Why Cayman keeps being ‘listed’

Cayman has been at the forefront of global transparency initiatives for many years now. We were among the first to sign the European Savings Directive, FATCA, the EU multilateral pilot for automatic exchange of information and the multilateral convention for the automatic exchange of information, to name just a few. We followed up with concrete actions such as signing 35 tax information exchange agreements with other countries and responding to their requests in a timely manner, something recognized by the Financial Action Task Force in their peer reviews. We got some very positive traction out of this, with a significant reduction in the mischaracterizations of our industry and the number of accusations of secrecy or tax evasion.  Probably most significant was the latest rating released by the OECD last November that rated Cayman as “Largely Compliant” – exactly the same level as countries like the U.S., the U.K. and Germany. Yet despite all these efforts we continue to be named and shamed in lists created with dubious impartiality and questionable methodologies that do not help our reputation and damage our business. To explore why, let’s analyze two cases:

Tax Justice Network Secrecy Index

Cayman Finance commissioned an independent review of the way this index is constructed by an econometrics professor in the U.S. The full analysis can be found on www.caymanfinance.ky, but let’s briefly look at some of the things he had to say about the way this index is constructed: “Regrettably, analysis of the study reveals several serious methodological flaws, where numerous assumptions have been made without the aid of economic or statistical theory.  For one, absolutely nothing is done to control for the many factors that may influence the size of the financial industry in a given jurisdiction. In fact, financial size is negatively correlated with the financial secrecy variable in TJN’s sample. TJN’s rankings are essentially a list of large financial centers with superfluous random noise. If subjected to a rigorous peer review, it is this reviewer’s opinion that the study could not be published in a respectable outlet due to its several methodological deficiencies.” It wouldn’t be reasonable to expect a neutral well constructed study from this NGO with a clear hidden agenda as it would not serve their purpose. At the same time, their effect on Cayman is limited and the fact that we were able to analyze and question their methodology should be sufficient to make our case and neutralize its affect.


Financial Conduct Authority 


One of the key U.K. regulators recently issued another list that includes Cayman as a “high risk” country for money laundering and illicit financial transactions. This clearly is more troublesome, as one would expect proper science and neutrality from someone like the FCA. Furthermore one would expect the FCA to practice what they preach – transparency. However, at the time of writing this article, the FCA has fallen short of these expectations. The list was constructed for internal use and never intended to be released publicly. Only after a failed appeal on their part to an FOI, did they decide to publish the list. However, they have not had the ethics that TJN had (kudos to them) to release the methodology.  Their website, which has since changed the link and hidden from the search engines the list and all information, provides only a vague description of the methodology, so we are left to wonder if there are hidden intentions here or simple ignorance. While we cannot conduct a proper analysis of their work, which we intend to do as and when they decide to be transparent, the description of the methodology suggests all the same pitfalls that TJN has made, and possibly more, leaving us shocked that we are even writing an article in which we compare both entities at the same level. In fact, we should probably put TJN at a higher level because they have at least been transparent in how their index is constructed.

Size is all 


Both studies seem to suffer from a major issue that has significantly affected Cayman. They both assume that the bigger the financial sector, the higher the risk of money laundering. In fact, analysis of TJN or a simple correlation analysis between size and FATF compliance demonstrates the opposite, bigger jurisdictions are better regulated, and therefore the risk should be smaller, not bigger. This issue is accentuated by the fact that size for the purpose of money laundering cannot be measured where it really matters. The transparent figures of size are in highly regulated bank balance sheets and funds assets, both areas where Cayman is abnormally big but also areas that are less prone to risk. The size that should matter, but is not measured, is private companies and trusts both being less transparent. As such, Cayman is penalized by its size in the most regulated areas of the industry. Lastly, the FCA vaguely mentions consideration of the size of the financial services industry in relation to the overall economy, which for Cayman is obviously extremely big. Far from increasing risk, the fact that the industry represents over 50 percent of GDP (over 50c of every dollar produced in Cayman) ensures proper focus and oversight of regulators and legislators and has allowed Cayman to stay at the front of all international initiatives to improve transparency and control money laundering. We can only wonder why or how the FCA seems to think differently. Cayman should be proud of what we have achieved. Our success is the envy of our peers, and whether driven by hidden agendas or by lack of knowledge, our size is likely to continue attracting negative as well as positive attention. As a jurisdiction we should understand how blessed we are and do more to defend what we have.

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