International Financial Centres (IFCs) are facing many challenges as we look towards 2019. Some are man-made, as global regulators and politicians use IFCs as political footballs to win populist anti-establishment votes; others are natural as we still recover from the biggest hurricanes to hit the Caribbean in generations.
But, amidst those threats lie greater opportunities. Developing nations in Asia and Africa are set to grow rapidly as they embark on truly great projects of human ingenuity and design. Technology is quickly moving financial services forward in ways we could never have imagined even a decade ago. At the centre of all this are IFCs, which offer businesses and individuals unrivalled benefits as national enterprises and entrepreneurs become global in their scale and aspirations.
To capitalise on the opportunities and to better fight the threats to our businesses, IFCs need to work better together to harness our strengths as one community. There is Strength in Numbers
In September 2017, the British Virgin Islands along with several Caribbean jurisdictions fell victim to Hurricanes Irma and Maria, two of the most powerful hurricanes on record. In the immediate aftermath of the hurricanes, we all feared that our business and financial services sectors – which represent more than 60% of our government’s revenues – could have been crippled.
But we worked together to rebuild and emerge as stronger. Friends across the Organisation of Eastern Caribbean States (OECS) and the Caribbean Community (CARICOM), which are home to many IFCs, came together to lend helping hands. The coordinated relief effort organised by the OECS and CARICOM was unprecedented. The OECS led a multi-national tour of the affected regions and was able to help with humanitarian and security support that ensured supplies came to us, and our governments were able to function. Support for the restoration of electricity in particular not only came from the OECS and from CARICOM but from Panama. The Financial Services sector contributed significant sums to the refurbishing of the Commercial Court as well as to the rebuilding of schools.
In our case, the BVI Financial Services Commission, housing services such as the corporate registry and its online company registration portal VIRRGIN, remained operational throughout the worst of the aftermath. In addition, the BVI’s beneficial ownership information portal (BOSSs) was unaffected by the hurricane.
The members of OECS and CARICOM have also been able to prove our strength in numbers when faced with man-made challenges. Earlier this year the UK Government voted to impose public registers of beneficial ownership on the BVI and other Overseas Territories (OTs), to take effect in 2020. We believe this is a deeply flawed policy and we have worked together with other OTs that rely on their IFCs for much of their region’s revenue to make that point clear to politicians in Westminster.
While the UK Parliament passed the Sanctions and Anti-Money Laundering (SAML) Bill, the OECS and CARICOM are working hard together to make our voice heard between now and 2020.
Weaknesses can be Overcome
While we in the Caribbean have strong bonds, it is evident that one of the perceived weaknesses IFCs have is that there is a clear geographic divide between many of the OTs here and the Crown Dependencies (CDs) closer to Europe.
We share a lot of the same challenges and issues, but we do not make enough of an effort to work together. As the challenges we face become more acute, we can and should do more to work across the Atlantic together. There are opportunities to do so through the Joint Ministerial Council which is the principal forum for reviewing and implementing the shared strategy for the security and good governance of the OTs. The International Financial Centres Forum represents another such opportunity.
As globalisation continues, all IFCs are in competition for international business. Though this clearly represents a potential divide, as IFCs seek to do the best by their employees and local communities competition is a natural and healthy part of the financial services industry. It is also arguably necessary to ensure all IFCs continue to develop best practice.
Regulatory Pressures Pose Threats
Regulatory pressures pose some of the most notable threats to IFCs. With the passing of the SAML Act, which was introduced to combat money laundering and tax avoidance in the OTs, we do not believe that public registers are the right solution unless implemented across the globe. In fact, some OTs already implement a far more robust system for anti-money laundering and counter-terrorist financing.
Within the BVI for example, the Beneficial Ownership Secure Search system (BOSSs) enables relevant authorities to have a secure and searchable database with information on BVI Companies and their beneficial owners. This information can also be shared with the UK government where necessary. Given that the data within this database is verified and accurate, we believe it is a more stringent and effective approach to ensure transparency than an unverified public register.
The insistence of this ’one-size-fits-all’ regulation as a global standard threatens IFCs whose business model is most attractive to investors looking to conduct cross-border transactions. We also strongly support the need for privacy, which is not the same as secrecy. There are many perfectly legitimate reasons why companies and individuals prefer to keep their affairs confidential. Privacy is a human right, after all.
Another threat posed to IFCs is the continued ignorance of what they ’contribute to global business and how much benefit they offer economies around the world.
According to the 2017 Capital Economics Report Creating Value: The BVI’s Global Contribution, the BVI mediates more than US$1.5 trillion of cross-border investment flows and supports more than 2.2 million jobs worldwide. Over US$15 billion of tax revenues are generated annually for governments around the world via investment mediated by the BVI and the resulting economic activity; the UK, the rest of the EU, plus China and Hong Kong are the largest beneficiaries.
Global Opportunities for Growth
Despite the threats facing IFCs, there are many opportunities for future growth as they continue to offer various business models and different focuses. Bermuda for instance, is well-known for offering specialist insurance services; Jersey is often used for trusts; while Mauritius serves African corporate business. The BVI is one of the leading corporate domiciles globally.
One major opportunity for several IFCs lies in China’s Belt and Road Initiative. This is a visionary strategy created by the Chinese government to bind economic and cultural ties among countries along the Silk Road Economic Belt and the 21st Century Maritime Silk Road. The network passes through 60-plus countries and regions, including several IFCs such as the BVI.
Many finance centres in the OTs are no strangers to Asian investment and have been enabling cross-border deals for several decades. The initiative is big enough for all of us and there is much to gain, such as the use of offshore holding companies and the need for investment funds and financing vehicles to successfully deliver the scheme.
Growth opportunities are not confined to China. We are watching the rise of African economies with great interest and excitement. Where Asia saw explosive growth in the 1990s and 2000s, Africa is predicted to develop rapidly in the 2020s and 2030s. The role of international investment will be crucial in Africa’s quest for economic growth, as it was in Asia, and IFCs will have a real role to play here in transforming the business landscape.
As the application of financial technology becomes more ubiquitous in the investment and banking world, we will need to adapt our services and approach accordingly. We have already seen a staggering level of interest and requests to structure Initial Coin Offerings (ICOs) in the BVI, where fintech entrepreneurs raise third party capital by issuing tokens of some form via a blockchain network. The BVI is now the second biggest ICO market in the world – we had a trading volume in crypto assets valued at US$78.5 billion in the first six months of 2018, just US$5 billion less than the United States’ ICO market.
IFCs have a positive outlook. Though we are facing challenges, we believe that the opportunities outweigh the threats, and our strengths will overcome our weaknesses. New markets and business ventures in Asia and Africa, combined with the new frontier of fintech are already proving invigorating for IFCs. If we can co-operate closer in the regulatory arena and maintain our healthy competition in business, we can be even more optimistic about our collective future.
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.