British Virgin Islands

THE BVI CONTINUES TO PUNCH ABOVE ITS WEIGHT

In the words of John Donne, “No man is an island.” This phrase is as true today as it was when it was written hundreds of years ago.

We live in a truly connected world whose economy is powered by cross border activity, whether that be travel or investment. With a long-standing reputation as a reliable and efficient offshore financial centre, the British Virgin Islands are at the epicentre of this intersection, having an economy dependent on both. Never complacent, the territory is always striving to evolve further as a global leader in the financial management sector, most recently with its incubator funds and also its FinTech initiative.

SIZE MATTERS!

The British Virgin Islands’ financial sector powers more than US$1.5 trillion of investment around the world and supports 2.2 million jobs. [Source: Capital Economics report: “Creating Value – The BVI’s Global Contribution” – June 2017.] More than 400,000 BVI business companies, which enable the British Virgin Islands to be the seventh largest source of foreign direct investment, are currently active. The BVI is also home to parts of the group structures of more than 140 major businesses listed on the London, New York or Hong Kong main stock exchanges. In addition, major international development banks, including the World Bank’s International Finance Corporation and the European Bank for Reconstruction and Development, use BVI Business Companies to help fund projects around the world.

A MODERN INTERNATIONAL FINANCIAL CENTRE

The BVI has a world-class brand and its business model is very attractive, with an established system of common law and US dollar-denominated currency. It performs its services in a secure, safe, well-regulated and business-friendly environment. It has a proven track record of excellence in its financial sector, exemplary regulatory standards, innovative legislation, state-of-the-art technology, and its firms and agencies are run and staffed by experienced and highly qualified professionals. Those are the reasons why top-tier firms are based in and do business from and through this jurisdiction.

The BVI’s advantages also include competitive and cost-efficient fees, highly efficient turnaround times, 24-hour services in some areas and the largest corporate registry of its kind in the world. The BVI’s corporate registry kept working in September 2017 when Hurricanes Irma and Maria tore through the islands.

A ROBUST REGULATOR

The BVI recognises and accepts the importance of compliance with established international standards of regulation and supervision. It conforms to these standards through the efforts of its autonomous, all-in-one financial regulator, the Financial Services Commission (FSC), its financial training body, the Financial Services Institute, and its autonomous Financial Investigation Agency (FIA).

The territory has a good track-record of international co-operation. It adheres to all international standards, combats money laundering and terrorist finance and remains keen to satisfy the standards of the International Monetary Fund.

TAX INFORMATION EXCHANGE AGREEMENTS (TIEAS)

In 2002, the territory signed a formal commitment with the Organisation of Economic Cooperation and Development (OECD) to uphold its principles of tax transparency and exchange of information. Indeed, in 2015 the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes found the BVI to be “largely compliant” with standards of transparency and “fully compliant” in terms of exchange of information.

A REGIONAL COMMERCIAL COURT

The presence of an internationally respected commercial court is a huge asset to the BVI. The court operates as part of the Eastern Caribbean Supreme Court, so there is a final right of appeal to the Privy Council in London. This specialist court places the BVI far ahead of other jurisdictions in expediting the cases that come before it, and in the timely handing down of judgements.

THE INTERNATIONAL ARBITRATION CENTRE

In 2014, the BVI International Arbitration Centre (BVI IAC), an independent not-for-profit institution, was established to meet the demands of the international business community for a neutral, impartial, efficient and reliable institution to resolve disputes in the Caribbean, Latin America and beyond.

The BVI largely adopted the UNCITRAL (United Nations Commission on International Trade Law) Model Law by passing the Arbitration Act in 2013 and it signed the New York Convention (which requires courts of contracting states to give effect to private agreements to arbitrate and to enforce arbitration awards made in other contracting states) on 25 May 2014. These two crucial steps allowed it to establish its internationally respected arbitration centre.

IDENTIFYING THE ULTIMATE BENEFICIAL OWNER

Another pioneering innovation has been the BVI’s formidable Beneficial Ownership Search System (BOSS) which the jurisdiction established in accordance with the ‘Exchange of Notes’ agreement that it signed with the UK in April 2016. This secure government search system satisfies global standards regarding beneficial ownership and balances the need for both disclosures of information about companies to the Government and appropriate levels of privacy, ensuring that companies share information rapidly and efficiently with law enforcement bodies.

GLOBAL MANDATE

Already in possession of a sophisticated array of products and services used by a discerning, highnet-worth clientele, the BVI has been marketing itself worldwide in recent years. It has long been pursuing opportunities in South East Asia, lately often in accordance with China’s impressive Belt and Road initiative. The BVI is small territory on the map but it does not have an island mentality and is very much a place where large global enterprises gather. With its formidable track record, the BVI will continue to punch well above its weight.

BACKING THE FUTURE – THE GREAT DIGITAL CHALLENGE FOR REGULATORS

* by Simon Gray, the head of business development and marketing at BVI Finance, and Philip Treleaven, Professor of Computer Science at University College, London University.

“For I dipped into the future, far as human eye could see, saw the vision of the world, and all the wonder that would be.” Alfred, Lord Tennyson

Regulators are sometimes unkindly criticised for having predicted all six of the last three recessions. Although it sometimes pays to be cautious, it is important that excessive caution should not stifle innovation and progress. Increasingly, the world’s leading regulators are trying to ensure that innovation is ever-present in their financial sectors and that the firms that they regulate are using technology extensively to perform better services, manage risks better and create new opportunities – invariably with the consumer in mind.

“Data-driven regulation and compliance is the key to future commercial success”

Historically, prophets have not always had good press, but in the long term it pays to be a visionary and, in today’s hyper-competitive financial services industry, practical forward thinking is a sign of real progress. Data-driven regulation and compliance is the key to future commercial success and regulators are acting as ‘public champions’ for new software in this area.

The automation of regulation and compliance is likely to improve the services that firms offer and help regulators in their work. The British Virgin Islands are showing great initiative in this area. BVI Finance, the territory’s promotional agency, hosted a conference entitled “Think Differently! The Great Digital Disruption and the New Internet Economy” in both the BVI and in Singapore last year.

THE SANDBOX

Do you remember playing in a sandpit as a child, using your imagination to create shapes and make things in a safe and controlled environment? Americans apparently refer to sandpits as sandboxes and a ‘regulatory sandbox’ is therefore the phrase that they (and, confusingly, that British regulators also) use to describe an enclosed environment in which innovation in financial technology or FinTech can take place.

The sandbox aims to promote more effective competition in the interests of consumers by allowing both existing and prospective licensees to test innovative products, services and business models in a live market environment, while ensuring that appropriate safeguards are in place.

To this end, a sandbox can help to encourage experiments in FinTech within a well-defined space and duration, where the regulator will provide the requisite regulatory support, with the fourfold aim of:

• increasing efficiency;

• managing risks better;

• creating new opportunities; and/or

• improving people’s lives.

The sandbox is an experiment for both regulator and regulated alike. It is the first time that many regulators have allowed licensees to test their products on consumers in this way, and interest in sandboxes is growing rapidly.

HERE COMES THE TECH!

Artificial intelligence (AI), the Internet of Things (IoT), Big Data, behavioural/predictive analytics and blockchain (distributed ledger) technology are poised to revolutionise regulation and compliance and create a new generation of RegTech (regulatory technology) start-ups. Examples of current RegTech systems include:

• chatbots and intelligent assistants;

• robo-advisors that support regulators;

• real-time management of the compliance eco system using the IoT and the blockchain;

• automated compliance/regulation tools;

• compliance records stored securely in blockchain distributed ledgers;

• online regulatory and dispute resolution systems; and, in future,

• regulations encoded as understandable and executable computer programmes.

WHY AUTOMATE REGULATION AND COMPLIANCE?

Automation is all the rage, but why is it happening and what are the benefits? The answer, in short, is money. Cost savings and greater efficiency are both imperative here.

“The sandbox is an experiment for both regulator and regulated alike”

People are hoping that this automation will reduce costs enormously for financial service firms and remove an intractable barrier for FinTech firms as they try to enter financial service markets.

HM Government in London has a new Fintech Sector Strategy, which it hopes will bolster the UK’s position as “the global capital of fintech” well beyond Brexit. Let us now translate some of these concepts into normal language.

DATA SCIENCE AND TECHNOLOGY

The main types of technology that are going to transform regulation are:

• data facilities – online facilities of regulatory data collected by national government agencies which are often open to the public (e.g. www.data.gov, https://data.gov.uk);

• the internet of things (IoT) - the inter-networking of ‘smart’ physical devices, vehicles, buildings, etc. that enable these objects to collect and exchange data;

• chatbots – systems for interactions between regulated companies, registrants and the general public using natural language and speech;

• Big Data – the process of examining very large data sets to uncover hidden patterns, unknown correlations etc.; data sets that are so complex that old data processing application software cannot deal with them;

• artificial intelligence (AI) - systems able to perform tasks that normally require human intelligence;

• behavioural/predictive analytics – the analysis of large and varied data sets to uncover hidden patterns, unknown correlations, customer preferences etc. to help someone make decisions;

• blockchain technology – the software that underpins digital currency and that secures, validates and processes transactional data.

Let us now illustrate these vital elements of technology in more detail.

BIG DATA

Regulators collect huge volumes of data (increasingly from open sources) and thus have major opportunities for so-called Big Data (analytics). In general, Big Data allows the user to examine large and varied data sets to uncover hidden patterns, unknown correlations, customers’ preferences etc.

Big Data encompasses a mixture of structured, semi-structured and unstructured data that someone has gathered through interactions with individuals, social media content, text from citizens’ emails and survey responses, phone call data and records, data captured by sensors connected to the internet of things and so on.

The “3 Vs of Big Data” are volume, variety and velocity. All three – the volume of data being handled, the variety of that data and the velocity at which is being created and updated – are increasing.

ARTIFICIAL INTELLIGENCE

AI technology powers intelligent personal assistants such as Apple Siri, Amazon Alexa, ‘robo advisors’ and autonomous vehicles. AI allows computers to make decisions and learn without explicit programming. There are three main branches of it.

“Big Data allows the user to uncover hidden patterns”

• Machine Learning – a type of AI programme that can learn without explicit programming, and can change when exposed to new data.

• Natural language understanding – the application of computational techniques to the analysis and synthesis of natural language and speech.

• Sentiment analysis – the computational process of identifying and categorizing opinions expressed in a piece of text.

BEHAVIOURAL AND PREDICTIVE ANALYTICS

Behavioural analysis and predictive analytics, which look at the actions of people, are closely related to Big Data. Behavioural analytics tries to understand how consumers act and why, helping software predict their likely actions in future. Predictive analytics is the practice of extracting information from historical and real-time data sets to determine patterns and predict future outcomes and trends. Predictive analytics ‘forecasts’ what might happen in the future with an acceptable level of reliability, assesses risks and includes ‘what if’ scenarios.

BLOCKCHAIN TECHNOLOGY

The main types of blockchain technology are as follows.

• Distributed Ledger Technology (DLT) – a decentralised database in which transactions are kept in a shared, replicated, synchronised, distributed bookkeeping record, which is secured by cryptographic sealing. Its proponents say that it has ‘integrity’ and is resilient, ‘transparent’ and unchangeable (or at least ‘mostly immutable’).

• Smart Contracts – these are (possibly) computer programmes that codify transactions and contracts which in turn ‘legally’ manage the records on a distributed ledger.

THE AUTOMATION OF REGULATION AND COMPLIANCE

Regulators have, of late, been looking at Digital Regulatory Reporting (DRR) and weighing up the pros and cons of each of the following concepts:

• the disambiguation of (i.e. the removal of ambiguity from) reporting requirements;

• “a common data approach across regulatory reporting;”

• mapping requirements to firms’ internal systems;

• a mechanism by which firms can submit data to regulators;

• the use of standards to help the regulator implement DRR;

• a “common data model;”

• application programming interfaces;

• DLT networks; and

• the removal of ambiguity from regulatory text.

DRR promises to help firms comply with regulatory reporting requirements more quickly and efficiently. It will make the information that firms send to the regulator more consistent, while boosting the amount of information that firms share with each other, especially for the purposes of offsetting internal risks.

REGULATION AND THE LEGAL STATUS OF ALGORITHMS

Legal redress for algorithm failure seems straightforward. If something goes wrong with an algorithm, the firm ought simply to sue the humans who deployed it. However, it may not be that simple. For example, if an autonomous vehicle were to cause death, would the plaintiff pursue the dealership, the manufacturer, the ‘third party’ who developed the algorithm, the driver, or the other person’s illegal behaviour? This paradox is part of a wider debate about whether or not algorithms ought to have legal personalities in the same way as companies.

As we know, a ‘legal person’ refers to a non–human entity that has a legal standing in the eyes of the law. A graphic example of a company having legal personality is the offence of corporate manslaughter, an act of homicide committed by a company or organisation, which is a criminal offence in law.

Another important principle of law is that of agency, where a relationship is created where a principal gives legal authority to an agent to act on the principal’s behalf when dealing with a third party. An agency relationship is a fiduciary relationship. It is a complex area of law with concepts such as apparent authority, where a reasonable third party would understand that the agent had authority to act.

As the combination of software and hardware is producing intelligent algorithms that learn from their environment and may become unpredictable, it is conceivable that, with the growth of multi-algorithm systems, algorithms will begin to make decisions that have far reaching consequences for humans. It is this potential for unpredictability that supports the argument that algorithms should have a separate legal identity, so that the due process of law can take its course in cases where unfairness occurs.

“DRR promises to help firms comply more quickly and efficiently”

The alternative to this approach would be a regime of strict liability for anyone who designs or places dangerous algorithms on the market. Is this a case of locking the stable door after the horse has bolted?

COLLABORATION ON THE RISE

The situation remains fluid. There are more and more signs of co-ordination between regulators of different nations and these are most welcome. For example, the 11 financial regulators and related organisations have collaborated to create the Global Financial Innovation Network (GFIN), building on earlier proposals to create a ‘global sandbox,’ a network for collaboration and shared experience of innovation.

The GFIN is designed to be an inclusive community of financial service regulators and related organisations and its expansion is inevitable. This is a brave new world and certainly one in which some regulators are taking the lead!

The Duke of Wellington, before his victory at the Battle of Waterloo in 1815, stated wisely that “time spent in reconnaissance is never wasted.” Sound advice indeed. Innovative financial centres such as the British Virgin Islands deserve to do well.

*Simon Gray can be reached on on +1 (284) 852-1957 or at sgray@bvifinance.vg

THE BVI: STILL THE WORLD’S FAVOURITE CORPORATE VEHICLE

* by Matthew Howson, a senior associate at the international law firm of Harneys

The BVI company remains the main product that the British Virgin Islands market to the world. The entity’s advantages remain as good as ever. It is famously adaptable, adjustable and consistent with common law legal systems everywhere. It is quick to incorporate and inexpensive, mainly because living costs are lower in the BVI (which uses the US dollar) than in competing jurisdictions. It is, moreover, ubiquitous. It used to be said that every Hong Kong businessman would give his son “a BVI” when he came of age and, even in today’s much tighter regulatory environment, people who set up cross-border joint ventures throughout the world assume that they will use BVI companies.

There are more than 450,000 active BVI companies. New incorporations in 2018, when the figures emerge, are likely to be the highest since 2014, even though Hurricane Irma interfered badly with the islands’ commerce in 2017.

However – and this is a point that we sometimes need to emphasise to a mistrustful media – popularity is not a sign of bad quality. The BVI has responded to the Common Reporting Standard or CRS, to the OECD’s and the European Union’s ‘substance’ requirements and to other international demands in the same ways as the other main international financial centres. The BVI’s financial compliance and anti-money-laundering standards are equivalent to those of the other main IFCs and BVI firms apply them to firms from those IFCs most rigorously. The BVI’s courts follow the mainstream of the English common law system, with ultimate recourse to the Privy Council in London.

The jurisdiction’s thriving financial service sector is experienced and internationally fluent and its judges and lawyers are often on retainers from chambers in central London – the BVI is, after all, as much a British Overseas Territory as Bermuda or Cayman.

These are not signs of lower quality. Instead, the BVI’s continuing popularity is due to three main reasons:

• new innovations to maintain the jurisdiction as the world’s foremost venue for corporate vehicles;

• new innovations to keep it at the top of the private wealth business; and

• the continuing preference that non-Europeans have for using it - a factor that can only continue to grow in importance.

CORPORATE INNOVATION

The Limited Partnerships Act 2017 takes the responsiveness to the needs of clients that has made the BVI company so successful and applies them to the concept of the limited partnership. The Act incorporates popular elements of corporate law – mergers, schemes of arrangement, etc. – and adds innovations such as ‘safe harbour’ provisions and opportunities to register charges. It will be particularly attractive for funds and, in particular, private equity funds and joint venture vehicles where onshore tax transparency is required.

“Popularity is not a sign of bad quality”

The Micro Business Corporations Act 2017 caters for an underdeveloped segment of the business market: micro-businesses. The project (still in the throes of development) aims to bestow the benefits of limited liability on micro-businesses anywhere in the world and especially in emerging economies. The microbusiness corporation is going to be simpler than a full company, more affordable to an entrepreneur and completely transparent. It will use IT heavily in order to “know its customers” to a degree that more than satisfies international standards.

PLANNING FOR SUCCESSION

The first generation of BVI company owners is growing old and thoughts are turning to the next generation. ‘Succession planning’ tends to have two main aims: the protection of assets against forced heirship and claims from third parties and the avoidance (or mitigation) of the consequences of obtaining a Grant of Probate in the BVI. Shares in a BVI company are legally situated in the BVI, so all shareholders who hold their shares absolutely or in a nomineeship should know that their families will be obliged to obtain BVI probate on their deaths before they are able to transfer or sell those shares.

“The VISTA trust continues to be very popular”

Many clients are comfortable with the prospect of probate. We advise such clients to obtain a simple BVI will, particularly if they come from noncommon-law jurisdictions, because it speeds up the probate process greatly. Rules issued in 2017 by the Eastern Caribbean Supreme Court have also helped this process along. Some less experienced firms saw those rules as revolutionary: in fact, they formalised some long-standing, informal practice that practitioners had been following for many years. The court decided that probate fees had to increase in order to support the registry financial and to make it work more quickly and efficiently.

For those who insist on avoiding probate and/or are interested in protection assets, trusts remain very popular. Indeed, clients are setting them up in an ever-expanding number of jurisdictions. The BVI has capitalised on this by evolving innovative new forms of trust.

VISTA TRUSTS

The Virgin Islands Special Trusts Act (VISTA) continues to be very popular because it introduces the concept of trusts to clients who are unfamiliar with it. The statute allows a trust whose corporate trustee is not required, nor indeed permitted, to manage and invest the trust’s assets actively. The trustee retains a statutory right to obtain information about the trust fund but the management of the trust fund is the responsibility of the directors of an underlying BVI company, which then holds the trust’s various assets.

The trust deed can set out certain circumstances in which the trustee must intervene, and in which the trustee should exercise its powers regarding the appointment or removal of directors. Supplementary legislation now allows non-VISTA trusts to benefit from the statute.

PRIVATE TRUST COMPANIES

Also aimed at accessing new clients, Private Trust Companies (PTCs) have become increasingly popular among high-net-worth families and business owners, the latter being hesitant about the prospect of transferring substantial wealth or control of the family business to corporate trustees when setting up trusts.

A PTC allows the settlor of the trust to retain effective control over the assets settled in the trust by way of acting as director. The shares of the PTC are typically then held in a BVI purpose trust with a BVI corporate trustee.

THE SHARE TRUST

In some countries, even middle class families use BVI companies to pay as little tax as possible and offset losses from overseas investments. Such families often do not require complex ownership structures. The Share Trust is designed to be a simple and cost-effective way in which the owners of shares in BVI companies can avoid ‘forced heirship’ rules and having to obtain probate in the BVI. The terms of a Share Trust are deliberately simple, with the settlor being the primary beneficiary during his or her lifetime and the shares being made over outright to the designated beneficiaries on the settlor’s death.

THE LONG REACH OF THE BVI

Asia is the largest client base for BVI companies and will remain so for some time to come. Jurisdictions on this vast continent are now working

out ways of using trusts which generally depend on their common law heritage. VISTA trusts, or their non-statutory equivalents, remain popular in jurisdictions which recognise trusts, and people elsewhere often use wills and joint tenancies.

“The Share Trust is designed to be simple and cost-effective”

Latin America is an oft-forgotten but very important centre for BVI company ownership. After the successful tax amnesties in many Latin American countries during the early 2010s, there has been a move to more sophistication and old-fashioned succession planning in trusts. Clients have become familiar with fully managed trusts, testamentary trusts, fixed interest trusts, etc.

The Middle East has long used BVI companies for joint ventures and is now becoming more and more interested in family and Sharia planning as well.

BVI service providers often write Europe off as a viable market, but many Europeans still have holdings in BVI companies. Some ‘UK non-doms,’ who only hold a small part of the BVI portfolio these days, have chosen not to ‘de-envelope’ their property, i.e. not to own their property directly rather than through a corporate vehicle registered in the BVI. Some jurisdictions, such as Monaco, arrange most of their property ownership through BVI companies.

Other jurisdictions, such as Russia, retain a great many BVI companies. BVI wills are popular in Russia at the moment, though trusts may return if the political environment changes. Switzerland remains a ‘clearing house’ for all jurisdictions and BVI trusts are expected to remain very popular there, even now that Switzerland has passed some trust legislation. Even Channel-Island structures often include BVI companies.

INNOVATING IN A WORLD OF TIGHT REGULATION

After creating such a successful vehicle as the BVI company, the BVI might be expected to rest on its laurels. Instead, it has created new forms of business that can prosper in a world of very tight regulation in which the world’s rulers expect international financial centres to facilitate its economic growth rather than help people avoid taxes. Indeed, with such a flexible toolkit, it could be argued that the BVI is the best-equipped among the IFCs to do just that.

*Matthew Howson can be reached on +44 203 752 3668 or at matthew.howson@harneys.com