SO THE EU HAS DECIDED TO BLACKLIST THE CAYMANS. QUELLE SURPRISE!

This month, the European Union added the Cayman Islands to its tax havens blacklist. Was anyone surprised? Put me at the head of the line. Not because the Caymans were caught fooling around... that's been going on for decades... but because the EU actually got off it's ass and did something.

On closer inspection, the Caymans have Brexit to thank for their embarrassment. It seems there was no one left in Brussels to bamboozle the EU into ignoring the dirty money games played in the UK overseas territories.

Unfortunately, what lies beneath the surface of the EU blacklist is not a desire to put an end to the laundering of drug money, or to reclaim funds tied to political or corporate corruption. It is, first and foremost, a tool to help EU nations collect taxes.

Understandably, folks in the Caymans aren't pleased. After all, tax avoidance... and more to the point, tax evasion... is a big money ticket. So it was left to the Cayman's Prime Minister, the Honorable Alden McLaughlin - who also serves as Minister for Employment, Border Control, Community Affairs, International Trade, Aviation & Maritime Affairs and, please note, Investment - to Tweet, "The Cayman Islands Government has already contacted EU officials to begin the process of being removed from the EU list of non-cooperative jurisdictions as soon as possible, which is understood to be October this year."

In the past, whenever something even remotely like this has happened, the Cayman authorities have quickly and emphatically denied that there were any problems. That they'd done anything wrong. That they had anything to answer (to anyone) for. This time, it seems more like someone is saying, quick, let's fill up the jar and pretend no one has been stealing cookies.

But then, the Caymans have always taken their own unique approach to putting out these kinds of embarrassing fires.

Many years ago, when an Irish corruption investigation revealed that the former Taoiseach (Prime Minister) Charles Haughey had stashed money in the Caymans, along with some of his mates, the government took the offending bank to court and tried to force the Caymans to hand over the accounts. Obviously, the account holders objected.

Cayman Chief Justice Anthony Smellie heard arguments for six days - in camera, so that there could be no public reporting - before coming down with a ruling that he hoped would show the island to be totally co-operative. Absolutely, 100% co-operative. Without actually co-operating, at all.

Smellie ordered the bank to divulge account records to the Irish inspectors. Except, he said, that would happen only after the names, addresses and any other descriptions of clients were removed.

How did the Caymans become the Caymans? It's a good story.

In 1974, white Anglo-Saxon bankers content to remain British, didn’t feel all warm and fuzzy when a black Bahamian, Lynden Pindling, became the father of his country by liberating the islands from British control. Her Majesty assured the place remained safe. Pindling and his pals were too slick by half.

That racism played a role in the development of the offshore world is undeniable. Sadly, part and parcel of the times, white bankers were simply not going to trust a black crook. White crooks? That was questionable. But not black crooks. Which explains why, even as Pindling continued to build a thriving, user-friendly offshore financial center – all the time, of course, lining his own pockets - money headed westward, past black islands like Jamaica, to the white-bread Caymans.    

A string of three small islands, it was once the hideout of the pirate Blackbeard. Over the past 60-plus years, it’s been one of the world’s preferred financial hideouts. Sometimes called “The Geneva of the Caribbean,” Grand Cayman, Cayman Brac and Little Cayman are long on sand, sun and banking secrecy, while decidedly short on over-burdening regulations, microscopic-scrutiny and taxes.

Originally a Jamaican dependency, the Caymans elected to take Crown Colony status in 1962. There is a British governor, but he does little more than cut ribbons at supermarket openings. The Queen’s picture is on the money, but the Bank of England has no say over banks in the Caymans.

Hiding money is why Oliver North set up a dummy company in the Caymans during the Iran-Contra fiasco. That's why Agha Hasan Abedi opened a branch there of his Bank of Credit and Commerce International (BCCI), at a time when the entire bank was nothing more than the world’s largest dirty money sink. That’s why a local hedge fund ran trading through IBCs with foreign suffixes – NV for Holland, GmBh for Germany and SRL for France – so investors would think these were foreign corporations, instead of Cayman shells. That’s why, when the Enron board was orchestrating their massive fraud, they incorporated more than 3500 companies there, none of them using the name Enron.

The Caymans are today the world’s fifth largest banking center. Taxes are nil and regulations are deliberately nonthreatening. Bankers, lawyers and government officials insist they are not the money laundering port of call they used to be – at least, they admit “used to be” - yet they staunchly defend their right to the rules of nowhere. As a result, financial services generate 55% of the total economy, more than one-third of all employment, and 40% of the government’s revenue.

It is also the world’ second largest captive insurance domicile – Bermuda ranks number one - with almost $37 billion in assets; home to more than 80,000 registered shell companies; and the world's leading offshore hedge fund jurisdiction with more than 10,000 firms pretending to operate there.

While Barclays opened the island’s first foreign bank in 1953, ten years later the Royal Bank of Canada became the opening salvo in a campaign by Canadian money managers to colonize the Caribbean. Canadians, who have traditionally sought warm weather winters, were suddenly looking south for tax avoidance and tax evasion, and Canadian banks responded.

Still life in the Caymans remained sleepy until Bahamian independence, when the spigots opened. It pretty much began with the legislature ratifying the Confidential Relationships Preservation Law which, similar to Switzerland, made it a criminal act for anyone to reveal information about someone's banking or financial associations. But then, they outdid Switzerland because in the Caymans merely asking about someone’s financials is illegal.

These days, there are only around 160 banks on the island including 40 branches of the world’s 50 largest banks. Combined, they hold assets of approximately $1.5 trillion, which works out to one bank for every 197 citizens, or $44 million per person.

Ironically, if you went looking for that $1.5 trillion you wouldn't find it because it’s not there. Fewer than 15% of the banks registered in the Caymans report ever seeing cash. Some people suggest that’s because of the water table. Unlike financial centers in Europe where subterranean vaults are filled with the cash, the water table on the island is so high that there are no basements. It’s a cute story, except Caymans banking has never been about cash. The money might be booked there, but the cash has always been in New York, London, Paris, Frankfurt and Hong Kong.

Several engines have driven a long period of prosperity, starting with drug money pouring in from South America during the 1970s. Next, Russian money arrived on the wings of capital flight. After that came money from Japan. Caymanians sell a disproportionately large amount of financial services to the Japanese. Then there was money from Hong Kong, especially following the takeover when banks aggressively sought out Chinese money. Some was legitimate. Some was owned by Asian organised crime gangs. But by the time it arrived in the Caribbean, it was sparkling clean, even though most of it was still being managed from Hong Kong.

More recently, the Chinese and Caymanians cooked up a scheme where a company owned by a Chinese national can sell rights to profits held inside a Cayman IBC. Through a public offering in the United States, American investors who don't read the small print think they’re buying a chunk of the main company. Instead, they’re paying for a tiny piece of profits and dividends, while the original owners retain the underlying assets without any recourse to share holders of the IBC.

*****

(c) Jeffrey Robinson 2020

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