SCRIPT 1: WHY CAYMAN - PART 1
In the Cayman Islands our habitats - including coral reefs, coastlines and mangroves are all dependent on one another - Our economy is no different.
From people, to businesses right through to government - it’s all connected.
And just like everyone wants a healthy ecosystem -
everyone wants a healthy economy too.
Cayman is a top-ranked international financial centre and domicile for captives,
Investment funds and pensions worldwide.
And our biggest economic contributor?
Construction you ask? Not quite.
Tourism? Close. It's true that we're a country of consumers, and the more people we have using our services, the more money we make.
But our actual greatest economic contributor is our world-class financial services!
Long ago we had a ‘simple economy’;
One person has fish, Another needs to eat,
That’s a transaction.
Now imagine that instead of fish, it’s a boat, a house, or a car?
Or a fleet or business you can earn on.
That’s investment.
But what if you’re in Canada and your investment is based in China?
Whose rules and regulations do you use?
Cayman maintains a high level of integrity,
With a stable government and UK-based legal system, globally respected for fairness.
That’s why so many countries choose us for these transactions.
The more transactions we do -
The more specialized we become - and the more our economy grows.
The result? Cayman is now home to many of the world’s top accountants, law firms, banks, fiduciary firms and administrators.
Unlike most countries, Cayman doesn’t add an extra layer of taxes on top of tax paid in an investor’s home country.
That way, there’s no duplication of taxation.
Instead, our financial service fees ensure constant investment in our professional sector’s exceptional service.
Cayman’s tax-neutral status combats tax evasion with legislation, regulation, and more;
Ensuring the highest international standards for transparency and cross-border cooperation,
And attracting reputable investors.
All these factors
Make the Cayman Islands an ideal and trusted international financial centre.
SCRIPT 2: WHY CAYMAN - PART 2
Episode One explained what makes the Cayman Islands a top-ranked international financial centre,
Now let’s delve into our financial services sector.
Much like Cayman's natural environments, our financial services sector provides value to our people.
Our tax-neutrality and stable economy work in perfect harmony;
Attracting leading banks, accounting, legal and investment firms as well as fiduciary firms and administrators.
It’s resulted in our Islands having the most hedge and private equity funds in the world.
But what do these Funds do and WHY are they registered here?
These Funds are collected and invested in “investment vehicles” -
where people put money into one business for collective gain.
Hedge Funds, like pension plans… but different;
Are also financial partnerships that use pooled funds and various strategies to earn returns for investors.
And while Pension Funds are restricted to safe investments like blue chip stocks and bonds;
Hedge Funds in Cayman can invest in stocks, bonds - and even riskier derivatives like futures and options.
We’re also home to many Private Equity and Private Credit Funds.
Private Equity Funds often invest in companies that are in trouble, thus saving and creating jobs;
While Private Credit Funds provide loans to businesses struggling to secure them.
Investment managers, fund administrators, auditors and directors must ensure these Funds are run properly;
And adhere to the rules determined by the Cayman Islands Monetary Authority or CIMA.
The fees these Funds pay to CIMA ensure everyone complies with the highest regulatory standards, laws and regulations,
And boosts the economy,
And creates new jobs.
In short, our islands benefit from the Funds industry.
Business-friendly legislation,
excellent service providers,
and our tax-neutrality
all make Cayman the number one global domicile for asset management vehicles;
an amazing achievement for our tiny islands!
SCRIPT 3: BANKS
We’ve learned how the Cayman Islands has attracted the world’s top banks;
And so much more!
And just like our ecosystem, they’re all connected!
Let's break down what makes them important…
starting with Banks.
Remember our person who wanted to buy a boat, a house, or a car?
What if she needed to borrow the money...
And her family couldn’t help?
That’s where banks come in!
Banks are businesses where people or other businesses keep their money;
and in return, Banks pay them interest.
Banks can pay interest thanks to people who borrow money - and pay to do so.
So if your US-based company needs help with a Chinese investment,
which bank would you use?
Savvy investors choose banks in Cayman!
Some are Tier 2 businesses, which we learned in our previous series, are companies that do business with other local companies;
while others service international companies,
ensuring payments flow between countries.
Because it flows through Cayman, we work closely with global banks;
That’s why the media refers to the “trillions” of dollars in Cayman or other
tax-neutral jurisdictions.
The money isn’t here, but invested globally, flowing through our legal entities.
Banks are highly regulated, meaning they can’t take risks -
so not everyone can borrow from them.
They earn a small amount on transactions
- especially transactions between different currencies -
and can invest the money we keep with them.
The people responsible for these investments and the exchange of currencies, are called Investment Managers;
who work in banks or anywhere else money is invested, including Pension plans.
And because Cayman is so popular for hedge funds or private equity funds;
It’s no wonder that so many of the world’s top investment management companies are registered here too!
SCRIPT 4: Investment Managers
Earlier we learned that investment managers are responsible for investing our money.
But how do they do this?
They invest via Hedge Funds by making investments in a portfolio of securities, including stocks, bonds and derivatives.
They work for the Fund’s investors and in line with investment objectives.
In fact, it’s Investment Managers who set up Funds and attract investors.
But how do they get investors to trust them with so much money?
Well, it’s usually due to their expertise and experience –
but also thanks to the Fund’s Independent Directors, Fund Administrators and Auditors.
Usually Investment Managers have experience in equity analysis and picking securities that will increase in value.
Most have impressive CVs - but must keep performing - to justify the fees they’re paid.
Investment Managers usually receive a management fee of 2% of the Fund’s assets - to support day-to-day costs.
And to ensure their interests are always aligned with the investor, they are awarded a 20% performance fee if they manage an increase in asset value.
Unlike Cayman’s accountancy and law firms, most Investment Managers aren’t located here;
But can employ staff anywhere.
So why do Investment Managers register their companies here?
One: The Investment Fund is located here, so it makes sense to register in the same jurisdiction.
Two: They know they only pay taxes where they live and not in Cayman too.
And Three: If something bad happens to the Fund they know Cayman’s legal system is fair.
And with all the Investment Management companies registered here regulated by CIMA, we can rest assured knowing CIMA will ensure they follow the rules.
SCRIPT 5: Fiduciary Roles
We learned how there are people with a fiduciary duty to ensure certain funds are run properly, like pension.
These people have different titles depending on the legal structure –
But for now, let’s call them Directors.
But what does a Fiduciary duty actually mean?
In short, it’s a legal obligation of one party to act in the best interest of another.
Directors are entrusted with the care of a legal entity’s money and property –
And must ensure it achieves its purpose and complies with the appropriate laws and regulations.
Directors hire experts and put controls in place to ensure they do their jobs;
while these experts also have a fiduciary and contractual duty to do the job.
As a Director of a regulated Cayman Islands entity, you need to register with CIMA –
Who will fine or deregister you if you can’t fulfill your role.
Wait, if Investment Managers set up Funds;
Why are the Board of Directors in charge?
While Funds are usually started by Investment Managers, their investors want a guarantee their investment is secure;
and that’s why an Independent Board of Directors is important.
Investment Managers can be Directors, and usually are,but the best structures have a majority of Independent Directors –
meaning they don't work for the Investment Manager, or other service providers.
Directors resolve any conflict and act as experts who understand the structure by ensuring all service providers have the expertise to do their jobs.
They also accept the liability and consequences -
So if a service provider does not do their job, it’s the director’s responsibility.
Thanks for keeping an eye on things Directors!
SCRIPT 6: Trusts & Corporate Services
The final element in our Financial Services ecosystem are Trusts – So what are they?
Let’s go back in time.
In the 12th century English landowners travelled to the Middle East to fight in the Crusades;
giving ownership of their land to someone to manage until they returned.
But some refused to return the property. That’s why Trust law was developed.
Trusts are set up when one party gives another the right to hold and manage assets for the benefit of a third.
The Trustee has a fiduciary duty to manage the Trust property and assets;
Like when a parent puts property in a Trust for their children.
Parents could just give the property to the kids - but if something happens to them the Trustee will ensure the kids are looked after.
The Trust legally protects the Trustor’s assets;
and ensures they’re distributed according to their wishes.
Great. But what’s their connection to Cayman?
Our Trust Law is based on English common law;
And since we introduced Trusts in the 1960s our skilled professionals have emerged as experts in Trust management;
Whether it’s done by one Trustee or a company with a Trust Company license from CIMA.
These Trust Companies employ accountants, lawyers, chartered secretaries and Trust and Estate Practitioners;
Who keep the Trust assets under safe custody, maintain records, and make decisions based on the Trust Agreement’s provisions;
Which might include investing in Funds or Insurance companies.
In fact, Cayman has quickly emerged as a premier Trust Jurisdiction!
Impressive when you consider the rest of the world’s 900-year head start!
SCRIPT 7: Insurance
Apart from being a number one Hedge Fund jurisdiction;
Cayman is also a key player in the Captive Insurance Industry;
and only second to Bermuda in the number of offshore captives licensed.
But what is Captive Insurance?
We all need insurance,
- where we agree to a policy;
and pay premiums in return for cover.
Captive insurance is your own private insurance but rather than paying premiums to a public insurance company;
You set up your own company to pay premiums to - and this captive exclusively insures your risks.
Why go to all that hassle though?
Well, because it’s cheaper.
For example, a hospital that needs medical malpractice insurance may find their insurance company’s premiums too high;
and that the insurance company bases premiums on an industry average and doesn’t understand their unique risks.
If the hospital sets up its own Captive, it can reduce its premiums and obtain greater control over its risk management.
So how do you set this up?
With an Insurance Manager.
There are many Insurance Managers in Cayman, regulated by CIMA, and set up and manage Captives.
First they must ensure a Captive is the right solution for the client, then they’ll work with CIMA to create and license the Captive.
Once it’s up and running, the Insurance Manager provides ongoing management services;
and participation in Board of Directors meetings.
So we have our Insurance Managers to thank for our booming captive insurance industry!
SCRIPT 8: Auditors
With so much money and assets moving around between banks, investment managers and more,
how do we ensure what’s reported is true?
Administrators verify fund structures, investors and investment managers;
but who checks the Administrators?
Meet auditors.
The next important players in our financial services ecosystem.
There are over 26,000 investment funds and over 700 insurance companies registered with CIMA;
and it’s a CIMA requirement that they produce audited financial statements.
It’s usually an Administrator or Insurance Manager’s role to prepare financial statements at year-end.
External auditors will audit these to ensure accuracy and fairness;
by reviewing the financial statements and the underlying information using different tools and techniques.
Key risks they will check for include assets that are overvalued or don’t exist,
or fees that have been miscalculated.
To prevent this, auditors test the valuation – and ensure they exist.
Whatever investment a fund makes, an auditor ensures they are independently valued.
They do this by using experts, or financial information providers like Bloomberg.
In a nutshell, auditors verify and test the numbers reported in financial statements;
and don’t simply rely on the word of the Investment Manager.
Being an auditor doesn't just require good maths, you need a questioning mind and the ability to ask difficult questions.
But what makes auditors key in Cayman Island’s financial services ecosystem?
Well, investors can be confident that their financial statements are audited by professionally qualified, experienced staff;
Which enhances the reputation of the Cayman Islands as a safe place to do business;
and provides training and great job opportunities for many young Caymanians.
SCRIPT 9: Lawyers & Corporate Services
In a previous episode, we learned that banks and other financial service providers can lend, borrow and invest money on behalf of others.
What we didn’t hear is that they need lawyers to set up these structures.
You’ve heard of lawyers, right? No, they don’t just shout “Objection!” in courtrooms.
Those are criminal lawyers - but most lawyers in Cayman create Funds that work with global jurisdictions.
Our well-respected legal and judicial system, level of legal expertise and service AND our position as one of the first offshore jurisdictions for legislation that governs our Fund industry;
have all contributed to our success as the number one fund jurisdiction.
An Investment Manager will first set up a Fund while a local law firm provides advice on its structuring and establishment.
Various documents must be completed and then drafted in line with Cayman Islands law and other countries’ regulatory requirements;
Such as the memorandum and articles of association and the Offering Memorandum, which sets out details for investment objectives, operational terms, and risks.
These complex documents must be reviewed frequently before being finalized.
So what happens to the lawyers once the Fund is operational?
During the lifecycle of a Fund, laws in Cayman and other jurisdictions may change;
Requiring amendments to the Fund documents which the Investment Manager will need advice on.
In short, our Fund industry wouldn’t exist without a stable legal environment with experts in Funds Law;
So we’re lucky to have so many top lawyers on our Island.
SCRIPT 10: Administrators
With such a busy funds industry;
how are these structures, investors and service providers Administered?
By administrators of course!
They use advanced software to ensure Fund investors comply with important laws;
and the Automatic Exchange of Information reporting;
This ensures we know who is sending or receiving money and that they’re not criminals;
While also helping “onshore” countries collect their taxes.
Once an investor is accepted, they send their money to a bank,
broker, or other party for the Investment Manager to trade.
Administrators verify trades and ensure the valuation of the securities they purchased or sold meet the Fund’s rules.
The result of these trades is called the fund’s ‘portfolio’.
Despite what you’ve heard, those trades don’t usually happen here because banks, brokers or counterparties are in other major financial centres.
Our tax system is designed so capital flows between them efficiently - without losing any investor returns to tax in Cayman.
The Administrator also calculates the fees due to the investment manager;
As well as fees due to lawyers, directors, and auditors, ensuring they’re in line with the Fund’s rules.
At year-end, the administrator creates financial statements for auditing, and assists the Fund, investment managers and investors with their ‘onshore’ tax reporting.
They also make regulatory filings, not just to CIMA, but to other regulators and law enforcement authorities via AEOI.
Cayman has numerous, changing tax information exchange agreements in place;
is a participant in FATCA, CRS, Country by Country reporting,
and has an accurate Beneficial Ownership Register;
Leaving no place for pesky criminals to hide, as global regulatory authorities can always access this information!
So thanks administrators!
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