November 29, 2020

Cayman Islands: Fiction And Fact: The Financial Times And Cayman Islands Hedge Fund Transparency

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anthony travers_015 February 2013 Article by Anthony Travers

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The Financial Times Fact
1. “The Cayman Islands thanks to a light touch some would say no touch-tax and regulation regime”. 1. 80% of Cayman Islands assets under management are invested through fund managers in the US and 20% in the United Kingdom.  The investment of these assets is regulated by the SEC, CFTC and FSA under the laws of those jurisdictions.  No additional prudential regulation is required in the Cayman Islands.  Taxes are paid on profits made in accordance with the laws of those jurisdictions.  The Cayman Islands does not impose an additional layer of taxation.
2. “The Caymanian plan to increase transparency in corporate governance rules will help investors verify that the directors ostensibly representing them have the ability and indeed time to discharge that duty”. 2. The Cayman Islands Mutual Funds Law requires an offering document with full disclosure of the identity and background of all directors of a Cayman Islands hedge fund which document is reviewed and accepted by a prospective investor.  This provision in 1993 codified the common law and has thus been a requirement of Cayman Islands law from inception.  CIMA proposals effect no change to this disclosure requirement.  Any investor may under existing law and regulation make due enquiry of a director as to the number of directorships held.  All directors of a Cayman Islands company are subject to fiduciary duties and duties of care and skill substantially similar to those laid down under English authority.
3. “Why anyone would entrust their money to funds whose directors they know nothing about is a puzzle”. 3. But not as big a puzzle as to why the editor of the Financial Times in the light of the foregoing point should suggest this supposition should possibly be of application to a Cayman Islands hedge or mutual fund.
4. “Transparent corporate governance is one thing; transparent company accounts is another”. 4. All Cayman Islands hedge funds are required by the Mutual Funds Law to have audited accounts prepared by recognized and major audit firms and signed off by their Cayman Islands affiliate firms.  The Madoff scheme could not have occurred in the Cayman Islands.
5. “The diminutive tax haven’s minimal disclosure requirements and tough corporate privacy laws”. 5. Nothing could be further from the truth.  The Cayman Islands has complete transparency in relation to tax matters with over 30 G20 and other countries including the USA and the UK and full automatic disclosure reporting in relation to bank account information with all European Union Treasuries.  There are all encompassing all crimes anti-money laundering provisions with the USA and the highest level of domestic anti-money laundering legislation far exceeding that in effect in the United States of America, notably Delaware.
6. “They even featured in rancorous debates over the tax affairs of US Presidential candidate, Mitt Romney”. 6. It appeared from those debates that Mr Romney’s affairs were perfectly legitimately structured in the Cayman Islands and that all due taxation was paid by him in relation to his affairs under United States tax law.
7. “Many of the world’s largest pension funds have until now had no way of verifying details of Cayman Islands funds they invest with or their directors”. 7. This is only correct if we assume that the investors were incapable of reading the required offering memorandum and of undertaking any due diligence in relation to it.
8. “”We have been screaming for more transparency for some time now” said Vincent Vandenbroucke, head of operational due diligence at Hermes BPK”. 8. See above at 7.
9. “Beyond such numbers however, little information has been historically available making the Islands an easy locale in which to secrete money and assets away from prying eyes”. 9. In addition to the tax transparency treaties above mentioned, the Cayman Islands Monetary Authority has full IOSCO membership and therefore full regulator to regulator disclosure in relation to all regulated entities including hedge and mutual funds.  The Financial Times statement is correct only in that journalists and others in the private sector who are not investors may not enquire directly as to fund operations as the Cayman Islands provide legitimate confidentiality.
10. “For investors, one of the most critical elements has become understanding who their fund’s Caymanian directors are”. 10. This information is all fully disclosed in the   offering memorandum which forms the basis of the contract on which the investor invests.
11. “Indeed, Cayman fund boards staffed by directors are the only protection investors have against unscrupulous managers who may try to fiddle performance numbers or worse, steal assets”. 11. The role of the directors in relation to most hedge funds is supervisory only.  The administrator, the prime broker, and the auditors and now under the EUAIFM, the distributor, all have direct responsibility for safe guarding assets.
12. “Under the current long standing regime, information on who fund directors are has been thin on the ground.  Due diligence is more a matter of detective work than fact checking”. 12. It is a matter of reading the offering memorandum and applying appropriate due diligence prior to, or at any time after, investment.
13. “There have been horror stories”. 13. Notably, consequent on the financial crisis, only one major case came to court in the Cayman Islands, Weavering, in which delinquent directors who failed to perform their duties were found liable.  During the crisis, hedge funds, as did many financial institutions, suffered liquidity issues which triggered gating provisions in their constitutional documents which operated as they were intended.  All such provisions would have been duly disclosed in the offering documentation and therefore, constituted legitimate and accepted investment risk.

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Specific Questions relating to this article should be addressed directly to the author.

 

 

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