FINANCIAL TWO BUSINESS FEATURES SERVICES IN THE CAYMAN ISLANDS

T W O B U S I N E S S F E AT U R E S FINANCIAL SERVICES IN THE CAYMAN ISLANDS INVESTMENTS WEALTH MANAGEMENT Resources in the Cayman Islands It...
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T W O B U S I N E S S F E AT U R E S

FINANCIAL

SERVICES IN THE CAYMAN ISLANDS

INVESTMENTS

WEALTH

MANAGEMENT Resources in the Cayman Islands

It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have it, it requires ten times as much skill to keep it. —Ralph Waldo Emerson

By David R. Legge

P

rivate Banking may have originated in

ancient times in Babylon where the first references to the concept date back to

2000 BC. Centuries later, the Greeks commonly engaged in private banking, followed by the Romans, and, of course, the Swiss who exemplify the modernday model. However, no bank brand, Swiss or otherwise, can rival the allure and the regard of Coutts, firmly ensconced in Grand Cayman but with its roots going back to 1692 when its founders, John Campbell and Thomas Coutts, established the enterprise (known

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originally as Campbells Bank) in the Strand, London, under a sign of the Three Crowns. Today the Coutts logo still bears Three Crowns which is appropriate, since Coutts is widely known as the “Queen’s Bank”—the bank that looks after the financial needs of the British Royal Family. In fact, a Coutts ATM resides in the basement of Buckingham Palace for the convenience of the Royal Family and staff. In Cayman, we sat down with David Foster, the gentlemanly managing director of Coutts, for an initial education on private banking and wealth management before we started our interview process for this article with other professionals at other banks. Foster explained that Private Banking traditionally meant the private ownership of banks by a group of partners who came together for mutual benefit. “Because the partners risked their own money in making loans and were keen to be associated with clients of substance, Private Banks tended to deal only with clients of above-average net worth,” Foster said. While private ownership of banks today is somewhat rare, the term Private Banking has come to mean the delivery of financial services to customers whose needs are both sophisticated and constantly changing.

“Old money,” if you will, is increasingly giving way to newer wealth, and today’s Private Bankers and wealth managers might deal with clients ranging from rock stars and celebrities to software entrepreneurs—in other words, the rich and famous who travel on private jets and relax on luxury yachts. The majority of Coutts clients will have assets with the bank of between $2 million and $100 million, and the bank is able to deal with all aspects of a client’s balance sheet. “We are conservative in our inhouse investment advice,” Foster said, “blending our strong heritage with innovation, and we are also able to leverage off our significant research capability to help work with clients who want to direct their own investments.” Interestingly, the bank has established a supporting structure called the Coutts Wealth Institute, which Foster described as a “meeting place for clients to exchange information, share experiences, and seek advice on managing their wealth, through family business, philanthropy, and next-generation services.” The Institute has conducted a number of family business forums which help clients and potential clients benefit from the learning experiences of other family business

owners. Other elements of the Institute include philanthropy advisory services and educational resources that focus on managing wealth across generations. “We provide support on almost every aspect of learning about and managing wealth and, most importantly, we pay great attention to its inevitable responsibilities,” said Foster. Foster advised us to think of Private Banking and wealth management this way: “Money talks . . . Wealth whispers.” — Scotiabank, located in downtown George Town, attends to its wealthy clients through its Scotia Private Client Group, tucked discreetly away on the third floor, removed from the hubbub of its first-floor retail operations. Bruce John, who set up the wealth management division about four years ago, explains that the goal was “to integrate a team of experts under one roof. We don’t have ‘Chinese walls’ here,” he said. “You can think of us as a ‘concierge service.’ Our client has one point of contact, and that person will look after all their banking needs for them.” A typical candidate for the Private Banking Group, said John, would have a net worth of at least $1 million or more, what he calls the “mass affluent.” In Cayman, he explained, GRAND CAYMAN 87

there are really three tiers of wealth: the “über-wealthy,” meaning the billionaire class, the “mass wealthy,” and then the lower tier. In Cayman, John estimates there are only a handful of the “über-wealthy,” perhaps a halfdozen or so. There are, however, hundreds in the middle range. Typically, a high-net-worth client would set up an initial meeting with a Scotia Private Banker who would describe the services of the bank and conduct a thorough assessment of the client’s financial situation.

“We ask questions about their investment objectives, their retirement planning, and their estate planning. We are particularly interested in their appetites for risk—in other words, how would they react if the value of their portfolio dropped by 5 percent? By 10 percent? Would they sell immediately?” After the initial visit, the Scotia Private Banker will bring in investment advisors, who will design an individualized investment portfolio that meets the client’s specific needs.

In a time when investors are overwhelmed by the vast amount of conflicting information available, our responsibility at BIAS is to bring clarity to our clients so that they can achieve their financial objectives. Since 1991 BIAS has been managing assets for high net worth individuals, trusts, charities and captive insurance companies. Please contact us at [email protected]

Importantly, these advisors have access to Scotia’s extensive research resources in Toronto as well as research professionals who operate independently of the bank. Clients have the option of either managing their own portfolios, partnering with the bank to manage their resources, or turning over the entire process to the Scotia team, which has direct access, for example, to the top fund managers in the United States. Scotia’s Private Banking Group also provides clients with Trust and Estate services. Bruce John emphasizes that Scotiabank is an excellent choice for the high-net-worth individual because it is highly regarded, conservative, well-capitalized, and has a global footprint with more than 2000 branches in 50 countries. — David Chamalian, who heads up wealth management services at HSBC in Grand Cayman, is enlightening, encouraging, and comforting—all welcome qualities when the topic of conversation is managing money for the well-to-do. “My job here is not to be judgmental,” he said. “My position is to be a professional wealth manager and help you make rational, rather than emotional, decisions about your finances and your financial plan.” Chamalian works within two banking “propositions” at HSBC: Advance and Premier. To qualify for the Advance Proposition, a client must have an annual salary of US$50,000. Generally, Chamalian says, Advance clients do not possess large pools of funds, but, precisely because of that, “they often are in need of the planning process because they don’t have as much to fall back on.” The Premier Proposition requires a minimum deposit of US$120,000 (in the form of cash, investments, or term deposits). The wealth of Premier clients, he says, can vary greatly.

BIAS (Cayman) Ltd. • Governors Square, Suite 5-203 • Grand Cayman Tel: (345) 943-0003 • www.bias.ky

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An initial meeting, called a “Discovery Meeting,” usually consists of the potential client or couple, Chamalian, and a Premier Relationship Manager. Chamalian handles the wealth management issues, while the Relationship Manager addresses such matters as credit needs, banking needs, international services, and other offerings of HSBC. “At that meeting, I try to elicit how a client or a couple is planning for their future financial needs. Do they have a 5-, 10-, or 20-year plan? Age is a big part of it. A couple in their 30s with a baby may have different needs from a 65-year-old. I also want to know what drives them, what motivates them; it’s essential that I gain an understanding of their tolerance for risk. “I always ask them, ‘When you put your head on the pillow at night, before you fall asleep, are you going to be able to live the next morning with the fact that the market has taken a turn?’” To aid in this discovery process, clients are asked to fill out a questionnaire to give some concreteness to the process. Chamalian will often politely leave the room for 5 to 10 minutes during this process, especially if he is meeting with a couple so that they can discuss their issues in private. One or two additional follow-up meetings are usually required as Chamalian and his team construct a strategic financial plan. Ultimately, Chamalian is likely to present to a client a highly individualized investment and management program that might include: • Fixed Deposit Accounts (for an investor seeking a fixed interest payment at maturity, and high liquidity) • Bond Funds (for conservative investors who may elect to receive a steady stream of income) • World Selection Funds (suitable for conservative to aggressive GRAND CAYMAN 89

investors who would benefit from access to global markets through HSBC professionals worldwide) • Equity Funds (for moderate to aggressive investors) • Alternative Funds (for the investor with a cutting-edge investment management style) In other words, said Chamalian, “the solutions we offer as a bank are extremely diverse. With our global network we are able to reach a large number of

markets and asset classes around the world. Whether it is stocks or bonds or commodities or real estate or currencies, we’re knowledgeable and involved. “My job is to hone this huge universe of offerings down to what would benefit the client most.” — At Butterfield, the foundation of a successful relationship with their high-net-worth customers has always been based on personal service and a thorough understanding of their

clients’ financial goals, expectations, and needs. Sheree Ebanks, a director of the Bank, explains that Butterfield offers a holistic package of services to its clientele, including Private Banking, Trust Services, and Asset Management Services. The Bank also can provide Will and Estate planning, global custody services (Butterfield is a “qualified intermediary” and can act as custodian of U.S. assets), and treasury services (to assist clients in managing for-

Investing

eign exchange interest rate risk for their personal and business interests). Often times clients are introduced to the array of Butterfield’s wealth management services through their Personal Relationship Manager within the Private Bank, where financial advisers will personally take the time to understand a client’s investment objectives, time horizon, risk tolerance, income and liquidity requirements and then work closely with them to develop a highly personalized investment strategy, or

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assist with overall estate, credit, and asset management strategies. Private Banking is often a conduit to Butterfield’s trust and asset management services, said Ms. Ebanks. “It is usually the first point of contact that our potential highnet-worth clientele makes with the Bank. “We are able to offer discretionary investment management within the Asset Management division with dedicated portfolio managers located in Cayman, unlike many of our competing firms,” she said. “We also take our fiduciary responsibilities very seriously, and our trust managers will work with the individuals to ensure that the structure, banking arrangements, and asset management comply with their wishes and are in the best interest of the beneficiaries of the trust. “Many of our clients are ultrahigh-worth individuals or families who are often best served by our setting up a ‘Family Office’ that can address all of their financial needs,” she said. Ms. Ebanks, who joined Butterfield in 1980 (“I grew up here,” she laughs), points out that many offshore clients look to Butterfield for reasons of geographic or political diversification, asset protection, and Cayman’s no-forced-heirship regime. Many wealthy individuals, she said, especially those with net worths in excess of $5 million, opt to work with Butterfield to set up their own Private Trust Company. Also in demand, she said, are Cayman discretionary trusts and especially the flexible “STAR Trust” (Special Trusts Alternative Regime) which continue to attract wealthy individuals from all over the world. — In the Cayman Islands, Cayman National, is widely (and justly) thought of as “Cayman’s Bank.” For more than 35 years, this publicly traded and largely Cayman-owned insti90

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tution has been serving the needs of its local clientele while, at the same time, expanding and extending its reach and services into the international community with operations in the Isle of Man, Panama, Dubai, and Turks & Caicos Islands. Cayman National Corporation Ltd. is publicly owned—its shares trade on the Cayman Islands Stock Exchange (CNC: KY)—and under agreement with Government, control of the enterprise must remain in the Cayman Islands with a Caymanian majority on the Board of Directors. In 2010, Cayman National Bank was recognized as the “Top Employer in the Cayman Islands,” again underscoring its local roots and the dedication of its staff. Through its Premier Banking program, Cayman National offers specialized banking services to its high-net-worth customers. To better custom-tailor its products and services, the bank has separate delivery channels for its domestic and international customers. The domestic segment is managed by Cayman National Vice President Judy Watler (a 30-plus year veteran of the bank), who is assisted by Account Officer James G. Ebanks. Meeting either in their offices at the Cayman National head office on Elgin Avenue in George Town or at the client’s place of business, the domestic team takes a “holistic approach” to examining a client’s financial needs and can tailor products and services to assist clients in meeting their financial objectives. The International Premier Banking group, located on the second floor of Cayman National’s offices at Camana Bay, is headed up by Senior Vice President Kim Remizowski, who is complemented by a dedicated support team which includes Heather Tatum and Rosie Ebanks. Collectively the International Premier team is well-versed in interGRAND CAYMAN 91

national banking and offers dedicated customer service to its diverse client base, which includes high-networth individuals or corporate structures, such as Cayman Islands exempted companies and limited partnerships, hedge funds, private equity funds, trusts, SPCs, and investment managers. Working with such a diverse client base requires Cayman National’s Domestic and International Bankers to work closely with seasoned professionals

such as attorneys, accountants, trustees, and other specialized financial service providers either domiciled in Cayman or other relevant jurisdictions. Cayman National’s own representative offices located in Panama and Dubai also work closely with the Cayman team, as do other Cayman National Group entities, namely Cayman National Trust Co. Ltd., Cayman National Fund Services Ltd., and Cayman National Securities Ltd.

TAXES

What You Should Know About FATCA By William P. Davis, JD

I

n February 2007, the U.S. Congress introduced the Stop Haven Abuse

Act to deter the use of offshore tax havens for U.S. tax abuse. The Abuse Act was changed to the Foreign Account Tax Compliance Act

(FATCA) in March 2010, when the FATCA legislation was signed into law by U.S. President Barack Obama as part of the Hiring Incentives to Restore Employment (HIRE) Act. The intent of the Abuse Act remained the same in the FATCA bill. The FATCA provisions require withholding on payments to foreign financial institutions (FFIs) whether for the account of the FFI or its customers, unless the FFI obtains information on its account holders and reports information on “United States accounts” to the IRS. Adding to the Abuse Act, FATCA 1) enhanced the mandatory disclosure of U.S. customers by FFIs; 2) expanded the statute of limitations from three to six years; 3) increased penalties from 20 percent to 40 percent for individuals and entities; and 4) imposed rebuttable presumptions to ease the burden on the U.S. Government in prosecuting tax cases involving offshore non-compliance.

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U.S. taxpayers will quickly realize that costs involved with reporting their foreign investments to the IRS will increase as additional disclosures have to be made.

Beginning in January 2013, FATCA requires offshore banks and other FFIs with U.S. customers to disclose detailed information regarding their U.S. taxpayer customers having assets of at least $50,000 in the FFIs. Failure to disclose the information to the IRS will result in the U.S. payer of income to the FFIs withholding a 30 percent tax on certain U.S. source income. This legislation, enacted to prevent offshore tax abuses by U.S. persons, is designed to achieve the intent of the FATCA by imposing the 30 percent withholding tax on FFIs that refuse to disclose the identities of its U.S. customers. Beginning in this year, however, FATCA imposes reporting requirements to the IRS on Form 1040 for certain individuals and entities that hold specified foreign financial assets in excess of $50,000 in FFIs during that particular calendar year. This

reporting requirement for individuals will be for calendar year 2011 to be reported on U.S. income tax returns which are filed in 2012. This individual filing requirement is in addition to the requirement to file a Form TDF 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) with the U.S. Treasury Department on or before June 30th each year in which a U.S. taxpayer has $10,000 or more in an FFI account or accounts. In other words, for calendar year 2011, a U.S. taxpayer will have to report FFI accounts and certain other investments having a value in excess of $50,000 to the IRS with his or her or its U.S. income tax return AND an FBAR to the U.S. Treasury Department listing any FFI account in excess of $10,000 for the previous calendar year. In addition to the individual reporting requirements mentioned

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above is the requirement that FFIs must either agree to disclose information about their U.S. account holders and U.S. investors or be subject to statutory withholding of 30 percent on its U.S. income. Doug Shulman, the IRS Commissioner of Internal Revenue, said in a speech to OECD on June 8, 2011, about the U.S. efforts to ensure greater tax compliance in the face of globalization, that FATCA is “the most important development in international reporting in a generation.” Commissioner Shulman stated in his speech: “It (FATCA) is a big step forward in our efforts to reduce tax evasion by creating transparency and accountability in the offshore financial markets . . . FATCA provides the IRS with the tools we need to crack down on Americans hiding assets overseas.”

To avoid the 30 percent withholding requirement, a FFI must either enter into an agreement with the IRS and satisfy the requirements listed below, or satisfy one of several alternatives: • Obtain information regarding each holder of an account in the amount of $50,000 or more maintained by the institution to determine which accounts are U.S. accounts held by specified U.S. persons or a U.S.owned foreign entity. • Comply with verification and due diligence procedures prescribed by the IRS to identify U.S. accounts. • Report annually for any U.S. account, identifying information as to the specified account holder (i.e., any U.S. person other than a corporation whose stock is regu-

larly traded on an established market, or certain affiliates, or certain exempt or special corporations or entities) and any substantial owner of a U.S.-owned foreign entity. • Deduct and withhold 30 percent from certain pass-through payments made to “a recalcitrant account holder” or certain other FFIs. • Comply with IRS requests for additional information for any U.S. account maintained by the institution; and • Attempt to obtain a waiver where a foreign law would (but for a waiver) prevent the reporting of information required by these rules for any U.S. account maintained by the institution, and, if a waiver is not obtained, to close the account.

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Should the non-U.S. bank or financial institution continue to have U.S. customers or own U.S. investments, or both?

This article is meant to be a broad overview of FATCA. Most of the details of how FATCA will function have not been issued. The IRS expects to release further guidance and eventually propose Treasury Regulations. As the reader can imagine, FFIs are very concerned about the practical effects of FATCA on their business. FATCA presents a major challenge for non-U.S. financial entities with U.S. investors or owners.

There are issues of identifying U.S. customers and U.S. accounts and the treatment of withholding payments. In addition, there is widespread uncertainty concerning the question of what – if any – alternative strategic options a non-U.S. bank or nonU.S. financial institution has. The focus is, understandably, whether or not an FFI should sign the FATCA agreement with the IRS at all. There are issues surrounding the target customer group and the investment products which should be issued to them: Should the non-U.S. bank or financial institution continue to have U.S. customers or own U.S. investments, or both? U.S. taxpayers will quickly realize that costs involved with reporting their foreign investments to the IRS will increase as additional disclosures have to be made. Once the various provisions of FATCA are enacted, the penalties associated with foreign noncompliance will increase, and the statute of limitations in which the IRS can audit a taxpayer will double. The doubling of the penalties and statute of limitations for foreign noncompliance may cause certain U.S. taxpayers to rethink whether or not they want foreign investments. While the FATCA rules are still in the development stage, FFIs and U.S. taxpayers need to start considering what they need to do to look ahead to compliance requirements under the FATCA rules. The material in this publication should not be construed as legal advice or legal opinions based on specific facts. The information is not intended to create, nor constitute, a lawyer-client relationship. William P. Davis is an attorney with the firm Kroney Morse Lan, P.C. in Dallas, TX. He can be contacted at 972-386-8500 or via e-mail at [email protected] 96

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The FATCA impact on local institutions and individuals By Mike Mannisto and Christopher Larkin

n March 18, 2010, the United States enacted the Foreign Account Tax Compliance Act (FATCA) as part of the Hiring Incentives to Restore Employment (HIRE) Act. With an effective date of January 1, 2013, FATCA’s primary goal is to prevent US taxpayers from avoiding US tax on their income via investments through non-US financial institutions and offshore vehicles.

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To achieve what FATCA sets out to do, the responsibility of compliance falls largely on foreign financial institutions (FFIs), as well as other specified foreign entities. While initially FATCA may not have been given much attention by non-US institutions, it has quickly become a top priority for the global financial community, as well as foreign governments and entities. This is partially due to the fact that certain FATCA provisions are already having an impact. Although most FATCA provisions won’t take effect until 2013, under FATCA, as of September 14, 2010, a 30% withholding (or lower treaty rate) applies to US-source dividend equivalent payments (substitute dividends) and a portion of the payment under certain swap contracts, unless proof of prior withholding in respect to that payment can be shown or it is established that withholding is not otherwise due. The global implications of FATCA are far-reaching: all foreign financial institutions such as banks, brokerages, investment funds, insurance companies, and trusts, for example, are potentially subject to compliance with the FATCA legislation. FATCA generally requires both US and non-US financial institutions to designate all of their investors and account holders as “US” or “non-US,” and to further break that classification into individuals and “financial” and “non-financial” entities. Entities deemed to be FFIs under the FATCA rules are required to enter into an FFI agreement with the Internal Revenue Service (IRS) to report certain US status accounts, as well as specific information for each of those accounts. At the same time, both FFIs and US financial institutions (USFIs) must also report certain data regarding account holders who are non-financial foreign entities (NFFEs) with substantial US owners (for FATCA purposes, “substantial ownership” is generally defined as more than 10% ownership by a US status person, and in the case of investment vehicles, any ownership by a US status person). The teeth of FATCA can be clearly seen in the legislation.

Non-compliance with FATCA will result in a 30% withholding tax on “withholdable payments,” in general, US source fixed or determinable, annual or periodic income (typically US source dividend and interest payments), and gross sales proceeds resulting from the sale of an asset that can give rise to US source income paid to a “nonparticipating” FFI, a “recalcitrant” account holder, or a NFFE that has not disclosed its substantial US owners. In practice, a US broker, for example, will first need to confirm its non-US account holder’s status before making any withholdable payment to determine if it must withhold 30% for FATCA purposes before applying current non-resident alien withholding rules. If FATCA withholding applies then current law withholding does not apply. If there is no FATCA withholding then current law non-resident alien withholding may be applicable. The withholding obligation for FATCA falls not only to USFIs, but also to FFIs should they make payments to other FFIs or NFFEs that might be account holders at their institution. Both USFIs and FFIs will be liable for any tax that they failed to withhold, as well as any associated interest and penalties. The IRS recently clarified the concept of a “passthru payment,” for which every FFI will need to calculate the US portion of a payment it might pass through to an account holder. This suggests that it will not be as simple as just assuming an investment in the security of a foreign entity is “foreign” income, since any income paid out by that foreign entity may invariably have a portion that is considered “US source” due to that foreign entity’s global investments. In addition, the recent IRS guidance establishes that a responsible officer of an FFI must certify that the FFI has not assisted account holders with respect to avoiding the identification of their US accounts from May 9, 2011 (publication date of IRS Notice 2011-34) to the effective date of the FFI agreement. The cost of not complying with FATCA is not just potentially monetary but also possibly reputational, which should also be considered when making any decisions regarding compliance. From an individual’s perspective, the FATCA regulations do not present the same compliance issues faced by foreign institutions; however, the impact on local residents of the Cayman Islands should not be overlooked.

Ernst & Young Ltd. can provide assistance with achieving FATCA compliance through educating institutional teams on the FATCA regulations, analysis of existing systems and business entities, preparing an impact assessment of current processes against the FATCA requirements, and designing a roadmap for FATCA implementation.

An individual account holder will ultimately be required by the FFI to certify their status as US or non-US as required by the FFI’s FFI agreement. Account holders who fail to certify their status within the specified periods will be deemed “recalcitrant” and subject to FATCA withholding on any withholdable payments made to them by that FFI. FATCA also asserts that “recalcitrant” account holders may be required to have their accounts closed by the FFI in order for the institution to remain compliant with FATCA. FATCA’s impact on US status individuals holding accounts with FFIs is hopefully becoming clear. For those who have not previously reported income from these foreign accounts on their US income tax returns or the accounts themselves on the Form TD F 90-22.1 (FBAR), the FFI’s disclosure of these account holders under FATCA will allow the IRS and the Department of Treasury to identify those US persons who have not complied with US tax regulations and disclosures. It should be noted that final regulations governing FATCA have not yet been issued. With many questions being raised by the international community in trying to understand the complexities presented by FATCA, the IRS issued two separate notices to give guidance on the areas of most concern. In August of 2010, they issued IRS Notice 2010-60; while in April of 2011, they issued IRS Notice 2011-34. Comments by the public on both notices were requested by the IRS. Navigating the FATCA rules and regulations is a challenging task for many foreign institutions seeking to be

compliant. The costs associated with understanding FATCA, data analysis and systems changes are the primary hurdles for entities to overcome. Ernst & Young Ltd. can provide assistance with achieving FATCA compliance through educating institutional teams on the FATCA regulations, analysis of existing systems and business entities, preparing an impact assessment of current processes against the FATCA requirements, and designing a roadmap for FATCA implementation. Funds should be speaking with their administrators to understand and determine their readiness to comply with FATCA. Administrators would be well advised to start putting policies and procedures in place to address effectively the requirements that FATCA will impose. Professionals at Ernst & Young Ltd. are well-schooled in the intricacies of FATCA and can assist with these compliance issues. There is no indication that FATCA is going away, though final regulations are still pending. Those institutions which begin to tackle the process of compliance early will later be the institutions best positioned to be leaders in the marketplace. FATCA provides a unique opportunity for the Cayman Islands to get this process right and be seen as leaders globally for those seeking offshore investment opportunities. Mike Mannisto (partner) and Chris Larkin (senior manager) are part of Ernst & Young Ltd. in the Cayman Islands. The views expressed herein are those of the authors and do not necessarily reflect the views of Ernst & Young Ltd.