Cayman financial services have become woven into the fabric of the global economy
The Cayman Islands came under the jurisdiction of England in 1670 with the Treaty of Madrid, formally recognizing England’s possessions in the Caribbean Sea. For most of its subsequent history, the Islands have been a place of abundant natural beauty but relatively modest economic status. That began to change in the 1960s under the leadership of Sir Vassel Godfrey Johnson, a member of the Cayman civil service since 1942 who ascended to the post of Treasurer in 1965. In 1966, Johnson led the creation of the landmark Bank and Trust Companies Law, the legislation that paved the way for the development of Cayman as a leading destination for offshore banking services. From 1971 to 1982, Johnson chaired the Cayman Islands Currency Board, the regulatory predecessor of the Cayman Islands Monetary Authority (CIMA), which is the principal regulatory body overseeing the financial sector today.
Sir Johnson passed away on November 12, 2008, marking the passage of a remarkable era in the history of the Cayman Islands. The foundation that he and others built in the 1960s and early 1970s has survived a number of significant events and developments over the years as global financial markets have grown and competition among international financial centers (IFCs) has increased. That foundation will surely be tested again given the historic turmoil in global markets. A look back at the evolution of the Cayman financial center to date may provide insight into how this financial center will likely meet these new challenges.
One of the individuals who helped Johnson build the Cayman financial services model was Jim MacDonald, a founding partner of the law firm Maples and Calder. In 1974, tax reform initiatives in the United States were beginning to have an impact on the U.S. private-client business that had become a profitable practice for Cayman-based financial and legal professionals, recalls Anthony Duckworth, at the time a U.K.-based lawyer who was invited by MacDonald to join Maples & Calder’s practice. “The landscape in the Cayman Islands was changing, the practice was becoming more institutional, and the partners (at Maples & Calder) recognized that a new level of professional was needed to meet the challenges of the new environment,” says Duckworth, now a partner at the Cayman law firm of Charles Adams, Ritchie & Duckworth. Around the same time, two other U.K.-based professionals were recruited to come build the next phase of development in the Islands: Timothy Ridley, who would go on to serve as Chairman of CIMA from 2002 – 2008 (his term recently expired on July 26, 2008), and Anthony Travers, Chairman of the Cayman Islands Stock Exchange.
“There were no precedents for what we were striving to accomplish,” says Duckworth. “We relied on innovative solutions to non-standard financial and legal problems.” One of the hallmarks of this early period, notes Duckworth, was the proactive support of the government and its key regulators. “Government regulators listened to us, and we listened to them, and there was a general spirit of cooperation,” says Duckworth. He believes this pragmatic approach has served the Islands well since then, as the spectrum of expert services has expanded from banking and trust activities to insurance, investment funds, and structured finance transactions. Instrumental in establishing a base for this eventual expansion was Arthur Hunter, the first Caymanian to qualify academically as a lawyer, the first registrar of companies for the country, and the founder and president of the Cayman Islands Law Society. The senior partners of many existing local law firms had their first taste of the local private practice as associates of his firm, Hunter & Hunter.
Another legal pioneer, the late William (“Bill”) Stuart Walker, started one of the first law firms to specialize in offshore finance. With the development of the firm of W.S. Walker & Company (now global offshore powerhouse “Walkers”), Walker also helped to forge important legislation that would become the building blocks of this country’s formidable financial industry.
One such building block was the Insurance Law of 1979, which marked a critical turning point in the progression toward a more diversified portfolio of financial services. Up until that point, the main focus of activity had been on the development of trust and banking services, building on the foundation of the 1966 laws. Former CIMA Chairman Ridley has noted that growth in Cayman during the 1966 -1976 period was helped by “political uncertainty in the Bahamas (in connection with the pro-independence movements there in the early 1970s) and the development of the Eurodollar market.” An opportunity for expansion into insurance emerged in the late 1970s, and the Cayman Islands moved to take advantage of it.
Captive insurance is a business in which corporations, for any number of reasons, may elect to set up their own insurance operations rather than taking out policies through unaffiliated insurance companies. Bermuda has long been the leading global center for captive insurance, a position that was already well established by the late 1970s. After enactment of the Insurance Law, the market for captive insurance in the Caymans grew from 1 captive insurance company at the end of 1976 to 107 at the end of 1986.
Duckworth emphasizes the role of prudent regulation in the success story of attracting captive insurance business to the Caymans. “We attracted insurance business by regulating insurance companies,” says Duckworth. In other words, by focusing on the specific needs of practitioners in the industry and developing a body of regulations that addressed these needs, the Cayman approach gave businesses confidence in what they saw to be a stable, responsive, and professionally-managed jurisdiction. Cayman has grown into the world’s number two domicile for captive insurance companies today, right behind number one Bermuda.
This formula for success repeated itself in 1993 with the passage of the Mutual Funds Law, establishing a clear regulatory framework for investment funds and their administration. This turned out to be a rather farsighted initiative, as the law became an important feature leading to Cayman becoming the world’s leading domicile for hedge funds. In 1993, hedge funds were a relatively small and little-known piece of the financial universe. By the end of 2006, there were 8,314 investment funds in the Caymans.
Professor Andrew Morriss of the University of Illinois College of Law attributes a good deal of the Cayman Islands’ success with hedge funds to the 1993 Mutual Funds Law — an example of what regulation can achieve when the relationship between business and government is practical and non-adversarial. “In the Cayman Islands, they created a funds law that specifically deals with funds,” says Morriss. He adds that the successful model of practical regulation exhibited by leading-edge offshore jurisdictions like the Cayman Islands has stimulated activity in onshore jurisdictions, citing Vermont as an example of a U.S.-domiciled location focused on providing the types of services and activities normally associated with IFCs (Vermont’s product focus is captive insurance).
In the current decade, Cayman has managed to take on challenges of a different nature: on the one hand, the increasing focus by world policymakers on money laundering and the financing of international terrorist and criminal activities, and, on the other hand, the ongoing economic controversy over international tax competition between high and low- or zero-tax jurisdictions.
In 2001, the IMF took note of an “ambitious financial inspection program” by Cayman authorities to strengthen the integrity of their institutions and policies. Regulatory activity in Cayman continues to be conducted in the spirit evoked by Johnson and his colleagues – one of productive cooperation and coordination between the private and public sectors rather than adversarial relations.
On the tax front, the Cayman Islands took a decisive step in 2001 with the Tax Information Exchange Agreement that was signed with the U.S. government, establishing a model for increased coordination, information sharing, and transparency between high-tax jurisdictions like the U.S. and the lower-tax environments characteristic of IFCs. At the time of the signing in November 2001, then-U.S. Treasury Secretary Paul O’Neill noted that the U.S. “will enter into similar agreements with other major financial centers,” and indeed since that time the U.S.-Cayman agreement has served as a basis for tax information sharing in other important financial markets from Switzerland to Antigua and Barbuda to Brazil.
Looking back over a career spanning more than 30 years in the government and in the business and political worlds of the Cayman Islands (he currently serves as party Chair for the People’s Progressive Movement, the ruling Cayman political party), Duckworth recalls that when he and his wife originally arrived in 1974 to join Maples & Calder, they decided to “give it one year and see” about staying on longer. Duckworth says that the subject never came up again. “I am proud of what we have been able to accomplish here over the past 34 years” he says, “and I have no regrets.”
The Westin Casaurina
