United States Government Accountability Office

GAO Report to the Chairman and Ranking 

Member, Committee on Finance, U.S. 

Senate 

CAYMAN ISLANDS

Business and Tax 

Advantages Attract 

U.S. Persons and 

Enforcement 

Challenges Exist 

July 2008 

 

GAO-08-778 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2008

CAYMAN ISLANDS

Business and Tax Advantages Attract U.S. Persons

and Enforcement Challenges Exist 

Highlights of GAO-08-778, a report to the 

Chairman and Ranking Member, 

Committee on Finance, U.S. Senate 

The Cayman Islands is a major 

offshore financial center and the 

registered home of thousands of

corporations and financial entities.

Financial activity in the Cayman

Islands is measured in the trillions 

of dollars annually. One Cayman 

building—Ugland House—has been

the subject of public attention as 

the listed address of thousands of

companies. 

To help Congress better 

understand the nature of U.S. 

persons’ business activities in the 

Cayman Islands, GAO was asked to

study (1) the nature and extent of 

U.S. persons’ involvement with

Ugland House registered entities 

and the nature of such business; (2)

the reasons why U.S. persons 

conduct business in the Cayman 

Islands; (3) information available to 

the U.S. government regarding U.S. 

persons’ Cayman activities; and (4)

the U.S. government’s compliance 

and enforcement efforts. GAO 

interviewed U.S. and Cayman 

government officials and 

representatives of the law firm 

housed in Ugland House, and 

reviewed relevant documents. 

What GAO Recommends

GAO makes no recommendations 

in this report. The Commissioner

of Internal Revenue, the Secretary 

of the Treasury, and the Leader of 

Government Business of the 

Cayman Islands were provided a

draft of this report for review and 

comment. GAO received technical

corrections which were

incorporated as appropriate. 

The sole occupant of Ugland House is Maples and Calder, a law firm and 

company-services provider that serves as registered office for the 18,857 

entities it created as of March 2008, on behalf of a largely international 

clientele. According to Maples partners, about 5 percent of these entities were 

wholly U.S.-owned and 40 to 50 percent had a U.S. billing address. Ugland 

House registered entities included investment funds, structured-finance 

vehicles, and entities associated with other corporate activities. 

Gaining business advantages, such as facilitating U.S.–foreign transactions or 

minimizing taxes, are key reasons for U.S. persons’ financial activity in the 

Cayman Islands. The Cayman Islands’ reputation as a stable, business-friendly 

environment with a sound legal infrastructure also attracts business. This 

activity is typically legal, such as when pension funds and other U.S. taxexempt entities invest in Cayman hedge funds to maximize their return by 

minimizing U.S. taxes. Nevertheless, some U.S. persons have used Cayman 

Island entities, as they have entities in other jurisdictions, to evade income 

taxes or hide illegal activity. 

Information about U.S. persons’ Cayman activities comes from self-reporting, 

international agreements, and other sharing with the Cayman government. 

The completeness and accuracy of self-reported information is not easily 

verified. While U.S. officials said the Cayman government has been responsive 

to information requests, U.S. authorities must provide specific information on

an investigation before the Cayman government can respond. 

The Internal Revenue Service has several initiatives that target offshore tax 

evasion, including cases involving Cayman entities, but tax evasion and crimes

involving offshore entities are difficult to detect and to prosecute. Cayman 

officials said they fully cooperate with the United States. Maples partners said

that ultimate responsibility for compliance with U.S. tax laws lies with U.S. 

taxpayers. U.S. officials said that cooperation has been good and that 

compliance problems are not more prevalent there than elsewhere offshore.

Ugland House, George Town, Grand Cayman Island 

Source: GAO photograph and statistics obtained from the Cayman Islands government and Maples.

· Sole tenant is Maples and Calder law firm, 

 which provides registered office services to 

 companies established in the Cayman 

 Islands

· 18,857 registered entities at the Ugland 

 House address

· Very few have a significant physical 

 presence in the Cayman Islands

· Five percent wholly U.S. owned

· Fewer than 50 percent have a U.S. billing 

 address To view the full product, including the scope 

and methodology, click on GAO-08-778. 

To view the E-supplement, click on 

GAO-08-1028SP. For more information, 

contact Michael Brostek at (202) 512-9110 or 

brostekm@gao.gov. 
Contents 

Letter 1

Results in Brief 3

Background 6

U.S. Persons Are Frequently Associated with Ugland House 

Registered Entities 10 

Several Factors Influence U.S. Taxpayers’ Decisions to Conduct 

Financial Activity in the Cayman Islands 26 

The U.S. Government Has Access to Several Information Sources 

Regarding U.S. Taxpayers’ Business Activities in the Cayman 

Islands, but Most Information Is Self-Reported 34 

U.S. and Cayman Officials Have Taken Steps to Address Illegal 

Activity, but Enforcement Challenges Exist 40 

Concluding Observations 49 

Agency and Cayman Islands Government Comments 50 

Appendix I Comments from the Cayman Islands Government 51 

Appendix II GAO Contacts and Staff Acknowledgements 52 

Figures 

Figure 1: Cayman Islands Demographics and Financial Industry 

Statistics 7

Figure 2: Ugland House 11 

Figure 3: Ugland House Entities by Type, March 2008 13 

Figure 4: U.S. Persons’ Involvement in Cayman Master-Feeder 

Hedge Fund Structure 18 

Figure 5: U.S. Persons’ Involvement in Cayman Structured 

Investment Vehicles 21 

Figure 6: U.S. Persons’ Involvement in Cayman Aircraft Financing 

Special Purpose Vehicles 23 

Figure 7: U.S. Persons Reporting Cayman Islands Foreign Bank 

Accounts, 2002-2007 36 

Figure 8: U.S.-Related SARs Disclosed to FinCEN by CAYFIN in 

2006-2007 by Type of Offense 44 

Page i GAO-08-778 Cayman Islands
Abbreviations 

AML Anti-Money Laundering 

ABS Asset-backed securities 

CFATF Caribbean Financial Action Taskforce 

CIMA Cayman Islands Monetary Authority 

CAYFIN Cayman Islands Financial Reporting Authority 

Justice Department of Justice 

Treasury Department of Treasury 

Ex-Im Export-Import Bank 

FinCEN Financial Crimes Enforcement Network 

IRS Internal Revenue Service 

IOSCO International Organization of Securities Commissions 

LMSB IRS Large and Mid-Sized Business Division 

SBSE IRS Small Business/Self-Employed Division 

KYC Know-Your-Customer 

OPIC Overseas Private Investment Corporation 

OFC Offshore financial center 

MBS Mortgage-backed securities 

MOU Memorandum of Understanding 

MLAT Mutual Legal Assistance Treaty 

FBAR Report of Foreign Bank and Financial Accounts 

SEC Securities and Exchange Commission 

SPEs Special Purpose Entities 

SPVs Special Purpose Vehicles

SIVs Structured Investment Vehicles 

SAR Suspicious Activity Report 

TIEA Tax Information Exchange Agreement 

SPC Segregated Portfolio Company 

UBIT Unrelated business income tax 

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page ii GAO-08-778 Cayman Islands
United States Government Accountability Office

Washington, DC 20548 

July 24, 2008

The Honorable Max Baucus 

Chairman 

The Honorable Charles E. Grassley 

Ranking Member 

Committee on Finance 

United States Senate 

The Cayman Islands is a major center for financial services, with nearly 2 

trillion dollars in banking assets as of September 2007. International 

financial activity is common in our increasingly global economy, and is 

encouraged or facilitated by various federal policies. Nevertheless, 

financial activity across foreign jurisdictions poses challenges for both tax 

policy and administration. 

Recognizing the serious problem posed by offshore tax evasion, you asked

us to study what is known about the business activities of U.S. taxpayers 

involving Ugland House in the Cayman Islands. Specifically, you asked us 

about the extent, motives, and tax implications of these activities, as well 

as the extent to which the U. S. government has looked into these taxpayer 

activities. This report focuses on these activities. Our objectives were to 

determine (1) the nature and extent of U.S. persons’ involvement with 

Ugland House registered entities, and what business, if any, these entities

carry on in Ugland House and in the Cayman Islands;1

 (2) what reasons 

attract U.S. persons to conduct business in the Cayman Islands; (3) what 

information is available to the U.S. government regarding U.S. persons’ 

Cayman Islands activities, including which are associated with U.S. 

taxpayers; and (4) for tax noncompliance and other related illegal 

activities, the U.S. government’s compliance and enforcement efforts, and 

any related activity on the part of the Cayman Islands government. 

To address our objectives, we reviewed and analyzed U.S. government and 

private sector documents and reports related to international finance, 

 1

 Under the Internal Revenue Code, a United States person is (1) a citizen or resident of the

United States, (2) a partnership created or organized in the United States or under the law 

of the United States or of any State, (3) a corporation created or organized in the United

States or under the law of the United States or of any State, or (4) any estate or trust other 

than a foreign estate or foreign trust. 

Page 1 GAO-08-778 Cayman Islands
offshore jurisdictions and tax havens, tax evasion and money laundering, 

and the tax gap. With regard to U.S. government knowledge related to 

Cayman Islands activities, we reviewed documentation from the Internal 

Revenue Service (IRS), Securities and Exchange Commission (SEC), the 

Department of the Treasury (Treasury) Financial Crimes Enforcement 

Network (FinCEN)2

 and International Affairs Office, the Department of 

Justice (Justice), the Overseas Private Investment Corporation (OPIC) , 

and the Export-Import (Ex-Im) Bank of the United States. We also 

interviewed officials from these agencies, and examined agency data for 

records related to Ugland House and the Cayman Islands. In addition, we 

identified 21 civil and criminal cases involving the Cayman Islands from 

DOJ, SEC, and IRS, as well as through searches of legal databases. We 

asked officials from the agencies to provide any cases known to them 

involving Cayman Islands and/or Ugland House entities. Our database 

searches looked for cases where recent Cayman Islands activity was 

central to the matter in question, including those with an Ugland House or 

Maples and Calder connection. The 21 cases ranged from cases in their 

investigatory stage to cases that were fully resolved. At the time of our 

review, none of the resolved cases had resulted in the subject of the 

investigation being exonerated. In order to describe the characteristics of 

these cases, they were separately reviewed by two individuals.

To determine the number of SEC filers located in the Cayman Islands, we 

searched SEC’s EDGAR database, a publicly available online database that

allows searches based on a number of criteria. To determine the number 

of controlled foreign corporations that filed tax returns with IRS in tax 

year 2004, we analyzed IRS’s database of Controlled Foreign Corporations. 

Finally, we traveled to the Cayman Islands and interviewed Cayman 

Islands government officials, including the Cayman Islands Solicitor 

General, the Cayman Islands Financial Secretary, and officials from the 

Cayman Islands Financial Reporting Authority, Tax Information Authority, 

General Registry, and Monetary Authority, as well as senior partners with 

the law firm of Maples and Calder (Maples). While in the Cayman Islands 

we also collected and reviewed documentation from the Cayman Islands 

government and Maples. We also reviewed a total of 133 instances of new 

business contacts that Maples received over a period of 2 separate 

weeks—41 from December 2007 and 92 from March 2008—that could have

 2

 FinCEN, an intelligence and analysis organization, is part of the U.S. Department of the 

Treasury’s Office of Terrorism and Financial Intelligence. 

Page 2 GAO-08-778 Cayman Islands
led to the formation of a Cayman Islands entity. A summary of relevant 

U.S. and Cayman Islands laws and regulations can be found in the Esupplement to this report, CAYMAN ISLANDS: Review of Cayman Islands 

and U.S. Laws Applicable to U.S. Persons’ Financial Activity in the Cayman 

Islands3

. We determined that the data from the various sources were 

sufficiently reliable for purposes of this report. We conducted our work 

from July 2007 to July 2008 in accordance with generally accepted 

government auditing standards. Those standards require that we plan and

perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit 

objectives. We believe that the evidence obtained provides a reasonable

basis for our findings and conclusions based on our audit objectives. 

The international law firm of Maples and Calder, with its associated 

businesses—Maples Corporate Services Limited and Maples Finance 

Limited—is the sole occupant of Ugland House. Similar to corporate 

service providers in the U.S., Maples Corporate Services Limited provides

registered office services, using Ugland House as a registered address, to 

entities that Maples and Calder establishes. Registered office services 

include activities such as maintenance of certain entity records, and filing 

of statutory forms, resolutions, notices, returns, or fees. Very few Ugland 

House registered entities have a significant physical presence in the 

Cayman Islands, or carry out business in the Cayman Islands. According to

Maples and Calder partners, the persons establishing these entities are 

typically referred to Maples by counsel from outside the Cayman Islands, 

fund managers, and investment banks. As of March 2008 the Cayman 

Islands Registrar reported that 18,857 entities were registered at the 

Ugland House address. Maples and Calder senior partners told us that 

approximately 5 percent of those entities were wholly owned by U.S. 

persons and 40 to 50 percent were U.S.-related in that their billing address 

was in the United States. A U.S. billing address does not necessarily imply 

U.S. ownership or control. Ugland House registered entities are often 

participants in investment activities, such as those related to hedge funds 

or private-equity funds, and structured finance activities, such as 

securitization or aircraft finance. Other Ugland House registered entities 

Results in Brief 

 3

 GAO, Cayman Islands: Review of Cayman Islands and U.S. Laws Applicable to U.S. 

Persons’ Financial Activity in the Cayman Islands, GAO-08-1028SP (Washington, D.C.:

July 2008), an E-supplement to this report. 

Page 3 GAO-08-778 Cayman Islands
involve corporate subsidiaries and holding companies, such as those used 

by multinational corporations to conduct international business. 

U.S. persons who conduct financial activity in the Cayman Islands 

commonly do so to gain business advantages, such as facilitating U.S.–

foreign transactions or minimizing taxes; while much of this activity is 

legal, some is not. Factors that attract U.S.-related financial activity to the

Cayman Islands include its reputation for stability and compliance with 

international standards, its business-friendly regulatory environment, and 

its prominence as an international financial center. Examples of the wide 

variety of business reasons for conducting financial activity in the Cayman

Islands include attracting foreign investors or taking advantage of the 

Cayman Islands insolvency laws, which provide specific protections for 

creditors and investors. Another frequent reason for doing business in the 

Cayman Islands is to obtain tax advantages. The Cayman Islands is an 

offshore financial center (OFC) that has no direct taxes and attracts a high 

volume of nonresident financial activity from the United States and 

elsewhere. U.S.-based corporations may legally use Cayman entities to 

minimize U.S. taxes in a number of ways, for instance by creating Cayman 

entities to earn amounts from active business transactions with unrelated 

persons, which are not generally taxed in the United States unless 

repatriated. Approximately 5.5 percent of the nearly $362 billion 

repatriated between 2004 and 2006 was from Cayman Islands controlled 

foreign corporations. As another example, U.S. tax-exempt entities, such 

as university endowments and pension funds, may invest in hedge funds 

organized in the Cayman Islands because doing so allows them to legally 

maximize their investment return by minimizing U.S. taxes. Lastly, as with 

other offshore jurisdictions, some U.S. persons may establish entities in 

the Cayman Islands to illegally evade taxes or avoid detection and 

prosecution of illegal activities, as illustrated by 21 criminal and civil cases 

we analyzed involving U.S. persons suspected of offenses including tax 

evasion, money laundering, and securities fraud. Because U.S. regulators 

have limited means of collecting information regarding foreign entities, 

some persons intent on breaking U.S. law may create such entities to 

obscure their activities. 

The U.S. government has access to several information sources about U.S. 

persons’ business activities in the Cayman Islands, although limitations 

exist regarding the nature of information available and its completeness 

because it is self-reported. Some information on U.S. persons’ Cayman 

Islands activities is reported to U.S. regulators such as SEC and IRS. For 

example, for tax year 2004, U.S. taxpayers reported about 1,400 controlled 

foreign corporations incorporated in the Cayman Islands to IRS. In fiscal 

Page 4 GAO-08-778 Cayman Islands
year 2007, 732 companies traded on U.S. stock exchanges reported to SEC 

that they were incorporated in the Cayman Islands. However, SEC and IRS 

information is largely self-reported and, like other self-reported 

information, its completeness and accuracy cannot be easily verified. 

When they have adequate identifying information, U.S. officials can 

formally request information regarding U.S. persons’ Cayman Islands 

activities through established channels such as the Tax Information 

Exchange Agreement (TIEA), which IRS has used a small number of times 

since it went into effect in 2004 to exchange information related to civil 

and criminal tax investigations or the Mutual Legal Assistance Treaty 

(MLAT), which has been used over 200 times since 1990 to exchange

information related to criminal violations. Cayman Islands and U.S. 

officials also have other channels for information sharing, such as 

coordination among regulatory officials and sharing of financial 

intelligence information on activities involving U.S. persons. U.S. officials

from multiple agencies said that the Cayman Islands government has been 

cooperative in responding to U.S. requests, and shared useful information 

at their initiative related to questionable financial activities that involve 

U.S. connections. 

The U.S. and Cayman Islands governments have taken steps to address 

instances of U.S. persons’ use of Cayman Islands entities to perpetrate 

illegal activity, but enforcement challenges exist. While not limited to the 

Cayman Islands, “hiding income offshore” is number 5 on IRS’s list of 12 

most egregious tax schemes and scams for 2008. To address the challenge

posed by this activity, the IRS Large and Mid-Sized Business (LMSB) and 

Small Business/Self-Employed (SBSE) divisions have targeted abusive 

transactions in areas such as hedge funds, offshore credit cards, and 

promoters of offshore shelters in numerous jurisdictions. Although the full 

extent of Cayman involvement is unclear, U.S. officials also described 

several criminal investigations and prosecutions involving the Cayman 

Islands. For example, in 45 instances over the past 5 years IRS field agents

have requested information regarding suspected criminal activity involving

the Cayman Islands from the IRS official responsible for the Caribbean. An

IRS official said that there were fewer criminal investigations involving the 

Cayman Islands than in some other offshore jurisdictions. IRS officials 

told us that concealing ownership and income often occurs through the 

use of a combination of entities spread across multiple jurisdictions, 

which can hinder detection efforts. This multijurisdictional and multientity 

character of some offshore activity presents one of several enforcement 

challenges. Despite these challenges, U.S. officials consistently report that

cooperation by the Cayman Islands government in enforcement matters 

has been good. In addition to collaborating in support of U.S. efforts, the 

Page 5 GAO-08-778 Cayman Islands
Cayman Islands government has also taken steps to address illegal activity 

by U.S. persons. For instance, the Cayman Islands was cited by the 

Caribbean Financial Action Task Force (CFATF), an international task 

force, as having a “strong compliance culture” related to combating 

financial crimes and terrorist finance and has implemented a regulatory 

regime that the International Monetary Fund (IMF) has deemed to be 

generally in compliance with a broad range of international standards. 

Maples and Calder partners noted the responsibility of U.S. owners of 

offshore entities to comply with U.S. tax laws, and Cayman government 

officials said that the Cayman Islands is “neutral” concerning U.S. tax 

issues until it receives a request for assistance from the United States. 

We provided a draft of this report to the Commissioner of Internal 

Revenue, the Secretary of the Treasury, and the Leader of Government 

Business of the Cayman Islands for review and comment. IRS and the 

Cayman Islands government provided technical comments, which we 

incorporated as appropriate. 

The Cayman Islands is a United Kingdom Overseas Territory located in the 

Caribbean Sea south of Cuba and northwest of Jamaica, with a total land 

area approximately 1.5 times the size of Washington, D.C., and a 

population of 47,862, as seen in figure 1. While geographically small, the 

Cayman Islands is a major offshore financial center (OFC) with no direct 

taxes that attracts a high volume of U.S.-related financial activity, often

involving institutions rather than individuals.4

 According to Treasury, U.S. 

investors held approximately $376 billion in Cayman-issued securities at 

the end of 2006, making it the fifth largest destination for U.S. investment 

in foreign securities. Although not easily defined, OFCs are generally 

described as jurisdictions that have a high level of nonresident financial

activity, and may have characteristics including low or no taxes, light and

flexible regulation, and a high level of client confidentiality. 

Background 

 4

 Direct taxes are taxes on income, and may take the form of taxes on personal and 

corporate income, social security contributions, and payroll taxes. 

Page 6 GAO-08-778 Cayman Islands
Figure 1: Cayman Islands Demographics and Financial Industry Statistics

Miami

Nassau

George Town

Havana

Santo

Domingo Kingston

Port-au-Prince

Florida

The Bahamas

Cuba

Jamaica

Haiti

Dominican

Republic

Cayman

Islands

Turks and

Caicos Islands

Atlantic Ocean

· United Kingdom Overseas Territory

· Population of 47,862 

· Approximately 1.5 times the size of 

 Washington, D.C., in area

· Over 80,000 registered companies

· Major domicile for hedge funds, with 

an estimated 35 percent of funds 

 worldwide

· Top foreign jurisdiction for U.S.-held 

asset-backed securities, at $119 

billion

· Major international banking center, 

 with highest level of U.S. banking 

 liabilities and second highest level of

 U.S. banking claims of any foreign 

 jurisdiction, as of September 2007 

and June 2007, respectively.

Source: Map resources; U.S. and Cayman Islands government, and private industry statistics.

Types of Financial Activity 

Conducted in the Cayman 

Islands 

As a major international financial center, the Cayman Islands attracts a 

high volume of financial activity in sectors related to banking, hedge-fund

formation and investment, structured finance and securitization, captive 

insurance, and general corporate activities. 

The Cayman Islands is a major international banking center, with nearly $2 

trillion in banking assets as of December 2007, according to the Cayman 

Islands Monetary Authority (CIMA), the jurisdiction’s financial regulatory 

agency. CIMA reports that as of March 2008, 277 banks were licensed to 

operate on the island, of which 27 percent were based in the United States. 

CIMA also reported that 97 percent of the $2 trillion held by these banks as 

Page 7 GAO-08-778 Cayman Islands
of December 2007 was from institutions rather than individual investors. 5

Treasury statistics indicate that, as of September 2007, U.S. banking 

liabilities to the Cayman Islands were the highest of any foreign 

jurisdiction at nearly $1.5 trillion, and as of June 2007, banking claims on 

the Cayman Islands were the second highest (behind the United Kingdom), 

at $940 billion. 

The Cayman Islands is also a major domicile for hedge funds. According to

CIMA, 9,018 mutual funds6

 were registered in the Cayman Islands in the 

registered funds category as of the first quarter 2008, the vast majority of 

which were hedge funds. Although there is no statutory or universally 

accepted definition of hedge funds, the term is commonly used to describe 

pooled investment vehicles that are privately organized and administered 

by professional managers and that often engage in active trading of 

various types of securities and commodity futures and options contracts. 

While there is no universally accepted definition of a hedge fund, privateindustry sources cited by the Joint Committee on Taxation estimate that 

there were approximately $1.5 trillion in assets managed by hedge funds 

worldwide as of the end of 2006, and approximately 35 percent of funds 

were organized in the Cayman Islands.7

 Funds organized in the Cayman 

Islands may be managed in the United States. According to the same 

source, the United States was by far the leading location for hedge-fund

managers, who managed an estimated 65 percent of hedge-fund assets in 

2006. 

In addition to being a prominent domicile for hedge funds, the Cayman 

Islands also carries out a high volume of structured finance activity. While

structured finance can encompass a number of financing strategies, it 

often involves securitization, the process of pooling similar types of 

financial assets, such as current or future cash flows from loans, and 

 5

 As of March 2008, 19 banks were licensed to conduct banking business with domestic 

clients, while 258 were licensed to carry out primarily international activities. U.S. banks 

are required to obtain permission from U.S. regulators to establish a foreign branch or

subsidiary and are subject to consolidated supervision by both U.S. and host country 

regulators. According to CIMA, other countries have similar requirements and CIMA will 

not license a foreign bank absent these prerequisites. 

6

 The definition of a mutual fund under Cayman Islands law includes funds with small 

numbers of investors. 

7

 Estimates are from International Financial Services, London. 

Page 8 GAO-08-778 Cayman Islands
transforming them into bonds or other debt securities.8

 Securitization 

involves isolating a group of assets to serve as the basis of financing that is

intended to be legally remote from the bankruptcy risks of the former 

owner, and is generally designed to move those assets off of the owner’s 

balance sheets. In the Cayman Islands, asset-backed securitization has 

been used widely to turn self-liquidating assets, such as receivables from 

mortgages, into debt securities that can be offered and sold on capital

markets. Treasury data show that as of the end of 2006, U.S. investors held 

more asset-backed securities issued by the Cayman Islands, at about $119 

billion, than asset-backed securities issued by any other foreign 

jurisdiction. 

The Cayman Islands is also a major domicile for the captive insurance 

industry. In its basic form, captive insurance is a method by which 

companies can self-insure against various types of risk rather than 

purchasing insurance from an insurance company.9

 In a traditional 

arrangement, a parent company will establish a subsidiary to act as a 

captive insurer. Other types of captive insurance arrangements exist as 

well, such as those in which a single captive insures, and is owned by, 

multiple companies. According to CIMA, the Cayman Islands was home to 

760 licensed captive insurance companies as of April 2008, with nearly $34 

billion in total assets and $7.6 billion in premiums. Ninety percent of these 

companies insured risks in North America. Slightly over a third were 

related to healthcare. 

Lastly, a wide range of corporate-related activities are carried out in the 

Cayman Islands. According to the Cayman Islands Registry of Companies, 

over 80,000 companies were registered in the Cayman Islands as of May 

2008. 

 8

 More broadly, structured finance can refer to a wide variety of strategies designed by

investment bankers and others to help clients obtain funding on desirable terms and in 

some cases with favorable economic, accounting, and tax characteristics. 

9

 According to CIMA, captive insurance arrangements enable companies to lower the cost 

of insurance or obtain coverage not readily available in the commercial insurance market. 

Page 9 GAO-08-778 Cayman Islands
Many of the 18,857 entities registered at Ugland House are U.S.-connected.

These entities most frequently involve investment funds and structured 

finance vehicles. 

Ugland House,shown in figure 2, is located at 301 South Church Street, 

George Town, Grand Cayman, Cayman Islands. It houses the international

law firm of Maples and Calder; Maples Corporate Services Limited, a 

licensed trust company owned by Maples and Calder which provides 

registered office services to clients of Maples and Calder; and Maples 

Finance Limited, a licensed trust company and mutual fund administrator 

owned by Maples and Calder which provides fiduciary and fund 

administration services.10 Maples business is to facilitate Cayman Islandsbased international financial and commercial activity for a clientele of 

primarily international financial institutions, institutional investors, and 

corporations. Maples is the only occupant of Ugland House. 

U.S. Persons Are 

Frequently Associated 

with Ugland House 

Registered Entities 

Maples and Calder, an 

International Law Firm 

and Provider of Registered 

Office Services, Is the Only 

Occupant of Ugland House 

Maples provides registered office services to companies, using the Ugland

House address.11 A registered office12 is required by Cayman Islands law for 

corporations registered in the Cayman Islands. States in the United States

have similar statutory requirements. Registered office services include 

activities such as accepting any service of process or notices, maintenance 

of certain entity records, and filing of statutory forms, resolutions, notices, 

returns, or fees. As is the case with many U.S. states’ laws, Cayman Islands 

law does not require or presume that any other business activity of the 

corporation occurs at the registered office. 

 10 Maples and Calder, Maples Corporate Services Limited, and Maples Finance Limited are

collectively referred to in this report as “Maples.” 

11 For discussion of the role and requirements of businesses that provide registered office 

services under Cayman Islands law, see the E-supplement to this report, GAO-08-1028SP. 

12 For discussion of services required of a registered office under Cayman Islands law see 

the E-supplement to this report, GAO-08-1028SP. 

Page 10 GAO-08-778 Cayman Islands
Figure 2: Ugland House

Source: GAO photograph and statistics obtained from the Cayman Islands government and Maples.

· Sole tenant is Maples and Calder law

 firm, which provides registered office 

services to companies established in

 the Cayman Islands

· 18,857 registered entities at the 

 Ugland House address

· Very few have a significant physical 

 presence in the Cayman Islands

· Five percent wholly U.S. owned

· Fewer than 50 percent have a U.S. 

 billing address

Cayman Islands law requires company service providers that establish 

entities and provide registered office services to adhere to specific AntiMoney Laundering (AML) and Know-Your-Customer (KYC) requirements.13

For example, as a company service provider, Maples must verify and keep 

records on the beneficial owners of entities to which they provide 

services, the purpose of the entities, and the sources of the funds involved. 

If suspicion arises in relation to any of these types of inquiries, the 

company service provider is required to make a suspicious activity report 

(SAR) to the Cayman Islands Financial Reporting Authority (CAYFIN). 

Cayman Islands law allows for nominee shareholders and the provision of 

officers and directors.14 The use of nominees, though, does not relieve the 

company service provider from its obligation under Cayman Islands law to 

know the beneficial owner under AML-KYC rules. In contrast, state laws 

which govern the creation of corporations in the United States generally 

do not require company formation agents to collect ownership information 

 13 Cayman regulators refer to these requirements as “AML/CFT” (anti-money

laundering/combating the financing of terrorism). For discussion of AML-KYC 

requirements under Cayman Islands law see the E-supplement to this report, 

GAO-08-1028SP. 

14 Maples and Calder partners stated that they provide directors to certain Cayman Islands

companies, principally to structured finance companies and investment funds, but do not

provide nominee shareholder services. 

Page 11 GAO-08-778 Cayman Islands
on the entities they register.15 The Cayman Islands has taken steps to 

restrict the use of bearer shares to obscure ownership or control of an 

entity. Use of bearer shares in the Cayman Islands is restricted to cases 

where they are immobilized through deposit with an authorized or 

recognized custodian who must keep a register of owners and perform the 

required beneficial ownership verification.16

The Ugland House Address 

Was Used by 18,857 

Entities as of March 2008, 

and Very Few of These 

Have a Significant Physical 

Presence in the Cayman 

Islands. 

According to the Cayman Islands Registrar, as of March 6, 2008, 18,857 

active entities used Ugland House as a registered office, and based on the

nature of these entities very few have a significant physical presence in the 

Cayman Islands. As displayed in figure 3, approximately 96 percent of 

Ugland House entities are exempt companies, exempt limited 

partnerships, and exempt trusts.17 Exempted companies are prohibited 

from trading in the Cayman Islands with any person, firm, or other 

corporation except in furtherance of their business that is carried on 

outside the Cayman Islands. Exempted limited partnerships exist under 

the same criteria and must have at least one general partner that is 

resident or incorporated in the Cayman Islands. Requirements for exempt 

trusts are that they must register with the Cayman Islands Registrar and 

have no beneficiary that is domiciled in or resident of the Cayman Islands. 

A Maples and Calder partner indicated that some exempted companies 

occasionally maintain minimal sales or marketing staff in the Cayman 

Islands to facilitate business conducted elsewhere, but most have no staff 

or facilities in the Cayman Islands and none, except for Maples group 

companies, is run out of Ugland House. According to Cayman Islands 

government officials, the domestic trading prohibition on exempted 

companies and exempted limited partnerships, is intended to protect the 

small domestic market from being flooded by outside competitors. Thus, 

exempted entities that wish to trade in the local market must receive a 

special license to do so under the Local Companies (Control) Law. 

 15 See GAO Company Formations: Minimal Ownership Information Is Collected and 

Available, GAO-06-376 (Washington, D.C.: Apr. 7, 2006). The lack of requirements for 

beneficial ownership information in the United States was cited by the Financial Action 

Task Force as a weakness in U.S. anti-money laundering regulations. See Third Mutual 

Evaluation Report on Anti-Money Laundering and Combating the Financing of 

Terrorism, (Paris, France: June 23, 2006). 

16 For discussion of the use of nominees and bearer shares see the E-supplement to this

report, GAO-08-1028SP. 

17 For discussion of exempt, nonresident, resident, and foreign companies under Cayman

Islands law see the E-supplement to this report, GAO-08-1028SP. 

Page 12 GAO-08-778 Cayman Islands
Figure 3: Ugland House Entities by Type, March 2008 

0%

Resident companies (77)

15%

80%

Source: GAO presentation of Cayman Islands Registrar information.

1%

Non-resident companies (115)

1%

Exempted trusts (161)

3%

Foreign companies (636)

Exempted limited partnerships (2,738)

Exempted companies (15,130)

According to Cayman Islands Companies Law, nonresident companies are 

a category of entity similar to an exempted entity in that neither can 

conduct business in the Cayman Islands. Foreign companies are organized 

under the laws of a jurisdiction other than the Cayman Islands, but have 

chosen to register with the Cayman Islands Registrar to conduct business 

in the Cayman Islands, such as to become a general partner in a Cayman 

Islands exempted limited partnership. Finally, less than 1 percent of 

Ugland House entities are “resident” companies that are registered to 

conduct their business in the Cayman Islands. According to a Maples and 

Calder partner, the persons establishing entities at Ugland House are 

typically referred to Maples by counsel from outside the Cayman Islands, 

fund managers, and investment banks. A Maples and Calder partner also 

said that the make-up of entities in Ugland House was reflective of the 

nature of their business and largely international, institutional client base, 

and was not necessarily representative of the types of entities registered 

with other company service providers in the Cayman Islands. 

Page 13 GAO-08-778 Cayman Islands
According to Maples and Calder partners, their business primarily involves 

two areas: investment funds and structured finance. 18 Specifically, they 

estimated that approximately 38 percent of the Cayman Islands companies 

and limited partnerships that have a registered office at Ugland House are 

formed to act as various types of hedge funds or private-equity funds19

(together referred to as “investment funds”), and generally involve 

institutional and high net-worth investors. Approximately 24 percent of 

entities formed related to structured finance/capital markets and project 

finance business, such as securitization or aircraft finance, and 38 percent

are of a “general corporate” nature. The general corporate business was 

described as being a “catch-all” category that may involve some overlap

with the other two areas of entity formation. Maples and Calder partners 

explained that their general corporate business involves entities such as 

trading companies, joint ventures, holding companies, wholly owned 

subsidiaries, and captive insurance companies. 

Ugland House Registered 

Entities Often Involve 

Investment and Structured 

Finance Business 

To obtain a more detailed understanding of Maples business, we reviewed 

a total of 133 instances of new business instructions that could have led to 

the formation of a Cayman Islands entity. These contacts occurred over a

period of 2 separate weeks in December 2007 and March 2008. We found 

that approximately 74 percent of all instructions involved investment-fundrelated business. Approximately 17 percent of the instructions involved 

general corporate business, and approximately 11 percent involved 

structured finance business. While this business distribution is somewhat 

different than what Maples and Calder partners estimated, the activity

undertaken in these 2 weeks may not be representative of Maples’ 

registered office business as a whole. Maples and Calder partners 

commented that activity in the weeks that we reviewed may reflect the 

recent decline in structured finance work caused by the “credit crunch.”

 18 Investment fund entities, structured finance entities, and general corporate entities 

mentioned in the overview here are also discussed in greater detail in the E-supplement to

this report, GAO-08-1028SP. 

19 Hedge and private-equity funds are similar in that they are pooled investment vehicles 

that do not register with the SEC and attract sophisticated investors. However, unlike 

hedge funds, private-equity funds tend to invest in long-term highly illiquid assets. 

Page 14 GAO-08-778 Cayman Islands
Maples and Calder partners estimated that 5 percent of the overall number 

of Ugland House entities are wholly owned by U.S. persons.20 The partners

also said that fewer than 50 percent, likely in the 40 to 50 percent range, of 

all Ugland House entities are U.S.-related in that their billing address is in 

the United States. This distribution of relationships is due to the nature of 

the entities registered in Ugland House. 

Five Percent of the 

Entities Registered at 

Ugland House Are Wholly 

Owned by U.S. Persons 

and Fewer than 50 Percent 

Are U.S.-Related 

Other than for those entities which are wholly owned or controlled, the 

concepts of ownership and control are complex for most of the entities 

registered in Ugland House. According to the partners, because a 

significant amount of Maples’ registered entities are related to structured 

finance or investment fund transactions, direct ownership or control by a 

U.S. person is only representative of a small number of entities registered

at Ugland House. For example, structured finance entities are not typically 

carried on a company’s balance sheet, and ownership can be through a 

party other than the person directing the establishment of the entity, such 

as a charitable trust, or spread across many noteholders or investors in 

deals involving securitization. U.S. persons’ involvement with structured 

finance entities is therefore of a different nature, and may include 

arranging or participating in deals without clear U.S. ownership or control. 

Similarly, while investment fund entities are often established, controlled,

and managed at the direction of investment managers, such entities are 

generally established as partnerships and are essentially owned by the 

fund’s investors. In addition, one investment fund or structured finance 

transaction can involve more than a dozen separate legal entities, thereby

increasing the number and complexity of relationships involved. 

For those instances for which Maples and Calder has a U.S. billing address 

for an Ugland House entity, U.S. involvement often takes the form of 

providing services to Cayman Islands entities, as opposed to wholly 

owning or controlling the entity. For example, the partners explained that 

many of the recipients of invoices include U.S. investment banks, paying 

agents, securities trustees, law firms, placement agents, and 

administrators for private-equity funds and hedge funds. The partners gave 

as an example of a tenuous connection a situation where a U.S. bank was 

the billing address for an Ugland House registered entity established for a 

Brazilian company to raise funds within Brazil for a Brazilian project. 

 20 Maples and Calder partners noted that this estimate was generated at our request and 

was made without systematic research. 

Page 15 GAO-08-778 Cayman Islands
New business instructions received by Maples that we reviewed provided 

additional detail regarding the type and role of U.S. persons involved. 

Among these instructions, approximately 60 percent involved U.S. 

persons, mostly through managerial, promoter, or advisory roles. Four 

percent involved U.S. subsidiaries or holding companies. U.S. investment 

firms were involved in approximately 44 percent of the transactions we 

reviewed, generally in the role of investment advisor, manager, or 

promoter. U.S. companies and banks were the second most common type 

of U.S. persons involved, with U.S. banks frequently directing the 

establishment of investment-related entities. U.S. persons were 

participants in a joint venture or were partners in a transaction in 

approximately 5 percent of the instructions. Maples and Calder partners 

said that major onshore commercial law firms or in-house legal counsel 

instruct Maples to form the entities, although we could not verify this in 

the new business instructions that we reviewed. The partners also said 

that onshore lawyers advise their clients on all onshore legal, regulatory, 

and tax issues for their home jurisdictions. 

Ugland House Investment 

Entities Are Hedge and 

Private-Equity Funds, And 

U.S. Investors Are Largely 

Institutional, such as 

University Endowments 

and Pension Funds 

The Cayman Islands is a major domicile for global hedge funds. Maples 

investment funds business is largely hedge-fund related, and also includes 

private-equity funds. Maples said that their investment fund clients are 

predominantly large investment banks or investment management firms, 

or the funds arranged by such firms for institutional and high-net-worth 

investors. Documentation provided by Maples indicated that persons 

establishing and investing in investment funds included investment banks, 

pension funds, insurance companies, and university endowments. 

According to Maples and Calder partners, Cayman Islands funds are used

to facilitate significant investment in the United States by non-U.S. 

investors. They said that one reason that many non-U.S. investors prefer 

not to invest directly into the United States is because of perceived 

litigation risk, and that the ability of U.S. fund managers to manage 

Cayman Islands funds, therefore, helps U.S. fund managers compete 

globally. 

An understanding of the structure and function of hedge funds and privateequity funds provides additional insight into the nature of the entities 

registered at Ugland House. Hedge funds are private investment funds that 

are actively traded by a fund manager. Hedge funds are “open ended,” in 

that investors are generally allowed to invest additional money or redeem 

shares at designated dates. Maples explained that hedge funds often are 

composed of a “master-feeder” structure wherein “feeder” fund entities are 

established that receive subscriptions from different investor groups and 

Page 16 GAO-08-778 Cayman Islands
invest in a “master fund” entity. The master fund entity is established for 

holding assets and making investment instructions. In this way, economies 

of scale can be maximized while allowing for simplified trading and 

reconciliation of portfolios of the assets invested. According to Maples, 

when U.S. investors invest in offshore funds in the Cayman Islands, they 

typically prefer doing so through a “feeder” entity that is formed in a U.S.

state such as Delaware. Figure 4 displays a common “master-feeder” 

hedge-fund structure. As figure 4 depicts, the fund is managed and 

administered, and fund managers can be U.S. persons. Also, Maples and 

Calder partners stated that U.S. and non-U.S. brokers/custodians offer 

services such as centralized securities and trade execution for the fund. 

Page 17 GAO-08-778 Cayman Islands
Figure 4: U.S. Persons’ Involvement in Cayman Master-Feeder Hedge Fund Structure 

Issues shares Pays for shares

Relationship or agreement

Transaction

Area of identified U.S. involvement

Ugland House registered entity

Source: GAO presentation of Maples and Calder information.

U.S. taxable

investors

Non-U.S. investors

and U.S. tax exempt

investors

Non-U.S.

investors

Non-U.S. broker/

custodian

Delaware LP/LLC

(Feeder fund)

Cayman company

(Feeder fund)

Cayman unit trust

(Feeder fund)

Cayman company/

partnership

(Master fund)

U.S. prime

broker

Issues shares Pays for shares Issues shares Pays for shares Issues shares Pays for shares

Investment fund

administrator

Investment fund

manager

Administers fund

Manages fund

Holds assets for

the master fund

Executes trades

and holds assets

for the master fund

The other type of investment entities registered at Ugland House are 

private-equity funds. In contrast to hedge funds, private-equity funds are 

generally private funds involving long-term, “closed” investments that do 

not involve an actively traded portfolio of stocks. Private-equity funds 

typically make 7- to10-year concentrated investments in a company and

often seek to create value by providing management support or consulting 

Page 18 GAO-08-778 Cayman Islands
services to the portfolio companies. According to officials from OPIC,21

one-third to half of private-equity funds in which it has invested have been 

organized in the Cayman Islands. According to Maples and Calder, privateequity funds are usually formed as limited partnerships rather than as 

corporations. 

Ugland House Structured 

Finance Entities Are 

Largely Off-Balance-Sheet 

Special Purpose Vehicles 

Involving Securitization, 

Asset Transfer, or Risk 

Isolation 

Structured finance entities are companies that are formed for a specific

and, in some cases, finite purpose. Commonly referred to as Special 

Purpose Entities (SPEs) or Special Purpose Vehicles (SPVs),22 these 

companies can be used in many different types of business transactions. 

Maples and Calder partners told us that structured finance entities using 

Ugland House as a registered office are largely related to transactions such

as securitization, aircraft finance, and other deals involving isolating risk 

and raising capital. In the case of SPVs, these transactions generally 

involve an SPV holding assets of some type, with the SPV being isolated 

from the bankruptcy risks of the former owner of the assets—typically the 

“sponsor” of the SPV. Because of this feature of SPVs, they are not 

generally represented on the sponsor’s balance sheet. According to a 2007 

CFATF evaluation, interest in SPVs in the Cayman Islands has increased in

the 2 years prior to the reports issuance. Maples and Calder partners 

stated that their clients for these types of entities are often large 

investment banks and institutions, including many well-known 

multinational companies. 

Maples and Calder partners reported that part of their structured finance 

business involves Structured Investment Vehicles (SIVs), which are SPVs

that use structured investments to make a profit from the difference 

between short-term borrowing and longer-term returns. Unlike some 

SPVs, SIVs can be established to continue their operations for an indefinite 

period. SIVs often invest in structured finance products such as assetbacked securities, which include bonds backed by auto loans, student 

loans, credit card receivables, and mortgage-backed securities. These 

structures are also used to facilitate major capital inflows from foreign 

investors into the United States, according to Maples. SIV use in the 

Cayman Islands originated as the use of structured finance techniques 

 21 OPIC is a U.S. government agency that helps U.S. businesses invest overseas, fosters 

economic development in new and emerging markets, complements the private sector in

managing risks associated with foreign direct investment, and supports U.S. foreign policy. 

22 From this point forward SPV will be used to represent the SPE term as well.

Page 19 GAO-08-778 Cayman Islands
evolved in financial markets, with the first Cayman SIV launched in 1988.

These financial instruments received heightened interest following the 

financial market crisis in 2007 after problems surfaced related to banksponsored SIVs. 

As shown in figure 5, SIVs are sponsored by an institution, such as a bank, 

and an investment manager is appointed to provide investment advice 

together with funding and operational support. In addition, the SIV can be

underwritten and arranged by an investment bank. As figure 5 depicts, the 

SIV sponsor, investment manager and underwriter/arranger can be U.S.

persons. The SIV sells notes to investors through a clearinghouse, and 

investors are paid interest through a trustee and paying agent. Finally, a 

swap counterparty can enable additional investors to participate in the SIV 

in a different currency and interest rate than the underlying asset being 

financed. Figure 5 shows that SIV investors, trustee and paying agents, and 

swap counterparties can also be U.S. persons. 

Page 20 GAO-08-778 Cayman Islands
Figure 5: U.S. Persons’ Involvement in Cayman Structured Investment Vehicles 

Relationship or agreement

Transaction

Area of identified U.S. involvement

Ugland House registered entity

Source: GAO presentation of Maples and Calder information.

Investment bank

(Underwriter/arranger)

Maples Finance Limited

(Directors, share

trustees, administrator)

Caymans company

(Issuer)

Investors

Originator/sponsor

Swap

counterparty

Trustee and

paying agent

Investment/

collateral manager Provides directors

and share trustees

Underwrites notes,

arranges transactions

Receives fees

Pays for

assets

Transfers

assets

Pays for

notes Pays income

Swaps S payment ells notes

Receives fees

Manages portfolio

Pay interest

Clearinghouse

A second type of Maples SPV activity includes transactions involving asset 

transfer, such as aircraft leasing deals. Maples and Calder partners 

explained that aircraft financing deals using Ugland House registered 

structured finance vehicles have involved Boeing, a U.S. airplane 

manufacturer, as well as a non-U.S. aircraft manufacturer. As shown in 

figure 6, these deals involve the creation of an SPV whose shares are 

owned by a Cayman Islands charitable trust, and managed by a company 

Page 21 GAO-08-778 Cayman Islands
service provider such as Maples Finance Limited. Aircraft involved in the 

deal are sold by the aircraft manufacturer to the SPV, which then leases 

the aircraft to the party that will operate the aircraft, such as a government 

or private entity from another country. The whole transaction is arranged 

by a third-party financial institution that backs the deal. Over time, the 

operator of the aircraft makes payments to the SPV while using the 

aircraft, and within approximately 5-8 years the aircraft are effectively 

paid for and the titles are transferred from the SPV to the aircraft operator. 

This structure reduces the credit risk involved and enhances the ability of 

financiers to repossess the aircraft if default occurs. 

Page 22 GAO-08-778 Cayman Islands
Figure 6: U.S. Persons’ Involvement in Cayman Aircraft Financing Special Purpose Vehicles 

Aircraft

manufacturer

(Security agent/

trustee)

Syndicate of

banks

(Lender)

Caymans

company

(Lessor)

Sells

aircraft

Pays for

aircraft

Repays

loan

Loans

funds

Repays

loan

Loans

funds

Ex-Im Bank

(Arranger)

Advises and arranges deal

Guarantees loan

Operator of aircraft

(Lessee)

Caymans

charitable trust

Maples Finance

Limited

(Directors, share

trustee, and local

administrator)

Makes lease payments

Leases aircraft over time

Administers and

manages company

Owns company

Provides

trustees

Relationship or agreement

Transaction

Area of identified U.S. involvement

Ugland House registered entity

Source: GAO presentation of Maples and Calder information.

Maples and Calder partners said that the Ex-Im Bank had facilitated 

aircraft sales involving SPVs registered at the Ugland House address. ExIm officials confirmed that it has been involved in supporting 42 aircraft

financing deals involving the Cayman Islands since 2003, with 24 entities 

involving Maples as counsel. Ex-Im Bank officials reported that one 

nonaircraft deal had been conducted involving the Cayman Islands, and 

that Maples served as counsel to the borrower in that deal. They said that

Page 23 GAO-08-778 Cayman Islands
since 2006 there has been less frequent use of Cayman Islands entities in 

U.S. aircraft financing deals since the United States ratified the Cape Town

Treaty in 2006. That treaty established common international protocols 

and standards for cross-border aircraft financing and leasing. The United 

Kingdom has not signed this agreement, and as a United Kingdom overseas 

territory, the Cayman Islands therefore is not party to the agreement. ExIm Bank officials said that many structured finance deals involving the

lease of U.S. aircraft now utilize other jurisdictions governed by the treaty, 

such as Delaware. 

Other Ugland-Registered 

Entities Include Corporate 

Subsidiaries, Holding 

Companies, and Trusts 

In addition to investment funds and structured finance entities, Maples 

provides registered office services to general corporate entities such as 

corporate subsidiaries and holding companies. Maples also establishes 

trusts, and a portion of those choose to be registered. 

Maples and Calder partners reported that a limited number of their general 

corporate entities are wholly owned subsidiaries of multinational 

corporations. Examples of this type of entity with a U.S. connection 

identified from Maples’ new business instructions that we reviewed 

include: 

• Formation of a company to be a subsidiary of a U.S. company to 

provide film production services for a film being shot in Romania. 

• Formation of a company by a U.S.-based company for the purposes of 

providing information technology services in Asia. 

According to Maples and Calder partners, Cayman Islands holding 

companies often have been used by businesses in emerging market 

countries to conduct initial public offerings of shares listed in the United 

States or Europe. 

Captive insurance companies are also contained within this general 

corporate category of Maples’ business, although the number of captive 

insurance entities registered at Ugland House is relatively low due to the

Cayman Islands requirement for captive insurance companies to have a 

licensed insurance manager located within the Cayman Islands. For this 

reason, captive insurance companies in the Cayman Islands frequently use

the insurance manager’s location as their registered office address. 

A portion of Maples general corporate business involves the establishment 

of holding companies. Examples of this type of entity with a U.S. 

Page 24 GAO-08-778 Cayman Islands
connection that we identified from new business instructions that we 

reviewed include: 

• Formation of an intermediate holding company for a company listed on 

the New York Stock Exchange with operations in 30 countries. 

• Formation of an investment holding company for the Hong Kong arm 

of a Wall Street bank. 

• Formation of two investment holding companies for real estate 

investments in Eastern Europe to be owned by a private-equity fund 

managed by a U.S. private-equity fund manager. 

Maples and Calder partners said that the formation of holding companies 

typically involves intermediate limited liability holding companies formed 

by multinational corporations to isolate risk related to their foreign assets. 

They said that the formation of personal holding companies was 

increasingly rare. They also indicated that the holding companies that they 

typically establish involve the company existing at the bottom of a family 

of corporate structures to hold specific assets, rather than at the top of the 

pyramid of the corporate family. As the example cases above describe, 

some holding companies established by Maples are associated with 

private-equity funds. 

Lastly, Maples establishes trusts for clients, some of whom choose to be 

registered as exempted trusts under Cayman Islands law. Exempted trusts 

afford official confirmation in the form of a certificate that the trust will 

remain exempt from any potential future direct taxes that may be imposed 

by the Cayman Islands for a specified period of time of up to 50 years. 

Such certificates are regarded in the market as reflecting the stable status 

quo as well as providing an additional level of commercial certainty.23 A 

senior Maples and Calder partner said that the clients for their trust 

business are invariably institutional trustees rather than the settlers of 

trusts, and mainly consist of banks (U.S. and non-U.S.) serving as trustees 

for non-U.S. taxpayers in private wealth trusts. He stated that a portion of

Maples trust business involves private wealth management, and that 

wealthy individuals in Central and South America and the Middle East 

establish trusts in other nations such as the Cayman Islands to manage 

their wealth primarily because their home jurisdictions have no structure 

equivalent to a trust due to their not having a common law tradition. 

According to Maples and Calder partners, being able to offer Cayman 

 23 For more detail see the E-supplement to this report, GAO-08-1028SP. 

Page 25 GAO-08-778 Cayman Islands
Islands trusts enables major U.S. banks to compete with other major 

foreign banks for private wealth management and lending business. 

Because the United States has trusts, U.S. persons rarely seek to establish 

trusts in the Cayman Islands, according to Maples and Calder partners. 

Maples and Calder partners also noted that U.S. states such as Delaware 

tend to service the domestic U.S. trust business. They said that, in addition 

to private wealth trusts, commercial trusts are sometimes established for 

Japanese clients as well. 

U.S. persons who engage in Cayman-based financial activity commonly do 

so to gain business advantages, including tax advantages under U.S. law. 

Although such activity is typically legal, some persons have engaged in 

activity in the Cayman Islands, like other jurisdictions, in an attempt to 

avoid detection and prosecution of illegal activity by U.S. authorities. 

While the Cayman Islands is one of a number of OFCs that attract 

substantial financial activity from the United States due to tax and other 

benefits, the Cayman Islands offers a combination of additional factors 

that may draw U.S. activity. In particular, the Cayman Islands is generally

regarded as having a stable and internationally compliant legal and 

regulatory system, a business-friendly regulatory environment, and a 

reputation as a prominent international financial center. 

Several Factors 

Influence U.S. 

Taxpayers’ Decisions 

to Conduct Financial 

Activity in the 

Cayman Islands

While OFCs Generally 

Offer Tax Benefits, U.S. 

Persons May Choose to 

Conduct Financial Activity 

in the Cayman Islands for a 

Number of Additional 

Reasons 

First, because the Cayman Islands’ legal and regulatory system is generally 

regarded as stable and compliant with international standards, U.S. 

persons looking for a safe jurisdiction in which to place funds and assets 

may choose to carry out financial transactions there. In particular, Cayman

Islands law is based on English common law, which is familiar in the 

United States due to similarities between British and U.S. legal systems. 

The Cayman Islands regulatory regime has also been deemed by the 

International Monetary Fund to be well-developed and in compliance with 

a wide range of international standards. Pursuant to a 2007 on-site 

evaluation, the Caribbean Financial Action Task Force (CFATF) also cited 

the Cayman Islands as having a strong compliance culture related to antimoney laundering and terrorist-financing activities. IRS officials cited the 

Page 26 GAO-08-778 Cayman Islands
Cayman Islands’ reputation for regulatory sophistication as a potential 

factor in attracting legal financial activity from the United States.24

U.S. persons may also be drawn to the Cayman Islands because of its 

business-friendly regulatory environment. Establishing a Cayman Islands 

entity can be relatively inexpensive. For instance, an exempted company 

can be created for less than $600 U.S., not taking into account serviceproviders’ fees, and it is not required to maintain its register of 

shareholders in the Cayman Islands or hold an annual shareholder 

meeting. Additionally, Cayman government officials noted that the 

jurisdiction has a public-private sector cooperative approach to regulation

and attempts to be responsive to the needs of market participants. For 

instance, Cayman law requires CIMA to consult with the private sector 

prior to issuing or amending rules.25 The jurisdiction’s responsiveness to 

market needs led it to adopt the Segregated Portfolio Company (SPC), a 

type of entity that opened up the captive insurance industry to smaller 

companies unable to meet minimum reserve levels on their own, but 

capable of doing so in groups. The Cayman Islands may also attract U.S.-

related captive insurance companies because it has lower capital 

requirements than some U.S. states. 

Additionally, as reported by Maples and Calder attorneys and U.S. 

officials, some persons may be attracted to the Cayman Islands to take 

advantage of specific legal protections for creditors and investors. 

According to Maples and Calder attorneys, if a Cayman Islands fund or 

other entity becomes insolvent, Cayman law is generally focused on 

protecting the interests of creditors and investors. For example, according 

to Maples and Calder, Cayman law differs from U.S. bankruptcy law in that

it provides no moratoria on secured-creditor action against a debtor 

company. Officials from OPIC report that, as an investor, it is important to 

OPIC that private-equity funds it invests in be organized in a jurisdiction 

with strong legal protections for creditors, such as the Cayman Islands. 

According to them, nearly half of the funds with which OPIC has been 

 24 The Cayman Islands is also approved by the IRS as a jurisdiction with acceptable KYC 

rules for purposes of the IRS qualified intermediary program. See GAO, Tax Compliance: 

Qualified Intermediary Program Provides Some Assurance That Taxes On Foreign

Investors Are Withheld and Reported, But Can Be Improved, GAO-08-99 (Washington,

D.C.: December 2007) for more information on the qualified intermediary program. 

25 A Cayman Islands government official noted that this process is similar to the regulatory

process in the United States wherein notice is given of proposed rulemaking and the public 

is invited to comment on the proposed rules.

Page 27 GAO-08-778 Cayman Islands
involved were organized in the Cayman Islands. Similarly, officials from 

the Ex-Im Bank stated that Cayman Islands law gives them confidence that 

they will have less difficulty reclaiming assets if a party in an Ex-Imbacked transaction defaults. 

The Cayman Islands may also be a jurisdiction of choice among U.S. 

persons due to factors related to its location and reputation for 

prominence as an international financial center. The Cayman Islands is 

proximate to the United States, operates in the same time zone as New 

York and the eastern United States and is English speaking, all factors that 

may contribute to U.S. persons’ choices to conduct activity there. It has a 

robust financial services sector, which includes several major law firms 

and other locally based service providers, as well as prominent 

international accounting and audit firms, fund administrators, and banking

institutions. The high volume of existing Cayman-based financial activity 

may also be responsible for drawing additional business. For instance, 

relationships between U.S. and Cayman law firms and other service 

providers may result in referrals of additional business. 

Finally, U.S. persons may carry out activity in the Cayman Islands because

of its reputation as a neutral jurisdiction for structuring deals with foreign 

partners. Ex-Im Bank officials explained that they frequently created 

Cayman Islands entities to facilitate the purchase of U.S. aircraft, and 

these deals often involve foreign entities who may prefer not to carry out 

business in the United States for tax, regulatory, or political reasons. 

Additionally, OPIC officials stated that foreign investors in private-equity 

funds that they are involved with value the Cayman Islands’ reputation for 

legal neutrality towards investors from different jurisdictions. 

Some U.S. Persons Can 

Defer or Minimize Tax by 

Carrying Out Financial 

Activity in the Cayman 

Islands 

Some U.S. persons engaging in financial activity in the Cayman Islands are 

able to legally minimize their U.S. tax obligations. For instance, some U.S. 

persons can minimize their U.S. tax obligations by using Cayman Islands 

entities to defer U.S. taxes on foreign income. In general, the United States 

taxes U.S. persons, including corporations, on their worldwide income,26

but only taxes foreign corporations on their U.S. income. The United 

States does not tax U.S. shareholders of corporations, whether foreign or

domestic, until the corporation makes a distribution to the shareholder, 

 26 U.S. persons may generally claim a credit for taxes imposed by foreign countries, thereby 

avoiding or reducing double taxation. 

Page 28 GAO-08-778 Cayman Islands
unless an exception applies, such as when the foreign corporation is a 

controlled foreign corporation and earns certain types of income. If a U.S. 

person earns foreign income, he is taxed on that income; however, if a U.S.

person is a shareholder of a foreign corporation and that corporation 

earns foreign income, then, in general, the United States will not tax that 

income until it is distributed to the U.S. shareholder. In this way a U.S.

taxpayer may be able to defer taxes on some foreign income.

For example, a U.S.-based multinational business with a Cayman Islands 

subsidiary earning foreign income may be able to defer U.S. taxes on that 

foreign income. The income deferred is not limited to income earned in 

the jurisdiction of incorporation but can be any non-U.S. income. If the 

foreign income had been earned by a U.S. component of the multinational, 

U.S. taxes would be owed when that income was earned. Instead, by 

employing a Cayman Islands subsidiary U.S. taxes are owed when the 

Cayman Islands subsidiary makes a distribution to the parent.

In some instances, U.S.-based parent corporations may be able to defer 

taxes on foreign-source income from foreign subsidiaries indefinitely by

reinvesting that income overseas. Additionally, U.S. parent corporations 

may further reduce U.S. taxes on foreign income by waiting to bring the 

income into the United States until a period in which they have domestic 

losses. Since corporate income tax is based on profits the parent would 

only owe tax on repatriated income that exceeded its domestic losses. 

The Internal Revenue Code has provisions limiting this deferment in 

certain circumstances. For example, if a foreign corporation qualifies as a 

controlled foreign corporation, then certain U.S. shareholders will not be 

able to defer tax on certain types of income, known as Subpart F income, 

earned by that foreign corporation.27

In other cases, persons may conduct financial activity in jurisdictions 

without a corporate income tax like the Cayman Islands to avoid entitylevel tax. In general, a foreign corporation’s earnings are taxed where 

earned, in the entity’s jurisdiction of incorporation, or both, depending on

the tax laws of the jurisdiction. Since the Cayman Islands has no direct 

taxes, a corporation organized there will not owe taxes to the Cayman 

Islands government. For instance, foreign hedge funds sponsored by U.S.-

 27 The law in this area is more fully explained in the E-supplement to this report, 

GAO-08-1028SP. 

Page 29 GAO-08-778 Cayman Islands
based managers are also generally organized as corporations in tax-neutral 

jurisdictions like the Cayman Islands to avoid double taxation for foreign 

investors. Officials we spoke with from the Ex-Im Bank also indicated that 

one motivation for structuring aircraft-financing leases in the Cayman 

Islands was the lack of entity-level tax on the entities established to hold 

the aircraft during the period of the lease. 

One indication of the extent to which U.S. companies use Cayman Islands 

entities to defer taxes is their reaction to a recent tax law. In 2004, 

Congress approved a received dividend deduction for certain earnings of 

foreign subsidiaries of U.S. companies repatriated for a limited time.28

Approximately 5.5 percent of the nearly $362 billion repatriated between 

2004 and 2006 was from Cayman Islands controlled foreign corporations. 

The Cayman Islands ranked eighth among all countries in the amount of 

repatriated income. 

Another way U.S. persons may use Cayman Islands entities to reduce U.S. 

tax obligations is to receive investment income in a form that avoids the 

unrelated business income tax (UBIT). The investment income of U.S. taxexempt entities, including pension funds, charitable trusts, foundations, 

and endowments, can be subject to UBIT if it is earned by a U.S. 

partnership in which the tax-exempt entity is a partner. Many U.S. 

investment vehicles, such as hedge funds, are organized as limited 

partnerships because, unlike U.S. corporations, these entities are not 

generally separately taxed, and as a result, income is only taxed at the

level of individual investors. Tax-exempt entities that invest in hedge funds 

organized as foreign corporations can be paid in dividends, which are not 

subject to UBIT. If an investment fund is incorporated in a jurisdiction 

without a corporate income tax, such as the Cayman Islands, the fund’s 

returns will not be subject to corporate income tax. According to the SEC,

the growth in hedge funds has been largely driven by increased investment 

on the part of U.S. tax-exempt entities. 

Some U.S. persons may also aggressively interpret U.S. tax law. The U.S. 

Internal Revenue Code is highly complex, and new strategies to reduce 

U.S. taxes continue to emerge as business environments change and in 

response to new rules and guidance. As we have reported before, some 

have postulated that major corporations’ tax returns are actually just the 

 28 American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 422, 118 Stat. 1418, 1515-20 

(Oct. 22, 2004). 

Page 30 GAO-08-778 Cayman Islands
opening bid in an extended negotiation with IRS to determine a 

corporation’s tax liability.29

In some cases, new tax-avoidance practices may emerge that involve

complex legal issues. For instance, IRS is examining a strategy used by

offshore hedge funds to avoid unfavorable tax consequences of owning 

U.S. stocks directly. Because many hedge funds are organized in tax-free 

jurisdictions like the Cayman Islands that do not have income-tax treaties 

with the United States, investors in these funds are generally subject to full 

30 percent withholding rates on certain earnings from U.S. investments 

such as dividends. However, some hedge funds may have avoided these 

withholding taxes on dividends by selling their U.S. stocks to a U.S.-based

derivatives dealer prior to a dividend payout in exchange for a payment 

equivalent to the value of the dividend, and then repurchasing the stocks 

after the payout. 

Specific tax positions may require complex legal and economic analysis to 

determine their legality. In particular, transfer pricing by multinational 

enterprises can pose challenges for IRS and U.S. regulators. IRS officials 

said that U.S. persons use entities established in many low-tax 

jurisdictions for transfer-pricing purposes. They also reported that they 

have dealt with transfer-pricing issues involving Cayman Islands entities, 

but that the problem is not worse there than in other jurisdictions. 

While the Internal Revenue Code and Treasury regulations state that 

transfer prices between related parties must be consistent with transfer 

prices that would be charged between unrelated parties, some taxpayers 

may manipulate these prices to obtain favorable tax outcomes in the 

related context. Additionally, because multinational operations and 

transactions can be quite complex and pricing methods may be inexact, 

evaluating the appropriateness of particular transfer prices can be 

difficult. A recent Treasury report delineates a number of areas in which

taxpayers take advantage of ambiguities in rules and legal guidance, 

aggressively setting transfer prices to move profits offshore and thereby 

avoid U.S. taxes.30 In particular, the report found that two types of 

activities among related parties—cost-sharing arrangements and services 

 29 GAO, Tax Compliance: Challenges to Corporate Tax Enforcement and Options to 

Improve Securities Basis Reporting, GAO-06-851T (Washington, D.C.: June 13, 2006).

30 See U.S. Department of the Treasury, Report to the Congress on Earnings Stripping, 

Transfer Pricing, and U.S. Income Tax Treaties (November 2007).

Page 31 GAO-08-778 Cayman Islands
transactions—were key sources of transfer-pricing abuse.31 Further, while 

Treasury urges caution in interpreting specific aspects of its findings, a 

recent working paper by Treasury’s Office of Tax Analysis finds that data

are consistent with, although not proof of, the existence of potential 

income shifting from inappropriate transfer pricing. 

Despite Cayman 

Regulatory Safeguards, 

Some U.S. Persons 

Conduct Financial Activity 

in the Cayman Islands to 

Hide Illegal Activity from 

U.S. Authorities 

As with other foreign jurisdictions and OFCs, some persons have 

conducted financial activity in the Cayman Islands in an attempt to avoid 

discovery and prosecution of illegal activity by the United States. As 

discussed later in this report, in 45 instances over the past 5 years IRS field 

agents have requested information from the IRS official responsible for the 

Caribbean about potential criminal activity on the part of U.S. persons in 

the Cayman Islands. Additionally, as we further explore later in this report, 

our review of 21 criminal and civil cases including those referred to us by 

DOJ, SEC, and IRS shows that U.S. persons have been involved in civil 

lawsuits and come under criminal investigation for suspected offenses 

including tax evasion, money laundering, and securities fraud. The full 

extent of illegal offshore financial activity is unknown, but risk factors 

include limited transparency related to foreign transactions,32 and 

difficulties faced by the U.S. in successfully prosecuting foreign criminal 

activity. Still, as we state later in this report, IRS officials said that criminal 

activity was comparatively lower in the Cayman Islands than in some 

other offshore jurisdictions. 

Although not unique to the Cayman Islands, limited transparency 

regarding U.S. persons’ financial activities in foreign jurisdictions 

contributes to the risk that some persons may use offshore entities to hide 

illegal activity from U.S. regulators and enforcement officials. Voluntary 

compliance with U.S. tax obligations is substantially lower when income is 

not subject to withholding or third-party-reporting requirements. Because 

U.S.-related financial activity carried out in foreign jurisdictions is not 

 31 Cost sharing arrangements between related parties, which involve participants that agree 

to share the costs of developing intangibles that will later be used by each participant,

carry risks of transfer-pricing abuse, especially with respect to the valuation of contributed

intangibles and the consequent compensatory buy-in payments for those contributions.

Similarly, pricing of certain types of services provided between related parties, especially 

services performed using valuable intangibles, may be particularly vulnerable to transferpricing abuses 

32 Cayman Islands government officials said that this is a common problem when one 

country seeks information on activities within another country. 

Page 32 GAO-08-778 Cayman Islands
subject to these requirements in many cases, persons who intend to evade 

U.S. taxes are better able to avoid detection. As an example, foreign 

corporations established in the Cayman Islands and elsewhere with no 

trade or business in the United States are not generally required to report 

dividend payments to shareholders, even if those payments go to U.S. 

taxpayers. Therefore, a U.S. shareholder could fail to report the dividend 

payment with little chance of detection by IRS. Persons intent on illegally 

evading U.S. taxes may be more likely to carry out financial activity in 

jurisdictions with no direct taxes, such as the Cayman Islands, because 

income associated with that activity will not be taxed within those 

jurisdictions. 

Some U.S. persons have also taken steps to complicate efforts to identify 

U.S. involvement in illegal activity by structuring their activities in offshore 

jurisdictions. As with other OFCs, some U.S. persons may create complex

networks of domestic and offshore entities in order to obscure their role 

in illegal schemes. For instance, the defendants in United States v. Taylor 

and United States v. Petersen pled guilty in U.S. District Court to crimes 

related to an illegal tax evasion scheme involving offshore entities, 

including Cayman Islands entities.33 As part of the scheme, the defendants 

participated in establishing a “web” of both domestic and offshore entities

which were used to conceal the beneficial owners of assets, and to 

conduct fictitious business activity that created false tax losses, and thus 

false tax deductions, for clients. 

Additionally, because offshore entities such as SPVs can be used to 

achieve a wide array of purposes, they can be abused even when the 

entities, the parties involved, and the stated business purposes pass 

scrutiny at the time of establishment. For instance Enron, a global energy

company had 441 entities in the Cayman Islands in the year that it filed for 

bankruptcy. Maples and Calder partners said they created entities for 

Enron at the instruction of major U.S. law firms. The partners noted that 

Enron’s legitimate business activity often involved holding assets in 

offshore subsidiaries, including many in the Cayman Islands. However, 

Enron did use structured-finance transactions to create misleading 

accounting and tax outcomes and deceive investors. Maples and Calder 

partners said they conducted due diligence on investment-fund managers 

 33 Statement by Defendant in Advance of Plea Guilty, United States v. Taylor, No. 2:08-cr00064-TC (D. Utah, Jan. 24, 2008); Statement by Defendant in Advance of Plea Guilty, 

United States v. Petersen, No. 2:05-cr-00805-TC-DN (D. Utah, Jan. 18, 2008). 

Page 33 GAO-08-778 Cayman Islands
and persons establishing structured-finance entities in accordance with 

AML/KYC standards, and that they had filed a SAR with regard to 

suspected illegal activity by Enron. Maples and Calder partners also said 

that the accounting fraud perpetrated by Enron was not intrinsically 

offshore in nature; rather, it was committed from within the United States, 

and that no suggestion of violation of either Cayman Islands law or U.S. 

law was ever raised with respect to Maples and Calder. 

The difficulty that U.S. regulators and law-enforcement officials face in

investigating and litigating cases may also influence U.S. persons’ choice 

to conduct illegal activity in offshore jurisdictions. As we have reported, 

obtaining information on U.S. persons’ financial activities abroad can be 

time-intensive for IRS, due to issues including difficulty accessing 

beneficial-ownership information.34 Additionally, offshore related cases 

may be time-consuming to litigate. For example, Treasury reports that IRS 

spends substantial resources to litigate cases involving transfer-pricing 

abuse by taxpayers. IRS confirms that transfer-pricing cases involve 

entities established in the Cayman Islands and elsewhere. Transfer-pricing 

cases can be very time-intensive to litigate because of the highly 

specialized issues involved, and the results may provide limited guidance 

for subsequent litigation of transfer-pricing issues due to the unique sets of 

facts and circumstances involved in each case. 

Individual U.S. taxpayers and corporations generally are required to selfreport their taxable income to IRS. Similarly, publicly owned corporations 

traded on U.S. markets are required to file annual or quarterly statements 

with SEC. When an individual or corporation conducts business in the 

Cayman Islands, there is often no third-party reporting of transactions, so 

the accuracy of the disclosures to U.S. regulators is dependent on the 

accuracy and completeness of the self-disclosure. When the U.S. 

government needs to obtain information from the Cayman Islands, there 

are formal information-sharing agreements in place to facilitate the 

exchange of information, in the form of a TIEA or MLAT. In addition, both 

the U.S. and Cayman Islands governments share information through their 

respective financial intelligence units. There are also channels for various 

agencies of each government to share intelligence. 

The U.S. Government 

Has Access to Several 

Information Sources 

Regarding U.S. 

Taxpayers’ Business 

Activities in the 

Cayman Islands, but 

Most Information Is 

Self-Reported 

 34 GAO, Tax Administration: Additional Time Needed to Complete Offshore Tax Evasion

Examinations, GAO-07-237 (Washington, D.C.: March 2007). 

Page 34 GAO-08-778 Cayman Islands
IRS and SEC collect self-reported information from individuals and 

corporations with activity in the Cayman Islands. IRS collects information 

on the number of controlled foreign corporations,35 as well as the number 

of foreign trusts and certain bank accounts owned by U.S. taxpayers 

overseas, while SEC collects information on publicly owned companies 

with operations in foreign countries. For example, for tax year 2004, 

approximately 1,402 foreign corporations in the Cayman Islands were 

controlled by a U.S. corporate taxpayer, according to IRS data. Those 

controlled foreign corporations in the Cayman Islands accounted for more 

than $23 million in average total income, placing them ninth among all 

jurisdictions in average total income among U.S.-controlled foreign 

corporations reporting to IRS. Net income earned from controlled foreign

corporations in the Cayman Islands ranks thirteenth among all 

jurisdictions in terms of all foreign corporations controlled by a large 

corporate U.S. taxpayer. In 2002, the most recent year for which IRS had 

data, 193 returns were filed by taxpayers indicating that they controlled a 

trust in the Cayman Islands. This number accounted for over 7 percent of

all controlled foreign trusts in 2002. In terms of total income, U.S. tax 

returns indicating that the taxpayer controlled a foreign trust in 2002 

reported about $472 million in income and foreign trusts in the Cayman 

Islands accounted for nearly 28 percent of that total, or about $132 million. 

Although U.S. Taxpayers 

Report Some Cayman 

Islands Activities to U.S. 

Regulators, Overall 

Information Reporting Is 

Limited 

Any U.S. person with signature authority over or a financial interest in an

overseas account whose value exceeds $10,000 at any time during a year is 

required to file a report called a Report of Foreign Bank and Financial 

Accounts (FBAR) disclosing this information to the Department of the 

Treasury. Failure to file this information can lead to civil penalties, 

criminal penalties, or both. For those taxpayers with signature authority 

over bank accounts in the Cayman Islands, the number of FBAR filings for 

bank accounts in the Cayman Islands has increased steadily since 2002, 

rising from 2,677 in 2002 to 7,937 in 2007 (see fig. 7). 

 35 A foreign corporation is a “controlled foreign corporation” when at least half of the

foreign corporation is owned by U.S. shareholders who own at least 10 percent of the

stock. For more specific information about the definition and consequences of a controlled 

foreign corporation see the E-supplement to this report, GAO-08-1028SP. 

Page 35 GAO-08-778 Cayman Islands
Figure 7: U.S. Persons Reporting Cayman Islands Foreign Bank Accounts, 2002-

2007 

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007

(7,937)

2006

(5,735)

2005

(4,839)

2004

(3,725)

2003

(3,152)

2002

(2,677)

Number of reports

Source: FinCEN.

Year

In November 2007, 732 companies traded on U.S. stock exchanges 

reported to SEC that they were incorporated in the Cayman Islands. Of 

these, 309 reported their Cayman Islands address on their filing. As part of 

their annual SEC filings, companies must also disclose the existence of 

any significant subsidiaries, either offshore or domestic. As of November 

2007, 378 U.S. public companies reported having at least one significant 

subsidiary in the Cayman Islands. 

Because only limited third-party reporting is required by financial entities

in the Cayman Islands, accuracy and completeness of the information are 

dependent on the taxpayer. For many taxpayers with domestic 

transactions and accounts, IRS is able to match expenses and income 

information provided by a third party to the taxpayer’s return. This 

approach has been proven to increase U.S. taxpayer compliance. However, 

Cayman Islands financial institutions are often not required to file reports 

with IRS concerning U.S. taxpayers. This increases the likelihood of 

inaccurate reporting by U.S. taxpayers on their annual tax returns and SEC 

required filings. The likely low level of compliance with these 

requirements is an example of the general problem with the completeness 

and accuracy of self-reported information. 

Page 36 GAO-08-778 Cayman Islands
In addition to the information that both IRS and SEC receive from filers of 

annual or quarterly reports, the U.S. government also has formal 

information-sharing mechanisms by which it can receive information from 

foreign governments and financial institutions. In November 2001, as a 

result of negotiations between U.S. and Cayman Islands officials, the 

United States signed a TIEA with the government of the United Kingdom 

and the government of the Cayman Islands with regard to the Cayman 

Islands. The TIEA provides a process for IRS to request information 

related to specific identified taxpayers, their specific transactions, 

companies, and named associates in respect of both criminal and civil

matters, including at the investigative stages. The IRS sends TIEA requests 

to the Cayman Islands based on internal requests from the Criminal 

Investigations division, in cases where a taxpayer is under active criminal

investigation, or from a revenue agent conducting an examination of a 

taxpayer. In addition to the TIEA, which is the newest international 

cooperation channel between the U.S. and the Cayman Islands, the U.S. 

government and the Cayman Islands also entered into a MLAT in 1986, 

which entered into force under U.S. law in 1990. The MLAT enables 

activities such as searches and seizures, immobilization of assets, 

forfeiture and restitution, transfer of accused persons, and general 

criminal information exchange, including in relation to specified tax 

matters. Extradition from the Cayman Islands to the United States is 

enabled under the United Kingdom’s United States of America Extradition 

Order of 1976 (as amended in 1986).

U.S. Regulators Can 

Formally Request 

Information Regarding 

U.S. Persons’ Cayman 

Activities

The TIEA is now the dedicated channel for tax information, while the 

MLAT remains the channel for the exchange of information with regards 

to nontax criminal violations. According to a Cayman Islands government 

official, neither the TIEA nor the MLAT allow for “fishing expeditions.” 

Rather, as is standard with arrangements providing for exchange of 

information on request, requests must involve a particular target. For 

example, IRS cannot send a request for information on all corporations 

established in the Cayman Islands over the past year. The request must be 

specific enough to identify the taxpayer and the tax purpose for which the 

information is sought, as well as state the reasonable grounds for believing 

the information is in the territory of the other party. 

Since the TIEA began to go into effect in 2004, IRS has made a small 

number of requests for information to the Cayman Islands. An IRS official 

told us that those requests have been for either bank records of taxpayers 

Page 37 GAO-08-778 Cayman Islands
or for ownership records of corporations .36 The IRS official also told us 

that the Cayman Islands government has provided the requested 

information in a timely manner for all TIEA requests. Since the MLAT went 

into effect and through the end of 2007, the Department of Justice told us 

that the U.S. government has made over 200 requests for information 

regarding criminal cases to the Cayman Islands. A Cayman Islands 

government official told us that assistance was provided by the Cayman 

Islands in response to these requests in all but rare instances, and that 

when a request was refused it was because it did not comply with the 

specific articles of the treaty. 

Some Financial 

Intelligence Information 

on U.S. Persons’ Cayman 

Activities Is Available to 

U.S. Regulators 

The U.S. government’s financial intelligence unit, FinCEN, works to gather 

information about suspected financial crimes both offshore and in the 

United States. As part of the Department of the Treasury, FinCEN is 

authorized, under the Bank Secrecy Act, to require certain records or 

reports from financial institutions. Thousands of financial institutions are 

subject to Bank Secrecy Act reporting and recordkeeping requirements. As 

part of its research and analysis, FinCEN can make requests of its 

counterpart in the Cayman Islands, CAYFIN. CAYFIN can and does make 

requests to FinCEN as well. When FinCEN receives SARs that involve 

connections to activity in a foreign jurisdiction—such as the Cayman 

Islands—the agency can investigate by requesting additional information 

from that jurisdiction’s financial intelligence unit. Cayman Islands law 

requires SARs from any person who comes across suspicious activity in 

the course of their trade, employment, business, or profession without 

limitation to financial institutions. SARs generate leads that law 

enforcement agencies use to initiate investigations of money laundering 

and other financial crimes. Similarly, when FinCEN receives reports from 

institutions within the United States that involve foreign persons it can 

disclose the information to that country’s financial intelligence unit. 

Certain U.S. law enforcement and regulatory agencies also have the ability 

to review SARs generated in the United States. If these agencies proceed 

with further investigation and require additional specific information from 

the foreign jurisdiction involved, the SAR-generated information can be

used to support an MLAT or TIEA request. 

 36 The TIEA has been in effect for criminal cases since 2004 and for civil cases since 2006. 

Page 38 GAO-08-778 Cayman Islands
FinCEN and CAYFIN routinely share suspicious activity information. In 

fiscal year 2007, FinCEN made 6 suspicious activity information requests 

to CAYFIN. From July 2006 to June 2007, CAYFIN made 25 suspicious 

activity information requests to FinCEN to follow up on potential new 

leads as well as existing Cayman Islands-generated SARs. From July 2006 

to June 2007, CAYFIN shared suspicious activity information with FinCEN 

in 30 instances, and CAYFIN described 27 of these instances as 

spontaneous in that CAYFIN disclosed suspicious financial activity with a 

nexus to the U.S. without receiving a specific request for information from 

FinCEN. The remaining three information disclosures were responses to 

requests from FinCEN and were related to active U.S. law enforcement 

investigations. According to CAYFIN, financial institutions primarily filed 

suspicious activity reports on U.S. persons for suspicion of fraud-related 

offenses. Other offenses leading to the filing of suspicious activity reports

included drug trafficking, money laundering, and securities fraud, which 

mostly consisted of insider trading. In addition, according to Cayman 

Islands officials, statistics regarding SARs filed with CAYFIN show the 

United States as the most frequent country of subject (30 percent of 

SARs). 

Some Other Information 

Sharing also Occurs 

between U.S. and Cayman 

Islands Regulators

In addition to the formal information sharing codified into law between 

the U.S. government and Cayman Islands government and financial 

institutions represented by TIEA and MLAT requests and SARs, Cayman 

Islands officials reported sharing with and receiving information from 

federal agencies, state regulators, and financial institutions: 

• According to CIMA, 40 requests for assistance were dealt with between 

2003 and early 2008, including requests from SEC, Office of the 

Comptroller of the Currency, Federal Deposit Insurance Corporation, 

and various state insurance and banking regulators. 

• CAYFIN reported informally sharing information with IRS criminal 

investigators on several occasions in cases involving predicate offenses 

such as drug trafficking or securities fraud. 

• CIMA officials reported having traveled to the United States to do due 

diligence on U.S.-based fund managers/administrators. 

• CIMA reported that other nations’ regulators have traveled to the 

Cayman Islands to conduct onsite inspections of entities for the 

purposes of consolidated supervision and Anti-Money 

Laundering/Combating the Financing of Terrorism (AML/CFT) reviews. 

While SEC has not conducted such inspections/reviews to date, CIMA 

indicated that it has provided substantial assistance to SEC over the 

Page 39 GAO-08-778 Cayman Islands
years and recently facilitated SEC’s conduct of interviews in the 

Cayman Islands relevant to a current SEC investigation. 

• The Cayman Islands Registrar of Companies maintains a limited 

amount of publicly available information—company name, type, status, 

registration date, and address of the registered office—about all 

Cayman Islands-registered entities. 

• CIMA officials stated that they regularly coordinate with U.S. 

regulators at the state and federal level, and have several existing 

agreements that structure the terms of coordination with these 

agencies. For example, U.S. insurance regulators from Washington 

State recently negotiated a Memorandum of Understanding (MOU) to 

share information and coordinate with CIMA regarding cross-border 

insurance matters. 

Tax evasion and other illegal activity involving offshore jurisdictions take 

a variety of forms. Because the activity is offshore, the U.S. government 

faces additional enforcement challenges. 

While not unique to the Cayman Islands, ‘hiding income offshore” is fifth 

on the IRS’s list of 12 most egregious tax schemes and scams for 2008. The

IRS list cites several illegal practices, including hiding income in offshore 

bank and brokerage accounts and foreign trusts, and accessing this 

income using offshore debit cards, credit cards, and wire transfers. IRS, 

SEC, and DOJ officials we spoke with described how offshore schemes 

have been used to facilitate tax evasion, money laundering, and securities 

violations. To address these issues, IRS’s SBSE, LMSB, and CI Divisions 

have several initiatives that target abusive offshore transactions, and 

officials told us that some of the cases that they have identified have 

involved Cayman Islands connections. Still, a lack of jurisdiction-specific 

data prevents IRS from knowing the full extent of Cayman Islands activity,

and the Cayman Islands was reported to be similar to other offshore 

jurisdictions with regard to the types of activity that occur there. 

U.S. and Cayman 

Officials Have Taken 

Steps to Address 

Illegal Activity, but 

Enforcement 

Challenges Exist 

U.S. Agencies Have 

Uncovered Illegal 

Activities with Cayman 

Islands Connections 

For example, IRS’s SBSE Division investigates leads referred from other 

IRS areas, and also actively develops information sources that may assist 

in identifying new areas of illegal activity. Several initiatives have emerged 

Page 40 GAO-08-778 Cayman Islands
from these two areas, including programs focused on offshore credit 

cards, electronic-payment systems, offshore brokerages, and promoters of 

offshore shelters. A program that we have previously reported on is IRS’s 

offshore Credit Card Summons project.37 This program is a compliance 

initiative that seeks to identify noncompliant taxpayers with offshore bank 

accounts, investments, and/or other financial arrangements by “following 

the money” associated with their credit-card transactions. This program 

has been in effect since 2000, when a federal judge authorized IRS to issue 

John Doe Summonses to U.S. credit card companies with banks in 

offshore jurisdictions. IRS officials we spoke with explained that, since its

inception in 2000, this program has resulted in completed examinations of 

over 5,800 returns, almost half of IRS’s FBAR violation caseload, and over 

$150 million in tax, $26 million in interest and $30 million in penalties. 

Returns continue to be examined under the program. In addition, officials 

reported that the program has placed pressure on one credit card 

company to revoke the ability of an offshore bank in the Bahamas to issue

cards, and the Bahamas government to revoke the bank’s license. 

IRS officials said that some abusive transactions identified through these 

initiatives involved Cayman Islands entities or accounts, although the 

exact extent of this involvement was unclear. IRS officials indicated that 

jurisdiction-specific statistics were not maintained, and thus 

comprehensive numbers on Cayman involvement in abusive transactions 

were unavailable. One official also stated that although illegal transactions

had been detected, most of the offshore business activity in the Cayman 

Islands was probably legitimate. 

The LMSB executive with whom we spoke noted that there is no 

jurisdiction-specific initiative involving the Cayman Islands. He also said 

that the type of activity that occurs in the Cayman Islands is similar to that 

in other offshore jurisdictions. Officials from LMSB described several 

enforcement initiatives that involve the use of offshore entities by U.S.-

related companies and investment funds, and reported that Cayman 

Islands entities have been involved in activities under investigation by 

LMSB in a number of cases. For instance, LMSB officials described 

ongoing investigations related to swap transactions to avoid tax on 

dividend income, as discussed previously in this report. IRS officials said 

that the rise of the hedge fund industry has required them to devote 

resources to evaluating the changed business environment and exploring

 37 GAO-07-237. 

Page 41 GAO-08-778 Cayman Islands
legal issues associated with strategies by industry participants to reduce 

U.S. tax burdens. According to IRS, it now has a special team exploring the 

tax implications of specific hedge-fund activities, including this

arrangement, known as a total-return swap. 

LMSB has activity-specific initiatives for several areas that involve 

offshore activity, including designated groups with expertise in

employment-tax enforcement and transfer-pricing schemes, issues 

discussed previously in this report. LMSB officials stated that transactions 

associated with these areas can be highly complex and may involve 

aggressive but legal interpretations of the U.S. Internal Revenue Code. For 

instance, LMSB officials said that it is legal for a U.S. company to establish 

an offshore subsidiary to employ U.S. citizens who work abroad, thereby 

avoiding Social Security taxes on those workers in some circumstances. 

However, if IRS finds that a domestic corporation is actually the true 

employer of the overseas workers, it can challenge the legitimacy of the 

arrangement, leaving the U.S. corporation liable for Social Security taxes.38

LMSB officials involved in transfer-pricing enforcement described IRS’s 

activities in this area, and said that IRS has seen transfer-pricing issues 

related to the Cayman Islands. They pointed out, though, that Cayman 

Islands issues were similar to those in any other low-tax jurisdiction. They 

also described several IRS efforts to counter transfer-pricing abuses, 

including developing new regulations publishing industry directives and 

providing guidance to field examiners in cases involving transfer-pricing 

issues. 

While some offshore activity amounts to aggressive, but legal,

interpretation of the Internal Revenue Code, the U.S. government has 

identified multiple cases involving civil and suspected criminal activity 

related to the Cayman Islands. Specifically, the IRS Criminal Investigations

Attaché who oversees requests related to the Caribbean reported that over 

the past 5 years field agents had requested information regarding 

suspected criminal activity by U.S. persons in 45 instances pertaining to 

taxpayers or subjects in the Cayman Islands. However, the official also 

stated that the Cayman Islands had fewer criminal violations than some 

other offshore jurisdictions. Department of Justice officials told us that 

 38 Section 302 of the Heroes Earnings Assistance and Relief Tax Act of 2008, Public Law 

110-245 (July 17, 2008) added subsection 3121(z) to the Internal Revenue Code. Subsection 

3121(z) states that, in general, if a foreign company is a federal contractor and is a member 

of a domestically controlled group of entities, then that contractor is treated as an 

American employer for the purposes of the Social Security taxes for its U.S. employees.

Page 42 GAO-08-778 Cayman Islands
DOJ has prosecuted cases involving the use of Cayman accounts and 

entities. We analyzed 21 criminal and civil cases to identify common 

characteristics of legal violations related to the Cayman Islands. Among 

these cases, the large majority involved individuals, small businesses, and 

promoters, rather than large multinational corporations. While they were 

most frequently related to tax evasion, other cases involved securities 

fraud or various other types of fraud. In most instances, Cayman Islands 

bank accounts had been used, and several cases involved Cayman Islands 

companies or credit-card accounts. 

The documentation we reviewed for two of the cases, one referred to us 

by DOJ and one found in our database searches, mentioned a Maples and 

Calder connection. DOJ referred to us an ongoing tax case concerning a 

taxpayer’s participation in a number of sale-in, lease-out transactions,39

some of which involved Ugland House entities. IRS disallowed the tax

benefits of the transaction and the affected party paid the resulting tax 

assessment and was suing to recover the amount at the time we did our 

research. A DOJ official said that it did not appear that Maples and Calder

initiated or promoted the transactions. In the case found in our search, a 

hedge fund was established as an entity with Ugland House as its 

registered office. The U.S. hedge fund founder and manager has admitted 

fraudulent conduct in the United States in the course of a civil 

enforcement action brought by the Commodity Futures Trading 

Commission. The documentation we reviewed contained no allegation that

Maples and Calder acted improperly. In neither of these cases did the 

activity in question occur in the Cayman Islands. A Maples and Calder 

partner said that the involvement of his law firm in these cases would 

almost certainly have been limited to establishing the entities in question.

SARs also provide useful information about the types of potentially illegal 

activity U.S. persons conduct in the Cayman Islands. As seen in figure 8, 

most SARs disclosed by CAYFIN to FinCEN in 2006 and 2007 were related 

to securities fraud, money laundering, drug trafficking, and other types of 

fraud. These SARS were all disclosed to the United States at the initiative

of CAYFIN. CAYFIN tracks statistics on SARs related to tax issues; 

however for the years in question, none were reported related to the 

United States. Officials from Treasury and SEC reported that the Cayman 

 39 In this sale-in, lease-out transaction, assets were sold to one party and then leased back

to the original owner or user. The purchasing party then claimed certain tax benefits as a 

result of ownership. 

Page 43 GAO-08-778 Cayman Islands
Islands has been cooperative in sharing information and SEC reported that 

several of the SARs shared have led to U.S. investigations. 

Figure 8: U.S.-Related SARs Disclosed to FinCEN by CAYFIN in 2006-2007 by Type

of Offense

Fraud

7%

20%

Source: CAYFIN.

3%

Terrorist financing

3%

Pornography

Suspicious activity

Drug trafficking

Money laundering

Securities fraud

17%

20%

30%

Offshore Activities Pose 

Several Enforcement 

Challenges 

IRS and DOJ officials stated that particular aspects of offshore activity 

present challenges related to oversight and enforcement.40 Specifically, 

these challenges include lack of jurisdictional authority to pursue 

information, difficulty in identifying beneficial owners due to the 

complexity of offshore financial transactions and relationships among 

entities, the lengthy processes involved with completing offshore 

examinations, and the inability to seize assets located in foreign 

jurisdictions. Due to these oversight and enforcement challenges, U.S. 

 40 Although we asked U.S. officials about the challenges they may face in investigations of 

offshore activity, some of the challenges they cited may also apply when investigating any 

non-U.S. activity. 

Page 44 GAO-08-778 Cayman Islands
persons who intend on conducting illegal activity may be attracted to 

offshore jurisdictions such as the Cayman Islands. 

First, jurisdictional limitations make it difficult for IRS to identify potential 

noncompliance associated with offshore activity. An LMSB Deputy 

Commissioner said that a primary challenge of U.S. persons’ use of 

offshore jurisdictions is simply that, when a foreign corporation is 

encountered or involved, IRS has difficulty pursuing beneficial ownership 

any further due to a lack of jurisdiction. Specifically, IRS officials told us 

that IRS does not have jurisdiction over foreign entities without income 

effectively connected with a trade or business in the United States. Thus, if

a noncompliant U.S. person established a foreign entity to carry out nonU.S. business, it would be difficult for IRS to identify that person as the 

beneficial owner. 

Additionally, the complexity of offshore financial transactions can 

complicate IRS investigation and examination efforts. In particular, 

offshore schemes can involve multiple entities and accounts established in 

different jurisdictions in an attempt to conceal income and the identity of 

beneficial owners. For instance, IRS officials described schemes involving 

“tiered” structures of foreign corporations and domestic and foreign trusts 

in jurisdictions including the Cayman Islands that allowed individuals to 

hide taxable income or make false deductions, such as in the cases of 

United States v. Taylor and United States v. Peterson, as discussed 

previously. Further, LMSB officials told us they had encountered other 

instances in which Cayman Islands entities were used in combination with 

entities in other offshore and/or onshore jurisdictions. One such instance 

involved an Isle of Man trust used in combination with Cayman bank 

accounts in order to obscure the beneficial ownership of funds. In another 

case, a U.S. taxpayer used a Cayman Islands corporation, Cayman Islands 

bank, U.S. brokerage account, U.S. broker bank, and U.S. bank to transfer 

funds offshore, control the brokerage account through the Cayman Islands 

corporation, and ultimately repatriate the funds to his U.S. bank account. 

One IRS official explained that it can be more useful to “follow the money” 

rather than follow paper trails when trying to determine ownership and 

control in such situations. 

Another challenge facing offshore investigations and prosecutions that we 

have previously reported on is the amount of time required to complete 

offshore examinations due to the processes involved in obtaining 

Page 45 GAO-08-778 Cayman Islands
necessary information.41 A senior official from DOJ’s Office of 

International Affairs indicated that the Cayman Islands is the busiest 

United Kingdom overseas territory with regard to requests for information, 

but also the most cooperative. She also said that the Cayman Islands is one 

of DOJ’s “best partners” among offshore jurisdictions. Despite the Cayman

Islands government’s cooperativeness, DOJ officials told us that U.S. 

Attorneys are advised that if any offshore jurisdiction may be involved in a

particular case, effort must be made as soon as possible to clarify needed 

information and initiate requests to obtain that information, in order to 

have sufficient time to successfully receive and include the information. 

They said that this is the case even with more cooperative jurisdictions, 

such as the Cayman Islands, due to the processes involved in making a 

request. According to Cayman Islands officials, they respond to MLAT 

requests within an average of six to eight weeks, and their response time 

for TIEA requests may be shorter. Past GAO work has shown that between 

2002 and 2005 IRS examinations involving offshore tax evasion took a 

median of 500 more calendar days to develop and examine than other 

examinations. IRS officials from LMSB indicated that the specificity of 

information needed to make requests was also an inherent limitation 

involved in investigations of offshore activity. 

Once noncompliance is determined, one LMSB official said that U.S. 

authorities cannot seize assets in foreign jurisdictions. Assets can be 

shared between the U.S. and foreign governments when an agreement 

exists, though. A DOJ official reported that the Cayman Islands has an 

agreement to share proceeds of criminal-asset forfeitures with the U.S. 

government, and has been a very cooperative partner. The Cayman Islands 

and U.S. governments have shared over $10 million from cases in which 

the two governments have cooperated, and several million dollars have 

also been returned to U.S. victims of fraud in other cases and in assetsharing with the United States since the inception of the MLAT. 

The Cayman Islands 

Government Has 

Developed Safeguards to 

Prevent and Detect Illegal 

Activity 

The Cayman Islands government has taken other steps to address illegal 

activity by U.S. persons, in addition to supporting and cooperating with 

U.S. government efforts. For instance, the Cayman Islands has 

implemented a regulatory regime that IMF has found to be generally in 

compliance with a wide range of international standards and has been 

cited by the CFATF as having a strong compliance culture related to 

 41 GAO-07-823T. 

Page 46 GAO-08-778 Cayman Islands
combating money laundering and terrorist finance. In addition, CIMA has 

supervision over various financial institutions in the Cayman Islands, 

including banks; insurance companies; investment funds; trust companies; 

and an array of service providers including insurance managers, fund 

administrators, and corporate-service providers. CIMA officials said that 

they do not regulate entities differently on the basis of their residence 

offshore or onshore. 

CIMA licenses financial institutions and service providers in the Cayman 

Islands, and CIMA officials said that they consider several factors in 

determining whether or not to issue a license, such as fit and proper 

management, ownership and control, compliance with industry 

requirements, compliance with industry standards, and consolidatedsupervision arrangements. In the case of the licensing of branches or 

subsidiaries of non-Cayman Islands banks, CIMA officials stated that they 

look to the foreign bank regulator in the bank’s home jurisdiction to 

ensure that (1) the foreign regulator permits the Cayman Islands branch or 

subsidiary; (2) that the Cayman Islands operation will be subject to 

consolidated supervision by the foreign regulator in cooperation with 

CIMA as host regulator, in compliance with international standards; and 

(3) that the bank proposing to open a Cayman Islands operation is in good

standing with its home-country regulator. CIMA officials said that the 

same procedures would be applied to any branches or subsidiaries of 

foreign trust companies that are subject to regulation in their home 

jurisdictions. 

CIMA officials said that they take a risk-based approach to supervision of 

regulated financial activities, consistent with international standards such 

as the Basel and the International Organization of Securities Commissions 

(IOSCO) principles.42 They develop a risk profile for the supervised entity,

which then leads to on- and off-site reviews of fund activity. In relation to 

on-site reviews of fund administrators, CIMA looks at whether the 

 42 The Basel Committee’s core principles for effective banking supervision are conceived as

a voluntary framework of minimum standards for sound supervisory practices in the

banking sector. Committee members include central-bank and regulatory officials from the 

United States and other industrialized countries. One of the objectives of the Basel 

Committee is to close gaps in international supervision coverage so that no internationally 

active banks escape supervision and supervision is adequate. IOSCO is the principal 

international organization of securities commissions, and is composed of securities

regulators from over 105 countries. IOSCO develops principles and standards for improving 

cross-border securities regulation, reviews major securities regulatory issues, and

coordinates practical responses to these concerns. 

Page 47 GAO-08-778 Cayman Islands
different types of investors are correctly allocated to the intended 

investment funds; usually done with a 10 percent sample. CIMA officials 

said that some on-site inspections are done outside the Cayman Islands, 

such as in New York, Jamaica, and the Bahamas. Off-site reviews of funds 

include reviewing offering documents, audited financial statements, 

supervisory returns, and information provided by or available from 

regulators and other data sources for red flags, such as regulatory 

breaches, violations of SEC or United Kingdom rules, criminal charges, or

any material related to the fund’s appointed service providers. While SEC 

has not conducted such inspections/reviews to date, CIMA indicated that it 

has provided substantial assistance to SEC over the years and recently

facilitated SEC’s conduct of interviews in the Cayman Islands relevant to a 

current SEC investigation. 

In addition, CIMA officials said that captive insurance companies 

organized in the Cayman Islands must meet certain requirements, such as 

submitting a sound business plan, revealing beneficial ownership under 

KYC rules, and identifying third-party administrators and actuaries. 

Applicants first find an insurance manager in the Cayman Islands or 

establish and staff a principal office in the Cayman Islands. Once the entity

is licensed, the manager provides audited annual financial statements (an 

interim report if the next annual audit is longer than 12 months away) and 

other supervisory returns. CIMA officials said that they meet with each 

company and the insurance manager every 18 to 24 months. 

Finally, CIMA requires audits of its regulated entities to be submitted 

within a prescribed time frame, and although the Cayman Islands has no 

direct taxation, CIMA officials said that if an auditor saw a clear criminal 

violation of another nation’s tax laws, CIMA would expect that to be in the 

auditor’s report and would take it into account in any invocation of its 

regulatory powers. Further, if at the licensing stage there are any concerns

or lack of clarity about the proposed business activity, from a tax (or any 

other) perspective, then CIMA officials told us that CIMA would require 

the applicant to submit a professional legal opinion on the tax aspects of 

the activity.

In addition to administering regulatory safeguards, Cayman government 

officials from the Financial Secretary’s Office told us that they act to 

implement regulatory standards and close loopholes when identified. For

example, they described a previous action by the Cayman government to 

prohibit the establishment of shell banks. 

Page 48 GAO-08-778 Cayman Islands
Cayman Islands government officials and Maples and Calder

representatives stated that their role in helping the United States ensure 

compliance with U.S. tax laws is necessarily limited. While government 

officials stated that seeking to legally reduce or avoid U.S. taxes would not 

be a legitimate reason to prohibit the establishment of a company or trust 

in the Cayman Islands, if it was clear that the entity was being set up as 

part of a scheme to evade taxes or violate other U.S. laws, that activity 

would be recognized as illegitimate and would not be allowed. As a matter 

of policy, and practically, the Financial Secretary and Deputy Secretary 

stated that the Cayman Islands government cannot administer other 

nations’ tax laws and are not aware of any jurisdiction that undertakes 

such an obligation as a general matter. They told us that until a request is 

made by the United States for tax-related assistance, the Cayman Islands 

government is “neutral” and does not act for or against U.S. tax interests. 

They said that at the point that a request is made, the Cayman Islands can 

be relied upon to provide appropriate assistance. They also said that the 

Cayman Islands would not be opposed to further agreements with the 

United States regarding tax information sharing if the international norms 

and standards supported such efforts, but that there would need to be a 

clear justification for such agreements. Senior partners from Maples and 

Calder that we spoke with stated that complying with U.S. tax obligations

is the responsibility of the U.S. persons controlling the offshore entity, and 

that they require all U.S. clients to obtain onshore counsel regarding tax 

matters before they will act on their behalf. They added that they are not 

qualified to advise on U.S. tax laws nor is it their role to enforce them, just

as is the case for U.S. lawyers when it comes to the tax laws of other 

countries. 

Ugland House provides an instructive case example of the tremendous 

challenges facing the U.S. tax system in an increasingly global economy. 

Although the Maples and Calder law firm provides services that even U.S.

government-affiliated entities have found useful for international 

transactions and the Cayman Islands government has taken affirmative 

steps to meet international standards, the ability of U.S. persons to 

establish entities with relatively little expense in the Cayman Islands and 

similar jurisdictions facilitates both legal tax minimization and illegal tax 

evasion. Despite the Cayman Islands’ adherence to international standards 

and the international commerce benefits gained through U.S. activities in 

the Cayman Islands, Cayman entities nevertheless can be used to obscure

legal ownership of assets and associated income and to exploit grey areas 

of U.S. tax law to minimize U.S. tax obligations. Further, while the Cayman 

Islands government has cooperated in sharing information through 

Concluding 

Observations 

Page 49 GAO-08-778 Cayman Islands
established channels, as long as the U.S. government is chiefly reliant on

information gained from specific inquiries and self-reporting, the Cayman 

Islands and other similar jurisdictions will remain attractive locations for 

persons intent on engaging in illegal activity. 

Balancing the need to ensure compliance with our tax and other laws 

while not harming U.S. business interests and also respecting the 

sovereignty of the Cayman Islands and similar jurisdictions undoubtedly 

will be a continuing challenge for our nation. 

We provided a draft of this report to the Commissioner of Internal 

Revenue, the Secretary of the Treasury, and the Leader of Government 

Business of the Cayman Islands for review and comment. IRS and the 

Cayman Islands government provided technical comments, which we 

incorporated as appropriate. In a letter to GAO, the Cayman Islands 

Leader of Government Business expressed appreciation for the 

opportunity to review and comment on the draft report. He said that the 

report generally presents an accurate description of the Cayman Islands’ 

legal and regulatory regime and assists in clarifying the nature of activity 

that takes place in the Cayman Islands. The letter from the Cayman Islands 

Leader of Government Business can be found in appendix I.

We will send copies of this report to the Secretary of the Treasury, the 

Commissioner of Internal Revenue, and other interested parties. This 

report is available at no charge on GAO’s web site at http://www.gao.gov. 

If you or your staff have any questions, please contact me at (202)512-9110.

I can also be reached by e-mail at brostekm@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found on

the last page of this report. Key contributors to this report are listed in 

appendix II. 

Agency and Cayman 

Islands Government 

Comments 

Michael Brostek 

Director, Tax Issues 

Strategic Issues Team 

Page 50 GAO-08-778 Cayman Islands
Appendix I: Comments from the Cayman Appendix I: Comments from the Cayman Islands Government 

Islands Government 

Page 51 GAO-08-778 Cayman Islands
Appendix II: 

A

GAO Contacts and Staff 

cknowledgements 

Page 52 GAO-08-778

Appendix II: GAO Contacts and Staff 

Acknowledgements 

Michael Brostek, (202) 512-9110 or brostekm@gao.gov 

In addition to the contact person named above, David Lewis, Assistant 

Director, Perry Datwyler, S. Mike Davis, Robyn Howard, Brian James, 

Danielle Novak, Melanie Papasian, Ellen Phelps Ranen, Ellen Rominger, 

Jeffrey Schmerling, Shellee Soliday, A.J. Stephens, Jessica Thomsen, and 

Jonda VanPelt made key contributions to this report. 

Cayman Islands

GAO Contacts 

Acknowledgements 

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