CF_Mag_2015_web-V2

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18 Cayman. Moving finance forward. IFCs continue to face the growing challenges of dealing with ever changing global standards focused on regulation and other crossborder risk issues. Invariably when the question of the future of IFCs arises, we tend to examine how well they might deal with these various initiatives. For certain, the ability of IFCs to better handle these international initiatives and strike that ‘perfect balance’ between addressing jurisdictional risk management concerns and commercial success remains a key factor in any attempt to size up their future sustainability. It is also equally and increasingly important to reflect on the future of IFCs in other ways. One such approach is to take a serious look at whether IFCs have unwittingly found themselves in the position of primarily reacting to such initiatives in an effort to survive instead of working smarter to deal with the underlying issues behind them. Initiatives: The Most Recent Goalpost Positions Some of the challenges faced by the IFCs over the years have not only maintained their original format but intensified, while new initiatives have been introduced. CFATF Evaluations The Caribbean Action Task Force (CFATF) is one of the regional arms of the FATF, the global standard setting body in the area of fighting money laundering and the financing of terrorism. The original FATF Recommendations have been revised and several Caribbean IFCs are undergoing or about to undergo the next round of CFATF Mutual Evaluations of their anti money laundering and CFT regimes. The Cayman Islands, as an example, is set to undergo its fourth round mutual evaluation in 2017. IFCs OUTLOOK: LEADING THE DEBATE These newer rounds of evaluation will test whether a country’s legal and institutional framework is producing the desired results. The main factor for most IFCs to consider in this respect is whether they have the resources and infrastructure in place to fully comply with the various laws and regulations. For the most part, IFCs that are able to invest resources into full implementation of their own previously established legal and institutional frameworks will likely survive these latest round of reviews and come through them very well. It is unlikely that any of the larger IFCs in the Caribbean region such as the Bahamas, BVI, Bermuda By Paul Byles and Cayman Islands will have any challenges effectively dealing with the required changes resulting from any of these reviews. From a purely resource perspective some of the smaller jurisdictions, be it in the Caribbean or elsewhere, may face difficulties in terms of making the recommended changes in a timely manner. The main risks facing IFCs generally with these evaluations is the potential PR damage, as a result of being projected in the final reports as ‘largely non compliant’ in terms of the effectiveness of their regimes. This can in turn have a negative effect on existing and potential clients’ perception of the jurisdiction.
Cayman. Moving finance forward. 19 Cross-border Tax Information Exchange Many IFCs have previously implemented numerous tax information exchange agreements in line with the ‘information on request’ regime introduced by the OECD several years ago. Issues related to cross-border information have moved on significantly over the past six years with automatic exchange of information between tax authorities fast becoming the new standard. As an example, the Foreign Account Tax Compliance Act (FATCA), will require automatic reporting of certain information on US or UK persons, as defined by those respective countries’ FATCA regulations. Some jurisdictions chose Model 2 version of FATCA with most IFCs, including the Cayman Islands, choosing Model 1, the latter being where local financial institutions report via their local tax authority rather than directly to the authorities in the US/UK. At this stage, many IFCs have put the required infrastructure in place and local institutions are getting closer to being equipped for the first reporting date in the latter part of 2015. In addition to FATCA being imposed by the US and UK, the OECD’s Common Reporting Standard has evolved significantly over the past two years in particular with over 51 jurisdictions already committed to start sharing information automatically in the latter part of 2017 and 2018. This standard is an automatic exchange of information protocol based on FATCA. Some of the key IFCs which have already signed on to this new initiative to date are: Bermuda, the British Virgin Islands, the Cayman Islands, Isle of Man, Jersey and Switzerland. IFCs Should Lead the Debate and Work Together The vast majority of the research and technical analysis that supports the existing approach by the major bodies such as the FATF, OECD, IMF etc is being carried out onshore in research centers in the USA or Europe for example. To date only a small amount of such activity has been undertaken in the IFCs’ jurisdictions themselves. The immediate outlook for IFCs therefore continues to be determined disproportionately by external forces on key policy matters. It is crucial now that IFC governments should position themselves to better influence these types of policy developments. Individual IFCs have made great efforts to better communicate the positive contributions, as well as the quality and depth of regulatory standards in their jurisdictions. Gains in this area will likely continue to be somewhat limited unless there is an improvement in the area of policy debate. It appears that the very well intended efforts to rebrand ‘offshore centres’ as ‘IFCs’ or to push back whenever someone describes an IFC as a ‘tax haven’ have not in fact materially helped the general perception issues that these financial services centres face. At the heart of the issue is not the labeling and its connotation but the more important policy and political battle that lies beneath. IFC governments should work more closely together via an organisation that has: an agreed vision and set of objectives, the budget and central administration infrastructure to better research the issues and to be able to communicate the findings in more technical terms to key stakeholders in the major international standard setting bodies. The over-riding objective must be to establish IFCs as having a rightful and meaningful place in the global financial system, facilitating the movement of international capital. With a recovering global economy and increasing demand from international clients for services in IFCs, the general economic outlook for IFCs remains strong in the short to medium term. Caribbean IFCs and indeed IFCs generally, now need to consolidate their experiences over the past two decades, by moving away from the current reactive approach to various initiatives, towards achieving greater involvement in the international debate regarding the role of IFCs in contributing to and controlling cross border risks, as well as whether perceived, or real, risks are being adequately addressed by the seemingly never ending wave of regulatory initiatives. About the Author Paul Byles is CEO and Director of First Regents Bank & Trust in the Cayman Islands, which provides private banking and investment advisory services. He is an experienced economist and financial services professional having worked in the financial services industry for 20 years. He is a former director of a big four consulting firm and a former financial services regulator. He is author of the book ‘Inside Offshore’ which deals with the perception of offshore centres and Offshore Financial Services: a BVI text, an introductory textbook on offshore financial services.
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