Persons Are Frequently Associated With Ugland House Registered Entities

The international law firm of Maples and Calder, with its associated  businesses - Maples Corporate Services Limited and Maples Finance  Limited - is the sole occupant of Ugland House. As of March 2008  the Cayman Islands Registrar reported that 18,857 entities were registered  at the Ugland House address. Maples and Calder senior partners told us that approximately 5 percent of  the entities registered at Ugland House were wholly owned by U.S.  persons, while 40 to 50 percent were related to the U.S. in that they had a  billing address in the United States. According to the partners, U.S.  persons associated with Ugland House registered entities are often  participants in investment and structured-finance activities, including  those related to hedge funds and securitization. The Cayman Islands may attract U.S-related financial activity because of  characteristics including its reputation for stability and compliance with  international standards, its business-friendly regulatory environment, and  its prominence as an international financial center. Another frequent reason for doing business in the Cayman Islands is to  obtain tax advantages, such as through reduction or deferral of U.S. taxes. The  investment income of U.S. tax-exempts may be subject to UBIT if earned  by an investment vehicle organized as a U.S. partnership, a formation  common among U.S.-based hedge funds. Lastly, as with other offshore jurisdictions, some U.S. persons may  establish entities in the Cayman Islands to illegally evade taxes or avoid  detection and prosecution of illegal activities. The U.S. Government Has Access To Several Information Sources Regarding U.S. Taxpayers’ Business Activities in the Cayman Islands, but Most Information is Self Reported

Individual U.S. taxpayers and corporations are generally required to self- report their taxable income to the Internal Revenue Service (IRS). When an individual or corporation conducts  business in the Cayman Islands, there is often no third-party reporting of  transactions, so disclosures to IRS and U.S. regulators are dependent on  the accuracy and completeness of the self-disclosure. Some financial intelligence information on U.S. persons’ Cayman activities  is available to U.S. regulators. Despite these challenges, U.S. officials consistently report that  cooperation by the Cayman Islands government in enforcement matters  has been good. Although the Maples and Calder law firm provides services that even U.S.  government-affiliated entities have found useful for international  transactions and the Cayman Islands government has taken affirmative  steps to meet international standards, the ability of U.S. persons to  establish entities with relatively little expense in the Cayman Islands and  similar jurisdictions facilitates both legal tax minimization and illegal tax  evasion. Despite the Cayman Islands’ adherence to international standards  and the international commerce benefits gained through U.S. activities in  the Cayman Islands, Cayman entities nevertheless can be used to obscure  legal ownership of assets and associated income and to exploit grey areas  of U.S. tax law to minimize U.S. tax obligations.
Why GAO Did This Study

The Cayman Islands is a major offshore financial center and the registered home of thousands of corporations and financial entities. Financial activity there is in the trillions of dollars annually. One Cayman building--Ugland House--has been the subject of public attention as the listed address of thousands of companies. To help Congress better understand the nature of U.S. persons' business activities in the Cayman Islands, GAO was asked to study (1) the nature and extent of U.S. persons' involvement with Ugland House registered entities and the nature of such business; (2) the reasons why U.S. persons conduct business in the Cayman Islands; (3) information available to the U.S. government regarding U.S. persons' Cayman activities; and (4) the U.S. government's compliance and enforcement efforts. GAO interviewed U.S. and Cayman government officials and representatives of the law firm housed in Ugland House, and reviewed relevant documents. The full report on GAO's review is GAO-08-778 , being released at the same time as this testimony.

What GAO Found

The sole occupant of Ugland House is Maples and Calder, a law firm and company-services provider that serves as registered office for the 18,857 entities it created as of March 2008, on behalf of a largely international clientele. According to Maples partners, about 5 percent of these entities were wholly U.S.-owned and 40 to 50 percent had a U.S. billing address. Ugland House registered entities are often participants in investment and structured-finance activities, including those related to hedge funds and securitization. Gaining business advantages, such as facilitating U.S.-foreign transactions or minimizing taxes, are key reasons for U.S. persons' financial activity in the Cayman Islands. The Cayman Islands' reputation as a stable, business-friendly regulatory environment also attracts business. This activity is typically legal, such as when pension funds and other U.S. tax-exempt entities invest in Cayman hedge funds to maximize their investment return by minimizing U.S. taxes. Nevertheless, as with other offshore jurisdictions, some U.S. persons may use Cayman Island entities to illegally evade income taxes or hide illegal activity. Information about U.S. persons' Cayman activities comes from self-reporting, international agreements, and less formal sharing with the Cayman government. Because there is often no third-party reporting, self-reported information may be vulnerable to being inaccurate or incomplete. U.S. officials said the Cayman government has been responsive to taxpayer-specific information requests. The Internal Revenue Service has several initiatives that target offshore tax evasion, including cases involving Cayman entities, but oversight and enforcement challenges related to offshore financial activity exist. U.S. officials said that cooperation with the Cayman Islands government has been good. Also, Maples partners said that ultimate responsibility for compliance with U.S. tax laws lies with U.S. taxpayers.