The BVI Leads with New World Compliance and Private Trust Companies

Over the last year, the British Virgin Islands (BVI) has been instrumental in promoting the distinction of the differentiation between onshore and offshore, an important psychological advancement for all international finance centres (IFCs). Colin Powell in his foreword to this publication five years ago brought to us the realisation that the critical distinction lay not in ‘onshore’ or ‘offshore’, but in “...whether an IFC was compliant or non-compliant with the international standards set by the Basle Committee, FATF, IOSCO and IAIS, and whether they are co-operative or non-cooperative in the exchange of appropriate information with the relevant competent authorities”. That was the test.

Few would argue today with this position, provided the common platform of the so-called level playing field, was indeed common. However, at the time of writing the financial world has greater priorities. We are in the midst of the worst economic downturn imaginable, with crisis talks at every turn. We have some of the largest, best known banks and financial institutions in the world under massive pressure, seeking the support of stronger partners, or requiring bailouts of a magnitude that has shocked investors and the market to the core. There are global concerns over credit, pension funds, stocks and commodities, while short sales have been stopped and oil prices have been on a financial bungee, to say nothing of the new US President, Barack Obama, who must face these hurdles.

Offshore, in the geographic sense, structured finance has stalled and the hedge fund industry, of which the BVI is behind only the Cayman Islands in world terms, is entering a new era. In the media some critics are pointing to weak regulation and in terms of the current crisis it is the banks that are on the receiving end. The BVI, however, has chosen a regulatory strategy that will enable the industry to weather this storm. It is timely that the new Anti-Money Laundering and Terrorist Financing Code of Practice 2008 became operative in early 2008 and introduced an environment in which responsibility is shared by the regulators and the industry. It has brought a new level of awareness to the dangers of non-compliance, particularly with regards to due diligence while allowing service providers to grow their business within a framework of caution. No one disputes the wisdom of taking this route, and the BVI is strategically defending its leadership position in the corporate world.

The BVI Code of Practice

The BVI Code of Practice (Code) makes clear a number of important principles. There are now in excess of 850,000 BVI companies, and the Code makes the BVI licensee responsible for the retention and production of information when required for those companies. Where third party professional intermediaries are involved, the BVI service provider must ensure that the new standards are met by that intermediary (the introducer of new business), in the full knowledge that he will be held accountable for any breakdowns in the required process. The BVI licensee is in no doubt as to what constitutes good business and must meet the challenge of investigating every client in a critical and objective manner. The bar has been raised; although with such high volumes of new company incorporations it is perhaps inevitable that rogue clients will slip through the net from time to time. The clear intention is to eliminate these, and with stiff fines and penalties in place for providers that do not pay attention to the requirements, the BVI is serious about its future.

BVI is Not a Banking Centre

Unlike the Cayman Islands, for example, the BVI is not a banking centre. Its strength lies in its corporate products, its trust, captive insurance management and mutual funds services, and its excellent professional infrastructure. This provides an industrial safety blanket in that the BVI is service driven and is not credit or investment dependent. Of course, the trickle down (and that may be understating the effects!) from the present global woes will be felt, but the need for properly structured wealth holding corporate vehicles will remain, and this is the BVI’s core business. The BVI is a jurisdiction of choice for these vehicles and has positioned itself to lead going forward. It does, of course, have a number of first-class banks to meet the needs of the financial industry and domestic market, but it is not a transactional or booking centre in the offshore sense of the word.

Private Trust Companies

That said, the BVI has other weapons in its arsenal. The BVI is the latest of the first division IFCs to recognise the importance of clarity regarding their private trust companies (PTCs) regulation. The BVI has moved forward with legislation to cover PTCs in direct response to general industry concern that the BVI did not have a sophisticated framework of guidelines and regulation that would both protect clients and satisfy onshore advisors. This has now changed.

There has long been a debate between academics as to whether PTCs should be regulated, and if so, in what manner. Until now the BVI has been without a clear legal framework for PTCs. The Financial Services (Exemptions) Regulations 2007, which came into effect on 7 August 2007, has drawn a line under the past and set down new rules. These rules have been driven primarily by BVI industry practitioners in partnership with the Regulator. Whereas a BVI company could have previously claimed to be a PTC (albeit unregulated) there was every likelihood that it would be ultra vires and that any trusts, which it established, would be void. The doubts surrounding the effectiveness of PTCs in the past have now been swept away and the BVI has a robust and progressive framework on which to build. There is nothing new in the concept of the PTC. They have been around for years as ‘dedicated’ or ‘family trust companies’, and have been set up in such favourite jurisdictions as Bermuda, where they are exempt from trust licensing requirements (although the Bermuda Monetary Authority (BMA) must first consent to the incorporation), in Jersey where the repeal of Article 56 removed the challenge faced by trust companies over directors’ liability, and the Cayman Islands, where a restricted trust licence has long been required, but came with ‘uncompetitive regulation’ and significant associated costs. The absence of specific regulations is not seen as an advantage, and the BVI has taken the initiative here and produced a sensible, client-friendly law. This provides a solid platform from which a new generation of private trustee structures is expected to flow. Let’s look at it.

The Financial Services (Exemptions) Regulations 2007 provides (subject to certain conditions) for the exemption of BVI companies from the requirement to obtain a trust licence under the Banks and Trust Companies Act 1990 (the BTCA), as amended. It repealed the Banks and Trust Companies (Application Procedures) Directions 1991, which were considered to lack transparency and to be generally problematic.

The conditions that now apply are as follows:

•   The company must be a BVI company, which was incorporated under the BVI Business Companies Act (the BCA). Additionally, certain BVI companies that were incorporated under the old International Business Companies Act 1984 as IBCs, and which were subsequently either re-registered on a voluntary basis, or which were automatically re-registered as business companies under the BCA, will also qualify for exemption.
•   Exemption under these new regulations applies only to limited liabilitycompanies (whether limited by shares or by guarantee).
•   The company’s name must include the designation ‘PTC’ (private trust company). Existing companies seeking exemption will, therefore, have to effect a change of name to comply
•   The Memorandum of the company must state that the company is a private trust company.
•   The PTC must be a private trust company and, as such, must not solicit business from members of the public. If it does, the exemption is lost and it will no longer qualify as a PTC.
•   All PTCs must use a registered agent in the BVI that holds a Class 1 Trust Licence under the BTCA. In other words a responsible, experienced, professional trust company must be involved.
•   The company must restrict its business to that of being a trustee and to the administration of trusts. Related and ancillary services, such as acting as a protector, are also permitted.
•   All the business undertaken by the PTC must be ‘unremunerated trust business’, or ‘related trust business’, and these requirements are the key tests that differentiate the BVI Regulations from those of Bermuda and the Cayman Islands. If at any stage these two conditions are not met, the PTC will be obliged to apply for a trust licence.
•   The regulations give clear definitions of what constitutes unremunerated trust business and related trust business. Appropriate anti-abuse provisions are sensibly included and provide clarity, for instance, regarding the treatment of payments to directors and employees. Unremunerated trust business is defined as trust business that is carried on “if no remuneration is payable to, or received by, the PTC or any person associated with it, in consideration for, or with respect to, the services that constitute trust business”.

The definition of related trust business is a little trickier. A PTC will be permitted exemption if it acts as trustee of:

(i) a single trust of which all the beneficiaries are either charities, or have certain specified blood, marital or adopted relationships to the settlor; or

(ii) more than one trust, where the respective settlors and beneficiaries have specified blood, marital or adopted relationships to each other, or are charities.

VISTA Trusts and the Ownership of a PTC

The classic structure for the ownership of a PTC has been through the use of a charitable or non-charitable purpose trust with the shares held by the trustees. The BVI VISTA trusts are ideal for this. Personal ownership of PTC shares in any jurisdiction is rarely satisfactory. Typically, in the BVI the regulated service provider providing administration services to the PTC would act as trustee of a VISTA trust. There are a number of reasons for this:

(a)The officer or director rules in VISTA trust deeds provide an effective ‘succession mechanism’ for directorships in PTCs. This is important as the directors will often exercise the discretionary trustee powers.

(b)The shares of the PTC cannot be disposed of or sold without the requisite   consents.

(c)With charitable or non-charitable purpose trusts there is no beneficial owner of the assets of the trust. This can have certain advantages in the context of the ownership of shares in PTCs.

(d)The trustee of a VISTA trust will be under no direct obligation to monitor the management of the PTC’s affairs.

It should be noted that an exempt PTC in the BVI cannot itself set up VISTA trusts.

VISTA trusts are established under the Virgin Islands Special Trusts Act 2003, and one of the key requirements is that they require a trustee licensed under the BTCA. Thus, a licensed BVI trust company can establish VISTA trusts for clients and can incorporate

PTCs for clients, but those PTCs cannot, in turn, create VISTA trusts.

As stated, the trustee of a VISTA trust can own the shares of an exempt PTC in appropriate cases and under certain circumstances. The way the ownership of a PTC is structured is most important, and requires specialist trust advice, as there will be tax and succession issues to be considered.

Directors of a PTC

Control of a PTC through a board of family member directors can be an attractive advantage but there is a need for some caution and it can present a double-edged sword. Where the settlor controls, or attempts to control through board representation, there lurks the risk of sham. As with any trust structure there must be a defined transfer of the legal ownership of assets to the trustee. The better way is to allow a structure of properly organised committees to manage certain functions and to invite the administrating BVI service provider to join the board. This will introduce trust disciplines and governance, which is an important part of the regulations’ requirements (see below). This will also help fulfil the requirement that the directors of the PTC be fully aware of their obligations with respect to trustee matters, as well as their generic director liabilities and duties.

Government Fees

An attractive feature of the new BVI regulations is the reasonableness of the government fees, thus giving the BVI an important advantage over other traditional PTC jurisdictions:

•   To incorporate a new exempt PTC with 50,000 shares or less, the government fee is US$750, and the annual renewal fee is US$750.
•   For PTCs with more than 50,000 shares, the fee for incorporation will be US$1,500, and the annual renewal fee will be the same.
•   The fee for changing the name of an existing BVI company to enable it to become an exempt PTC is US$425.

Registered Agent’s Responsibilities

The registered agents of PTCs now have a number of new responsibilities and obligations, and these are driven directly by the necessity to monitor compliance with the regulations and, ultimately, to ensure an effective framework within which to control fiduciary risk.

Specifically, the registered agent of exempt PTCs must:

1.   Satisfy itself, on an ongoing basis, that all conditions that provide eligibility for the exemption are met at all times;
2.   Undertake compliance reviews on a periodic basis, and inform the Financial Services Commission (FSC) if the standards and requirements for exemption are not being maintained;
3.   Maintain current copies of all trust deeds and documents involved in the creation or amendment of trusts established by the PTC;
4.   Maintain supporting documentation evidencing that the PTC is fully compliant with the regulations;
5.   None of the documents to which these points refer have to be actually filed with the FSC, further demonstrating the government’s desire to take a ‘common sense’ and pragmatic approach to controlling PTC activity; however, PTCs must file their Memorandum and Articles of Association. Registers of directors and shareholders must also be maintained at the offices of the registered agents, as they are for all companies incorporated under the BCA.

Prior to the issue of these regulations, there was arguably some lack of clarity regarding the definition of ‘carrying on trust business’. These new regulations make this concern obsolete.

Trustee’s Responsibility

By allowing the establishment of exempt PTCs in the BVI, the regulators are placing responsibility upon those BVI trust companies that act as the registered agents of the PTC. In practical terms, it will be essential to ensure that there is adequate knowledge, experience and fiduciary controls available across the spectrum of trust administration.

Here BVI trust companies can assist both family offices and advisors by undertaking the management of the PTC and the administration of the underlying trusts. Most families will not have the background to complete their trustee duties without guidance.

Above all, a close, professional relationship between the client, the advisors and the trust company, plus a high level of offshore technology, will be essential to build the platform for success in the future. The BVI has moved much closer to this paradigm with its new PTC laws. It places the BVI firmly in the sights of advisors seeking the best PTC jurisdiction.

New Opportunities

Outside the ambit of trusts and corporate services, the BVI continues to develop through its captive insurance and mutual funds capabilities. The management of properly constituted and well-regulated captives is on the rise and with the world currently in financial turmoil this can be expected to continue. The BVI is no longer simply a bit player in this marketplace: it is now firmly on the world stage. With all businesses undertaking risk self-assessment it is likely that the growth of captives will continue. Mutual funds are regrouping as markets slide into free fall. This will provide new opportunities as the cycle corrects and the BVI is well positioned to respond. The leading global law firms are here now and this is in direct response to the opportunities ahead. The BVI is quietly ready.