Offshore firms are not letting proposed regulatory changes to the legal profession put them off opening offices in the British Virgin Islands
Over the past 12 months, the British Virgin Islands (BVI) legal market has seen an unprecedented influx of firms from outside the jurisdiction. Three firms have launched their own offices, while another three have formed new associations with BVI firms to give themselves a foothold in the region.
The newcomers have joined an existing, mature legal market that has grown over the past few decades, and particularly in the past 15 years. But what is the attraction of the BVI in today’s economic climate, especially when onshore governments around the world are trying to crack down on what many see as attempts to evade more onerous tax and regulatory requirements?
Harney Westwood & Riegels is the only one of the top 10 offshore firms by size to have originated in the BVI. It was founded in 1960 and, although it has expanded to jurisdictions around the world, its home jurisdiction remains key.
Harneys global managing partner Peter Tarn arrived in the BVI in 1997 and has watched the rest of the offshore market move in.
“We’ve gone from a position of having a complete monopoly to being part of a more vibrant market,” says Tarn. “It probably doesn’t change the dynamic in the BVI market that much.
“By the time we had three or four established offshore firms that was probably a bigger step change than adding more at this stage.”
The arrival of other offshore firms was a gradual process.
However, the real influx has occurred more recently. Channel Islands firms Bedell Cristin and Mourant Ozannes have both opened offices in BVI, as has US litigation specialist Kobre & Kim. Meanwhile Cayman firm Campbells, the Isle of Man’s Simcocks and most recent Channel Islands firm Carey Olsen have all forged associations with local outfits to give themselves a presence on the ground.
Conyers’ BVI managing partner Robert Briant has also watched the development of the jurisdiction, having arrived from Bermuda at about the same time as Tarn in 1997. He says he was initially sceptical about the move, at a time when “there was maybe one or two City-type lawyers out here”, but soon saw the potential of the jurisdiction.
“The growth in legal activity has happened because of the growth of the jurisdiction for transactional purposes,” says Briant.
Unlike the Cayman Islands, which are known primarily for their funds vehicles, and Bermuda, which made its name as an insurance hub, the BVI has one predominant and popular product. The BVI Business Companies Act and its predecessor, the International Business Companies (IBC) Act draw on English and other common law statute and, as Tarn explains, have been used to structure corporate vehicles for many years. The various forms of the legislation have remained flexible and simple and that, say lawyers, is its principal attraction.
The BVI company really gained in popularity in the 1980s, according to Tarn, which was when it took off as the vehicle of choice for Asian investors. This, he says, was because of the “clunkiness” of Hong Kong law in comparison.
“People just adopted the BVI IBC as the vehicle of choice. In Asia it’s the norm,” he says.
“BVI companies are extremely popular where you have people from different jurisdictions trying to structure their affairs,” adds Briant. “Because they’re so ubiquitous around the world, as soon as you get someone from a different jurisdiction coming in you set up a neutral vehicle. BVI simply is cost-effective, it’s relatively low cost but it’s also got the best corporate statute.”
Clinton Hempel, one of the two founding partners at Carey Olsen’s associated BVI firm Hempel & Boyd, agrees.
“It’s a market that on the corporate side has seen increased activity over the past couple of years. One of the successes of the BVI is that it has a wide geographical client base. It’s not reliant on any one sector or particular jurisdiction,” says Hempel.
“In the 1990s, the BVI grew on the back of Hong Kong, mostly small businesses and private individuals. That’s since expanded tremendously and the BVI brand as an offshore vehicle is pretty much spread across the globe now. That’s one of the reasons why the BVI has seen increased activity over the past couple of years,” he adds.
Appleby’s BVI managing partner Michael Burns says the fact that the BVI is a UK overseas territory, with access to the Privy Council and a “slavish adherence” to English company law also makes it attractive.
The connection with Asia is, lawyers think, the main catalyst for the recent flood of arrivals. While Asian investors have been using BVI structures for many years, the economic crisis and the realisation that there is money to be had from China and the surrounding region have prompted many offshore firms to open or expand in the Far East. And if your Asian clients are demanding BVI structures, then you need a way of servicing that demand.
“Everybody’s looking east. If you want to be able to have an impact in Asia, then you’ve got to have a BVI offering,” says Bedell Cristin’s BVI head Simon Pascoe.
Mourant Ozannes’ BVI managing partner Michael Williams agrees, explaining that the BVI was a natural complement to the firm’s Hong Kong office, which opened in January 2012.
“It’s a long time coming for us,” says Williams. “We [legacy Mourant du Feu & Jeune] started looking at the BVI in 2007. For us it’s a considered move. It’s not a recent thing; we think this is a good jurisdiction, it’s well-governed, it’s a popular jurisdiction and it’s one where we certainly were seeing instructions come in and we weren’t able toaccept them.”
He describes the firm picking up work in other jurisdictions with a BVI connection – for example a BVI company administered out of Guernsey, or a BVI connection to a piece of Cayman litigation – where Mourant Ozannes and its legacy firms were having to refer work to a rival in the BVI.
Asia was the other piece of the picture. “If you want to access that market, these business people aren’t really interested in Jersey and Guernsey,” Williams admits.
As well as Asia, other developing markets with money – or that are the target for money – also use BVI structures. Russia, Eastern Europe and Africa are all mentioned in connection with the BVI. Hempel & Boyd has a small South African office which it plans to develop in conjunction with Carey Olsen, while Harneys has a representative lawyer on the ground in Zimbabwe and has recently forged an association in Mauritius.
On the Russian side, one of the biggest M&A transactions for years recently closed in the jurisdiction, when state-owned oil company Rosneft took over TNK-BP, which was owned by a BVI holding company.
Harneys represented 50 per cent owner BP alongside Linklaters. Conyers, Skadden Arps Slate Meagher & Flom and Weil Gotshal & Mangesrepresented AAR Consortium, which owned the other 50 per cent of TNK-BP. Mourant Ozannes, together with Cleary Gottlieb Steen & Hamilton, acted for Rosneft.
“We’ve been involved with various bits throughout its life,” says Tarn. “To have a closing of that magnitude where you’ve got crucial bits of the jigsaw being put together in your offices is a challenge, but actually a good reason for getting out of bed in the morning.”
Lack of regulation
However, the popularity of BVI structures, and the draw this has proved for law firms, has caused a fair amount of debate within the jurisdiction. Debate was heightened by the lack of any legislation regulating the legal profession. As things stand, a lawyer trained in a common law jurisdiction is able to fly to the BVI, be admitted to the bar through an affidavit from a BVI-qualified lawyer, and fly off to offer BVI services to clients anywhere in the world. There is no training and no minimum period that has to be spent on the island. Once you are admitted, you are admitted for life.
A number of firms, including UK firms Charles Russell and Mishcon de Reya, as well as offshore firms with no BVI presence like Manx outfit Dougherty Quinn, are therefore able to give BVI advice, because they employ lawyers admitted to the BVI. Many of those practising BVI law outside the jurisdiction have spent time there, but the fact this is not a requirement has been a concern for many years.
In 2007, the government introduced a Legal Profession Bill, which proposed fusing the solicitors’ and barristers’ professions and providing for admission to practise BVI law and the discipline of lawyers.
The bill failed to progress and the legal profession continued to operate as it has done for decades. Last June, BVI premier Orlando Smith introduced the Legal Profession Bill 2012. The new bill is modelled heavily on the 2007 version. Introducing the first reading, Smith said: “In the intervening five years, the challenges and issues surrounding the practice of Virgin Islands law remain, and in some areas have increased, given internal and external features of the territory’s continued socio-economic development.”
He said that the bill would help promote the observance of the rule of law, preserve the reputation of the legal profession, promote the BVI’s competitiveness as a financial services centre and “most importantly”, enhance opportunities for BVI citizens in the profession.
The revised bill introduces concepts such as the annual issue of practising certificates and a code of ethics to the BVI legal profession. Outstanding questions still under debate include whether there should be a restriction on the number of BVI lawyers allowed to work outside the jurisdiction and whether firms need a presence in the BVI to offer BVI law (and what that presence should comprise).
Although it will make it difficult for firms to offer BVI law, lawyers from the leading offshore firms are unanimous in their support of the bill.
“It’s an excellent thing, we’re all behind it in the industry. It’s important that the jurisdiction be protected from people who would practise BVI law without any connection to the jurisdiction,” says Burns.
“It’s driven by a desire to ensure that what we have as a product is regulated and appropriately regulated,” adds Ogier’s BVI head Ray Wearmouth.
Briant thinks the bill would be unnecessary if the jurisdiction had not become so popular.
“Right now there’s a large number of lawyers practising BVI law with very little knowledge of BVI law. No one wants to discourage the growth of the legal market in the jurisdiction, but how do we maximise the growth of the jurisdiction not only as an incorporation jurisdiction but also as a transactional jurisdiction while maintaining control over lawyers most of whom may be outside the jurisdiction? It’s not easy,” he says.
Tarn says the “open access” to admission to the BVI has to end. “There isn’t effective policing of people setting themselves up as BVI lawyers and something needs to change there.”
At Bedell Cristin, Pascoe says having an office was always a key part of the firm’s BVI strategy and one it wants to expand on.
“We, like every other firm, expect to have a core of people on the ground in Tortola, people able to service the work in the eurozone. With this new law we need to be mindful of what we need to do in each place,” he says.
Mourant Ozannes’ Williams, who was admitted to the BVI bar in 2011 before relocating there in 2012, says the principles of BVI law are not difficult to grasp if you have a common law background – he originally trained in Australia.
“When you’re in a common law jurisdiction, law travels quite well. The best test is to get the deal on and put something into practice,” he argues. Williams says that a small team of BVI-admitted lawyers at Mourant Ozannes did some BVI-related work before the office launch, but did not advertise the service. He too is solidly behind the legislation.
“It gives some credibility to the jurisdiction to have a piece of legislation like this that requires you to have a practising certificate and to have it renewed annually,” he says.
The question of restrictions does concern some. As Williams points out, if a firm is advising Asian clients on BVI law, it absolutely has to have a Hong Kong office due to the 12-hour time difference between the jurisdictions. But he and others think the government has recognised this.
“The balance that’s been struck in the bill and the propositions put forward by the government should ensure that all the firms that are operating here won’t be affected by the new law,” Wearmouth says.
Tarn agrees that a balance needs to be struck.
“We also firmly believe that people need access to BVI lawyers wherever they are. A restriction in numbers has potential to damage the jurisdiction. It’s a difficult question and that’s why the government and the bar has struggled with it for so long,” says Tarn.
As things stand, there is no sign that the BVI has been materially damaged by its lack of legal profession regulation to date. In more general terms, the country has made an effort to improve its international standing in areas like transparency, although it maintains its flexibility.
“I think the BVI was seen as having more relaxed standards than other jurisdictions in terms of its regulation generally but that’s now not the case,” says Williams. “There are many provisions in the companies legislation that you can contract out of if that’s what the shareholders want to do.”
The popularity of BVI companies is being maintained. There was a drop in incorporations in 2009 compared to 2008, according to BVI Financial Services Commission data (see chart, page 36), but there was an increase the following two years and a further increase is expected in 2012, once data for the fourth quarter is finalised.
Around a third of all BVI companies registered are still active, although Tarn points out that in an offshore context, longevity of a company means very little – many companies are set up for a specific purpose and with a deliberately limited lifespan.
The BVI also signed an agreement with the Hong Kong stock exchange in 2010, allowing the listing of BVI companies in Hong Kong. As yet only a handful have listed, but as Wearmouth points out, the number of IPOs generally worldwide has been enormously limited in the past couple of years.
While the fact that the BVI’s main offering is focused on a standard product, this does not necessarily limit the work being done from the jurisdiction, says Tarn.
“You’ll often hear people say there’s only one product in terms of the company. If you can do enough with the corporate structure, you actually have such a wide range of markets I think it’s a pretty resilient way to build business,” he believes.
Others agree, pointing to new types of investors using the BVI and an increase in litigation.
“What we’re finding is that these companies aren’t being used simply as sole single asset holding companies, there are some substantial transactions taking place. Lenders are quite comfortable now with BVI companies in their structures and prepared to push their financing through these structures,” says Hempel.
Wearmouth adds: “Private wealth has been focused on heavily in the past few years and that will continue. Litigation is very much a thriving part of the jurisdiction and that’s coming off a very diverse base again. The support and depth on offer continues to grow.”
The newcomers are also happy with progress in the jurisdiction. “We’ve been very pleasantly surprised by the level of work that we’ve been getting to start with in still a challenging market,” says Williams.
Pascoe says Bedell Cristin is planning to recruit more people for its BVI team, and the firm is happy with the mix of work it is picking up from the jurisdiction.
Appleby’s Burns believes current incorporation numbers are a bellwether of the islands’ good health. Adding that the BVI is “well out of the doldrums”, he concludes: “Things are really beginning to come back quite robustly.”