Cayman government halts company law reform at eleventh hour

10 September 2012

The Cayman Islands government has suspended enactment of the Companies Amendment Law 2012 after financial industry representatives protested it would cause a bureaucratic disaster for foreign firms operating in the jurisdiction.

The legislation was rushed through parliament late in August to meet the demands of the Organisation for Economic Coordination and Development (OECD) Global Tax Transparency Forum, which was preparing to conduct a peer review inspection. An earlier peer review had identified shortcomings in Cayman Islands company law that made international tax information exchange agreements of limited value, because the jurisdiction did not force companies to keep the relevant records. Thus the new bill includes sanctions against companies and partnerships that do not maintain adequate ownership and identity information; a requirement for exempted and non-resident companies to maintain registered offices with Cayman licenced service providers; and provisions for heavy fines on non-compliant private trust companies.

It was reported on 31 August ready for assent by the jurisdiction's governor, which would have brought it into full effect.

But before that could happen, the Cayman financial industry suddenly woke up to the implications of the new regime. Clause 20 of the new Companies Law, though only 22 words long, has a dramatic effect. It requires a Cayman company that administers IFC firms to keep copies of these international businesses' full account ledgers, including all transaction records, at its own registered office in the Cayman Islands.

According to one commentator, local accountant Chris Johnson, this requirement would be ‘nothing short of a disaster for the Cayman Islands which will quickly bring about the demise of the financial industry’. It would force local company service providers to recruit ‘hordes’ of new employees, mostly from abroad, to manage the ‘mountain’ of paperwork for the 80,000 companies registered in the jurisdiction.

No other financial centre imposes this requirement, said Johnson. The widely drawn implication is that the Cayman government was pushed by OECD negotiators into making unnecessary concessions - and then failed to consult the financial industry about them.

Paul Harris of the Cayman Islands Company Managers Association said existing Cayman practice was the same as the UK's, in that only the registers of directors and shareholders and similar documents needed to be held locally, not records of every financial transaction. ‘To require Cayman companies to do differently would impose an insurmountable disadvantage on the desirability of Cayman as a corporate base,’ he said.

Last week the storm broke and the financial sector insisted on a series of emergency meetings with the government to stop the bill receiving the governor's assent. On Friday afternoon the government duly announced that the bill is not in effect and that it is working to address ‘industry concerns’ about clause 20.

The question is now whether the government can itself amend the bill by issuing some suitably drafted supporting regulations - or whether the process of parliamentary scrutiny has to be followed again, by referring the bill back to the legislative assembly.

Sources

CNS Business

CNS Business (2)

Cayman Islands Official Gazette (Bill as passed, PDF file)