Bank deposits continue to decline in Channel Islands

Guernsey has seen the value of deposits held with banks in the Island dip to a 6 year low.

Deposits declined 6% in Q3 to £96.9bn, more than 15% down on a year ago.

The drop was said to be due to the ongoing economic crisis.

Jersey has not yet released its Q3 statistics, but it too has experienced a steady decline in bank deposits since the 2007 peak of £212 million.  As at the end of Q2 2012, Jersey bank deposits stood at £150 million.

Guernsey fund manager acquisition - MitonOptimal to buy Argyll

MitonOptimal, the Guernsey head-quartered multi asset management business founded in 2002, is to acquire a majority stake in Argyll Investment Services in Guernsey for an undisclosed consideration.

Following the acquisition Argyll will be re-named MitonOptimal Portfolio Management (CI) Limited.  The group will have operations in Guernsey, South Africa and Singapore, and $600 million of funds under management.

Argyll was established in 2000 as an independent discretionary portfolio manager. It offers investment portfolio management services, a niche discretionary fund management service, bespoke pension services and the Fortress Pension Plan.  Like MitonOptimal, Argyll is an owner-managed company.

The deal is subject to final approval by the Guernsey Financial Services Commission.

Blackstone reported to be in exclusive talks to acquire Intertrust

According to Reuters, Blackstone have been granted exclusivity in talks to buy the Intertrust Group, which is being sold by private equity house Waterland.  They report that banks are now being lined up to finance around Euros 400-500 million to back the deal.

Intertrust is a trust and company administration specialist with over 1,000 employees in 20 locations.

Huge threat to Crown Dependencies and Overseas Territories from UK

According to International Tax Review, a leaked government document shows that the UK is planning to impose its own version FATCA on its Crown Dependencies and Overseas Territories, such as the Channel Islands, the Cayman Islands and the Isle of Man.  This is something which could be a huge blow for those territories – although not for the reasons that many might expect.

The offshore centres are already facing a huge workload in preparing for compliance with FATCA which requires foreign financial intermediaries to report all activity with “US persons”.

During the summer, Britain’s International Development Committee recommended that the UK should introduce equivalent legislation to FATCA, requiring the automatic reporting of information relating to UK citizens or corporations. The proposals were controversial for many of the same reasons as the US equivalent has been controversial – including claims that the costs of compliance by the FFIs will outstrip any taxation benefits gained through the reporting, and that nationals of the countries who have FATCA-type legislation will face higher costs and less choice of service provider.  In the case of the UK, the cost/benefit analysis is likely to be even more skewed, because HMRC does not currently track the affairs of all UK citizens – only those who are resident in the UK.  The imposition of a citizenship based reporting would therefore require a huge change in HMRC infrastructure and reporting systems.  For those reasons, there were many who doubted that FATCA equivalent legislation would really get off the ground in the UK, at least unless and until its EU colleagues all agreed to do the same. 

However, in a development which will be seen as very worrying for the British offshore centres, it seems that the government may be determined to go down a route which, so far as the British offshore centres are concerned, is the worst of all worlds.  It is being claimed that the government has already drafted FATCA equivalent legislation which will be imposed on its Crown Dependencies and Overseas Territories. The draft agreement, seen by International Tax Review, will require the automatic exchange of information for each reportable account of each reporting financial institution. That will include full details of all beneficial owners of the account, including those whose identities might otherwise be hidden by trusts or companies.  However, by making the legislation apply only to the Crown Dependencies and the Overseas Territories, the government is putting them at a huge disadvantage to other offshore centres.  The costs of compliance will rise significantly, and therefore the clients are likely to move their financial arrangements to other centres which will not be affected by the legislation, such as Singapore or Switzerland. 

The Tax Justice Network is cock-a-hoop at the situation, saying that it shows that the UK government for the first time is really getting to grips with tax evasion and that it is the start of the end of tax haven secrecy.  I have never believed for one second the statistics put out by TJN on the scale of tax abuse in the tax havens and therefore do not think that FATCA-type legislation would have the hugely positive impact that they expect – as someone who worked in the offshore financial centres for almost 25 years, I think the days where people put their assets offshore and simply did not report them to the UK revenue are for the most part long gone.  However, even if the TJN was right and there are huge numbers of tax evaders in the Crown Dependencies and the Overseas Territories, this action by the UK government, if it does come to fruition, will not stop those who are determined to evade taxes – it will simply move them elsewhere.

And there is a real and much more damaging danger for the UK in that.  Numerous studies over the years (including the UK government sponsored Edwards Report) have shown that the funds which are routed through the Channel Islands in particular end up being invested in the City of London, and HMRC gets the benefit of that.  If those funds are moved to Asia or Switzerland, then chances are the assets will not be invested and managed through London, but through New York or Hong Kong.  The UK would therefore lose out rather than gain.

If the UK wants to introduce FATCA-type legislation then in my mind it can only make sense if it is done in a way similar to the US – ie impose it on a worldwide basis, not singling out a small handful of jurisdictions.  Doing the latter will mean it is doomed to be ineffective.  Personally, I am very far from convinced that it makes sense for the UK to have FATCA equivalent legislation at all (at least, until we have had a few years to understand the impact that is has on the US economy), but imposing it in relation to the Crown Dependencies and Overseas Territories alone would, in my view, be a massive own goal for the UK.

Unless there is a change of tack, the UK government is expected to announce the new rules this autumn, with the legislation coming into effect on 1 January 2014.

Axiom Legal Financing Fund - Time for Regulatory Investigation

The situation regarding the Axiom Legal Financing Fund has become increasingly farcical.

As previously reported in this blog, US-based OffshoreAlert has made a series of very serious allegations, claiming publicly that the Fund appears to be a Ponzi scheme and warning investors that they have been victims of a massive fraud.  The Fund directors have denied any wrong-doing and brought KPMG in to investigate, although the publication of their findings has been delayed. In the meantime, redemptions and subscriptions from the Fund have been suspended, Tim Schools, the founder of the Fund and former boss of its investment manager, Tangerine, has been replaced as its head as a consequence of the allegations, and Tangerine itself has been sacked as investment manager of the Fund.  And to ramp up the pressure a notch further, Tim Schools has now commenced legal proceedings in the UK to sue OffshoreAlert for defamation.  The whole sorry scenario is being played out in public, through blog posts, social media and published correspondence between the protagonists.  

Spare a thought in all this for the investors who have invested in good faith in the award-winning Fund and who have no idea who to believe as the pressure increases.  I have been contacted by one such individual, who has asked whether there is any likelihood of him getting his money back.  The truth is that I have no idea.  The specifics of the allegations being made by OffshoreAlert are fairly detailed and on the face of them certainly merit a thorough and independent review, but they are being robustly denied by all involved and it would be dangerous simply to accept them at face value.  If they are true, then the investors and those involved in advising the Fund could potentially lose very significant sums of money.  If they are false, then doubtless huge damage will have been done to a Fund which may struggle ever fully to recover.  

Whilst the whole sorry saga is being played out, there has been a striking lack of comment from the Cayman Islands authorities.  Surely now it is time for them to launch their own investigation?  Given the size of the Fund (over £100 million), the very public and serious nature of the allegations, I do not think it is sufficient comfort for the investors to have the directors organising an investigation (albeit by a third party) into what, if anything, has happened.  Whilst the directors were absolutely right to launch their own investigation, they cannot be seen as entirely impartial as there may be implications for them if the allegations are substantiated. Investors may, therefore, not be entirely satisfied with the outcome of a review where the terms of reference are set by the Fund's directors, and they are the recipients of the report.  

In my view, it is time for CIMA or the Cayman Islands police to be seen to take control of an investigation into whether there is any truth in the allegations, as a matter of urgency. This is not because I believe that a fraud has been committed - as I have said earlier, I simply do not have sufficient facts available to know - but because the current very unsatisfactory situation should not be permitted to persist.  The reputation of the Fund, its advisers, and the Cayman Islands regulator are all at stake.  

IFG acquire Moore Group

IFG Trust and Corporate Group (“IFG”), the trust company and fund administrator, has agreed to acquire Jersey-based fund management business Moore Group for an undisclosed sum, subject to regulatory approval. 

The acquisition is the first for IFG since AnaCap Financial Partners backed its £70 million MBO from the wider IFG Group in the summer.

IFG was established in 1975 and today provides fiduciary services, fund administration and services to the leisure industry through offices in the Isle of Man, Jersey, Cyprus, Switzerland and the Republic of Ireland.

Moore is a specialist fund administration business founded in Jersey by Ian Moore in 1996 and which now administers assets in excess of $17bn.  It has had a long-standing focus on Asian clients, with offices in Tokyo and Bermuda, and IFG believes that the acquisition will strengthen the combined group’s position in Asia.

Ian Moore will continue to work with the group and will become its executive chairman.

IFG is currently undergoing a rebrand to establish itself as corporate service provider independent of the IFG name, and is due to unveil its new corporate identity shortly.  For the time being at least, the Moore brand will exist as a subset of the new brand, retaining its own name and trademark.

Brooks Macdonald to acquire Spearpoint for £34 million

Channel Islands investment management boutique Spearpoint is to be acquired by Brooks Macdonald Group plc, an AIM listed wealth management group, for approximately £34m.

Spearpoint was established in 2007 by Jon Davey and has grown to 54 staff across Jersey and Guernsey. It offers fund management, retirement services, and execution only stock-broking.

Spearpoint has assets under management of approximately £1.1bn and the new combined group will have funds under management of approximately £4.5bn.

As Brooks Macdonald had no Channel Islands presence prior to the acquisition, and as the plan is to expand the business, it is believed that all of the existing staff will keep their jobs.  It is also understood that the key senior executives will all remain with the business.

Santander reported to be pondering sale of its Jersey private banking business

Santander, the huge Spanish banking group, is reported to be looking into the possibility of selling its Jersey-based private banking operation, believed to comprise tens of thousands of customers and around £4 billion in deposits.

The Jersey business was rebranded in 2010 as Santander Private Banking from Abbey International (which it acquired in 2004).

The fact that Santander are looking at the options is by no means evidence that it has already taken a decision to sell – it conducted a similar review of its Alliance & Leicester International business on the Isle of Man earlier this year, and has retained ownership of that business.

The sale of a private bank in Jersey is not necessarily straight-forward because of the policy of the Island’s regulator only to grant banking licences to banks amongst the world’s largest 500.  This limits the pool of potential buyers quite considerably, although there are still numerous banks operating in the private client field in the Island who could view this as an opportunity to add some significant critical mass.  Royal Bank of Canada, Kleinwort Benson, UBS and Investec are amongst a number all of whom have significant existing operations in the Island.

Santander is understood to have appointed London based corporate finance advisory firm Gleacher Shacklock, to assist in the process.

FATCA Model 2 Agreement published

The United States Treasury has published a second model agreement, developed in conjunction with Japan and Switzerland, designed to facilitate the implementation of FATCA.

In February this year, the US Treasury announced the first model agreement – negotiated with France, Germany, Italy, Spain and the UK - to facilitate a government-to-government mechanism for implementing FATCA.   Under the first model agreement, FFIs would report the necessary information regarding US persons to their respective governments rather than directly to the IRS.   The agreement also envisages tax information sharing between the governments on a reciprocal basis, based on existing bilateral tax treaties.  This model agreement is expected to be available only to jurisdictions who have signed a Tax Information Exchange Agreement with the US, or who have a double tax treaty in place.

The second form of model agreement takes a different approach.  It does not obviate the need for direct reporting by FFIs to the IRS, but it does deal with some perceived legal impediments which would otherwise prevent FFIs from passing the information across. In essence, governments using the second model agreement would issue a directive to their resident FFIs directing them to register with the IRS by January 1, 2014, to comply with all of the requirements of an FFI agreement, and instructing them to request the consent of pre-existing account holders to the reporting. 

There are likely to be some situations where existing US account holders refuse to consent to the reporting of their information.  The model agreement deals with this by providing that in those situations the FFI will provide aggregated information on all such accounts to its own government’s tax authority, which will then be authorized to transmit the data to the IRS.  

New accounts for US persons would only be permitted to be opened if the FFI first obtains consent from each account holder for the FFI to comply with the requirements of an FFI agreement. 

The model two agreement is a pragmatic solution to situations where a country’s laws would prevent the passing of data to a foreign tax authority without the explicit consent of the underlying client, and as such has been welcomed by American Citizens Abroad (ACA), a Geneva-based organisation which represents American expatriates.  However, as it does not obviate the need for the FFI to have a direct reporting relationship with the IRS, it is likely to be viewed in many quarters as less attractive than the first model agreement.

Some offshore jurisdictions, including the Channel Islands, have already announced their intention to put IGAs in place following model one.  The Cayman Islands, by contrast, decided not to commit themselves to any particular course of events until the second model agreement had been published.  It can therefore be expected to make an announcement as to its preferred course of action shortly.

The IRS is currently understood to be in dialogue with around 50 countries in relation to arrangements for FATCA compliance.

FATCA Survey Results - opinions deeply divided on impact on trust company profits

It seems that trust companies are starting to get to grips with what FATCA will mean for them.  In October I ran a survey of trust companies to test their preparedness for the new regulations.  The results have now been collated and seem to show that plans are further along than some might have feared, but that there is a real lack of clarity regarding whether FATCA will have a positive or negative financial impact on the trust company industry.

7% of respondents had little or no idea how FATCA would affect their business and a further 7 % had only a basic understanding of what FATCA was about and did not yet have a clear idea of how it would impact the business.  However, a creditable 86% had at least a fairly detailed understanding of the regulations and their impact, with 29% believing they had a thorough understanding and were already well into their implementation preparation.  One respondent commented that they had a dedicated programme office to handle the regulations, had already analysed the entire client base and were well into the process of gathering any missing data items - a commendably thorough approach.

There seems to be some doubt as to whether time costs will be billable for FATCA work - 39% of respondents thought that revenue would increase because of FATCA, but the majority (62%) felt that income would be unaffected.  None of the respondents felt that revenues would actually decline, which seems to indicate that practitioners do not feel that many clients will close their structures as a result of the new regulations.  

The picture with regard to profits shows more of a divergence of opinion - 39% felt that profits would decline as a consequence of FATCA (citing amongst other things the cost of implementing the necessary controls), 39% felt that they would increase as the additional time costs would be recovered, and 23% felt that they would be unaffected.  It is clear that there is a great deal of uncertainty regarding what proportion of the costs of FATCA compliance can be passed on to clients, but it is a matter of crucial importance for fiduciary businesses.  My own view is that in the first year or two profits are likely to decline, because I do not feel that all of the costs of adjusting IT reporting procedures and systems can or will be passed on to client, and nor do I expect non-US clients to pay for the privilege of being able to prove that they are not caught by the regulations, without a great deal of resistance.  However, once new systems and procedures are in place for the efficient gathering of data and reporting to the relevant authorities in the future, then I would expect that these ongoing costs could reasonably be expected to be passed on to the US clients maintained by each trust company.  

FATCA will require trust companies to gather data on the 6 indiciae of a US person.  43% of respondent trust companies believe that they already have the data they need to test the 6 indiciae for each client, but that the data was not stored electronically, implying that there will be a big manual task involved in implementation.  Just under one third of respondents believed that they had all the required information and it is stored already on an IT system.  Perhaps surprisingly, only 29% of respondents believed that they were missing necessary information.  In my experience, I have never come across a trust company which recorded the data required to consider all 6 elements of the US person test prior to the introduction of the FATCA regulations, which seems to suggest that either trust companies still do not understand the depth of information that they need, or that there has been a very large amount of data gathering in the last year.

There was complete unanimity that the FATCA rules would not prevent trust companies from representing US clients.  100% of respondents said that they do currently have US persons amongst their client base, and none proposed to change this view.  This is in contrast to some of the larger banks and investment managers (particularly those based in Asia), who have announced an intention to cease to service US persons as clients.

And in a final bit of good news for the consultants who work in the field, 57% of trust companies felt that they would need to pay for external help in implementing FATCA, with the remainder believing that they could manage with internal resources and knowledge sharing within their industry bodies.

The survey does seem to suggest that FATCA is now getting the attention of very senior individuals within the trust company sector.  In 55% of respondent companies the CEO/Managing Director was taking direct responsibility for the new regulatory project, with the Head of Compliance taking control in 36% of cases, and only 9% of trust companies having delegated the task to business unit directors.

After a slow start it seems that trust companies are now making real efforts to get to grips with the impacts of FATCA, and to prepare themselves for implementation.  The task is not made easier by the fact that certain key grey areas remain, and that the US is currently negotiating IGAs with up to 50 different territories.  Until this process is complete, it is difficult for companies to be sure that they have done everything that needs to be done.

Many thanks to all of those trust companies who participated in the survey.

Guernsey proposes new 10% tax rate for fiduciary businesses

There has been speculation for some time about whether Guernsey would extend its 10% tax rate to fiduciary businesses, to bring it in line with current practice in neighbouring Jersey and to help fill the fiscal hole brought about by the abolition of the deemed distribution provisions under pressure from the EU earlier this year.

Today has seen confirmation that this will be debated by the States on 12 December 2012 as part of the budget proposals.

Up until now, under the Island’s zero ten tax regime, fiduciary businesses have been zero rated for tax.  The aim of the new budget proposals is to raise an additional £12 million from the financial sector.

As yet details are sketchy, and it is not entirely clear exactly who will be caught into the new 10% tax band (for example fund administrators), but it can be assumed that traditional trust companies certainly will be.

The new tax will be applied to fiduciary businesses, but not to any underling client entities administered by them, unless they also meet the criteria for fiduciary business themselves.

Axiom Legal Financing Fund sacks Tangerine Investment Management

The directors of Cayman based Axiom Legal Financing Fund, the embattled fund at the centre of a storm of serious fraud allegations, are reported to have sacked the current investment managers, Tangerine Investment Management.

Last month all redemptions in the fund were suspended following a flood of redemption requests in the wake of allegations made by OffshoreAlert about Tangerine’s boss, Tim Schools, and management of the fund.   The seriousness of the allegations made by OffshoreAlert has escalated over the past couple of months, and now includes claims that the fund appears to be a Ponzi scheme and that investors have been defrauded. 

Mr Schools, Tangerine and the Fund have all strenuously denied any wrongdoing, and Mr Schools has indicated that he will be taking defamation proceedings against OffshoreAlert.  Despite this, Mr Schools stepped down as head of Tangerine following publication of the allegations.  He is separately under investigation by the Solicitors Regulation Authority in England in relation to alleged misconduct at ATM Solicitors, an English solicitors firm he sold last year.  His case has been referred to the Solicitors Disciplinary Tribunal, where it will be heard in due course. The allegations are as yet unproven and again Mr Schools strongly denies any wrongdoing.

KPMG Cayman was appointed by Axiom to carry out an independent review of operations and it was said that Tangerine was “actively cooperating with that review”.  The output of that review was expected by today at the latest, but whilst it is understood that the directors have seen a draft of the report, the final version will be delayed as KPMG have now been asked to provide interim advisory services in the light of Tangerine’s removal and need to focus on this as their priority.  KPMG’s role will be to preserve the fund’s assets, to interact with a panel of law firms to determine their short-term funding requirements for the progression of cases and to gather proposals for the ongoing management of the fund.  The delay of the publication of the report will doubtless be a disappointment to the many investors in the £100 million fund, who are desperate to know whether there investment is safe and whether there is any truth in the allegations.

In a letter dated 14 November, the directors said that an Extraordinary General Meeting will be held in December at which the directors, will present proposals regarding the continued management of the fund.

There is no explanation in the letter as to why Tangerine’s appointment has been terminated.  It is therefore not clear whether the action is because KPMG have found prima facie evidence of wrongdoing, or simply that the step was necessary to restore credibility in the fund’s management in light of the allegations.

Global offshore incorporations up 9%

Despite all the doom and gloom in the press recently regarding tax havens, according to a report released by offshore law specialists Appleby the number of new offshore companies being registered globally in the first six months of 2012 was up 9% from the previous six months, to 41,556, indicating that the offshore markets are recovering from the financial crisis.  

The British Virgin Islands, which have always been very popular with clients from Asia in particular, dominate offshore new company registration activity by volume, enjoying a huge six-fold lead over its nearest rival, the Cayman Islands. However, Cayman was the fastest growth jurisdiction for new registrations, with a 13% increase in the first half of 2012 over the previous six months. 

Despite the global growth, overall company registrations in the offshore sector have still not yet returned to their pre-crisis growth - hardly a surprise given the very slow haul out of recession being experienced by many of the major economies which provide them with their work. Furthermore, the total number of active offshore companies has actually decreased 4% to 801,168, implying that significant numbers of companies are being wound up.  Nevertheless, the level of activity in new incorporations will be reassuring to those working in the sector.

Whistle-blower leaks details of 4,400 HSBC Jersey bank accounts

It is being reported this morning that a whistle-blower has sent to HMRC details of every British client of HSBC Jersey, including names, addresses and account balances.  The list apparently covers more than 4,400 accounts and almost £700 million in deposits.

Early press coverage of the leak is whipping up something of a storm regarding failures by the bank in its compliance standards, primarily on the basis that it is being suggested that there are 5 individuals on the list; one of whom has a conviction for arms offences eleven years ago, one of whom is wanted for questioning regarding the growing of cannabis some years ago, and three of whom are City bankers facing fraud allegations.  However, I can't help feeling that the bank is being castigated for failings here before the situation has been verified.  Those facing allegations have, I assume, not yet been convicted of anything.  It would be a strange and unjust situation indeed if people were denied  banking facilities as soon as any allegation of wrong-doing is made against them.  There is nothing at this stage to indicate that the bank has done anything inappropriate in relation to those accounts, and we should not rush to judgement before the facts are examined.  

Certainly it appears troubling on the face of it that there is an individual on the list who has past arms convictions, but again, we have no detail regarding what safe-guards the bank may or may not have put in place to verify the bona fides of that account or the purposes for which it is being used.  

And even if all of those  highlighted accounts are found to be opened in breach of regulations, five accounts out of more than 4,400 is hardly a pattern indicating a malignant culture and justifying the leaking of such a huge amount of data and such sensationalist reporting.  All banks have to be vigilant regarding their clients, but few would dare to cast the first stone as they all worry, whether onshore or offshore, that the occasional rogue customer can slip through the net.  Indeed, recent research (on the subject of which I have recently blogged) tends to show that on balance offshore jurisdictions are more inclined to challenge and question customers than onshore jurisdictions.

Perhaps there has been a wholesale failure of compliance at HSBC Jersey - clearly I don't have the facts to know at this stage.  But let there be a proper evaluation before we leap to judgement. If there are found to be serious shortcomings then the regulator should deal with the bank appropriately (the Jersey regulator has a reputation for dealing with compliance failures very robustly) and HMRC can deal with any individuals who have not properly disclosed their financial arrangements. But in the meantime it is dangerous to assume that the mere existence of the 4,400 accounts is in itself evidence of major compliance failings.

In fact, I would be very surprised if a large number of people on the list are involved in money laundering or tax evasion.  The fact is that there are plenty of very sound and legitimate reasons why people may have bank accounts in Jersey.  For example, someone who is UK resident but non-domiciled would be routinely advised to keep their cash offshore, and to bring it in to the UK tax net as and when required.  These arrangements are perfectly legal, and usually transparent to HMRC.  Indeed, if a money launderer or a tax evader did want to set up bank accounts to hide his ill-gotten gains there are many more conducive places to doing so than in Jersey, a territory with a large number of Tax Information Exchange Agreements with onshore territories and with a strongly regulated banking and fiduciary industry. The innuendo that the 4,400 people are involved in nefarious activities is, in my view, likely to be proved wholly wrong - but if this is found to be the case and the bank is exonerated no doubt the reporting of that would take up considerably fewer column inches than this morning's coverage.  

Indeed, the fact that the details of the individuals seem to have been leaked not only to HMRC but simultaneously to the press would seem to me to suggest that the action has been taken by someone with a general political anti-offshore agenda, rather than someone who is simply concerned with ensuring that people are not permitted to hide money from the tax man.  If the latter were true, then the details would have been passed only to HMRC to investigate with proper thoroughness, and without thousands of probably entirely innocent taxpayers having their confidential information touted around journalists.

Maitland acquires fund administrator Admiral Financial

Maitland, the law firm and trust company group, has expanded its hedge fund and fixed income fund administration capability to new markets through the acquisition of Admiral Financial Group.  Admiral is a multi-national administrator head-quartered in the Cayman Islands with offices in Dublin, Virginia and Nova Scotia.

The acquisition will bring Maitland’s total assets under administration (AUA) to US$145 billion, of which US$25 billion are hedge fund assets.

The company will continue to trade as Admiral Administration and will also establish an operating subsidiary in Cape Town, South Africa, where Maitland has an existing platform. 

The objective is to establish Admiral as a leading provider of administration services to the hedge fund industry in multiple jurisdictions, both onshore and offshore.

Cayman Islands Premier pushed into humiliating climb down

Yesterday I reported how Cayman Premier McKeeva Bush had precipitated a crisis in relations with the UK by stating on Monday in the Legislative Assembly that he would refuse to pass the Framework for Fiscal Responsibility into law without amendments (despite having agreed the FFR with the UK a year ago), and would proceed with a deal with the China Harbour Engineering Company for new port facilities, despite the outright opposition of the UK.

Less than 48 hours after making these bold statements, he has been forced into a humiliating climb-down.

In an emotive statement released last night, Bush stated of the proposed deal with CHEC:

"No reasonable person could say that our process has not been fair, open, and carefully scrutinized. It has been as robust as the standard form of tendering and would have produced good value for money. However, we are told by the UK that it is the specific type of process that matters, not the outcome; and it is not acceptable to use any other process, even one that can be shown to be as good as the one they prescribe.

Accordingly, in spite of the sustained efforts this government has made to bring improved port facilities to reality we have been stymied unless we follow their prescribed approach to the letter. I must therefore regretfully say that the government is left with no choice but to abandon the present contract negotiations, which were on the verge of being completed. .... I want to publicly extend an apology to China Harbour Engineering Company. ...I trust that having to abandon these negotiations will not harm future relations with Chinese companies."

Of the FFR Law, he said:

"The UK calls for us to implement the FFR into Law without debate or amendment. As I have said publicly, I agree with the UK on much of the FFR because of the large loans and debt left by the PPM. The Opposition has joined in the hue and cry for implementation without amendment. They should both be concerned for the position of the Cayman Islands Government, should we suffer financial or reputational loss as a result of following budget management advice handed down by the UK. The FFR Bill will therefore be taken to the Assembly as prescribed and God help us all if it proves to have the negative consequences that some experts have warned are likely.

I make these announcements with a heavy heart. I have fought against these positions, but I am now forced to do so, through the dictate of the UK Government, which is supported by the Opposition. While I am prepared to bear the political pressures that would result in continuing to resist these demands, I am NOT prepared to expose my family to the political turmoil being brought into play at the present time. I can only pray that the worst will be averted, and that we will find a way forward that shields our population from too painful a decline in our living conditions. The government will continue do its utmost to bring forward the swiftest possible advances towards an improved economy, and trust our industry partners will appreciate that while our hand is now being forced, we will do everything within our power to perform our obligations, and to work for mutually beneficial outcomes now and in the future."

Whilst the climb-down by McKeeva Bush will no doubt avert the immediate prospect of the UK forcing the legislation on the Islands by direct rule, the wording of his statement will do nothing to foster a productive relationship between the two territories going forward.

I make no comment on whether the CHEC deal was a good one or not for the Island - I do not know the details and so cannot make an informed judgement.  Nor do I comment on whether the amendments that Bush sought to the FFR would have been good and sensible ones.  The issue for me that the time for negotiation had long since passed - the FFR agreement was signed last year and, once signed, there was never going to be anything other than enormous difficulty if Bush then sought to block it or disregard its requirements. As a highly experienced politician, he should have been able to avoid both the diplomatic crisis, and being pushed into such a public climb-down.  

An unlikely Anglo-German alliance on tax

In recent years the UK government has been at loggerheads with many of the EU jurisdictions when it comes to matters financial – whether it be the imposition of a financial transaction tax, giving more power to the EU or even agreeing its budget.  It was perhaps surprising, therefore, to see George Osborne, the UK’s chancellor, tightly aligned with the German finance minister, Wolfgang Schäuble, in announcing an international crackdown on tax avoidance by multinational companies at the G20 finance ministers’ summit in Mexico.

The subject of tax avoidance by corporate behemoths has been very high profile of late. Most recently, according to Reuters, Starbucks has not paid tax in the UK for three years and has paid only £8.6 million income tax since 1988, on sales of £3.1 billion – something which has caused a media storm in these straightened circumstances, despite the fact that everyone seems agreed that Starbucks has done nothing illegal.  And nor are Starbucks the only target of public and political ire – Google, Amazon and many others have all also recently been berated by politicians for using lawful techniques to move profits to low tax jurisdictions such as Netherlands and Luxembourg. 

There is a perception that these huge multi-national groupings have opportunities to structure their businesses to be tax efficient in ways that are simply not open to small independently owned businesses, giving them an unfair competitive advantage.  This has added to the sense that what they are doing may be legal, but is fundamentally unfair.

The difficulty is that large nations have enormously complex and unwieldy tax laws which have evolved over many years and were designed in days where businesses were largely static – they would have a physical presence in a location and would trade from there.  Nowadays, e commerce in particular has changed the nature of the game fundamentally – it provides companies with a huge degree of flexibility in where they trade from, and offers opportunities to separate intellectual property rights from trading entities in order to control where profits arise. The simple fact is that the ponderous nature of international corporate tax rules and the tortuous process that most of the mature jurisdictions have to go through to amend them means that governments are permanently trying to catch up with the accountants employed by big multinationals as they shift profits around the globe.  The companies always seem to be at least one step ahead of the tax man, and many of the most creative brains in the field are employed in private practice rather than in HMRC.

So whilst it is not surprising that Osborne and Schäuble have both recognised the problem, finding the solution will be a lot more taxing (forgive the pun!).  At present the detail is vague save that they have said that they will back ongoing work by the OECD to identify gaps in tax laws. But Osborne treads a fine line in as much as the UK actively encourages businesses and individuals to come to it because of its own relatively low taxation rates relative to its European competitors in key areas – Britain has the lowest rate of corporation tax in the G7, and has cut its rate by more than any other G20 country over the past two years and intends to keep doing so (from 28% in 2010 to 22% by 2014). Furthermore, it was only a few months ago that the government was encouraging the French wealthy to relocate to the UK in response to an increasing tax burden in France.  Osborne appears to want to try to keep the UK’s own tax competitiveness whilst limiting the opportunity for companies to use other lower tax areas, which raises the interesting question of at what point a tax rate is unacceptably low – traditionally it has been the offshore “tax havens” such as the Cayman Islands and the Channel Islands which have been the target of criticism, but it appears that it is countries such as Netherlands, Luxembourg and Ireland which are the key centres to which the corporate behemoths have been flocking.  These are much harder nuts to crack – their membership of the EU affords them a power and influence that the smaller offshore centres lack, and they are not naive enough to be turkeys voting for Christmas. 

So for now, despite the strong words, it is likely that the joint statement is more a case of political grand-standing than a real threat to the financial services businesses in the Netherlands, Luxembourg and Ireland.  There may be a growing and understandable feeling that "something must be done" - but identifying the solution is incredibly difficult when there are so many vested interests to balance.  The cynic in me can't help but think that in making this announcement with the Germans, the UK government is playing gesture politics so that when the forthcoming difficult EU budget negotiations begin, it can say that the UK does not always oppose the direction in which Angela Merkel wants to go.

Relations between Cayman and the UK deteriorate dangerously

Relations between the Cayman Premier McKeeva Bush and the UK have sunk to a new low. 

In November of last year, McKeeva Bush signed a Framework for Fiscal Responsibility with the UK government, in light of UK concerns regarding governance in the Island and its large fiscal deficit.  The FFR was designed to reduce risk and increase accountability in public decision making, and to control public spending within a tightly defined framework.

However, it now seems that the Cayman Premier feels that he is in a position to call the shots and tell the UK government which bits of the Framework for Fiscal Responsibility he is prepared to honour and which he chooses not to.   He has stated that the FFR will only be passed into law with a series of amendments which he is proposing – something which the UK’s overseas territories minister, Mark Simmonds, has made very clear is completely unacceptable. 

It is astounding that a politician of McKeeva Bush’s long experience should feel that he can simply ignore binding commitments publicly given by him, and is an eloquent example of why the UK had concerns about the governance of the Islands in the first place.  It may well be that McKeeva Bush genuinely feels that the FFR is not right for the Cayman Islands and it is in the interests of the Caymanian people that it should be changed, but if that is the case then he should not have signed the agreement last November.

In addition, McKeeva is insisting on going ahead with a partnership with Chinese investor CHEC in relation to a proposed new cruise port, again despite the clear opposition of the UK.  The Premier said he did not believe that Mark Simmonds was aware of all the facts regarding the port, but once he was, he felt sure he would support the project.

In a statement delivered in the Legislative Assembly today Bush told the parliament that if the UK was, as it claimed, a reasonable partner, it could not object to the changes he had made to the FFR bill.  I would argue that it is not unreasonable for the UK to expect the Cayman Islands’ Premier to honour agreements made less than a year ago.

He has also levelled some powerful criticisms of the current governor, saying:

“So far, the only ‘help’ coming from the present Governor – has been to keep our economy flat, people unemployed and unable to pay their mortgages and lose their homes – all of which has exacerbated the rise in the level of crime at gunpoint”.   

What puzzles me is why McKeeva Bush feels he is in a position to take such a defiant stance.  In a letter to the FCO last week (which appears to have bypassed all the usual protocols for correspondence between the two territories), he wrote that Cayman can be led but not pushed, and makes it very clear he will be doing things his way.  In fact, he is entirely wrong in this analysis.  The UK can indeed push.  The Cayman Islands are a British colony and as such are capable of being ruled directly from the UK.  Those who doubt that the UK government would take such a drastic step would do well to learn the lessons from Turks and Caicos.  If direct rule was imposed, it would be disastrous for the Islands’ financial services industry.

The current situation leaves the Cayman and UK governments at what many are already suggesting is a very worrying stand-off and there will be many hoping that an urgent resolution can be found before the situation spins out of the Islands’ control.

Cyprus could be first to exit Eurozone as bailout talks are in chaos

This weekend concerns are growing that Cyprus may be the first Eurozone country to be forced into exiting the Euro.  The country is in an enormous financial mess, and its leaders seem to have their heads in the sand about the size of the problem, refusing to accept EU conditions for a bailout and clinging to the naive hope that the Russians will come to their rescue with a no-strings-attached loan. 

Of course Cyprus is not the only EU country in financial difficulties at the moment, but the crucial difference is that, unlike those other countries, it is probably not too big to fail and there would be limited contagion within other EU countries if it were to do so. It is therefore entirely conceivable that it may be forced out of the Eurozone soon unless the Cypriot government takes a radical and very swift change in approach.  

Cyprus applied for a bailout from the EU and the IMF in June after its two largest banks sought state aid to help with massive losses incurred by the Greek debt write-down earlier in the year.  The island has been unable to borrow from international financial markets for more than a year and the country’s financial system is consequently hanging on a knife edge.  There is a real danger that the prolonged uncertainty and instability of the system, and the spectre of a Eurozone exit, could prompt foreign depositors to move their cash to another country, in which case the overnight collapse of the banks would appear inevitable. 

A lot of the blame for this situation, in my view, lies at the door of President Christiofas who has shown his political naivety in recent months, stalling discussions with the Troika and ultimately rejecting their conditions for an EU bailout in favour of his own set of populist leftist proposals.  He seems entirely to have failed to appreciate the size of the hole he is in. One might expect that negotiations regarding a bailout would involve a healthy debate about the size of wage reductions to be made or new taxes to be levied, but the fact that Christiofas is still sticking dogmatically, for example, to a demand that wages should continue to be index-linked shows the scale of his delusion.

Contrast the approach of Cyprus with that of Ireland, which found itself in similarly straightened circumstances but instead of sticking its head in the sand faced up to the difficult decisions that had to be made.  The Irish public undoubtedly felt the pain of harsh cuts and tax increases, but are now starting to see light at the end of the tunnel as a consequence.  Why should the Irish people, having taken their own harsh medicine, now have to subsidise the Cypriots so that they do not have to do the same?

The upshot of the Cypriot approach in recent months is that the chances of a bailout being agreed in time to save Cyprus are now rapidly receding, with it being clear that the ill-thought-out counter offer is unacceptable to the Troika and no clarity as to where the parties go from here or even when they will next meet to discuss the problems.  The deadline which had been set of 12th November to have agreed the bailout now seems a very remote, if not impossible, prospect.

For Cyprus, the future looks very frightening and it will take some heroics to bring the small country back from the brink.  Unless of course you believe that the Russians will save the day with a very large suitcase of cash........