but not worry about what their obligations might be if the investment fund was registered in Saudi Arabia or Japan. They don’t have to worry about paying taxes twice or try to reduce those taxes through claiming tax credits or treaties. This process is complicated and costly, but with offshore funds that offer tax neutrality, we can avoid it and not have the capital markets working in completely sealed compartments in each country.
The US is still the most powerful country on earth, but it would be better for its Senators to think a little more broadly and accept that US persons are not the only investors in the world. If US investors want to take part in the world economy, they need to do it on terms that are satisfactory to their fellow investors and trading partners, too. The financial industry in Cayman helps make that possible.