A Glance Backward
In 1984, when the British Virgin Islands enacted the seminal IBC Act, the intention was to offer corporate solutions to international corporate transactions at an economic advantage. With the waning appetite of many countries at that time to enter into treaties to mitigate double taxation, the epic move enabled international businesses and investment funds to use BVI companies in their structures to attract investment from multiple jurisdictions without incurring an additional layer of taxation. 32 years of history now reflects that the BVI business companies’ model has been extremely successful in attracting international business to the BVI’s commercial shores and today this success has positioned the BVI as one of the leading offshore financial centres and the leading domicile for company incorporations.
Over the last three decades, the BVI has had to make continuous amendments to its product offering to ensure that it meets international standards with regard to its regulatory regime in order to uphold its integrity as a reputable financial services jurisdiction. It has enacted legislation in every financial services area to ensure that the entire industry is adequately supervised and regulated and has simultaneously maintained its leadership in the offering of flexible financial services products. In doing so, it has secured its position offshore as a highly regulated and sophisticated jurisdiction.
Between 1990 and 2010, the BVI introduced legislation to govern and regulate various areas of financial services including banking business, trust business, insurance business, money services business, financing business and securities and investment business. A regulatory code was also introduced alongside, which spans the gamut of all these areas. The regulatory code contains detailed and service specific requirements designed to support the general framework established by primary financial services legislation.
The BVI also joined the rest of the organised world in implementing legislation, systems and enforcement agencies to demonstrate its dedication to the fight against money laundering and terrorism. Anti-money laundering regulations and a code of practice implemented recommendations of the Financial Action Task Force to ensure that entities carrying on relevant business in the BVI had rigorous and appropriate Know Your Customer (KYC) and due diligence systems and procedures in place, adequately designed to prevent money laundering and terrorist financing.
More Recent Developments
Most of these legislative introductions were followed up with a series of amendments over the years in order to continue to adjust, augment and cooperate with international measures and pressures. The AML legislation, in particular, was also recently overhauled, primarily to implement new and internationally accepted obligations on KYC as it relates to ‘introduced business’ — a system whereby BVI registered agents rely on a third party eligible introducer to introduce client entities on the basis that the eligible introducer possessed the due diligence information on the ultimate beneficial owners of such entities. These new requirements came into force on 1 January 2016.
Tax Information Exchange Agreements
Since 2002, major steps have been taken to implement an initiative of the Organisation for Economic Cooperation and Development (OECD) to address harmful tax practices by developing principles of transparency and promoting international co-operation in tax matters through exchange of information processes. To date, the BVI has signed twenty-eight of these tax exchange information agreements (TIEAs). The responsible authority for tax matters in the BVI, the International Tax Authority, is actively partnering with countries who are party to the TIEAs in providing requested information which satisfies the provisions of the particular agreement and the enabling legislation.
Beneficial ownership register and register of directors
One of the most recent internationally driven developments which overseas territories, including the BVI, are now grappling with is the provision of access to beneficial ownership information of BVI companies by way of a public register. During 2015, legislative changes were made to financial services legislation requiring that beneficial ownership information relating to BVI companies be kept in the BVI. Discussions are now on-going as to how such information would be kept and the BVI Government recently signed an agreement with the UK governing how such information would be exchanged.
In addition to these requirements, recent amendments to the BVI Business Companies Act in 2015 also now require that a register of directors for each active BVI company will need to be filed with the BVI Registry of Corporate Affairs. Importantly, the register of directors will not be a public register and will not be available upon a public search of the company. It will only be available and can only be accessed by BVI regulatory and legal authorities as required.
These robust legislative and systemic changes reinforce the BVI’s commitment to enhance its anti-money laundering regime to continue to bring it in line with international standards of transparency while maintaining a required level of privacy to its offshore clientele.
FATCA and CRS
US centred efforts relating to tax recovery have also resulted in the implementation of FATCA in the BVI. FATCA, a US tax recovery inspired piece of legislation aims to achieve its goal to reduce the possibility of US tax evasion by US individuals who invest in non US accounts and non US vehicles. The legislation requires foreign financial institutions to report to the IRS on all US account holders and a 30 per cent withholding tax is applied to payments to any such institutions which do not participate. In June 2014, the BVI signed an intergovernmental agreement with the USA to provide the framework for the implementation of FATCA and introduced legislative provisions to regulate this agreement. A UK version of FATCA has been similarly implemented.
Most recently, the OECD Common Reporting Standards (CRS) have been implemented by way of another amendment to local legislation. As with FATCA, CRS (affectionately referred to as FATCA on steroids), is the standard for automatic exchange of financial account information and provides for systemic and periodic automatic exchange of information between participating jurisdictions. Whilst very similar to FATCA, CRS has more far reaching consequences, as more than 90 countries have already adopted or committed to adopt the implementation of CRS, with the BVI being one of the early adopters.
In 2011, the Alternative Investment Fund Management Directive (AIFMD) requiring all alternative investment fund managers to obtain authorisation from the European Economic Area (EEA) and submit to government regulation in order to operate within or market to investors within the EEA, came into force. The BVI has already drafted the enabling local legislation and is currently seeking the approval of the European Securities and Markets Authority in order to take advantage of the opt-in regime component of the AIFMD for alternative investment funds of non-European countries; and so that BVI fund managers can also to take advantage of passporting BVI funds to professional investors in any European jurisdiction.
Back to the Future
Trailblazing a new path
The BVI still continues to trail blaze the path of structural innovation by examining certain developed trends which have been established over time in establishing itself as a leader in offshore financial services. One such established trend is that the BVI has become home to the smaller sized emerging manager. Acknowledging that fact, the BVI introduced three fresh and sensible products to simplify operations and costs for these types of managers.
In 2012, the approved manager regime was introduced to provide a licensed management vehicle similar to the full SIBA licensed manager but with much lighter regulatory obligations, low set up costs, expedited approval times and minimal ongoing obligations. The product has become very popular and is being increasingly utilized by these emerging managers.
In 2015, two new products were also introduced along-side the approved manager — the incubator fund and the approved fund. The incubator fund is another great product for start-up managers seeking to test their investment strategy, perhaps with friends and family money and build a strong track record with absolute minimum set up costs before seeking institutional investment. This fund has a validity period commensurate with a typical start-up period of two to three years, has very low minimum investment thresholds (as low as US$20,000 per investor) and does not require an audit during the validity period. The approved fund is also a new product which has been introduced. It is similar to the private fund but is automatically exempt from the requirements to appoint an auditor, manager and custodian. Unlike with the incubator fund, the approved fund has an unlimited life provided it continues to satisfy the established criteria, which include a maximum of 20 investors and assets under management not exceeding US$100 million.
One has to look to the past to know how to plan the future and the BVI must continue to keep pace with and anticipate international developments in regulation and compliance. Simultaneously, it must build on the success of its past by introducing innovative products and robust legislation and systems to continue to attract and retain its international business clients. It has withstood the tests of its time and remains a centre of international commercial business and looking towards the future, an obvious challenge will be to continue to develop its strengths. As it looks to the next decade of conducting financial services business in a contracted and even more highly regulated space, the BVI must continue to remain at the cutting edge by continuing to provide legally sound dynamic and cost-efficient corporate solutions in the international business expanse.
Ayana Hull Counsel