In 2008, as the financial world began to crack, telephone lines to the Cayman Islands hummed with calls from desperate investors in hedge funds. For some, the numbers just rang and rang. Many were finding their directors – their supposed fiduciaries with fees of up to $30,000 a year – hard to track down. One investor trying to call was mistakenly put through to a turtle farm.
Five years on and the same pool of hedge fund clients, among them some of the biggest investing institutions in the world, are pushing for the most sweeping overhaul of the way their capital is run in decades. Cayman, and its long-held secrecy, is at the forefront of their agenda.
“We are looking for a fairly dramatic change in the way Cayman conducts its business,” says Luke Dixon, head of hedge fund investments at the Universities Superannuation Scheme, one of the U.K.’s biggest pension funds.
For Mr. Dixon, if Cayman authorities do not help them gain greater control over what happens to their money when it goes to the Caribbean, then they will start to send it elsewhere. “Over the course of 13 years, I’ve seen the hedge fund industry evolve from people simply investing on a handshake to now having to do months of due diligence,” he says. Cayman, they believe, must help, not hinder, the process.
In its 50-year journey from malarial mangrove swamp to the world’s fifth-largest financial centre, the crown dependency (it dodged a future as a distant satellite of an independent Jamaica in 1962) has won few friends globally with its pay-no-taxes, ask-no-questions model of development.
“We like the place,” a banker told Time magazine in 1973 – when the poverty-stricken islands were on the cusp of financial take-off – “because it is suitably devoid of law.”
Cayman has had a hard time shaking off its frontier reputation ever since, even though the days when drug barons landed with suitcases of money and lugged them brazenly to the local bank are now but a memory.
It is a linchpin in the global financial system because it is home to thousands of trust companies, innumerable structured finance vehicles and, perhaps most significantly, most of the world’s hedge funds. The diminutive trio of islands – Grand Cayman, Little Cayman and Cayman Brac, scattered about 160 kilometres south of Cuba – houses more than 9,400 hedge funds, sheltering assets worth about $2.2-trillion (U.S.). As an offshore centre, it is leagues ahead of rivals. The British Virgin Islands, the next largest offshore centre, is home to 2,900 funds.
With so much at stake, Cayman is taking note of investors’ complaints. On Jan. 14, the Cayman Islands Monetary Authority launched a consultation that outlined key proposals to begin opening details of registered funds and their directors to public scrutiny. Directors, whose names and details are currently not public, will also require approval from Cima, based on a new competency regime.
Although the proposals may seem toothless in comparison with regulatory regimes elsewhere in the world, they are a significant step forward for Cayman, where companies file barely any public information. While centres such as the British Virgin Islands, Switzerland and the Channel Islands are famed for their secrecy and discretion, they have introduced greater accountability in recent years and Cayman now stands out for opacity.
Pushing the Cayman Islands to become more accountable is not straightforward. Secrecy is deeply entwined with Caymanian politics and attitudes towards the “onshore” world are coloured by perceptions of threats to independence and interference from London. Relations with the U.K. are at a low ebb. In December, McKeeva Bush, the Cayman premier, was arrested and later bailed on suspicion of corruption. He denies the allegations.
More significantly, there are powerful vested interests in Cayman who have their own priorities for shaping any changes to the islands’ corporate governance strictures.