Dan Wise looks at why certain IFCs prosper. He discusses regulation and investment opportunities, and opines on the implementation of public registers of beneficial ownership in the British Overseas Territories.
Offshore jurisdictions come in many different shapes and sizes. They are unified by little save that they have all evolved in different ways over time. Different jurisdictions have different areas of specialisation traditionally; Bermuda for insurance, the Channel Islands for trust work, the Cayman Islands for hedge funds and banking, the BVI for asset holding vehicles – to name but a few.
Since at least 2008, however, the increased emphasis placed by international organisations such as the EU and the OECD with regard to anti-money laundering (AML) issues has in some ways altered the way in which offshore jurisdictions operate. IFCs have been divided as a matter of practice into those which are fortunate enough to have sufficient resources to support an effective regulatory environment (and enforce compliance with high AML standards and the verification of beneficial ownership); and those which, although subject to the same standards, are not so well resourced. As an asset recovery lawyer operating internationally, I have been struck by how effective the Ultimate Beneficial Ownership (UBO) regulations have been in nearly all the Caribbean jurisdictions in which I have worked. I base this view essentially upon obtaining Norwich Pharmacal disclosure orders in aid of civil asset recovery actions. Even in some of the less well-established offshore jurisdictions such as Belize I have found that UBO information is available with authorisation by a court.
That notwithstanding, in certain jurisdictions the regulatory authorities are less demanding than in others. From a BVI perspective, I would say there has been a noticeable migration of less reputable businesses, from the BVI to other jurisdictions, but mainly to those in the Indian Ocean and to less regulated US States such as South Dakota.
Offshore Products and Trends
The traditional BVI product, which is the sale and management of relatively inactive assets holding companies has, in the past, lent itself to a variety of end users. These range from wholly respectable joint-venture vehicles to exploit natural resources, to property-holding structures owning property onshore, whether for convenience, legitimate privacy or to allow fractional ownership or estate planning. The less creditable end of the business, where BVI companies might be used to hold assets (say wrongfully extracted from South America) has become unsustainable by reason of the requirement for verified UBO information and the gradual percolation amongst crooked end users, and their onshore advisors, that verified UBO information must be supplied as a condition of setting up any BVI company.
The seemingly inexhaustible supply of investment opportunities generated in and around China has provided a continuing source of clients for offshore services. The forthcoming new Silk Road project, which is intended to build a belt of road and rail, together with associated infrastructure throughout Asia, the Near East and Europe, is estimated to require investment to the tune of US$1.5 trillion. It is anticipated that offshore service providers with an existing footprint in Hong Kong and the People’s Republic of China (PRC), like the BVI and the Cayman Islands, stand to do well in terms of providing asset holding and investment structures to allow the raising of the external capital required for this development.
Private equity funds are probably the most significant source of investment structures in Cayman and the BVI. Much of this private equity investment works through limited partnerships. In an attempt to increase its share of the more complex, and therefore higher value-added work, the BVI has recently passed its own Limited Partnership Act. Previously, it is fair to say that the BVI lost out in this area to the Cayman Islands.
As China continues to increase its day-to-day control over both Hong Kong and Macau, incentives remain for Chinese businessmen to vest assets into offshore structures. The same is true of many Latin American businesses, and, of course, persons from the former Soviet Union. In addition to reducing exposure to perhaps capricious home governments, offshore gives access to an impartial dispute resolution forum, whether in a commercial court or by way of arbitration. In addition to benefits for the founding owners of a business, it is undoubtedly easier to raise third-party capital if there is a dispute resolution forum outside certain of the less predictable jurisdictions. In addition, the unfair prejudice protections which are conferred, certainly within the BVI Companies Act, provide a mechanism of protection for minority shareholders and, arguably, a means of dismantling the structure and cashing out with an impartial valuation of the interest and without having to resort to placing the company into liquidation.
Access to, and adopting a dispute resolution mechanism in a legal system which is both highly developed in terms of company law, and impartial and with access to specialist counsel, including leading counsel from London, is one of the major advantages of the British Overseas Territories.
Where offshore jurisdictions continue to prosper, they do so by leveraging the fact that they are small jurisdictions without large populations; in part because of that, they can be nimble in responding to market trends. As globalization has concentrated wealth into the hands of an increasingly small number of people who see themselves as ‘global citizens’, and given that in many jurisdictions, certainly the United Kingdom and the United States, a person is entitled to manage their tax affairs in such a way as to reduce their liability for taxation, lawfully, the scope to structure one’s affairs to minimize onshore tax liability by engaging in tax arbitrage remains extremely important. Whilst this is anathema to some, the fact remains that lawful offshore tax planning is derivative of the terms of onshore tax codes.
In the BVI, the opportunity to operate a private trust company, and within that trust company administer Vista Trusts, provides very considerable flexibility for ultra-high net worth individuals to manage their affairs and deal with succession planning, but without the risk mitigation features of conventional trusts which dilute the control of the settlor. Cryptocurrency and FinTech are other areas for which smaller developed offshore jurisdictions are seeking to cater with bespoke legislation. These are good examples of offshore jurisdictions being able to respond to market needs.
Public Registers of Beneficial Ownership for the British Overseas Territories
It is impossible to discuss trends in the offshore world sensibly without commenting on the British Parliament’s decision to pass the Sanctions and Anti-Money Laundering Bill on 21 May 2018. As readers will no doubt be aware this bill mandates publicly available beneficial ownership registers by 31 December 2020. The imposition of this measure is causing consternation in the British Overseas Territories. The measures have not been imposed upon the crown dependencies of the Channel Islands and the Isle of Man. I believe these measures are unjustified. The basis of my view is as follows:
1. The British Overseas Territories have a high degree of self-government pursuant to their respective constitutional arrangements with the United Kingdom. In the case of the BVI, this is enshrined in the 2007 Constitutional Order. While there is scope under this constitutional arrangement for the British to interfere I suggest that such interferences must be justified by reference to some exceptional imperative, and be proportionate. That is not the case here.
2. Public availability of Ultimate Beneficial Ownership (UBO) data is not justified. The Overseas Territories have put together a searchable registry of beneficial owners, backed up by verified objective documentation. It is agreed between the territories and the United Kingdom that UBO information can be obtained by appropriate authorities within 24 hours; and in an emergency within one to two hours. This step is in addition to numerous Tax Information Exchange Agreements.
3. The analysis which appears in the Hansard record of the debate for 1 May 2018 in the House of Commons, and pursuant to which the Bill was passed, is infantile. No consideration at all is given to legitimate rights to qualified privacy, notwithstanding the protections deemed essential in the UK under current data protection legislation, or for bank account information.
By way of example, consider a Russian who misappropriates significant money, wrongfully, from the former Soviet Union and uses it to buy real estate in London via a BVI company. It would be very unlikely that the Russian would hold their money in a BVI bank. The bank account would probably be in the City of London or in Switzerland, or in some other onshore jurisdiction. The money used to purchase the real estate would be subject to scrutiny by the onshore bank, both of origin and destination, for the real estate purchase. The solicitors for both the purchaser and the vendor would need to satisfy themselves as to the bona fides of the money and of the underlying beneficial owner of the BVI entity (and would be able to do so because the information is available to be demanded). If any of those onshore professionals had concerns as to the origin of the money, they would be expected, as a matter of English law and regulation, to make the appropriate suspicious transaction report.
4. Given the above there is no necessity for the compliant Overseas Territories to be pushed to exceed the standards presently required, both in law and in practice, in the United Kingdom. The Overseas Territories with populations of far fewer than 100,000 have already done what the United Kingdom has been unable to do in compiling a register of verified UBO data. In the Commons debate it was accepted that although the Scottish Limited Partnership legislation required disclosure of the UBOs of those entities, those regulations have, in practice, been ignored with impunity. According to Paul Sweeney MP, 57 per cent of Scottish Limited Partnerships have failed to provide the information they are required to do, with the result that £2.2 billion in backdated but uncollected fines has accrued. As was reported in The Independent on 2 May 2018, the position is hardly better in England, where almost no-one, save for one or two whistle blowers, has been prosecuted for filing inaccurate information regarding significant control of an English company. It would appear that both in Scotland and in England, regulations have been imposed which are an ineffective fig-leaf, because the enforcement infrastructure is not in place to demand verified documentation to substantiate the identity and address of a UBO. A Territory with fewer than 40,000 people has put an infrastructure in place to do this, while a country of over 60 million cannot.
5. A public registry is likely to backfire. Legitimate business, and in particular legitimate tax planning, will remain. Crooked business will move to less well-regulated jurisdictions which have been unwilling to devote the resources that the major Overseas Territories have to compliance and cooperation with onshore tax authorities and law enforcement. The replacement jurisdictions will probably be independent countries which will be outside the reach of the United Kingdom, and therefore much less susceptible to the influence of the British Parliament. The commercial incentives in England to deal with, advise on and administer large sums of illicit money, for the purchase of real estate or to invest in English financial products, for example, will remain. Based on the concerns raised in the British parliament as to the millions of dollars improperly circulating the world, it would seem that the English anti-money laundering legislation and regulations, and in particular their enforcement of them, is proving ineffective. In spite of the constitutional settlement entered into with the various Overseas Territories and despite the very significant efforts and resources devoted to compliance by the Overseas Territories, the British have imposed a standard which exceeds that which is applicable to themselves, and which will not solve the problems about which the UK Parliament pretends to be concerned. In my view, as an experienced trans-national asset recovery lawyer, this approach is likely to make the situation worse. An unkind person would detect an attempt at diversion from British failure.
Dan Wise Head of Litigation. He is also Partner at O'Neal Webster.