Interview with Jude Scott of Cayman Finance

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Q: How does Cayman help Chinese investors with overseas investment?

A: The Cayman Islands actually is a great premier global financial hub. So what it does is it efficiently connects law abiding users and providers of investment capital and financing from around the world benefiting developed and developing countries. Where it works really well is we’re really an extender of value for countries such as China. So it allows China itself, businesses in China, or individuals to access investment financing opportunities globally through the Cayman Islands.

In addition to that, because the Cayman Islands is home to about 70 percent of the global hedge funds, that also means there’s a huge amount of pooled investable capital in Cayman that’s available to be supporting the inward investing as well as supporting IPOs for Chinese businesses and maybe listing in the Hong Kong stock exchange, as well as when we look at the Belt and Road Initiative, Cayman has been uniquely positioned to support that. Whether it’s direct investing or accessing financing it’s able to actually connect China with this large pool of investable capital from the global marketplace.

You know you mentioned earlier the Belt and Road initiative, that’s an area that Cayman is very, very well positioned to support in. In particular when we look at the Belt and Road initiative that’s connecting multiple countries around the world, one of the strengths of Cayman is its efficient neutral platform. So we as a matter of course on a daily basis are dealing with thousands of clients around the world from different countries, different laws, different regulations, different tax rules, allowing them to transact in a very neutral but trusted environment.

And so as we look at the types of transactions, the type of investment capital, and infrastructure transactions that are going to be taking place going forward, Cayman is well positioned to be supporting China as well as the other countries that China is working with, to be able to access that global capital in a way that is sensitive to the different requirements that are necessary for each of the countries. So we’re very happy to be playing that role now when we see Cayman as a primary jurisdiction that’s being used now, and we just expect that to accelerate as China continues to expand its Belt and Road Initiative.

Q: Apart from China, how much demand is there from other Asian jurisdictions?

A: We also, for example, in the Japanese market, we’re the primary jurisdiction for Japanese pension funds. Investing through Cayman entities, generally they’re going to be a unit trust as the preferred structure for it. But again, being able to access that global talent of investment, manager expertise etc., to derive strong returns for them. Also when we look at India, Cayman is really emerging as a top jurisdiction for supporting foreign direct investment into India and we’re seeing those trends replicating in other jurisdictions around Asia as well.

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Q: How does Cayman balance the compliance with highest global transparency standards and also respect investors’ privacy?

A: We understand our important role because we are so integral to the global financial system. So we’re constantly working and enhancing our transparency measures. So whether it’s U.S. FATCA, whether it is common reporting standards as an early adopter, or BEPS Country-by-Country reporting, we take a very pragmatic approach to it. We look to understand what the international standards of direction are, and then we look to apply technology and pragmatism to create solutions that help our clients be able to comply with those, but in the most efficient way possible.

We also for example, if you look at things like beneficial ownership, Caymans had in place for, over 15 years, a real world class verified ownership regime. So we take that very seriously. Our professional service providers are licensed and regulated and they have responsibilities subject to criminal sanctions to be collecting necessary information for AML and protecting the jurisdiction from these arrests.

But we’ve also looked at it from the perspective of, you know, we believe that, you know, where there are appropriate investigations, we have proper cooperation channels in place, whether it be regulatory, tax investigations or anti-money laundering investigations. So we have three main platforms for that and then agreements which allow countries around the world to be able to request the information they need to properly pursue investigations.

But we believe that, you know, law-abiding users of the jurisdiction also have a right to appropriate privacy. So our verified ownership regime is not publicly available. We don’t believe that that’s appropriate, it’s not the global standard. And in particular, when you look at the trends we’re seeing from a data protection perspective, human rights perspective, as well as a privacy perspective in various conventions that have historically been in place we believe that there will be a balancing with regard to that. And the approach that we’ve taken, which is to properly collect the information for it to be available for appropriate investigations but for it to be also properly protected as private for legitimate parties and transactions is really the model that will be sustained globally.

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Q: We know that Cayman has a neutral tax system, what does it mean by “neutral”?

A: So Cayman has never had income taxes and it operates based on fees and other types of direct taxes. So for example we have work permit fees, we have import duties. We are an island nation, so we import, you know, in excess of 95% of what we consume, so it makes it very, very efficient. And the collection of those types of fees and taxes probably raise in excess of 20% of our GDP is collected by government in the form of taxes.

So what we’re really focused on is leveraging that platform also ensuring that we don’t have a platform which supports tax evasion because we have all the transparency measures in place. We also do not support aggressive tax avoidance. As you know, for countries to support aggressive tax avoidance they need to have in place legal mechanisms that shift tax base from one country to another. Things like double taxation agreements. Cayman doesn’t have any double taxation agreements.

We technically have one with the UK that’s called the double taxation agreement, but it’s really the form or the tier that they requested to be in that form, but it provides no benefits to Cayman. And so Cayman really is very, very efficient, in that we do not add an extra layer of tax to the transactions. So a typical pooling of investments through Cayman the investee entities are going to report and pay their taxes as they would normally. And the investors into the Cayman entities report and pay their taxes as they would normally. But Cayman does not add any additional taxes to it. So it allows us to be very neutral from that perspective.

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Q: What are some key aspects of Cayman’s progress in terms of fintech research or regulatory updates?

A: It is an area that we are investing a lot of time into. And I think in true traditional Cayman style we are not focused on sort of blowing our trumpet or being very high profile with it at the time. But we believe this amazing technology is going to be a technology that is going to be tremendously disruptive and it will be the mainstay of global financial services going forward. We also recognize that there are many challenges with being able to apply this technology which was developed outside of financial services to global financial services transactions.

So in Cayman and through Cayman Finance, we’ve really been interacting with countries around the world looking at how governments are dealing with it taxing authorities, regulators, looking at the risks looking at traditional models, for example, where, you know, maybe 20, 30 years ago when there were complex derivatives coming into the marketplace they would first come into offshore jurisdictions before they would go into regulated jurisdictions. So investing the time, using those models to understand things like, for example, the cryptocurrency side. You know, how do we understand how to deal with things like the risk of existence and valuation and those aspects where similar types of risks that we encountered when new derivative products were issued, so we leveraged that knowledge. And we’ve also then sort of focused on the technology side of it as well.

We believe that currently around the world, most countries are focused on what are referred to as wave two of seeking to adopt this amazing technology into their global financial system marketplace. From a Cayman perspective, we believe that the appropriate wave is wave three. So if we were to look at wave one, wave one would be where countries sought to take the technology with the good aspects and some of the inherent challenges adopt it into their jurisdictions with existing laws and regulations and as a result, that created significant problems in many countries.

Wave two is where we are in most countries now, where they’re seeking to still bring the technology on board with the good attributes and the challenging attributes but change their laws or regulations to be able to have the technology fit. We believe we need to move to what we refer to as a smart fintech regulation environment.

So we actually take the best of the technology, so the speed, the low cost, the peer-to-peer, the borderless aspects of the technology capability we bring that across, but we leave behind the aspects of things like anonymity and not being regulated and anonymous nodes and instead we’re working on an environment and wave three, which would be a closed or permissioned environment, which would be scalable so countries are able to bolt into it, digital exchanges and the like. And access into that environment would be through a certified digital ID, which is a big project that Cayman Finance working groups are working on is to create an effective, efficient but regulated regtech platform that actually does certifications that result in certified digital IDs that can be used in this closed, permissioned environment that then allows parties who are pre-certified for anti-money laundering to be able to transact.

As you know right now one of the big challenges that we have was trying to apply the technology to global financial services is issues of anonymity, issues in how we deal with complaints around anti-money laundering because of the inherent nature of people being able to transact digitally with or without verification on those. So we believe that the wave three solution is really going to be the fundamental platform for the future. It addresses concerns with anti-money laundering through the certified digital ID. It enhances all of the benefits of the technology with the speed, low cost, the peer-to-peer aspects of it. It also addresses concerns that we’ve been seeing from our large fintech developers who are seeking to have their products be acceptable globally where there is resistance or concern from taxing authorities in various countries concerned that they are not sure how they are going to tax transactions and things that may be anonymous or might be unregulated.

This provides a framework where they’re actually able to have taxation frameworks attached at an entry point and so all the parties who are transacting are known and they are able to have appropriate taxation profiles in it. So we think that, you know, a lot of work to be done on it. We work very closely with our business partners around the world working with regulators and governments but it is a solution that we think is necessary and the important global marketplace and we’re just happy to play a role in helping set the standards for it.