From "THE SINK" - A Few Thoughts on The Caymans

As a direct result of Bahamian independence in 1974, some bankers started having second thoughts about the financial sector there. With Britain in charge, they saw the island as safe. But the WASP banking world didn’t have a particularly high opinion of native politicians, most of whom seemed to have been cut from the same cloth as (the late Prime Minister Lynden) Pindling. Some of those WASP bankers decided it might be time to start looking for someplace else to go.

That racism played a part in the development of the offshore world is undeniable. As one person put it, “White bankers wouldn’t trust a black crook. White crooks, okay. But not black crooks.” Which is also why nearby ports of call in the Eastern Caribbean didn’t land the business. Instead, money headed westward, past Jamaica to a British crown colony — which meant it was still acceptable to the white world — called the Cayman Islands.

Some 480 miles south east of Miami, the Caymans is a British crown colony of three islands, 525 banks, 900 mutual funds, 400 insurance companies, 40,000 IBCs and about the same number of residents. As there are no direct taxes on income, profits, wealth or capital gains, the government must make its money on indirect taxes, which include sales tax, import duties, stamp duty, plus the sale of banks, mutual funds insurance companies and IBCs.

Commercial finance came slowly. In 1953, Barclays opened the island’s first foreign branch. Ten years later, a second bank arrived — the Royal Bank of Canada — being the opening salvo in a campaign by Canadian money managers to colonize the Caribbean. The island’s third foreign bank, a year after that, was the Canadian Imperial Bank of Commerce. As more and more money left the Bahamas, the pace in the Caymans picked up and, within 20 years, the Caymans could boast one bank for every 49 residents. Abuse brought embarrassment and several banks have since been shut. So now, there’s only one bank for every 76 residents, which still isn’t bad considering that by holding assets of nearly $900 billion — more than twice the amount on deposit in all the banks in New York — it works out to $22.5 million per resident.

Not that every resident has that much. For that matter, you won’t find $900 billion on the island. A few years ago, a local businessman needed to raise a lowly $1 million in cash to pay for a banknotes-on-the-table deal, and it took him several weeks to manage it. Unlike financial centers in Europe where vaults are filled with the stuff, the water table in the Caymans is so high that there are no basements.

No basements, no underground vaults, no cash.

But even if they had vaults, you still wouldn’t find $900 billion there because it’s never been there and there’s no reason for it to go there. Most of the money is in New York. Whatever transaction are booked in the Caymans have nothing to do with moving that money. It’s only blips on a computer screen pretending to be the location of the money.

“What is all this money doing off-shore?” New York’s legendary District Attorney Robert Morgenthau answers his own question. “It is not there because of the sunshine and the beaches. To be blunt, it is there because those who put it there want a free ride, depositors, investors, banks and businessmen want to avoid or evade laws, regulations and taxes.”

Morgenthau is unrelenting in his aversion to the Cayman Islands and the way they do business. “Tax havens which rely on bank and corporate secrecy are knowingly assisting customers of theirs to commit tax fraud. Unlawful tax shelters do not need to be kept secret.”

One of the engines that drove this long period of prosperity was drug money. It poured in from the 1970s well into the 1990s. Then the Russians arrived on the wings of capital flight. Since 1992, it is estimated that as much as $300-$400 billion has bled out of the Russian economy. Some of it stayed in Europe — London, Frankfurt and Vienna, and less obvious financial centers such as Cyprus, Latvia and Turkey. Some if it went to Dubai. A lot of it wound up being invested in the United States. But at some point, a lot of it either moved through the Caribbean or was bedded down there for a while. And in some vases it still lives there. In the Caymans, at least in the beginning, they welcomed the Russians with open arms.

Russian money was followed by money that used to be in Hong Kong. Fearing the Chinese take-over of the colony, a great deal was shipped out to be bedded down in the Caymans for safe keeping. Some of it was legitimate money. Some of it was owned by Asian organized criminals. But, by the time it got to the Caribbean, it all smelled sparkling clean. What’s more, just because it now lived in the Caymans, that didn’t mean the money wasn’t still being managed from Hong Kong.

These days when you mention money laundering in the Caymans, you get the same answer, almost verbatim, from everyone you speak with: no one here wants money launderers, we systematically reject dirty money, we’ve cleaned up our act; the Caymans is no longer a sink for the world’s drug cash.

When it comes to drug cash, there may be some truth in their avowals. It’s a lot tougher for a Colombian cocaine trafficker to hide his money there. Although it’s not beyond the realm of belief that the trafficker might have a lawyer in Switzerland, who manages a Luxembourg company, that is financing a huge land development project in Haiti, which is being financed with a back-to-back loan out of the Caymans. They also insist there is no terrorist money there, either. And, it must be said, over the past few years, the Caymanians have got better at looking for both drug cash and terror dollars. But that’s not the same as saying there’s no dirty money regularly coming into the Caymans. UPS and Fedex 737s arrive daily, filled to the brim with express envelopes for banks and trusts and mutual funds and IBCs registered on the island. It’s hard to imagine so many flights a week, filled with that many “documents”, flying into any other jurisdiction of 40,000 people.

Throughout the history of the Caymans as a financial center, there has been tax evasion. People tell you there, too, that tax evasion — like drug money and capital flight — is not what the Caymans is all about. They’re fast to point out that, in 2000, the government negotiated a treaty with the US ending, once and for all, ambiguities in tax evasion cases. The island agreed to provide American prosecutors with some banking and corporate information. And, for a while, it seemed as if one former Caymanian banker’s rebuke — “The Cayman Island government is knowingly aiding and abetting tax evasion” — was a thing of the past.

That is, until the Caymanians announced in 2002 that, maybe it wouldn’t sign the treaty after all.


Reprinted from Jeffrey Robinson's (eBook)

THE SINK - Terror, Crime and Dirty Money in the Offshore World

(c) Jeffrey Robinson, 2002, 2009, 2013

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