By Paul Byles, Director, Caledonian Global Financial Services
Originally published in World Finance
The positive contribution of offshore financial centres sometime gets lost in the debate about regulation and transparency, but it is important to recall why centres like the Cayman Islands exist in the first place, suggests Paul Byles, Director at Caledonian Global Financial Services
The only thing more prominent than the proliferation of global tax and regulatory initiatives is the question regarding the future sustainability of offshore financial services centres.
At first glance it seems a reasonable question: after mounting pressure from the OECD and major overhauls of their regulatory and cross border cooperation frameworks, coupled with numerous regulatory reviews (and the occasional blacklist), it should come as no surprise that these financial services centres might buckle under the pressure.
This potential buckling comes in one of two forms: either clients of jurisdictions such as the Cayman Islands will become frustrated with the increasingly and disproportionately burdensome requirements simply to do business, or the jurisdictions themselves will eventually find that the cost of supporting these new regulatory frameworks is just too high to remain globally competitive in the financial services arena.
The experience of the Cayman Islands demonstrates that the reality is very different, which gives much cause for optimism for the world of offshore financial services. Whether it’s adding value to the wealth management objectives of high-net-worth families or creating corporate efficiencies for multinationals, the Cayman Islands continues to lead the way. This experience has been persistent despite the millions spent enhancing regulatory frameworks and accommodating the umpteenth international review of its legal and regulatory infrastructure.
Yet the story of the Cayman Islands’ experience is not simply one of persistence; rather, the success lies in the actual contribution that the jurisdiction adds to the world economy. Let’s look at the value added a bit more closely.
The Cayman Islands is one of the top 10 international financial centres in the world, with over 40 of the top 50 major international banks holding licences there. Over 80 percent of more than $1trn in deposits booked through the Cayman Islands represents inter-bank bookings between onshore banks and their Cayman Islands branches or subsidiaries. The offshore bank product continues to thrive and evolve due to worldwide recognition of the quality of Cayman’s industry, as well as the intrinsic benefits of the absence of capital gains tax, taxes on bank transfers and no exchange controls. These banking groups can also utilise their Cayman-based branches or subsidiaries to issue international debt as it is easier and more economical for banks to issue bonds, CDs, TDs, etc. which are then
sold to investors.
It is also important to remember that the aforementioned benefits can have a direct positive influence on consumers based onshore, because the capital raised may be utilised to decrease the cost of funding to these banks, thereby enabling lower interest to be charged to its onshore customers.
Private banking, too, has its traditional benefits, insofar as wealth management can be handled by offshore experts to improve succession planning while preserving or maximising capital for high-net-worth individuals. While the issue of legitimate financial privacy is not normally at the forefront of the current debates on transparency, most stakeholders including government officials, banks and of course the clients themselves still recognise that privacy has a key role to play. Moreover, this privacy value can co-exist alongside the various due diligence and transparency requirements for the vast majority of clients who are carrying out business legally.
The Cayman Islands is the leading jurisdiction for healthcare captives, representing 34 percent of all captives, and to date approximately 90 percent of this is focused largely within the North American market. Cayman’s insurance industry has been resilient in a very challenging market environment. To put this in perspective, in 2012 Cayman received the highest number of captives licences since the brutal downturn of the 2004 market. Today, the Cayman captive sector continues to show positive growth, with premiums at $11.83bn and total assets at $88bn, compared to $11.80bn and $69.2bn (a 27 percent increase) last year.
Fundamentally, captive insurance companies afford, for example, hospital networks in the United States the option of setting up their own captive insurance company in the Cayman Islands. One of the benefits of using the Cayman captive structure is that it offers flexibility to the client. This helps to address certain difficulties onshore clients may endure when attempting to secure insurance coverage via commercial insurance companies or when they simply cannot access intended coverage in a cost effective manner.
For years now, the Cayman captive product has been the facility through which many US-based medical groups have gained access to insurance coverage at reasonable rates. The cost savings benefit to related hospitals can be passed on to patients, and in some cases those hospitals may even gain new types of coverage which they may not have otherwise had access to.
The international markets know very well that Cayman is the global leading hedge funds domicile. What is less known is how these funds use the Cayman Islands by adding value within onshore economies. The Cayman Islands has, in fact, facilitated hundreds of billions of dollars of investment into OECD economies such as the US using offshore hedge funds. Cayman funds provide a tax-neutral platform for international investors, enabling them to participate from several countries under a mutual investment purpose.
In many cases, the funds invested support projects based in economies such as the US. It is, therefore, somewhat ironic that the debate on the impact of offshore financial centres focuses on the issue of capital outflows when in actuality this capital, which often originates outside the US, ends up onshore benefiting the US and other OECD based economies via increased employment opportunities resulting from those investments.
So whether it’s the role of its banking, insurance, trusts, or investments services, the Cayman Islands continues to offer positive value to the global economy. And this seems set to continue for the foreseeable future. Clients and other users of the services offered in the Cayman Islands can rest assured that this jurisdiction will likely remain a major player in the offshore financial service arena, precisely because it continues to uphold a high calibre of international expertise, continues to add value, in spite of regulatory developments.
While no one can predict the future of the offshore world, it is fair to surmise that the Cayman Islands have effectively demonstrated their staying power as one of the leading financial services centres. That the jurisdiction is able to continue to deliver these services to its clients and service providers alike in the context of the various global developments over the past decade or so is, in itself, a remarkable success story, and one that is rarely told.
For further information:www.caledonian.com