On 21 June 2010, a ‘green bill’ was published in the Cayman Islands Gazette called The Charities Bill, 2010. If passed into law, it would not only fundamentally change the way charities operate here, but it would also have a significant impact on one of the Cayman Islands’ important financial services industry segments: charitable trusts.

The gazetting of the bill came as a surprise to many interested parties, but not because of its efforts to regulate charities; indeed, the government has been trying to do that for many years due to external pressures from organisations like the Financial Action Task Force, which sees charities as possible avenues for money laundering and the financing of terrorism.

The Cayman Islands Government, through the Law Reform Commission, presented a discussion bill on the issue in February 2009. After some changes as a result of that public consultation, it issued a revised discussion bill in July 2009.

Each time the discussion bill was presented, it was met with objections from the parties it would affect.

What ultimately was surprising was that many objections were largely ignored by the Law Reform Commission.

The provisions of the bill

Part I of the bill defines charity as “a person who conducts activities for charitable purposes, but does not include a private charity”.  The phrase ‘charitable purposes’ is then defined to mean purposes that relate to 24 sections and 14 subsections of activities.  The sections incorporate a wide range of activities including, among others, culture, sports, education, religion, health, science, community, social harmony and animal welfare. Just about every group organised to relieve human or animal suffering or to promote the betterment of human kind singularly or collectively in any way would be considered a charity under the bill.

Part III of the bill would require charities desirous of conducting any activity for a charitable purpose that involves fund

raising by means of solicitations of property from the general public or government to apply to be registered with a Cabinet-appointed Registrar of Charities.

Among the things the law would require of charities are the identity of the trustee or fiduciary and other members of the charities; annual audits of the charity’s operations; records of contributions and contributors; statements about anticipated sources of contributions; evidence of how contributions were or are to be applied; evidence of ‘Know Your Client’ compliance on donors; and various other documents.

With regard to donors, the charity would be required to maintain a record of the names and contact information of all its donors and, where that information is not easily ascertainable, the method relied upon in the solicitation of property.

Charities would be required to notify the Registrar of any changes to their status, including changes to its membership, within 30 days, or such longer period as the Registrar may in his discretion allow.

The fiduciary of a charity which fails to comply with the law would be subject on conviction to a fine of $5,000 or to imprisonment for one year or both and for a further fine of $100 per day for every day the offence continues after conviction.

Objections

Many of Cayman’s charities have made representations to the government asking for the bill to be re-considered or to be excluded from the provisions of the law.

In an 18 August letter to Premier McKeeva Bush signed by Treasurer Jackie Sterling, the Cayman Islands Humane Society noted that the law, if passed, would create additional costs in the form of registration fees, annual fees, auditors’ fees, data and document storage fees and payroll expense for additional staff.

“The added cost of complying will increase our monthly overheads... and thereby further reduce the intended purpose of the contributed money,” the letter stated. “This would result in additional burdens and complications for the [Humane Society]... We may have no other choice but to close our doors.”

In a 5 August letter to Premier Bush signed by President Lori McRae, the Rotary Club of Grand Cayman also cited additional financial burdens created by a Charities Law.

“Indeed, it may require the hiring of permanent staff to collate and report [the required] data, which entails an overhead burden that Rotary has never had before,” the letter stated. “Rotary tries to keep administrative costs to a minimum. Compliance with a bill such as this will drive administrative costs up.”

Cayman Islands Little League Association Chairman J.C. Calhoun pointed out that the bill requires charities to keep records for at least seven years, creating more expense and liability exposure to its volunteer members.

The Reverend Bob Thompson, chairman of the Cayman Ministers’ Association, said his organisation has also made a submission to government about the bill. In early drafts of the bill, churches were exempted from the law, but they are now included in the gazetted bill.

“I think the main thing we object to is the requirement to get an annual external audit,” he said, noting that church audits are usually done by members.  “It would be too expensive.

Thompson acknowledges that money laundering can occur through charities, but he doesn’t think Cayman’s small charities are a problem.

“If there were organisations like United Way here, that’s one thing,” he said. “But a lot of the charity work here is carried out by small organisations or individuals.”

KYC

The requirement for Know Your Customer compliance and record keeping on all contributors drew the objections of several charities, including the Humane Society.

“The [Humane Society has] persons that may donate just a single dollar, for whom we will now have to obtain their name and address and keep a complete list of all these donors,” it said in its submission. “It is going to take more time in administration than the small donation is worth.”

The Humane Society said the KYC requirement would have a negative impact on local contributors.

“They will simply not bother to donate and remit their funds elsewhere.”

The Rotary Club of Grand Cayman also objected to the KYC requirements on all donors.

“We do not understand the reason for requiring a service club such as Rotary to be forced into a regulatory regime and the compliance culture which exists in the financial services industry,” it stated. “Expecting us to obtain two photo IDs, and two municipal address confirmations (less than three months old) certified in true ink copies for all of our contributors is bound to have a negative impact on our fund-raising initiatives.”

The Cayman Islands Little League noted that the bill would require it to collect information on “all persons buying a raffle ticket, participating in the balloon barrage at our auction, or even buying a hot dog at our concession stand.”

“Whether this is required would depend on the application of the definition of the word ‘ascertainable’, which is extremely subjective,” it stated. “The penalty is $5,000 and/or a year in jail - on a subjective definition.”

The Rotary Club said the penalties for breaches in the reporting requirements were onerous.

“Breaches could easily occur with the number of volunteers we have and it is difficult to understand why a service club member, belonging to a club dedicated to the public welfare, should be exposed to financial penalties and possible incarceration,” it stated. “This appears extremely unrealistic and will no doubt affect our retention of existing members and our efforts in attracting new membership.”

Given the possible penalties for breaches, the Little League predicted it would have fewer volunteers willing to accept the liability. So did the Humane Society.

“The bill would make it even more difficult to recruit already scare volunteers that may be subject to severe fines or imprisonment and interrogation by the attorney general for their kind-hearted contribution to the community,” it stated.

In its 2009 submission to the government, the Cayman Islands Cancer Society questioned whether the KYC compliance would be required for all donations regardless of size.

“Depending on the prescribed information required, this will be difficult in practical terms for nonprofit organizations, which often receive small donations under $100, to enforce and may detract potential donors,” it stated. “The Society therefore suggests that donations under $10,000 not be subject to KYC Compliance.”

Both the Humane Society and the Cancer Society pointed out that the KYC requirements amounted to a duplication of efforts in many cases.

“One hundred per cent of our funds are received and collected in the Cayman Islands, and apart from cash donations collected from various coin collection boxes, the funds are received from or paid out of bank accounts that are held with local banks, which are already closely monitored and regulated,” the Humane Society stated. “The vast majority of our expenses are paid to local vendors and staff, who maintain local bank accounts. It is difficult to understand and justify the purpose of the [Humane Society] duplicating the KYC documentation already in place with the regulated banks.”

In some cases, anonymous donations are made to charities through various firms in the financial services industry.

The Cancer Society suggested there be an exemption from the obligation to collect KYC for any donations from a company or individual already subjected to anti-money laundering regulations and regulated by a governmental or statutory authority.

“This would allow banks, law and accountancy firms to make donations without the charity having to obtain KYC from the donor,” it stated.

Fund raising

Parts V and VI of the bill regulate the conduct of fund raising activities by or on behalf of charities.

Among other things, the law requires all charities to declare its status as a registered charity on all collection boxes, member labels or badges, notices, advertisements and other documents issued by or on behalf of the charity soliciting property. Any person who signs, issues or authorises such a notice, advertisement or other documents who fails to include that status is subject to a fine of CI$2,000.

The law also requires every person soliciting property from the public or government through fundraising activities to do so in accordance with an agreement with the charity. It also requires that any such solicitation be accompanied by a statement clearly indicating the name of the charity or charities for which the property is being sought, and if there is more than one charity concerned, the proportions in which they will benefit.

In addition, the law would require all charities to take “reasonable steps” to ensure its fund-raising activities are carried out in a way that does not “unreasonably intrude on the privacy of those from whom funds are being solicited”; does not “involve the making of unreasonably persistent approaches to persons to donate funds”; does not “result in undue pressure being placed on persons to donate funds”; and does not involve making false or misleading statements about the urgency of need for the funds, the way in which the funds donated will be used, or the activities, achievements or finances of the charity.

The Cancer Society stated this requirement could negatively impact certain established sources of donations.

“In practical terms, charities are not always aware when people are asking the public to donate to the organization, such as when donations are made in lieu of flowers at a funeral or in lieu of gifts for birthdays and weddings, or persons are doing a sponsored event and have designated an organization as the beneficiary,” it stated.

The Humane Society questioned the need for the requirements for all fundraising efforts.

“Is this really necessary in a small community such as ours, where every dog wash and cake sale brings in a few pennies to help our cause?”

The Little League said the penalties for infractions would make holding many fundraising activities impossible.

“Volunteers run these things and if we fine them for a simple omission, then we will have no volunteers,” it stated. 

The Little League also pointed out that the provisions governing fundraising contained many subjective phrases, like “unreasonably persistent”, “undue pressure”, and “unreasonably intrude”, the interpretation of which could depend on a point of view or a person’s mood on any given day.

Charities’ accounts

The law would require all registered charities to keep records of all sums of money received and expended, including the reason for the receipt or expenditure; of all sales, purchases and receipt of property; of all donations received; and of all of its assets and liabilities.  It also requires that the books be handed over to the Registrar of Charities within six months of the end of each financial year.

Any charity that holds or receives property valued in excess of $50,000 would also be required to have its books audited by an independent and reputable accounting firm.

The Little League noted that getting audited accounts within a specific time period would require it to pay for the audits.

“Most nonprofits do not [pay for audits] now, so there are increasing costs.”

The Little League also noted that the requirement to record the identity of individual donors would hinder anonymous donations.

The charities’ accounts submitted to the Registrar would be available for inspection by members of the public, something about which the Cancer Society had concerns.

“This may be detrimental to a charity in practical terms,” it stated. “Potential donors may inspect the books of a charity and decide that the organization does not need the funds as they are currently in a sound financial position. Charities and nonprofit organizations need to ensure they have funds for short, medium and long-term development of their operations, programs and services and evidence of being in a solid financial position now, is not reflective of the organization’s future needs.”

Financial industry impact

Charities are not the only entities that would be impacted by the proposed Charities Bill. Cayman’s financial services industry, particularly the private wealth sector, would also be significantly affected.

The Society of Trust and Estate Practitioners has commented to the government on more than one occasion about the negative impacts the bill could have on the financial industry, most recently with a letter to the attorney general dated 1 July, 2010.

In a letter signed by then-Chairman Andrew Miller in February 2009, STEP submitted comments on the bill to the Law Reform Commission. 

The letter stated that STEP disagreed with the Financial Action Task Force’s view that nonprofit organisations were particularly vulnerable with regard to the financing of terrorism.

“As far as we are aware, there is no substantive evidence to support this, at least from a Cayman perspective,” the letter stated. “Even if this was not the case, the requirement to register certain charities with the Charity Commission would, seemingly, add little by the way of a measure to counter such use of nonprofit organisations; it is just the sort of organisations that would fall outside the need to register that would more likely be used for such purposes.”

A 1 July, 2010 letter to Attorney General Sam Bulgin signed by Carlos de Serpa Pimentel, the current STEP chairman, states he and fellow STEP member Justin Appleyard met with the Law Reform Commission in 2009 to discuss the practical impact of the bill on the private wealth and institutional use of charities in Cayman.

“In short, there were so many issues that required to be addressed, it was agreed that the most efficient course of action was for STEP to draft a revised Charities Bill as a discussion document to highlight the fundamental issues that needed to be addressed as a matter of charity law before the regulatory regime that we understood was the principal objective of the new legislation could be implemented,” it stated.

Appleyard proceeded to draft, on behalf of STEP, a 66-page, 90-section discussion Charities Bill. After submitting that document, no one from STEP heard anything more about it from the Law Reform Commission.

“As the months passed, it was assumed that the technical requirements evidently necessary from the STEP redraft and the more general objections of the local charities had been sufficient to cause the idea of regulating charities in the manner of the first draft to have been abandoned,” it stated. “The first that the private sector then hears, almost a year later, is that a Charities Bill, which nobody in the private sector has apparently seen, is about to be gazetted.”

STEP points out that the gazetted bill varies little from the Law Reform’s draft bill of July 2009.  The gazetted bill takes on board some of the proposals of the STEP discussion draft bill. However, STEP states that the “recommended redraft only works as a whole and it’s not possible to take parts of the redrafted bill out of context, leaving behind the rest.”

STEP’s letter warns of the potential impacts the bill would have, not only on local charities, but also on Cayman’s financial services industry.

“The use of Cayman Islands charities, which are not limited to trusts and companies, but extend to clubs, unincorporated associations and in some cases foundations, is a critical component of the ability of the Cayman Islands to attract onshore lawyers and accountants and their wealthy clients in offering estate planning structures using Cayman Islands companies, trusts, partnerships and charities,” the letter states. “For many of the wealthiest families in the world who either already use the Cayman Islands or might be tempted to do so, the philanthropic objectives of the family as a whole are an important factor in deciding whether to choose Cayman over its competitors. We are not aware of any other country that would regulate charities to the degree that is proposed under this regulation.”

One of the key problems STEPS sees with the bill concerns which charities can be exempted from registering. Without an exemption, the trustee or fiduciary must be identified.

STEP notes that the certain provisions of the Charities Bill are inconsistent with other legislation here.

“It is simply inconsistent policy to accept that a registered private trust company is suitable as trustee for a private trust but is not suitable as a trustee for a charitable trust,” the letter states. “For the purposes of anti-money laundering and anti-terrorism vigilance, there is no difference between them.”

Should the bill be passed as drafted, STEP believes the Cayman Islands would be left at a “significant competitive disadvantage” in attracting wealthy families to set up charitable trusts here.

Bill status

After it was gazetted in June, the Charities Bill was expected to be presented in the Legislative Assembly during the meeting in July.  However, Premier Bush announced there had been representations made about the bill and that its presentation would be deferred to another meeting.

Speaking on 14 August, Bush said the bill would not be on the agenda for the September meeting of the House.

“What I saw there, I could not present, so I delayed the bill,” he said. “There are far too many matters about the bill that I need to question and I don’t have information on now.”