Acknowledge problem to see solution
So we all know by now about UK Prime Minister Gordon Brown’s new trick. It goes like this: whenever he finishes a speech (and it doesn’t matter what the speech is about) with the final flourish – “And finally, comrades, we are going to clamp down on tax havens!” – he gets a standing ovation.
It is rabble rousing stuff. And since he never gets clapped for saying anything else, he has begun to trot out the tax haven thing with alarming regularity.
On the other side of the pond, Senator Levin is still hopping with indignation. This is how he described the problem at a 2007 reading of the Stop Tax Haven Abuse Act bill: “At one Subcommittee hearing, a former owner of an offshore bank in the Cayman Islands testified that he believed 100 percent of his former bank clients were engaged in tax evasion.” (Levin doesn’t actually name this individual – that’s a secret.) “He said that almost all were from the United States and had taken elaborate measures to avoid IRS detection of their money transfers. He also expressed confidence that the offshore government that licensed his bank would vigorously defend client secrecy in order to continue attracting business.”
Unpalatably true, or dastardly false? His statement certainly doesn’t sit very well with the US Internal Revenue Service’s own commissioned in depth report, which concluded last summer that Cayman-based financial activities of US persons is typically legal.
Meanwhile, a delegation of Cayman Islands ministers and their advisers, roused at last from their soporific complacency, hot-footed it to Washington last week to “make sure the right people get the right messages”. The right message, it seems, is that Cayman is a global financial services centre of good standing, with exemplary anti-money-laundering and anti-terrorist-financing policies that are held up as a beacon oflight in the offshore industry.
Furthermore, it is hoped that Cayman’s recent Tax Information Exchange Treaty amendment – rushed through just before Christmas to forestall the growing rumblings of global discontent – will single Cayman out as being wholly cooperative. In short, the message is that Cayman is not a deserving candidate for blacklisting at the upcoming G-20 meeting in London.
And Cayman is cooperative; even the IRS thinks that cooperation with the Cayman Islands government has been good. Furthermore, Cayman has been identified as having a “strong compliance culture” by the Caribbean Financial Action Task Force, findings not dissimilar to those of the IMF and the OECD.
But the trouble is that mere cooperation does not really solve the US problem – which is how to identify those offshore transactions that are not legal. The IRS, which relies on self-reporting, has to make cumbersome specific and justified enquiries on a case by case basis; they cannot simply make a blanket enquiry about everyone.
And yes, Cayman does now make a handy scapegoat. Of course the credit crunch wasn’t caused by the existence of offshore centres! But so what? Actually, Levin & co were sounding off long before anyone had ever heard of the credit crunch. So let’s not get sidetracked by the unfairness of it all. For until we look the problem squarely in the eye, we cannot see the solution … so let’s be clear:
The reality is this: thanks to offshore confidentiality laws, some (overtaxed) onshore citizens have – according to their own laws and at least to some extent – been able to ‘cheat’ on their taxes. And, like it or not, onshore governments have a sovereign right to rein them in.
Coming up next:
• ‘The new legislation – its likely effect on Cayman’s financial centre’ (what’s legal and what’s not, how they’ll police it, and how severe – or not – will be the resultant contraction), and finally
• ‘A bright future – why Cayman will continue to flourish’.
Category: Viewpoint
Completely agree with the above. Restated in a different form:
Should it be Cayman’s charge or duty to enforce foreign government regulations or laws or help enforce them even when there is no crime or ‘shady’ ethical condition present as viewed by Cayman law ?
Big Governments have historically, and indeed continue to act in rude and imperious ways to smaller countries or even their own citizens whom they view as their own property.
Libertarian
Concerned Expat…I would go a step further and say any service provider and representative thereof who is aware of or suspects of any any non tax compliant client (or potentail) client is required under our POCL to notify their MLRO. Would be interested to know the views of other readers…
I don’t know of a service provider in Cayman who would offer services to non-tax compliant clients. Generally anyone claiming to be wanting service to avoid taxation or be otherwise non-compliant would not be considered as clients. It is just not good business. Reputationally or otherwise.
Although onshore revenue agencies may have a sovereign duty to rein in any tax fraud that may exist amidst their taxpayers, it should be made clear that the journey to discovery is for their account not ours. Cayman should not aspire to become the policeman for the world’s tax authorities. In as much as we would want to assist, we do not have the resources or know-how to pretend our people could be familiar with every society’s ever-changing tax code.
Suffice to say, in today’s litigious and interconnected world, the motivation for legitimate financial privacy does not automatically equate to tax fraud and never has. Governments and lay people have misunderstood this reality for decades. Sadly, Cayman has neither clashed to defend its position nor deployed effective PR to alter this perception. It’s a shame.
“At one Subcommittee hearing, a former owner of an offshore bank in the Cayman Islands testified that he believed 100 percent of his former bank clients were engaged in tax evasion.” (Levin doesn’t actually name this individual – that’s a secret.) “He said that almost all were from the United States and had taken elaborate measures to avoid IRS detection of their money transfers. He also expressed confidence that the offshore government that licensed his bank would vigorously defend client secrecy in order to continue attracting business.”
Unpalatably true, or dastardly false?"
Levin is undoubtedly referring to John Mathewson of privately-owned Guardian Bank notoriety. Guardian Bank was (along with a few other private banks such as Finsbury and Eurobank) a bit of a pariah in the local banking community and was closed down by Cayman’s banking regulators. Mathewson in support of a plea bargain said whatever he thought the U.S. prosecutors wanted to hear. In return instead of being sent to prison Mathewsongot 5 years probation. Levin is disingenuously suggesting that Guardian was/is typical of Cayman Islands banks.
Only last year new allegations of tax fraud surfaced against Mr. Mathewson who has been living in the U.S. It seems like it was more Mr. Mathewson’s nature than the Cayman banking culture at fault.