Persons Are Frequently Associated with Ugland House Registered Entities

Many of the 18,857 entities registered at Ugland House are U.S.-connected. These entities most frequently involve investment funds and structured  finance vehicles. A Maples and Calder partner also  said that the make-up of entities in Ugland House was reflective of the  nature of their business and largely international, institutional client base,  and was not necessarily representative of the types of entities registered  with other company service providers in the Cayman Islands. Persons and Fewer than 50 Percent Are U.S.-Related

Maples and Calder partners estimated that 5 percent of the overall number  of Ugland House entities are wholly owned by U.S. persons. Ugland House Investment Entities Are Hedge and Private-Equity Funds, And U.S. Investors Are Largely Institutional, such as University Endowments and Pension Funds

The Cayman Islands is a major domicile for global hedge funds. Several Factors Influence U.S. Taxpayers’ Decisions to Conduct Financial Activity in the Cayman Islands

U.S. persons who engage in Cayman-based financial activity commonly do  so to gain business advantages, including tax advantages under U.S. law. Although such activity is typically legal, some persons have engaged in  activity in the Cayman Islands, like other jurisdictions, in an attempt to  avoid detection and prosecution of illegal activity by U.S. authorities. In particular, the Cayman Islands is generally  regarded as having a stable and internationally compliant legal and  regulatory system, a business-friendly regulatory environment, and a  reputation as a prominent international financial center. This  approach has been proven to increase U.S. taxpayer compliance. The likely low level of compliance with these  requirements is an example of the general problem with the completeness  and accuracy of self-reported information. Some Financial Intelligence Information on U.S. Persons’ Cayman Activities Is Available to U.S. Regulators

The U.S. government’s financial intelligence unit, FinCEN, works to gather  information about suspected financial crimes both offshore and in the  United States. Some Other Information Sharing also Occurs between U.S. and Cayman Islands Regulators

In addition to the formal information sharing codified into law between  the U.S. government and Cayman Islands government and financial  institutions represented by TIEA and MLAT requests and SARs, Cayman  Islands officials reported sharing with and receiving information from  federal agencies, state regulators, and financial institutions:    According to CIMA, 40 requests for assistance were dealt with between  2003 and early 2008, including requests from SEC, Office of the  Comptroller of the Currency, Federal Deposit Insurance Corporation,  and various state insurance and banking regulators. U.S. and Cayman Officials Have Taken Steps to Address Illegal Activity, but Enforcement Challenges Exist

Tax evasion and other illegal activity involving offshore jurisdictions take  a variety of forms. CIMA officials said that  they do not regulate entities differently on the basis of their residence  offshore or onshore. In the case of the licensing of branches or  subsidiaries of non-Cayman Islands banks, CIMA officials stated that they  look to the foreign bank regulator in the bank’s home jurisdiction to  ensure that (1) the foreign regulator permits the Cayman Islands branch or  subsidiary; (2) that the Cayman Islands operation will be subject to  consolidated supervision by the foreign regulator in cooperation with  CIMA as host regulator, in compliance with international standards; and  (3) that the bank proposing to open a Cayman Islands operation is in good  standing with its home-country regulator. 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 in the Cayman Islands is measured 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.

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 included investment funds, structured-finance vehicles, and entities associated with other corporate activities. 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 environment with a sound legal infrastructure 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 return by minimizing U.S. taxes. Nevertheless, some U.S. persons have used Cayman Island entities, as they have entities in other jurisdictions, to evade income taxes or hide illegal activity. Information about U.S. persons' Cayman activities comes from self-reporting, international agreements, and other sharing with the Cayman government. The completeness and accuracy of self-reported information is not easily verified. While U.S. officials said the Cayman government has been responsive to information requests, U.S. authorities must provide specific information on an investigation before the Cayman government can respond. The Internal Revenue Service has several initiatives that target offshore tax evasion, including cases involving Cayman entities, but tax evasion and crimes involving offshore entities are difficult to detect and to prosecute. Cayman officials said they fully cooperate with the United States. Maples partners said that ultimate responsibility for compliance with U.S. tax laws lies with U.S. taxpayers. U.S. officials said that cooperation has been good and that compliance problems are not more prevalent there than elsewhere offshore.