Protests Arise Over Fraud in Tax Haven : Cayman Islands: U.S. presses Britain to insist on greater openness and closer financial regulation in the Crown colony, where BCCI has left its mark.

On this sultry sliver of coral sand due south of the Florida Keys, there are six traffic lights, 25,000 people and 540 banks holding $369 billion in largely secret deposits. Behind those statistics, residents say, lie a thousand tales of deceit, exile and fraud.

Whether those stories will ever be told is a story in itself.

It is a crime in the Cayman Islands, a British Crown colony and tax haven with an elected local government, to discuss confidential business--defined as matters learned on the job--in public. It is also against the law to disclose financial records, bank accounts, transaction records or ownership files. Among the islands’ 10,000 or so expatriates, nearly everyone seems to have a secret.

The question being debated in the islands these days is how long those secrets will be kept, and from whom. The U.S. government, concerned that the islands’ banks have been used by drug smugglers to launder illegal profits, is pressing Britain to insist on greater openness and closer financial regulation. Cayman officials say substantial progress has already been made to satisfy Washington.

Now the bank scandal involving the Bank of Commerce and Credit International, which is accused of using a Cayman subsidiary as part of a multibillion-dollar fraud, is putting even more pressure on Cayman bank regulators.

The colony’s bank inspectors did close BCCI’s two subsidiaries here on July 5 as part of an international seizure of BCCI operations coordinated by the Bank of England. But as details about BCCI’s fraud emerge, it is becoming clear that the bank relied on its secretive Cayman subsidiaries to make improper loans that other arms of the bank might not have been able to hide.

The deal that got BCCI in trouble with U.S. authorities, for example, was its acquisition of Washington’s First American Bank. In that transaction, BCCI disguised its ownership of First American shares by arranging loans to Middle Eastern front men by one of the bank’s Cayman subsidiaries, which handled transfers within the bank, according to the Federal Reserve Board.

The other affiliate here, BCCI (Overseas), was the headquarters of a bank with branches in Europe, Asia and Africa.

Cayman bank regulators argue that they should not be blamed for failing to detect fraudulent loans carefully hidden from bank inspectors. They also point out that they were hardly the only bank regulators to be fooled by BCCI. Nonetheless, U.S. bank regulators reacting to the scandal are already saying that more must be done to improve regulation and access to information in banking centers abroad like this one.

The problem regulators here face is that the secrecy laws are a key source of the islands’ prosperity. Nobody in the Caymans, least of all the approximately 15,000 native islanders--who lived in poverty here before an influx of emerging multinational banks in the early 1970s--wants to spoil a system that has produced one of the highest per capita incomes in the Caribbean.

The Caymans’ bank laws have promoted a culture of secrecy that runs deeper than money. Lounging with young girlfriends on the white beaches are ex-U.S. Air Force pilots with deep tans. When asked about their pasts, they admit only to running “some contract stuff” during the 1980s with a certain air cargo company that made regular flights to rural Honduras--where the U.S.-backed Nicaraguan contra rebels were based.

There are American ex-husbands who chuckle about how when their ex-wives back home reached divorce court, they found that marital assets had been sold mysteriously to a Cayman Islands corporation, beyond the reach of U.S. courts.

Whether various funding mysteries will ever be solved depends partly on how the unfolding BCCI scandal plays out on the islands. Officials at government headquarters, known universally here as Glass House, are anxious to dispel any impression that they sanction illegal activity.

Island bank regulators argue that the colony is thriving not because its secrecy laws shield criminals but because it has worked hard to develop a growing tourist industry and has served as an efficient, politically stable corporate tax shelter. Cayman companies and banks pay no taxes unless they buy or sell land on the island.

The colony signed a mutual assistance treaty with Washington in 1986 that allows disclosure of information about Cayman bank accounts if U.S. law enforcement officials provide specific evidence of wrongdoing. U.S. bank regulators say the treaty is a good start, but not enough. Cayman regulators say they are moving as quickly as they can.