The head of the Cayman Islands financial services industry trade group rejected charges from economist Jeffrey Sachs that the Caribbean nations oversight of hedge funds and banks is a mortal threat to the global economy.

Sachs, in separate letters to the Financial Times the past two weeks, said some residents of the island nation sit on hundreds of fund boards, limiting their ability to provide oversight. He also said the Cayman banking system has $1.4 trillion in liabilities and assets, citing data from the Bank for International Settlements. The system is a house of cards for the global financial system, he said.

Professor Sachs needs to understand that a significant part of the banking assets registered in Cayman are U.S. banks placing overnight deposits in their own Cayman-registered branch, Cayman Finance Chief Executive Officer Gonzalo Jalles said in an e-mailed statement May 8. The money is effectively being transferred between accounts in New York and not being exposed to how a local banker in Cayman decides to invest it.

The Cayman Islands, a British Overseas Territory located south of Cuba, has the highest number of hedge funds in the Caribbean. About 10,900 funds were registered there in the first quarter, up from about 9,990 in 2011, according to the Cayman Islands Monetary Authority.

The monetary authority, known as CIMA, is responsible for the regulation and supervision of financial services. It says officials on its board of directors can have contractual relationships with entities they are charged with regulating.

The boards members are responsible for the policies and general administration of the affairs and business, CIMA says on its website. This benefits the Authority as they have current knowledge and experience of the regulated industry.

It calls into question the degree to which they can exercise their fiduciary duties, said John Prout, executive director of the Foundation for Fund Governance in Washington. Its a small country. It has a high caliber of professionals on the island, but they have to move beyond a small-island mentality.

Officials at CIMA didnt respond to questions e-mailed by Bloomberg News. Sachs wasnt immediately available to respond because he is traveling, according to an official in his office who asked not to be identified.

The Cayman Islands was cited for accounting shortcomings in a 2010 report by the Organization for Economic Cooperation and Development. A year later the nation was praised for moving quickly to address the reports findings. The country has 31 tax sharing agreements with nations ranging from the U.S. to Japan, according to the Paris-based OECD.

I have no problem with the Cayman Islands developing its financing expertise and housing a financial industry commensurate with its size and its capacity to protect the world from abuses and upheavals, Sachs, who has advised countries from Bolivia to Russia on handling economic crises, wrote in his May 7 letter. Instead, it is being used by powerful and out-of-control forces vastly beyond the Caymans capacity to regulate, monitor or backstop in the event of crisis.

Read more:

Cayman Islands Spars With Sachs Over Hedge Fund Directorships