Among the islands’ biggest employers are the law partnerships and fiduciary services firms that tend to the islands’ funds and provide them with professional directors for hire. Cayman’s critics believe efforts to open up will end up as little more than window dressing, with little more substance behind them than that behind the thousands of brass plaques of registered enterprises in George Town.
Boards and directors are a pivotal, if overlooked part of the way hedge funds work. On paper, it is a hedge fund’s board that “hires” an onshore-based manager – the business most people tend to confuse with the actual hedge fund – to make investments on its behalf. The directors exercise oversight of the manager and must approve all decisions relating to the inflow and outflows of investors’ money in the fund.
In reality, the board is usually made up of a majority of ex-officio appointees from the onshore manager. It therefore falls to the board’s “independent” members to safeguard investors’ interests.
It is information on who those independent members are, and what other relationships they have, that hedge fund investors are now trying to extract from Cayman. “We are footing the bill but we never get to speak to them, says Vincent Vandenbroucke, head of operational due diligence at Hermes BPK, one of the U.K.’s biggest institutional hedge fund investors. “We never go to the meetings or see the minutes. We don’t know what they are doing with our money.”
Many horror stories have circulated among investors about boards that have simply followed onshore managers’ instructions, disregarding investors’ concerns. Boards have “gated” assets indefinitely, whereby investors were prohibited from withdrawing funds, but managers were still entitled to collect their fees.
Investors have grown most concerned about the proliferation of so-called “jumbo” directorships, where individuals sit as independents on hundreds of fund boards.
With no public database, investors could not find out about these jumbo directors. An investigation by the Financial Times revealed the existence of some of the biggest Cayman jumbo directors – with one sitting on more than 560 boards – for the first time in 2011. “These jumbo directors are just acting as rubber stamps,” says Kevin Ryan, a former head of hedge fund research at ABN Amro who now runs a firm called HedgeDirector. Mr. Ryan calls it the “Walmart model” of fund governance.
Mr. Vandenbroucke is equally scathing. “It’s like obscenity,” he says. “It is very hard to put a definition on it, but you know it when you see it.”
The Cayman Island Directors Association, the self-regulatory body that counts many of the islands’ professional directors as its members, declined to comment. In the past, Cida has said that its members are highly skilled. All but 10 of its 185 members have degrees and professional qualifications, it told the FT in 2011. Most full-time directors have backgrounds as accountants or lawyers.
Sweeping, sanctioned secrecy in Cayman stems from a single piece of legislation. In early January 1976, Anthony Field, the managing director of Castle Bank and Trust, arrived at Miami International airport. As soon as he landed, he was charged by a Florida court and ordered to reveal information about his clients or face jail. Cayman retaliated against the U.S. by enacting the Confidential Relationships (Preservation) Law. Section 5, paragraph 1, makes it punishable by jail to possess information to which you are not supposed to be privy, divulge confidential information, and – most egregiously of all – attempt to obtain confidential information.
Years of international diplomacy have chipped away at the law but it remains a powerful totem. Secrecy is ingrained at other levels: the islands’ corporate laws are scantily revised versions of Britain’s Victorian companies acts, in which directors were practically omnipotent.
Tim Ridley, chairman of Cima until 2008, says that recent moves towards greater transparency are bona fide and “praiseworthy.”