One size does not fit all

Published by the Cayman Islands Journal – 2 July 2014

Over the last decade and significantly more since the 2008 crisis, we are experiencing an increase in the level of regulation and a constant increase in the speed at which it evolves and becomes globalized. Supporters of this trend call it “harmonisation of regulation,” while others see it as a questionable competitive strategy where those in the driving seat design these standards with their individual interests at the forefront of their thought process.

The so-called global standards are increasingly driven by a small number of countries with more similarities than differences in their institutions. They do so directly or through bodies like the OECD, who claim to be open but are effectively controlled by these same countries.

This additional burden acts as a barrier of entry for private entities (the minimum assets under management to make a fund viable) as for countries wishing to participate in certain industries. Countries in the Caribbean that have an unrealized potential to become relevant participants of the international financial industry will struggle to achieve the critical mass needed to sustain the institutions needed in order to address this global concern.

No one can argue against the increased level of transparency requirements; however, the results cannot be quantified. It is impossible to assess if these efforts have reduced the amount of illegal activity flowing through the financial system.

What is clear is the increased level of transparency has significantly elevated the cost for any government to supervise its financial industry, and the cost grows exponentially if the jurisdiction operates as an international financial center. It would, therefore, be reasonable to expect a reduction in the number of jurisdictions operating as international financial centers over the next decade.

Whether this consequence is by accident or by design is a much more difficult question to answer. In most instances, it is possible to justify the proposed standards in the eyes of the countries promoting them, but it is impossible to ignore that their individual interests are at the forefront of their proposed solutions.

Let’s look at the central public registry of beneficial ownership. Recently proposed by the U.K., it is now being pushed globally, particularly towards its crown dependencies and overseas territories, without consideration of their particular circumstances or those of their customers in other less fortunate parts of the world with a legitimate need for privacy.

The U.K. has thousands of unregulated corporate services providers all over the country. No information is collected regarding the ultimate beneficial owners of U.K. companies. From that starting point the proposed solution is arguably a reasonable one – a system of self-disclosure for major shareholders only (above 25 percent) without third-party verification that attempts to use the public (through the publication of the registry) as a free provider of verification. It’s difficult to argue that is not a cost-effective solution and a step in the right direction.

The question is if implementing this solution as a standard across the globe is a step in the right direction in all cases? A quick analysis of Cayman’s current system with respect to the collection of beneficial ownership information against the proposed system will show several aspects where its implementation would represent a step backwards.

Cayman collects information for all beneficial owners above 10 percent not 25 percent. Would someone attempting to use third parties to avoid disclosing ownership go to a jurisdiction where he needs four “shareholders” or one where he needs ten?

Cayman regulates the service providers who are responsible for assuring the quality of the information collected, putting not only their livelihoods (as their license can be revoked by the regulator) but their personal freedom on the line without being shareholders in the company.

Would someone with illicit intent prefer a system where the information is self-disclosed and potentially questioned by the public or a regulated framework where the registry of ownership is held by a professional third party? Cayman constantly updates the information. This is because the ownership registry is held by the service provider and transfer of shares must be registered by that provider in order to be valid. In contrast, the proposed U.K. system requires the registry to be updated once a year. What would someone intending to hide the ownership with illicit objectives prefer?

Leaving aside the philosophical or personal desire to have the information public, there is no rational way to explain how the U.K.’s proposed method delivers better results than what Cayman already has.

Cayman’s system is significantly more expensive than what is being proposed and, therefore, not necessarily a better solution for the U.K. either, but that is exactly the point.

On the issue of how beneficial ownership is collected and made available, as is true for other regulations being proposed, one size does not fit all.

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