In recent months a great deal of misinformation regarding the Cayman Islands has been circulating. Sophisticated users of the jurisdiction understand it to be an appropriately regulated, tax-neutral centre which enables the efficient deployment of international capital. However, politicians will point the finger at anyone but themselves as they seek to apportion blame for economic woes
and opportunists look to attack its position as the world's leading centre for hedge funds and other private funds. In order to ensure that funds and their advisers are making choices predicated on facts, this update clarifies a few points which may have become blurred in recent times.
Questions and answers
Did the Cayman Islands require a bail-out from the UK government?
The Cayman Islands remains financially independent, and has no income tax, capital gains tax, inheritance tax or sales tax. It has not received any form of financial support from the United Kingdom or anywhere else: it requires no such help. It has a triple-A credit rating.
What is the Cayman Islands' status in terms of OECD tax transparency?
The Cayman Islands is on the White List for Organization for Economic Cooperation and Development tax transparency purposes.
Which banks failed or required government intervention during recent events?
No banks have failed in Cayman at any point during the global financial crisis, despite it being the fifth largest banking centre in the world. No government intervention of any sort was required.
Has there been a property collapse in the Cayman Islands?
No. Prices have remained stable in the Cayman Islands over recent years.
Have there been any other fiscal problems in the Cayman Islands?
No. The currency is pegged to the US dollar and is stable. There is a newly elected, pro-business government. Cayman remains a stable British dependency.
Is the Cayman Islands an unregulated jurisdiction?
Cayman Islands funds are subject to a great deal of regulation, as are those in many other major funds jurisdictions. As such:
* every fund must be registered in the Cayman Islands and file its offering document, including full details of its directors, with the Cayman Islands Monetary Authority, which is a full member of the International Organization of Securities Commissions;
* full details of the investment strategy and restrictions (and any other matter which affects an investor's decision on whether to invest) must be set out in the offering document. The fund must abide by these restrictions;
* every fund is required to undergo an annual audit by a firm approved by the authority;
* the authority must be notified promptly of any changes to a fund;
* the authority regulates Cayman Islands administrators and providers of directors;
* the authority has extensive powers to intervene should it believe a fund to be in difficulty or be being run inappropriately; and
* administrators of Cayman Islands funds can be located anywhere, thereby allowing funds to take advantage of industry-leading companies.
Are there more highly regulated fund types in the Cayman Islands?
Yes. Most funds are set up as Section 4(3) funds. This is generally regarded as an appropriate vehicle for funds offered to sophisticated investors. However, there are alternatives.
Licensed mutual funds may be established where the authority is satisfied as to the reputation of the promoter, the expertise of the administrator, the directors being fit and proper persons and the fact that the business of the fund will be operated in a proper way. Regulated funds may be established where a licensed mutual fund administrator provides the fund's principal office in the Cayman Islands. These alternative types of fund are not subject to the minimum interest per investor requirement of US$100,000.
Will the EU Alternative Investment Fund Managers Directive affect the Cayman Islands funds adversely?
While it is impossible to ascertain the effects of the directive until the final version has been passed, it is now regarded as unlikely that the Cayman Islands funds will be greatly affected. Cayman is likely to be able to continue with the existing private placement regime within the European Union for three years after the directive comes into force. By the time that period has expired, equivalent regulation may be required, with which the Cayman Islands is highly likely to comply.
Have US managers stopped using the Cayman Islands?
There has been little change in the structures used by US managers. As far as US law firms are concerned, nothing has changed in this regard. More than 100 funds have been established per month in the Cayman Islands in each of the last two years.
The Cayman Islands: some questions answered
