More than 70% of applications from businesses seeking to operate in the Cayman Islands without majority local ownership have been approved over the past three years.
There are currently around 250 businesses operating in the jurisdiction that have been granted Local Companies (Control) Licences exempting them from the legal requirement of having majority Caymanian ownership.
A large proportion of those – almost a third – are for property holding or real estate development.
According to data shared with the Cayman Compass following a Freedom of Information request, 56 LCCLs have been granted in the Cayman Islands since the beginning of 2019, while 23 applications were refused during that time.
The so-called 60/40 rule, which requires businesses to have majority local ownership, is designed to protect the interests of Caymanian entrepreneurs.
Any business seeking to operate in the islands without at least 60% Caymanian involvement must obtain a Local Companies Control Licence.
Businesses currently operating under such licences include multinational airlines which operate here, film and television production companies and IT specialists.
There are also a significant number of developers who have been granted exemptions for a variety of construction projects.
Those refused in the past three years included a plastic surgery business, a handful of restaurants and cafes, a health and fitness business and airline agents and real estate companies.
While the Trade and Business Licensing Board acknowledges there have been numerous applications and a relatively high approval rate in recent years, it attributes this to the economic growth of the islands.
A spokesman for the board, chaired by Garth Arch, indicated that companies operating under Local Companies Control Licences still make up less than 2% of total businesses in the Cayman Islands. He added that the total number of LCCLs had been consistent over the past seven years and there had been no significant recent increase.
The purpose of the LCCL regime is to enable businesses that might benefit the islands to be allowed to operate. It is also designed to enable economic development in areas where Caymanians may not have the finances or relevant expertise. Anyone applying for a licence must demonstrate they have taken steps to find a Caymanian partner, including advertising in the newspaper.
Local business concerns
Multiple local business owners have expressed concern that licences are now being given out too freely. Several Caymanian developers said they had written to the board on numerous occasions in recent years.
They have highlighted fears that the number of licences being granted are too high, that the process of advertising for a local partner is often manipulated to discourage applications, and that the application and notification process is in need of an overhaul.
Stefan Baraud, owner of Baraud Development, said the granting of exemptions to Caymanian ownership appeared to have become the rule rather than the exception in the industry.
He said the islands had always had numerous local property developers able to meet the demands of Cayman’s housing market and he does not see the need for LCCLs to be granted for property or real estate projects, except in special circumstances like a large branded hotel or marina project.
“Caymanians that are involved in local property development have always been more conscious and more mindful of the needs of the country,” he said, suggesting local developers would be more sensitive to economic and environmental concerns.
“We understand the lay of the land. The money remains in Cayman and the long-term impact is less,” he said.
His concerns spill over to other industries.
“If numerous LCCLs can be granted for overseas developers to operate in Cayman, then what next? Supermarket chains like Publix or Walmart?
“The whole process needs to be looked at,” he said.
Adverts are exaggerated
Baraud believes that many applicants for LCCLs are gaming the system, which requires them to advertise for Caymanian participation as a prerequisite to the application process.
“I believe the adverts are exaggerated so the value of the project is grossly inflated to deter participation,” he said.
Ken Thompson and Paul Pearson, of Davenport Development, have also added their signatures to various letters sent by local developers and contractors on the issue.
Pearson agreed that developers seeking LCCL licences are asking too much of prospective Caymanian partners.
For example, he said, a Caymanian company responding to a newspaper ad seeking participation for a $100 million development, would be required to show they had $60 million to invest in the project. In reality, he said, the project would be funded through bank financing and pre-construction sales and any partner would need only a fraction of that figure to be involved.
Matthew Wight, of NCB Group, which has carried out multiple major projects in Cayman and is currently mid-construction on a new hotel opposite Kirk Market, said there was a valid rationale for LCCLs to be granted in some cases for large-scale development.
But he said many business owners in the sector believe licences are being handed out too readily to non-Caymanians.
He said this had become “common practice” and was contributing to a number of issues in the industry including scarcity of developable land, increasing land cost, overdevelopment and fewer opportunities for Caymanian businesses.
“This practice of wholesaling LCCL licences has been talked about for decades and has gone unchecked,” he said.
Wight said local developers would like to see a complete redraft of the criteria under which licences are granted and far greater scrutiny of the application process. He agreed with Pearson that many applicants exaggerate development costs to exclude local applicants.
An increase to the 21-day notice for potential local investors to submit expressions of interest, a central website for applications and a means of directly sharing these applications with registered local businesses are also needed, he said.
Many developers would also like to see better scrutiny of ‘fronting’ – the practice of hiring a silent Caymanian partner for a flat fee to circumvent the 60/40 rule without the need for a Local Companies Control Licence.
Vast majority of businesses still Caymanian-owned
Responding to questions from the Compass, a spokesperson for the Trade and Business Licensing Board said it is committed to ensuring that licences approved under the LCCL regime are in the public interest.
“This continues to be evidenced by the low percentage of licences approved to companies where sixty percent or more of its shares are not beneficially owned by Caymanians,” it said in a statement. The total number of companies currently on LCCLs represents just less than 2% of all Trade and Business Licences handed out in 2020.
The rise in applications (and approvals) in recent years is linked to the economic growth of the islands, it said.
“The Board has no control over the number of applications submitted for consideration, foreign investors have seen the Cayman Islands as a highly competitive and attractive jurisdiction to do business.”
The spokesperson said the law dictates the circumstances under which licences can be granted and all applications are considered on their own merits. In some cases, specific conditions are attached to protect the general interests of Caymanian businesses. For example, he said, five-year limits were placed on LCCLs offered to developers along with conditions that they use local real estate agents, contractors and architects.
The spokesperson added, “The board has and will continue to control the licences that are approved for such businesses, being keenly aware of this in order to ensure the protection of commerce for Caymanian businesses.”
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