Can the BVI survive in a world of international minimum level tax treaties and data hacks and leaks? Shaun Reardon-John poses the question in the brand new FraudNet 2022 Global Annual Report.

The offshore world is generally derided by the international press as a sunny place filled with shady people. It is easy to find stories depicting offshore territories such as the British Virgin Islands (BVI) as small, sparsely populated islands where thousands of companies are incorporated but none do business locally, all with the sinister undertone of money laundering.

This article will summarise some of the steps taken by the BVI in recent years to make information about its financial services sector more accurate and transparent. Many of the legislative initiatives are worthy of an article of their own and as a firm we would be pleased to discuss their impact with any readers who have an interest in how they affect their company or cases.

Recent Developments

Some recent events have provided ammunition to those seeking to demonise the offshore industry. Leaks such as the Panama, Paradise and Pandora Papers – reported by the International Consortium of Investigative Journalists (ICIJ) and its partner media organisations – were exploited for salacious effect, designed to infuriate taxpayers in onshore jurisdictions. 

The reality was that only a small percentage of the companies disclosed were involved in nefarious actions. Whether the exposure of the few to the detriment of the majority’s right to privacy is appropriate is a thorny issue. The focus of the vast majority of companies in these various leaks was legitimate tax “avoidance”, something that is not illegal and allowed by ‘onshore’ governments across the world (if governments wished to prevent such avoidance and make it illegal – i.e. tax evasion – they could and should change their laws). 

These offshore misconceptions were illustrated during a panel discussion between our managing partner, Martin Kenney, and the veteran Labour Party MP, Margaret Hodge, during a webinar organised by Offshore Alert in late 2020. Ms Hodge is a strong advocate for offshore reform and one of the principle architects of the public register amendment to the UK Sanctions and Anti-Money Laundering Act. It was startling that despite Ms Hodge’s position as an influential member of the UK parliament, she demonstrated little detailed knowledge about the workings of the BVI financial systems as the debate progressed despite attacking the BVI several times. 

In contrast, it would be interesting to compare the number of genuine tax evasions found in the most recent leaks (the Pandora Papers) against, for instance, the number of frauds committed against the various UK government’s bailout and bounceback schemes during the Covid pandemic. Both show that no system is perfect, but should the UK governments efforts be demonised because of the few in the way the offshore industry has been? That is before we turn to the almost non-existent verification checks of reported identities of Ultimate Beneficial Owners (UBOs) of companies in the UK (something that is thankfully being promised reform).

Outside of the financial services sector, the BVI government has been the subject of an independent commission of inquiry (COI) established in January 2021 by the outgoing BVI Governor, Augustus Jaspert and headed by Sir Gary Hickinbottom. The Commission is not investigating the financial services sector or the Court system in the BVI but, rather “whether there is evidence of corruption, abuse of office or other serious dishonesty that has taken place in public office in recent years, and if so what conditions allowed this to happen.” The narrative promoted by sectors of the press has been that the inquiry into these public officers cannot be distinguished from that of a “shady” financial system (despite efforts to ensure the inquiry’s purpose is clear). Sometimes the truth is simply not as scintillating as a good story.

In addition to the passing events that have affected the BVI, the Territory has also brought into force a steady stream of legislative amendments to combat money laundering. Some of these have been voluntary, others forced in order to avoid the Territory being blacklisted by larger states.  

Within the European Union’s (EU) own borders, there are still member states failing to implement anti-money laundering (AML) legislation that was supposed to take effect in October 2016. While reviewing the steps taken by the BVI in this article, it is worth comparing the BVI’s willingness to act to those “onshore offshore” juridictions that appear to be dragging their feet when it comes to AML compliance. This appears to be a classic “do as I say, not as I do” tactic.

Legislative and regulatory steps taken by the BVI to address money laundering risks

As far back as 1997, the BVI introduced the Proceeds of Criminal Conduct Act (PCCA) which provided the core primary legislation to combat money laundering. The PCCA was substantially amended in 2008 by the Proceeds of Criminal Conduct (Amendment) Act 2008 and, more recently, by the Proceeds of Criminal Conduct (Amendments) Act 2021.

As part of the BVI’s ongoing steps to ensure reforms keep apace with the risk of abuse the BVI market faces, these amendments have provided steps to modernise the BVI’s primary legislation on matters relating to money laundering. This was part of a number of legislative initiatives in 2021, which 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. The aim of the BVI government is clearly to ensure the Territory’s legislation keeps pace with new financial risks the world faces.

The PCCA spawned the Anti-Money Laundering Regulations which ensure that regulated persons carrying on regulated businesses in the BVI are required to keep “know your client” (KYC) information about those they do business with. This duty to keep transaction records and ensure there are internal reporting procedures places a duty on financial services businesses in the BVI, who are overseen by the Financial Services Commission (FSC) and the Financial Investigation Agency. 

These bodies are charged with receiving suspicious activity reports. In addition to Regulations, the FSC continues to issue Codes of Practice for various sections of the financial services sector. Given the BVI’s small size and focus on its financial services sector as a core pillar of the economy, it appears the Territory is more ready and able to act than many larger countries.

In 2017 the BVI introduced what many consider to be the most significant legislative evidence of its intention to weed out money laundering and tax evasion: the Beneficial Ownership Secure Search System Act (the BOSS Act) which, subject to specific exceptions, applies to all corporate and legal entities incorporated in the jurisdiction.

While the information held on the system has expanded over time to incorporate the requirements of the Economic Substance (Companies and Limited Partnerships) Act 2018, the initial aim was to request, verify and capture the true beneficial ownership details of BVI entities on an annual basis. If sufficient information is not provided, the registered agent will likely resign and the entity will not be able to find a new registered agent until sufficient information is provided.

The system was introduced to facilitate the sharing of beneficial ownership information with specific authorities in order to combat money laundering and tax evasion. There is a continuing duty on a BVI company to keep this information up-to-date, with various levels of fines for infringement by the company and those involved in its administration. The wide definition of a beneficial owner has been key to the legislation’s success, capturing those who would otherwise slip through the net using loopholes and includes:

    1. Persons who directly or indirectly own 25% of more of the shares or voting rights
    2. Persons who exercise control over another legal entity that owns the BVI company
    3. Any control via a legal arrangement, e.g. a nominee, so that the legislation can look behind those who claim to control the shares of a BVI company.

The importance of the BOSS system is twofold. Firstly, it allows international agencies to verify the information they have been provided in order to combat money laundering and tax evasion, thus weeding out those who provide inaccurate information to different jurisdictions. Secondly, and crucially, is the accuracy of the information. Registered Agents seek to verify the UBO data during the incorporation process and have processes for regular review by requesting, with appropriate evidence, annual information from the entity to verify there has been no changes to the UBO(s). By comparison to Companies House in the UK, where little or no verification of beneficial ownership information is undertaken at the incorporation stage (though this will hopefully improve due to promised reforms to the system), it is a gold standard system. Similarly, places such as Delaware in the USA do not hold beneficial ownership information: though this too, in some circumstances, should change due to the introduction of the US Corporate Transparency Act enacted in 2021. Those tracing assets will know that the accuracy of information provided to third parties is key to our work. At the moment it is difficult to see how developed nations can criticise the BVI in this respect, yet they continue to do so.

How the BOSS Act has changed things

Since the BOSS system was introduced, the BVI has utilised the new process as part of its economic substance reporting obligations. In late 2018, the BVI passed the Economic Substance (Companies and Limited Partnerships) Act 2018, which came into force on 1 January 2019. This legislation was in response to EU and Organisation for Economic Co-operation and Development (OCED) pressures, and to similar legislation brought into force in a number of offshore jurisdictions. 

In summary, the law created an obligation on certain corporations carrying out relevant activities to evidence that they had an adequate economic presence in the BVI if they claimed to be tax resident here. In practice, this has meant they have needed to show that the relevant activities are directed and managed from the BVI with the associated expenditure you would expect to see from such an entity. If an entity carrying out a relevant activity claims to be tax resident outside the BVI, then documents supporting this claim have to be filed with the BVI International Tax Authority to be assessed whether the entity is exempt from the reporting requirements in the BVI.

These economic substance reports are provided to the company’s registered agent and then uploaded into the BOSS system. Because the information needs to be provided annually to the registered agent, it allows a fuller picture of the business to develop over the years, which also helps the registered agent identify any sudden changes that may be cause for concern.

Some have criticised how few requests are made to the BVI authorities to access the information held on the BOSS system. However, this is not a BVI problem but more a sign of the lack of resources available to those who can access it. This begs a question: even if more information is discoverable, will it ever be reviewed? The recent FinCEN leak suggests such volumes of data may be impossible to monitor.   What is clear is that the BVI is not a place where it is easy to escape attention if law enforcement or governments want to investigate the source of your wealth. 

Tax reform challenges

The next obvious challenge for the BVI and other tax neutral jurisdictions will be the G20’s International Tax Reform. The BVI was one of 136 countries to sign up to the agreement last year to impose a minimum 15% corporation tax on the largest multinational companies, so that profits can be taxed where they are earned. As a tax neutral jurisdiction, it is unlikely that profits will be made in the BVI or at such a scale that a company meets the minimum criteria. Is there a reason to be in jurisdictions such as the BVI at all? Time will tell, but I suspect, in reality, the changes will affect only a small percentage of companies (albeit important ones) since it only affects these businesses with global sales above £17 billion and profit margins above 10%. 

What will be interesting to see is how, if at all, a global tax levy on certain businesses will sit alongside the so called “Revenue Rule” which applies across many common law jurisdictions, including England and Wales, the USA and the BVI. In essence, this rule says that the courts of one jurisdiction will not enforce the tax and penal laws (and consequential judgments) of another jurisdiction. While this principle has been slowly eroded over the years, its application going forward will be interesting to follow.

However, the BVI is not beyond criticism. While legislative changes have been positive for many years, there is one ongoing – and concerning – set of implications from legislation that was initially passed in the BVI on 19 March 2020. This concerns the Charging Orders Act 2020 which, seemingly, the government believed was in force. The aim of the Act was to expand the authority of the courts to secure and enforce judgments via a charge over certain assets. The BVI’s Attorney General at the time the Bill was debated, Baba Aziz, stated to the BVI House of Assembly the aim of the legislation:

Mr. Speaker, some judgment debtors seek to avoid the enforcement of judgments of the High Court. This Bill is intended to confer jurisdiction on the court to make orders imposing a charge on assets which are directly or indirectly owned or controlled by a judgment debtor. This includes where assets or shares are held in layered corporate structures which are ultimately beneficially owned by a debtor. The enactment of this Bill will demonstrate that the Territory is not a haven for recalcitrant debtors and those who would seek to evade justice by means of in part the use of asset protection structures.”  

However, on discovering the Act was not in force, certain sections of the BVI financial services sector sought to lobby for amendments to water down its effectiveness. This has left the BVI government at a crossroads. Does it proceed, as it intended, with a strong piece of legislation aimed at preventing debtors using corporate structures to evade their liabilities, or does it bow down to sections of dissent within the financial services sector who would seek to protect the interests of these “recalcitrant debtors”? At present, no definitive decision has been made.

Can the BVI continue to benefit from its status as an offshore territory?

Financial services are a central pillar to the BVI economy. At its most basic level, the registered agents charge fees for incorporating and maintaining the BVI companies they service. However, the effect of the offshore industry goes deeper for all residents. As a consequence of the companies incorporated there, there is a thriving legal industry, supported by a Commercial Court where the ultimate appellate court is Her Majesty’s Privy Council. This ultimate appellate court is key for many businesses when they incorporate in the BVI. 

Then there are the direct benefits to local businesses and landlords from those who purchase services, products or rent accommodation on the island. Should the financial services industry be affected by the ongoing attack on its shores, the consequences for the local population may be devastating. With Covid-19 having decimated the other pillar – tourism – the financial services sector has kept many BVI islanders afloat during the past two years.

A recent report noted that new BVI company incorporations have been in a steady, slow decline for many years. However, the same report says that the lifespan of BVI companies is increasing. This suggests that recent legislative initiatives to remove unscrupulous persons who have abused the incorporation system (such as the requirement to verify the ultimate beneficial owner of a BVI company) is working and that the BVI is moving to a more stable lifespan for incorporations.

What most do not appreciate is that the BVI and other offshore jurisdictions provide companies with the possibility to enter into joint ventures in a tax neutral environment.  Such a tax neutral location, coupled with an arbitration centre and a commercial court where the final appellate court is the UK Privy Council, is important. This is especially so for cross-border fledging business which may not initially turn a profit. Once a profit is made, being based in a zero or low tax jurisdiction will mean those losses can be recovered more quickly, keeping the costs of goods down and allowing more profits to be reinvested for further growth. This results in more employment and expenditure and therefore local tax receipts in the countries where the businesses operate – via, for instance, income tax and national insurance contributions in the UK.

There is no doubt that inequality exists in the world. There are leaders of multinational (or even some smaller) companies who seem to leave their conscience at the door when awarding themselves obscene pay, regardless of their enterprises’ performance. Increasing tax on corporations is not going to reduce this inequality. Those who lack the moral compass to pay their staff properly, while hoarding profits, may simply increase the prices of products or reduce staff benefits to cover the additional costs. We are not talking about a BVI problem or issue here: this is a worldwide problem. Attacking the BVI, or other offshore jurisdictions, will not change this inequality; neither will increased taxation.

It is likely that the BVI will continue to be an important player in the world’s economy. It has proven in recent years that it has the ability to adapt and overcomes the hurdles in its way. Asia, South America and now Africa are real generators of financial services work for the BVI. Notwithstanding that, it appears unlikely the BVI will see a sudden increase in incorporations against the long term trend of decline. However, if the life of the average BVI company continues to increase as more multinationals take advantage of its place as a tax neutral jurisdiction (which will remain unaffected by the recent G20 agreement for most businesses), then this increase in quality over quantity should be applauded.

Shaun Reardon-John is a consultant solicitor-advocate for Martin Kenney & Co.