International Finance Centres play a key role in global wealth management. By improving the availability of credit and encouraging competition in the domestic banking system they boost investment in the major economies, which ultimately supports growth and employment.
Professor Jim Hines Jr of Michigan University has established through extensive research that the financial services offered in IFCs contribute to the competitiveness of financial markets in the region in which they are located. For example, consider the Caribbean region and the nearby financial markets of the United States. Further, Professor Jason Sharman of Griffith University in Australia has contrasted the relatively high standard of living in Asia, where there are a number of sophisticated IFCs, including Hong Kong and Singapore, with Africa where there are few IFCs.
It is significant that the leading IFCs in the Caribbean, Bermuda, Cayman, the British Virgin Islands and the Bahamas, continue to be included in every issue of the Global Financial Centres Index, which measures and assesses the competitiveness of the top 75 financial centres on a bi-annual basis. However, according to the most recently published Index, these centres have suffered considerable reputational damage in the past three years as a result of attacks from onshore and some supranational bodies. One might venture to say that more often than not their interests converge.
This article looks at the strength and attractiveness of Caribbean IFCs and uses the example of the British Virgin Islands to highlight how IFCs in the Caribbean are being used as a catalyst for investment internationally. It considers the jurisdiction’s ‘architecture’, including its robust regulatory regime, the published views of international standard setters such as the IMF and the FATF and the unique qualities that have catapulted the BVI into prominence among international finance centres. It then considers where the future lies for Caribbean IFCs.
The Challenges Posed by ‘Onshore’ and Supra Nationals
It is pointless for IFCs, including the BVI, to assume the ostrich position and ignore the fact that sustained criticism and threats from onshore negatively impact their growth and sustainability. But perhaps more importantly, is the increasing fear of investing in IFCs that is being created with some success from onshore. The prospect of doing jail time for some careless or imprudent decision is never an attractive one. Service providers are duty bound is to help their clients to minimise their tax liability, but this has now become something of a double edged sword. Then there is the OECD Global Forum’s Peer Review Process that could determine that a jurisdiction’s legal and regulatory framework does not meet the international standard. The publication of such a Report can strike mortal fear in the jurisdiction as well as the investor.
Despite the challenges alluded to above, High Net Worth Individuals (HNWI) as well as corporations will always be looking for jurisdictions where their assets will be managed most profitably. These investors seek political and economic stability, a financial services sector that offers sophistication and a variety of services, security, a robust legal system and sound infrastructure – all of which are features of the BVI.
But fundamental to the future of the BVI as an IFC is its sterling reputation. The fact is that year on year the BVI’s legal and regulatory regime have come in for high praise from the international standard setters. Less than a year ago the IMF in completing its comprehensive review of the BVI, publicly recognised the strength of its regulatory regime and its ‘willingness to be a full partner in international information sharing and co-operation.’
The same report continued that the regulatory framework is ‘clear and comprehensive’ and that the Financial Services Commission has demonstrated its strength and independence as a regulator.’ Most importantly perhaps the report notes that because the BVI’s continued ability to attract business relies on its being viewed internationally as a well regulated and policed jurisdiction, the authorities are keenly attuned to risk and have in place a sound system of surveillance and enforcement to combat this.
Just the year before, the CFATF in publishing its report on the BVI noted that the Virgin Islands has maintained a robust public policy commitment to ensuring that the territory plays its part in the global fight against money laundering and the financing of terrorism. All this brings comfort and confidence to the kind of investor that the BVI encourages – people of honest, integrity and of sound reputation.
Moreover the BVI was white listed by the OECD in early 2010 and today has signed more than 20 Tax Information Exchange Agreements with its major economic partners, including China and the United States, thereby further enhancing its reputation. In mid September of this year the legal and regulatory framework of the BVI was further assessed by the OECD Global Forum at which time it was determined that the elements were in place for the jurisdiction to move to the Phase 2 Assessment next year. This is a very significant development as the BVI was rigorously judged by a panel of thirty of its peer jurisdictions.
A Goldman Sachs report, published in 2003, speculated that by 2050 the economies of Brazil, Russia, India and China (BRIC) would be wealthier than most of the current major economic powers. The BRIC thesis posits that China and India will become the world's dominant suppliers of manufactured goods and services, respectively, while Brazil and Russia will become similarly dominant as suppliers of raw materials. The current trend supports this prediction and these four countries have become synonymous worldwide with the leading emerging markets.
Although Brazil is a very prosperous economy with many opportunities for investment using BVI entities, there are significant limitations to doing so directly at the moment. It is the author’s understanding that the Government of Brazil automatically places countries with an income tax regime of less than 20 per cent on its black list. This raises an interesting issue of whether in the circumstances it is possible to negotiate a Tax Information Exchange Agreement between the BVI and that country.
Be that as it may, the whole Latin American area is ripe with opportunities and there are other countries that act as conduits for business from Brazil. Several BVI firms have not only organised themselves to do legitimate business with Brazil using BVI structures but from all reports are doing are doing so at a considerable profit.
Given the increasing wealth emanating from Latin America it is advisable for the Government of the BVI to sign TIEA’s with countries such as Uruguay and Panama as a way of enhancing this relationship and at the same time gaining some ‘entrée’ into nearby markets. Having said that a significant number of BVI Trust companies already emanate from Panama.
According to a Forbes Magazine study, and a BBC report carried out in May of this year, the Russian capital of Moscow now boasts more billionaires than any other city in the world. There are 33 billionaires in the city compared to New York’s 31. The study also estimates that a quarter of Russia's wealth is now concentrated in the hands of just 100 people. The flexibility of the BVI corporate regime is known to be as attractive to Russians as is its cost effectiveness.
At least two of the BVI leading law firms have formed an association with Cypriot Law firms in order to offer services to Russia. Additionally one BVI Trust Company with Cypriot origins does substantial business with Russia. BVI law firms as well as several trust companies continue to do a thriving business with that country.
India constitutes one of the world's fastest growing economies. There are for example 69 US$ billionaires among the 100 richest families. In 2010 the BVI signed a Tax Information Exchange Agreement with India. The treaty combined with the fact that the BVI’s legal and regulatory framework has recently been determined to be compliant, further cements the relationship between India and the BVI.
What is even more encouraging is that Nerine Trust with offices in the BVI, Guernsey and elsewhere has already established an office in India. The resident director of that company in a recent article stated that rapid and broad economic growth in India is setting the agenda for change and that the key is to offer a ‘raft of services’ to potential Indian clients. In his view it also helps to have a global spread of expertise.
For many years the BVI has been the largest investor in China after Hong Kong. Signing a TIEA in 2009 with China has only served to enhance that relationship. Oddly, although there was initially some concern about the possible negative impact of signing such a treaty, the BVI continues to experience year on year growth in business from that part of the world. BVI companies continue to be popular in Hong Kong and China, where they are preferred for commercial property transactions and the structuring of private equity investments.
Due to the exemplary collaborative relationship between the BVI public and private sectors, BVI companies can now be listed on the Hong Kong Stock Exchange. As a matter of interest, BVI companies may also be listed on the SGX in Singapore, New York Stock Exchange, the NASDAQ, and AIM in London.
The BVI Advantage
Although the offerings of the BVI run the gamut of international financial services (the BVI is for example the second largest domicile for hedge funds world wide) there is no doubt that its corporate register dominates the global international financial services landscape. The BVI corporate registry is the largest of its kind in the world with state of the art technology, including VIRRGIN, an electronic means of filing, processing and receiving feed back about documents filed 24/7. With over 450,000 active companies on the register, one can bank on the fact that in almost any international business configuration, there is a BVI business company within that structure.
A wide range of applications is possible using a BVI company, including: investment, property holding, financial management, trading and copyrighting and/or licensing. International financial institutions including those that lend to other institutions and actively support the alleviation of poverty, multinationals, high net worth individuals as well as ordinary persons, all use BVI companies for investment purposes because of their unique qualities including ease of use, flexibility, and cost effectiveness
According to the most recently published statistical bulletin of the BVI Financial Services Commission, corporate registrations in the fourth quarter of 2010 reached 14,267 compared to 11,931 for the previous year. This is a clear indication that company incorporation numbers in the BVI are where they were in the pre crisis period. That's certainly an excellent signal. Clearly the demand for corporate structures remains robust.
In terms of the prospects for the future of IFCs in the Caribbean and the BVI in particular, this jurisdiction continues to be proud of the contribution it makes to the management of global wealth and financial markets and the future remains bright. This is the time to build on our success, to adapt where necessary, to thrive and flourish. In the words of a former colleague from another jurisdiction: “This is not the time to fear for the future, it is the time to build on our success.”
Lorna Smith OBE
Chief Executive Officer and Founder at LGS and Associates, formerly Interim Executive Director, BVI Finance, British Virgin Islands. Lorna Smith has more than three decades of experience at the highest levels of the public service in the British Virgin Islands. Over the course of her senior-level service, Ms Smith has developed extensive relationships with leaders from the business community, international NGO’s and government leaders from around the world. She is well published, a popular speaker and consults on BVI financial services. For more, visit her website at LGSASSOCIATES.COM