Posted on Mar 23, 2022
Even if the EU were unable to agree on painful sanctions against Russia’s lucrative energy sector, its unprecedented onslaught of asset freezes and financial injunctions has refocused attention on the legal and illicit money flows coming out of Russia.
In particular, the country’s numerous oligarchs – many of whom have close ties to President Vladmir Putin – have been the target of such actions, which fall into a broader category of European attempts to crack down on tax havens in recent years.
Revelations such as the Panama and Pandora Papers have sharpened scrutiny on places like the Cayman Islands, which was recently named as the top destination for hiding illegal assets by the Tax Justice Network (TJN). Although the Caymans appear to be towing the party line when it comes to sanctioning Russia, the labyrinthine infrastructure of the jurisdiction’s financial sector makes it easy to obscure assets, defraud investors and launder money. The ongoing saga involving the Caymans-based Port Fund and its disgruntled limited partners is a particularly striking case in point, which highlights the archipelago’s unsavoury financial behaviour in no uncertain terms and lays bare the need for tighter regulations going forwards.
Oligarch asset freeze ignites paper trail to tax havens.
Dependent as it is for 40% of its energy needs on Russian oil, the EU was unable to come to an agreement about limiting its importation of the fuel source in the wake of the Ukrainian invasion. Nonetheless, it is still taking a hard-line approach to a multitude of Russian oligarchs, many of whom are currently under investigation by the International Consortium of Investigative Journalists (ICIJ). At the time of writing, it’s believed that more than 680 individuals and over 50 entities are being sanctioned by the EU – and the list is growing by the day.
The Cayman Islands are following suit, just as they did in 2014 after Russia’s annexation of Crimea. Last month, the Cayman Islands Monetary Authority published a list of new Russian asset holders who will feel the financial squeeze, though it’s thought that those named represent just the tip of the iceberg. Although a 2016 analysis did not find any direct transfers from Russia to the Caymans, the nature of the jurisdiction’s fiscal system makes it virtually impossible to trace funds to their origin. That’s particularly true when the cash travels through other countries beforehand, with a common path thought to encompass Cyprus, the British Virgin Islands and the Caymans en route to the USA and the UK.
Caymans chicanery epitomised by Port Fund scandal.
It’s hardly a secret that the Caymans’ structures were set up to cater to those who wish to squirrel away assets and avoid legal probes. The long-unfolding stand-off between the Kuwait Ports Authority (KPA) and the Kuwaiti Public Institution for Social Security (PFISS) on one side and the Caymans-based international investment vehicle The Port Fund (TPF) on the other is, perhaps, an illustrative microcosm of the archipelago’s wider malaise. The case experienced an historic moment late last year when the Grand Court of the Cayman Islands ruled, for the first time, that the KPA and PFISS had grounds to bring litigation against TPF and its one-time manager, Mark Williams.
TPF’s track record was patchy at best anyway, losing money on three out of five ventures, but it’s alleged that they devalued the profits from one of their only two successful investments. The sale of airport infrastructure project Clark Global City was priced at around $1 billion by local authorities in the Philippines, but TPF reported the deal at $496 million and distributed just $305 million to their partners. The discrepancy between all three figures has never been acknowledged.
Meanwhile, it’s not just TPF who have come under fire, but the wider infrastructure which supports and enables this wrongdoing. The landmark Court ruling has opened the floodgates to further litigation: the state of Qatar and the Gulf Investment Corporation (GIC) are now going after TPF itself, while Qatar is also suing Cayman law firm Walkers, an alleged systemic enabler. Walkers was previously accused of indirectly helping one of the Fund’s stakeholders – KGL Investment Company – to embezzle hundreds of millions of dollars through negligence.
Integrity of Islands under fresh aspersions.
It’s noteworthy that the EU placed the Caymans on its list of countries with strategic deficiencies in their Anti-Money Laundering regimes a mere three days before Russia’s invasion of Ukraine. That timing proved prophetic, for now the archipelago will likely come under even closer scrutiny from EU authorities. And while critics have in the past alleged that Brussels, as well as London, have been too soft on the Caymans, the context of the world-shifting war in Ukraine might serve to convince Brussels to investigate the islands in earnest.
The self-governing territory has always been keen to promote itself tax-free status as an entirely legal means of establishing and maintaining its role as an “international finance centre”, the Port Fund controversy and the ensuing legal process are tarnishing its reputation all over again. These developments are only likely to be exacerbated by the connections with Russian oligarchs which will surely become more apparent and intelligible as time – and the war in Ukraine – marches on, spelling troubled waters ahead for this Caribbean paradise.
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