News

The Cayman Islands suffered a double reputational blow Tuesday after independent research branded the U.K. overseas territory the world’s greatest enabler of illicit finance and the European Union added it to a blacklist of uncooperative tax jurisdictions.

Cayman moved from second on the 2018 Financial Secrecy Index—a ranking of more than 130 jurisdictions based on the size of their offshore financial-services sector, level of corporate transparency, adherence to global anti-money laundering norms and other criteria—to top the list for the first time, followed by the United States, Switzerland and Hong Kong.

The Caribbean island provides nearly five percent of the world’s total offshore financial services and the sector is more than 1,500 times larger than the rest of its economy combined, according to the Tax Justice Network, a global advocacy group that produces the index every two years.

Cayman’s growing, outsized role in offshore finance is largely driven by the global hedge fund industry’s use of companies, trusts and limited partnerships formed on the island to cloak their operations, TJN found.

“The dangers that emanate from Cayman are now less about money laundering and criminal activity—although it hosts plenty of that as an inevitable side effect of being a secrecy jurisdiction—and more about the risks to global financial stability and public finances posed by its role as an opaque conduit for large international financial institutions,” TJN concluded.

Cayman’s new, dubious distinction as the world’s leader in financial secrecy coincides with the EU’s separate decision Tuesday to blacklist the island alongside Panama, Palau, the Seychelles, the U.S. Virgin Islands and seven other jurisdictions for helping hide taxable income from the bloc’s 27 nations and failing to implement reforms by deadline.

The decision comes less than a month after Britain formally exited the EU and illuminates a split between U.K. officials who, prior to Brexit, had a platform to shield Cayman from the bloc’s countermeasures, and U.K. investigators who have repeatedly accused the island of enabling financial crime.

Outcomes

EU officials can limit EU financing and investment to countries on the list, or require enhanced monitoring of transactions that intersect with them.

Compliance officers may end up separately flagging the latest index—and Cayman’s new position atop it—to their boards of directors, said Ruth Paley, an attorney with Eversheds Sutherland in London, but most already viewed the jurisdiction as high risk long before Tuesday.

“It’s possible that we may see some de-risking activity around Cayman Islands business, although the territory has issued a fairly bullish response to the criticisms,” Paley said. “Much will depend on existing risk appetites, so the Caymans’ appearance at the top of the list is perhaps unlikely to change much in practice.”

Angola was included in the index for the first time, weeks after the International Consortium of Investigative Journalists and other media outlets revealed that Isabel dos Santos, daughter of Angola’s former President Jose Eduardo dos Santos, became Africa’s richest woman through insider deals, advantageous loans and public contracts that her father often arranged by decree.

The U.S. remained second on the list, reflecting the country’s prominent role in world finance and lax incorporation policies in Delaware, Nevada and other states.

New Hampshire’s 2017 decision to allow non-charitable private foundations to be formed without having to identify the individuals behind them moved the U.S. past Switzerland, which dropped from first in 2018 to third in the latest index.

Britain, whose exit from the EU raised concerns among opposition lawmakers and advocacy groups that the Conservative government would weaken tax and anti-money laundering rules to attract investment, moved farthest up the list, from 23rd in 2018 to 12th, as a result of its “worsened tolerance for financial secrecy practices.”

The nation still “outsource[s] some its financial secrecy” to a “network of satellite jurisdictions” such as the Cayman Islands, British Virgin Islands and Bermuda, as well as to Guernsey, Jersey and the Isle of Man.

Globally, the grand total of all financial secrecy as measured by the index shrunk 7 percent from 2018 to 2020 amid more bilateral agreements between nations to automatically exchange tax data and broader adoption of beneficial ownership standards.

Germany, which TJN previously cited for “serious loopholes” in its tax governance and anti-money laundering rules, poor AML enforcement, and failure to ban bearer shares outright, dropped seven places from 2018 to rank 14th after moving forward with plans to increase corporate transparency.

Cayman authorities said in a statement Tuesday that their jurisdiction meets global standards for transparency and international cooperation, and claimed TJN’s methodology “penalizes countries with successful financial services industries.”

“We do not work in ‘secret,’ rather we continue to work cooperatively with tax and law enforcement authorities around the world as is reflected by independent assessments of our regime,” Dax Basdeo, chief officer in the Cayman Islands Ministry of Financial Services, said.

Contact Koos Couvée at kcouvee@acams.org