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. 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. Many of the 18,857 entities registered at Ugland House are U.S.-connected. These entities most frequently involve investment funds and structured finance vehicles. Ugland House,shown in figure 2, is located at 301 South Church Street, George Town, Grand Cayman, Cayman Islands. It houses the international law firm of Maples and Calder; Maples Corporate Services Limited, a licensed trust company owned by Maples and Calder which provides registered office services to clients of Maples and Calder; and Maples Finance Limited, a licensed trust company and mutual fund administrator owned by Maples and Calder which provides fiduciary and fund administration services. 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. 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.