By Gonzalo Jalles, CEO, Cayman Finance
Almost 58% of voters in a recent poll suggested Cayman should reject FATCA. Don’t get me wrong, my stomach says the same, but I’m going to try to explain why we cannot.
FATCA is a monster. It will cost millions of dollars, considering all of the costs of compliance for each of the institutions. But what would happen if Cayman had not signed up to it?
First, we need to clarify who we are referring to when discussing if Cayman should have rejected FATCA. The Government was invited, and only joined with the support of the industry, so let’s evaluate what would have happened if Government did not sign.
At this stage, I will simplify some concepts to make things easier. So while some of the statements below may not be an exact explanation of FATCA, the consequences are correct, and after all, FATCA itself is several hundreds of pages.
If an institution refuses to sign up to FATCA, 30% on every transaction it makes in US dollars would be withheld on their own behalf or on behalf of a customer. So unless local banks were to sign up for FATCA, from the day of implementation, every time you made a transaction in a local bank, they would take 30% of your transaction value. Even more, banks clear a CI Dollar cheque by transferring the equivalent US dollars between them in the US, so even CI transactions would be subject to a punitive tax kept by the US. If the Cayman Islands Government and the banks wanted to escape FATCA, they would need to stop using the US dollar all together, and we would need to create a new currency system where our currency is not pegged to the dollar. Given the UK and Europe are going the same way, we could not peg it to those currencies either. Therefore, we would need a floating currency, which will automatically mean the complete disappearance of our international financial industry that represents over 50% of our GDP and government revenue. Even if we were to make the silly assumption that hotels, restaurants, and every other business would not be affected by this loss, civil servants, elected officials, police, and social services beneficiaries would need to take a 55% cut in their salary, as the Government would loose 55% of its revenue.
If you still think the Cayman Islands Government and local institutions should have said “no”, I give up. You should move to Cuba, probably the only country in the world that might remain completely out of it.
Now, what is the problem with the institutions doing it themselves and the Government not signing? Well, the problems are technical in nature — complications in liability and documentation needed if the Government does not drive it locally. But the bottom line is while the information would still be sent to the US, in a way, they achieve what they want, and the cost for the economy as a whole would be significantly higher.
Let’s say the police catch you speeding and driving under the influence. You are going to pay a fine and be riding a bike for a while. Do you accept it or do you refuse to pay the fine and keep driving, making things worse for yourself?
Maybe a few lawyers and accountants like FATCA as they will see more business, but most of us don’t. It’s like a hurricane heading straight at us — ignoring it is not an option, we need to accept it and get ready.