Industry Trend: Increasing Demand for Conducting Due Diligence in the Cayman Islands

As one of the most popular offshore financial centers, the Cayman Islands has attracted tax evaders, drug dealers, and even terrorists, who have used shell companies to conduct illegal activities. Though many businesses registered in the British territory are legitimate—given that approximately 60 percent of global hedge fund assets are domiciled there as of 2016—a recent case conducted by Vcheck Global shows the importance of conducting a thorough background check on companies registered in the Cayman Islands.

In May 2019, Vcheck Global handled a case investigating an entity in the Cayman Islands. As it turned out, the entity is entirely controlled by a Chinese residential real estate company that was involved in a series of consumer rights lawsuits. Court records in China also showed that the company had a bank account that was subject to enforcement of a judgment. Since then, the company’s reputation among Chinese consumers declined substantially.

The Cayman Islands is popular among real estate businesses, hedge fund managers, and many others for a reason. Depending on the circumstances, company registration may take as few as two days to complete. The Cayman government also does not tax the capital gains of investment funds. Operation costs for offshore funds can be substantially lower compared to that in investors’ home countries. In addition, the business environment in the Cayman Islands is adaptive to the needs of investors in the U.S., Europe, and Asia. For instance, it is one of the few jurisdictions that offers the limited liability corporation (Cayman LLC) structure.

However, these benefits sometimes come with associated risks, particularly for the offshore funds’ business partners. With lower level of regulations, some offshore funds might have the outward appearance of an active entity but are little more than empty shells that manage the money in it and cover up the actual owners. Other entities might have ties with companies outside the Cayman Islands, which investors may not be aware of. In response, investigators in the due diligence industry are developing new multilingual databases and tools to better assess potential risks associated with offshore entities.

With the ongoing trend of companies establishing entities offshore, only comprehensive international due diligence can uncover adverse information that may prevent costly business decisions. Vcheck Global aims to provide due diligence products of the best quality to help assess whether business partners are in compliance with local and international regulations. In the case of the Chinese real estate company, Vcheck Global’s investigation helped prevent potential entanglements in lawsuits or fraudulent schemes.

Sun Shen is an Analyst at Vcheck Global. She has an educational background in international relations, U.S. and Chinese foreign policy. Ms. Shen specializes in research in the Asia Pacific region. She is fluent in Mandarin.

Photo: Flickr/Bruce Harlick