Offshore

Cayman trial threatens future of offshore finance

A staff reporter, 29 May 2002

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The world of offshore finance faces a severe threat following the opening of a court case in the Cayman Islands to determine whether tax eva...

The world of offshore finance faces a severe threat following the opening of a court case in the Cayman Islands to determine whether tax evasion is a predicate offence for money laundering. The case in the Court of Grand Cayman opened yesterday against Eurobank, formerly part of the Central Bank of Russia, but offshore centres that use common law face oblivion if the Crown is victorious, said industry officials. The cost of due diligence will be too crippling for firms to merit undertaking business in these jurisdictions, they said.

"There is a danger that the Cayman Islands will be seen as an offshore centre of "super equivalence" by following through the dual criminality concept. We have seen what happens in an EU context when legislation is implemented on a super equivalent basis - business goes to point of least resistance. This should be borne in mind in mind by the Caymanians if they do not want to damage their offshore funds and other business," said Simon Firth, partner at Wilmer, Cutler & Pickering, the US law firm.

The trial centres round the Cayman-registered part of Eurobank, which stands accused of setting itself up as a ‘money laundering shop’ for various interests. Four people, from the general manager down to the lowlier ranks, have been indicted for conspiring with the bank for these purposes and various clients are also in the frame.

In the UK’s overseas dependency territories, as well as in the UK itself, money laundering offences have worked on the basis of dual criminality. An institution can therefore only be convicted of money laundering offences if the alleged predicate offences are crimes in both the money’s country of origin and its country of destination. This, so far, has saved the Caymans and other offshore states from cases of this kind because tax evasion is not a crime in these tax-free jurisdictions.

The case is being prosecuted on behalf of the Crown by the attorney general, a Cayman official who represents the Cayman government. His motivation for arguing a case in this manner is unclear: the Cayman government may be unaware of the momentous nature of the case or it could be the result of intense pressure from the UK government.

Private Client Management understands that the attorney general will sidestep the obstacle of dual criminality by accusing the parties of offences that are common to both the US, where much of the wrongdoing allegedly took place, and UK jurisdictions such as the Caymans. The Crown will argue that various parties in the US were guilty of uttering a false document, an offence which always takes place during a tax fraud, and false accounting relating to tax evasion, according to local officials.

This is an interesting variation on a theme that first surfaced when US authorities began complaining to the Swiss about their refusal to make tax evasion a crime in the late 1990s. US law enforcers have often held up Switzerland as a non-compliant country in money laundering terms because it is impossible for them to extradite or obtain legal assistance against tax evaders on money laundering charges under the doctrine of dual criminality.

The Swiss have spent years telling the US authorities that they merely have to prosecute on the grounds of document fraud, without which no tax evasion can take place, to secure full legal assistance. The US seems to have ignored this advice so far, but this is exactly the kind of action that the Cayman government is now taking. The response that the defendants will be making to these charges could not be ascertained by press time.

The Caymans wriggled off the Financial Action Task Force’s blacklist of non-cooperative countries and territories in the summer of last year, after a period of extensive legislative reform. Every financial statute on the islands was changed in the preceding 12 months. Cayman government representatives, before and since, have been telling compliance officers not to make disclosures about tax evasions. If they have to do so now, and if a precedent is set for other offshore jurisdictions, the case could deal a body blow to the profitability of the entire offshore world, industry officials told Private Client Management.

Euro Bank Corporation was put into voluntary liquidation by a meeting of its shareholders in June 1999, about a month after the Cayman government appointed Deloitte & Touche as regulators to manage its affairs. The authorities subsequently made Deloittes the official liquidators. One of those arrested for money laundering was the father of Kenneth Taves, a businessman accused of fraud and himself a client of Euro Bank. Taves was jailed in the US in 1999 on other charges.

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