28 November 2013Accounting & tax analysis

Communicating the truth

It was with a collective sigh of relief (and a dash of vindication) that stakeholders in the Cayman Islands captive insurance industry heard David Cameron, Prime Minister of the UK, addressing his parliament on offshore British jurisdictions after the 2013 G20 summit.

Cameron told his ministers: “I do not think it is fair any longer to refer to any of the overseas territories or Crown Dependencies as tax havens. They have taken action to make sure that they have fair and open tax systems. It is very important that our focus should now shift to those territories and countries that really are tax havens. The Crown dependencies, which matter so much—quite rightly—to the British people and members have taken the necessary action and should get the backing for it.”

According to stakeholders in the Cayman captive industry, this is an example of credit long overdue. Tim Frawley, partner at Maples and Calder, told Cayman Captive: “The popular media and uninformed commentators may to some degree try to portray Cayman as a ‘tax haven’ or ‘secrecy jurisdiction’, but that is simply not the case. The reality is that Cayman has a modern and internationally compliant legislation on anti-money laundering, tax information exchange and corporate transparency.”

Cayman’s transparency credentials go on. From tax information exchange agreements (TIEAS) and membership in organisations such as the Offshore Group of Insurance Supervisors, to glowing reviews from the International Monetary Fund and the US Government’s Accountability Office, it would seem that little space still exists for accusations. And yet they persist. Where do they come from, and how can the Cayman captive industry combat them?

Cindy Scotland, managing director of the Cayman Islands Monetary Authority (CIMA) said, “Cayman’s reputation in the business and regulatory community is that of an international financial centre of quality, with an internationally lauded regulatory and legal framework, a modern infrastructure, business-friendly environment and expertise of service providers.

“It is regarded as a market leader in many areas. However attempts by some—clearly the minority—to misuse financial structures for fraudulent activity could be the reason why offshore domiciles have attracted negative attention.”

A bad rap

The people working in and responsible for the captive industry in the Cayman Islands insist that the perception of the Islands as a tax haven—just like the perception of captives as a tax-dodging mechanism—is a misconception born of lack of understanding.

Robert Leadbetter, chairman of the Insurance Managers Association of Cayman (IMAC) explained, “The negative perception of ‘tax havens’ is perpetuated by a lack of understanding by the general public as to how investments moving through international financial centres like the Cayman Islands benefits the global economy, and this perception is fed by both Hollywood and politicians who are anxious to feed a popular myth in order to take the attention away from government overspending problems.

“The decision to set up a captive offshore very rarely has to do with tax. However, an offshore captive is an offshore company and therefore the false perception sticks, although it is as unjustified as it would be for any offshore investment company.”

According to Scotland, CIMA faces a number of challenges as an offshore domicile. They include negative tax perceptions, the US’s increasing presence in the captive market as a provider of onshore domiciles and recent legislation such as the Dodd-Frank Act which—while not directly aimed at offshore domiciles—can impact the business done there.

“The fact that captive insurance regulation is not well understood outside of the insurance industry could be a reason for the perception that it is a tax vehicle,” she said. “To change this perception it should be made clear that captive insurance companies allow, for example, hospital networks in the US the option of setting up their own captive insurance companies in the Cayman Islands. This helps to address certain difficulties onshore companies may experience when attempting to secure insurance coverage via commercial insurance companies, or when they simply cannot access intended coverage in a cost-effective manner.

“For many years now the Cayman captive product has been the facility through which many US-based medical groups have gained access to insurance coverage at reasonable rates. The cost-savings benefit to related hospitals can be passed on to patients and in some cases, those hospitals may even gain new types of coverage which they may not otherwise have had access to.”

"Captive managers and owners can be comfortable that they are basing the captive in a well-regulated and compliant jurisdiction, which is internationally recognised by international institutional investors."

Frawley added, “Captives cannot be singled out for any negative perception. Any remaining perceptions about the Cayman Islands as a jurisdiction are unfair and uninformed. Captive managers and owners can be comfortable that they are basing the captive in a well-regulated and compliant jurisdiction, which is internationally recognised by international institutional investors such as pension funds, insurance companies and sovereign wealth funds.”

Leadbetter already feels a change in the air. “We are starting to see changes in mentality. The Cayman Islands has received excellent reports from the OCED, FATF and the IMF,” he said. “Even the UK Prime Minister has recently acknowledged the efforts that the British overseas territories have made in terms not only complying with, but also leading the charge on, regulatory initiatives.”

Clearing the air

A strong positive message is required to defeat the misperception of offshore domiciles and the captive insurance companies which have found a home there, according to Scotland. As the regulatory body of the Cayman Islands, CIMA has identified several strategic ways to make their voices heard in the fray over offshore domiciles and tax evasion.

According to Scotland, the introduction of TIEAs will be key to defending the position of Cayman and other offshore domiciles. In addition, spreading the message that income from offshore captive operations is consolidated into the parent company’s taxable income—and that many Cayman captives choose to take a IRS 953(d) election and so are taxed like any onshore US entity—would be a move towards silencing critics of offshore domiciles and the captive insurance concept.

In the long run, Scotland said, she thinks that the pressure faced by captive insurance companies and the offshore domiciles on which they are established will fade. As the US—simultaneously a critic and client of the offshore domiciles—becomes more involved in the captive industry, Scotland said, knowledge will become more mainstream.

“We anticipate that in a few years’ time the level of international cooperation will have evolved in recognition of the fact that we all play a vital part in the international financial system and that there has to be a global, inclusive approach, to finding solutions to current issues. This should dispel myths and misconceptions about offshore domiciles.

“Whenever captive managers and regulators attend international and regional conferences, they should spread a positive message of cross-border cooperation and transparency,” she concluded.

This transparency—like TIEAs—will be vital to the case, according to Frawley. “Enhanced transparency is going to be the way of the future,” he said.

Leadbetter and his colleagues at IMAC purport to be doing just that. He told Cayman Captive that IMAC is a strong defender of enhanced transparency to a global audience.

“We combat these misperceptions as we do money-laundering and other criminal activity, methodically and with enthusiasm,” he said. “We consistently frame our messages to tell people that companies use Cayman as a domicile for their captive insurance vehicles because of the infrastructure of professionals here that service these companies, the regulator—which has an appropriately robust regulatory framework that accomplishes the regulatory task, while still being commercial—and because of the decades’ worth of know-how and expertise that is ingrained in the halls of the insurance managers.

“IMAC members are continuously working to communicate the truth—by speaking to clients and prospective clients, by putting information on their websites, by writing articles and submitting press releases to the newswires. IMAC members are tweeting, blogging and posting information on LinkedIn. We are an active group and are committed to continuing our efforts at communicating the truth.”