The Story of the Rise and Fall of the Cayman Islands
Posted Thursday, October 06, 2011 6:24 PM
“Capital goes where it is welcomed. And stays where it is well treated.”—Walter B. Wriston
Grand Cayman Island, famously described as a sunny place for shady people, owes its extraordinary rise and equally spectacular fall to three people: expat lawyer Bill Walker, best-selling novelist John Grisham and President Barack Obama.
With its flat landscape and palm-fringed beaches, Grand Cayman, 60 minutes flying time from Miami, looks more like a Pacific atoll than a lush Caribbean island. In centuries past, however, Cayman’s pancake profile made it virtually invisible on the horizon — the perfect hideaway for pirates determined to stay hidden from prying eyes.
This tiny coral-encrusted British territory has long claimed to be the world’s fifth-largest financial center, routinely ranked with Hong Kong, Zurich and London. More than a trillion US dollars are said to be parked in Cayman, most of it in 8,000 trust funds (75% of the world’s registered trust funds).
Christopher Columbus recorded Cayman in his log, but it was 200 years before the island was deemed worthy of British occupation. The few thousand Cayman islanders, descendents of soldiers from Cromwell’s Army and the daughters of African slaves, lived a hardscrabble existence.
Right up until the 1960s, the Caymanians could only survive by eating sea turtle meat, or going to sea as merchant sailors. Wives scraped together tiny gardens from the thin sandy soil.
There were no telephones, no piped water and limited electricity. Roads were made of crushed coral. Swamps in Grand Cayman’s interior made massive swarms of mosquitoes a perennial plague. In the wet months, swarms grew so bad that children had to walk to school in groups carrying “smoke pots.” Older Caymanians tell of rainy years when cows, inadvertently left outside after dark, would be found dead at dawn, their mouths literally smothered shut by millions of mosquitoes.
Then, between 1968 and 2008, three men would forever change the fate of the Cayman Islands: Cambridge lawyer William Walker, Mississippi novelist John Grisham and Hawaiian-born Barack Obama.
It was Bill Walker who first brought in the necessary vested interests needed to create Cayman’s fledgling financial industry: suitably wealthy clients.
The stars, however, were also perfectly aligned in the financial firmament. The Bahamas had long been a trustworthy offshore banking center for the über rich. Then in 1967, for the first time, a black man won control of the Bahamian government. Nervous financial investors realized that the Bahamas would gain independence. A search began for other islands, where the government would require few regulations and ask depositors few questions.
The Bahamas bankers loved what they saw in the Cayman Islands: it was officially a British Territory, with a British governor and a Royal Cayman Police Service. More importantly, it had a hands-off administration—one that imposed no income tax, no corporate tax, nor any tax on capital gains, inheritance or gifts—and actively promoted its strict confidentiality laws.
Cayman launched its own dollar currency, pegging it to the greenback. Word went out that if you bring your cash to Cayman, it will be invisible to the world. Dubious depositors began to jet in from places like Panama, Cuba, Colombia, Nigeria and Miami.
“From the late 1970s until the 1990s, it was common for private jets to touch down at Owen Roberts Airport, with people carrying large suitcases packed with money for deposit in local banks. It was money laundering, and tax evasion, pure and simple. Everyone knew it, but nobody batted an eye in those days,” said a retired attorney, still living in Cayman, who refused to reveal his name.
[Despite working as a journalist in Cayman for more than a year, it proved impossible to quote any expat resident in Cayman by name for this article, because foreign workers who upset the government can have their Work Permits pulled and be told to leave].
Cayman’s secretive banking regulations, and its enduring indifference to shadowy depositors, was common knowledge among top private bankers, but unknown outside international financial circles. All of that abruptly ended in 1991, however, when John Grisham wrote a novel, partly set in the Cayman Islands, about a suspicious law firm that laundered mafia money in Grand Cayman.
The Firm became a best-seller, and was soon made into a blockbuster film starring Tom Cruise. Decades later, Cayman bankers still fume with fury at Grisham for making their tiny island a cheesy catch phrase for artful dodgers and tax cheats.
In recent years, no major financial scandal has seemed complete without money being funnelled through the Caymans. When the notorious Houston-based energy giant Enron collapsed in 2001, U.S. government investigations quickly discovered that Enron had registered 692 subsidiaries in Cayman. Two years later, the Cayman-regulated insurance company National Warranty collapsed, affecting almost a million American policyholders.
In late 2003, Parmalat, Italy’s eighth-largest company, went bankrupt as a result of the failure of a Cayman-registered mutual fund. Investigators suspect that 4 billion Euros were stashed in a Cayman firm “that did not exist.” Then one of Germany’s biggest banks, Bankgesellschaft Berlin, virtually collapsed after cheating depositors by selling dubious real estate investments to Cayman companies it had created. In 2007, two multi-billion-dollar, Cayman-registered Bear Stearns hedge funds collapsed.
That same year, then-Senator Obama co-sponsored legislation (the Stop Tax Haven Abuse’ Act) to crack down on offshore activities by corporations and wealthy individuals. Obama’s target: the estimated $100 billion in revenue lost to the U.S. Treasury because it was hidden in places like Cayman.
Later in 2007, the head of the Senate Finance Committee, Senator Max Baucus, referred to one building in Cayman, Ugland House, where thousands of shell companies had their addresses. The Senator thundered, “I want the [Government Accountability Office] to go looking in one of the most likely places shady tax transactions could be sheltered, and that’s this building in the Caymans.”
In 2008, then-presidential candidate Barack Obama, too, sited Ugland House. “You've got a building in the Cayman Islands that supposedly houses 12,000 companies. Either this is the largest building in the world, or the largest tax scam. And I think the American people know which it is: The kind of tax scam that we need to end.”
But Obama isn’t the only politician to have put Cayman in his crosshairs. German Chancellor Angela Merkel joined France’s Nicolas Sarkozy and the British government in calling for regulation of shadowy banking, which they feel played a significant part in the global economic crisis.
The Cayman government repeatedly states that it was, and is, breaking no laws, and has long stopped dealing with shady suitcase-carrying customers. But a March 2008 report by the U.S. Department of State Bureau for International Narcotics and Law Enforcement, included the Caymans in a list of countries where money-laundering took place.
And just this past September, the Wall Street Journal revealed that one of the world’s most-wanted tax exiles, William Millard, has been found living on Grand Cayman. According to court records, Millard, the founder of the retail chain ComputerLand, had allegedly totaled unpaid U.S. tax bills of more than $100 million over 20 years. Authorities said Millard was last seen on the remote Pacific island of Saipan in 1990, having vanished shortly after selling his firm. According to the Journal, Millard is linked to a vast network of more than 50 shell companies, trusts and numbered bank accounts.
Cayman’s Anglophile politicians feel betrayed by the British. But they have a special disdain for the American president. The reason: Aside from targeting their tax haven status, Obama has indicated a willingness to lift a half-century ban on American visitation to Cuba — a move that could sink Cayman’s already floundering cruise industry.
In fact, massive job losses in the U.S., where most of Cayman’s vacationers hail from, have already put Cayman’s tourism industry into a tailspin. At one time, the streets of Cayman’s tiny capital, George Town, were swarmed daily with thousands of Americans, who perspired profusely as they disembarked from seemingly endless droves of cruise liners. Now, far fewer American ships enter Cayman’s ports
As job losses mount in Cayman itself, resulting economic fear has led to complaints that “Cayman has too many expats.” Cayman’s older generation, a reserved and genteel people, are wholly aware that it was outsiders who brought tourism to Cayman with the development of the famous Seven Mile Beach. They remember, too, that it was British bankers who transformed Cayman from the dregs of the Caribbean into arguably the world’s premier tax haven, luring thousands of millionaires happy to pay modest annual fees (about $3,000) to hide their vast wealth from the eyes of government tax agencies.
For a growing number of young Caymanians, though, there is now a heightened sense of entitlement. Expatriates are told by xenophobic young locals, “You came by plane, but I came by pain [of birth].” In the past, all Caymanians were guaranteed jobs; young Caymanians shunned hot-weather work in the tourist industry, preferring instead a cushy air-conditioned office post with shorter hours and higher status.
An expat businessman, who has recently moved from Cayman to the U.S., says: “Today’s Caymanians are ill-equipped to live in their own country that is dominated by the off-shore banking industry. While the government employs the lion's share of its citizens, unemployment among the country's youth is at an all-time high and, at the same time, violent crimes have become commonplace on an island that once considered itself the safest place on earth.
“I think that the greatest irony of allowing so many American millionaires to stash their fortunes on computer servers in George Town may be that, while the money gained from the hedge funds has raised the standard of living for a handful here in Cayman, many Caymanians can barely afford to live on their own island, let alone find decent paying jobs.
“The government has long bent over backwards to accommodate the hedge fund industry, but many Caymanians feel they’ve been given the leftovers — including a shamefully substandard school system, an inept police force and dead-end jobs that none of them want.”
Today, perhaps half of Cayman’s nearly 55,000 population is expats. (No one knows for sure; the government refuses to release exact figures.) The largest expat community are Jamaicans, some 10,000, followed by about 3,000 Filipinos, plus hundreds of Indians, Colombians, Hondurans and Cubans; these are the people who repair the pot-holed roads, clean the condo pools, service the hotel rooms, man the fast-food restaurants and staff the car washes, supermarkets, bars, and dive shops.
Then there are the several thousand elite Americans, British and Canadians. It is these nationalities that make up the fabulously paid hedge-fund managers, lawyers, bankers, accountants, compliance officers and fund administrators of Cayman’s secretive financial sector.
Today, Cayman still boasts “offices” belonging to 300 international banks. But there’s now a definite chill in the otherwise tropical air: a slowly rising fear that the pampered affluence that the elite expats have gotten used to could all be taken away by powers beyond Cayman’s sunbaked shores.
“For Sale” signs appear with startling frequency as you drive along the highway that hugs the Cayman coast. The familiar logos of Century 21, Caldwell Bank and Sotheby’s seem to be everywhere.
If you pause at one of these posters after turning down a rocky side-road or peaking over a small rise to the sparkling sea, you may well come upon an ornate mega-mansion in the middle of nowhere. But you are just as likely to pull up in front of a shanty house with plastic lawn chairs, an old zinc roof and sagging wooden hurricane shutters. Both the mega-mansions and shanty huts once had shocking prices because of the juiced-up value of the limited land, the prices of which were hyper-inflated by Cayman's astonishingly wealthy expat bankers.
A European resident, who spends six month each year in Cayman, says: “The old Caribbean class system is alive and well here. So you don’t have to drive even a kilometer from the multimillion-dollar high-rise condos here on Seven Mile Beach to find Cayman's many shabby, rundown neighborhoods, where no one is ever likely to grow up to be a hedge fund manager.”
A July 11, 2010 article in the Financial Times, titled “Caymans’ domicile future seen as bleak,” noted that as the pressure mounts in Europe against unregulated offshore hedge funds, European institutional investors are increasingly choosing alternative investment funds that comply with the new stringent regulations.
The article quotes Mark Fleming, a partner at London-based fund manager Tiburon Partners, which runs a range of international funds, including some in Cayman: “The Caymans will wither on the vine. It won’t go overnight but very few people are going to set up there. We will not open another Cayman fund. If I was a Cayman lawyer with more than three years of career expectation, I would wonder what I’m going to do with the rest of my working life.”
In an effort to make up funds lost to America’s increasingly regulated financial sector, the Cayman government quietly opened an office in Hong Kong last year — with an eye towards China’s new millionaire elites who don’t want to pay their taxes.
Meanwhile, Cayman’s financial sector is struggling to push back against the international media onslaught, which it sees as one-sided. The island’s reputation got knocked yet again when it was revealed that Deepwater Horizon, owners of the negligently maintained oil rig that caused the worse environmental disaster in history, had previously been a Cayman client.
Added to Cayman’s growing woes are its mounting domestic problems. The last several years have been annus horribilis for Grand Cayman: highlighted by a string of nearly a dozen high-profile murders, a surging crime wave included the killing of a female rights activist and the death of a 4-year-old in a shootout. And then, late last month, there were five gang-related murders within a 10-day span.
As the social fiber of the island seems to be unraveling, the Royal Cayman police are also now dealing with scores of break-ins and armed robberies, phenomena virtually unheard of in previous times. This past summer, an island store was held-up by a teenager armed with a hand-gun — the boy still in his school uniform.
The growing fissure between affluent foreign expats and native young Caymanians has been worsened by the government’s “Roll-Over” policy, which forces most mid-career expats to leave Cayman within seven years of arriving, engendering scant loyalty to the local community.
Said one irate expat banker, who was preparing to return to his home country after seven years in Cayman: “A lot of Caymanians are now suddenly saying that there are too many foreigners in Cayman. But they should be careful what they wish for, because if the E.U. and the U.S. continue to do what they want, the hedge fund bosses and the offshore banks will have little incentive to stay here.
“This is the age of banking by Blackberry. Billion-dollar funds can be moved very quickly. And for many firms it really is only a matter of removing a tiny plastic name plate from a door here. And then they’re gone.”
Journalist Steven Knipp is a veteran editor, writer, reporter and correspondent whose work has appeared in publications such as the Washington Post, the New York Times, the San Francisco Chronicle, and the International Herald Tribune. Currently based in Hong Kong, he has reported extensively on China, and Southeast Asia, Japan, Korea, Russia, the Caribbean and the Middle East.
Photos by Steven Knipp: 1) Ugland House, home to 18,000 U.S. companies; 2) Yachts and Mansion, Grand Cayman; 3) For Sale signs are everywhere; 4) Bankers in paradise, Grand Cayman