According to the summary of outcomes of the meeting of the Organisation for Economic Co-operation and Development’s (OECD) Global Forum on Transparency and Exchange of Information for Tax Purposes held in Mexico earlier this month, the Global Forum will operate under a new three-year mandate aimed at ensuring rapid and effective global implementation of standards of transparency and exchange of information for tax purposes through in-depth monitoring and peer review.

Driving this process is the expressed need of the 30 OECD countries to protect their tax bases from non compliance with their tax laws. Equally concerned with this notion will be the five “accession candidate” countries and a further five “enhanced engagement” countries.

In addition, the OECD members are also concerned to enable developing countries to benefit from the new more cooperative tax environment. We take this to mean that the Cayman Islands, for example, will not get away with restricting its co-operation in tax matters to those countries with whom a tax information exchange agreement (TIEA) has been signed.

Phase 1 of the peer review process, which will examine the legal and regulatory framework in each jurisdiction, will begin early in 2010 and will be completed for all members within the initial three-year mandate. Phase 2, which will also begin early in 2010, will evaluate the implementation of the standards in practice.

In other words, the relevant legislative framework in the Cayman Islands could be subject to detailed OECD scrutiny within a fairly short time – as little as six months. When it is, one of the obvious factors that will surely be taken into account is the existence of our bank secrecy legislation – the Confidential Relationships (Preservation) Law – which is undoubtedly a large part of what makes the Cayman Islands a “secrecy jurisdiction” in the eyes of the United States Congress.

The question is – and one that we have raised on several occasions in the recent past – is when is the government going to come to grips with a law that may have served a purpose in the past by helping to elevate the Cayman Islands to its position as the Switzerland of the Caribbean but is now more likely to be an albatross around our neck as we try to distance ourselves from the “tax haven” label.

In the meantime, it is well known that the US has been cracking down on its citizens that hold undeclared offshore assets and they now have about a week to turn themselves in under an Internal Revenue Service amnesty programme or gamble they will not be caught.

According to a recent Reuters report, by coming forward voluntarily, individuals significantly minimise penalties and could potentially avoid owing more to the IRS than is in the offshore account when all the liabilities are added up.

A taxpayer with about $1 million in an offshore account for six years would pay about $386,000 under the amnesty program, compared with $2.3 million under the normal regime, according to an IRS example.

One tax attorney in the US described clients with undeclared foreign assets as “terrified” and, if true, could well lead to an exodus large or small of US resident customers from local banks. After all, if a US citizen is going to pay normal taxes on money and investments held in a Cayman Islands financial institution, it hardly makes sense to retain it here.

Whether this possible movement of US-owned funds will have any significant impact on local banks and other financial services providers remains to be seen.

In any event, it emphasises the urgent need for our traditional business model to be restructured as a matter of urgency – another issue that we have raised on a number of previous occasions but never seems to be discussed on a practical level in the wider community.

This newspaper has been asked to comment on the situation here by European media on two occasions in the last couple of days, and we conclude from their questions and reactions to the answers that there is a large degree of astonishment abroad that, after all these years of playing host to trillions of dollars in offshore funds, the Cayman Islands has effectively nothing put aside in reserve for the current rainy day.

This should indeed be a source of great embarrassment to successive governments as well as the financial sector as a whole, which has for so long resisted any suggestion that might have curtailed its ability to generate profit – none of which is apparently now available to help out the very place that
facilitated it.