Do Cayman and eight other offshore financial centres have what it takes to get through the world financial crisis?
That’s the focus of a review being done by former Bank of England executive Michael Foot, who visited Cayman last month on a fact-finding mission for the United Kingdom. Mr. Foot released a progress report on his work this week, and expects to have conclusions by the end of 2009.
The UK is essentially trying to determine what financial shape the nine offshore centres are in, whether they have the necessary international tax reporting and transparency regimes in place, and what measures, if any, exist to back up investors’ assets in the event of a global financial meltdown.
The report also seeks to determine the extent to which the Mother Country will be liable for the three crown dependencies (Jersey, Guernsey, Isle of Man) and the six overseas territories (Cayman Islands, Bermuda, Gibraltar, British Virgin Islands, Anguilla, and the Turks and Caicos Islands).
Cayman Islands Leader of Government Business Kurt Tibbetts said he looked forward to the review’s completion.
‘The Cayman Islands welcomes this progress report and its observations relating to the importance of the Cayman Islands financial services industry,’ Mr. Tibbetts said.
The crisis management tools available to each overseas territory and crown dependency are one of the main areas being reviewed.
For instance, Mr. Foot points out in his progress report that Gibraltar and the Isle of Man both have some form of deposit protection scheme in place for investors and bank customers. Guernsey has recently moved to introduce one.
But the other territories do not have such ‘safety nets’ in place.
‘Any financial centre considering setting up a deposit protection scheme carefully needs to consider the coverage of the scheme and the mechanism for funding it,’ Mr. Foot wrote in his report.
Mr. Foot also noted that the UK Treasury Select Committee stated in a recent report that the British government would not provide cover for deposits held by UK citizens in jurisdictions not directly controlled by the United Kingdom.
Taxation within the off shore centres is also an issue to be considered by the UK review.
There has been some grumbling amongst the overseas territories of late, including Cayman, that the three crown dependencies were placed on the Organisation for Economic Co-operation and Development’s ‘white list’ following the G-20 summit in London earlier this month while the oversees territories were left on a so-called ‘grey list.’
The ‘grey’ listing means that Cayman and others had committed to internationally agreed tax standards, but had not yet substantially implemented them.
‘The review should also…like to clarify the importance of existing tax regimes as a factor in attracting and retaining financial services business and in supporting the current economic models of the financial centres,’ Mr. Foot’s report noted.
In 2005, a review by the International Monetary Fund found that Cayman and other offshore finance centres’ tax reporting and transparency compliance regimes were comparable and in some cases better than their onshore counterparts.
However, Mr. Foot notes, international standards ‘do not stand still.’
‘The G-20 is implementing a series of measures to strengthen financial supervision, including a renewed focus on the ability and willingness of jurisdictions to provide the information and level of co-operation needed if cross-border financial crime is to be combated effectively,’ the progress report stated. ‘Taken together, this adds up to a considerable resource challenge for smaller jurisdictions such as the financial centres covered by this review.’
There is no question Cayman and many other offshore centres depend heavily on the financial services sector to support local economies. Mr. Foot’s report said financial services in Cayman made up for 36 per cent of its total gross domestic product and 21 per cent of its total employment.
Other centres were even more dependent on the finance industry. For instance, Jersey’s finance sector makes up more than half its gross domestic product, while Guernsey’s finance sector employs 24 per cent of its people.
The report also noted that only the overseas territories, and not the Crown dependencies, still had completely avoided local taxes on income, profits, capital gains or wealth. Five of the six territories, including Cayman, also have no corporate tax.
‘The review will also discuss with the financial centres whether pressure on their respective public finances as a result of the global economic downturn might encourage diversification of existing taxation systems,’ Mr. Foot noted, adding that his team would not make recommendations about what types of ‘tax regimes’ could be considered.