18 October 2004
During the late 1990s a number of low-tax jurisdictions, including the British Virgin Islands (BVI), were the subject of a concerted campaign by a number of pan-jurisdictional entities, such as the EU, the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF). They criticised the jurisdictions for “unfair” tax competition, and alleged that insufficient steps were being take in these jurisdictions in the global fight against money laundering. Although the BVI itself was never blacklisted, a number of other leading offshore jurisdictions were, and the threat to offshore jurisdictions, which are generally only economically viable because of their financial industries, was very real indeed.
Since the opening blizzard of initiatives, the OECD, FATF and other organisations have taken a more measured approach relating to their proposals. A more open dialogue now exists between these bodies and the various offshore jurisdictions. Now there is more of a consensus to work towards ‘level playing fields’ between offshore and onshore jurisdictions. (Criticisms made by the FATF of “secrecy” in offshore jurisdictions were found to be equally applicable to, for example, Delaware companies.) However, the impact of the initial flurry of reports and initiatives cannot be understated.
The financial sectors in some offshore jurisdictions suffered particularly heavily from these initiatives. The government of the Bahamas reported that the number of active international business companies (IBCs) dropped from nearly 100,000 in 2000 to approximately 47,000 in 2002. One offshore jurisdiction in the Pacific was reported earlier this year as simply having shut down its offshore financial sector entirely. The BVI was not immune from this pressure, although because the core of its offshore business remains the formation of corporate vehicles and trusts, it attracted less outside concern than jurisdictions that promoted offshore banking and ship registrations.
While all offshore jurisdictions have had to accept that changes are necessary, the BVI has seized the opportunity to make a number of significant improvements to its legislative structure, in an effort both to satisfy international regulatory requirements and to maintain its position as the leading jurisdiction for the incorporation of offshore companies (at present it has some 600,000 companies on its books).
The initiative started in 1997 with the Proceeds of Criminal Conduct Act. Ahead of its time, it is similar in scope to the UK’s Proceeds of Crime Act 2002. Among other things, it created a number of new offences relating to money laundering and set up a procedure by which suspicious transactions could be reported by professionals to a new regulatory authority. This was followed in 2001 by the creation of the BVI Financial Services Commission, an autonomous regulatory authority responsible for the regulation, supervision and inspection of all financial services in and from within the BVI. Its remit covers not only the obvious fields of insurance, banking, mutual funds and trusts, but also company management, the registration of IBCs, limited partnerships, IP and ships.
One area of particular concern to the offshore world has been bearer shares. The transfer of legal ownership of a share by transferring physical possession of its certificate has been a source of some difficulty. In the BVI this manifested itself in a string of cases involving the mistresses of deceased entrepreneurs claiming to have been given IBCs as keepsakes. The problem was addressed in 2001 with an amendment to the International Business Companies Act, which was aimed at immobilising bearer shares issued by IBCs by requiring them to be held by licensed custodians. The change reflected what had been a growing practice, in the wake of anti-money laundering legislation, of banks and major financial institutions elsewhere in the world refusing to deal with companies whose shares were in bearer form unless the shares were held by a custodian.
One of the surprising features of many offshore jurisdictions is the rudimentary nature of the provision they make for insolvency. The BVI was no exception. However, it has very recently tackled this issue with the Insolvency Act 2004, which came into force on 16 August 2004. Based on the English 1986 Insolvency Act, but incorporating a number of innovative developments, it provides a comprehensive insolvency regime, introducing for the first time the concepts of insolvent trading, transactions at an undervalue and voidable floating charges. It also gives regulators greater power to intervene where wrongdoing is uncovered on the part of the company or its officers.
By providing the comfort of sophisticated insolvency legislation aimed at protecting creditors and investors alike, the BVI clearly hopes to enlarge its share of the corporate offshore market. Bearing in mind that the assets of IBCs regularly run into hundreds of millions, if not billions, of dollars, such provisions are long overdue.
Elsewhere, the BVI scored another first with the introduction earlier this year of Vista trusts, which aim to give the settlor a far greater say in the administration of trust assets.
Further changes are in the air. At present a new Companies Bill is being circulated, which is intended to consolidate a number of existing corporate statutes into a single piece of legislation. It is anticipated that the bill will consolidate and build on earlier changes to corporate legislation, in particular eliminating the ‘ringfencing’ of IBCs for taxation purposes.
While it is perhaps too early to gauge the success of the BVI’s strategy, particularly because the offshore sector is so closely tied to the global economic cycle, anecdotal evidence suggests that the market has responded positively to recent developments in the BVI. Incorporations of new IBCs have held steady, while they have dropped in other offshore jurisdictions. Perhaps a more significant barometer is the growth in the number of lawyers heading for the islands. Over the last two years, several law firms based principally in other offshore jurisdictions have been shifting resources to the BVI from these other jurisdictions in an effort to capture part of what they plainly see as a growing and lucrative market.
Stephen Moverley Smith is a barrister at XXIV Old Buildings