In a rational world we may have anticipated that the US regulatory response to the financial crisis would have established some cursory reference to two of its fundamental causes. Yet the framers of the Dodd/Frank Act did not see fit to restrict Fannie Mae and Freddie Mac’s ability to guarantee mortgages to uncreditworthy borrowers nor to restrict the rating agencies in granting triple AAA ratings to the repackaged toxic waste that resulted, writes Cayman Finance Chairman Anthony Travers

In the political world it is supposed to therefore follow, that if neither cause is sanctioned by the new regulation, the actual causes lay elsewhere. Cue then the political attack on bankers’ bonuses a more assured political bandwagon for the party currently in control of all three US Houses than any attack that might cut across the laudable but blatantly populist objective that everyone should own a home, regardless of their ability to pay for the home they supposedly owned. By that simple expedient political history and accountability is rewritten.   

So, too, we see hedge funds now targeted in Europe and subject to a regulatory response that will restrict leverage and require fund managers to receive 50 per cent of their remuneration after a deferred three year period. And yet the average leverage in the hedge fund industry is around two. Perhaps it is the threat that hedge funds pose to the political aspirations of those driving a totalitarian federalist agenda that needs to be curbed. European regulators may well remove sovereign debt risk from the stress test evaluation of European banks how long would it take the hedge fund industry to expose that delusion.  But is that really what is meant by systemic risk?

In all of these legislative responses we find a troubling gulf between the economic and the political reality, either to protect a sacred political cow or to avoid responsibility for its rotting carcass.  These exercises in delusion require a political mastery of the art of blame deflection and nowhere is that craft more evident than in the continued references to the US tax revenue that is being lost through the use of offshore financial centres like the Cayman Islands. But In reality not only is this comment too  a gross distortion but  it should be a source of real concern to the US legislature and the public it represents, that for political ends deliberate confusion is introduced  between what is illegal tax evasion and lawful tax structuring.  This mischaracterisation is not only unfair in describing the proper function of the offshore financial centre and the benefits it confers on the United States, but forms a wholly unsound basis on which to formulate United States tax policy.

It always helps to have an impressive sounding private sector group support the political initiative and so we find this latest falsehood supported by the hitherto unheard of ‘Business and Investors Against Tax Haven Abuse’, which notably is supported by Senator Carl Levin (D-MI).  Senator Levin was a co-author (along with then Senator Barak Obama) of the “Stop Tax Haven Abuse” bill, which was supplanted by the altogether more balanced legislation known as the ‘Hiring Incentives to Restore Employment’ (“HIRE”) Act (The response of Cayman financial services industry was set out in the open letter to Senator Levin and printed in the Washington newspaper Politico. The full text is available at
www.caymanfinance.com).

Some research on the ‘Business and Investors Against Tax Haven Abuse’ group shows that it is supported by the ‘American Sustainable Business Council’, ‘Business for Shared Prosperity’ and ‘Wealth for the Common Good’, all of which are inter-related grassroots political organisations that host website petitions for or against various policy initiatives. No information as to how these organisations formulate policy, who or how many people of organisations back them, is available.

What these bodies and the latest initiative seeks to do is to promote the falsehood that US companies, which rely on legitimate provisions of the US Tax Code properly and lawfully structured through the Cayman Islands,  are in some way engaged in tax evasion, or unlawful conduct. But, seeking to mis-describe lawful and proper behaviour by painting it as illegal does not stand a moment’s scrutiny and is wrong in principle.  

This particular heresy completely, and no doubt deliberately, also misses the point that the US is the major recipient of the capital flows from of the Cayman Islands – which is providing the liquidity that is essential to the recuperation and ongoing health of the US economy. 

It is surprising that it has become necessary to state, yet again, the obvious point that the laws complained of by these bodies under which US companies use international financial centres, such as the Cayman Islands, are US laws and changes to them are entirely a matter of domestic US tax policy.

It also should go without saying that all Cayman Islands companies are required to operate on the basis of full tax and anti-money laundering transparency under our own domestic law and under existing treaties with the US and many other G20 jurisdictions. Good arguments may exist as to why these domestic laws should be amended and US multinationals double-taxed, as a result but presaging the debate with deliberate obfuscations prevents the real arguments from being heard on their merits.

The organisations filing the petition claim that low or no-tax jurisdictions hurt the US economy through tax evasion.  This suggestion runs counter to the existence of the tax transparency treaties in place and to the growing body of academic reports that suggest that international financial centres such as Cayman are well-regulated and neutral jurisdictions that facilitate cross-border business.

The Cayman Islands in fact provides liquidity to markets around the globe by increasing investment into developed nations such as the United States and developing economies, where project financing is desperately needed to fuel job creation and alleviate poverty. The exercises in blame deflection which emanate from US politicians are not only unfair to offshore financial centres they cloud the basis for the debate in the US with falsehoods which form an unsound basis for US
tax policy.