Effective regulation, expertise, and stability put Cayman ahead
Technology has provided the tools for companies to engage in business in any corner of the world and to be managed from any location. Cayman’s tax neutral platform and security as a United Kingdom overseas territory, as well as its reputation for efficiency and an abundance of financial expertise, provides an advantage over other international financial centers.
Three main factors have contributed to Cayman’s success: First, Cayman is a U.K. overseas territory, which provides a sense of security and stability for investors; Second, the Cayman government has allowed foreign experts to live and work in the Cayman Islands and pass their skills on to local Caymanians. As a result, professionals from London and New York can find their equals in Cayman, both in qualifications and expertise. Finally, the Cayman government has provided a legal and regulatory framework that has allowed the industry to develop and maintain itself – a difficult task since over-regulation can frustrate the legitimate investor and drive him to less regulated jurisdictions, but under-regulation could invite financial scandals, which could ruin the reputation of Cayman as a financial center. A familiar criticism of international financial centers is that only “paper companies” are registered in them and that these companies have no physical presence in the financial center. Such statements are misleading. All companies, offshore and onshore, wherever they are incorporated, can be said to be paper companies in that they are constituted by paper documents, namely the charter and bylaws – known in the Cayman Islands as Memorandum and Articles of Association – and operate using a whole range of other documents, such as share registers, minute books, share certificates, deeds, employment contracts, management agreements and mortgage documents. As far as physical presence is concerned, companies are often incorporated in and maintain their registered offices in an entirely different location from where their physical operations are carried out. The walls of the accounting firm I worked for in London were full of the nameplates of companies for which we provided the registered office. One can see the same thing in New York and, in particular, Delaware, which is probably the world’s largest company management center. In fact, some 300,000 businesses and over half of the Fortune 500 are incorporated in Delaware - while their main operations are elsewhere.
Despite the political rhetoric and what the media says about international financial centers, U.S. politicians realize they have to keep a very fine balance between the imposition and collection of tax revenue and the encouragement and facilitation of international trade to ensure foreign investment capital is available to its industries. The reason the U.S. government allows most of its top companies and banks to conduct operations in the Cayman Islands is because U.S. politicians know its businesses will not be able to compete internationally if they’re subject to tax on their current international income. They are, of course, subject to normal taxation when their profits are repatriated to the U.S.
Interestingly, the U.S. government grants foreign companies and investors special facilities in order to attract foreign capital. For example, unlike U.S. citizens, foreigners depositing money in U.S. banks aren’t subject to U.S. tax on the interest they earn nor does Uncle Sam tax them on capital gains derived from U.S. stock market investments.
Rather than focusing outward, the U.S. would be served best by enacting legislation that prevents the abuse of its own capital markets, which would go a long way in preventing abuse of international financial centers’ facilities. By better regulating financial activities in its own financial centers, where the present global financial market distress seems to have originated, the U.S. government may be able to avert future crises as well. The Cayman Islands should welcome such legislation because it would help keep dishonest operators such as Bernard Madoff, Enron, Tyco International, and WorldCom from abusing Cayman’s facilities as well as the world markets and allow legitimate business to continue to prosper in Cayman for the benefit of the world’s economies.
Paul Harris is president of the Cayman Islands Company Managers Association and president of the Cayman Islands Directors Association. A resident of Cayman since 1967 he is also chairman and founder of International Management Services (IMS), one of the first providers of corporate services in the Cayman Islands.
The Westin Casaurina
