OFFSHORE BANKING IN ISLAND NON-SELF-GOVERNING TERRITORIES DISCUSSED IN SPECIAL COMMITTEE ON DECOLONIZATION19990528 Cayman Islands Says Attempt to Control Banking Through 'Tax Harmonization', 'Transparency' Assault on Offshore Jurisdiction
(Received from a United Nations Information Officer.)
CASTRIES, Saint Lucia, 26 May -- Discussion this afternoon focused on "transparency" and "tax harmonization", as an expert from the Cayman Islands made a presentation on the nature and effects of measures that could impact on offshore banking in the territories to the Special Committee on the Situation with Regard to the Implementation of the Declaration on the Granting of Independence to Colonial Countries and Peoples.
The expert from the Cayman Islands told participants that the Organization for Economic Cooperation and Development (OECD) countries produced a report entitled "Harmful Tax Competition: An Emerging Global Issue", which set out both legislative and administrative measures it intended to enforce. The report addressed harmful tax practices in the form of tax havens. The main OECD concerns were that the offshore centres suffered from a lack of exchange of information and a lack of transparency.
Viewed in the perspective of world trends, he said, the issue was not one of criminality, money laundering or tax evasion. It was one of forcing offshore centres, which depended on offshore services for their subsistence, to conform to a standard. There was no moral high ground, but rather a "big bully syndrome". The buzz-words of "transparency and harmonization overall" were nothing more than a smokescreen for pure, unadulterated self-interest, where might was right. Those assaults on offshore jurisdiction were a thinly veiled overture to impose enforcement of domestic tax laws on an international basis.
Concurring with that view, to some extent, the expert from Bermuda said tax harmonization and transparency were indeed smokescreens. Given that those policies were being thrust at the small island developing States by the OECD and given that the United Kingdom was a member of that organization, surely
that led to a conflict of interest, since the United Kingdom by the terms of the Charter was vested to look after the interests and the development of the Non-Self-Governing Territories.
The expert from British Virgin Islands said the administering Power said it was going to control the banking in the Virgin Islands, Bermuda and the Cayman Islands. A plea could be made to the United Kingdom. Offshore banking, like tourism, had proven to be a very sure method for communities like hers. Obviously there was a need to control the criminal element and the Committee should note that the Territories were responding to the British request that the banking industries should be clean. Loss of that offshore banking revenue in the British Virgin Islands would result in the loss of billions of dollars.
The Committee will meet again tomorrow at 10 a.m. to hear presentations from non-governmental organizations (NGOs) on its substantive issues and to hold another question and answer session. (For background see Press Release GA/COL/2998 issued 19 May.)
CASEY S. GILL, expert from the Cayman Islands, said that what he had to say was not the Cayman Islands Government policy, viewpoint or perspective. Further, his perspective was limited to an understanding based on Cayman's business perception -- an economy that had two main pillars, tourism and the financial industry. The financial industry, including banking, insurance and mutual funds, continued to enjoy steady and solid growth. The value of deposits held in banks in the Cayman Islands in 1997 totalled $640 billion. As of 1997, included among its 593 banks were 47 of the world's top 50 banks. The Cayman Islands were rated the seventh largest international banking operation in the world and the fifth largest financial centre in the world after London, Tokyo, New York and Hong Kong.
The Cayman Islands also remained the world's second largest captive insurance domicile, with gross assets of $8 billion, he continued. Those statistics were not meant to boast, but rather to try and explain the competitive nature, the fierce professionalism and the challenging business environment of the financial industry in the Territory. "It is also meant to show the business atmosphere prevalent in the Islands, so that you may achieve a better understanding of our needs," Unlike most of its neighbours, the Cayman Islands did not have any natural resources or any products, let alone self-sufficiency. While there was respect for Caribbean neighbours who had reached and gained independence, "that for us is not a viable route or one we even countenance. Ours is a little island in the north-west Caribbean satisfied with retaining links with the United Kingdom".
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He said that the Cayman Islands understood its smallness and its insular location and was not driven by a self-sustaining economy, so as to seek or even consider breaking its links with the United Kingdom. Caymanians were aware of the trappings that independence brought with it, the commensurate responsibilities and the burdens, including the financial. According to the Financial Secretary of the Cayman Islands, George McCarthy, "there is a direct and solid connection with the United Kingdom which provides political stability that the independent nations around the Caribbean can only try to emulate. Cayman is a British dependent and had made its position quite clear to the United Nations that it wants to remain dependent".
He said the OECD countries produced a report entitled, "Harmful Tax Competition: An Emerging Global Issue", which set out both legislative and administrative measures it intended to enforce. The report addressed harmful tax practices in the form of tax havens. The report discussed factors that characterized tax havens and then identified preferential tax regimes that could be considered to lead to harmful tax competition. It found that there were three categories with different tax differentials. It was, however, ambivalent about onshore jurisdictions, which lured residents from other countries because of preferential tax treatment. The main concerns were that the offshore centres suffered from a lack of exchange of information and a lack of transparency.
Viewed in the perspective of world trends, he continued, the issue was not one of criminality or money laundering or even tax evasion. It was essentially one of forcing offshore centres, which depended on offshore services for their subsistence, to conform to a standard or a sort of morality of expedience. There was no moral high ground. It was the "big bully syndrome". The buzz-words of "transparency and harmonization overall" were nothing more than horrific visions of "1984 Big Brother is watching you". Tax harmonization was a smokescreen for pure, unadulterated self-interest. Might was right. It was gunboat diplomacy at the dawn of the millennium. Those assaults on offshore jurisdiction were a thinly veiled overture to impose enforcement of domestic tax laws on an international basis.
Question and Answer
JUDITH BOURNE, of the United States Virgin Islands, said Mr. Gill's opinion on self-determination could be illustrative of the lack of information and understanding about international law and the meaning self-determination. If the Cayman Islands felt that it could not provide for itself, then that decision could well be an act of self-determination in itself. However, it still had that right to self-determination. If it did not take that right, it did not necessarily have to be removed from the list. It could just be noted that the Cayman Islands were not ready.
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She said the attacks on offshore banking by the OECD led one to ask why the administering Power would take that position and why the Cayman Islands would wish to retain a relationship with that Power in light of such actions.
WANTON BROWN, expert from Bermuda, said tax harmonization and transparency were smokescreens. Given that those policies were being thrust at the small island developing States by the OECD and given that the United Kingdom was a member of that organization, surely that led to a conflict of interest, since the United Kingdom by the terms of the Charter was vested to look after the interests and the development of the Non-Self-Governing Territories.
Mr. GILL, of the Cayman Islands, said the best way to get an answer on self-determination was by a plebiscite or a referendum. He, however, could not speak for Caymanians, but the inclination would suggest that they were happy with the system they had.
Responding to the question raised about why the administering Power was trying to insist on the OECD measures, he said the offshore industries had burgeoned at rates that outstripped other national economies. The architect of the harmful OECD report said that neither Luxembourg nor Switzerland were likely to be targeted. The islands in the sun were the likely targets. The question asked was, "what was $250 billion doing in the Dutch Antilles"? That was the mentality; money should not be somewhere where there was no reason for it to be. If the offshore centres closed tomorrow, the entire world would collapse. The reason for the existence of such centres was often overlooked. They provided a lot of flexible financial instruments that could not be found in the traditional banking system.
He said the OECD reaction had been initiated by the Germans, who claimed that some $15 billion had gone offshore. That money had not landed in the Caribbean, however, but in Luxembourg. The reason the administering Power was following the OECD action was because it was in the "club" and did not want dirt on its face, because one of its "people was doing that" down there.
He said that in attempting to deal with the situation, a contingent of Caymanian Government officials went to London for talks. During those discussions, tall agendas were given out and were usually based on what the Americans wanted -- the war on drug dealers, for example. It was felt that all those answers were in the Cayman Islands. Caymanians officials would not answer those questions, because certain procedures had to be applied. The Cayman Islands did not have a problem with criminals -- it did not harbour them. However, there was still a need for guidelines. "We are a civilized world and there is a need for civilized procedures", he said. Of course, the United States did not like that. Similar events and requests occurred with other Powers. The new laws against offshore banking thrust wealthy expatriates, industrialists and exiles in the same ballpark as criminals.
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He said it was necessary to distinguish between crime and money laundering. Politicians had created the myth that if the money root was caught, problems such as drugs would be eradicated. "The truth is that we are no closer to solving the drug problem than we were 20 years ago", he added. However, the Cayman Islands had cooperated with all such related measures. Now it was not just the issue of a level playing field -- it was a much bigger field.
Mr. BROWN, of Bermuda, said that the OECD countries based their taxation on income tax. In many offshore countries it was based on indirect taxation, such as customs duties. When the OECD spoke of tax harmonization, they spoke of something in contrast to any system that a Territory like Bermuda had in place.
FERMIN L. ARRAIZA NAVAS, Colegio de Abogados de Puerto Rico, noted that his Government gave money to private companies to do certain jobs or projects. Sometimes the money was not used on the contracts for which it was intended. The funds disappeared and were put in offshore centres, such as the Cayman Islands. Such actions seriously affected the right to development of many Non-Self-Governing Territories.
Mr. GILL said that when money came to the Caymanian financial institutions, there was an investigation. The client was usually warned that if there was a police investigation, he or she would not be protected. Cayman's procedures were still more stringent than those of most metropolitan societies.
PETER D. DONIGI, Papua New Guinea, Chairman of the Special Committee, said that it seemed that as far as the Cayman Islands were concerned, there seemed to be no objection to procedures for law enforcement. But, it viewed the measures levied against taxation as a threat to its livelihood.
Mr. GILL said that today not many clients were really tax driven. The transactions were far greater in complexity and focused on pure savings.
The CHAIRMAN said that in his own country, tax evasion and tax avoidance were criminal offenses. Was it possible for his country to negotiate with the Caymanian Government if such a crime were committed and involved Caymanian financial institutions?
Mr. GILL said tax avoidance and tax evasion were two different things. Evasion was a criminal offence. Avoidance was not, as it was just a structuring of affairs so as to pay the lowest possible tax. However, if that loophole was illegal and if a government felt that it was an offence and sent a subpoena, the subpoena would be taken to court. If the crime cited in the subpoena was not listed as a crime in the Cayman Islands, then it would not be treated as such. His country had drug crimes, money laundering and ordinary
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crimes. There were no taxation crimes. A person indicted with a tax crime would have to have that crime proved before confidential information was handed over.
Regarding his Territory's status with the Special Committee, he said that body needed to understand where the Cayman Islands were now. It was not a situation, however, where the door was closed and "you should forget about us". Things changed and the world and situations were vulnerable.
Mr. BROWN said that at the end of the year, a cross-border tax would be implemented on members of the European Union. The United Kingdom would have to impose that tax on its territories.
ERMIN PENN, expert from British Virgin Islands, said, as colonies, there was no direct negotiation with anyone. The United Kingdom had to negotiate everything on behalf of its dependent Territories. The administering Power said that it was going to control the banking in the Virgin Islands, Bermuda, and the Cayman Islands. A plea could be made to the United Kingdom. Offshore banking had proven to be a very sure method for communities like hers, as had tourism. Obviously, there was need to control the criminal element. The Committee should note that the Territories were responding to British requests that the banking industries be clean. Loss of that offshore banking revenue in the British Virgin Islands would result in the loss of billions of dollars.
Mr. NAVAS, referring to the issue of lack of transparency, said that in Puerto Rico's Federal Code there was an allowance for foreign industries to be established and be tax-exempted. That clause had now been removed from the Federal Code and many of those companies were closing. Referring to the Cayman Islands situation, he said that stomachs were full now, but they might not always be full.
Mr. GILL, responding to the Chairman's question on "flee" clauses, said they were clauses that were found in trust documents. Whenever adverse conditions arose, the trusts could be taken to a different jurisdiction.
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