Overview: Obstacles and opportunities

The Cayman Islands and Bahamas have faced the challenges of international scrutiny in recent years, but have proved determined to tackle change with further business growth. By Caroline Poynton.

In 1986, Charles Jennings was only the seventh lawyer to join Cayman Islands law firm Maples & Calder. And things were very different. “The infrastructure was very good for the Caribbean in the mid-1980s, but I can remember, for example, that to make long-distance calls, we had to call the operator to put us through,” he says. Since then, the firm has grown to over 140 lawyers and additional offices have been launched in Hong Kong (1995), London (1997), British Virgin Islands and Jersey (2004), Dubai (2005), and Dublin (2006). The firm’s growth and the international spread of its most senior lawyers – Jennings is now managing partner of the London office – is an obvious testament to the firm’s success, but it also reveals the extent to which the Cayman Islands has grown as an offshore jurisdiction in recent years.

Nor is it alone in the change process. Since the 1980s the Cayman Islands has shifted its emphasis from private-client work to international business and finance, gaining particular recognition for its expertise in mutual and hedge funds. Such developments have gained the jurisdiction an impressive reputation, but it has also helped the Bahamas focus resources on its own strengths. “It’s not that we don’t want to get involved in mutual-fund administration and corporate activities,” says Ian Fair, deputy chairman and director at Butterfield Bank (Bahamas), “but Bermuda has stolen a march in relation to insurance and Cayman is very much mutual funds and corporate-trust areas.

That leaves the Bahamas to take a slice of the pie in terms of wealth management and private banking.” That Banker magazine rated the Bahamas as the best international financial centre for wealth-management services in November 2005, has also proved a good boost to the jurisdiction’s recent strategies for growth.

Facing up to the challenges

Despite successes, however, both the Cayman Islands and the Bahamas have faced testing times in recent years, as international sources such as the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF) have pressed offshore jurisdictions for greater financial transparency and tax-information collection and exchange. The Cayman Islands was quick to commit to the OECD’s programme, avoiding its early ‘black list’ of uncooperative tax havens published in 2000, but the Bahamas took another two years to sign up, in which time it also introduced an array of new legislation in response to FATF pressure for regulatory reform.

“The Bahamas went through a challenging time in 2000, when various listings came out from the FATF and OECD,” says Fair.

“But the Bahamas responded very rapidly and we kept cool in a very traumatic time. We’re pretty good at crisis management.” This insider’s view stems from Fair’s long history with the Bahamas where he has lived since 1969. More recently, he was founding chairman of the Bahamas Financial Services Board and founding chairman of the Bahamas International Securities Exchange (BISX), before he accepted his current role at Butterfield Bank.

His experience puts him in a unique position to comment on business in the Bahamas and he does not think that all the criticism has been fair.

“I was quite annoyed when in 2000, accusations were made that the Bahamas were unregulated. The reality is that the Bahamas has had pretty stringent regulations in place since 1965. That was when we introduced the first Bank and Trust Companies Regulation Act, which required a licence from everybody who was in the banking or trust businesses. Some of our competitor jurisdictions only started regulating trust companies about three years ago,” he says.

After the debacle of 2000, the Bahamas quickly implemented eleven new pieces of financial-services legislation and appointed an inspector of banks from the FSA. Some detractors have described the move as a knee-jerk reaction, but Fair argues that the Bahamas was merely ‘beefing up’ existing regulation to meet Know Your Client (KYC) regulations and compliance requirements generally.

Whatever the motivation, however, the legislation marked an important step for the jurisdiction, improving its international reputation for regulation and kick-starting a wave of developments in the Bahamas, including its recent Foundations Act1, which promises much for the future.

Public-private cooperation

The Cayman Islands has followed a seemingly less rocky path since 2000, but it has similarly had to take major steps to adjust to or, as it seems keen to do, pre-empt international scrutiny. “Cayman has traditionally been a leader [in its legislative framework] – it had the first offshore Mutual Legal Assistance Treaty, which became the prototype for many others. It also implemented comprehensive and robust money-laundering laws in 1996, well ahead of even the US and UK. And the Cayman Islands has consistently surprised international bodies with the quality of its standards, practices and procedures,” says Charles Quin, senior partner at Quin & Hampson and president of the Cayman Islands Law Society.

Jennings also attributes legislative success to an active consultation process between private and public sectors. “Whenever challenges arise on a supranational level – OECD or FATF matters, for example – the public and private sector get together and think very carefully about what they are going to do. They don’t act precipitously.”

Quin has particular experience of this public/private cooperation.

As president of the Cayman Islands Law Society, he represents a growing number of lawyers in the Cayman Islands, but a major role of the Society is to assist the government in drafting legislation. “We set sub-committees to revise the laws including, for example, the banks and trust companies law, exempted limited partnership law, and insurance legislation. Lawyers in Cayman are exposed daily to the most sophisticated offshore structures imaginable, so they are uniquely qualified to help the government prepare, draft and review legislation.

It is a public-private sector cooperation that explains why the Cayman Islands is a leading jurisdiction in areas such as private-equity funds.”

The Bahamas also recognises the importance of public-private sector cooperation, with Fair describing its stock exchange, BISX, as an essential joint venture between the public and private sector. “If you look at stock exchanges in developing countries, the majority have started up off the back of government privatisations. We have no privatisations as yet, but there is talk of listing bonds of certain government-owned corporations.

We also have 16 local and some international listings and we’re very encouraged for the future,” he says. Fair hopes that the stock exchange will support the development of a capital market in the Bahamas and propel its place as a major financial centre internationally. “We have a lot of mutual-funds business flowing through the Bahamas. We felt the need for an exchange was quite vital,” he says.

Optimism for the future

The Bahamas and Cayman Islands have responded positively to legislative change and appear confident about recent growth and future opportunities. Both Jennings and Quin point to the quality of professionals working in the Cayman Islands, and are proud of the jurisdiction’s ability to recruit lawyers from the UK, South Africa, New Zealand, Australia, and elsewhere. “The reason Cayman has been so successful is that it is a truly free-market economy,” says Jennings. “Provided you can convince the government that there isn’t a Caymanian that can do your job, you will be welcomed to the island – to develop the island; build a hotel; do whatever you like in terms of commercial ventures. Other jurisdictions are just not like this.”

Most recently, changing immigration regulations could set a seven-year time limit on the number of years a work-permit holder can work continuously on the islands.

But in terms of professionals at least, the current system seems safe. “Businesses can nominate crucial employees for exempted positions. In that case, although the government retains a discretion at the seven-year time, indispensable employees will be granted permanent residence. It is fully expected that important professionals, including lawyers, will be included in this,” says Jennings.

Immigration in the Bahamas is more tricky. Although Fair says that immigration is accommodating, with work permits rarely refused, the government singled out the legal profession as a closed shop to non-Bahamians when the country gained independence in 1973. “There are critics of this local fiefdom in the legal sector, and I am one of them, as I think we need a certain free flow of legal minds” says Fair. “And there is movement in accepting this principle. One or two of the larger law firms in the Bahamas have managed to get permits for foreign lawyers. This could be speeded up and it should be more widespread – but it is happening.” If the Bahamas succeeds in opening its legal profession to the outside world, it may well replicate the successes of jurisdictions such as the Cayman Islands in using those professionals to further reinforce growth.

For the Cayman Islands and Bahamas, recent years have been ones of challenge and change, but both have worked hard to turn potential difficulties into opportunities. For the Cayman Islands, the months and years ahead may be more about consolidating its impressive successes of recent years, keeping a close eye on the competition and any unexpected international developments that might further impact the offshore market. For the Bahamas, the significant challenges of recent years are now past and, while there is still work in progress (for example, with legal-sector immigration and the growth of the stock exchange), the jurisdiction seems more confident than ever about the future.

For offshore business growth and opportunity in general, the signs are promising.

Reference

1. See article by Wendy Warren of the Bahamas Financial Services Board, page 8.