EDITORIAL

An Unholy Financial Trinity

Thursday, June 3, 2004

A report in Newsweek magazine this week referred to recent revelations in yet another billion-dollar corporate scandal, this time in Germany, as “another Enron”.

Enron itself, whose name has become synonymous with high level corporate deceit, resulting in the loss of billions of dollars to investors, employees and pensioners, was followed by Parmalat, which one might justifiably call ‘Italy’s Enron’.

The latest revelations concerning the virtual collapse of one of Germany's biggest banks, Bankgesellschaft Berlin (BGB), might justifiably be termed ‘Germany’s Enron’.

One thing that this unholy trinity of ‘Enrons’ has in common is the use (or rather, misuse) of financial vehicles established in the Cayman Islands – a fact that the foreign media, hardly surprisingly, tend to dwell on.

Enron cheated investors by using 692 subsidiaries in the Cayman Islands to pretend that money it borrowed was money it earned.

Parmalat cheated investors by creating fictitious assets in Cayman Islands subsidiaries to disguise losses.

BGB cheated investors, depositors and taxpayers by selling troubled real estate investments to Cayman companies it created, using money it effectively lent to itself.

We have made the point in previous editorials that all the efforts made by government to upgrade the image and reputation of the Cayman Islands in the eyes of the world in general and the financial community in particular is a waste of time and money if corresponding steps are not taken to require the local financial service providers to take greater responsibility for the activities for their clients.

The fact that these large foreign corporations choose the Cayman Islands in the first place to conduct their business is an indication that we do enjoy a certain level of respectability. But whatever progress we manage to make in this area is undone in the twinkling of an eye when the bad news about the latest corporate scandal hits the fan.

One reality to which those involved with the local financial industry must awaken, is that although some legitimate businesspeople set up corporations here because of our respectability, other less honest people incorporate in our country or otherwise do business in Cayman precisely because they think that they can use the holes in our system for illegal gain.

Of course, no one in government or the private sector wants to take the blame for such regulatory gaps in our system.

The Cayman Islands Monetary Authority (CIMA) says it is not required to supervise run-of-the-mill companies and trusts, or even some vehicles that one would expect to be regulated, such as some mutual funds.

Some lawyers and accountants have claimed they had no idea what their clients were actually doing with these vehicles until it is too late.

All this may be true, but it is about time someone was made to take responsibility here instead of disclaiming all accountability. Until the regulatory loopholes are sewn up, more and more businesses with financial connections to the Cayman Islands will continue to experience Enron-types of scandals in countries all around the globe, to the detriment of our reputation.

We certainly do not need the proverbial “few bad eggs” to embarrass the Cayman Islands’ otherwise good record in our burgeoning financial industry.

If this country is to ever truly turn the corner of legitimacy in the world’s eyes, it must take steps to ensure that the name of the Cayman Islands does not continually pop up as the vehicle used to defraud millions and millions of dollars - or other currencies - from honest, hardworking people in far away places.

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