No smoking gun was found into an alleged tax-dodging scheme with Cayman’s leading law firm following a year-long probe by the US Government Accountability Office according to top officials at the Senate Finance Hearings last month.
Far from being a drive-through for tax cheats, the GAO investigation into Ugland House, the law offices of Maples and Calder, revealed the bulk of clients had legitimate business reasons for setting up offshore structures, reflecting the trend of crossing multiple borders to do mega-dollar deals.
But the GAO’s findings did not stop US senators Baucus and Grassley from pointing accusing fingers at Ugland House, the law offices of Maples and Calder and by default the entire Cayman’s offshore financial services sector. Following a similar path as the US recent hearings on Liechtenstein and Swiss bank UBS, both senators used the hearings as a platform to call for crackdowns on all tax havens.
Nor did it stop international news agencies using sensational sound bites from Senator Baucus and Grasselys’ press releases rather than a thorough analysis of the GAO’s hefty report. News reports from Associated Press, Reuters, Wall Street Journal, Miami Herald, Houston Chronicle and CNN all ran stories within hours of the hearings that lead with calls to crack down on offshore tax havens.
“Calling Ugland House the biggest scam on record is like Falujah emerging – it has inherent political appeal,” says Strikeman international tax lawyer Richard Hay. “The discovery that Cayman is not some black hole for tax evasion is an inconvenient truth for them.”
It is no secret that jurisdictions, which have oil or financial service industries, are among the wealthiest in the world he explained. Seven of the top 12 countries in the world with the highest GDPs per capita also have robust financial service sectors according to the CIA World Fact book. Unlike many sectors, financial services is a powerful mechanism that allows small countries like Cayman and Bermuda the ability to compete at the international level and it is a lucrative business, which is not lost on policymakers who want to domesticate that business within the US says Hay.
Being a successful financial centre makes for a visible target for larger, jealous rivals like the US, which are seeking to regain the power and money that financial services brings he says.
“The power is the control over the allocation of mobile capital in the global economy,” says Hay.
But if the US is looking to push Cayman aside and take over its lucrative financial services business, it would be unacceptable to say so as this strategy makes it look overbearing. Instead, US politicians use the excuse of improper offshore regulatory standards as a lever to unsettle the market in its favour says Hay.
Driving this quest for control of the financial market is the escalating US budget deficit that has climbed to US$1.8 trillion in the last five years. And the deficit is expected to grow by another US$500 billion - half trillion - in this year. The deficit, combined with the pressure from the upcoming presidential elections is causing politicians to look for scapegoats. And Cayman is an easy target.
With this huge deficit and a big election year, American politicians are under tremendous pressure to close the fiscal gap he explains.
“American politicians have three choices. One - cut programmes; two - raise taxes. Or three - blame the offshore centres, populated by non-voters, for leading otherwise honest American voters astray.
“One political strategy that works time and time again is to always blame the person that is not in the room. The offshore centre is the person not in the room,” says Hay.
Leader of Government Business Kurt Tibbetts says the Cayman Islands government is aware of the intense focus by US Congress on the so-called the ‘tax gap.’
“The discrepancy is between tax collected and tax owed to the IRS by US entities and individuals,” says Tibbetts. “The tax gap has provided a significant platform for political messaging in Washington DC.
“To the extent that there is a reality gap associated with the tax gap based on misconceptions about our industry, the findings of fact in the GAO report will go into our armoury; for instance, the high degree of transparency and assistance provided to US law enforcement, regulatory and tax authorities by Cayman Islands counterparts.”
But while the Cayman Islands is a sovereign country, US politicians hold a trump card over this jurisdiction; access to US banks and securities markets says Hays.
“It may not be fair, but Cayman is a small centre so it needs to maintain access to their banks and securities markets in order to survive. If the US denies access to its market, that is a big problem for Cayman,” he explained.
Offshore experts have previously dismissed the Ugland House investigation as political grandstanding during an election year. Cayman has long been a target for US politicians, exacerbated by the 1993 movie, The Firm, perpetuating this jurisdiction as a haven for money laundering.
But the Ugland House investigation now appears to be part of systematic strategy by US politicians to push back offshore competition in the financial sector.
Last year, Senator Carl Levin and presidential candidate Barack Obama submitted draft legislation Stop Tax Haven Act, designed to close the loopholes estimated at $100 billion lost in tax revenue each year, although industry experts believe the real losses could be two to three times higher.
“Offshore tax havens have declared economic war on honest US taxpayers by helping tax cheats hide income and assets that should be taxed in the same way as other Americans,” stated Levin.
Cayman expects there will be changes to US tax policies in the future, says Tibbetts.
“While there has been much discussion and political messaging to date in the US, when, and to what extent any such action will occur is unclear. What is clear is that the Cayman Islands’ protecting the interests of its financial services sector, which the government will continue to do vigorously, is not connected to protecting the interests of potential tax evaders. We don’t promote that sort of business; we don’t need it and we don’t want it,” says Tibbetts.
Hay is not sure if the proposed Stop Tax Haven Abuse Act will get passed. But the investigations into Ugland House as well as hearings on Switzerland-based UBS and Liechtenstein are proof that it is gaining political momentum.
“This is a warning shot that offshore centres should be sensitive to the risks that it poses and plan for them.
“If you find yourself selected to be the target of US agencies and you don’t take a proactive role in engagement - you could get hammered,” says Hay.