Impact of a recent decision by the US Government to order all institutions to sever ties with an Asian offshore bank shows just how much influence an off-shore financial centre, such as the Cayman Islands, has on the world's political stage.
It also illustrates the importance of Cayman's banking and legal system in safeguarding against money laundering and receiving assets obtained from the proceeds of crime.
Last week the US Treasury instructed all US banks and companies to sever ties with Macau-based bank Banco Delta Asia (BDA), the subject of an 18-month investigation linked to allegations of North Korean money-laundering and counterfeiting. In turn North Korea immediately demanded that a freeze on its assets held by BDA be lifted. The US claimed that the probe had confirmed BDA's "willingness to turn a blind eye to illicit activity, notably by its North Korean-related clients".
In September 2005, the US labeled BDA a 'primary money-laundering concern' and alleged front companies laundered millions in cash through the bank linked to the North Korean trade in counterfeit US currency, cigarettes and drugs. These claims led the Macau Government to freeze over US$25m in North Korean-linked accounts. In turn lawyers for BDA denied any wrongdoing with the bank stating that it had a dated computer system and lacked the technology to check for counterfeit money.
The US decision led an angry North Korea to boycott talks on ending its nuclear program which caused a major international crisis for more than a year which raised fears of a nuclear showdown. North Korea only returned to the negotiating table in December 2006 after successfully testing missiles and a nuclear weapon. Pyongyang agreed in February, at a further round of six-party talks in Beijing, to "shut down and seal" its Yongbyon nuclear reactor in exchange for energy aid.
The six parties - the two Koreas, China, the US, Japan and Russia - were due to resume talks this week on the progress of the nuclear deal. However China expressed its "deep regret" at the US actions as did the Macau Monetary Authority adding that the Macau Government "will soon make an official response". Furthermore China stated in defence of the money laundering allegations made against Macau based financial institutions that, "our position is strong. Our measures are effective. We follow closely the international obligations". The outcome of this latest international crisis is yet to be determined.
The Cayman Islands has been perceived for a number of years, rightly or wrongly depending on your point of view, as a conduit for money laundering activities and dubious dealings especially from companies and individuals based in the US. This reputation has changed over the last few years due to the increased regulation and transparency of financial dealings put in place by the Cayman Government as well as the self-imposed structures introduced by the financial institutions working in off-shore jurisdictions.
These actions have resulted in Cayman receiving positive reports from the IMF and being removed from a blacklisting by the Financial Action Task Force. Unfortunately US State Department reports still classify the Cayman Islands as a jurisdiction of primary concern regarding drug related money laundering.
The catalyst for most of this regulatory activity has been the events post September 11 and the demands the US Government has made on seeking the sources of terrorist activity funding. Compared to many offshore, and some on-shore financial centres, the Cayman Islands is more advanced in regulatory safeguards. What is important is not necessarily the need for increased regulation but to manage and implement the current regulation in an effective and transparent way.
It is difficult to confirm the extent of money laundering activities occurring in the Cayman Islands, and other off-shore jurisdictions, but off-shore financial centres continue to be named as key nations for such illegal activities. Often offshore nations with significant banking operations are included in lists with less scrupulous countries that do not have an appropriate regulatory framework such as the Cayman Islands.
Financial services are a pillar of the Cayman economy with over US$1trillion worth of assets held in Cayman registered banks. The banking industry alone contributes 25% of GDP to the local economy with estimates claiming that the financial industry taken as a whole equals between 40-50%.
In turn, Cayman plays a major part in the global banking system and is a major supporter of the US economy. The US Federal Reserve stated recently that the Cayman Islands dominates the Caribbean interest in US assets. With the rapid emergence of the Chinese, Middle Eastern and Indian economies, Cayman will likely play a major role in these areas over the next few years, and arguably already does.
The continued growth and influence of the Cayman Islands financial sector will be determined by how Cayman-based financial institutions operate and how future regulation dealing with money laundering and financial crime is introduced. The Cayman Government has made commitments to fight financial crime while further developing a fair and business- friendly regulatory regime. Always a difficult task as the industry is risk-based and regulatory regimes are not necessarily prescriptive.
There will continue to be a greater focus on Cayman and other offshore financial centers especially by US regulators. Due to the increasing influence of the Cayman financial sector, the Cayman Islands' Government and professional bodies have the responsibility to play an even more active involvement in shaping regional and global policy. Currently Cayman plays a leading role in Caribbean regional activities but needs to start acting globally. As the events in Macau have shown, the financial activities in a little country such as Cayman can have a major effect on the world stage.
Hugh McDermott is a Litigation Attorney with Charles Adams Ritchie & Duckworth, Grand Cayman; and Doctoral Researcher in Law, King's College London. The views expressed are his own. Please send comments to:
This e-mail address is being protected from spambots. You need JavaScript enabled to view it