EDITORIAL
Accountability for Cayman’s Vital Financial Service Sector
Friday, June 18, 2004
For some time now, in the wake of a succession of financial scandals
involving the Cayman Islands in one way or another, we have been pressing for
greater supervision, responsibility and accountability in our financial
sector.
It was therefore interesting, as well as disappointing, to read a recent
report by Reuters of comments made by a partner of one of our largest law
firms applauding the absence of regulation of, in this instance, hedge funds
established in the Cayman Islands.
According to the individual concerned, the rules in Cayman are ‘simple and
flexible’ so that such funds may be set up with the ‘minimum of regulatory
interference.’ He went on to say that a hedge fund can be established in just
one day in the Cayman Islands, provided strict anti-money laundering criteria
are met.
The choice of words, namely, “interference”, in describing the Cayman
Islands Monetary Authority’s (CIMA) role in financial regulation is a
revealing one. We extend our commiserations to all of those local financial
service providers who regard CIMA as “interfering” with their legitimate
pursuit of wealth.
These recent comments come against a backdrop of calls for greater
supervision of the largely unregulated hedge fund industry. As reported only
yesterday, a British financial group is currently facing a lawsuit for damages
over tens of millions of dollars lost by investors in unregulated Cayman hedge
funds.
However, it is apparently perfectly acceptable to our financial sector if
investors lose their shirts, as long as the shirts in question are ‘clean’,
but not too freshly ‘laundered’. And as long as such events can be explained
by the facile excuse of a few “bad eggs” or “it wasn’t our fault.”
Furthermore, the firm whose partner made the comments referred to has had
its own list of “bad egg” clients. After all, this is the firm that catered to
Epicurum, a Cayman-registered ‘unregulated mutual fund’ from which half a
billion dollars went missing. They also catered to Bonlat Financing
Corporation, whose reported assets of five billion dollars turned out to be
fictitious. They also catered to Dairy Holdings and Food Holdings as well,
which defaulted on notes worth a collective $315.5 million.
It is easy to be cynical over plaudits from such a source in relation to
the alleged absence of regulation in the Cayman Islands.
We are continually told that financial supervision and regulation in the
Cayman Islands meets internationally accepted standards. Nevertheless, the
constant refrain in the overseas media is that their domestic regulation is a
lot tighter than that in the Cayman Islands.
At the time of writing there is a report in a New York newspaper of calls
for an investigation into an account set up in the Cayman Islands by a local
hospital. The president of the hospital group in question justifies the
account by saying that offshore accounts are common to fund malpractice claims
because the insurance regulations are looser.
Even China is starting to complain about so much of its foreign direct
investment being channeled through entities established in the Cayman Islands,
expressing concern that such vehicles escape domestic supervision.
Yes, all of this business adds to the bottom line of the professionals who
provide legal management, accounting and other financial services in the
Cayman Islands and ultimately adds to the net worth of the partners and
principals of the local firms, but how much of that wealth actually stays in
the Cayman Islands for the benefit of our people?
Judging by the positive grassroots feedback we have received whenever we
have addressed these issues, there is significant concern locally in this
regard. To such an extent, we suggest that it should be elevated to an
election issue and the candidates asked for their views and proposals.
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