Part III
Ugland House, an elegant four story building, adorned by beautiful palms in front, is located in Cayman Island’s capital Georgetown in Grand Cayman. Its sole tenant is an international law firm of Maples and Calder. But there are 18,857 corporate entities registered at this address. And, Ugland House is no exception. In 2008, Cayman Islands had over 80,000 registered companies, almost twice its then population of about 48,000. In addition, there were 277 licensed banks, 9,000 registered investment funds, and 760 captive insurance companies. This is what an attractive financial services destination translates to. Unbelievable but more than true.
The Red Flag
In mid-2015, the Supreme Court of India appointed Special Investigation Team (SIT) on black money, found that the Cayman Islands was the largest beneficiary of participatory notes from India, receiving 31.31% of the total outstanding Offshore Derivative Instruments.
The SIT found that the Cayman Islands had a total investment of ₹85,000 crore (US$11 billion) in Indian stock markets as on 28 February 2015, or about ₹1.75 crore (US$220,000) per Caymanian citizen.
Among the Tax-havens, Cayman has the most opaque laws. Consequently, many countries have higher banking liabilities than banking claims vis-a-vis Cayman. US, for example, had banking liabilities to the Cayman Islands of the tune of nearly $1.5 trillion, the highest of any foreign jurisdiction while US banking claims stood at $940 billion.
Obviously, it was so extra-ordinary that heckles were raised. The red flag since then has assumed magnification. Regulators in India are constantly on the watch to check whether tax havens such as Mauritius and Cayman are used by Indians to round-trip their own money. At the end of FY21, there were 20 Cayman FPIs that invested in just one firm in India. There are concerns that a number of such funds could have a high non-resident Indian (NRI) holding and are used by Indian promoters for round-tripping and manipulating share prices.
The Riddle of Ultimate Beneficial Owner(UBO)
A UBO is the person that is the ultimate beneficiary when an institution initiates a transaction.
If the market regulator and the tax authorities are watching Mauritius and Cayman FPIs that may not have provided adequate information about their UBO (Ultimate Beneficial Owners), it may seem fine in principle but quite intractable in practice.
The Reserve Bank of India has initiated some steps to check round-tripping and the SEBI’s (Securities and Exchange Board of India) FPI regulations require ultimate beneficial owner (UBO) declaration as well as curbs on Indian resident investment in case of investments through the FPI route. Some experts however feel that a significant majority of the funds have been invested by genuine investors and for reasons that are commercial, i.e., flattening of interest rate in developed jurisdictions.
Tax Information Exchange agreement (TIEA)
There are over 60 tax havens in the world, and about 100 countries which may want to seek information from them. So, there should be about 6000 TIEAs for free flow of information . Till 2008, only 50 TIEAs were signed, mostly by powerful countries like the US and several EU members.
The Cayman Islands and India signed a Tax Information Exchange Agreement (TIEA) on 21 March 2011. This was the 22nd TIEA signed by the Cayman Island and the 5th for India. However, the strong privacy laws of the Island overwhelm any bilateral agreement.
For one, the conditions imposed on the authority making the enquiry are very difficult to fulfill. It has to give details of the tax structure they are investigating , where it is, who runs it in that place, and what precise information is wanted. In other words, they do not oblige if just a letter asking for bank statements related to an entity is sent.
And when it comes to the crunch, tax havens fight tooth and nail to defend their clients. The best example of this is the recent case of UBS, the biggest of Swiss banks, locking horns with the US government. In July 2008, after months of intense pressure, a UBS official admitted to the US Senate’s Permanent Subcommittee on Investigations that it held $18 billion in secret accounts of 18,000 US citizens. Senator Levin, chairman of the subcommittee said, “tax evasion and offshore tax abuses that are burning a $100 billion hole through the U.S. budget.”
After decades of protracted negotiation, legal action and considerable political pressure, UBS eventually struck a deal with the US government, agreed to pay $780 million as penalty for conspiring with tax cheats and promised not to open any more accounts without informing the US and to disclose the identities of 4,550 US clients and close the chapter.
But India is not US.
A Continuing Challenge
The solution perhaps lies in greater disclosure of information in public domain and liberal exchange of information. But either is not foreseen in near future. If the TIEA was expected to offer a handle to Indian Tax Authorities to lay hands on the information about the ill gotten moneys stashed here, it is yet only a consolation in theory and a notional comfort. To extract information from the Cayman government is a formidable challenge. It requires a political persuasion that in effect means enforcing a diplomatic coercion. The political will and the international political clout needed in its pursuit is enormous because the resistance outside and from within will be strong and uninhibited. And when the rich and mighty including even law makers, seem to gain from the infirmities and loopholes of the law, the challenge is practically impossible to surmount.
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