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The Cayman Islands is facing international pressure to make its finance industry more open and responsive to investors. In 2008, one desperate investor trying to reach a hedge fund director was mistakenly put through to a turtle farm.Thinkstock

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.

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."

Mr. Ridley is among those on the islands who argue that if Cayman does not move with the times, it risks damaging its status as a financial centre. "Going back to growing thatch palm and catching turtles is no way to make a living," he warns. "There are residual areas of Luddite behaviour which do not serve the industry well," says Mr. Ridley, but adds Cima is aware of the need to modernize and adds that critics need more patience.

"Cayman has been wrestling with the issue of transparency for years," he says. "There has been and will be much discussion, but what matters is that Cima is sensibly making haste slowly. There are lobbying groups both on and off the islands, and Cima needs to reach a balanced decision." He observes that clamouring for transparency is healthy but it is like "being in favour of motherhood."

Others are skeptical. In a community of just 50,000, the delineations of authority can sometimes appear blurred. Linburgh Martin, Cima's deputy director, for example, is listed as a director of dozens of Cayman entities in U.S. regulatory filings. Cima says it protects against conflicts of interest in the small community with a strict code of conduct for its members.

Yet despite such guidelines, some argue the islands have a clannish culture. "When I opened up the chamber of commerce, that was a revolutionary act," says Gordon Barlow, a resident of the islands for 35 years. He says that Cayman, for all its modernization efforts, remains a small community dominated by special interests. "One thing you have to bear in mind is that there is a fairly strict unwritten prohibition on free speech here," he says. "Any expat who is out of line can be thrown off the islands … or any resident can get an expat thrown off the islands. You write an anonymous letter to immigration, or you whisper to your cousin's cousin and boom, they're off the islands."

Financial authorities on Cayman reject such depictions as outmoded but doubts persist.

"It is a total whitewash," says one hedge fund director, in reference to Cima's proposals. He declined to be named because he is worried about Cima refusing him permission to operate as a director. "I think what they've proposed is a smokescreen. It has no meat. Funds will be listed on this database, but directors themselves won't be searchable. There will be no requirement to disclose their total positions, past or present," he says. "When it comes down to it, it all stays hidden. Cayman doesn't want to open up because if it did, no one would be mad enough to invest with these guys as their directors."

Another big investor agreed that Cayman would only make token changes. "I think the measures Cima comes out with later this year will probably end up being enough to shut most of us up. So that will be fine for them. But if Luxembourg or Ireland, or even the U.K. got serious about crafting a proper onshore, transparent but low-tax fund law, then that would be it for them. They've just got to hope that never happens."

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