Dosh and checks
28 July 2008
The common catch-cry you will hear when you speak to anyone involved in the British Virgin Islands (BVI) financial services industry is: “from the donkey to the SUV in 20 years.”
There can be no denying that the BVI enjoys premier status within the offshore international financial markets and continues to grow exponentially, notwithstanding current world trends. A record 77,022 new companies incorporated in the territory in 2007 – an increase of 15 per cent from 2006.
Anti-money laundering regulation overview
In line with the BVI’s commitment to international cooperation, the government and financial services industry has embraced the worldwide anti-money laundering initiative and has introduced a comprehensive regulatory framework to safeguard the integrity of the jurisdiction.
To implement the initiative, the government introduced the Anti-Money Laundering (AML) Regulations 2008, the Anti-Money Laundering and Terrorist Financing Code of Practice 2008, and the Non-Financial Business (Designation) Notice 2008. These complement the existing Drug Trafficking Offences Act 1992 and the Proceeds of Criminal Conduct Act 1997.
The new legislative framework is complex – the code of practice itself runs to some 127 pages – but what is critically important to note from the outset is that the regime will apply to all participants in the BVI financial services industry, including lawyers, and will also have an impact on clients that have dealings in the BVI.
The AML Regulations are predicated on client transparency, record keeping
In the event that the strict legislative requirements are not complied with, harsh criminal penalties are imposed.
All firms are required to maintain a written system of internal controls to assess the risk that a business relationship or a client’s business or transaction may pose with respect to money laundering or terrorist financing.
Central to the risk assessment process is the requirement that lawyers must properly identify the person(s) from whom they receive instructions via a prescribed ‘know your client’ (KYC) process. If the client is a company, trust or similar entity, the KYC process must be conducted on all individuals who beneficially own at least 5 per cent of the entity.
The level of due diligence that a lawyer must undertake to identify their client will depend upon proper categorisation of the risk associated with acting for that client. In particular, consideration should be given to: client risk (eg is the client’s business cash intensive?); service risk (eg do the client’s instructions involve international private banking transactions?); and geographic risk (eg does the transaction or client have any connection to a country with restrictions imposed by the UN or EU?).
Ordinarily BVI lawyers will undertake enhanced due diligence on their clients because transactions will inevitably have an offshore component and the lawyer will rarely, if ever, meet with the client face to face. This means that a client will be required to produce evidence of their identity and residential address and the law firm is likely to undertake a search to determine the extent (if any) of the client’s criminal background.
It should be noted that foreign and domestic politically exposed persons (governmental persons and their families or associates) are considered special risks and are subject to enhanced due diligence requirements.
A law firm is required to retain copies of all KYC documents, as well as details of all transactions undertaken for, or on behalf of, a client for at least five years. All records must be made available for inspection by the Financial Investigation Agency upon request.
Every law firm is required to appoint a money laundering reporting officer to whom lawyers and staff must report any suspicious client activity or transaction. The officer must investigate the report and, if warranted, forward it to the Financial Investigation Agency. There are substantial criminal penalties for a lawyer who tips off the client (either directly or indirectly) that a report has been made.
Some ;consider ;that ;anti-money laundering regimes, both in the BVI and abroad, are too invasive and seriously impinge upon a lawyer’s duty to maintain client confidentiality. In our view, such criticisms are unwarranted. Lawyers have long been precluded from aiding the crimes of their clients and have adopted a process of being selectively uninformed as regards tainted transactions. All that anti-money laundering legislation does is prevent lawyers from being purposely ignorant of client dealings.
However, one area that may become difficult for lawyers is the prohibition against tipping off a client to a suspicious activity report being lodged. An obvious way of indirectly doing this would be to cease acting without good reason, but as this is prohibited it would seem that, after reporting a suspicious activity, the lawyer must continue acting as if nothing has happened. This creates problems on many different levels and is something that needs to be addressed.
Whatever criticisms may be leveled at the anti-money laundering regime, the process represents current worldwide opinion, and also the commitment of the BVI government and the financial services sector to prevent BVI entities from being used for criminal purposes.
Mark Forté is a partner Jayson Wood an associate at Conyers Dill & Pearman