Cayman Islands: Business and Tax Advantages Attract U.S. Persons and Enforcement Challenges Exist
Published: 2008-07-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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. tax-exempt 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.

section_title: Letter
paragraphs: 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; (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,  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) 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  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 E- supplement to this report, CAYMAN ISLANDS: Review of Cayman Islands  and U.S. Laws Applicable to U.S. Persons’ Financial Activity in the Cayman  Islands. 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.
subsections: section_title: Background
paragraphs: 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. 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.
subsections: section_title: Types of Financial Activity Conducted in the Cayman Islands
paragraphs: 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  of December 2007 was from institutions rather than individual investors.   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 funds 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, private- industry 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. 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  transforming them into bonds or other debt securities. 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. 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.
section_title: U.S. Persons Are Frequently Associated with Ugland House Registered Entities
paragraphs: 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.
subsections: section_title: Maples and Calder, an International Law Firm and Provider of Registered Office Services, Is the Only Occupant of Ugland House
paragraphs: 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. Maples business is to facilitate Cayman Islands- based 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.
Maples provides registered office services to companies, using the Ugland  House address. A registered office 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.
Cayman Islands law requires company service providers that establish  entities and provide registered office services to adhere to specific Anti- Money Laundering (AML) and Know-Your-Customer (KYC) requirements.  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. 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  on the entities they register. 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.
section_title: 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.
paragraphs: 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. 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.
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.
section_title: Ugland House Registered Entities Often Involve Investment and Structured Finance Business
paragraphs: According to Maples and Calder partners, their business primarily involves  two areas: investment funds and structured finance.  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 funds  (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.
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-fund- related 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.”
section_title: 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
paragraphs: Maples and Calder partners estimated that 5 percent of the overall number  of Ugland House entities are wholly owned by U.S. persons. 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.
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.
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.
section_title: Ugland House Investment Entities Are Hedge and Private-Equity Funds, And U.S. Investors Are Largely Institutional, such as University Endowments and Pension Funds
paragraphs: 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 private- equity 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  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.
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  services to the portfolio companies. According to officials from OPIC,  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, private- equity funds are usually formed as limited partnerships rather than as  corporations.
section_title: Ugland House Structured Finance Entities Are Largely Off-Balance-Sheet Special Purpose Vehicles Involving Securitization, Asset Transfer, or Risk Isolation
paragraphs: 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), 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 asset- backed 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  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 bank- sponsored 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.
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  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.
Maples and Calder partners said that the Ex-Im Bank had facilitated  aircraft sales involving SPVs registered at the Ugland House address. Ex- Im 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  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. Ex- Im 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.
section_title: Other Ugland-Registered Entities Include Corporate Subsidiaries, Holding Companies, and Trusts
paragraphs: 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.  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. 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  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.
section_title: Several Factors Influence U.S. Taxpayers’ Decisions to Conduct Financial Activity in the Cayman Islands
paragraphs: 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.
subsections: section_title: 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
paragraphs: 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.
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 anti- money laundering and terrorist-financing activities. IRS officials cited the  Cayman Islands’ reputation for regulatory sophistication as a potential  factor in attracting legal financial activity from the United States.
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 service- providers’ 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. 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  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-Im- backed 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.
section_title: Some U.S. Persons Can Defer or Minimize Tax by Carrying Out Financial Activity in the Cayman Islands
paragraphs: 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,  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,  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.
In other cases, persons may conduct financial activity in jurisdictions  without a corporate income tax like the Cayman Islands to avoid entity- level 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.- 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.  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. tax- exempt 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  opening bid in an extended negotiation with IRS to determine a  corporation’s tax liability.
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. In particular, the report found that two types of  activities among related parties—cost-sharing arrangements and services  transactions—were key sources of transfer-pricing abuse. 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.
section_title: Despite Cayman Regulatory Safeguards, Some U.S. Persons Conduct Financial Activity in the Cayman Islands to Hide Illegal Activity from U.S. Authorities
paragraphs: 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, 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  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. 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  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. 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.
section_title: 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
paragraphs: Individual U.S. taxpayers and corporations generally are required to self- report 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.
subsections: section_title: Although U.S. Taxpayers Report Some Cayman Islands Activities to U.S. Regulators, Overall Information Reporting Is Limited
paragraphs: 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, 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.
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).
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.
section_title: U.S. Regulators Can Formally Request Information Regarding U.S. Persons’ Cayman Activities
paragraphs: 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).
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  or for ownership records of corporations . 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.
section_title: Some Financial Intelligence Information on U.S. Persons’ Cayman Activities Is Available to U.S. Regulators
paragraphs: 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.
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).
section_title: Some Other Information Sharing also Occurs between U.S. and Cayman Islands Regulators
paragraphs: 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  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.
section_title: U.S. and Cayman Officials Have Taken Steps to Address Illegal Activity, but Enforcement Challenges Exist
paragraphs: 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.
subsections: section_title: U.S. Agencies Have Uncovered Illegal Activities with Cayman Islands Connections
paragraphs: 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.
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  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. 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  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.  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  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,  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  Islands has been cooperative in sharing information and SEC reported that  several of the SARs shared have led to U.S. investigations.
section_title: Offshore Activities Pose Several Enforcement Challenges
paragraphs: IRS and DOJ officials stated that particular aspects of offshore activity  present challenges related to oversight and enforcement. 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.  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 non- U.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  necessary information. 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 asset- sharing with the United States since the inception of the MLAT.
section_title: The Cayman Islands Government Has Developed Safeguards to Prevent and Detect Illegal Activity
paragraphs: 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  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 consolidated- supervision 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. 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  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.
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.
section_title: Concluding Observations
paragraphs: 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  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.
section_title: Agency and Cayman Islands Government Comments
paragraphs: 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.
section_title: Appendix I: Comments from the Cayman Islands Government
section_title: Appendix II: GAO Contacts and Staff Acknowledgements
subsections: section_title: Acknowledgements
paragraphs: 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.