By David Gonzalez
New York TimesPeople here had always made their livelihoods offshore. Generations ago, Caymanian men were renowned as sailors aboard ships headed for the United States and Europe. Now residents of those old ports of call venture here to make or protect their fortunes in offshore banks and businesses.
In less than four decades, this territory of the United Kingdom has gone from being a mosquito-infested island to being the world's fifth-largest financial center. The growth has brought opportunities, providing good jobs and fueling the local economy. But it has also brought opportunists who have taken advantage of the island's lack of income taxes and its booming banking sector to evade taxes or launder money. Government officials insist that those episodes are in the past and that they have strict financial regulations and procedures to exchange information with law enforcement agencies in different countries.
But old perceptions linger, and not just those in John Grisham's legal thrillers, where a Cayman Islands bank account is de rigeur. The recent disclosure that the Enron Corporation used nearly 700 partnerships registered in the Cayman Islands to avoid paying federal taxes has revived suspicions. A recently signed treaty to exchange tax information with American authorities has been derided by some American prosecutors as a sham because it would not take effect for a few years, which they said would give tax cheats ample time to find another haven.
Executives and officials on Grand Cayman are used to the skepticism, even as they insist they are not the impenetrable tax haven of old. They want to prove that the notion of someone sauntering into a local bank with sacks of money or setting up free-wheeling deals is myth in an age when international monitors keep close watch.
"The fact that the Cayman Islands are tax-free doesn't equate with this being some kind of black hole," said Deborah Drummond, the government's assistant financial secretary. "We provide a very necessary service to global capital markets, and when requested, we have the ability to fully cooperate with international authorities. The concept of stashing money in a tax haven and dropping off the face of the earth is not an appropriate way to look at what the Cayman Islands are about."
With tens of thousands of business partnerships listed in the Cayman Islands, though, and with hundreds of banks here, there is no doubt that the financial sector has driven the island's new prosperity and a high — some say too expensive — standard of living.
Although the popular image may be that of a Caribbean Casablanca harboring bon vivants with a penchant for fast cars and faster cash, the streets of downtown George Town, on Grand Cayman, are mostly full of gawking tourists from the cruise ships anchored nearby. Most of the cars are the sedans and sport utility vehicles found in American suburbs, as are the homes, although there are some spectacular oceanfront estates. Oddly enough for a Caribbean island that has been plagued by accusations of financial shenanigans, there are no casinos nor even a lottery, because religious-minded locals resist gambling as an evil.
The transformation into a financial center began in the mid-1960's, when officials capitalized on the island's no-tax policies to pass banking laws that became the foundation of the financial sector. The 1980's brought problems to this and other offshore centers, as money launderers relied on banks that were unprepared or unwilling to ask too many questions of their customers. "I don't think anybody in the United States was focused on it until then, said Thomas Jefferson, a former financial secretary. "It caused all of us to look inside and look at what were our policies." Since 1990, when the island entered into a mutual legal assistance treaty with the United States, banking regulators say they have provided information to investigators in 180 criminal cases.
Nevertheless, concern over some practices led international monitors to label the Cayman Islands in June 2000 as uncooperative in fighting money laundering. They were taken off the blacklist last June, after codifying what banking regulators said were already common practices. Still, all players in the financial sector from banks to lawyers now have to review every single one of their clients in order to ensure their identity and sources of income.
"You either get over it, deal with it, or whine and become more marginalized," Ms. Drummond said. "We got the whining out of our system a while ago."
Today, there are more than 400 banks and 47,000 partnerships registered or licensed in the Cayman Islands. The government, which prefers to allow the private sector to market the island's services, has moved away from the notion of being a tax haven and prefers to focus on the range of professional services offered by the 6,000 people who work in the financial sector. The banks include about a dozen full-service institutions, with the rest being offshore banks that by law must be affiliated with either a local or overseas bank. Although the Cayman Islands started the decade with about 62 shell banks that were essentially conduits for cash, recent changes in the law require all banks to have a physical presence, records and books in the islands.
Although Enron's multitude of partnerships have raised suspicions, officials and executives here said such companies are legitimately used by major corporations to defer taxes, maximize profits or provide a tax-neutral setting for deals involving businesses in two countries with different tax rates. Aircraft deals have become popular here, for example, because the island's stability is acceptable to manufacturers and insurers who worry about the political climate or legal protections of some Third World clients.
"These are real deals, not paper transactions designed to deceive," said Tony Travers, the senior partner at Maples and Calder, a law firm on Grand Cayman. "This is not brass-plate stuff. We have real people here and we know we add value, for the simple reason that clients would not pay us if we did not."
By some estimates, Cayman banks hold $800 billion in American money — a figure that last year led Robert M. Morgenthau, the district attorney in Manhattan, and others investigating tax cases to question how much of it was there to keep it from the reach of tax collectors. But Cayman bankers and officials, long accustomed to these criticisms, said that most of that figure represents money from major American banks that has been booked in Cayman accounts in order to gain interest, among other advantages.
"Those $800 billion are not physically in the Cayman Islands, it is all in New York," said Conor O'Dea, managing director of Bank of Butterfield. "It is booked with banks in the Cayman Islands. It is not a wire transfer. We would love to have $800 billion in deposits."
Still, the islands enjoy perhaps the highest standard of living in the Caribbean. Many people who were born here and remember the days when the only jobs for young men were aboard ships said the financial industry has provided more opportunities. At the same time, some lament the loss of an easy-going, trusting pace, especially when expatriates outnumber native-born Caymanians.
"Some of the expats don't have a feeling of unity," said William Ebanks, a farmer who grows pineapples and raises hogs on the northeast part of Grand Cayman. "It's more a feeling of they're here to get what they can and go."
That philosophy has also been adopted by some native-born acquaintances of one local woman who works in a law firm. She said that while it has taken her more than 10 years to finish building her house, some of her co-workers have managed to build two homes. "I know how I got my house," said the woman, who spoke on condition of anonymity. "We get the same pay. How could they get so far in life?"
But keeping up with the neighbors here can become expensive because of a hefty 20 percent duty on imported goods, an indirect tax that adds up quickly because almost everything here has to be imported from the United States.
"When I grew up, I could go fish and that was good enough to eat," said Rudy Manderson, who runs a construction company. "Now, if you don't have a T-bone steak, you're not in the groove. The tourists and foreigners eat these, so people figure they have to eat the same thing."
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