ICC Commercial Crime Service

Financial Attraction: Big Corporations and the Caymans

Can governments put enough pressure on the world’s offshore tax havens to make a dent in what has become a competitive trillion dollar industry? Both the U.K. and the U.S. hope so. They are developing strategies to force corporations to pay taxes at home, even as the Cayman Islands and other havens continue to compete for corporate business. However, with so much money involved andconstitutional questions at play, the idea of forcing British territories to bend to the governments’ demands is probably more an aspiration rather than a near term reality. Focusing on their own reporting laws at home, and working with Overseas Territories (OTs) and Crown Dependencies to update and improve their systems, would more likely yield results and additional corporate tax funds in government coffers.

These days it is difficult to gauge whether the Cayman Islands is better known for its idyllic landscape or as an offshore tax haven for Fortune 500 corporations.Few jurisdictions rise to the level of attention and criticism leveled at the Caymans over the issue, but lately,calls for action have reached a fever pitch in the UK and in the U.S.

According to a recent study, the 500 largest American companies hold more than $2.1 trillion in accumulated profits offshore to avoid paying U.S. taxes. The study by Citizens for Tax Justice and the U.S. Public Interest Research Group Education Fund estimates that the companies would owe about $620 billion to the U.S. government were they to repatriate those funds. Apple alone holds $181 billion offshore, more than any other U.S. company. Other brands include Nike and General Electric.

In addition to corporations, however, the wealthy also hold assets offshore. In 2012 a study commissioned by Tax Justice Network a British activist group, found that worldwide, the wealthy have accumulated at least $21 trillion in such jurisdictions. The study was conducted by James Henry, former chief economist at McKinsey, and an expert on offshore tax havens.

These revelations, which anger taxpayers everywhere, coupled with the recent financial crisis, have spurred governments to aggressively go after money owed to them. The issue is popular with voters, unlike tax increases or spending cuts.

In the UK last month, Sir Eric Pickles, a member of Parliament and an anti-corruption advocate, said the government could use legislation among other means to force its former territories to reveal the identities of the ultimate beneficial owners of offshore companies.The Guardian has reported that both the Caymans and the British Virgin Islands have received joint letters from the Treasury and Foreign Office ordering them to present an implementation plan by November.

“How to get there, through legislation, guidance or naked pressure, the Prime Minister is pretty determined to get there,” Pickles told the Guardian.

One option on the table is the use of a public registry of beneficial ownership, which would identify who really owns and controls companies in tax havens.

The popular thinking behind the idea of a public registry of beneficial ownership is that it would enable anyone to see who owned a particular company. Arecent spike in receipts from a tax on homes bought up by companies, trusts and investment funds, rather than individuals, led to the assertion by Donald Toon, director of economic crime at the UK NationalCrime Agency, that foreign criminals were investing in real estate as a way of storing their ill-gotten gains.

Supporters argue that revealing beneficial ownership would unearth the practice and make it easier to trace assets. In reality, as with all steps law enforcement takes, criminals will always find a way to get round them. For example, little has been said about how discretionary trusts would be recorded. By their very nature, discretionary trusts do not have beneficial owners and many criminal cases have these structures as a feature. Foundations are another example. In short, sophisticated criminals will find a way of disconnecting their ownership and control of a structure from the view of the authorities.

Governments world wide have become more innovative in recovering tax they believe has either been evaded or, crucially, avoided by using aggressive tax planning schemes. For example, the UK government is looking to recover over £7bn in tax by issuing accelerated payment notices to taxpayers where tax avoidance schemes have been used. It is questionable as to whether the publication of beneficial ownership information of offshore companies will produce results especially when alternative mechanisms for finding out the information – witness the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard - or recovering the tax already exist. It looks more like a political ploy than a tax recovery exercise.

Realistically, the British government does not have the constitutional power to force the Caymans to do anything. The Cayman Islands are an Overseas Territory (OT) as opposed to a Crown Dependency like Jersey, Guernsey and the Isle of Man. Putting aside the complexities of constitutional law, the Cayman Islands has its own legislature and determines its own fate, only relying on the UK in matters of foreign policy and defence. While it has a Governor, who is appointed by the Queen, and requires Privy Council (the UK body which represents the Crown) assent for all its legislation, pressure can really only be applied indirectly without causing a constitutional crisis.

It is interesting to note that before the Overseas Territories Joint Ministerial Council meeting which is due to be held in London later this month, leaders of several OTs met in Bermuda in July to discuss the matter. The clear message arising from that meeting was that developing a collective position was central to furthering the OTs’ interests so that the UK was not able to ‘divide and conquer’.

To some extent it seems as though this has had some effect. In August, Grant Schapps, the Acting UK Overseas Territories Minister said that “There’s more than one way to skin a cat.” Following this the Cayman Islands’ Premier has said that the UK Government appeared to have “moved its position” and would accept “another effective mechanism” for releasing beneficial ownership information. This will be further addressed at the OT Joint Ministerial Council meeting. Watch this space.

As to tax and large corporates, a public registry of beneficial ownership is not as relevant. The use of offshore entities in this context is part of tax planning strategies which are designed to exploit loopholes in tax legislation and practice across the world, either resulting in double non-taxation or diverting profits to jurisdictions which have highly beneficial taxation regimes. This is what the OECD Base Erosion and Profit Shifting programme is designed to address (although usurped to some extent by the UK’s Diverted Profits Tax proposals). Of course, the United States already has its own problems with U.S. corporations stashing away cash offshore thanks to its worldwide approach to taxation under which the government only taxes profits when they are remitted to the U.S.

In short, the tax issue for large companies is not so much one of disclosure as to weaknesses in international and domestic tax regimes.

For OTs and Crown Dependencies, the greatest fear is not the adoption of a register per se but that it is done unilaterally. The offshore financial services industry is fiercely competitive and any advantage that one jurisdiction can gain over another would be seized upon immediately by competitor jurisdictions. This issue has brought out a surprising degree of cooperation between offshore centres in adopting a near-uniform approach of rejecting the idea.

It is also not without some irony that neither the UK nor the U.S. operate a central register of beneficial ownership or, in the case of the U.S., require the collection of beneficial ownership information – as recently noted by New York County District Attorney Cyrus R. Vance Jr.

The message is that the onshore jurisdictions should get their house in order first before pointing the finger offshore.

Stephen Baker is an Advocate and Partner of Baker & Partners, and a member of ICC FraudNet. He is also an appointed Crown Advocate. He has acted regularly for foreign governments including Brazil, Kenya, Pakistan and Nigeria in asset recovery actions, and has been responsible for handling suspicious activity reports and investigations for the Attorney General of Jersey. Regularly instructed by both the Attorney General and the Jersey Financial Services Commission, Stephen is a specialist in conducting investigations into the flow of suspected corrupt payments made to politicians through Jersey. He also has expertise in cases involving complex fraud and money laundering, particularly those with an international and political dimension.





ICC FraudNet is an international network of independent lawyers who are leading civil asset recovery specialists in each country. Recognized by Chambers Global as the world’s leading asset recovery legal network, our membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. Founded in 2004 by the Paris-based International Chamber of Commerce (ICC), the world’s business organization, FraudNet operates under the auspices of the ICC’s London-based Commercial Crime Services unit.