The Cayman Islands may be little known to ordinary Koreans, but inward and outward investments between South Korea and the British overseas territory located in the western Caribbean Sea have been on the rise, according to government data.

As of the end of January, the amount of investment from the island reached 9.96 trillion won ($8.72 billion), up from 8.22 trillion won in January 2015. The figure in 2008 was 3.67 trillion won. 

With a population of less than 60,000, the Caribbean island has more than 100,000 companies registered there and is considered one of the main offshore financial centers where individuals and corporates build paper companies to avoid taxes back home.

The number of institutional and individual investors from the island amount to 3,305, accounting for 7.6 percent -- or the third-largest proportion -- of the total 43,297 foreign investors here, as of the end of 2016, according to the financial supervisor. Investors from US and Japan come in first and second with 14,383 and 3,818, respectively.

The burgeoning investment from the Cayman Islands has been raising suspicions about the true identities of the investors and whether they are South Koreans setting up paper companies to avoid corporate taxes.

Foreign investors here are exempt from some taxes in the stock markets.

A government official said that in addition to dodging taxes by disguising themselves as foreign investors, they could also benefit from tax exemption, avoid local financial regulations, create slush funds and might get involved in stock price manipulation.

Meanwhile, separate data from the Ministry of Strategy and Finance showed Wednesday that South Korea’s direct investment to the Cayman Island jumped 29.9 percent to $5.58 billion in 2016 from the previous year. Most of the investment, or $4.31 billion, was made in in the finance and insurance sector, the ministry said.

Outward investment to the Cayman Island was bigger than those toward China, South Korea’s largest trading partner, which recorded $4 billion of investment in 2016, down from $4.3 billion in 2015.

Outward direct investment refers to when a resident acquires securities or makes an initial investment in order to participate in the management of a foreign company. It also takes into account the establishment of subsidiaries or local offices. 

By Park Ga-young (gypark@heraldcorp.com)