The Caribbean has surrendered
to the pressure of the industrialized nations
By: Ian Kilpatrick

The Way we were

When I first moved to the Cayman Islands some thirty years ago life was simple. International calls (both incoming and outgoing) had to be placed through the local overseas operator. This had many advantages because if you were expecting an overseas call but wanted to pop out for a lunch time drink you just phoned Christine and told her you would be at the Lobster Pot and to forward your calls there.

My favorite lunchtime watering hole was the airport bar. At that time the airport on Grand Cayman consisted of a number of wooden sheds with tin roofs. There was little, if any, security and the bar itself had an uninterrupted view of the tarmac. You could easily see the arriving and departing passengers. There were a number of us who went there on a regular basis. As there was little to stimulate the mind we used to bet amongst ourselves how much was in the suitcases of the arriving businessmen. Remember this was the early 70's and we concocted a pretty accurate gauge of the amount, by analyzing the clothes the person was wearing:

White patent leather shoes = $50,000

Plus white polyester pants = $100,000

Add a colorful shirt with huge collar = $250,000

Gold chains by the 100's = $ 500,000

But the real giveaway was the brand new silver metallic Halliburton suitcase. Anyone arriving with this luggage had to have at least a $1 million stashed inside. After all, such a precious cargo deserved the best packaging. Our bets were twofold: which bank would take the money and what would be the amount deposited? There was no need to follow the unsuspecting traveler to his bank of choice, as next day we would meet again and which ever one of us was employed by the bank selected would own up and reveal the amount of the deposit to the rest of us. As we were all bankers we believed confidentiality was never compromised!!

Another bet we often took was to guess the total amount of the money that would be shipped out from Cayman Islands the next time the Brinks agent was flown down from Miami. We were all beer drinkers and in fact beer was the largest single import to the Cayman Islands at that time. Amazingly, most of the boxes in which the beer was shipped had ideal properties in that dollar bills could fit snugly side-by-side ten in a row. So we arranged with the importers to deliver the empty boxes to the banks St Pauli Girl (blue) to RBC, Red Stripe (red) to Scotia, Heineken (green) to Barclays. The Banks had to have some way of distinguishing whose box was who's when they got to Miami. Depending on the denominations inside the box they contained anywhere from $100,000 to $5 million. I think the record shipment was $40 million.

How I long for those days, but I just cannot drink as much beer now.

While Cayman took the brunt of the criticism over the acceptance of such money it was the international banks that allowed it to happen and whose branches in New York put the money back into circulation. A fact lost to many.

Perhaps surprising to many the flow of suitcase money in Cayman virtually ended in the early eighties when Cayman signed a Mutual Legal Assistance Treaty with the US. Cayman and most other legitimate centers wanted to co-operate once it was realized much of the money was drug related. I suppose the threats to ban national airlines landing rights and the issuance of subpoenas against every bank manger, trust officer and corporate manager working in the Caribbean might also have had something to do with it.

The times are a'changing

In early 1979 I was going to New York via Miami and was asked to accompany an immigration officer. My bags were searched and I was kept waiting in a small room for about an hour. Finally, someone came and explained to me it was an offence to fill out the immigration form I-94 falsely. I was advised that a conviction of such an offence was subject to a fine and possible imprisonment. I was asked if I needed to review the details of the I-94 I had completed. After which they were kind enough to give me back my passport and escort me right on to the Eastern whisper jet to New York. I arrived at the Halloran House and while checking in I thought the desk clerk seemed nervous but pleasant and I took my key and off I went to my room. I had not had time to lay the suitcase down before a thunderous knock on the door startled me. I opened it to find two men, one slightly behind the other with what appeared to be his hand reaching discreetly inside his jacket, like so. I was handed a subpoena to appear in two days before a Grand Jury in Washington DC.For those of you not old enough to remember the 70's there was a major Congressional hearing into the business ethics of American companies' in seeking overseas contracts. Lockheed Corporation admitted paying "incentives" to Japanese officials to secure contracts, a fact that perplexed Congress despite their own campaign finance practices. Raytheon Corporation also admitted to greasing the wheels of commerce but in their defense they claimed that fraud had been committed against them. They won a contract to build modular housing for a project in Saudi Arabia and the price included the customary backhanders. But apparently their purchasing agent told the Saudi official the commission was 'x' when in fact it was 'x' plus. The purchasing agent had gone to Yale with the President of the shipping company that won the contract to transport the modular housing to Saudi Arabia and was generous enough to share the overage with him and his Vice President. They, in turn, purchased deferred variable annuities from the company in the Cayman Islands of which I was General Manager. Strangely enough, even in those days I had done my due diligence and hired Equifax who told me the premium being paid by the two applicants was well within what could be expected for people of their net worth. The premiums were wire transferred from a Swiss bank and I issued two policies.

Unbeknown to me and apparently, Equifax, the premiums were the alleged proceeds of the shared commission. The justice department had traced the money to Switzerland where they met a brick wall of confidentiality. However, they raided the offices of the shipping executives where they found copies of the policies signed by myself as General Manager. So believing the money to be the proceeds of embezzlement, they decided to request me to attend an interview. As a resident of the Cayman Island I was bound by their Confidentiality Laws and of course could not just pop down to Washington for a quiet chat.

Fortunately, I had previously met an attorney in New York who represented Lloyds. He introduced me to the partner of his Washington office. A motion was entered to quash the subpoena on the grounds that forcing me to testify would make me a criminal in my country of residence. Judges, in those days were far more understanding and respected foreign laws and I was allowed to return to the Cayman Islands to apply for a waiver from the confidentiality laws to return and testify at some future date. The Justice Department, who claimed that if I left the country I was likely never to return, immediately opposed the ruling. So back to Court we went and again found a sympathetic judge who felt there was no evidence of my desire not to see the US again. I returned to Cayman to seek the waiver.

The Justice Department provided a sworn statement of the facts of the case to the Attorney General in Cayman and he agreed to support my application for a waiver from the Cayman Islands Grand Court. A hearing before the Grand Court was scheduled for the following Monday. To my horror at that hearing the Attorney General opposed the waiver, which was not granted. After the hearing I was summoned to his chambers. Somewhat apprehensively I went along to be given a copy of a Washington Post in which there was an article about the Justice Department who were crowing about how easy it was to circumvent Cayman Island's confidentiality laws. To make it worse the young attorney in this case had been interviewed and openly questioned the ability of the Attorney General to understand the complexities of this particular case. Needless to say the Attorney General was more than a little troubled by the article.

Not returning to the US at the appointed time, the Justice Department had little trouble in persuading a judge to issue a material witness warrant for my arrest. My vacation to Las Vegas was postponed.

After much correspondence had been exchanged it was agreed that the attorney in the Justice Department would travel to Grand Cayman bringing with him all the necessary documents to support their case for me to receive a waiver. So on a hot and humid Thursday afternoon in September a US Justice Department attorney arrived with twelve boxes of evidence, which without help he had to carry one by one through a diligent customs inspection. His seersucker suit drenched, he arrived at the Holiday Inn where he stayed in the company of a local constable: just in case he were to try and seek out information of a confidential nature. Unfortunately, the Attorney General was unable to make the scheduled appointment next day due to important Government business. In fact he was only able to see him at six on Sunday evening at his office on the fifth floor of the Government administration building. Sadly, being the weekend the elevator was not operational and one by one this distraught attorney carried the boxes of evidence to the Chambers of the Attorney General. At six precisely the elevator door opened and out stepped the Attorney General casually dressed. He opened one of the boxes took a cursory glance at the contents and turned to the attorney and said there appeared to be sufficient evidence and that he would now support my application for a waiver. Fortunately, he had the courtesy to leave the elevator on when he left.

I was granted my waiver on Monday and flew that afternoon to Washington to give evidence to the Grand Jury. I arrived on Tuesday morning to be told that I would not be needed that day and could return to Cayman. Every Monday for three months I flew to Washington returning Tuesday without giving evidence. Finally the game ended and I appeared before the Grand Jury and what an eye opener that was. It appeared to me that the Government had just walked outside of the Court House and picked the first twenty-four people they set eyes on. At one point during the proceedings, not out of bravery but frustration, I asked the attorney if my evidence was important. He replied it was, to which I suggested it might then be appropriate for all the jurors to be awake. Outside we went the riot act read to me in front of my attorney mild threats of including me in the charges and then back to the inquisition.

Near the end of the proceedings the attorney suggested a recess after which I was to return to answer any questions the Grand Jury may have. After a brief break I returned to have the foreman of the jury read from a yellow pad a number of questions obviously given to him by the attorney. He could not pronounce deferred variable annuity let alone spell it. I suggested to the attorney outside of the Court House that he had written the questions, which of course, he denied but the smile said it all.

Into the 21st Century

So what is the purpose of telling you all this and how does it relate to the Caribbean moving into the 21st Century. I believe these stories illustrate a number of points:

Exchange of information between Offshore domiciles and the US and other countries has been going on for over 30 years

Originally the information exchange was of a criminal nature, drug money laundering, racketeering, and financial fraud. With few exceptions the Governments of Offshore territories did not want to be seen to aiding and abetting criminals

In the past feisty Attorneys General in the Islands took secret pleasure in advising young US lawyers that they had no standing in the jurisdiction and that the laws of the US did not transcend sovereignty

Nowadays Attorneys General planted in the Dependent Territories by the Clintonesque UK Government have little or no interest in their sovereignties

Governors under threat of an Executive Order from the UK have signed Tax Information Exchange Agreements without attempting to or caring to negotiate any benefits for the Dependent Territories themselves.

The Cayman Islands, The British Virgin Islands, Antigua and Barbuda and The Bahamas have signed these agreements and many other countries are poised to do the same. While each is worded slightly differently the common purpose is to "provide assistance through the exchange of information relating to the administration and enforcement of domestic laws of each country relating to tax matters" Initially the information exchange is limited to criminal tax evasion for taxable periods commencing 1st January 2004. For all other tax matters of a civil and administrative nature the agreements apply to taxable years beginning 1st January 2006.

The treaties provide that information will only be provided pursuant to a specific request, and that the information sought is relevant to an investigation or examination being conducted in accordance with the Laws of the United States. Importantly, the requesting authority will have to specifically identify the taxpayer, hopefully eliminating "fishing expeditions".

However I personally believe that these agreements will be seen by the various US agencies as an open ticket to go on fishing expeditions, despite the wordings of the agreements. One saving grace under the Cayman agreement is that the request for information must be routed through a newly created statutory body rather than the Monetary Authority itself. If this body takes over the role of the feisty Attorney General and makes sure the requests are specific, well documented and not just general in nature it may be the first time that a new Government department is of benefit to the people.

All but seven of the original countries listed as tax havens have signed commitment letters with the OECD, which will ultimately translate to similar tax information exchange agreements being signed with member countries. Those seven countries are:

Andorra

Liechtenstein

Monaco

Marshall Islands

Nauru Vanuatu

FATF have issued a new list of non-cooperative nations and it contains nineteen names and can be found on their web site.

What concerns me most is as a result of these initiatives the Treasury Department has been able to convince the public at large that legitimate tax planning is the same as tax evasion. By adding the word "abusive" they have been able to summarily dismiss the long held principle of law that every man has aright to handle his affairs in such a way to pay only the minimum amount of tax. The Treasury Department appears to believe this is not a valid principle and should anyone have the audacity to try and minimize their tax bill it is not only morally wrong but also abusive as it is outside the spirit of the law.

In its very public crackdown on the use of credit cards issued by offshore banks the IRS suggested that between one and two million Americans have such cards the primary purpose of which is to defraud the Revenue. Apart from the extremely large differential between the high and the low estimate these figures need questioning. In 1999 about 2.4 million Americans filed tax returns that reported adjusted gross income in excess of $200,000. I would suggest this group would seem the most logical taxpayers to have an offshore account. If the IRS guesstimates are correct then 4 out of 5 of these citizens are tax cheats. Would the judge in this case been as quick to authorize the handing over of Visa M/C and Amex records if the Island in question had been Manhattan rather than offshore. I doubt it. Yet an equally compelling and more convincing argument could be put forward that the residents of Manhattan use their cards to avoid taxes on volume alone.

"Offshore" as a Government and Media catchword

"Offshore" has become a Government and Media catchword, its mere utterance denoting sinister, secretive and shady deals. The fact that the majority of offshore financial activity is perfectly legal seems to matter little. The media who repeat everything expressing outrage rather than offering a critical analysis of the situation blindly accepts any press release issued by the Treasury Department. These stories are often accompanied by self-righteous editorials inferring that anybody who tries to minimize their taxes is un-American and unpatriotic and can only have an illicit purpose in mind when going offshore.

In reality the term offshore merely indicates that institutions which are based in one country service clients and business transactions that are based in other countries. To a great extent much of the financial business carried on in London and New York is offshore and is no different to the business done in The Bahamas or Cayman. Business and Investment will always naturally seek advantages, whether they can be found in labor costs, minerals, natural resources or better tax systems. In today's Global economy it would be a foolish company that did not try and seek these benefits whether in New York or Cayman.

The IRS has also recently been saying that annually $70 Billion of tax revenues are lost to people using offshore havens. But for this to be true one tax accountant has estimated that the amount offshore would have to exceed $2 Trillion. The OECD estimates that $5 trillion is deposited offshore. I find it difficult to believe these numbers. Personally I believe the exaggeration of facts and the attempt to legislate through press releases, because the IRS position may be questionable in law, is equally abusive, if not more so, than the programs the IRS are trying to stamp out. It concerns we when Government agencies decide that the laws of the land, as written, are insufficient or unacceptable, as they do not support their own positions.

The Cayman Islands Government in its attempts to lead the offshore world in international co-operation created a Monetary Authority. Their legislature passed stringent anti money laundering laws, which required guidelines to be issued by the authority covering financial service providers. The Monetary Authority decided the laws did not go far enough, so he included in the guidelines clause 1.3, which I paraphrase:

"In some respects these guidelines go beyond the requirements of the Money Laundering Regulations set out in the law, failure to comply with these guidelines however, may result in the Authority determining that the Financial Service Provider could be subject to sanctions under applicable legislation."

To me this is a prime example of how the OECD, FATF, FINCEN and the many other bureaucratic entities have succeeded in imposing their standards and beliefs on the world at large which has significant implications for privacy, free trade, sovereignty and most importantly rule of law. If these organizations and the countries that sponsor them believe so much is being hidden offshore, should they not ask themselves why? The right way to fight tax evasion is to cut taxes reform the system and create an environment conducive to business so that all are willing to contribute in an equitable manner.

I frequently am accused of living in the past or not adopting to modern thinking. I left banking in the Cayman Islands because of the suitcase money, not wanting to be a part of it. The business I have undertaken has, for the most part, been supported by legal opinions written by US law firms, opinions that now the IRS are trying to suggest may fall short of the minimum standards that they think are appropriate. The fact that they comply with the law seems of little relevance to them. I have great difficulty with Government agencies and departments which forget they exist to be our servant not our master. Their responsibilities are to administer the laws as passed by the Legislature they do not exist to dictate our lifestyles or determine what is moral, or to interpret the law to suit their own values and narrow points of view.

For the most part the Caribbean has surrendered to the pressure of the industrialized nations. One can only hope that the authorities in those countries will not abuse the commitments that have been given in good faith. In showing the world they are responsible the Islands of the Caribbean should continue to prosper provided the business they undertake will stand up under the microscope of transparency in the Dependent Territories.

The Caribbean has surrendered

In reality the term offshore merely indicates that institutions which are based in one country service clients and business transactions that are based in other countries. To a great extent much of the financial business carried on in London and New York is offshore and is no different to the business done in The Bahamas or Cayman. Business and Investment will always naturally seek advantages, whether they can be found in labor costs, minerals, natural resources or better tax systems. In today's Global economy it would be a foolish company that did not try and seek these benefits whether in New York or Cayman.

The IRS has also recently been saying that annually $70 Billion of tax revenues are lost to people using offshore havens. But for this to be true one tax accountant has estimated that the amount offshore would have to exceed $2 Trillion. The OECD estimates that $5 trillion is deposited offshore. I find it difficult to believe these numbers. Personally I believe the exaggeration of facts and the attempt to legislate through press releases, because the IRS position may be questionable in law, is equally abusive, if not more so, than the programs the IRS are trying to stamp out. It concerns we when Government agencies decide that the laws of the land, as written, are insufficient or unacceptable, as they do not support their own positions.

The Cayman Islands Government in its attempts to lead the offshore world in international co-operation created a Monetary Authority. Their legislature passed stringent anti money laundering laws, which required guidelines to be issued by the authority covering financial service providers. The Monetary Authority decided the laws did not go far enough, so he included in the guidelines clause 1.3, which I paraphrase:

"In some respects these guidelines go beyond the requirements of the Money Laundering Regulations set out in the law, failure to comply with these guidelines however, may result in the Authority determining that the Financial Service Provider could be subject to sanctions under applicable legislation."

To me this is a prime example of how the OECD, FATF, FINCEN and the many other bureaucratic entities have succeeded in imposing their standards and beliefs on the world at large which has significant implications for privacy, free trade, sovereignty and most importantly rule of law. If these organizations and the countries that sponsor them believe so much is being hidden offshore, should they not ask themselves why? The right way to fight tax evasion is to cut taxes reform the system and create an environment conducive to business so that all are willing to contribute in an equitable manner.

I frequently am accused of living in the past or not adopting to modern thinking. I left banking in the Cayman Islands because of the suitcase money, not wanting to be a part of it. The business I have undertaken has, for the most part, been supported by legal opinions written by US law firms, opinions that now the IRS are trying to suggest may fall short of the minimum standards that they think are appropriate. The fact that they comply with the law seems of little relevance to them. I have great difficulty with Government agencies and departments which forget they exist to be our servant not our master. Their responsibilities are to administer the laws as passed by the Legislature they do not exist to dictate our lifestyles or determine what is moral, or to interpret the law to suit their own values and narrow points of view.

By: Ian Kilpatrick
iank@candw.ky