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Caymans Fret About Banking Charge

August 7, 1999

GEORGE TOWN, Cayman Islands (AP) _ Blackbeard and other pirates used the swampy mangrove lagoon off Grand Cayman as a hideout _ and if U.S. investigators and critics of offshore banking are correct, not much has changed since.

Claims by U.S. investigators that the spectacularly successful Caymans financial industry is a safe haven for a fortune in unpaid U.S. taxes sent alarm bells ringing throughout the community of some 40,000, which also happens to be the world’s fifth largest banking center.

``This could be bad _ real bad,″ said Glenrick Randall, a car rental agent. ``It’s so unfair. Pretty soon everybody be pulling their money out of Cayman! Who’ll I rent cars to then?″

Like everyone here, Randall knew all about John M. Mathewson of San Antonio, Texas, who was sentenced Monday in a Newark, N.J., federal court for helping U.S. citizens evade taxes while running the now-defunct Guardian Bank and Trust Limited of the Cayman Islands.

Mathewson got off with probation by providing what U.S. District Judge Alfred J. Lechner called ``unparalleled″ cooperation: computerized records that could produce tax evasion charges against 1,500 U.S. citizens.

That prospect rattles Caymanians, who take great pride in their zero direct taxation, a lack of exchange controls, and bankers who, according to a satisfied client in John Grisham’s ``The Firm,″ ``make the Swiss look like blabbermouths.″

In hushed tones, bankers and officials here disputed Mathewson’s claims that his actions were commonplace _ and suggestions by U.S. officials that by obtaining the secret codes to Guardian’s files, they might have pierced other banks’ secrecy.

``Absolute nonsense,″ said Nick Duggan, managing director of the Brown Brothers Harriman and Co. branch. ``It’s a black eye. It’s an embarrassment. But I think in time it’ll blow away.″

But Eduardo D’Angelo Silva, manager of the Caymans’ Sul America International Bank and president of the Cayman Islands’ Bankers Association, said the case ``could put at risk what we’ve been building for two or three decades.″

The question for Assistant U.S. Attorney John J. Carney, lead prosecutor on the Mathewson case, is exactly what have the Caymans been building.

``There’s no great business in the Caymans. It doesn’t have its own capital market. Its services are not any better,″ Carney said. ``What it has is the secrecy.″

Neville Grant, managing director of the Cayman Monetary Authority, defended the Caymans, noting that local authorities shut down Guardian three years ago _ although Mathewson said it happened because he refused to pay bribes. More recently, three banks were liquidated for unspecified financial irregularities.

Grant cited a 1996 law that allows criminal courts to recover proceeds from serious offenses and bars bankers from assisting in crime.

``We don’t want people who will bring us disrepute,″ he said in an interview in his yellow-brick and glass headquarters in George Town, where serious young people in suits and ties scurry between modern buildings.

``There are gateways through the secrecy laws,″ Grant said, ``but we also don’t want to help people obtain information because they’re on fishing expeditions.″

So the disagreement appears to be over where the bar is set _ and critics say it’s not quite low enough yet.

Charles Intriago, publisher of the Miami-based newsletter Money Laundering Alert, said the Caymans and other Caribbean banking centers have too often been reluctant to open their records.

``Rarely does a major money laundering case arise, especially in the United States, that does not have a Cayman Islands peg, either through the use of an offshore facility or through one of the corporations formed in the Caymans,″ Intriago said.

Discovered by Christopher Columbus in 1503, the Caymans were ceded by Spain to England in 1670 and remain a colony by choice. But London seems to exert limited pull. Its efforts to bring the Caymanian banking system in line with Europe’s have received polite rebuffs.

According to the Basel-based Bank for International Settlements, in December 1998 Caymanian banks held $521.5 billion in foreign institutional deposits _ behind only the United States, the United Kingdom, Germany and Japan. That doesn’t include another $100 billion or so in individuals’ deposits.

There is also a huge insurance sector and more registered companies _ about 45,000 _ than people.

Banks employ a tenth of the workforce, Grant estimated, and provide about a fifth of the roughly $1 billion gross national product.

The industry’s defenders argue that Caribbean islands with few natural resources deserve a break.

``Look at the Cayman Islands and ask yourself what they’ve got to sustain themselves,″ said Ivelaw Griffith, an offshore banking expert at Florida International University. ``It’s always a delicate thing to balance trying to clamp down on illegitimacy while not destroying their economies.″

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