Bryan Hunter
For too long, offshore financial centers like the Cayman Islands have been stereotyped as refuges for the wealthy to stash their fortunes. Like most stereotypes that grow more out of myth than reality, the role of today's offshore financial centers is quite different from what many perceive.
Successful offshore financial centers uphold global transparency and cooperation standards and enable market efficiency and competition. It's time to dispel the stereotypes that have long driven global efforts to stem the vital role of financial services centers. The realities of what offshore financial centers are and their contributions to global financial markets are explained below, alongside four of the most commonly held myths.
Myth: Offshore financial centers only benefit the rich and powerful.
Reality: The Cayman Islands and other offshore financial centers compete aggressively with each other every day to offer the most cost-efficient environment for international capital flow. This competitive market allows companies to raise financing and package financial risk more economically. These efficiencies benefit businesses, consumers of goods and services sold by these companies around the world and shareholders, which include such venerable clientèle as non-profit endowments and public-sector pension funds.
Myth: Companies and investors doing business in offshore financial centers are driven by a need for secrecy.
Reality: Today's successful offshore financial centers have a long history of promoting commercial certainty for global clientèle. For the Cayman Islands, this has meant adherence to recognized and relevant international standards--not absence of regulation--which has helped fuel sustainable growth of the sector. Since the early- to mid-1980s, the Cayman Islands has progressively reinforced its international cooperation channels in law enforcement, regulation and exchange of information on tax matters. These channels include a tax information exchange agreement that was signed with the U.S. in 2001 and is in force, as well as a mutual legal assistance treaty with the U.S. on criminal matters in effect since 1990 and under which the Cayman Islands and the U.S. have cooperated in some 230 requests for assistance.
Myth: Offshore financial centers prey upon other countries' tax codes, fostering illegal tax shelters.
Reality: Investors and/or their advisers choose the Cayman Islands for tax neutrality. This simply means that investors and their specific corporate activities--which can often involve two or more countries--are not subject to additional layers of taxation over and above those of their home country, which is where capital flows ultimately end up and are then taxed. In a similar context, numerous U.S. companies have left states where they were founded or have substantial business operations and established registered offices in Delaware, Nevada, Colorado and Texas so they can take advantage of the tax savings and efficiencies of having a registered office there. This is not seen as being shady or unduly evasive in the least.
Myth: Offshore financial centers foster illicit activity and are unregulated.
Reality: The Cayman Islands has a strong track record of effectively regulating a full spectrum of financial services that measures up with standards found anywhere in the world. Effective oversight of complex financial activity--where literally billions of dollars trade hands every day--can only be accomplished by regulating services typically unregulated in other global regimes, such as company formation services, trust-services providers and fund administration. In addition, the Cayman Islands government invests significantly back into regulation and into combating cross-border financial crime.
Over the past 15 years, the Cayman Islands financial regulation and prevention of financial crime regimes have been evaluated, "road-tested" and recognized by many third-party organizations such as the IMF, FATF and OECD. The Cayman Islands continues to participate in these valuable "health checks" to help ensure the integrity of its regimes.
Due to necessity and market expectations, offshore financial centers must be mature, sophisticated and specialized providers of financial services with sound legal frameworks and modern infrastructure in order to succeed. The "Big Four" accounting and auditing firms, most of the world's fund-service providers and substantially all of the world's top global banks have a presence in the Cayman Islands.
It's time to focus on the reality. Offshore financial centers are increasingly critical economic catalysts in today's fast-paced, cross-border, open-market system. Their continued and singular focus on transparency and appropriate levels of regulation is vital to a dynamic and resilient global economy.
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