On February 18, 2020, the European Union Finance Ministers announced that Panama, the Seychelles, Palau and, most notably, the Cayman Islands will be blacklisted for failing to comply with fair tax governance standards. The Cayman Islands is most notable due to its relevance to fund managers and the timing with the United Kingdom’s exit from the EU. This blacklisting will prevent EU persons and entities from investing in the Cayman Islands, which will impact offshore fundraising capabilities. That said, there will be no limitations on private fund offerings as a result of this blacklisting. Offshore private funds will still be able to raise capital from EU persons, so this is certainly not a “sky is falling” scenario.

The blacklist, which began in 2017, now contains 12 jurisdictions that the EU believes have poor tax governance and do not meet the EU’s standards. It’s worth noting that most of these places have little to no financial relevance to the EU, such as Fiji, Oman, Vanuatu and Guam.

The following is a breakdown of the rationale behind the decision, broader implications and how the Cayman Islands may change this new status.

Rationale for Blacklisting

The EU believes that the funds raised in the Cayman Islands are almost solely for tax reasons and have nothing to do with a desire to invest in the islands. It likewise wanted to see greater improvements into tax transparency and information exchange. It’s also fair to note that the Cayman Islands have taken a number of steps to avoid this result.

The EU placed a deadline for the Cayman Islands to make the requisite changes. This led to a number of legislative changes that sought to address the EU’s concerns and standards. On January 31, 2020, the Cayman legislature passed the Private Funds Law and the Mutual Funds (Amendment) Law directly related to Brussels’ concerns and to close all of the issues. The law became effective on February 7. This was a few days after the EU’s deadline, which apparently was the breaking point for the finance ministers.

Based on the reforms undertaken by the Cayman Islands, and its overwhelming willingness to work with the EU, it’s evident that missing the deadline was the clear factor in the decision to blacklist. In contrast, the EU extended a similar deadline for Turkey. That deadline was originally set for December 2019, which Turkey missed and is still not sharing this information with Germany, France, the Netherlands, Belgium and Austria. Yet, Turkey was granted a year, perhaps due to other political considerations, but certainly not a favor that was lent to the Cayman Islands.

Brexit Reasons?

Given that the Cayman Islands are a British territory and the United Kingdom’s recent departure from the European Union, you may be asking, “Is this Brexit-related?” The answer is most likely yes.

For example, Markus Ferber, a member of the European Parliament had the following to say about the action: “The U.K. would be well advised to take note that EU Finance Ministers put a British Overseas Territory on the blacklist of tax havens. This sends a clear signal that the idea of turning the U.K. into a tax haven will not be acceptable to the EU.” In addition, Commissioner Valdis Dombrovskis stated that being blacklisted presents “reputational consequences” to the Cayman Islands. In other words, now that the U.K. is out, all bets are off.

Currently the EU is drafting a negotiating mandate with the U.K. which will include sharing financial information. The final version is due February 25, assuming that the EU is as strict with itself on deadlines as it was with the Cayman Islands. Is the EU simply using this as a demonstration to flexes its muscles at the U.K. as the separation continues? It certainly seems like there is a fair amount of evidence to support that motive.

Potential Impacts

For the Cayman Islands, this is likely not a permanent blacklisting, but a temporary setback. Although 12 jurisdictions are on the list, almost 30 have been added in the past with many remediating the issues and leaving the list. In fact, Bermuda, another British territory, was added and removed last year as it took steps to end its blacklisting. Although the Cayman Island government stated that it will continue working with the EU to solve this problem, as it has done in the past, removal from the list may come as late as October.

Greyline will continue to monitor this situation closely and will post an update when there are significant changes.