Cayman thriving as tax-dodgers'Shangri-La, is under scrutiny
The Seattle
(Wasington) Times
(21 May 2000)
Stephen Franklin
Chicago Tribune
It is the postcard-perfect image of a tiny, windswept Caribbeanisland - a sleepy, safe, sun-baked British colony that is an escapefor rich and well-heeled retirees.
This is a Shangri-La for more than tourists, however.
It is paradise for those whose money flows through tiny one-personoffices or thick-carpeted digs of lawyers and accountants. Theirclients can protect their money from taxes because there are none.
The Caymans are among the Caribbean's richest islands, thoughnothing of significance is grown or made here. They are rich becausethey make money on money.
But these islands and more than 40 other tax havens are undersiege. The world's most powerful countries, including the UnitedStates, want them to live by some of the same basic tax laws aseveryone else.
That means softening their banking secrecy rules and bolsteringregulations and surveillance - or face trade sanctions.
Experts estimate that as much as one-third of the world's wealthsurges through tax havens. The Organization for Economic Cooperationand Development (OECD) estimates havens account for 15 percentof direct investments made by U.S. companies and individuals.The organization, which provides a forum for its 29 member governmentsto discuss policy, defines direct investments as those of at least10 percent in a particular company.
The problem with tax havens, said Jeffrey Owens, OECD's head offiscal affairs in Paris, is that they "shift the tax burdenof dishonest taxpayers to honest taxpayers."
After two years of research, his group plans to list in June themost abusive tax havens, an event feared in such places as theCaymans, where many expect their concerns to be steamrolled.
"We are not trying to put them out of business," Owenssaid. The goal, he explained, is to "make certain they arenot dependent on tax evasion or money laundering."
Such reasoning isn't popular in the Caymans. "The OECD'sargument is nonsense," said Michael Alberga, a lawyer witha long list of foreign clients. The Caymans are simply "practicingpure capitalism - few or no taxes and little regulation,"he said.
Home to 52,000 companies, 600 of the world's top banks, 2,200mutual funds, at least another 16,000 closed-end funds, thousandsof insurance companies and the latest schemes dreamed up by lawyersand savvy investors, the Caymans are the world's fifth-largestfinancial center.
Before the Caymans became hot, money flowed to tax havens suchas Luxembourg, Liechtenstein and the small islands off Great Britain.Today there's fierce competition from Pacific islands such asVanuatu and more than a dozen money-hungry Caribbean islands thathave created an archipelago of secrecy and flimsy regulations.
Aware of the growing criticism in Washington and Europe, the Caymanshave written new laws and stiffened regulations somewhat. Mutualfunds are now regulated; there is a code of ethics for those whorepresent foreign companies and a central authority to overseeall financial dealings.
"We have a large franchise to protect here," said NevilleGrant, (who headed the Cayman's Monetary Authority before leavinghis post abruptly a couple of months ago.)
Still, the Caymans have very few eyes to train on a financialGoliath. The Monetary Authority has only 48 employees, and onlysix police investigators work on white-collar crimes.
Admitting their numbers are few, Cayman officials say they relyon the enforcement agencies of businesses' home countries to keeptabs on the companies.
But that hasn't always worked. Cayman officials have not alwayscooperated, saying their secrecy laws bar them from doing so.
How many major U.S. firms do business in the Caymans, for example,is a mystery because the Caymans will not provide a list.
But thanks to John Mathewson, a former Chicago-area homebuilder,the U.S. government got a glimpse at how easy it is for some Americansto break U.S. tax laws by using Cayman banks.
Mathewson was chairman of Guardian Bank & Trust in the Caymansand was tripped up by an FBI agent in 1994 posing as an investorwho wanted to evade U.S. taxes. After Cayman officials closedhis bank in 1995 - but never charged him with anything - Mathewsonreturned to the U.S. He was charged in San Antonio in 1996 withmoney laundering.
Mathewson cooperated with federal officials and turned over computerdisks that listed hundreds of his clients, nearly all of themAmericans, their dealings and the fake companies he set up forthem. But the bank's liquidators in Cayman, saying they were upholdingCayman banking secrecy laws, fought to prevent the disks frombeing used.
When a judge rejected Cayman's argument, bank officials triedto block software companies from decrypting the disks. Eventually,the government prevailed.
Having provided the government with its the first inside lookat an offshore bank, Mathewson, 71, last year was sentenced tosix months of house arrest and five years' probation. While Mathewsontold U.S. prosecutors that similar abuses were common in Cayman,officials here said he was a renegade and an exception.
But a recent case has given U.S. officials another look at thepotential for Americans to break the law in the Cayman Islands.
It involves a $314 million Ponzi scheme based in Fort Lauderdale,Fla., and Atlanta that victimized more than 1,000 people, mostof them elderly investors who lost all of their savings, saidAmy Cotter, a lawyer with the Securities and Exchange Commission.
The investors thought they were putting their money into bondsbacked by cash for title loans and payroll advances. Actually,nearly all of their money was stashed in hundreds of Cayman companies,which then put the money in Cayman banks.
Cayman officials have not opened the banking records, citing secrecylaws. But they are providing information about the companies usedin the scheme, Cotter said.
"We are getting great cooperation, which is a first and hopefullynot the last time," she added.