Articles

Published by The Cayman Compass

Anthony Travers critiques the powerful messaging advocated by the good Dame In Westminster in support of her continuing crusade for even greater disclosure in Cayman Islands financial services.( With apologies to the late Barry Humphries )

G’day my precious darlings,

I have just returned from a week of serious international investigation, and I can tell you I have finally uncovered the explanation for every ill besetting Britain, and solved Britain’s crime and money laundering problem. No, my dears, don’t be silly, not by looking in Britain, that would be simply ridiculous.

No, I watched three old BBC documentaries, read half a Guardian article, one Financial Times expose on something they call a “tax haven” and eavesdropped on two bankers sitting in front of me in first class. Well, what I learned nearly caused me to swallow my olive.

The problem, my treasures, is not the UK Parliament, not the failure to apply UK law, not the UK Regulators, not the UK Solicitors, not UK Estate Agents and certainly not UK Banks. And not His Majesty’s Government that collects simply oodles of criminal or sanctioned proceeds once it comes back freshly laundered as something called stamp duty. No sweethearts; the culprit is 4,800 miles away and it’s called ‘offshore’.

My evidence is impeccable. And the beauty part is that whenever you hear the word ‘offshore’, you immediately stop asking any further questions. It’s like hearing the word ‘cheesecake’. Once you’ve heard it, you’ve already made your decision.

You see, darlings, just like cheesecake this is all too delicious. Whenever another 75-million-pound townhouse is bought in Mayfair it now gives me a soapbox from which to pontificate and virtue signal about my relentless hunt for the truth in other people’s tax affairs and wrongdoings and avoids anyone looking too closely at mine. This allows everyone here in Britain to carry on exactly as before.

Yes, the word ‘offshore’ does the trick every time. Just look at the distinguished commentators who solemnly whisper the word as if they’re revealing the identity of the masked murderer in the final act. ‘Offshore’ … cue the dramatic music. Nobody notices that the house was bought on the other side of the street from Harrods. Yes, Possums, we hear that the Cayman Islands enabled it.

Enabled what exactly, you may ask? Britain permitting someone to purchase British property under British law through British professionals. Exactly; but this is the part where you just need to switch your focus to picture that secret council meeting in George Town, with compliance officers in their simply gorgeous tropical shirts leaning over maps of Knightsbridge. “Raise that townhouse another 15 million quid.“ “Very good, Chairman Coconut.” And then come the newspaper headlines.

Anonymous owner buys 90-million-pound mansion. Anonymous? Really? How extraordinary. Did nobody think to ask who it might be before handing over the keys? Apparently not but never mind. Altogether too radical a thought and why bother? There’s a Caribbean island available for immediate blame, which suits the results of my investigation infinitely better.

You really have to think of it like a blame relay race. Responsibility begins in Britain, laundered money passes through several banks, a procession of accountants, solicitors, estate agents, regulators and HMRC and then just before the finish line someone hurls a baton across the Atlantic with spectacular athleticism, points a perfectly manicured finger towards the Caribbean and concludes, “It was all them”.

I can tell you that if “Blame Deflection” was a movie Britain, it would win the Oscar for the best film ever.

Now, Possums, in my investigation, I’ve been told, but frankly it ruins a perfectly good prejudice, that Cayman has one of the most developed financial regulatory systems in the offshore and onshore world. Compliance officers, anti-money laundering checks, international cooperation, information sharing, reporting, obligations. Honestly.

Who invited responsibility to the party? Precious ones, let’s picture again these poor compliance officers sitting in their simply charming thatched offices, under gently swaying palm trees endlessly asking for documentation, proof of funds, beneficial ownership, declarations and certified evidence, all of which is available to English law enforcement and tax authorities, whilst here in Westminster, somebody says, “splendid, now let’s blame them anyway.” One almost wants to send a bouquet of gladioli, and I say fair dinkum because as for me, I simply adore this line of reasoning.

If someone double parks badly in Knightsbridge, we should blame Bermuda. If the Underground is delayed, clearly Luxembourg is responsible. And if Wimbledon is rained off, no doubt we’ll discover that the Cayman Islands forgot to issue a cloud licence.

Can you imagine, my dears, one somebody actually tried to tell me that the Cayman Islands has an internationally recognized regulatory framework and cooperates extensively with overseas authorities, exchanges financial information, enforces anti-money laundering rules, and requires rigorous compliance. How frightfully awkward for my conclusions. I think we all agree that facts can be so dreadfully unsporting. But we must never let reality spoil our own truth and destroy a perfectly satisfying accusation.

Why examine the conduct of those who actually received the criminal proceeds and laundered money, when we can blame the island with palm trees. Palm trees are, you see, so wonderfully photogenic don’t you agree? Just ask that little ripper of an editor of the Financial Times. He has a filing cabinet full of artfully taken piccies of them which he publishes from time to time as absolute proof of this offshore wickedness.

But my dearest friends, I feel that the most truly remarkable accomplishment of my investigation, and the part which firmly establishes me as the global anti-corruption megastar, is to portray Britain in all of this as an innocent bystander when the transactions are conducted under British law, through British institutions, involving British assets. A close friend of mine once said. “Never complain, never explain”, and that is such good advice for every UK legislator.

Now speaking purely personally I find that if brains were dynamite most of them wouldn’t have enough to blow their wigs off, but my dears, if you are engaged in a conversation with one of them, or it could be anybody infinitely less intelligent than you who insists that every expensive London property purchased with criminal proceeds and laundered money is somehow the fault of the Cayman Islands, simply smile politely and do not ask a terribly unfashionable question: Who actually approved the purchase, who handled the funds, who completed the conveyance, and under whose laws did it all occur?

And under no circumstances tell him he’s dreamin’ or admit that whilst Cayman keeps verified beneficiary ownership records documented and checked, accessible to all authorities through proper channels, that our very own regulatory wizards in Companies House, many of whom are clearly a few roos loose in the top paddock, quite routinely allow vast property holdings to be owned by Mickey Mouse or Donald Duck, while Scooby-Doo apparently holds the keys to most of Mayfair.

Well now, my gorgeous Possums, there you have it. I know what you’re thinking; Surely the jurisdiction where the money actually enters and changes hands has the responsibility but no, let’s not bring any logic, law or common sense into it. I have worked very hard in my investigation to avoid any such thoughts.

Anthony Travers

Hopeless, Clueless, and Almost Disingenuous: The EU Tax Observatory Global Tax Evasion Report 2024 IFC Review Article

16/03/23 FROM COMMENT by Anthony Travers OBE FROM GLOBAL REGULATION & POLICY
Read the full Article – IFC Review

Five years on since its inception, how effective has the EU tax blacklist been in tackling tax avoidance? “No coherent argument has yet been made as to how the Cayman Islands are involved in tax avoidance. And for good reason. They are not.” – Anthony Travers OBE
Read the article on IFC Review

01/12/22 by Anthony Travers OBE FROM COMMENT FROM GLOBAL REGULATION & POLICY Read the full Article – IFC Review

01/12/22 by Anthony Travers OBE FROM COMMENT FROM GLOBAL REGULATION & POLICY Read the full Article – IFC Review

Radio Cayman – Money Sense featuring Anthony Travers
Watch on YouTube

Published 8^th September 2021- IFC Review
The Financial Action Task Force (FATF) was formed in 1989 with laudable objectives. It describes itself as the “global money laundering and terrorist financing watchdog”. It proceeds, therefore, on the serene assumption that to speak out against it and its methodology is to be against God, Motherhood and Apple Pie but in practice it is a hopelessly flawed organisation that has failed in its objectives and one that is increasingly driven by arbitrary prejudicial and purely political motivations of the EU. An objective analysis of the performance of the FATF over the past 30 years evidences systemic failure on an epic scale.
I recall being in the room in the Cayman Islands in the early 1990s when representatives of the FATF described the problem. We were told some US$2 trillion of criminal proceeds were being placed, layered, and integrated into the global financial system annually. It seemed a reasonable concern. And of course, at that time, the Cayman Islands had no financial transparency. Strict and novel measures were required to combat the problem and so the FATF forty recommendations of money laundering of 1990 were swiftly followed by the nine special recommendations and on terrorist financing in 2021. Thousands of trees have died in the past 30 years printing the subsequent FATF prognostications. But the net result after 30 years, according to the most recent EU Report of the European Credit Research Institute and Center for the European Policy Studies Report of January 2021[i] is that “a new approach is needed”. No doubt as John Cusack, an ex-chair of the Wolfsburg Group, estimates that the proceeds of crime now in circulation is closing in on US$5.8 trillion annually. All the FATF can show for its efforts and hundreds of billions of dollars of costs annually, according to the United Nations Office of Drugs and Crime, is that 0.2 per cent of that total is confiscated by law enforcement. In 2016, Europol estimated the confiscation rate in Europe to be as high as a paltry 1.1 per cent.[ii]
Any organisation in the private sector displaying results of that sort would have long since ceased to exist. But as leading economist, Dan Mitchell, writes in “The Pointless Burden of Anti Money Laundering Laws,[iii] the response of the FATF will be to double down on an epically flawed system. He is wrong about that. The multiple will be many times more than double because like the OECD, with which the FATF shares office facilities in Paris, and a good many other EU based organisations, the FATF is incapable of any meaningful self-analysis or any reconsideration of a failed philosophy.
We can now conclude without doubt that the fundamental failure of the FATF approach was to seek to shift the obligation to interdict crime from law enforcement to the private sector through the mechanisms of know your client (KYC), source of funds due diligence, and suspicious activity reporting. More recently, moving from a certified schedule of FATF approved jurisdictions on which financial institutions and others could place reliance to a country risk assessment made by the individual made matters risibly worse. The subjective concept of risk assessment is an unsound basis for criminal sanction. We also can say with certainty that suspicious activity reporting has become nothing other than an indemnity seeking exercise. According to figures from Europol, of the 1.1 million SARS reported across the EU in 2019, only 10 per cent were further investigated by public authorities and within the EU, only 1.1 per cent of criminal profits were confiscated as a result.[iv]
The founding principles of the FATF talk loftily of “proportionate” responses. But the cost of the foregoing mechanisms and the hopelessly flawed risk-based approach is entirely disproportionate. A Nexis Lexis report in April 2020, “The True Cost of Financial Crime Compliance Global Report”, estimated the annual cost of financial crime compliance at around US$181 billion per annum.[v] You can do the math on the costs over 30 years. But this is a gross underestimate given the methodology applied which focused on large, medium, and small institutions and then multiplied the average by the number of firms in the given market. The initial proposals of the FATF have been uselessly extended without thought to the cost of compliance. The initial representations in that room in the Cayman Islands in 1990 were that KYC and source of funds due diligence should be done once at the point of placement of the monies into the financial system by the relevant financial institution (and who is better placed to undertake meaningful analysis on source of funds?) and every other service provider thereafter could rely on that due diligence. The elegance of this concept has been entirely bastardised by the FATF in that now, every single service provider in the chain, whether it is in actual receipt of the monies, must undertake like analysis of the same dollar. That is particularly offensive to financial institutions in the Cayman Islands through which monies in a typical open ended or closed ended fund structure will typically pass only electronically and particularly, given the certain knowledge that the KYC and source of funds checks must in any event be undertaken at the point of introduction of the monies to an investor’s account by the financial institution with which the investor is most closely connected and by the ultimate recipient prime broker, administrator or fund manager located in a major money centre. The truth is that the FATF know that money laundering occurs but have no idea of where or how to look for it.
Basel Index
This hopelessly flawed thinking is mirrored by a non-transparent group of clowns responsible for creating something called the “Basel Index” which, like the FATF, suggests that smaller jurisdictions like the Cayman Islands are at high risk to money laundering when the contrary is the case. Anyone who might understand how money laundering operates in practice will know that the money launderer needs a major financial market in which to operate effectively and that it is the major financial centres which are therefore the locations where monies must be placed and integrated. Credit to the US International Narcotics Control Strategy Report which, contrary to the FATF analysis, gets this point right. The evidence of actual money laundering, to which the FATF are blind, confirms the correct narrative. If we analyse the known cases of money laundering, in 2010 it was found that drug cartels in Mexico laundered US$390 billion through Wachovia Bank in Miami. In 2012, Standard Chartered laundered US$265 billion for the Iranian Government in breach of Anti Money Laundering sanctions. In 2010, Danske Bank, Denmark’s largest bank with the assistance of Deutsche Bank, laundered US$228 billion through its Estonian branch. In 2014, BNP Paribas was fined US$9 billion by the US authorities for transactions with countries blacklisted by the United States. Semion Mogilevich, reputably of the Russian Mafia, laundered US$10 billion through the Bank of New York at exactly the time when the then Attorney General of New York, Robert Morgenthau, in conjunction with Senator Carl Levin, were accusing the Cayman Islands of being a hot bed of money laundering. The problem with their suggestions is that there is and was simply no evidence of comparable or indeed statistically relevant money laundering in the Cayman Islands at all. Unlike the position in 1990, the Cayman Islands are now completely financially transparent. The money flows into the Cayman Islands are all electronic and can be readily tracked. Those flows emanate from the very 205 countries and the financial institutions in them (in fact in the main 10 per cent of that number) that are members of the FATF.
So not only is there no such evidence of money laundering in the Cayman Islands but since every law enforcement authority and tax authority of note has an unrestricted right to establish the verified beneficial ownership of every legal entity registered in the Cayman Islands and to investigate any account in the Cayman Islands, we can conclude that either all onshore law enforcement and tax authorities are completely incompetent or the FATF do not have the slightest idea of what they are talking about in grey listing the Cayman Islands and thereby requiring increased monitoring of its financial transactions.
Further, the FATF, in including the Cayman Islands on their recent grey list, has persuaded the dunderheads in the UK Treasury to include the Cayman Islands in their list of high-risk countries in the Money Laundering and Terrorist Financing (Amendment) (High Risk Countries) Regulations 2021 and all without evidence of a predicate money laundering offence. Mr. Marcus Pleyer, the President of the FATF, cannot be stupid but he is evidently frustrated and that is leading to poor decisions. He flails at the problem complaining “the vast majority of countries are failing to tackle money laundering”. But he is the architect of his own confusion in allowing the system to be based on meaningless attempts to evaluate risk rather than to focus on hard evidence of source of funds. And he fails to give credit where it is due; the law and regulation in the Cayman Islands, and indeed the Overseas Territories and Crown Dependencies in general, on verified beneficial ownership is world leading and leaves the unverified shambles at London Companies House in its wake. If that is right, and it cannot on any technical analysis be controverted, then the reaction of the FATF in grey listing the Cayman Islands is nothing short of perverse and politically motivated. It certainly has nothing to do with money laundering. Mr. Pleyer should know better than to seek his inspiration from the notable French essayist, Baudelaire who said, “the greatest trick the devil ever pulled was convincing the world he didn’t exist”. The greatest trick of the FATF has pulled is to seek to convince the world that the absence of convictions for money laundering in the Cayman Islands or, even more preposterously, the absence of fines imposed by the Cayman Islands regulator for failure to adhere to anti money laundering procedures, must be evidence of the fact that money laundering exists in the Cayman Islands and that it is simply not being detected. Since we and the US Federal Reserve know, and the FATF should know, there are no cash deposits of any significance in the Cayman Islands and transparency is established, so the reverse is the truth. However frustrated Mr. Pleyer may be, it must be wrong in principle for the FATF to create a structure under penalty of law which relies on smear tactics and requires the accused to prove a counterfactual.
Corrupt Logic
What is particularly pernicious about the FATF’s corrupt logic is that it insidiously erodes one of the fundamental tenets of a robust and well-functioning common law legal system by extending extraterritorially the worst aspects of the European Union regulatory and legal approach. It ought to be a fundamental of the United States, English, Cayman Islands, and other common law systems that the burden of proof cannot be reversed. But regrettably, we find that the Cayman Islands regulators, for fear of arbitrary and prejudicial FATF black or grey listing, have wittingly or unwittingly acquiesced in the FATF approach and seek to apply fines with no indication whatsoever of a predicate money laundering offence.
The problems with the FATF can be attributed to its increasingly close political connection with the EU. Tax avoidance was included as a money laundering offence under the Fourth AML Directive since which the black and grey lists of the EU List of Non- Cooperative Tax Havens and the EU High Risk Third Country List (anti money laundering), which are ostensibly separate, have increasingly developed the common objective of extending EU tax policy extraterritorially and with which the FATF has become politically intertwined.

The FATF system, in its arbitrary application of the EU’s favoured blacklist tactic, has become dangerously prejudicial and not fit for purpose. The organisation and the entire architecture of the anti-money laundering bureaucracy needs to be deconstructed. A cursory review of the FATF budget and the hundreds of billions of dollars spent annually on failed compliance would be better spent on funding law enforcement to prevent the criminal activity in the first place. In doing so, a more effective approach would be to focus law enforcement on the acquisition of assets and properties in the onshore jurisdictions. Unexplained Wealth Orders are a sensible approach that should target the money launderer at the right end of the chain. The notion that jurisdictions like the Cayman Islands, which are institutional and not retail and whose financial structures conduit funds from and into the major international financial centres, are involved in predicate money laundering offences, is nonsense and entirely politically motivated.
The illustration, by Michelle Bryan, was commissioned by the author.
Footnotes:
[i] Anti-Money Laundering in the EU, Time to Get Serious, January 2021
[ii] https://www.europol.europa.eu/newsroom/news/does-crime-still-pay
[iii] The Pointless Burden of Anti-Money Laundering Laws (freedomandprosperity.org)
[iv] https://www.ceps.eu/wp-content/uploads/2021/01/TFR_Anti-Money-Laundering-in-the-EU.pdf
[v] https://risk.lexisnexis.com/about-us/press-room/press-release/20200407-fcc-global-study

Published 29^th August 2021- IFC Review
The Truth Will Out: Time Is Up For The Tax Justice Network
By Anthony Travers OBE, Senior Partner, Travers, Thorp Alberga, Cayman Islands
Whilst we can only surmise as to the precise reasons why founder and chairman, John Christensen and his high tax-campaigning colleague, Richard Murphy, have parted company with the Tax Justice Network (TJN), the disintegration of the organisation was simply a matter of time. Ironically, and much as predicted by informed observers, the introduction of transparency legislation consequent upon the 1998 OECD initiative on all crimes, anti-money laundering, and tax matters in the Cayman Islands and other Overseas Territories rendered the TJN anti “tax haven” narrative unsustainable. Many have been astonished that Christensen and Murphy had maintained their positions for quite so long.
One can extend a degree of sympathy to Christensen who had something of a short-lived career in the financial services private sector on the Island of Jersey in the days before tax transparency, and was no doubt exposed to a certain amount of simplistic tax evasion of the sort that was practised there before the 1998 transparency initiative. This may well have coloured his thinking but he remained rooted in those beliefs and it became increasingly clear that neither he nor Murphy had any experience or demonstrated any understanding of the way in which offshore financial centres, post the 2001 transparency commitment to the OECD, subsequently moved on to focus on the concept of tax neutrality. Nor, for deep rooted philosophical reasons driven by personal belief in the benefits of a high tax redistributive society, was it an understanding either wished to develop. Simply put, tax neutrality neither avoided nor evaded onshore tax. It relied upon the creation of state-of-the-art legislation in the offshore jurisdiction to create structures that pooled international investors’ monies with the intention that they were onward invested in onshore jurisdictions. There, the profits and gains on those investments were unquestionably subject to tax paid in the jurisdiction of investment. Nor did the TJN ever comprehend the effect of the introduction of FATCA and the Common Reporting Standard which ensured that distributions net of those onshore taxes paid to the investors would also be taxed in the jurisdiction of receipt. Neither Christensen nor Murphy understood or chose to understand this evolution and the inevitable consequence that jurisdictions like the Cayman Islands increased onshore tax revenues rather than decreased them. To them, the offshore financial centre remained branded with the simplistic tax evasion based on non- disclosure, of the 1970s and 1980s, and as a result, the TJN narrative became increasingly irrelevant and post 2000, completely so. There is a limit to the length of time that you can drive an organisation by only looking in the rear-view mirror.
In the light of these developments, the repetitive TJN narrative that monies were somehow secreted in a “black hole” or, to use the expression of an equally confused TJN advocate, Nicholas Shaxson, in his fanciful work Treasure Islands, “stuffed” in the Cayman Islands thereafter avoiding any form of onshore tax because they were “lost to the financial system”, defied logic and the law and became increasingly unsustainable. But what should have set alarm bells ringing within TJN years ago is that with the complete transparency available to the Internal Revenue Service and HMRC (and other tax authorities), the volume of Cayman Islands transactions significantly increased year on year. Nor was there any evidence that the transparency secured in the offshore financial centres by onshore tax authorities increased onshore tax revenues by any statistically relevant amount. No doubt Christensen and Murphy resigned from TJN in “frustration“ but we can more probably attribute that to the continually improving financial success of the Cayman Islands despite their best efforts.
In part, we can attribute the longevity of the TJN narrative to two additional factors. The lack of a coherent public relations campaign by the offshore jurisdictions themselves to counter the false TJN narrative contributed to its perpetuation. This was a consequence of the inability of the offshore jurisdictions to work together better to educate the public at large. A long-standing and self-inflicted weakness. Secondly, the TJN narrative was picked up by EU high tax campaigners, notably Thomas Piketty and Richard Zuckerman, both of whom were keen to align with the TJN and deliberately mischaracterise financial structuring in the modern offshore financial centre in a wholly negative manner, but for different reasons. These relate to the EU’s intention to substantially increase tax rates across the 27 Member States which we see evidenced in the political moves towards the Common Consolidated Corporate Tax Base and the EU’s philosophical hostility to small government low welfare benefit states and low tax rates.
EU Campaign To Increase Tax Revenues
Neither Christensen nor Murphy should feel their efforts were by any means a complete failure, as, however erroneous the narrative, their opinions and the repeated narrative about the “tax losses’’ caused by “tax havens’’ held sway with those in the media, particularly the BBC, whose hostility towards offshore financial centres remains palpable. And nor is the EU campaign against offshore financial centres, particularly, post Brexit, those centres likely to boost inward investment to the City, expected to end any time soon, rather the contrary. But the motivation of the EU is quite distinct. To the EU Tax Commissioners and the Code of Conduct Group, low or no tax jurisdictions (outside of the EU) which attract international capital flows are simply an embarrassment and a challenge to the EU which is fully aware that to meet its burgeoning welfare benefit obligations, tax rates must increase substantially and across the entire 27 Member States. The EU sees the success of the offshore financial centres as dangerous to its extra-territorial intentions to monopolise international capital flows which it believes, if captured, will increase its tax revenues. And so, the EU has its own reasons for mischaracterising the structuring in the offshore financial centre and of confusing tax neutrality with tax leakage. No doubt the lines of its narrative crossed with those of the TJN and each derived a degree of support from the other. But that narrative is evidently and manifestly false from whichever perspective.
The TJN will no doubt continue in some shape or form, producing its “Financial Secrecy Index”, but what this Index is supposed to mean, considering the unrestricted ability of onshore tax authorities and law enforcement to enquire into all financial transactions in the Overseas Territories and the Crown Dependencies, remains shrouded in a greater secrecy that which the TJN falsely attributed to Cayman Islands financial structuring. In the interest of concomitant transparency, perhaps the remaining staff at TJN would like to describe the methodology of the Index without which it should be taken with a large pinch of salt, a problem which Christensen and Murphy in criticising the emphasis placed by TJN on the Index no doubt discerned.
This leaves an interesting conundrum for the charities Christian Aid and Oxfam which have spent a good deal more of their charitable donations than they ought in pitching the same false TJN narrative about offshore financial centres. But neither of them can show how financial structuring in the Cayman Islands results in improper tax avoidance or tax evasion in the onshore jurisdiction. This may therefore be a good time for them to reassess how their hard-won charitable donations are spent. If what they really mean is that taxes in onshore jurisdictions should be increased as a redistributive mechanism with a view to increasing distributions to the poor, then they should simply say so. Offshore financial centres simply have nothing whatsoever to do with that debate. Save to say that the trillions of dollars of investments made, say, through Cayman Islands private equity and hedge fund structures into the United States, substantially increase not decrease tax revenues in that jurisdiction and that the Cayman Islands is therefore entirely aligned with whatever the redistributive policies of the United States may be about the relief of poverty. The perversity of the current Oxfam and Christian Aid narrative simply cannot be sustained either. As with all false narratives, as TJN have discovered, ultimately the truth will out.

Published by IFC 9th June 2021
The New G7 Minimum Tax Initiative And The Cayman Islands
Anthony Travers OBE
“Rumours of my death are greatly exaggerated”
So exclaimed Mark Twain on reading his evidently premature obituary. And we can similarly characterise the hopelessly inept Economist article of 1st June 2021 “Twilight of the Tax Haven”, in similarly suggesting that the effect of the new G7 minimum tax initiative will be the demise of the Cayman Islands and other offshore financial centres. The confusion evidenced in The Economist’s analysis is entirely predictable. It is the consequence of over two decades of robotic and repetitive mischaracterisation of the modern offshore financial centre, in which respect The Economist has consistently excelled. In light of the tax transparency established in the Cayman Islands over the last 20 years, any writer still using the expression “tax haven” to describe the Cayman Islands in pejorative terms and as being in any way involved in effecting the EU-centric tax avoidance aggressively, but lawfully and routinely, practised by the US global corporates is, by definition, clueless.
US Secretary of the Treasury, Janet Yellen, of course, comments to the same effect. I should rest my case. Very possibly, neither of them have read my previous articles. But in the unlikely event that they read this one, let me try and help.
Before so doing, and absent as yet, any published detail, we should cut through the tedious virtue signalling and grandstanding of the G7 Ministers and analyse the intention of the newly announced G7 initiative. It seems there are three elements and, driven by the understandable frustration, often reported, that US multi-nationals pay inadequate to zero amounts of tax on their sales in respect of their non-US global, and primarily EU based, business activity. That we all agree, I believe, is a plain daft result, but so too is the newly suggested solution.
Failure Of Double Tax Treaty Networks
The first limb of it, but without saying so, attempts to deal with the failure of the OECD double tax treaty networks which, in concert, are the facilitators of the egregious transfer pricing and profit shifting strategies that are the root cause of the EU’s problem. These, we should remember, are EU based double tax treaty agreements. The OECD base erosion profit shifting initiative was a failed attempt to put a band-aid over that particular sore but to no good effect and now, rather than admit that the OECD transfer pricing structuring requires dismantling and rebuilding from ground up, the attempt is to affix a second band-aid. The intention of the first limb of the G7 initiative, simply put, is to ensure that tax is paid in the jurisdiction in which the profits are made. The second limb is to ensure that US corporates, and this must mean domestically in the United States (it will apply to the corporates of other jurisdictions but the serial offenders are US entities) pay a minimum rate of tax of apparently 15 per cent on these profits (possibly more), howsoever calculated and with whatever allowances. The third limb, which remains extremely unclear and which would be far beyond the remit of the G7 or even the OECD, seems to imply that every jurisdiction in the world, regardless of whether its methodology of taxation is direct or indirect and regardless of the rate of tax collected as a percentage of GDP, should apply a 15 per cent tax rate to corporations undertaking business activity within its jurisdiction. This is no doubt a step en route to the ultimate OECD game plan – an overarching global tax authority – but it is currently a far-fetched overreach and not of immediate concern as every jurisdiction, and notably Ireland within the EU, has a sovereign right over its own tax affairs.
So what is it exactly that The Economist and President Biden think they are talking about when referring to tax havens? In fact, there are tax havens involved. But not the ones to which they refer. The only relevant tax havens are the provisions of US tax law which enable deferral of non-sub part-F income by the overseas subsidiaries of US corporates undertaking global business activity, and to the extent the income is reinvested annually in legitimate trading activity with a non-related party. The deferral thereby enabled was, of course, partially reduced by the Global Intangible Low-Taxed Income (GILTI) tax provisions of the Tax Cuts and Jobs Act 2017. It is now proposed that the 10.5 per cent rate then imposed be increased, one supposes, to 15 per cent over the 10 per cent base hurdle. It should have been blindingly apparent to the editor of The Economist and President Biden that these are provisions of the US, not Cayman Islands tax law. It should also have been blindingly apparent that these provisions are there for good reason. The United States practises a capital export neutrality system of taxation whereas European Union jurisdictions apply capital import neutrality. If it were not for these tax deferral provisions, US corporations in respect of their global operations outside of the US would suffer harmful tax competition in being taxed twice. Indeed, these provisions have had significant beneficial effect in enhancing the profitability of US corporations globally since their introduction in the 1960s. That of itself has been a major source of resentment to the EU authorities. Simply put, in acquiescing to the reduction of these deferral provisions, President Biden adversely affects the competitiveness of the US corporates globally when it is the EU double tax treaty networks and some now defunct and preposterously aggressive Irish tax structuring that were the root of the problem for all concerned. Further, President Biden has yet to explain quite how the G7 initiative, which intends taxes on profits to be paid in the EU at the point of sale, will not significantly reduce the tax payable in the US by US corporations to the US Treasury. Prior to the G7 initiative there was a prospect of those deferred tax revenues being taxed in the US on ultimate distribution. Post this G7 initiative that is less clearly the outcome.
Tax Transparency
But how concerned are we in the Cayman Islands about these developments? The answer, to the intense irritation of the Tax Justice Network (TJN) which does not demonstrate the capacity to analyse offshore financial structuring, is not very. There are possibly no more than 100 US corporations involved in this sort of activity of which possibly one third may have subsidiaries in the Cayman Islands out of a grand total (increasing annually) of Cayman Islands registered corporations numbering 110,000. It should also be obvious to the editor of The Economist (and in fairness, he draws reference to the offending EU based double treaty tax jurisdictions) that the zero tax jurisdictions, notably the Cayman Islands, are in no way involved in the mechanics of profit shifting by way of the application of the excessive transfer pricing practices of these US corporates. It is not the Cayman Islands subsidiaries that are parties to the double tax treaty arrangements.
If it needs to be said again, and it shouldn’t, Cayman Islands financial structuring is entirely tax transparent. Not only is there automatic financial reporting to the home jurisdiction of every account of a Cayman Islands entity under US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard but HMRC, the IRS, and almost every other tax authority of relevance has unrestricted access in the Cayman Islands under the tax information exchange agreements of which there are some 36 in place. The suggestions of TJN, Zucman and Piketty that monies are in some way secreted away in offshore financial centres like the Cayman Islands and not taxable are, not to put too fine a point on it, intellectual and fiscal nonsense. Further, the irony, which should be apparent, is that the main drivers of the Cayman Islands financial services industry, the open and closed ended hedge and private equity funds and the structured finance vehicles which onward invest in the US$4-6 trillion range, do so on a basis entirely consistent with the Base Erosion and Profit Sharing (BEPS) initiative in that all applicable taxes on investment are paid in the jurisdiction where the profits are made. As far as the statistically irrelevant parent subsidiary arrangements are concerned, sophisticated tax jurisdictions, and certainly the United States, United Kingdom and the major EU jurisdictions, already have controlled foreign corporation legislation which, save for the deferral provisions above mentioned of the US Tax Code, consolidate the profits of overseas operating subsidiaries with the parent. It is therefore open to any jurisdiction to tax an overseas subsidiary of any parent within its taxing authority by consolidating offshore profits for domestic tax purposes. Most do so already to an extent.
If the result of these G7 proposals is simply that a greater percentage of profits that would previously have been deferred become so consolidated and a higher level of taxation is applied to the parent in, say, the United States, the net effect of that adjustment is not material to the Cayman Islands budget and even if it renders the subsidiary concerned redundant.
It would have been refreshing to have seen The Economist writing an article about the real cause of the problem, the failure of the OECD double tax treaty network and the incompetence of the OECD generally. The fact that France and the United Kingdom were to implement taxation on the gross revenues of US corporates (rather than the net amounts resulting after the aggressive double tax treaty manipulation and transfer pricing undertaken within the EU) is all the evidence that needs to be presented as to the failure of the OECD double tax treaty architecture. At some point, the OECD needs to be subjected to a competence test. Not only does its transfer pricing architecture fail at the base level but the OECD’s subsequent initiatives seek to avoid accountability by obfuscating the root cause of the problem which persists. As far as President Biden’s support is concerned, US tax revenues are likely to decline as a result of the G7 initiative as taxable profits are reallocated back to the EU jurisdictions from which they were shifted in the first place. But these newly proposed machinations, however circuitous, are of peripheral concern to the Cayman Islands financial services industry.
Original IFC article

IFC 17th June 2020 – The Cayman Islands And The International Bodies: A Commentary On Inequality And Self Interest
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