LEGAL BRIEFS

The Cayman Islands have long been considered an ideal tax-planning jurisdiction because of strong privacy laws and nominal taxation. This has led to the Cayman Islands becoming the fifth-largest financial center in the world, trailing only New York, Hong Kong, London and Tokyo.LEGAL BRIEFS

The Cayman Islands have long been considered an ideal tax-planning jurisdiction because of strong privacy laws and nominal taxation. This has led to the Cayman Islands becoming the fifth-largest financial center in the world, trailing only New York, Hong Kong, London and Tokyo. The islands currently host over 57,900 international corporations, 465 financial institutions, 2,621 mutual funds, 114 trust companies and 541 insurance companies. As of June 2000, Cayman banks carried total assets of approximately 747.6 billion dollars. This popularity as a financial center changed dramatically on November 27, 2001, when the Caymans entered into an information-sharing agreement with the United States. This Agreement is important to many people, particularly those involved in the adult entertainment industry.

As has been documented many times, the United States Government has largely been unsuccessful in prosecuting obscenity charges against the adult entertainment industry. In an effort to subvert this failure, the federal government has often successfully turned to tax evasion charges. As a result, many in the industry have moved their financial operations offshore to avoid government efforts. The Cayman Islands were a popular jurisdiction in which to transfer such operations due to a strong economy and communications facilities. These strengths, however, have now been wiped out when compared to the loss of privacy allowed under the new Agreement.

The Agreement between the countries provides a superfluous amount of access into the private finances of individuals and companies using the Cayman Islands. Specifically, the U.S. need only make a request for information on persons or companies that it believes may be evading taxes illegally. The U.S. is not required to make any showing that its belief is valid or even remotely credible. Upon receiving such a request, the government of the Cayman Islands has agreed to supply information regarding all filings in the country regarding offshore trusts, international business companies and other business entities. The Cayman government has also agreed to supply all information pertaining to bank accounts, investments and any other financial holdings of the person or company in question. In short, the strong privacy laws of the Cayman Islands have been terminated.

Perhaps even more troubling, is that the request from the U.S. can be for “criminal, civil or administrative tax investigations.” The broad nature of this definition is extremely problematic as a simple tax audit can be considered an “administrative tax investigation.” Arguably, the IRS can submit requests for information for every single person or company that it audits in a particular year. The severe privacy violation that results from this action is predicted to seriously damage the status of financial institutions in the Cayman Islands. Indeed, many financial institutions are considering moving to other jurisdictions that maintain strong privacy laws.

Why would the Caymans commit such financial suicide? Two reasons: Stupidity and no choice … Being the fifth biggest financial center makes them a big target.

The US government has always wanted this type of an agreement, but the Islands have never granted the US any right to review any private financial information until now. In fact, it was illegal for any financial institution or its employees to reveal such information. (It is legal to live in the US and have business holdings in the Caymans, however, all U.S. citizens must pay taxes on any income earned anywhere in the world.)

And why then did the Caymans agree to it? Most of the bankers and lawyers I spoke to in the Caymans said the agreement was forced down their throats by the British Goverment. All of these professionals are of the belief that it will kill business in the Caymans, because people seeking privacy can hop over to Bermuda and regain the relevant privacy.

Another question that may arise as a result of this agreement is, did the agreement come about because of the terrorist attacks on September 11? Generally, the parties will suggest this is also being done because of 9/11, realistically however, it is not. The governments have been negotiating this issue for some time.

For those in the adult industry that have any business based in the Cayman Islands, an immediate evaluation of their position must be undertaken. The Cayman Islands have committed financial suicide in entering this Agreement. It is vital that those who do business in the Caymans understand as much and avoid falling down the same hole. Implementation of the Agreement begins on January 1, 2004, so act now while there is still time.

The reason the change will take two years to implement is to let people and companies react to the Agreement. Most people think the Caymans are a hotbed of drugs and other illicit business operations. In fact, the Caymans are really an entity of private alliances between multinational companies that would get killed if the information was made public. For instance, it is widely believed that certain computer manufacturers and software companies have offshore alliances, yet still compete against each other in the US because of anti-trust laws. These companies simply view the commercial world as having two distinct sections, the US and the rest of the world. They treat each area differently. (The two years also allows crooked politicians and others to move their money!)

Rick Chapo, Esq. is a 1992 Graduate of the California Western School of Law. He was admitted to the California Bar and the U.S. District Court, Southern District of California in 1992. Chapo’s areas of practice are Internet Law, Business Law, Tax Planning, and Asset Protection Planning. Visit his website at www.adultinternetlaw.com.