The end of goodwill?

On 21 June 2010, a
‘green bill’ was published in the Cayman Islands Gazette called The Charities
Bill, 2010. If passed into law, it would not only fundamentally change the way
charities operate here, but it would also have a significant impact on one of
the Cayman Islands’ important financial services industry segments: charitable
trusts.

The gazetting of the
bill came as a surprise to many interested parties, but not because of its
efforts to regulate charities; indeed, the government has been trying to do
that for many years due to external pressures from organisations like the
Financial Action Task Force, which sees charities as possible avenues for money
laundering and the financing of terrorism.

The Cayman Islands
Government, through the Law Reform Commission, presented a discussion bill on
the issue in February 2009. After some changes as a result of that public
consultation, it issued a revised discussion bill in July 2009.

Each time the
discussion bill was presented, it was met with objections from the parties it
would affect.

What ultimately was
surprising was that many objections were largely ignored by the Law Reform
Commission.

The provisions of the
bill

Part I of the bill
defines charity as “a person who conducts activities for charitable purposes,
but does not include a private charity”. 
The phrase ‘charitable purposes’ is then defined to mean purposes that
relate to 24 sections and 14 subsections of activities.  The sections incorporate a wide range of
activities including, among others, culture, sports, education, religion,
health, science, community, social harmony and animal welfare. Just about every
group organised to relieve human or animal suffering or to promote the
betterment of human kind singularly or collectively in any way would be
considered a charity under the bill.

Part III of the bill
would require charities desirous of conducting any activity for a charitable
purpose that involves fund

raising by means of
solicitations of property from the general public or government to apply to be
registered with a Cabinet-appointed Registrar of Charities.

Among the things the
law would require of charities are the identity of the trustee or fiduciary and
other members of the charities; annual audits of the charity’s operations;
records of contributions and contributors; statements about anticipated sources
of contributions; evidence of how contributions were or are to be applied;
evidence of ‘Know Your Client’ compliance on donors; and various other
documents.

With regard to
donors, the charity would be required to maintain a record of the names and
contact information of all its donors and, where that information is not easily
ascertainable, the method relied upon in the solicitation of property.

Charities would be
required to notify the Registrar of any changes to their status, including
changes to its membership, within 30 days, or such longer period as the
Registrar may in his discretion allow.

The fiduciary of a
charity which fails to comply with the law would be subject on conviction to a
fine of $5,000 or to imprisonment for one year or both and for a further fine
of $100 per day for every day the offencecontinues after conviction.

Objections

Many of Cayman’s
charities have made representations to the government asking for the bill to be
re-considered or to be excluded from the provisions of the law.

In an 18 August
letter to Premier McKeeva Bush signed by Treasurer Jackie Sterling, the Cayman
Islands Humane Society noted that the law, if passed, would create additional
costs in the form of registration fees, annual fees, auditors’ fees, data and
document storage fees and payroll expense for additional staff.

“The added cost of
complying will increase our monthly overheads… and thereby further reduce the
intended purpose of the contributed money,” the letter stated. “This would
result in additional burdens and complications for the [Humane Society]… We
may have no other choice but to close our doors.”

In a 5 August letter
to Premier Bush signed by President Lori McRae, the Rotary Club of Grand Cayman
also cited additional financial burdens created by a Charities Law.

“Indeed, it may
require the hiring of permanent staff to collate and report [the required]
data, which entails an overhead burden that Rotary has never had before,” the
letter stated. “Rotary tries to keep administrative costs to a minimum.
Compliance with a bill such as this will drive administrative costs up.”

Cayman Islands Little
League Association Chairman J.C. Calhoun pointed out that the bill
requires charities to keep records for at least seven years, creating more
expense and liability exposure to its volunteer members.

The Reverend Bob
Thompson, chairman of the Cayman Ministers’ Association, said his organisation
has also made a submission to government about the bill. In early drafts of the
bill, churches were exempted from the law, but they are now included in the
gazetted bill.

“I think the main
thing we object to is the requirement to get an annual external audit,” he
said, noting that church audits are usually done by members.  “It would be too expensive.

Thompson acknowledges
that money laundering can occur through charities, but he doesn’t think
Cayman’s small charities are a problem.

“Ifthere were organisations like United Way here,
that’s one thing,” he said. “But a lot of the charity work here is carried out
by small organisations or individuals.”

KYC

The requirement for
Know Your Customer compliance and record keeping on all contributors drew the
objections of several charities, including the Humane Society.

“The [Humane Society
has] persons that may donate just a single dollar, for whom we will now have to
obtain their name and address and keep a complete list of all these donors,” it
said in its submission. “It is going to take more time in administration than
the small donation is worth.”

The Humane Society
said the KYC requirement would have a negative impact on local contributors.

“They will simply not
bother to donate and remit their funds elsewhere.”

The Rotary Club of
Grand Cayman also objected to the KYC requirements on all donors.

“We do not understand
the reason for requiring a service club such as Rotary to be forced into a
regulatory regime and the compliance culture which exists in the financial
services industry,” it stated. “Expecting us to obtain two photo IDs, and two
municipal address confirmations (less than three months old) certified in true
ink copies for all of our contributors is bound to have a negative impact on
our fund-raising initiatives.”

The Cayman Islands
Little League noted that the bill would require it to collect information on
“all persons buying a raffle ticket, participating in the balloon barrage at
our auction, or even buying a hot dog at our concession stand.”

“Whether this is
required would depend on the application of the definition of the word
‘ascertainable’, which is extremely subjective,” it stated. “The penalty is
$5,000 and/or a year in jail – on a subjective definition.”

The Rotary Club said
the penalties for breaches in the reporting requirements were onerous.

“Breaches could
easily occur with the number of volunteers we have and it is difficult to
understand why a service club member, belonging to a club dedicated to the
public welfare, should be exposed to financial penalties and possible
incarceration,” it stated. “This appears extremely unrealistic and will no
doubt affect our retention of existing members and our efforts in attracting
new membership.”

Given the possible
penalties for breaches, the Little League predicted it would have fewer
volunteers willing to accept the liability. So did the Humane Society.

“The bill would make
it even more difficult to recruit already scare volunteers that may be subject
to severe fines or imprisonment and interrogation by the attorney general for
their kind-hearted contribution to the community,” it stated.

In its 2009
submission to the government, the Cayman Islands Cancer Society questioned
whether the KYC compliance would be required for all donations regardless of
size.

“Depending on the
prescribed information required, this will be difficult in practical terms for
nonprofit organizations,
which often receive small donations under $100, to enforce and may detract
potential donors,” it stated. “The Society therefore suggests that donations
under $10,000 not be subject to KYC Compliance.”

Both the Humane
Society and the Cancer Society pointed out that the KYC requirements amounted
to a duplication of efforts in many cases.

“One hundred per cent
of our funds are received and collected in the Cayman Islands, and apart from
cash donations collected from various coin collection boxes, the funds are
received from or paid out of bank accounts that are held with local banks,
which are already closely monitored and regulated,” the Humane Society stated.
“The vast majority of our expenses are paid to local vendors and staff, who
maintain local bank accounts. It is difficult to understand and justify the
purpose of the [Humane Society] duplicating the KYC documentation already in
place with the regulated banks.”

In some cases,
anonymous donations are made to charities through various firms in the
financial services industry.

The Cancer Society
suggested there be an exemption from the obligation to collect KYC for any donations
from a company or individual already subjected to anti-money laundering
regulations and regulated by a governmental or statutory authority.

“This would allow
banks, law and accountancy firms to make donations without the charity having
to obtain KYC from the donor,” it stated.

Fund raising

Parts V and VI of the
bill regulate the conduct of fund raising activities by
or on behalf of charities.

Among other things,
the law requires all charities to declare its status as a registered charity on
all collection boxes, member labels or badges, notices, advertisements and
other documents issued by or on behalf of the charity soliciting property. Any person
who signs, issues or authorises such a notice, advertisement or other documents
who fails to include that status is subject to a fine of CI$2,000.

The law also requires
every person soliciting property from the public or government through
fundraising activities to do so in accordance with an agreement with the
charity. It also requires that any such solicitation be accompanied by a
statement clearly indicating the name of the charity or charities for which the
property is being sought, and if there is more than one charity concerned, the
proportions in which they will benefit.

In addition, the law
would require all charities to take “reasonable steps” to ensure its
fund-raising activities are carried out in a way that does not “unreasonably
intrude on the privacy of those from whom funds are being solicited”; does not
“involve the making of unreasonably persistent approaches to persons to donate
funds”; does not “result in undue pressure being placed on persons to donate
funds”; and does not involve making false or misleading statements about the
urgency of need for the funds, the way in which the funds donated will be used,
or the activities, achievements or finances of the charity.

The Cancer Society
stated this requirement could negatively impact certain established sources of
donations.

“In practical terms,
charities are not always aware when people are asking the public to donate to
the organization, such as when donations are made in lieu of flowers at a
funeral or in lieu of gifts for birthdays and weddings, or persons are doing a
sponsored event and have designated an organization as the beneficiary,” it
stated.

The Humane Society
questioned the need for the requirements for all fundraising efforts.

“Is this really
necessary in a small community such as ours, where every dog wash and cake sale
brings in a few pennies to help our cause?”

The Little League
said the penalties for infractions would make holding many fundraising
activities impossible.

“Volunteers run these
things and if we fine them for a simple omission, then we will have no
volunteers,” it stated. 

The Little League
also pointed out that the provisions governing fundraising contained many
subjective phrases, like “unreasonably persistent”, “undue pressure”, and
“unreasonably intrude”, the interpretation of which could depend on a point of
view or a person’s mood on any given day.

Charities’ accounts

The law would require
all registered charities to keep records of all sums of money received and
expended, including the reason for the receipt or expenditure; of all sales,
purchases and receipt of property; of all donations received; and of all of its
assets and liabilities.  It also requires
that the books be handed over to the Registrar of Charities within six months
of the end of each financial year.

Any charity that
holds or receives property valued in excess of $50,000 would also be required
to have its books audited by an independent and reputable accounting firm.

The Little League
noted that getting audited accounts within a specific time period would require
it to pay for the audits.

“Most nonprofits do not [pay
for audits] now, so there are increasing costs.”

The Little League
also noted that the requirement to record the identity of individual donors
would hinder anonymous donations.

The charities’
accounts submitted to the Registrar would be available for inspection by
members of the public, something about which the Cancer Society had concerns.

“This may be
detrimental to a charity in practical terms,” it stated. “Potential donors may
inspect the books of a charity and decide that the organization does not need
the funds as they are currently in a sound financial position. Charities and
nonprofit organizations
need to ensure they have funds for short, medium and long-term development of
their operations, programs and services and evidence of being in a solid
financial position now, is not reflective of the organization’s future needs.”

Financial industry
impact

Charities are not the
only entities that would be impacted by the proposed Charities Bill. Cayman’s financial
services industry, particularly the private wealth sector, would also be
significantly affected.

The Society of Trust
and Estate Practitioners has commented to the government on more than one
occasion about the negative impacts the bill could have on the financial
industry, most recently with a letter to the attorney general dated 1 July,
2010.

In a letter signed by
then-Chairman Andrew Miller in February 2009, STEP submitted comments on the
bill to the Law Reform Commission. 

The letter stated
that STEP disagreed with the Financial Action Task Force’s view that nonprofit
organisations were particularly vulnerable with regard to the financing of
terrorism.

“As far as we are
aware, there is no substantive evidence to support this, at least from a Cayman
perspective,” the letter stated. “Even if this was not the case, the
requirement to register certain charities with the Charity Commission would,
seemingly, add little by the way of a measure to counter such use of nonprofit
organisations; it is just the sort of organisations that would fall outside the
need to register that would more likely be used for such purposes.”

A 1 July, 2010 letter
to Attorney General Sam Bulgin signed by Carlos de Serpa Pimentel, the current
STEP chairman, states he and fellow STEP member Justin Appleyard met with the
Law Reform Commission in 2009 to discuss the practical impact of the bill on
the private wealth and institutional use of charities in Cayman.

“In short, there were
so many issues that required to be addressed, it was agreed that the most
efficient course of action was for STEP to draft a revised Charities Bill as a
discussion document to highlight the fundamental issues that needed to be
addressed as a matter of charity law before the regulatory regime that we
understood was the principal objective of the new legislation could be
implemented,” it stated.

Appleyard proceeded
to draft, on behalf of STEP, a 66-page, 90-section discussion Charities Bill.
After submitting that document, no one from STEP heard anything more about it
from the Law Reform Commission.

“As the months
passed, it was assumed that the technical requirements evidently necessary from
the STEP redraft and the more general objections of the local charities had been
sufficient to cause the idea of regulating charities in the manner of the first
draft to have been abandoned,” it stated. “The first that the private sector
then hears, almost a year later, is that a Charities Bill, which nobody in the
private sector has apparently seen, is about to be gazetted.”

STEP points out that
the gazetted bill varies little from the Law Reform’s draft bill of July
2009.  The gazetted bill takes on board
some of the proposals of the STEP discussion draft bill. However, STEP states
that the “recommended redraft only works as a whole and it’s not possible to
take parts of the redrafted bill out of context, leaving behind the rest.”

STEP’s letter warns
of the potential impacts the bill would have, not only on local charities, but
also on Cayman’s financial services industry.

“The use of Cayman
Islands charities, which are not limited to trusts and companies, but extend to
clubs, unincorporated associations and in some cases foundations, is a critical
component of the ability of the Cayman Islands to attract onshore lawyers and
accountants and their wealthy clients in offering estate planning structures
using Cayman Islands companies, trusts, partnerships and charities,” the letter
states. “For many of the wealthiest families in the world who either already
use the Cayman Islands or might be tempted to do so, the philanthropic
objectives of the family as a whole are an important factor in deciding whether
to choose Cayman over its competitors. We are not aware of any other country
that would regulate charities to the degree that is proposed under this
regulation.”

One of the key
problems STEPS sees with the bill concerns which charities can be exempted from
registering. Without an exemption, the trustee or fiduciary must be identified.

STEP notes that the
certain provisions of the Charities Bill are inconsistent with other
legislation here.

“It is simply
inconsistent policy to accept that a registered private trust company is
suitable as trustee for a private trust but is not suitable as a trustee for a
charitable trust,” the letter states. “For the purposes of anti-money
laundering and anti-terrorism vigilance, there is no difference between them.”

Should the bill be
passed as drafted, STEP believes the Cayman Islands would be left at a “significant
competitive disadvantage” in attracting wealthy families to set up charitable
trusts here.

Bill status

After it was gazetted
in June, the Charities Bill was expected to be presented in the Legislative
Assembly during the meeting in July.  However,
Premier Bush announced there had been representations made about the bill and
that its presentation would be deferred to another meeting.

Speaking on 14
August, Bush said the bill would not be on the agenda for the September meeting
of the House.

“What I saw there, I
could not present, so I delayed the bill,” he said. “There are far too many
matters about the bill that I need to question and I don’t have information on
now.”

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