Cayman Islands Offshore Business Sectors:

Cayman is well-developed as an international financial centre. For 25 years the Government has welcomed offshore business, and has created a world-standard regulatory structure to avoid money-laundering and other criminal activity. The Cayman Islands has the world's largest offshore banking sector, and is second only to Bermuda as a captive insurance centre. Mutual funds have been a more recent success story, assisted by the establishment of a stock exchange. Trust management has always been a significant activity. The islands also offer a shipping registry. During 2003 and 2004, China's explosive entry into world markets saw the Cayman Islands emerge as one of the primary routes for financial flows into and out of the Chinese mainland.

During 2003 the Cayman government battled to avoid inclusion in the scope of the EU's Savings Tax Directive, but in the end was forced to give in by the UK Treasury, and applyied the information exchange model under the Directive from 1st July, 2005. This means that information about interest on savings paid to citizens of European member states is being forwarded to the tax authorities of the member state in question. The Cayman Islands authorities have put a brave face on this development, which they tried hard to avoid.

Most sectors of the Cayman Islands financial services industry had a good year in 2004 despite hurricane Ivan. CIMA Chairman Mr. Timothy Ridley observed that: “We are very encouraged to see the impressive growth of the banking and insurance sectors of international business in 2004, despite the unforeseen burdens imposed by hurricane Ivan. Our service providers and their client base remain committed to the jurisdiction as evidenced by the strong licensing and registration activity in the final quarter.”

CIMA's report for 2004/2005 showed continuing growth in the jurisdiction's offshore business sectors, with rapid growth of securitization business being one of the most marked features.

This section of the site describes the most important types of offshore business activity carried out from the Cayman Islands.

Cayman Islands Investment Fund Management:

The Cayman Islands are now one of the world's leading fund management centres due to the welcoming regime, well-constructed legislation, good reputation, and the recent opening of the Stock Exchange, whose regime is particularly well-suited to mutual funds.

Under the Mutual Fund Law 1996, investment or mutual funds with more than 15 members must be individually licensed, or must be administered by licensed mutual fund administrators. Licenses are issued by the Governor in Executive Council ('ExCo') after scrutiny of the application by the Monetary Authority.

In November, 2003, CIMA introduced new mutual fund regulations in order to make funds domiciled in the jurisdiction more attractive to Japanese fund distributors. Legal experts explained that the changes were deemed necessary, as although the Japan Securities Dealer's Association had not objected to the distribution of Cayman-registered funds, the guidelines for the selection of foreign unit trusts were vague with regard to the required standards for foreign regulatory regimes, meaning that some Japanese fund distributors had opted not to take the risk.

However, CIMA included a clause in the new regulations exempting existing Cayman funds registered in Japan from the obligation to adopt the more stringent rules if the fund manager does not see the need.

During the year to the end of June 2005, the number of active mutual funds regulated by CIMA grew by 21 percent to 6,527 funds.

In the early years of the new millennium, the Cayman Islands became the jurisdiction of choice for the registration of hedge funds. A record number of new hedge funds was created in the Cayman Islands during the first six months of 2005, despite an overall slowdown in the inflow of capital to hedge funds. More than 80 percent of the world's hedge funds are registered with the Cayman Islands Monetary Authority (CIMA), which reported that the first half of 2005 saw the total number of registered funds grow from 5,932 to 6,527.

The Cayman Islands Monetary Authority (CIMA) announced in mid-2006 that the islands' hedge fund sector is continuing to boom, with an additional 665 funds having registered in the first five months of the year.

The SEC's new rules for hedge fund registration in the US have done nothing to lessen the attractions of 'offshore' as an alternative domicile. Many US fund managers now choose to register their funds in Cayman, with actual management sub-contracted to US or UK firms.

The Cayman Islands Stock Exchange opened in July 1997 under the Stock Exchange Company Law 1996, specifically targeted at mutual funds and specialised debt securities (SPVs). Funds of funds and umbrella funds are both accepted, and there are no restrictions on investment policies. Funds can be established locally, or in a recognised jurisdiction, meaning the EU, the USA, Japan, Switzerland, Canada, and a number of other IOFCs. Listing takes as little as 1-2 weeks. See Law of Offshore for details of listing requirements.

By the end of 2003, over 700 issues had been approved for listing since the CSX's inception in 1997, with market capitalisation in excess of $44bn by April, 2004.

The Securities Investment Business Law, 2001 aims to regulate the business of securities investment in the Cayman Islands and provide an appropriate structure for the regulation of securities brokers, including market makers, arrangers, investment advisors and investment managers. The fundamental objective of the law is to define activity that requires a licence and then to ensure that such activity is undertaken by fit and proper persons in accordance with accepted supervisory standards of conduct for securities investment business. The Cayman Islands Monetary Authority (CIMA) is directly responsible for the licensing, supervision and enforcement of such licences.

The Securities Investment Business Law, 2002 (Commencement) Order 2002 came into force from August 14th 2002. It obliges anyone carrying on SIB to examine their status under the Law and consider whether they should apply for one of the exemptions under the Law, or potentially be subject to its licensing requirements.

With effect from 4 March 2004, the UK's Board of the Inland Revenue designated the Cayman Islands Stock Exchange as a ‘recognised stock exchange’ under section 841 of ICTA. The term ‘recognised stock exchange’ occurs throughout the Taxes Acts and in various tax regulations. For example it is used in the definition of a close company in section 415 ICTA 1988, and in the definition of investments which may be held in PEPs and ISAs. The term is often used in the phrase ‘listed on a recognised stock exchange’ or in similar or related expressions. Firms listed on the CSX will now be able to take advantage of the 'quoted eurobond exemption'. As a result, interest paid on securities listed on the Cayman Islands Stock Exchange can now be paid without deduction of UK tax. Similarly, securities listed on the CSX are now regarded as 'qualifying investments', allowing them to be held directly in Personal Equity Plans (PEPs) and Individual Savings Accounts (ISAs).

In March, 2006, offshore law firm Walkers says that collateralized debt obligations (CDOs) were being created at a record pace in the Cayman Islands, with $125 bn of transactions in 2005.

Walkers says that more than 270 CDO transactions were established in the Cayman Islands in 2005; the number of CDOs issued in the Cayman Islands has grown more than 100 percent in the past two years.

"The first Cayman CDO was issued in 1994, however current stability in the corporate marketplace combined with the lackluster performance of debt and equity markets worldwide is translating into a surge in demand for CDOs of all types," Ian Ashman, a Partner in Walkers' Structured Finance group, said. "This type of vehicle is being used in a wider range of transactions including high volume commercial real estate deals and middle market loans."

A recent report by Moody's Investors Services predicts that the record-breaking 73 percent increase seen in CDO issuance worldwide in 2005 should translate into a strong first quarter in 2006. Walkers has seen increased activity in their CDO work to support this analysis.

One of the drivers for this growth is that CDOs are being used in more ways than ever before: as asset-backed securities, commercial- and residential-backed securities, balance sheet CDOs backed by pools of commercial loans, high-yield bonds, leveraged loans, and repackaged CDOs.

"There weren't a lot of corporate credit roller coasters in 2005, so CDOs performed well, diversified, and became increasingly attractive to investors and bankers," David Egglishaw, Managing Director of Walkers SPV, a licensed trust company wholly-owned by Walkers, said. "And this seems to be just the tip of the iceberg. The markets are much more transparent and liquid and we expect to see CDOs applied in increasingly innovative ways in 2006."

The Cayman Islands provide CDOs with a tax neutral jurisdiction, a sophisticated financial infrastructure that includes major banks and accounting firms, and therefore the ability to achieve measurable savings which, in turn, are passed along to investors.

Cayman legal firms were indeed in great demand from the issuers of structured finance securities during the first six months of 2006, underlining the Cayman Island's pre-eminence as a jurisdiction of choice for special purpose vehicles (SPVs) used in securitisation transactions.

According to UK data provider FactSet Global Filings, leading Cayman Islands law firms Maples and Calder and Walkers gave legal advice on 147 asset-backed securitisation (ABS) deals between January and June 2006.

Maples gave advice on a total of 111 deals and Walkers on a further 36 deals, while smaller contributions from Mourant du Feu & Jeune and Ogier pushed the total number higher still. This compares with the combined total of 92 from the three main Irish law firms of A&L Goodbody, Matheson Ormsby Prentice and McCann Fitzgerald.

The process of asset securitisation involves the sale of income-generating financial assets (such as loans, trade receivables and leases) by a company to a special purpose vehicle. The SPV, which might be a trust or a company, finances the purchase of these assets by the issue of bonds, which are secured by those assets.

Cayman law firms were also dominant in advising on collateralised deals during the first half of the year with Maples and Walkers advising on a combined 143 transactions compared, compared with 77 from the main Irish firms.

Cayman Islands Banking:

Cayman banks must be licensed under the Banks and Trust Companies Law 1995 as amended in 2003. The astonishing Cayman Islands banking industry has 340 such licensed banks, of which about 30 hold Class A licenses permitting local and offshore business activity, while the remainder hold Class B licenses, permitting only offshore business - a local office is allowed, but only very limited transactions can be carried out with Cayman Islands residents. Banks do not need to be incorporated locally: a foreign bank can register as a foreign company and then obtain a license. For further details of licensing requirements and procedures and fees payable see Law of Offshore and Offshore Legal and Tax Regimes.

The assets of Cayman banks exceed US$1 trillion as at March 2005. A very wide range of services is offered: the 70,000 offshore companies registered in Cayman include many treasury management or investment management subsidiaries of multinationals taking advantage of the excellent banking environment and absence of taxation. Evidently, private banking is a major component of the industry: asset protection rather than tax avoidance as such is the driving force, so that the stability of Cayman alongside stringent banking secrecy and its sophisticated investment environment are very attractive to wealthy individuals, particularly those from the US where Cayman has a very good reputation.

In 2005 the total number of banking and trust licences declined by 22 to 312, due mainly to consolidations worldwide, however the assets and liabilities of licensees increased. Total international assets booked through banks in the Cayman Islands stood at US$1,265 billion at 30 June and liabilities totalled US$1,250 billion at the same date.

Cayman Islands' banks are supervised by the Cayman Islands Monetary Authority (CIMA), which concentrates on 110 banks for which Cayman is the home-country supervisor. CIMA recently extended its bank inspection programme to on-shore subsidiaries of Cayman banks.

Cayman signed a Memorandum of Understanding on cross-border banking supervision with Brazil in 1999, and intends to create a network of such agreements with all the countries whose banking supervisors evince interest in Cayman's banking sector.

Following KPMG's independent report to the UK Government on the regulatory regime in the Cayman Islands and other offshore financial centres in the autumn of 2000, CIMA made a ruling on private 'shell' banks that have no effective supervision because they are not units of established international banks, subject to stringent regulation in their home jurisdictions. Such mainly US banks have no physical presence in the Cayman Islands.

In 2000, the Cayman Islands introduced additional due diligence procedures for banks when they were required to comply with fresh Know Your Customer regulations. The original deadline of 31 December 2002 for the provision of information about customers to the authorities was extended, and the new rules came into force in March 2004.

The due diligence rules require both new and long-standing account holders in the jurisdiction to provide proof of identity and physical address, in addition to an explanation of their banking activities. The rules have provoked criticism from some quarters, particularly from those who have banked in the Caymans for many years, who argue that they are intrusive and unnecessary.

Cayman Islands Trust Management:

Trust Management has been a major activity in the Cayman Islands for 30 years or more, and trust assets in Cayman now equal or exceed banking assets. Originally the trust was used primarily by wealthy individuals from the major common law countries, but it is now accepted as a major technique of asset protection in all parts of the world. Over the last 25 years the Cayman Islands, perhaps more than some other jurisdictions, have extended and adapted their trust laws to accommodate this wider market, which is not necessarily interested so much just in tax avoidance, but also in the efficient management of wealth in a more general sense. See Law of Offshore for a fuller treatment of trust law in Cayman.

There is a large and sophisticated community of professional advisers on trust matters in Cayman. Individuals can provide trust services in the Cayman Islands without registration, but companies offering trust services must be licensed under the Banks and Trust Companies Law 1995. Foreign or Cayman-resident companies may obtain licenses. These are issued by the Governor, after the Monetary Authority has accepted an application giving comprehensive information about the applicant.

A licensed trust company may be 'restricted' or 'unrestricted'. 'Restricted' companies require less capital, but are more strictly controlled. See Law of Offshore and Offshore Legal and Tax Regimes for further details of the licensing regime for trusts, and fees payable.

Private trustee companies have recently become popular. In this arrangement, the trust itself remains uncluttered by control arrangements, which are exercised by the private trustee company, which in turn can be administered by a licensed trust company. This form is particularly suited to the larger type of family trusts with multiple beneficiaries and objects.

Cayman Islands Insurance:

The Cayman Islands insurance sector is regulated under the Insurance Law 1979 as amended, most recently in 2004. Class A insurance licenses cover domestic insurance in Cayman itself; Class B licenses cover Cayman or (registered) foreign companies conducting external business; restricted Class B licenses are for captives. Applications for licenses are made to the Cayman Islands Monetary Authority (CIMA). See Law of Offshore and Offshore Legal and Tax Regimes for further details of the licensing regime, minimum capital requirements and fee levels.

Legislation in 1998 introduced a Segregated Portfolio Company Law. The SPC is an exempted company which may create one or more segregated portfolios in order to segregate the assets and liabilities of the company held within or on behalf of the portfolio from the assets and liabilities of other portfolios. As originally passed, SPCs were available only to certain types of insurance company, but in 2002 amendments extended the provisions relating to segregated portfolios to any exempted company. In essence, the new law provided that any new company may apply to be registered as a segregated portfolio company. A segregated portfolio company must pay additional fees and must provide notice to the Registrar of the names of all segregated portfolio accounts created.

The changes now in process will allow an existing company to convert into an SPC, although a number of criteria will need to be met, including the written consent of each creditor of the company and the approval of the Cayman Islands Monetary Authority (CIMA). An SPC will also be able to create separate portfolios by reference to a series of shares, as well as by reference to separate classes of shares.

An improvement to the current SPC structure, adopted from Guernsey legislation, will ensure that there will now be no ‘flow over’ from an insolvent cell to general assets. A key change for mutual fund issuers is a provision that secured creditors will now be able to enforce their security against a segregated portfolio, despite the existence of a receivership order against that portfolio. This will ensure that a segregated portfolio will be acceptable to – and will be rated by – the rating agencies in the same manner as an exempt company.

The Cayman Islands has the second-largest captive insurance community in the world, after Bermuda. The year 2000 saw 48 new captives set up in the Caymans, bringing the total to 535. By the end of 2002 Cayman had 642 captives, having beaten Bermuda into second place for new formations in the year with 97 new companies. A total of 83 new captives were licensed during 2003, bringing the total number of active captives to 644 at December 31st writing US$4.98 billion in premium and reporting US$19.35 billion in assets. Additionally, 39 new segregated portfolios were established within the segregated portfolio companies. At December 31, there were 79 Segregated Portfolio Companies licensed with a total of 350 Segregated Portfolios.

Hurricane Ivan in 2004 damaged the Cayman Islands in physical terms, but did not halt the expansion of the insurance sector. According to CIMA, in the weeks that followed the devastating hurricane, nine licences were granted to captive insurance companies, and the authority also issued an insurance management licence to Strategic Risk Solutions (Cayman) Limited.

Brady Young, President of SRS, noted: “There is a strong demand among current and prospective captive owners to domicile their companies in Cayman. As a captive manager it is important for us to be present in this domicile.”

The number of captives increased by 75 to 693 at the end of 2004, a 7% net increase.

Cayman's captive insurance sector continued to grow in 2005, with 733 Cayman-licensed captives active at 31 December, according to March, 2006, figures from CIMA. Total assets of the 733 captives active at year end 2005 amounted to US$26.6 billion. Premiums written by these entities equalled US$6.7 billion

North America was the region of origin and the location of risk for the vast majority of licensees. Eighty-eight percent of licensees (646) were providing cover in North America, writing premiums amounting to US$5.6 billion.

This was followed by the Caribbean and Latin America, which made up approximately five percent of total licensees (33) with premiums amounting to US$132.4 million.

Healthcare was the primary class of business for 38 percent of Cayman-domiciled captives in 2005, with US$2.5 billion worth of premiums written in this class.

Workers compensation was the primary class of business for 21 percent of captives (155 licensees). Premiums in this category totalled US$1.5 billion.

Property was the third most popular category, with 10 percent of captives (75 companies) listing it as their primary class of business and writing US$487.5 million in premiums.

Also in 2005, the Cayman Islands witnessed the formation of an open market reinsurer, Greenlight Re with approximately US$250 million in capital.

"Greenlight Re is the first Cayman-based global property and casualty reinsurance company and has worldwide reach, specializing in custom tailored reinsurance solutions. We anticipate that during 2006 interest in utilising Cayman as a domicile for such vehicles will continue," observed Mrs Nicol.

Cayman Islands Ship Management and Operations:

The Cayman Islands operates Registers of Shipping and Civil Aircraft. George Town is a Port of British Registry. Over the years, Cayman has been included in most English merchant shipping acts, with the result that it is a Category 1 registry, entitled to register all classes of vessel.

The Cayman Islands Shipping Registry administers Cayman registration, and has a full professional staff for this purpose. The Registration of Merchant Ships Law 1991 governs Cayman registration and lays down fee levels according to tonnage.

Aircraft are registered under the (English) Aircraft Navigation (Overseas Territories) Order 1989. The Civil Aviation Authority of the Cayman Islands maintains the register. The UK Civil Aviation Authority has discretion over Cayman registration, and in practical terms limits it to private aircraft.

In 2003 the register consisted of 123 ships (1,000 GRT or over) 2,402,058 GRT, 3,792,094 DWT. By type: bulk 22, cargo 5, chemical tanker 31, container 2, liquefied gas 1, petroleum tanker 21, refrigerated cargo 35, roll on/roll off 5, specialized tanker 1.

The new Merchant Shipping Law of 1997 together with its amendments (the "New Law") was commenced in July 1999 to revise, streamline and update the pre-existing law. The New Law is based mainly on the United Kingdom ("UK") Merchant Shipping Act, 1995, the UK Aviation and Maritime Security Act, 1990 and the UK Merchant Shipping and Maritime Security Act, 1997. It also embraces up-to-date convention requirements together with a number of innovations that address some of the specific needs of the Cayman Islands. These include: wider ownership, extended demise charter, enhanced mortgagee protection, registration and mortgage of ships under construction, mandatory minimum insurance, anti-piracy measures and clearer exercise of due diligence in the registration, deletion and representation of ships. The provisions of a number of ILO Conventions have also been incorporated, covering the engagement and welfare of seafarers, recruitment and placement of seafarers, regulation on hours of work and rest, and living and working conditions of seafarers.

A similar revision exercise has taken place with the Merchant Shipping (Marine Pollution) Law. This Law places all applicable aspects of marine pollution into one comprehensive and up-to-date body of law. It incorporates relevant aspects of UNCLOS, MARPOL, the Intervention Convention, OPRC 90, the London Convention on dumping of wastes (including its Protocol of 1996) and the Hazardous and Noxious Substances Convention. Some applications that have a broader reach than strict pollution issues have been included in the Merchant Shipping Law. Examples include the Civil Liability Convention and the Fund Convention.

The third body of principal maritime legislation is the Admiralty Jurisdiction Law, which came into effect in 2003. It is based on the UK Supreme Court Act, 1981 and incorporates the Arrest Convention of 1952. It operates as part of the Cayman Islands Grand Court Law and Rules.

In July 2004 it was announced that the Cayman Islands' shipping registry is now fully compliant with the International Maritime Organisation’s new International Ship and Port Facility Security Code. These international maritime security measures entered into force on July 1, 2004 and are designed to enhance maritime security on board ships and at ship/port interface areas. They were adopted by a Conference on Maritime Security, part of the United Nations, in December 2002. The new chapter applies to passenger ships and cargo ships of 500 gross tonnage and above, including high speed craft, mobile offshore drilling units and port facilities serving such ships engaged on international voyages.

In 2005 a Maritime Authority Law was passed, creating the Maritime Authority of the Cayman Islands (MACI), a body which incorporates the Cayman Islands Shipping Registry, Cayman’s Port State Control and Marine Casualty Investigation arms into one entity.

In August, 2005, Cayman Islands Governor, H.E.Bruce Dinwiddy, appointed six new board members to MACI.

Leading the new maritime authority will be Sharon Roulstone, an Attorney-at-Law and a Partner with Turner & Roulstone, who has been appointed Chairman. The post of Deputy Chairman is filled by Sydney Coleman, CEO of Paget Brown Trust Company Ltd since 1983 and a founding member of the Shipping Sector Consultative Committee. Joel Walton, JP was appointed in May 2004 as Chief Executive Officer (Designate) and Director of the Cayman Islands Shipping Registry.

Other board appointees include: Woodward Terry, head of law firm Woodward Terry & Company and a founding member of the Shipping Sector Consultative Committee; Donovan Ebanks MBE, Deputy Chief Secretary in the Portfolio of Internal and External Affairs and Chairman of the National Hurricane Committee; Andrew Eden, former president and an active member of the Cayman Islands Seafarers’ Association; and Errol Bush MBE, former Director of the Port Authority. A seventh Director with international maritime experience is to be appointed in due course.

Mr Dinwiddy commented: “The selection of this board was quite challenging among the very distinguished and qualified persons being considered. But I am confident we have brought together a very competent and well-rounded group of individuals to form the MACI Board for the next two years. I wish them every success as they chart the way forward, firmly integrating MACI as a key constituent of the Cayman Islands international financial services sector."

Version date: 07.05.06