Letter to the Editor

Setting the record straight over financial supervision

Friday, November 21, 2003

Dear Sir,

I am writing in my role as Managing Director of the Cayman Islands Monetary Authority (the "Authority") to clarify certain inaccuracies and misrepresentations that appeared in your editorial of 4 November titled "Looks Aren't Everything".

First, of the four cases presented, one case, Enron, was not a regulated entity in the Cayman Islands and did not conduct relevant financial business subject to direct supervision by the Cayman Islands Monetary Authority.

In fact, of the approximate 45,000 companies registered here, the majority are not subject to direct supervision by the Authority. This is not inconsistent with other jurisdictions, for example the United States, Canada and the United Kingdom. In fact, it can be argued that the Cayman Islands regulatory regime goes beyond the requirements in other jurisdictions, as it requires that those persons responsible for providing registered offices and company management be licensed and have procedures in place to prevent and detect money laundering.

In any event there has been no allegation that we are aware of that any Cayman Islands entity regulated by the Authority was involved in any illegal activity in either the US or in Cayman in relation to the Enron case. To the extent that information relevant to investigations carried out by the US Securities Exchange Commission (SEC) was located in the Cayman Islands, the Authority co-operated fully with those investigations in accordance with Cayman Islands laws.

Second, in another case mentioned, Long Term Capital, which occurred over five years ago, there were no findings of fraud or impropriety. Rather, the hedge fund lost a considerable percentage of its capital due to trading losses, specifically on credit risks that caused a reduction in the fund's relative value position.

That, unfortunately, is the risk that comes with dealing with these types of investments, and those who invested were aware of this risk when investing.

Third, in three of the cases mentioned in the editorial, regulatory bodies in onshore jurisdictions also held responsibility for regulating the named entities' activities in their jurisdictions.

It is therefore unfair to imply that the Cayman Islands regulatory regime was solely responsible for the supervision of the companies that eventually demised. This is not mentioned to pass the buck but merely to demonstrate that the regulation of the financial services industry in the Cayman Islands, as in other financial centres, is an international effort requiring the co-operation and assistance of regulators globally. As a consequence, should events occur onshore that raise issues of concern, it is not unusual to see a ripple effect on our licensees here.

Furthermore, in your editorial, you stated the following: "Proper supervision is not forcing an insolvent company into liquidation. Proper supervision is making sure it doesn't get to that point in the first place." The Authority has put in place rules, policies and guidance in an effort to direct its licensees as to appropriate practice.

No regulator wishes to see its licensees encounter financial difficulty, however, in truth, it is the responsibility of the directors and managers of financial institutions to ensure their entities do not reach this position.

While the regulator should take appropriate action where it has relevant information to justify such action, the role as supervisors often is reactionary. As a result, when the Authority learns of issues surrounding a licensee, its efforts are directed to getting the principals to rectify the situation. Failing that, the Authority may have little choice but to take regulatory action against the licensee to protect the interests of the stakeholders.

It is normal that businesses fail and that fraud will occur. Information publicly available indicates that 30 to 50 percent of start-up companies fail within the first three years of operation.

According to The Association of Certified Fraud Examiners 2002 Report to the Nation on Occupational Fraud & Abuse, fraud accounts for six percent of revenues or $600 billion annually. Drawing a parallel of these figures to the number of financial institutions registered or licensed with the Authority, the number of cases in which such action is required is less than one-quarter of one percent.

In addition, if one compares this figure to that of regulators in other jurisdictions, in particular the SEC and the Financial Services Authority (FSA), Cayman's is, in most cases, lower.

The Authority is cognisant of the negative publicity surrounding these Islands, most of which is unfounded, and its role in promoting and enhancing the reputation of the Islands as a financial centre.

As a result, we have a deepened commitment to maintaining Cayman's status as a leading financial centre, and a jurisdiction of integrity. Through co-operation with international standard setters and our regulatory counterparts overseas, and working closely with the financial services industry, the Authority is championing this cause.

The recent IMF assessment was an opportune occasion to demonstrate the soundness of our regulatory environment, and accordingly Cayman received a favourable review.

As you stated in your editorial, the proof of the pudding is in the eating. In comparison to other jurisdictions, the factual numbers indicate that the Authority has an excellent record.

According to published figures for 2002, the SEC had 598 enforcement actions initiated as compared to the approximate 7,000 brokers and dealers registered with them. Across the pond, the FSA, for the year ended March 31, 2003, opened enforcement cases in 138 instances as compared to its over 11,000 authorised entities. Comparing these figures to that of the Authority, which during 2002 took enforcement action against only 17 of approximately 5,700 licensees and registrants, it is fair to say that the Cayman Islands performs much better.

All in all, the problems that arise are not unique to Cayman. Frequently, the issues facing our licensees are not the consequence of events on these shores. It is with this in mind that the Cayman Islands received a favourable review in the IMF's preliminary report and it is for this reason that the Cayman Islands should feel proud of this accomplishment.

Cindy Scotland
Managing Director
Cayman Islands Monetary Authority

Editor's Response

We appreciate the fact that the Managing Director of the Cayman Islands Monetary Authority (CIMA) has taken the time to respond to our recent editorial. Usually, it seems that what we have to say falls largely on inattentive ears.

However, we feel that Mrs Scotland has, to some extent, missed the point of our editorial. The questions we asked were not specifically an attack on the CIMA, as stated, but were posed in the context of a ideal supervisory environment which, we were at pains to point out, is a partnership between the public sector (the Monetary Authority) and the private sector (the attorneys, accountants and management companies that deal with the individual clients).

As we have also stated in an earlier editorial, the private sector must bear its share of the responsibility for things that go wrong and should be embracing the spirit of regulation instead of all too often pushing the envelope when it comes to the letter of the regulatory law.

Unfortunately, it doesn't always require "findings of fraud or impropriety" to result in a negative perception. For example, it may be that there was no fraud or impropriety in the case of National Warranty, but that does not alter the fact that the company ended up insolvent, leaving a million individual policy holders in the United States, by far our most treasured business partner, with a highly negative perception of the Cayman Islands, now compounded by the domino effect of the bankruptcy of one of its major associates.

There is no doubt that, as Mrs Scotland says, there is a good deal of negative publicity abroad surrounding the Cayman Islands ­ one only has to read our daily 'News about the Cayman Islands in the Foreign Press' column to realise that ­ and it will take time and effort, especially in the private sector, to counter this. These reports are presented for no other reason but to bring to the attention of our public and private sector leaders what the world is saying about us, so that they might be able to do something to clean up our act.

Even the smallest thing, such as returning a phone call from a foreign news organisation, might help to change a negative comment into a positive one ­ changing the impression that there is something to hide into one of being open and above board.

We therefore stand by our contention that "Looks aren't everything." There has to be some substance as well. Unfortunately, judging by what seems to be the common perception abroad, perhaps only one finding us good looking these days is the IMF.

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