Global Business Issues
Many Complications
1
What being global means
• You might operate a firm in another jurisdiction:
build a factory in France.
• You might put money in another jurisdiction: most
major banks hold cash in banks in the Cayman
Islands to avoid U.S. financial regulations on short
term deposits.
• You might put non-monetary assets in another
jurisdictions: U2’s copyrights are “in” the
Netherlands.
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Reasons to operate globally
• Access to markets - 1,336,718,015 Chinese;
U.S. public procurement market is $1.1
trillion, larger than GDP of all but 13
countries
• Different tax rules - why U2 moved its music
publishing company from Ireland to the
Netherlands.
• Different non-tax legal rules - you can have a
trust in Britain but not in France.
3 3
Reasons governments worry about
you operating globally
• Tax evasion (NOT tax avoidance)
• Money laundering
• Terror finance
• Fraud
4 4
Tax evasion
• Roger the Taxpayer takes in $100,000 per year in
cash and $100,000 per year paid by credit cards
from his car wash business. His expenses are
$50,000. So he nets $150,000 from the business.
• If he reports income of $150,000 and is in a 35%
tax bracket, he has after-tax income of $97,500.
• If he puts $100,000 cash in a suitcase and takes
it a jurisdiction without a tax information exchange
agreement with the US, pays the business
expenses with some of the credit card receipts,
and reports income of $50,000, he nets $32,500
+ $100,000 illegally stashed overseas.
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Money Laundering
 Presenting dirty money through the banking
system to “clean” it.
 Dirty money: money obtained by illegal
means (drugs, extortion, blackmail, tax
evasion).
 Most dirty money starts as / is converted to
cash.
 3 stages of money laundering
• Placement
• Layering
• Integration
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Anti-Money Laundering (AML)
• Compliance officers
– Expansion of AML compliance from banks to car
dealers, jewelry stores, etc.
• Governments put burden on businesses to
identify potentially dirty money
– Must report suspicious transactions
– Refuse suspicious transactions
– Cooperate in tracking and seizing dirty money
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Cayman AML laws
 Proceeds of Crime Law (POCL) 2008
 Allows actions based on “criminal lifestyle”
 Civil proceedings
 Asset freezing powers
 “reasonable grounds” for suspected money
laundering is enough to trigger additional
reporting requirements
 Terrorism Law
 Misuse of Drugs law
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 Cayman AML regs require that Financial Service
Providers have AML policies, procedures and
practices as follows:
• Identification of clients procedures
• Record keeping procedures
• Internal reporting procedures
• Training procedures
•
Recently revised to accommodate to comply with
FATF 40 + 9 Special recommendations.
 Failure to comply = a criminal offense; Penalty is
unlimited fine and imprisonment up to 2 years
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Typical Business AML Policy
 New Business
 Account Opening
 Copy passports
 Understanding of the
 Training procedures
 Orientation
 Annual refresher
 Risk Based approach/Risk
relationship
profiling
 Source of funds
 Risk rating for all
customers
 Source of wealth
 Monitoring of accounts
 Risk assessment of
customer
 documentation of
process
 Transactions monitoring
 clear ownership of
 review of transactions
process (who owns it)
 periodic review of
 audit evidence of
customers
process (make records)
 Reporting procedures

Large Transaction
 Internal
Reports
 External
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 11Record keeping
Fraud: Madoff Scam
• Created infrastructure that appeared to
have trades, but did not.
• Client losses of $65bn+ ($20bn)
• 150 year sentence
• Red flags
– Acted as own broker
– High, stable returns
– Implausible returns given market and
size of investments ($13 bn)
– Accounting firm was 3 person firm with
just 1 accountant
– No independent custodian
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Offshore Financial Centers
Global Competition
Focus on Cayman Islands
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Offshore Financial Centers
•
What do they do?
• Provide incorporation and back office services
•
•
•
•
Why have they grown?
Avoid some taxes
Avoid some “excessive” regulations
Provide financial services (accountants,
lawyers, trustees, etc.) at lower cost
Confidentiality
•
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Quality jurisdictions
• Have adequate regulatory infrastructure
– May not look like US
• Membership in international organizations
– IOSCO (International Organization of Securities
Commissions)
• Whitelists / blacklists
• Compliance with international best practices
1515
Business trusts
Protector
Trustee
Control
Settlor
Control
Company
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Beneficiary
Creating complex structures to
facilitate finance
IP Co.
Real Estate
Co.
Equipment
Co.
Brazil Co.
Operating
Co.
Trading Co.
U.S. Co.
China Co.
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Example: Owning Hotels in
China
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Financing
• Primarily equity and debt
• Complex arrangements reflect laws,
international currency issues, a desire to
control organizations in various ways
• Many choices possible
• Voluntary agreements
Debt, equity & more complex things
• Stock – claim on share of future earnings
and of assets
• Debt instruments – claim to be repaid
principal and paid interest
• More complex:
–
–
–
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Financing a particular asset (e.g. airplane)
Financing a particular project (e.g. opening a
mine)
Financing to meet particular investors’ needs
(e.g. Islamic finance)
Debt
• Create security interests
Natural Resource Co.
Ship 1
Ship 2
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Refinery 1 Drilling
Equip. 1
Refinery Drilling
2
Equip. 2
with priority against
particular assets
• Access to Eurodollar
markets
• Allow investors to choose
type of risks to which they
are exposed
• Debt instruments typically
contain detailed
covenants; equity does
not.
Foreign investors’ needs
Capital flows
around the world
seeking best
opportunities
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Stock markets’ roles
• Aggregators of capital
• Trading
• Investment quality signaling
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CSX – Listing Exchange
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Taxes, 3 Transactions + 3 OFCs
• International tax issues
• 3 transactions that often involve OFCs
– Hedge Funds
– Captive Insurance
– Asset Securitization
• 3 OFCs: The Good, The Bad, and the Ugly
– Cayman Islands
– Antigua
– Netherlands Antilles
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Income Taxation is
Based on
Residence
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or
Source
Worldwide Taxation – a system that taxes foreignsource income to some extent.
•Resident individuals are taxed on worldwide income
regardless of where income is from.
•Double taxation is reduced through a foreign tax credit.
•Deferral is a problem because of the separate entity
status of corporations.
Territorial Taxation – a system that exempts from tax
most foreign-source income.
• Double taxation is not a problem because foreignsource income is tax-exempt.
• Deferral is not a problem for the same reason.
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Who Does the U.S. Tax?
U.S.
Persons
United
States
Foreign
Persons
Question of residency
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U.S.
Country X
Shareholders
USCo
ForCo
USCo is taxed by US on its US-Source income.
USCo does not receive dividends from its subsidiary, ForCo, so ForCo’s
earnings are not taxed by the US.
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ForCo
is taxed on its Country X-source income by Country X.
• Usually, double taxation occurs
because residence overlaps source
–Example: Foreign person buys stock of
U.S. corporation that earns dividend
• Foreign person is liable for United States
source tax on dividend
• Foreign person may be liable for residence tax
in the foreign jurisdiction
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• Foreign Tax Credits – permits a credit against U.S.
taxes for taxes paid to foreign taxing jurisdiction.
• Income Tax Treaties – allocate the right to tax as
between the treaty countries and provide reduced
rates of taxation for double-taxed income.
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Punish companies by the highest corporate profits rate
in the world—they keep cash out of the U.S.
What is “offshore”?
 Relational concept – implies existence of
onshore jurisdiction
 Regulatory arbitrage opportunities
 Cigars vs. corporations
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Purchase of Cuban cigar outside US violates US law
Import of Cuban cigar into US violates US law
Creation of corporation outside US does not violate
US law
Privacy issues
• Why do people want financial privacy?
• Tournier vs. The National and Provincial
and Union Bank of England (1924) 1
K.B. 461 (Court of Appeal 1923).
• Foreign nationals often do not want to
report assets / income to the U.S.
government.
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Forced Heirship
• A portion of a person’s
estate MUST be given to
specific relatives named in
law.
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– France: an only child MUST
get 50% of parent’s estate; 2
children share 66%, 3 or
more share 75%.
– Marital real estate MUST go
to spouse for life; then to
children.
Political oppression
• Fear that if
government
identifies
opponents’
wealth, it may
seek to
confiscate it.
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Crime
• Revealing
assets may
make your
family
vulnerable.
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Corruption
• If investors are
known to be
wealthy, can
attract “shake
downs.”
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Jurisdictional competition:
Key economic ideas
• Competition among jurisdictions produces
innovation, lower prices, better service, etc. just
as competition among firms does.
• Governments compete for wealth-creating
activities.
• Laws affect the economics of where a business
locates.
• Rearranging bundles of legal rights can increase
(or decrease) the value of the rights.
• Taxes play a large role in structuring global
transactions.
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Master-Feeder structure
4040
Offshore vs. onshore
• Investors from different jurisdictions have different
tax regimes in home countries.
– Locating the fund in a no-tax jurisdiction for
flexibility
• Costs of securities statutes significant; benefits
vary across individuals.
– Non-retail investor products
• “Master-feeder” groups of parallel funds in
different jurisdictions, with same management, to
provide different tax structures for investors.
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Tale of 3 OFCs
Curaçao
Antigua
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Cayman
OFCs’ role
• Post WWII growth
• Clustering of corporate, accounting, and legal
services + with a strong legal system
• Legal protections for privacy
• Competition to onshore jurisdictions
– ‘Product’ innovation in law
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Curaçao: failure to adapt
4444
• May 1940 – Germany invades the Netherlands
– Netherlands’ companies move to Curacao
• Restructuring of the Kingdom after WW2
• 1960 – 2nd highest GDP per capita in Caribbean
• 1954 – US-Netherlands tax treaty extension
• “Antilles Sandwich” structures
– “You just go down there and they have a package waiting for you –
sign here and you are in business”
– Expansion into real estate and other areas
– 1975 – most important OFC
• Pushback from Treasury, law enforcement – “treaty shopping”
• 1987: US cancels treaty
• End of the line
4545
Antigua: poor quality institutions
• 90,000 population,
• “Land of Sea and Sun”
• Main export: bananas
• 18 international banks by 2008
• Sir Allen Stanford's “Stanford International
Bank”
• “a man who likes to throw his weight around”
• largest private sector employer in Antigua
• sponsor of Antigua Sailing Week (largest
sailing regatta in the Caribbean),
• multimillion dollar investment in cricket
through the Twenty20 Tournament Close ties
to Antigua Labor Party
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Stanford International Bank / Group
• 2000-2004: SIB assets grew from $1bn to
$8bn
• 2006: Allen made “Knight Commander of the
Most Distinguished Order of the Nation
(Antigua and Barbuda)”
• 2008: SIB claims $50bn in assets
• “I have never in my eight years here seen a
letter from a customer of the bank complaining
they had not been paid,” he added. “We are
not turning a blind eye, but at the same time
we cannot allow the blogosphere and press
articles to distract us. We have to make sure
that when you have a good client that we have
never found wanting, we have to stay the
course.”
– Leroy King, head of Financial Services
Regulatory Commission in early 2009
4747
• Independent financial analyst report questioned use of CAS
Hewlett for audit rather than a major firm
• After death of CAS Hewlett CEO in Jan. 2009: “the business
has been in limbo. Employees of the firm say the day to day
operations are being handled by Mr. Hewlett’s daughter,
Celia Hewlett, who is based in Enfield in London, but the
overarching impression is one of confusion over who is
really in charge and what the future holds.”
Financial Times
4848
Unraveling
• 2008: employment discrimination lawsuit in Texas
by employees including many problematic
allegations about unethical and illegal actions
• July 2008 SEC subpoenaed plaintiffs
• Discovers “fractal” nature of Stanford companies
4949
 Stanford Group Company, Stanford
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5050
Agency Co. (US)
Stanford Trust Co, Baton Rouge, NZ,
Columbia
Stanford Fiduciary Investor Services,
Houston, Miami, San Antonio
Stanford Coin and Bullion, Houston
Stanford International Consulting,
Baltimore.
Stanford International Bank (Antigua)
Stanford Venture Capital Holdings,
Houston
Bank of Antigua
Stanford Development Corporation
Global Management Complex
Stanford Caribbean Investments (St.
Croix)
Stanford Group Antigua
Stanford Group Aruba
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Stanford Group Suisse
Stanford Bolsa y Banca (Columbia)
Stanford Group Ecuador
Stanford Casa de Vaolores
Stanford Trust Company
Administradora de Fondos y
Fideicomisos, SA
Stanford Fondos (Mexico)
Stanford Group Mexico
Stanford Bank Panama
Stanford Casa de Valores (Panama)
Stanford Group Peru
Stanford Bank Venezuela
Stanford Group Venezuela Asesores de
Inversion
Stanford Trust Co. LTD (Antigua)
Stanford Capital Management
Fraud / Ponzi scheme
• “[it is a fraud] of shocking
magnitude that has spread its
tentacles throughout the world.”
– Rose Romero, SEC
• 2009:
– some Stanford Antigua entities put
into receivership by Antiguan
regulators
– Eastern Caribbean Central Bank
took control of Bank of Antigua
• “Sir” Allen’s convicted and
sentenced to prison in U.S.
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Cayman
• Avoiding the Curaçao problem – need to grow,
need to be flexible
• Avoiding the Antigua problem – need to avoid
frauds, need to provide effective governance /
brand management
• Proving that the value added exceeds
transactions costs of doing business offshore
• Fiscal stability issues – Miller Commission
(James Miller, David Shaw, Kenneth Jefferson)
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Cayman as a jurisdiction
• Institutional strength - CIMA, top banks and
accounting firms, high quality law firms, CSX
• Strong reputation - membership in organizations
such as IOSCO
• Up to date and efficient legislation: specialized
insurance, banking, funds, companies laws
• Political stability and fiscal sustainability
5353
Cayman Development
 Cayman Islands, 1960s

241 sq. miles, rooms for 229 tourists in 1962,
mosquito infested
 Today
More than 500 banks, including “nearly all the
world’s top 50” banks
 Deposits > US$500 billion
 GDP per capita: US$32,300, higher than UK


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Cayman is #11 worldwide, 8 other offshore
jurisdictions are ahead of Cayman, together with
the U.S. and Norway.
Cayman issues
• Is Cayman fiscally sustainable?
• Is the Cayman-UK relationship stable?
• What will the US/UK/EU/OECD/China do?
• Can offshore jurisdictions survive?
• What’s the next key transaction for Cayman /
OFCs?
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