Offshore directors in firing line, warns Ridley

(CNS): After years of avoiding litigation for their actions, the offshore director may no longer be able to preserve his unscathed position when things go wrong, Tim Ridley, the former Chair of Cayman Islands Monetary Authority, has warned. He said that directors and auditors should sit up and take note of the wake-up calls as they may no longer be able to avoid the fallout.

Speaking at Cayman’s second annual  International Fund Conference on Friday 9 January, Ridley said a number of directors, auditors and law firms based in the Cayman Islands have been and are being sued in the US courts, and that some locally based directors have been the subject of subpoenas issued by foreign regulatory authorities.

He said Bernie Madoff’s activities (which appear to be the biggest ponzi scheme in history) "should certainly make the directors and auditors (not to mention the promoters, investment advisors and administrators) of some fund of funds and feeder funds feel very nervous."

He added, "It will also not have escaped your notice that the US has brought tax conspiracy charges against a senior Zurich based officer of a major Swiss bank, that the Australian authorities are seeking extradition of an accountant in Jersey (Channel Islands) and will possibly seek the extradition of a fellow accountant in Monaco in connection with high profile tax evasion investigations involving Paul Hogan of Crocodile Dundee fame."

“There is a school of thought in the US — likely to grow under the Obama presidency — that offshore service providers that supply directors and other services to structures that enable US taxpayers to evade taxes should be sanctioned and put out of business by their home regulators, e.g. by the revocation of their licences on the grounds they are carrying on business contrary to the public interest or in a manner that is not fit and proper,” Ridley warned the gathered audience.

He said the only thing surprising about this was how long it has taken for onshore agencies, regulators and law enforcement to work out that the best way to deter offshore professionals from actively assisting in illegal activities is to pursue them as conspirators.

“Dropping a subpoena on someone in Miami airport to give evidence or produce documents is one thing,” he said. “Charging that person with criminal conspiracy is a much more serious matter. So the prudent professional would be well advised to carry in his or her wallet the 24 hour cell phone number of a retained criminal and immigration law firm in the US. It may be the best investment you ever make.”    

Ridley criticized the way that service companies and lawyers have provided directors for funds, as well as the conflict of interest of law firms acting as legal counsel and providing directors for the same fund.

“Arguing this is what the clients want and the market demands, misses the point. Lawyers should educate their clients and explain why it is in the clients’ best interests to avoid the conflicts of interest from day one. And they will get better legal advice, service and loyalty from their lawyers as well,” Ridley pointed out.  

He criticized the tendencies for directors to take on more directorships than they could realistically handle, which he said had been demonstrated by the number of high profile resignations from the boards of major corporations recently. He said that as offshore products have become increasingly sophisticated directors don’t always understand the risks involved even though the service providers are quick to sign to get the business.

“This poses real difficulties for individuals who are asked to serve as directors and approve and oversee the structures and transactions,” Ridley said. “One solution is to turn the business down (increasingly likely post 2008); another is to reach out to persons who have the necessary knowledge and expertise to serve.”

He said there are very few in Cayman and they are becoming very expensive. He suggested training employees to give them the skill sets they need.

“Perhaps the best long-term solution is to recognise that the directors may not have the in depth knowledge to understand the intricacies of a broad range of structures and transactions and to build into the deal the wherewithal for the directors to retain outside advisors who can fill the gaps in their expertise,” he suggested.

He said that there were a number of important regulatory reasons why local service providers and directors should be alert and proactive at the moment, and that the need for experienced and strong directors would increase, and the demands and pressures on them would increase too.

“Litigation over the sins of the past both locally and overseas will increase,” he added. “The 2007 amendments to the Cayman Companies Law will increase the statutory obligations of directors. There will be continuing calls for direct statutory regulation of professional directors, and not merely of those who serve as directors of funds regulated by CIMA — all licensed entities, such as banks and insurance companies must already have their directors approved by CIMA — for greater limits on exculpation and indemnification and the possibility of disqualification of directors generally.”

He warned that they were all knotty issues, but the key thing was improving the talent pool and performance of directors.

Ridley’s full speech can be found here