Increased public transparency in the British Virgin Islands’ BOSS system purports to curtail illegal economic activity in the BVI. In the battle between law enforcement and criminals, though, the BVI financial sector appears to be caught in the middle.
The headlines of the past couple of years have not been friendly to the British Virgin Islands (BVI). A corruption inquiry[i] was launched by the British government in January 2021, following a number of damaging revelations about potential misuse of public funds. Subsequently, the islands’ Premier was arrested in Miami[ii] this past April for alleged drug smuggling.
Following that, the BVI then narrowly avoided[iii] the imposition of direct rule in June following the conclusion of the corruption inquiry, with the British government overriding its own commission’s recommendations for direct rule and instead requiring the implementation of reforms over the next two years. If these reforms fail to occur, direct rule seems likely.
As a result, the BVI is facing some potentially sweeping changes that will impact all those who do business with the islands. Away from some of the lurid media headlines, life and business go on: but one change is incoming that will have ramifications.
I am referring to UK Parliament-mandated changes to the way that companies are incorporated and notably, the information that will be stored and accessed about ultimate beneficial owners (UBOs) of companies incorporated here in the BVI.
Previously, this material has only been accessible to a limited number of government-authorised parties, such as law enforcement, via the Beneficial Ownership Secure Search (BOSS) system. This registry contains UBO information of every entity incorporated in the BVI. But, at some point during 2023, our company registers will be “fully open”. This means that anyone, members of the public included, can access the information they hold.
A longtime pillar of the BVI’s economy has been its financial services sector. The past 15 years, however, have seen steadily growing cracks emerge in this pillar. The sector is primarily driven by fees paid by corporations to BVI-based registered agents to incorporate and maintain them in its offshore jurisdiction. In 2020, approximately 80 per cent of BVI government revenue alone came from its financial services industry.[iv]
Since 2007, however, the rate of new incorporations has been in decline. After peaking at 77,022 in 2007, new incorporations fell to below a third of their pinnacle in 2020, hitting a 21-year low with just 22,362 new companies formed.[v] Although the most recent data through Q1 2022[vi] shows some promising gains, current new incorporations still pale compared to their record highs.
The total number of companies incorporated in the BVI has also fallen, albeit less dramatically. Said by some sources[vii] to be the more telling number about the health of BVI financial services, there were 375,185 active companies[viii] in the BVI at the close of Q1 2022. Although slightly up from 2020, where active companies finished the year at a 14-year low[ix] of 366,364, these figures remain considerably diminished from their 2011 peak at 481,002.
This downturn is predominantly due to regulatory pressures facing the islands’ financial services sector. Although the International Business Companies Act, 1984 was a resounding success as a boon to BVI financial services, it also allowed corporations[x] to be incorporated in the BVI merely by providing the names of directors and an email or fax address. While the BVI government has contended that the sector is well-regulated and used for legitimate ends, it nevertheless has faced continued accusations that it has provided a safe haven to tax dodgers and economic criminals.
In its critics’ eyes, these accusations were at least in part substantiated in investigations undertaken by the International Consortium of Investigative Journalists (ICIJ) and its partner media organisations, starting with the Offshore Leaks in 2013, the Panama Papers in 2016, the Paradise Papers in 2017 and the Pandora Papers in 2021. Matters were then compounded when veteran MPs Margaret Hodge (Labour) and former International Development Secretary Andrew Mitchell (Conservative) drove a successful amendment to 2018’s sanctions and anti-money laundering bill. It required the UK’s 14 overseas territories to introduce public ownership registers by the end of 2020 (later amended to 2023) or face having them imposed by London.
The reality, of course, is that money laundering and tax evasion have made up only a minuscule percentage of financial activity in the BVI. Rather than committing crimes, the vast majority of companies featured in media leaks, as well as many other companies incorporated in the BVI, have sought to reduce their tax burden through legitimate and entirely legal means.
And the BVI government has taken steps to curb illegalities such as money laundering and tax evasion. Beginning in 1997 with the Proceeds of Criminal Conduct Act 1997 the BVI legislature has sought to combat illegal financial activity in its jurisdiction. In 2021 alone, legislative initiatives included the Proliferation Financing (Prohibition) Act 2021, the Drug Trafficking Offences (Amendment) Act 2021, the Criminal Code (Amendment) Act 2021, the Economic Substance (Companies and Limited Partnerships) (Amendment) Act 2021 and the Beneficial Ownership Secure Search System (Amendment) Act 2021.
Nevertheless, a small percentage of nefarious actors, hyper-publicised by the media, have continued to cloud the reputation of the BVI’s offshore services. International governments have responded by increasing pressure on the BVI to further curb illegal financial activity in its jurisdiction.
Five years ago, the BVI government responded to these pressures with significant legislation, the Beneficial Ownership Secure Search System Act, 2017 (BOSS Act). This legislation called for the development of a registry to store the identities of the person or persons who ultimately control BVI-based corporations, otherwise known as UBOs. The BOSS Act applies to all corporations and limited partnerships in the BVI, and its registry allows for the retrieval of UBO information on any such entity. Under the system, companies report information about their UBO to their registered agent, who uploads it to the registry’s secure database.
A key feature of the current system is that it is confidential: access is limited to individuals who “have passed security vetting tests, have made an oath of confidentiality and are considered fit and proper by the BVI authorities.”[xi] This allows law enforcement officials in the BVI and the UK to access UBO information for investigative purposes without implicating privacy concerns.
The benefits of having this “controlled transparency”[xii] are severalfold – most obviously, limited access to UBO data preserves owners’ privacy. New costs for maintaining a public database are also avoided. For asset recovery lawyers like myself, registries with limited access preserve the secrecy needed to successfully investigate and retrieve assets from complex fraud cases. Publicly accessible registries, by contrast, will expose our efforts to the very fraudsters we seek to catch, enabling them to stay several steps ahead of investigations.
Adverse Effects Of Public Registers
As I have previously warned[xiii], opening UBO registers to the public will likely be not only ineffective but counterproductive. It also poses major confidentiality concerns.
To start, public access to UBO information is unnecessary. The current system already provides law enforcement officials with swift access to carefully verified UBO information – authorities are guaranteed access to information within 24 hours of a request, or two hours in emergency situations. One need only look at the UK’s public UBO register, Companies House[xiv], to see that public data is not necessarily better data.
As recently as 2018, Companies House only employed a handful people to verify all UBO data for the more than four million UK-incorporated companies; for context, the BVI’s Financial Services Commission has a 140-person team to ensure the compliance of under 400,000 BVI corporations. Failure to meaningfully regulate or police the submitted data has rendered Companies House virtually useless[xv], leading the Financial Times Editorial Board to castigate it[xvi] for “the seriousness of poor data verification”. Pressure group Transparency International said that this allows economic criminals to hide in plain sight.[xvii] Merely providing public access to UBO information is not an adequate substitute for a thorough verification process.
In fact, the popular justification for increased transparency, much-touted by campaigners and journalists, is rooted in a naive belief that this will lead to more effective regulatory enforcement. What these groups fail to consider is that there would be little gained from extra eyes reviewing UBO information under a public system – criminals would simply respond by increasing the sophistication of their enterprises and continue with business as usual (crooks lie, after all). In an open UBO register, criminals will likely adapt by concealing true UBO identities beneath layers of fictional ‘strawman’ nominees.
Rather than reducing crime, a concern is that the greatest impact of a public register will be on the BVI financial services industry itself. As we saw in the Panama, Paradise, and Pandora Papers, journalists will seek to expose prominent individuals – not only wrongdoers – even when their businesses are acting in a perfectly legitimate manner. Stripped of their right to privacy, UBOs will abandon the BVI and seek to incorporate in jurisdictions where they can maintain anonymity. And if the proposal to force open company registers doesn’t actually work, and in my view will likely destroy important evidentiary material necessary for the prosecution of economic criminals … then what is the point of such legislation?
My prediction that the creation of a public UBO registry will negatively impact the BVI financial sector is hardly bold. After all, increased regulation has mirrored the slow decline of BVI incorporations over the last 15 years. The biggest concern, however, is the extent to which this groundbreaking step towards total transparency will impact the BVI financial services industry. This key pillar of the BVI economy was already showing cracks: we will soon learn how much further they can widen.
With thanks to Sam Spurrell and Olivia VanBennekom, interns at Martin Kenney & Co., for their additional research.
Martin is Managing Partner of Martin Kenney & Co (MKS), a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases. In 2014 Martin was the recipient of the Association of Certified Fraud Examiners (ACFE) highest honour: the Cressey Award for life-time achievement in the detection and deterrence of fraud. Ranked by both Chambers and Partners and Legal500, for the past several years he has been chosen as a global elite “Thought Leader” of the legal profession by Who’s Who Legal. http://martinkenney.com/