How IFCs Collaborate To Remain Competitive

While the BVI was in the midst of an extraordinary recovery in 2020, COVID-19 was declared a pandemic in March, causing millions of deaths or serious illness worldwide.

22 years earlier, IFCs were in real danger of being branded as tax havens with OECD countries discouraging their use, which could have caused economic disaster for both onshore and offshore. This article speaks to how in all three instances of near disaster, IFCs collaborated with each other to emerge stronger.

The Role Of International Finance Centres

The financial services industry is global and by using IFCs, the cost of capital becomes much less expensive. For instance, capital raised through a BVI company may go into building a hospital in Africa, a factory in China or a restaurant in New York at a much lower price than capital raised normally. Similarly, a Cayman incorporated company may administer and manage a pension fund with contributions from around the world and through sound investments, bring peace of mind and a high quality of life to many thousands. Unfortunately, the threat to IFCs remains real as through various dramatic events including the publication of sensational headlines, they are constantly under fire from those who do not understand their role or deliberately try to bring about their demise.

The Level Playing Field

IFCs have always maintained that for global trade in financial services to thrive, policy and regulatory decisions must be taken by the relevant players worldwide, whether they reside and work in metropolitan countries like the USA, the UK and China, or in small IFCs like the British Virgin Islands, Cayman Islands or Bermuda.   

Equally, IFCs live by the code that if money laundering, terrorist financing and other international crimes are to be tackled effectively, the requisite regulations must be drawn up and implemented by all concerned on the basis of a global level playing field, rather than by one group of countries dictating the rules to another.

Especially before 2000, the financial world was meant to operate according to the guidance and recommendations put out by international bodies – recommendations developed without the IFCs but which they were nonetheless expected to adhere to, or be criticised as “tax havens” and face the threat of being blacklisted.

Bringing Matters To A Head

Small country IFCs were already concerned about how the big, rich countries were conducting themselves when two reports from the OECD Secretariat caused matters to come to a head. Both had the potential to distort international trade patterns to the detriment of BVI and other IFCs.

Two reports, one published in 1998 and the other in 2001, Harmful Tax Competition: An Emerging Global Issue and Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes essentially urged OECD member countries to, among other things, terminate existing tax conventions with “tax havens”; impose a substantial withholding tax on payments to countries that engaged in “harmful tax competition”; and develop procedures to address the use of “tax havens” for transfer pricing.  The latter document said governments should obtain information globally on the beneficial ownership and control of corporate vehicles to ensure these were not used for illicit purposes. Both reports thus had significant privacy and other implications for many IFC jurisdictions and their clients.

A number of leading IFC players saw the need to respond to the OECD on its own terms as a collective group of countries and with factual arguments.  They decided to band formally together forming the International Trade and Investment Organisation (ITIO) in 2001. Its chief aim was the development of a “balanced approach” globally to international tax and investment issues. It actively encouraged members to form a common position in negotiations with the OECD and it supported relevant research.  The ITIO became a rare example of IFCs actively collaborating to get better results than their usual way of going it alone achieved. Over time, it grew to 17 members.

The group would meet in members’ countries or at the Commonwealth Secretariat in London.    For years they fought in the trenches for fairness and for the acceptance that countries large and small – whatever their state of development – had to work on an equal basis in order to stop organised transnational crime from penetrating national boundaries.

ITIO member countries spoke with one voice, having first agreed common negotiating positions towards the OECD. They shared with each other what the OECD was telling them individually, exposing and undermining its attempts to play the old game of divide and conquer.

A significant victory of the ITIO was the commissioning of the law firm of Stikeman Elliott to publish in collaboration with the Society of Trust and Estate Practitioners (STEP) Towards a Level Playing Field. The report, published in 2002, proposed that the design of any new rules for combatting transborder crime must include:

• All countries being subject to the same rules for any given activity, implemented on the same timetable with the same consequences for non-cooperation;
• Policy discussion and decisions in a universal forum;
• Appropriate regard to competing considerations such as reasonable privacy; and
• Regulation proportionate to the risk and benefits of the activity being regulated.

The OECD now found itself on the ‘back foot’ and became more amenable to listening to IFCs’ demand that change should happen only on the basis of a level playing field. After years of being dismissed as “tax havens”, the BVI and other IFCs began to be mainstreamed, with a greater international appreciation of their role in the global economy and greater input into the development of international regulations.

IFCs Collaborating During Catastrophic Climate Crises

When hurricane disasters struck in 2017, BVI adopted the same playbook used when Hurricane Ivan struck Cayman with similar force in 2004.  Georgetown as a leading IFC was similarly reduced to an apocalyptic wasteland.  Although for months there was radio silence globally as Cayman sought to come to terms with the disastrous hurricane, BVI as an IFC stepped in to assist by not only providing accommodation for displaced businesses, but altering its work permit and immigration procedures to allow Caymanians working in the financial industry to work uninterrupted in BVI for six months at a time. The seamless transition of staff was also facilitated by the fact that many firms had branches in the BVI.  The upshot was that Business Continuity Plans could be easily engaged with minimal loss of business. IFCs by their very nature facilitate international activity by operating under a regulatory framework as approved by the host country which gives them the ability to function - at least for a few months - from another country.

In a similar vein, BVI businesses operated in Cayman for at least six months after the 2017 hurricanes and were afforded the same privileges. But the extent of the damage in BVI was significantly more so that firms also set up temporary shop in other IFCs including St Lucia, Curacao, Barbados and as far afield as the Channel Islands.  In every instance BVI firms were welcomed and accommodated so that business could continue.

There was one significant decision that BVI had to make as one of the world’s leading incorporation centres: that was to open up its incorporation platform VIRGIN in jurisdictions outside of the BVI to allow this important aspect of business to continue.   It was fortuitous that when the 2017 hurricanes struck that senior BVI regulators were abroad on business.  The Chief Regulator directed them to stay put in London, Hong Kong and the United States where they could continue to direct business from those locations. 

Traditionally only BVI Company Service Providers (CSPs) have access to the VIRGIN platform.  In the aftermath of the hurricane CSPs from Hong Kong were given access to the VIRGIN platform for seven months to allow business to continue, which explains the increase in incorporations in 2018. According to the BVI FSC Statistical Bulletin, in Quarter Three of 2017, the period when the hurricane struck, incorporation numbers stood at 7,639, in Quarter Four of the same year they rose to 8,538, in Quarter One of 2018, they rose further to 9,798, falling to 9,126 which coincided with VIRGIN’s administration returning to normalcy.

Following the harrowing experience of Hurricanes Ivan in Cayman Islands and Irma in the BVI, regional Financial Services Regulators later decided that it was prudent to develop a Memorandum of Understanding that would allow firms to operate seamlessly in other jurisdictions in the event of natural and other disasters.  This is still being finalised and hopefully will be signed off by the beginning of next year.

The COVID-19 Pandemic

In March of 2020 when COVID-19 was declared a pandemic, most IFCs had their Business Continuity Plans in place. Technology having developed at a stage where most – if not all – activities in the industry could be carried on virtually was a blessing.  In fact, output/productivity increased in many areas according to the ILO Stats[i]; with the world’s output per hour increasing by 4.9 in 2020. More specifically in financial services, according to various sources including The Bond Buyer (September 15^th 2021) it all came down to quality of work, as there was a significant lack of supervision. 

Be that as it may, IFCs transitioned easily to conducting business virtually via Zoom or Teams which resulted in significant cost savings as for nearly two years travel was impossible. Clients of course also got used to using these facilities.  Conferences and international meetings continued to be held virtually. For instance, much of the negotiations/meetings between the OECD and members of the Inclusive Framework in relation to the Global Minimum Tax were conducted virtually.

We Still Need An ITIO

I began this piece by discussing the important role that an ITIO can play among IFCs.  Sadly, it only lasted a few years. But in that time, it achieved many things.

It developed joint strategies for members and by stating common demands, IFCs achieved more than if they had worked alone. In particular, they succeeded with their united message that the OECD must operate on the basis of a level playing field and include all committed jurisdictions in its Global Tax Forum. It also engaged with FATF on the revision of its then 40 Recommendations, highlighting how FATF countries themselves would be blacklisted under a fair process.

The BVI and Barbados took forward work begun in ITIO meetings to help CARICOM members devise their own strategies for commitments to the OECD.

I asked Glenroy Forbes, BVI’s former Financial Secretary and its last serving Chair, what the cause was of the ITIO’s demise in 2005. He cited people changes, inadequate financial resources and a gradual return by jurisdictions to acting bilaterally.  Glenroy Forbes told me, “There is the need for an ITIO type of organisation in this space today”. How true! In the face of demands for public access to beneficial ownership information and greater evidence of “substance”, a focus on the greening of financial services, moves toward a global minimum corporate tax rate and much more, a focus on bringing IFCs together to develop a joined-up response is as relevant as ever. We need a new ITIO!

Footnotes:

[i] ilo stat.ilo.org

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