Business BVI August 2015 by Business BVI

August 2015 Edition

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August 2015 Edition

CONTENTS 27

Business

S E C T I O N S

Masthead Opening Remarks Contributors BVI Calendar Ahead of the Curve Business

Bookshelf Spotlight: Wealth Management in Asia Pivoting to Asia Tourism and Real Estate Feature Research Article Business BVI Guides Over And Out

THE BVI FOR FINANCING OF CORPORATE AND PRIVATE AIRCRAFT by Audrey Robertson

WHAT DOES THE BRITISH ELECTION RESULT MEAN FOR THE OVERSEAS TERRITORIES AND THE BVI IN PARTICULAR?

by Ross Munro

REMARKS AT THE SOCIETY OF TRUST AND ESTATE PRACTITIONERS (STEP) CARIBBEAN CONFERENCE 2015 by Helene Ann Lewis

48 52

FATCA - THE HORSE MAY HAVE BOLTED by Dr. Angelo Venardos

INVESTMENT FUND PRODUCTS IN THE BRITISH VIRGIN ISLANDS by Tim Clipstone

RE-SITUATING THE BVI: OFFSHOREART.CO, INTERNATIONAL FINANCE AND CONTEMPORARY ART by Kristian Wilson

WORKING TOGETHER TO "FUTURE-PROOF" BVI’S FINANCIAL SERVICES SECTOR by Julien Johnson

A BRAVE NEW WORLD CAN THE BVI INTERNATIONAL ARBITRATION CENTRE KNOCK NEW YORK, LONDON AND PARIS OFF THEIR PERCH? by Lord Goldsmith, QC

REMARKS AT THE BVI INTERNATIONAL ARBITRATION CONFERENCE, 21 MAY 2015 by Dame Janice M. Pereira, DBE

August 2015 Edition

Pivoting to Asia

Tourism and Real Estate

111

THE GROWING BUSINESS JET MARKET IN ASIA: BVI FLYING HIGH

by Simon Lawrenson and Danielle Roman

MOVING BEYOND OUR BUBBLE ARE WE POSITIONED TO RECEIVE THE PUCK IN LUXURY TOURISM? Remarks by Sharon Flax- Mars, Director of Tourism at the BVI Business Outlook Conference January 14, 2015, Scrub Island Resort

Business BVI Guides

Contents

112 116

16 17 18 20 22 68 95 122

MOVING TO THE BRITISH VIRGIN ISLANDS

by Business BVI Staff Writer

FAST FACTS ABOUT THE BRITISH VIRGIN ISLANDS

by Patlian Johnson

MASTHEAD OPENING REMARKS CONTRIBUTORS BVI CALENDAR AHEAD OF THE CURVE BOOKSHELF FEATURE RESEARCH ARTICLE OVER & OUT

August 2015 Edition

CONTENTS

F E AT U R E A R T I C L E S

34 122 28

28 70

A GAME-CHANGER: STRATEGIC REPOSITIONING OF THE BVI FINANCIAL SERVICES SECTOR

by Christian Sanchez

WHAT WILL YOUR LEGACY BE?

Remarks by Robert A. Mathavious, Managing Director & CEO BVI Financial Services Commission, At the 22nd H. Lavity Stoutt Community College Graduation Exercises June 11, 2015, Paraquita Bay Campus

'BUSINESS IN ASIA: OPPORTUNITIES AND CHALLENGES' A TEAM BVI ASIA ROUNDTABLE DISCUSSION by Robert Grieves

122

SETTING THE DNA - JUDGE BANNISTER REFLECTS ON TIME IN THE BVI

by Russell Harrigan and Freeman Rogers

August 2015 Edition

CONTENTS

SPOTLIGHT: WEALTH MANAGEMENT IN ASIA by Alvin Ma

HNWIS IN CHINA - WHERE DOES THE MONEY COME FROM?

VALUE-ADDED WEALTH MANAGEMENT SERVICES PROVIDED BY PRIVATE BANKING - HNWIS IN CHINA

UNIQUE RMB BASED NICHE SOLUTIONS HNWIS IN CHINA

August 2015 Edition

EDITORIAL BOARD RUSSELL HARRIGAN

LORNA SMITH, OBE

CEO, OYSTER GLOBAL MARKETING GROUP

CEO, LGS ASSOCIATES

ELIHU RHYMER

AYANA HULL

CEO, BVI DEVELOPMENT CONSULTANTS

SENIOR ASSOCIATE, HARNEYS

SIMON SCHILDER

KENNETH M. KRYS

PARTNER, OGIER

FOUNDER AND CEO, KRyS GLOBAL

M A N AG I N G E D I TO R PUBLISHER P R O J E C T C O - O R D I N AT O R DESIGN

RUSSELL HARRIGAN OYSTER PUBLICATIONS LTD PORTIA HARRIGAN OYSTER DESIGN TEAM

P H OTO G R A P H Y

BVI TOURIST BOARD

A D V E RT I S I N G

RUSSELL HARRIGAN KATE MULLAN

B U S I N E S S B V I .C O M

Business BVI is a bi-annual magazine published by Oyster Publications LTD P.O. Box 3369, Road Town, Tortola British Virgin Islands Tel: 284-494-8011 Fax: 284-494-3066 www.oysterbvi.com Email: info@oysterglobalmarketing.com Please send comments and address changes to this address.

PORTIA HARRIGAN

Business BVI and Oyster Publications LTD are divisions of Oyster Global Marketing Group. www.businessbvi.com

All information in this publication has been carefully collected and prepared, but it still remains subject to change and correction. Use this content for general guidance only and seek extra assistance from a professional adviser with regard to any specific matters. Copyright reserved. None of the contents in this publication may be reproduced or copied in any form without permission in writing from the publisher. These articles do not constitute tax or legal advice, and no action should be taken based on the information in these documents without first consulting suitable tax or legal advisers. No liability for actions taken, or in action, based on the information in these articles, will be accepted. 16

August 2015 Edition

OPENING REMARKS

The BVI - A Critical Node of Globality We are at a tipping point to sustained growth

The British Virgin Islands (BVI) has always been a crossroad and a transit point to the world. It is in our DNA; from the days of the early settlers, followed by the plantation era, to the BVI today with over one hundred nationalities. As globalisation has evolved and deepened, so too has the Territory’s larger than size role in facilitating 21st century trade and commerce. The BVI today at its very core remains ‘A Critical Node of Globality’. It is a vital facilitator of globalisation with forward leaning infrastructure ranging from the global cable and fibre optic networks that transit the Territory to an ecosystem of financial services and tourism with well-established global branding. This mixing pot of people, infrastructure, data, finance, services and laws that bind the Territory to the wider international community and the related flow of goods and services, sets the BVI apart from its peers. It provides the Territory with a unique platform from which to scale up its economy, both physically and virtually. Here, the potential of the secondary sector (social networks, websites and other virtual specific projects) attached to the virtual economy must not be overlooked. We at Business BVI view this platform as a seminal strategic opportunity for the Territory to look past our daily challenges, and for a moment, imagine our substantial prospects for the future, and consider what must be done collectively to make that future a reality. We are at a tipping point to the next round of sustained growth -a point I heard repeatedly during a mid July trip to Hong Kong and Singapore. This confidence is informed by a confluence of significant developments including: I. The re-election in early June of the government led by Premier and Minister for Finance Dr. the Hon. D. Orlando Smith, OBE with an increased majority. This decision signaled a vote of confidence and took the Territory off the ‘in and out’ track of governance prevalent during the last 12 years. It placed the new Government in a strong position to pursue policies that will put the BVI on a path to further development in its offshore and tourism industries, as well as in new areas such as clean tech, trading and private equity. II. The McKinsey study, which sought to determine ways to reinvigorate financial services, is essentially a road map for our continued advancement in the industry. This first time strategic plan was completed, championed and guided by Premier Smith and his government with strong private sector involvement. III. The capital work and other vital projects undertaken by the government over the last three and a half years ranging from the ongoing road and sewerage work, the upgrading of the Territory’s electricity supply, the completion of the new cruise pier facility, the completion of the new hospital, education reform with a focus on the demands of the economy, the passage of new laws aimed at enhancing protection of the environment and the strengthening of the Territory’s fiscal position. IV. The ongoing search for a long-term solution to the Territory’s debilitating air access challenges.

V. The strength of the BVI brand globally in both tourism and financial services. Here, the continued strength of the financial services brand in Asia cannot be underestimated. VI. The relative strength of the global economy led by North America and Asia. VII. The sustained growth of wealth globally which is no longer just United States or European centric but is instead truly global. VIII. The outcome of the recent elections in the United Kingdom where the conservatives were returned to office with a small but outright majority. This was perhaps the ideal outcome for the BVI from an offshore standpoint. The British Prime Minister is now free of the shackles of a coalition government and by extension the non-governmental organisations and their ‘antioffshore’ agenda. United Kingdom politics over the next couple of years is likely to be dominated by two issues: the European Union (EU) referendum and austerity. This in no way means that the push for central registries is off the table. Here, as a territory, we must redouble our effort to firmly push back against what is an existential threat to the Territory and our people. Welcome to the August edition of Business BVI which is also the 10th issue of the magazine. We are now on the semi-annual track, a move driven by feedback from our readers and advertisers. We believe that this evolution also speaks to the growth of the economy and the business community over the last nine years. As usual, we continue with our perennial tweaking and in this issue you will notice three new additions; BVI Calendar (p.20) featuring upcoming tourism destination events, Feature Research Article (p.96) which is intended to drill down on a specific topic in the financial services space and Over & Out (p.122) our parting interview with leading business related personalities in the Territory. For our first interview, we sat down with Edward Bannister, the former Judge of the Commercial Court, just prior to his departure from the Territory. We continue to be bullish on the BVI’s long-term Asia prospects in the financial services space. In this issue, we continue our focus on the region with two articles looking at Wealth Management in Asia (p.72) and Business in Asia - Opportunities and Challenges: A Team BVI Asia Roundtable Discussion (p.84). Additionally, we explore the aircraft registration space with two articles The BVI for Financing Corporate and Private Aircraft (p.38) and The Growing Business Jet Market in Asia: BVI Flying High (p.80). Enjoy and please let us have your feedback and comments info@oysterglobalmarketing.com

RUSSELL HARRIGAN Managing Editor

August 2015 Edition

CONTRIBUTORS

TIM CLIPSTONE advises on all aspects of BVI and Cayman Islands securities, corporate and partnership law, including the formation, sale, purchase, listing, licensing and restructuring of regulated and unregulated vehicles, joint venture arrangements and corporate governance issues. Tim heads Maples BVI Investment Funds team and chairs the BVI's Securities and Investment Business and Mutual Funds Advisory Committee. Investment Fund Products in the BVI p.52, his first article in Business BVI looks at two new BVI funds.

“Business in Asia – Opportunities and Challenges” p.84 is a must read roundtable discussion convened by BVI House Asia with Team BVI Asia practioners, moderated by ROBERT GRIEVES. It looks at the current state of doing business in Asia, as well as regional issues and trends impacting the BVI. Robert is Founder, Chairman and CEO of Hamilton Advisors Limited, Hong Kong. A top-tier communications consultant since 1989, following a 12-year career in journalism.

“The British Virgin Islands is becoming an increasingly popular jurisdiction for aviation finance transactions in both the commercial and business jet sectors. Among the reasons for this are the British Virgin Islands’ tax neutral status, its political stability, the developed Englishbased legal system, a bespoke commercial court, the flexible and commercial nature of its legislation and its adherence to international standards of compliance and other matters.” - From The BVI for Financing of Corporate and Private Aircraft p.38 by AUDREY ROBERTSON who is a counsel in the corporate department of Conyers Dill & Pearman in the British Virgin Islands.

August 2015 Edition

Working together to ‘Future Proof ‘ BVI’s Financial Services Sector p.58 by JULIEN JOHNSON take a look at the rebranding of BVI Finance and the repositioning of the agency which is charged with promoting the sector globally. The rebranding comes in the wake of the recently completed McKinsey Study on the sector. Julien recently took the reins at BVI Finance where he serves as Executive Director. Immediately prior he was the COO of the Financial Investigation Agency.

Setting the DNA-First Commercial Court Judge Reflects on Time in the BVI our first interview for our new section OVER&OUT p.122 and appropriately so as we speak to Edward Bannister the first Judge of the Commercial Court. An insightful read. FREEMAN ROGERS is the editor of the The BVI Beacon. A South Carolina native, he has lived in the BVI for the past eight years. In his spare time, enjoys surfing, reading and learning about the BVI.

Our Fast Facts Guide p.116 is intended to provide top of mind data about the BVI, its economy, and doing business in the territory. We rely on PATLIAN JOHNSON to ensure we are current. Patlian is the Deputy Financial Secretary, Ministry of Finance, Government of the Virgin Islands with responsibility for Economic Development and Fiscal Affairs. Ms. Johnson holds a Masters of Science Degree in Economics and Finance from the University of Bristol.

“As civilian airspace within China slowly liberalises, emerging markets in the Asia-Pacific region continue to grow. The BVI is well placed to meet this anticipated growth in demand and, with its aircraft and mortgage register soon to be open for business, may offer a “one-stopshop” few jurisdictions can match.” - From The Growing Business Jet Market in Asia: BVI Flying High p.80 by DANIELLE ROMAN and her colleague Simon Lawrenson. Danielle is an experienced banking and finance specialist and advises on a broad spectrum of transactions, including asset finance based at the Hong Kong office of Mourant Ozannes.

“The BVI is now building on its attractiveness as a key jurisdiction for the Asia Pacific business jet market, with the enactment of the Mortgaging of Aircraft and Aircraft Engines Act, which provide a framework for registration in the BVI of security over aircraft and, separately, aircraft engines.” From The Growing Business Jet Market in Asia: BVI Flying High p.80 by SIMON LAWRENSON and and his colleague Danielle Roman. Simon leads the banking and finance practice of Mourant Ozannes in Asia based in Hong Kong.

Asia’s ascendancy in global wealth has been spectacular. As a new area of opportunity for the BVI, we asked ALVIN MA to dig a bit deeper in Wealth Management in Asia p.72.

“The BVI Government has recognised that these challenges strike at the heart of the Territory’s competitive global position. It has worked diligently to engage key stakeholders in crafting the best courses of action to help inject new life into the industry and ensure its continued competitiveness. One such initiative is a game changing comprehensive financial services consultancy report. It was commissioned by the BVI Government under the aegis of Dr. the Hon. D. Orlando Smith, OBE, Premier of the BVI and Minister of Finance. The report was undertaken by various stakeholders and proponents, including global experts McKinsey.” - From A Game Changer: Strategic Repositioning of the BVI Financial Services Sector p.28 by CHRISTIAN SANCHEZ a secondgeneration journalist, continuing his family’s tradition of love for the written word.

KRISTIAN WILSON is a prolific writer on BVI matters in the financial services space. He contributes two articles in this edition: Re-Situating the BVI: Offshoreart.Co, International Finance and Contemporary Art p.54 and Seeking Truth from Fact: Rational and use of offshore Jurisdictions in the PRC p.96. Kristian is a senior associate Bedell's Singapore. An experienced commercial lawyer, he practiced offshore law in the BVI and Jersey and currently advises on BVI law including corporate, financial, commercial and regulatory matters.

Alvin’s involvement in the wealth management and investment banking field spans 32 years. He is now Head of Emerging Wealth Private Banking EFG Bank - Hong Kong, responsible for HK, Macau & PRC wealth management business development & marketing.

“UK politics over the next couple of years is likely to be dominated by two issues: the European Union (EU) referendum and austerity.” From - What does the British Election Result mean for the Overseas Territories and the BVI in Particular? p.40 by ROSS MUNRO. Based in London, Ross has a unique vantage point on such matters. He advises a number of the world's largest fund managers and institutions on all aspects of the formation, operation and restructuring of BVI investment funds. Ross joined Harneys in January 2005 and became a partner in 2008.

“With chapters in 40 different countries, the organization, Republicans Overseas has been garnering support from US officials and elected representatives to address the issues of FATCA deemed insensibly onerous. The organization plans to launch a challenge to the constitutionality of FATCA in a US court of law on three major legal grounds.” - From FATCA - The Horse May have Bolted p.48 by DR. ANGELO VENARDOS is the Founder and CEO of Heritage Trust Group, an independent trust and corporate services company with offices in Singapore, Hong Kong and BVI.

August 2015 Edition

BVI CALENDAR

A U G U S T

2 0 1 5

August 2015 Edition

T O

D E C E M B E R

2 0 1 5

A U G U S T BVI EMANCIPATION FESTIVAL: The celebrated August Festival is a two-week event honouring the islands’ emancipation in 1832. Attendees revel in the wide array of activities that include the August Monday parade, the Miss BVI pageant, the August Tuesday horse race, performances by local and other international musicians, and events to showcase cultural traditions such as donkey races and fishing competitions. Mocko Jumbies, vivid costumes, food fairs, J’ouvert (street jamming), gospel celebrations and folklore presentations are some of the crowd favourites. | July 24th – August 9th

O C T O B E R QUANTUM/RED STRIPE IC24 I N T E R N AT I O N A L R E G AT TA : Royal BVI Ya c h t Club www.royalbviyc.org The Willy T’s Virgin’s Cup: Royal BVI Yacht Club - www.royalbviyc.org 16TH FOXY’S HALLOWEEN CAT FIGHT: Foxy’s, Jost Van Dyke - www.foxysbar.com

N O V E M B E R BVI FOOD FETE | TOURISM MONTH: November 1st – 30th BVI RESTAURANT WEEK: Restaurants throughout the BVI present custom menus that offer wide selections of dishes at reduced prices. It’s a food lovers dream! www.bvitourism.com/RestaurantWeek BAREFOOT GOURMET SOIRÉE: An evening of fine dining over dishes prepared by award winning chefs amid chic island elegance | November 7th BVI CHARTER YACHT SHOW: www.bvicrewedyachts.com | November 7th – 10th PEG LEG’S ROUND TORTOLA RACE: Royal BVI Yacht Club www.royalbviyc.org | November 22nd ANEGADA LOBSTER FESTIVAL: The Anegada Lobster Festival is for everyone who loves food, loves lobster, loves the Caribbean and dreams of the British Virgin Islands! A two-day culinary event held on the shores of Anegada. The event was created to entice our community, visitors, new travelers and the niche market of food connoisseurs to the shores of the British Virgin Islands to experience our versatile tourism product.

D E C E M B E R

28TH ANNUAL PRO AM REGATTA: Come race with and against, and learn from Olympic Medalists, America’s Cup winners, National & World Champions, and socialise ashore with them. For more information visit www.beyc.com

CHRISTMAS IN SPANISH TOWN: Annual Christmas in Spanish Town is held on Virgin Gorda. Stores in Spanish Town move their stores outside. Enjoy musical entertainment, local foods and great deals. For additional information contact 1 (284) 495-5181. FOXY’S OLD YEAR’S NIGHT CELEBRATIONS: “Jost Van Dyke is known as one of the top three places in the world to be at for New Year’s Eve. On that night, also known as Old Year’s night, this yachtsman’s haven welcomes visitors from all over the world”. | December 31st FIREBALL NEW YEAR’S EVE BASH: Bring in the New Year in Trellis Bay. A full evening of revelry that features live musical performances, Caribbean food and drink, fireworks, dancing, Mocko Jumbies and more. | December 31st

For more information on all that the British Virgin Islands have to offer, visit the official BVI Tourist Board website at www.bvitourism.com or contact 1-800-835-8530. August 2015 Edition

AHEAD OF THE CURVE

August 2015 Edition

TRAVEL + LEISURE RANKS BRITISH VIRGIN ISLANDS IN TOP FIVE OF WORLD’S BEST AWARDS JOST VAN DYKE AND VIRGIN GORDA PLACE SECOND AND THIRD

he British Virgin Islands, Jost Van Dyke and Virgin Gorda earned the top rankings in Travel + Leisure’s 2015 World’s Best Awards. Jost Van Dyke was awarded the No. 2 spot while Virgin Gorda followed in the No. 3 ranking this year for Top Islands in the Caribbean, Bermuda, and the Bahamas. These spots were awarded based on surveys conducted by readers who marked their rankings based on natural attractions, beaches, activities, sites, restaurants, food, people, friendliness, and value. Commenting on this significant achievement, Premier and Minister of Tourism Dr. the Hon. D. Orlando Smith said “We are indeed

excited about this recognition because it is a reminder to the world that Destination British Virgin Islands is the ideal vacation spot to enjoy life. For us to be lauded by Travel and Leisure, a major publication in the United States, speaks volumes to the commitment that our people, our industry and my Government have placed on tourism. I congratulate the people and businesses on Jost Van Dyke and Virgin Gorda for ensuring that our visitors are exposed to exceptional and memorable experiences.” Additionally, Scrub Island Resort & Spa and Rosewood Little Dix Bay were among the Top 25 World’s Best Hotels based on readers’ rankings of rooms, facilities, locations, service, restaurants, food, and value of hotels and resorts in the Caribbean, Bermuda, and the Bahamas. “We are honoured to receive such high accolades from Travel + Leisure, a publication that is renowned around the globe,” said Sharon Flax-Mars, Director of Tourism. “The esteem for our islands and cays continues to radiate and we applaud our tourism industry and community for their vigilance in helping us to be recognised as a treasure in the Caribbean.” To view the complete list of Travel + Leisure’s 2015 World’s Best Awards you may visit: http://www.travelandleisure.com/worlds-best/islands#overall

August 2015 Edition

AHEAD OF THE CURVE

VIRGIN GORDA YACHT HARBOUR BOAT YARD UPGRADES TARGETING THE MEGA/ SUPER YACHT SECTOR WITH NEW LIFT

irgin Gorda Yacht Harbour has announced that it will be upgrading its Boat Yard lift capability with a state of the art and first in the region 350 Ton Lift. With this new Mobile Boat Capacity, the Virgin Gorda Yard will be able to service vessels of approximately 150 feet in length. It is partnering with the Italian company CIMOLAI TECHNOLOGY SPA for this $3.5million leap forward. The new lift will be operational by the summer of 2016 and it is designed to target and cater to the maintenance and service needs of the growing mega and super yacht sector in the BVI and the wider Caribbean. This investment will also help to deepen and broaden the BVIâ&#x20AC;&#x2122;s presence in the mega and super yacht space regionally. 24

August 2015 Edition

BUSINESS

BUSINESS - BVI BUSINESS

A GAME-CHANGER: STRATEGIC REPOSITIONING OF THE BVI FINANCIAL SERVICES SECTOR by Christian Sanchez

he financial services industry in the British Virgin Islands (BVI) is a fundamental part of the Territory’s economy. Over

the past 30 years, the industry has enjoyed remarkable growth and the overall economy has grown in lockstep with it. Today, the sector continues to take centre stage, as it accounts for most of the Territory’s revenue to the treasury and also provides employment for many BVIslanders.

In recent years, however, the financial services sector has been reeling. International pressures have begun to cause significant strain, and new competitors are posing a challenge to the sector’s vitality. The BVI Government has recognised that these challenges strike at the heart of the Territory’s competitive global position. It has worked diligently to engage key stakeholders in crafting the best courses of action to help inject new life into the industry and ensure its continued competitiveness. One such initiative is a game chaninging comprehensive financial services consultancy report. It was commissioned by the BVI Government under the aegis of Dr. the Hon. D. Orlando Smith, OBE, Premier of the BVI and Minister of Finance. The report was undertaken by various stakeholders and proponents, including global experts McKinsey. Its findings were revealed at the end of 2014, and the report itself was made publicly available in April 2015. In a nutshell, the report takes stock of the context within which the BVI operates; assesses past efforts to revive the sector; lays out a strategic plan, coupled with an implementation strategy; recommends initiatives and discusses how these initiatives can be implemented. This article summarises the report and takes an initial look at the actions taken by the BVI Government to actualise the recommendations.

SUPER SECTOR The BVI economy is one of the most prosperous and stable in the Caribbean. The success of the Territory’s financial services sector over the last few decades has been a cornerstone of the Territory’s positive standing. Crucially, in 2013, the industry contributed at least 65% of direct government revenue. The report points out that this figure could surpass 80% if indirect sources of revenue are also considered. The sector is also a source of funding for critical public services in the Territory such as education, social security, infrastructure and healthcare. It is a major employer as well, with between 4,000 and 7,000 BVIslanders in its present workforce. In the past 30 years, the BVI has earned a place at the forefront of the global financial services sector, receiving many accolades in recognition of this. Most recently, for instance, it was singled out as the leading offshore jurisdiction in the 17th Global Financial Centres Index (GFCI), which biannually ranks major global financial centres in terms of competitiveness. The Territory has also seen significant growth in the areas of asset management, fiduciary services, fund administration and management, as well as captive insurance. 28

August 2015 Edition

There are many facets to the competitiveness of the BVI financial services sector. The Territory leads the pack in the provision of financial services, and is paramount in company incorporations. This is due to its adoption of a powerful, adaptable and easy-to-use legal and regulatory framework that has proven superior to that of the competition. This framework has proven to be a popular selling point. According to the Financial Services Commission (FSC), the Territory’s financial services regulator, company incorporations in the BVI ballooned from approximately 100,000 in 1993 to 480,000 in 2013. Comparative figures quoted in the financial services consultancy report, sourced from the Financial Services Authorities of the Cayman Islands, Guernsey, Jersey and Mauritius, prove that the BVI is the domicile with five times the number of incorporated companies than any other offshore jurisdiction. A second facet is the FSC itself. It maintains a powerful, yet flexible regulatory framework that is administered by professional staff. A third facet, according to the report, is the BVI Registry of Corporate Affairs, which has achieved global renown for being well-structured, low-cost, and transparent. The report also cites the existence and good reputation of the Virtual Integrated Registry and Regulatory General Information Network (VIRRGIN), is an internet-based information system introduced in 2006 that makes it possible to register a company and obtain crucial corporate documents in less than 24 hours. The report also mentions other key elements contributing to the competitiveness of the BVI, such as a top-tier legal system, including a powerful insolvency regime, and a very highly globally regarded commercial court.

LITANY OF CHALLENGES These strong points notwithstanding, in recent years, the BVI’s financial sector has had to contend with very significant challenges. The amount of international pressure around compliance and transparency has continued to increase. The consultancy report states that blacklisting by the French Government and a poor compliance rating from the Organisation for Economic Co-operation and Development (OECD), may have negatively affected the Territory’s reputation. Also, several banks in Asia – quite possibly as a reaction to international pressure or in compliance with their own policies – have begun to make it difficult for BVI business companies to open bank accounts there. Additionally, a recent data leak to the International Consortium of Investigative Journalists (ICIJ) may have exposed the names of BVI investors, raising significant concerns about the capacity of the Territory to protect client confidentiality. These issues are being capitalised on. Strong competitors, including the Seychelles and Samoa, have begun to eat away at the BVI’s share of the international financial services market by successfully growing incorporations businesses of their own. A parallel development is the failure of the BVI to expand the menu of financial services it offers. As the report points out, basic company incorporations constitute the vast majority of government revenue generated by financial services. There is an improperly met need for more substantive services in areas like investment management, administration, wealth mananegment, arbitration and accounting. These value-added services also provide proof that substantive work, not just profit-shifting, is being conducted in the Territory. What constraints prevent the industry from growing its available range of value-added services? The report mentions a limited base of local talent

capable of offering such services; a corresponding difficulty in attracting and retaining foreign talent (due to such potential factors as onerous restrictions and variability in service quality); the persistent perception that there is less focus on other subsectors beyond incorporations; and poor infrastructure that results in decreased accessibility and convenience – a major competitive disadvantage for the Territory. Yet another challenge is the inability of the BVI’s product offering to meet the full range of customer needs. According to the report, while needs revolving around incorporation- and legal-related issues are being met, the offering struggles to meet needs relating to other value-added services. For instance, it has not been successful enough at attracting value-added brand name service providers and talent – which has made it impossible to create an adequate business environment for professionals. In this regard, other jurisdictions are having more success. The report mentions the Cayman Islands as an example. In that jurisdiction, targeted economic zones featuring special incentives have been established to extend a more comprehensive service offering to potential customers. Also, problems in modifying or updating pertinent legislation in the BVI and inefficient marketing of the Territory and its product competitiveness have also created additional layers of difficulty. A key effect of these challenges has been a continued decline – since 2011 – in the number of new company incorporations in the BVI. Admittedly, some of this decline can be linked to market instability due to the global economic recession and is thus beyond the control of the sector but the stark reality is that incorporations have been declining. Consequently, concerns have emerged about the long-term prosperity of the BVI’s financial sector and that of the Territory itself.

LEARNING FROM THE PAST As mentioned previously, the BVI Government has been well aware of these issues and has implemented initiatives to counter them. The financial services consultancy report incorporates a brief assessment of these past efforts, with the aim of leveraging lessons learned from them to inform future strategy. More specifically, the report focuses on the Territorial Action Plan, which was synthesised in 2013 from a 2012 Interim Report generated by the Financial Services Task Force and the so-called Wadham Report that was released in 2013. The Territorial Action Plan focuses on three initiatives. The first was to adapt to the new environment (including entering into an intergovernmental agreement with the United States regarding the Foreign Account Tax Compliance Act or FATCA). The second focused on sustaining the current value proposition, making the necessary changes while constructing a parallel model based on substance. The third involved the education of the BVI populace and the international community regarding its operations. While these themes were adjudged “thoughtful and well- reasoned” and the recommendations seen as strong, the implementation failed to bear fruit. The reasons for this failure are manifold. There was a lack of execution and coordination because prior to this current endeavour, there was no single resource that would specifically coordinate and execute a plan. Secondly, budgets were not flexibly allocated to help deliver on the initiatives; neither were any of the point persons able to dedicate resources to drive these efforts. Lastly, some recommendations including difficult but necessary reforms such as those touching on immigration and labor policy, required both August 2015 Edition

strong political will and the support of BVIslanders. These underscored the need to cultivate a better understanding of the financial services sector and its importance. Vision Quest Keeping in mind the context and leveraging the lessons learned from previous efforts to reinvigorate the sector, the Steering and Advisory Committees of this initiative agreed on a new strategic vision for the BVI which is aimed at moving the Territory into an upward trajectory. In the financial services consultancy report, this vision extends across three parts. • First, the proponents will work to ensure that the BVI remains a world leader in company incorporations by improving its international reputation and level of customer service. • Second, they will expand into value-added services through attracting and retaining top talent, growing local capabilities, and investing in infrastructure to make the BVI a convenient destination for business. • Third, the proponents will construct best-in-class enabling mechanisms for the financial services industry. These will include a Delivery Unit and divisions that will focus on business development and marketing and promotions.

FULL HOUSE AND FULL STEAM AHEAD

systems to promote local involvement in financial services 12. Land and stamp duty – Make it easier for non- Belongers to own land and reduce stamp duty to encourage retention. 13. Fund product update – Update fund legislation and regulation to provide new selling points for industry. 14. High net worth individual (HNWI) trust products – Invest to attract substantially more business from HNWIs from Asia seeking trust products. 15. Insurance products – Halt decline in captive insurance business through update in insurance legislation and regulation. 16. Banking – Review banking legislation and regulation; if required, attract Chinese bank to open BVI branch. 17. Arbitration – Establish an arbitration center in the BVI, enact immigration exemptions and develop physical space. 18. HNWI targeting – Increase focus on, and direct marketing to, HNWIs and other priority customer segments. 19. Aircraft and shipping – Prioritise and develop aircraft and shipping registries 20. Conference facilities – Invest to develop international conferencing facilities and attract large-scale conferences. 21. LatAm presence – Focus marketing and products towards Latin America and rising demand from the region.

To bring about this vision, the proponents of this new plan identified 40 initiatives. These run the gamut from “basic and fundamental” strategies that directly seek to address identified issues, to more forward-thinking and ambitious steps.

22. China relationship – Focus on developing the China relationship into one where China advocates for or promotes BVI products.

These 40 initiatives are as follows. Maintain and increase current business

24. Intellectual property – Pursue legislation and policy to make the BVI a leader in intellectual property.

1. US/UK FATCA – Roll out FATCA requirements and technology.

Build world-class enabling mechanisms

2. Tax information exchange agreements (TIEAs) – Implement automatic information exchange initiatives (superseded by multilateral conventions).

25. Delivery unit – Establish a financial services delivery unit to catalyze implementation in the sector.

3. FSC service – Strengthen consistent customer service culture at the BVIFSC, across all departments.

23. Work permit fees – Rationalise work permit fee structure to be more in line with peers.

26. International Finance Centre (IFC) revamp – Develop and resource the IFC to establish it as a world-class promotion and marketing entity.

4. VIRRGIN access – Make VIRRGIN accessible to all geographies at all times.

27. Business development – Dedicate full-time resources to strengthening the business development capability of the BVI.

5. Separate registry – Move the registry out of the BVIFSC into a separate entity, or into the government.

28. National agenda – Make financial services initiatives part of a bipartisan national agenda to depoliticise priority actions.

6. Cost-benefit regulation – Conduct cost-benefit analyses on international regulation compliance, and enact accordingly.

29. Engage population – Educate population on value and importance of financial services industry to build buy- in.

Expand into value-added services

30. IT and technology – Build IT and technology skills and platforms through the jurisdiction to position the BVI for future access.

7. Value-added services – Identify high-potential value- added service providers, and provide incentives to attract them. 8. Immigration and labor – Bring immigration and labor policies in line with best practice.

31. Government and industry skills – Embark on a skills- development programme to build sectoral skills based on current and future needs. Investigate big, “out-of-the-box” ideas

9. Infrastructure – Improve business infrastructure to increase convenience of the BVI (telecommunications, transport).

32. Retail banking – Offer seamless retail banking to BVI business companies in key international markets (through BVI bank or other).

10. Education reform – Develop local talent through education reform (curriculum, teacher training and overhaul of the Financial Services Institute).

33. Islamic finance – Develop Islamic finance-focused product offering and target Middle East customers.

11. Scholarship/internship – Strengthen the scholarship/ internship 30

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34. Data repository – Set up jurisdiction as data repository for offshore, secure data and legal protection from surveillance.

35. Pharma prospecting – Create marine biology hub to pursue pharmaceutical/ biomedical prospecting in BVI waters. 36. Renewable energy – Set up environment for solar and wave-power energy testing within the BVI. 37. RMB internationalisation – Explore opportunities in Chinese currency, e.g. offshore currency clearing house, bilateral swaps. 38. Wealthy benefactor – Pursue wealthy benefactor to develop infrastructure and new technology-based industries. 39. Bitcoin products – Offer Bitcoin index funds and exchange traded fund (ETF) products and accept Bitcoin-denominated deposits and collateral. 40. China revenue sharing – Enter into incorporation- revenue sharing agreement with China in exchange for direct endorsement.

TIGHT FOCUS Of the aforementioned initiatives, 10 were identified as priority based on their potential impact on the sector as well as their ease of implementation, and are to be focused on for at least the next six to 12 months. The other 30 are to be revisited when efforts on the priority ten initiatives are already underway. The 10 initiatives (along with the rationale for their selection, and with accompanying recommended actions per initiative) are as follows. Initiative 1: Pursue tax initiatives. The BVI’s international reputation, as

discussed previously, has declined due to increased UK and US pressure on FATCA and the issues regarding the OECD and French government. Complying with FATCA requirements and working with France and the OECD is necessary. Additional recommended actions include adoption of standards for Common Reporting Standards and proactive alignment on what the Territory will do to manage pressure on Base Erosion/Profit Shifting. Initiative 2: Enhance FSC customer service. While the regulatory reputation of the FSC is excellent and VIRRGIN is known as efficient and secure, concerns have been raised regarding the FSC’s customer orientation and responsiveness. There is also a question about whether limiting VIRRGIN access to BVI-based businesses is inadvertently leading to loss of company registrations from elsewhere, especially Asia. The actions under this initiative include determining FSC service level to identify gaps and opportunities for improvement; establishing and communicating commitment to culture change and providing training and incentives to FSC staff; and conduction of cost-benefit analysis of external access to VIRRGIN and system improvements. Initiative 3: Attract value-added services. This initiative is intended to surface and provide specific incentives for selected secondary service providers to set up shop in the BVI. Recommended actions include identifying anchor companies or groups that could serve as leaders in the provision of key value-added services;

identification of incentives that might entice such organisations to establish a presence in the Territory; and consider whether a Special Economic Zone akin to what the Cayman Islands has set up is a possible solution.

Initiative 10: Build BVIslander capabilities. There is a need to build local financial services talent and create opportunities for BVIslanders to join, contribute to and participate more meaningfully in the industry.

Initiative 4: Reform immigration and labor. Improved immigration and labor policies have been identified as critical to attracting and retaining both foreign and local talent to support a strong financial services industry. Policies that support reform in both areas need to be adopted.

Recommended actions include conducting a comprehensive skills assessment to identify current and future capability shortages, and shaping educational and training interventions to explore the development of skills for professions facing such shortages.

Recommended actions include the development of a clear vision for the role of skilled labor in the BVI and for the development of local talent; reforming immigration and labor policies in line with this vision and enact reformed policies; and restructure immigration and labor departments to deliver consistently high-quality service. Initiative 5: Invest in infrastructure. The jurisdiction needs to prioritize the creation of business infrastructure characterised by convenient air and sea transportation and seamless telecommunications services. Recommended actions include identification of alternatives for financing large infrastructure projects and decision on suitability for the BVI context; fast-tracking the airport upgrade or providing targeted ferry connections to the Cyril E. King International Airport in St. Thomas; and clarifying the aspirations for improved connectivity and undertaking initiatives in pursuit of these aspirations. Initiative 6: Establish a Delivery Unit. This is viewed as necessary to overcome the challenges to implementation that surfaced during the prior initiatives to revitalise the financial sector. A small but empowered team is needed to drive progress and achieve results.

SETTING SAIL Work is already underway on these 10 key objectives. With regard to Initiative 1, both the US and UK FATCA have already been signed and proponents are working to meet all requirements. Additionally, at a public event in April 2015, BVI Premier, Dr. the Hon. D. Orlando Smith briefly discussed these initiatives and noted that each had been assigned a public or private sector “sponsor”. This is a senior expert who is accountable for creating implementation plans per initiative. The list of sponsors includes Financial Secretary, Neil Smith; Permanent Secretary in the Premier’s Office, Brodrick Penn; FSC Managing Director Robert Mathavious and Chair of the Financial Services Business Development Committee, Mrs. Lorna Smith.

Recommended actions include the identification and acquisition of an exceptional leader and capable team; development of tools and performance dialogues for the unit; refinement of approach and interactions; and establishment of a governing board that boasts significant technical expertise.

The Premier added that these sponsors would work closely with the Delivery Unit in order to fast track the implementation of the initiatives. A steering committee chaired by the Premier himself and reporting directly to the Cabinet would guide the unit. The committee would be staffed by six dedicated professionals and headed by Kedrick Malone, former head of the BVI London office who has also served as Executive Director of the then International Finance Centre.

Initiative 7: Revamp the IFC. The IFC needs to become a cutting-edge organisation that can promote the financial services industry to the proper stakeholders, through the requisite channels, and at the correct time.

CONCLUSION

Recommended actions include completion of the strategic business plan to guide activities and priorities and focus on existing and potential customers, markets and products; recruitment of qualified professionals to staff the new IFC; and introduction of an industry membership programme to encourage private sector input and to raise private funds to supplement the budget. Initiative 8: Strengthen the business development function. The current business development function, the Financial Services Business Development Committee (FSBDC), is a gathering of private and public stakeholders. It is important to formalise this function and decide where to house business development. Recommended actions include alignment of the business development function whether as an independent body or as part of Delivery Unit or IFC; and dedication of human resources to perform key roles depending on the ultimate placement of the function. Initiative 9: Engage the population. This is a crucial step to seek broadbased commitment and support, without which key initiatives are unlikely to succeed. Recommended actions include gauging current public opinion and understanding of financial services; defining key messaging and identifying public champions; and crafting a multi-channel engagement and education campaign. 32

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The BVI may well have a long and arduous journey ahead of it in its quest to help its financial sector overcome its challenges. However, the financial services consultancy report appears to be a big step in the right direction. Those who crafted the report appear to have performed their due diligence – including having leveraged lessons learned from prior initiatives – and also seem to have engaged all the relevant stakeholders in its creation. It is also noteworthy that the BVI Government is already actualising the report’s recommendations, and that it has successfully engaged a wide range of experts to do so. The government is showing its eagerness to hit the ground running and to roll out these solutions. Further, pushing forward the 10 high-priority initiatives while keeping the other 30 on the back burner seems to be a sensible way to pursue implementation of a comprehensive project with both wide-ranging and deep ambitions. More challenges may surface now that the implementation phase is underway. However, the report is very welcome. The BVI looks forward to seeing how the report – and the initiatives it has sparked – can help improve the prospects for future growth of the Territory’s financial services industry. -BB

August 2015 Edition

BUSINESS - BVI BUSINESS

In Memory of the late

H O N. H. LAV ITY STOUTT ,

former Chief Minister and father of the modern BVI, on this the 20th anniversary of his passing and as a challenge to the youth of the territory to make the BVI a Great Little Nation.

WHAT WILL YOUR LEGACY BE? Remarks by Robert A. Mathavious Managing Director & CEO BVI Financial Services Commission At the 22nd H. Lavity Stoutt Community College Graduation Exercises Thursday, June 11, 2015 Paraquita Bay Campus

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Premier and Minister for Finance, Honourable D. Orlando Smith, Minister of Education and Culture, Honourable Myron V. Walwyn, other Honourable Members of Cabinet and newly elected Honourable Members of the House of Assembly, Deputy Governor, Mrs. V. Inez Archibald, CBE, Chairman of the Board of Governors of the H. Lavity Stoutt Community College, Dr. Charles Wheatley, Members of the Board of Governors of the H. Lavity Stoutt Community College, Dr. Bryan Penn, Acting President of the H. Lavity Stoutt Community College, Faculty and Staff of the H. Lavity Stoutt Community College, Distinguished Ladies and Gentlemen, And especially to you, graduands, Class of 2015, Good afternoon.

am honoured and humbled by the invitation extended to me by President Dawson to participate in today’s graduation ceremony on this the 25th anniversary of the founding of HLSCC. Timing is everything – last year I was asked to be the standby speaker, just in case the keynote speaker was unable to attend.

He was not a man who suffered from the tyranny of low expectations or allowed others to do so. He set high standards and demanded high standards of himself, his country and his people. He believed there was no problem that we could not solve, no gridlock we could not break, no barriers we could not overcome and no compromise that could not be improved upon. He knew that there could be no success without successors. How vividly I recall him standing here on the occasion of the first HLSCC graduation, proud as a peacock and bursting with pride. I believe if he were here today, he would say to the Class of 2015: “This is your day. You are our future. You were born to be players in this extraordinary game called life. So climb the ladder of success. Now go and amaze us.”

So like you, I have had a long time to prepare for today. Our time has come!

Class of 2015, to help you on your journey up the ladder of success, I would like to share with you a few tips and nuggets of wisdom that I have picked up along my professional and lifelong journey. I hope that you may find some of these insights worthy of entering into your personal GPS to help you chart your own professional career and lifelong journey.

Allow me therefore, on behalf of the BVI community gathered here, including those listening by radio or watching via television, your friends and families – and indeed on behalf of my own family – not only to congratulate you on your accomplishment, but also to thank you in advance for what you can and must do to bring meaningful change to these Virgin Islands.

Graduands, the first thing you should know is that the BVI both needs you and wants you. It is starved for your talents and skills; it yearns for your authenticity and energy; it thirsts for your potential leadership – leadership that will be based on character, credibility, competence, compassion and consequence.

Graduands, we salute you. Your graduation today has reinforced our beliefs and fed our hopes that you and all of us who desire a better country will continue to travel down the path to progress and prosperity.

Yes, the BVI longs for and eagerly awaits the fabulous potential that lies in those magnificent and unjaded minds of yours, minds bursting with ideas and innovative solutions. We need an army of the smartest, most able, most passionate and most resilient young people who are committed to helping to change the BVI for the better.

This is a path which was laid long ago by a great BVIslander to whom we all owe a tremendous debt of gratitude. Like you, I too am a part of the living legacy of the late Hon. Lavity Stoutt. Where I am today is a direct result of the doors of opportunity opened by Hon. Stoutt. And having had the privilege and opportunity of working closely with him over a span of almost 20 years – as Deputy Financial Secretary then Financial Secretary and then Director of Financial Services, and also as one of his speechwriters – I believe I am qualified to tell you something about the man who 25 years ago founded this College that now bears his name. National icon, father of the modern BVI, Chief Minister, landscape developer, lay preacher, elocutionist, statesman, fundraiser extraordinaire, champion of all things BVI, philosopher, chorister, man of good taste, husband, father – the titles do not tell the tale or explain the span, scope, grasp or influence of this exceptional human BVIslander; a man inspired by faith, influenced by the church and rooted in the BVI. A man who became the embodiment of Shel Silverstein’s “The Giving Tree” and who showed the catalytic and lasting effect that a single person with sufficient self-belief, drive and power to inspire can have on his country. A man also of passion and compassion, Hon. Stoutt had the tenacity and audacity to stay focused on whatever he dreamt to be possible for his people and to ignore the naysayers who stood in his way. Indeed, Hon. Stoutt took great delight in defeating his doubters! How vividly I can recall him and Hon. Omar Wallace Hodge going around the Territory in the late 1980s with stickers, flyers and brochures proclaiming “A College is a Must”. It has been said some people want things to happen. Others wish they would happen. Hon. Stoutt made them happen. Hon. Stoutt willed the Community College into existence when others said all it would do is produce “intellectual midgets”.

Be assured your HLSCC education will shape your future in more powerful ways than you can ever imagine. It gives you a uniquely powerful foundation to build on, whether you are going directly into the workplace or continuing to pursue further education or training overseas. Your task is to use what you have learnt here at HLSCC to make a difference in the quality of life here in these islands. What truly matters is, not only what you studied here but what else you learnt. Has the HLSCC experience made you thoughtful, inquisitive, courageous, serious, caring, generous and compassionate? Or, has it made you more haughty, pedantic, truculent or vain? I ask these questions because it is never too early to contemplate what type of legacy you want to leave behind. Working towards a legacy, whether in academia, business or in your personal life, keeps you motivated and performing at peak. It gives a higher purpose to your life’s work and above all, it helps you to share the fullest of what you are with others. So, graduands, I ask each of you to think about what your legacy will be. Will it be one of honesty, hard work, selflessness, sacrifice, integrity and thoughtfulness towards others? Will it be one of excellence in everything you do – or will it be something else? Will you take care of the people around you and of the fragile environment that sustains the BVI? Will you be sensitive to the needs and circumstances of those less fortunate than you? Will you love and nurture them the way you should? Or will you pass by on the other side? Will you pursue employment options that allow you to make the world around you better – or will you seek financial gain for its own sake? Will people generally feel better for interacting with you? At the end of your lives, how intense will your footprints have been in the sands of the BVI? August 2015 Edition

When I went to college some forty years ago, attending a university or college was a rare phenomenon for BVI students. Accordingly, the BVI community and H. L. Stoutt expected and demanded much from those of us who did. For me, this meant that I wanted to repay the taxpayers who funded my studies. Through a lifelong career in public service, I have sought to give of my best and to serve with distinction. I have tried to conduct myself and behave in such a manner that it could never be said of me that I had graduated from university with a magna cum mediocrity or a summa cum pomposity. I urge you, let that never be said of you. For you see, my belief has always been not only that we must do good – but that we must do so quietly. We should share in secret. We must– give when there is no crowd applauding and give to those who can offer us nothing in return. Unashamedly a BVIslander and unapologetically a product of the BVI public education system, I did not come from a rich family but I was offered rich opportunities by the BVI. I stand here as testimony to the fact that, if we seize the opportunities we are offered, the script of our life is ours and ours alone to write. That nothing is set in stone and that everything is possible. That we must never let others define us, limit us, pigeonhole us or stereotype us. Class of 2015, you alone must define yourselves – and you must do this by listening not only to your head but to your heart and your gut as well. You are embarking on your lifelong journey at a pivotal time in the development of these islands. This country and this College have evolved since the passing of H. L. Stoutt, largely for the better. But further improvement is still possible and desirable. And I believe no one is better prepared to make the improvements than you graduands of 2015. This is still a country of opportunity. Your graduation today is an occasion of hope, optimism and excitement. Do not therefore allow yourselves to be consumed or overwhelmed by any of the negativism, cynicism, skepticism, pessimism and all the other “isms” so prevalent today about the BVI. Do yourselves a favour by surrounding yourselves with positive people, positive thoughts, positive words, positive habits and positive values. Learn from Gandhi who said: Keep your thoughts positive because your thoughts become your words. Keep your words positive because your words become your behaviour. 36

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Keep your behaviour positive because your behaviour becomes your habits. Keep your habits positive because your habits become your values. Keep your values positive because your values become your destiny. Your reputation is the single most important possession that you have. Endeavour at all times to conduct yourselves with honour and dignity, and live your life so that if it were a movie, others would find it worthy of viewing. There will be times throughout your journey that you will have to make tough, difficult decisions. Just remember that each of these decisions, whether right or wrong, will become a part of your legacy. Graduands, you will soon learn, if you haven’t learned it already, that life does not always work out the way you want it to. And that the easiest and more expedient ways are not always the best ways to take. That’s why I have always sought to choose my battles wisely: big enough to matter but small enough to win. Experience has taught me that life will never guarantee you an easy road and you are not going to meet with approval of everything you do. Indeed, you will not always find joy in what you do and much of what you do will cause you pain – but I hope you will always seek to avoid doing things that cause pain and hurt to others. Class of 2015, no matter the consequences, no matter the situation, always be true to yourself and to others. Throughout your journey do not be afraid of saying what you believe to be right – no matter how unpopular it may be. Do not be complicit with the status quo and simply follow the crowd. Sure, in so doing you will take lumps. Sure, you will lose some friends and make a few enemies – but history teaches us that your lives will be the richer and better for following the straight path. Sometimes all the pressure you will face, as you struggle to meet deadlines, keep your boss happy, make your mortgage, car and loan payments and work your way up the corporate ladder will seem much too much to worth it. Believe me, I speak from experience! That’s when you have to dig deeply into yourself. If you do so, you will find that with perseverance, hard work and determination there are no limits to what you can achieve. You see, success at anything comes down to focus and effort and we control them both. As my father used to tell me repeatedly, “Sure, there may be people more talented than you but there is no excuse for anyone working harder than you at what you do.” So never let what you cannot do prevent you from doing what you can do. And don’t just do what you are good at. If you just stay in your comfort zone, you will never know what you are capable of and you will never get to experience the benefits of frustration. Yes, the benefits of frustration. For frustration

PHOTOGRAPHS PROVIDED by the Department of Information and Public Relations, Government of the Virgin Islands

can actually be a great teacher – you learn patience, tolerance and perseverance from frustration. Be strong enough to know when you need help and to ask for it when you do. You need also to be strong enough to say “I don’t know” or “I don’t understand”. Believe you me, there is USUALLY far much too much at stake to risk guessing it or faking it. Learning these seven words often work wonders in life: “I don’t know but I’ll find out.” People will respect your honesty and your self-assurance. No-one respects a phoney. Remember that the world owes you nothing and you only get from life what you invest in it. So invest wisely. Selfishness and self-centeredness are terminal diseases that have aborted and assassinated many a promising careers. They are the cancer that kills relationships and destroys healthy opportunities for growth and advancement in life. You will need to learn what I was taught by my parents and grandparents years ago. “To consider yourself capable and be considered capable is good. To consider yourself loving and be considered loving is even better. But to consider yourself generous and be considered generous is best of all. Many people make the mistake of thinking that all the challenges of life will dissipate if they have enough money. Nothing could be further from the truth. When we worship the devils of money, when we hanker after the power and prestige that we believe money and access to it brings, we are running away from the real world. We are setting ourselves up for a big fall on the perilous rocks of life. Class of 2015, money matters. But never do anything just for money. Never believe that everything has a monetary value or that money is the most important measure of whether you are successful in society. Experience has shown that money cannot save you – but it can ruin you. In this age of Facebook, Instagram, Facetime, never do anything you are not willing to be caught doing or that you will be ashamed of your parents and loved ones seeing now or in the future. So be careful what you post or what you allow to be posted about you. Remember your reputation – it is hard to build up, but it can be destroyed easily. As guardians of the legacy of H. L. Stoutt and as lifelong ambassadors for HLSCC, it will be up to you – as it is up to me – to take up the cause of preserving the legacy that he left us. More importantly, it is up to each and every one of us to establish and leave our own legacy that is worthy of emulation by our children and the generations of BVIslanders yet to come. The type of legacy that you yourselves would be proud to inherit. For your college and your territory but above all for yourselves, you graduands, the class of 2015, must become the difference that makes the difference.

If you don’t, you will be shortchanging yourself and the people who believe in you. If you don’t strive at all times to make that effort, you will be consigning yourself to a life of mediocrity and disappointment. You are among our brightest and our best. I therefore believe you will embrace the responsibilities and rich possibilities ahead and that you will contribute to the betterment of these Virgin Islands with conviction, enthusiasm and commitment. Let me leave you with the words found in the Gnostic Gospel of Saint Thomas, a book that did not make it into the New Testament. Saint Thomas said: “If you find out what’s within you and bring out what’s within you, what’s within you will save you. If you find out what’s within you and do not bring out what’s within you, what’s within you will destroy you.” Class of 2015, find out what’s within you. Bring out what’s within you. And change the BVI for the better. Change it by bringing to it… Goodness Compassion Caring Excellence Generosity Selfless service and Respect and civility towards our fellow men. Let this be your legacy. And may the God who brought you to this moment continue to guide you in the years ahead. -BB August 2015 Edition

BUSINESS - BVI BUSINESS

THE BVI FOR FINANCING OF CORPORATE AND PRIVATE AIRCRAFT by Audrey Robertson

The British Virgin Islands is becoming an increasingly popular jurisdiction for aviation finance transactions in both the commercial and business jet sectors. Among the reasons for this are the British Virgin Islands’ tax neutral status, its political stability, the developed English-based legal system, a bespoke commercial court, the flexible and commercial nature of its legislation and its adherence to international standards of compliance and other matters.

n the corporate and private jet sphere, while many such aircraft are, and will continue to be, cash purchases, in recent years an increasing number of such aircraft have been financed with bank finance - whether with respect to new or used aircraft and/or pre-delivery payments. Such financings are very frequently structured using a British Virgin Islands business company as the vehicle which finances, acquires title to, and then operates or leases the aircraft. This article, explores some of the features and issues which may arise in corporate and private jet financing transactions involving the British Virgin Islands.

THE SPECIAL PURPOSE VEHICLE Typically, the structure will involve the establishment of a new company, a special purpose vehicle (“SPV”), the sole activities of which will be to finance, own and operate the aircraft. Unlike in a commercial aircraft transaction, the acquisition of the aircraft is mostly for the operator’s private use and, consequently, there will not generally be a leasing arrangement to a lessee/commercial party but there may instead be an operator/management agreement with a professional operator/MRO. Additionally, again unlike in many commercial deals which often involve a bankruptcy-remote orphan trust structure, the SPV will generally be within the direct ownership of the principal behind the transaction, whether a large multi-national corporate or a high net worth individual. Some features of a British Virgin Islands business company: • the establishment and maintenance of a British Virgin Islands business company is straightforward, quick and cost-competitive. The company is incorporated on a same day basis and the certificate of incorporation and the stamped registry sealed memorandum and articles of association are received within 24 hours; • the British Virgin Islands is a tax neutral jurisdiction and, as such, no corporation tax, income tax, capital gains tax, inheritance tax, gift tax, 38

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or any other tax is payable by a business company in the British Virgin Islands; • there are no minimum capital requirements for a British Virgin Islands business company under the laws of the British Virgin Islands (save in the case of certain regulated entities), although there must be at least one share in issue at all times; • there is no British Virgin Islands law requirement to have locally resident directors or other officers or to hold shareholder or director meetings physically in the British Virgin Islands. A British Virgin Islands business company must, though, maintain a registered office and registered agent in the British Virgin Islands and keep certain corporate records and registers at such registered office; • there is no statutory requirement to prepare annual accounts or to file accounts in the British Virgin Islands (save in the case of regulated entities). A British Virgin Islands business company is required to keep such books of account that give a true and correct view of its affairs; and • the British Virgin Islands AML/KYC regime complies with international standards and will, therefore, be familiar to most transaction parties.

FINANCING AND SECURITY DOCUMENTATION The SPV will enter into certain documentation providing for the financing of the aircraft, including, typically, an aircraft sale and purchase agreement, a loan facility agreement and security documentation. Title to the aircraft will be transferred to the SPV by way of a bill of sale. If the aircraft is new, this will come from the manufacturer; if used, title will be derived through the chain of ownership affected via bills of sale back to the manufacturer. The security package would normally include an aircraft mortgage between the aircraft owner (and, if, for example, a US foreign owner trust structure, also the beneficial owner) and the lender and one multi-party agreement or separate security assignment(s) of the SPV’s/operator’s rights under the

various contracts relating to the maintenance and operation of the aircraft for example, the operating/management agreement, maintenance programs and policies of insurance over the aircraft and assignments of manufacturers’ warranties. As a further protection for the lender in the context of the security provided by the SPV, a BVI business company is required to keep a register of all relevant charges created by the company. Where a company creates a relevant charge an application to register the charge may be made to the registrar pursuant to Section 163 of the BVI Business Companies Act (the “Act”). A relevant charge registered under Section 163 of the Act has priority over any subsequently registered and unregistered charges. Third parties are deemed to have notice of any publicly registered charge. Additionally, the lender may take a charge over the shares of the SPV. As part of the share charge, the lender will also receive and retain certain ancillary “deliverables”, all designed to facilitate and allow the lender to take control of and potentially sell, the SPV and the underlying aircraft on an enforcement. These may consist of some or all of the following: (i) the original share certificate (if any) with respect to the charged shares, (ii) an executed, undated blank share transfer form, (iii) executed but undated resignation letters from the SPV’s directors and accompanying letters of authority to date the same on an enforcement, (iv) an irrevocable proxy in favour of the lender permitting it to vote the shares in the SPV on an enforcement and (v) an undertaking from the SPV and, potentially from its registered agent, inter alia, to co-operate with and take instructions directly from the lender on an enforcement. The SPV’s articles of association may also be amended to include certain share charge-related provisions. As a further protection for the lender in this context, it is standard practice for a notation that the shares have been charged to be placed on the register of members of the company and filed with the registrar for registration, thereby putting third parties on notice that the shares of the company have been so charged. Further, it is also typical in a corporate/private jet financing for the principal/the ultimate beneficial owner of the SPV (in many transactions, the “true credit”) to provide a guarantee.

In a pre-delivery payment financing, the security package may consist of the aforementioned guarantee, a security assignment of the purchase contract for the aircraft (or of the SPV’s assignment thereof) and often also a share charge. All of the aforementioned principal transaction documents (save for the charge over shares, which will commonly be British Virgin Islands lawgoverned) will be written under laws other than British Virgin Islands law, for example English law, New York law or Hong Kong law. Almost invariably, British Virgin Islands counsel will render a British Virgin Islands law corporate and enforceability opinion addressed to the lender/ other interested parties as to the SPV and its entry into the transaction documents and additionally where a mortgage over that aircraft is registered such opinion will also include confirmations as to such registration.

ENFORCEMENT/CREDITOR-FRIENDLY The British Virgin Islands bespoke commercial court will commonly recognise and enforce foreign law contractual and security arrangements provided such matters are validly created under such other laws. They will also customarily recognise self-help remedies, which will allow a lender to take possession of the SPV or the aircraft via the security granted in its favour without the requirement for a British Virgin Islands court order. The lender will not be deemed to be resident, domiciled or carrying on business in the British Virgin Islands as a result solely of the entry into/ performance and/or enforcement of the relevant transaction documents, nor is it the case that the lender must necessarily be licenced, qualified or otherwise entitled to carry on business in the British Virgin Islands in order to enforce its rights under such transaction documents. In the event of the insolvency of the SPV, as a matter of British Virgin Islands law, the lender’s position and priority as a secured creditor would in general terms be preserved.

CONCLUSION When selecting a jurisdiction for an aircraft transaction the parties will require consistency of application of laws and procedures, a safe and stable political environment with no unnecessary jurisdictional risks, a lack of additional tax consequences, certainty as to how security and contractual rights may be enforced, and high-quality professional support. The British Virgin Islands meets all of these needs. We expect to see the British Virgin Islands at the forefront of offshore aircraft financing in years to come. -BB

August 2015 Edition

BUSINESS - BVI BUSINESS

WHAT DOES THE BRITISH ELECTION RESULT MEAN FOR THE OVERSEAS TERRITORIES AND THE BVI IN PARTICULAR? by Ross Munro

he United Kingdom (UK) election on 7 May, 2015 was a bad one for opinion polls. All the predictions pointed to a hung parliament with the math seeming to favour Ed Miliband of the Labour Party to succeed David Cameron and become the next Prime Minister, albeit as part of a coalition or minority government. The pollsters got it terribly wrong and come the second week of May, David Cameron was presiding over the first all-Conservative Cabinet for 18 years from Downing Street, while Miliband contemplated what had gone wrong from a holiday villa in Ibiza.

Prime Minister Cameron is now free of the shackles of a coalition government (the 2010-15 government while led by Cameron was in coalition with the centre-left Liberal Democrats). In theory, this should mean a clear run at implementing all of the Conservative Partyâ&#x20AC;&#x2122;s manifesto commitments. However, the partyâ&#x20AC;&#x2122;s House of Commons majority is just 12 and Prime 40

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Minister Cameron is already being reminded of how fragile that is by some of his rebellious backbenchers. To provide some context, John Major won the 1992 election with a majority of 21 but that majority steadily diminished during the term of the parliament, largely as a result of by-elections and it disappeared altogether towards the end. So what does the election result

mean for the Overseas Territories (OTs) and the British Virgin Islands (BVI) in particular? UK politics over the next couple of years is likely to be dominated by two issues: the European Union (EU) referendum and austerity. A simple in or out of the EU referendum was promised and will now take place before the end of 2017. The official position is that Prime Minister Cameron will negotiate a new deal with the EU and then put it to the vote. There is practically no doubt that whatever deal is reached, Cameron will be in the yes camp, opting to remain part of the union. That much is not terribly controversial. However, in the few weeks following the election, there were disagreements within the parliamentary party over the exact question to be asked, the date of the referendum (Cameron is thought to favour a quick vote to get it out of the way, while Euro-sceptics would like to have time to organise their opposition), whether ministers can remain in office while supporting the out vote, how the civil service will act during the campaign and so on. Many disputes already, but none concern the actual merits of remaining in the European Union. An out vote in the referendum is, according to the current polls, unlikely. An intriguing perspective but these are the same polls that got the election result so wrong. So how much credence should we give them? Whatever the outcome, we can reasonably expect a good deal of debate about the UK’s place in the world and its foreign relationships in the period leading up to the referendum. Whether or not and to what extent the referendum itself will impact the Overseas Territories is difficult to predict, but influences are unlikely to be felt straight away. Nonetheless, on balance, a Britain which is less introspective and looks to the global economy for growth rather than just the EU is likely to look more sympathetically at the role of the BVI financial services industry. To the extent that the referendum dominates the domestic agenda, other matters may be pushed out of the spotlight or down the list of priorities. That could be a good thing but the flip side is that decisions made in a hurry or in a vacuum are much less likely to be good ones. Austerity, in the form of government cuts is unlikely to have a material impact on the Overseas Territories. Do not expect any handouts from the UK Government. Interaction between BVI residents and the UK will probably mean higher

fees – the cost of a UK passport is already one of the highest in the developed world, but nobody would rule out further increases and further tax changes are likely to target non-residents. Member of Parliament (MP), James Duddridge remains the Parliamentary Under-Secretary of State in the Foreign and Commonwealth Office (FCO) with responsibility for the Overseas Territories (having succeeded in August 2014 from Mark Simmonds). Continuity in the role is to be welcomed given the broad remit. In contrast, few in the Overseas Territories will miss Margaret Hodge MP as Chair of the Public Accounts Committee, due to her frequent and fierce criticism of the BVI and other OTs for their perceived role in tax avoidance. One would be forgiven a touch of schadenfreude when it was disclosed in April 2015 that Mrs. Hodge benefited from distributions from a Liechtenstein Foundation in 2011 as a result of the Liechtenstein Disclosure Facility. Mrs. Hodge is succeeded by Meg Hillier MP as Chair of the Public Accounts Committee. The Conservative Party manifesto expressly mentions the Overseas Territories in just two places. The first is a commitment to support the creation of so called “blue belt” maritime conservation areas subject to local assistance and environmental need. The second, a commitment to defending the territories which was perhaps written more with the Falkland Islands in mind. While welcome, neither of those commitments is likely to have an impact on day to day lives in the BVI, let alone be transformational. It is necessary to drill down and look at some of the policy detail. The manifesto states the UK will “continue to lead the world on tax and transparency” and “lead international efforts to ensure global companies pay their fair share in tax. The disclosure of beneficial ownership of companies has been the focal point of UK / BVI relations since the G8 conference in 2013 and looks set to continue to be that way. In the UK, the Small Business, Enterprise and Employment Act, 2015 received Royal Assent on 26 March, 2015. UK companies are required to keep a register of “people with significant control” (PSC) from January 2016 and to file the information with UK Companies House annually from April 2016. The PSC information will be available for public inspection. Publically at least, the UK remains committed to implementing Financial Action

Task Force (FATF) and G20 standards on antimoney laundering and terrorism financing. However, it has declined to regulate trust and company service providers (TCSPs). The UK model has no empirical evidence to support its effectiveness and no mechanism for verification of data accuracy as required by FATF and G20 standards. Despite these limitations, the UK continues to urge the Overseas Territories to implement a central register of beneficial ownership, although it appears that the requirement for it to be public is no longer being pursued with the same vigour. The EU’s Fourth Anti-Money Laundering Directive (AMLD4) took effect on 26 June, 2015. Member states have two years from that date to implement the directive into national law. AMLD4 requires member states to implement central registers of beneficial ownership and to provide access to authorities and “obliged entities”. The directive does not apply to the BVI, but the UK is using its existence to apply further pressure on the central register issue pointing to the emergence of an international standard. The BVI maintains that the FATF and the G20 standards remain the applicable international standards and that the specific measures to achieve those standards remain a jurisdictional choice. It is clear that many jurisdictions outside of the EU have not committed to central registers, most notably the United States. The risk remains that while the Overseas Territories (including the BVI) have convincing intellectual arguments over the effectiveness of their AML regime – especially when compared to the UK – the intense pressure from the UK to deliver on a political commitment will not go away. In June 2015, the EU published an Action Plan for Fair and Efficient Corporate Taxation calling for the introduction of common tax rules among member states to combat tax avoidance. Part of that announcement on 17 June included a “new” EU blacklist of 30 noncooperative jurisdictions, which includes the BVI. It is important to understand that the EU blacklist does not present any new information and there are no direct consequences of being on the blacklist. It is merely the results of analysing member states blacklists as of December 2014 in what the EU describes as a first step towards a common approach to non-cooperative tax jurisdictions. The EU Action Plan states that the list “offers member states a transparent tool to August 2015 Edition

compare their national lists and adjust their respective approaches to non-cooperative tax jurisdictions as necessary”. However, its own analysis conducted by the Platform for Tax Good Governance, contradicts this by highlighting a number of issues with its own data. First, only half of the 28 member states maintains a national list. Germany also maintains a list, but it is currently empty. In addition, the difficulties of keeping national lists up to date are real. By way of example, the EU reports that eight member states still list the Netherlands Antilles despite the fact that it has not existed as a jurisdiction since October 2010 and Belgium has failed to review its list once since its adoption in 2010. While member states have been inactive, the BVI has done much to meet developing international standards. Since 2010, the BVI has entered into many Tax Information Exchange Agreements (TIEAs); signed Intergovernmental Agreements (IGAs) with the US and the UK for automatic tax information exchange; committed to the Common Reporting Standard as an early adopter and signed and implemented the Convention on Mutual Administrative Assistance Tax Matters.

national black list, with the exception of Bulgaria since that country has not signed the Convention. The criteria for being on a member state black list is varied and the impact is equally varied. Even the Organisation for Economic Cooperation and Development (OECD) has criticised the EU’s list in public correspondence.

i n

As a result, the BVI has agreements to exchange tax information matters with all 12 of the EU member states which have put the BVI on their own

While the EU’s blacklist can be picked apart with about 30 minutes of online research, the BVI’s inclusion, is without doubt unhelpful. The BVI needs to be proactive and communicate with stakeholders that the blacklisting has no immediate impact and also engage the EU and individual member states to press the shortcomings of any kind of blacklisting and that given the steps taken, the BVI should not be included. A default agreement seems to already exist, as many member states do not produce blacklists. The UK should assist its Overseas Territories in communicating that message, but will they be motivated to do so in light of the UK’s demands for a central register of beneficial ownership? The newly elected BVI Government will have to apply a mix of old fashioned skills of diplomacy, negotiation and discretion, combined with grit and stamina to find a pathway, that not only meets developing international standards, but satisfies the UK’s political ambitions and commitments. -BB

BUSINESS - BVI BUSINESS

THE ROAD TO SUCCESS AS AN OFFSHORE CENTRE REMARKS AT THE STEP CARIBBEAN CONFERENCE 2015 by Helene Ann Lewis

ood morning! Thank you for your very kind introduction. Hon Ministers, STEP Worldwide Chair Ed Buckland, fellow STEP Council Members, Delegates, Friends. It is a great pleasure to be hosted by Anguilla here in neighbouring St Maarten. I thank the Anguilla Executive Committee and Anguilla Finance for your excellent hospitality. Characterising a successful international finance centre (IFC) is probably trite, but it is perhaps necessary to determine what practical advice I could possibly give to any IFC to attain, if not ensure success in the current and foreseeable environment. As much as we have come to abhor the term, I perceive that the topic is really directed at an examination of “offshore financial centres” rather than the well established metropolitan finance centres such London, Zurich and New York – which hardly need my advice! Permit me then to 'paint a picture of a landscape that forms the backdrop for this topic. The emergence of financial centres outside of Europe, North America and Japan, began with the

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Channel Islands, initially because of issues over radio licenses that caused an entity in the United Kingdom (UK) known as “Radio Caroline” to set up offshore, in waters closer to the Channel Islands than to Britain for the purpose of broadcasting popular music and other content not offered by the government controlled British Broadcasting Corporation (BBC). The concept of “offshore” was born – avoidance of licenses soon gave rise - and I’m sure I’m skipping some hurdles here - to avoidance of taxes. The post war explosion of wealth, simultaneous with the rise of trade unions and heightened concerns over equitable distribution, gave rise to concerns over protection of legacies and the necessity to pre-empt the squandering of resources by governments on so-called “socialist” programmes. The wealthy looked for different ways to protect their wealth for themselves and future generations. As estate planning and tax minimisation became high priorities, a growing number of professionals became experts in developing wholly legitimate ways and means of avoiding estate and other taxes at a time when international financial centres as we know them now didn’t yet quite exist. Initially it was as simple as a Swiss or Channel Islands bank account. But mechanisms became more sophisticated, lots of lawyers were involved and by the late 1960s, people were being knighted for tax avoidance – although just 20 years later, the Queen’s jockey Sir Lester Piggott was jailed for tax evasion! But I digress! International finance centres came to be recognised, in the words of Dr RoseMarie Belle Antoine, in her 2013 publication, Offshore Financial Law, as jurisdictions which “have chosen as a main or important path to development, legislative, financial and business infrastructure which is more flexible than orthodox infrastructure and which caters more specifically, and often exclusively, to the needs of non-resident investors”. By the early 1970s, The Bahamas, Bermuda and the Cayman Islands gained recognition as niche markets offering a range of financial services attractive to increasingly mobile, wealthy global citizens both individual and corporate. Perhaps it was the very mobility of such persons that ensured the emergence of island states

as financial centres as “snow birds” took up residence in warmer climates for much of the “winter season”. The British Virgin Islands (BVI) came fairly late to the party, but soon achieved unimaginable success – due in no small way to the fall of former Military Leader of Panama, Manuel Noriega in 1989. The trajectory from latecomer to what the Global Financial Centres Index (GFCI) characterised in April 2015 as the most successful of the Caribbean IFCs, has been well-documented and indeed experienced by many of us. But what were the hallmarks that catapulted the BVI from virtual obscurity as a place “fit only for a bird sanctuary” to a major contender for high honours on the Top 100 list of successful offshore finance centres? Although I speak of the BVI here, I am reasonably assured that the story is the same for other Caribbean IFCs represented here. Of course the introduction of appropriate legislation was the beginning of the climb up the ladder, but legislation alone could not have ensured success. The government of the day and successive governments since then, established and maintained close and productive working relationships with the private sector. By consulting widely with the technical experts who have first-hand commercial knowledge of clients and their needs, governments are able to develop and introduce attractive products facilitated by modern, innovative legislation and hospitable working environments for the plethora of experts needed to underpin the industry.

of the BVI offer, winning accolades from prominent commercial litigators globally. Reliable judicial systems became yet another sought after feature of the successful IFC. Unfortunately, as with the larger and more accepted financial centres such as London and New York, there have been those who abuse the systems for their own benefit and to conduct illicit activity. However, the foresight of the region’s governments saw the introduction of regulation as early as 1990, such that some jurisdictions were found to be ahead of the curve by the time Whitehall chose to become involved. Since 1990, the introduction of appropriate regulation has been an increasingly important requirement for the preservation of the industry worldwide. However, many people are still stunned by the rapidity with which the provision of financial services from outside of the large Western cities has become reviled and despicable in the eyes of international organisations which now regard what was once the legitimate avoidance of taxation and the preservation of wealth for future generations as abominations. But here we are!

While the islands of the Caribbean were playing catch up with the Channel Islands, their political status became a deeper cause for concern in Whitehall. Political correctness became imperative and the defences against increasingly unacceptable governance arrangements with former “colonies”, led to a restructuring of relationships with Britain that saw more autonomy vested in local governments, which were encouraged to develop financial services as an assured revenue stream and a path away from aid and grants from the UK. The new status of British Overseas Territories (OTs) brought with it tensions over citizenship and control of finances. The governments of OTs were however urged not to rock the boat as the tenuous financial services industry could soon evaporate if the perceived stability of British status and the presence of Her Majesty the Queen as Head of State were threatened. So, political stability became an important characteristic of the successful IFC.

International organisations have reacted with uncharacteristic speed and resolve to reverse well established tenets of privacy, confidentiality and legitimate succession planning. Statutory provisions onshore that saw a flight of capital to emerging financial centres and to “tax havens” have been repealed and criminal liabilities imposed on actions that were once perfectly legitimate. So-called tax havens have been told to publish or perish! Disclosure of the identity of beneficial owners is now atop the agenda of all political parties in Europe. The demands of the European based organisations that have become the watchdogs of international finance have become more stringent by the week if not the hour! Meanwhile, the real powerhouses of the Asian economy, Singapore and Hong Kong, having outstripped the growth and development of the Caribbean IFCs, have only now begun to emulate the regulatory provisions that have been in place in the Caribbean for more than 15 years – and they get full credit for that! The Caribbean IFCs, not so much! No sooner is the ink dry on one sanctioned agreement than another imposition is pushed through the pipeline. Keeping pace with the international “common standards” is not for the fainthearted, nor for the unfit! Indeed we may well have come to the point where only the super-strong will survive.

Easy access to markets and the development of niche products also became important with each of the Caribbean sectors developing a specialist track. While competition was keen, specialisation afforded room at the table for everyone and although proximity to the United States (US) east coast was a huge advantage to some, others found Asian markets very receptive to a cost effective product and the mobile expertise that resided in the Caribbean but commuted frequently to Hong Kong and Singapore, which was then still called the Far East. The rapid advances of technology and the flexible co-operative relationship with Cable & Wireless allowed Caribbean IFCs to capitalise on the modernisation of telecommunications with the introduction of the internet, eliminating the arrival of faxes stamped “Top Most Urgent” on the desks of lawyers all over the Caribbean. The burgeoning populations of the new IFCs put a strain on the islands’ infrastructure but governments remained sensitive and attuned to the demands of the industry and in most centres made the adaptations necessary to sustain it. Technology and infrastructure were added to the list of requisite characteristics for a successful IFC.

While the demands of stringent global and some may say extra territorial regulation have begun to impact the growth and development of all IFCs, it is particularly true that allegations of over-regulation fall on deaf ears while in fact the politicisation of the arguments in support of the most dramatic measures – public registers of beneficial owners – tend to cloud the underlying issues and the practical realities. In the Caribbean, particularly in the Cayman Islands, Bermuda and the BVI, identification evidence of beneficial ownership has long been the norm although such information is confidentially held not publicly available. There are very good reasons to maintain that position, but non-governmental organisations (NGOs) are not satisfied with such reasons and revenue hungry jurisdictions have become the most ardent supporters of the positions adopted by the likes of Tax Justice Network and the International Consortium fo International Journalists (ICIJ)! Go figure – we really are living in altered reality! In the meantime the advisability of maintaining an appropriate balance between the need for regulation and the benefits of international business, is overlooked and decried as a tax dodger’s anthem.

In the meantime, they all became truly international – providing products and services that were sought after and used by global corporations and Ultra High Net Worth Individuals (UHNWIs) as part of complex crossborder transactions. In most Caribbean financial centres, there are significant developments in corporate and trust law not only at the legislative level, but also in jurisprudence as a result of litigation involving multinational corporations and individuals who choose to litigate their causes in the well-renowned courts of the region. Indeed, the establishment in the BVI of the Commercial Division of the Eastern Caribbean Supreme Court has become a significant feature

Professor Jim Hines, no stranger to the STEP Caribbean Conference, published a significant work in 2009 analysing the role of IFCs in the global economy. He has concluded that: “Offshore centres act as conduits for global trade and ease international capital flows. International joint ventures are often structured as companies in an offshore jurisdiction when neither party in the venture wishes to form the company in the other party's home jurisdiction for fear of unwanted tax consequences. Although most offshore financial centres still charge little or no tax, the increasing sophistication of onshore tax codes has meant that there August 2015 Edition

is often little tax benefit relative to the cost of moving a transaction structure offshore.” Where then are the benefits or advantages of doing business with IFCs in the foreseeable future? How can the success of the 90’s and early millennium days be sustained? Is there a demand for the services provided by these centres? Are the markets available and accessible? Can IFCs survive? What must IFCs do to ensure their survival? Of what value today are the characteristics that helped achieve their success? Does the new regulatory paradigm require “reinvention” of the IFC? The viability and success enjoyed by IFCs between 1984 and 2007 were in no small way due to the emergence of a class of persons particularly in Asia and Latin America who have come to be known as HNWIs or UHNWIs, who being more commercially minded and business savvy than the wealthy of the 18th and 19th century, were becoming increasingly involved not only in cross border transactions but in the movement away from the “socialist” 1960s and 70s where governments raised taxes on the rich in order to provide programmes for the poor. Tax efficiency became an imperative, and the demand for financial services that facilitated such efficiencies as well as the protection of assets from rapacious governments willing not only to impose high taxes, but also to confiscate private wealth, increased exponentially. As far as wealthy private citizens especially in Latin America were concerned, the threat of kidnapping – a measure adopted by many “revolutionaries” - for the purpose of raising revenues, was a growing and predominant concern. Legal and financial advisers in the global financial centres initiated, encouraged and supported the use of low tax jurisdictions as banking options but also as sources of corporate vehicles that were flexible enough to submit to jurisdictions other than that of their domicile. The International business company (IBC) and the so called “offshore trust” were devised as a means of providing just the privacy, confidentiality and tax efficiency that such markets demanded. The wave was sustained right through to the Global Financial Crisis in 2007, but while growth slowed, it can nowhere be said that demand has atrophied.It may have mutated somewhat, but the real demand for financial services has not dried up! A significant industry leader, the VISTRA Group of Hong Kong, has for the last five years conducted a survey of the financial services industry in offshore financial centres. In their 2014 report “Looking Forward: an industry on the move”, respondents were split 50/50 between Asia and the rest of the world. The report asserts that:“When asked to name the top 10 locations for client origination over the next five years, 40% of respondents opted for China, well ahead of the United States (US) and the United Kingdom (UK) in second and third, with 13% and 10%, respectively”. The report notes that the survey results are not skewed because of a heavier Asian response. It is clear from an analysis of the respondents that industry practitioners from the Middle East as well as the Caribbean share the views of their Asian colleagues that more and more business will come directly from China. Journalists from magazines such as GQ , the Economist and Forbes all agree that the number of new millionaires and billionaires in China will continue to outstrip those in Europe, the USA and Latin America annually over the next five years. The VISTRA Group believes that: “Part of staying relevant means engaging with China, still the fastest-growing source of new business yet a constituency that is now looking to put capital to work overseas as much as find ways to bring it in. This amounts to a more global opportunity, which can be tapped by industry participants almost irrespective of their location.” China is not the only growth market. Most global economic indicators show a great surge in wealth in Africa, the Middle East and Latin America. Notwithstanding political instability, business development is progressing rapidly across Africa, with clear indications that burgeoning wealth will see increased demand for financial services in those jurisdictions where legislation does not yet provide the sort of flexible succession planning options with which most of us are familiar. 46

August 2015 Edition

So there are markets! The burning question is, can Caribbean IFCs provide what these markets want? Confidentiality is gone! What’s left? Perhaps people far more clever than I am have an actual answer to that, but what I think is that notwithstanding the diminishing returns on selling confidentiality, the products and services of IFCs are still very much in demand and will continue to be. It is undeniable that a wealth of technical expertise resides in the various facets of the industry in the Cayman Islands, Bermuda, Bahamas and BVI – I shall speak of the Asian centres a bit later on. Perhaps then a key to success in the new paradigm is for that expertise to be innovative and assertive, offering new products, better quality services and generally diversifying from the narrow niches that have come to define each of us. Just as those service providers who predicted the present environment became nimble enough to adapt whether by downsizing, outsourcing, consolidating or even expanding, so too jurisdictions must become more nimble and proactive rather than reactive to the winds of change. The VISTRA Group says:“Jurisdictions face a similar battle to (service providers) to prove they are relevant in an increasingly complex commercial environment. A number of offshore financial centres have already carved out niches for themselves… and it is difficult to see them being supplanted. Others must identify a unique selling point and invest in it, or face extinction.” I believe that deeper and closer collaboration with the private sector is needed to assist governments with developing and introducing legislative regimes that will win new business and service the demands of longstanding clients. Collaboration must be real, not cosmetic. Legislators and civil servants must have significant buy-in to the mission of every government to preserve and upgrade the jurisdiction to ensure ongoing success. Facilitating the improved growth and development of the financial services sector in any IFC will require a genuine effort that will involve the entire population. Governments must be willing to reach across the aisles to embrace their colleagues on the opposition benches to solidify leadership in a common goal. Westminster model democracies do not tend to do that very well, but Caribbean IFCs (perhaps all the nations of the Caribbean) need only look eastwards to the shining star that is Singapore for an example of how to ensure the success of an IFC. Taking advantage of such fortuitous factors as location, opportunity and timing, the late Singaporean President Lee Kuan Yew built a nation from scratch – retaining the fundamental legacies of colonialism that he found advantageous but ruling in a disciplined way, he emphasised a few things that made Singapore an enormous success, and solidified his legacy. I will touch on only a couple of them. Firstly, he took steps and made huge investments, as he put it, “to develop Singapore’s only significant resource, its people”. He invested in education. In eulogising Lee Kuan Yew recently, a former Executive Vice-Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, said: “it should be emphasised that Singapore’s education system was not designed de novo by Lee Kuan Yew and his colleagues. Rather, it was built on the very solid foundations inherited from Singapore’s British colonial past. In contrast to many of his contemporaries among post-colonial leaders, Lee Kuan Yew was not afraid to embrace whatever elements from that past that would prove useful to the nation-building enterprise. Nowhere is this approach more evident than in education.” Today, Singapore with a population of five million people, boasts among its several tertiary and specialist level institutions, two universities that consistently rank among the world’s top 75 institutions of higher learning – the same as China, Japan and Germany. Singapore’s tertiary level institutions span the gamut of relevant training needs for the entire society and specialisation is not only encouraged but fully supported. IFCs wishing to be successful in the coming decade need to do the same thing. Emphasise education – from the cradle to the grave. The general population must learn, know and understand the industry and its significance to the jurisdiction and be willing to support their governments’ commitment to enhancing opportunities for the industry, especially where the industry is

the main revenue earner. Programmes must be introduced at primary and secondary school levels to expose young people to the sector. In Singapore, teachers’ salaries are so structured as to attract only the best graduates for the jobs on offer. In all IFCs, community colleges must develop curricula that equip students for successful entry into the industry. Organisations like the Institute of Chartered Secretaries and Administrators (ICSA), CLT International and STEP can help with that. STEP certifications are now the gold standard for every employer in the industry from Bermuda to Brazil and all points in between. The new realities that impact all IFCs demand highly specialised services. Clients are no longer bound by old loyalties but go shopping for jurisdictions that can offer such services not only at the right price, but most often from a single shop. Service providers are increasingly becoming multi-jurisdictional to serve their highly mobile global clients from wherever they choose to reside. Practitioners too have become more mobile and flexible. More and more people are willing to step outside their inherent comfort zones and move across oceans three or four times in a career in order to take advantage of opportunities offered in every recognised jurisdiction from London to Uruguay and Zurich to Shanghai. Therefore the successful IFCs must do everything to attract, empower and retain highly trained work forces. The second characteristic that Singapore emphasised was discipline – not only moral and ethical discipline, but fiscal discipline. Singapore began as a poor nation and Lee Kuan Yew taught his people to act poor. A former head of the Singapore civil service and now a significant business leader in Singapore, Lim Siong Guan spoke of Lee Kuan Yew’s legacy at a Business Times conference in March 2015. He told delegates that the starting mind set of Singapore in the 1960s was that of a poor man: “life is uncertain, earn what you can, save what you can, spend on what you need, we never know what tomorrow will bring, so be prepared and save for the rainy day.” The attitude to wealth persists even now that Singapore is perceived to be a rich nation. Although Singaporeans may have become more relaxed in their consumer habits, on the part of the government there is a fierce determination not to spend the country back in to poverty. According to Mr Lim, they are “understandably, concerned that Singapore could be setting itself up to fall into a situation where the country is in fact poor, but the government provides for the people as though they are rich”. As I say Caribbean governments and IFCs need to pay attention! Finally in relation to Lee Kuan Yew, his eulogists have placed great emphasis on the value of integrity and a virtually corruption free society. One of them described the secret of Singapore’s success this way:“What explains a willingness on the part of so many foreigners to park their funds and their wealth in Singapore? The explanation lies in an ability to trust Singapore as a place where promises are kept, the rule of law maintained, justice is assured, government policies are predictable. Singapore offers reliability, integrity, quality, hard work and trustworthiness. These are what make for long-term relationships. Trust is the root of relationships, and honour is the foundation of trust, where the people, businesses and government deliver on their word of honour. Singapore’s place in the community of nations obviously depends not just on trust, but on being able to mobilise talent, and to synergise the efforts of workers, employers and government under superior leadership. But honour has to be the starting point and the abiding foundation.” Alongside Singapore at the top of the successful IFCs of the future, sits Hong Kong. Benefitting from its special relationship with and close proximity to China, Hong Kong enjoys an enviable position. It is the IFC likely to benefit most directly from the explosion of wealth in China. It has become the destination of choice for most expatriates seeking to work in offshore financial services and the last ten years have seen unprecedented levels of migration from Europe and the Caribbean to Hong Kong. Global trust corporations and law firms are making huge investments in their Asian operations and setting up in Hong Kong has become an imperative to success for many heretofore

traditionally conservative and quintessentially Western entities such as the “magic circle” accounting and law firms. Globalisation is another key to success for IFCs. The global application of new and more inflexible regulatory standards affects all IFCs. Jurisdictions that were once secure in their niche markets must now re-invent themselves to create new attractiveness – face lifts and tummy tucks are the order of the day, to say nothing of implants and transplants! Seriously, we all need to go back to the drawing board. The things that worked for us all in the 90s are no longer the only reliable characteristics for the new millennium. Location, legislation, political stability, public private partnerships, and softselling, must now all be supplemented and underpinned by expertise, dynamism, assertiveness, client-focussed products, synergies between governments and service providers, sophisticated infrastructure and superior leadership. It’s not enough to simply be user friendly. Jurisdictions now have to work much harder to motivate their populations both indigenous and expatriate to develop and maintain hospitable environments for healthy survival of their financial services industry. It will not be enough to introduce innovative legislation, it will be necessary to train the resources that support the management and sale of those products from within their jurisdictions. Ramping up educational opportunities at every level, insisting on high standards of qualifications for all industry practitioners and facilitating - genuinely and reliably facilitating, the transplanting of expertise into their jurisdictions to enhance the global offer. All these things must simultaneously impact the policies geared to sustaining growth and development of the financial services sectors of all IFCs. Success then will be defined not only by longevity but by the key indicators that keep an IFC recognised and recognisable as a “major player”: Is it a stable, reliable, honest environment in which to do business? Is the legislation modern, flexible and innovative? Is the expertise available to facilitate use of the jurisdiction? Are the “products” relevant and attractive? Is regulation appropriate and accommodating? Are services world class and efficient? Is the judicial system trustworthy and reliable? Can the jurisdiction provide everything the client needs? Competition is fierce. But imagine the possibilities if we faced adversity together rather than allowing old school philosophies to impact our policies. Is there really still room for "divide and rule" in the 21st century? Caribbean IFCs so often allow themselves to be picked off, hoping that winning brownie points with the Foreign & Commonwealth Office (FCO) will ensure some secure position! All that does is ensure that even harsher measures will be adopted sooner rather than later. Imagine if we'd all held hands and run the course together! We might have saved confidentiality! But again here we are: Recognisable brands cannot continue to rely on traditional trade ties. Everyone must engage in more direct interface with the leading players in the target markets, including the governments to secure viable commercial relationships advantageous not only to the seller but to the buyers as well. Clients too will need to be educated to the need for substance over form. Advisers will need to become far more closely involved with all aspects of clients’ operations to enable delivery of more comprehensive practical advice. Cross disciplinary practices will continue to emerge as lawyers, accountants and estate planners will need to work closely together across disciplines as well as across borders. There is much work to be done but for those who are willing and able to reinvent themselves, the rewards are possibly larger than ever. Just remember: Hell is where the regulators are in Singapore, the marketers are BVI and the products are from Gibraltar but Heaven is where the regulators are Guernsey, the products are BVI and the marketers are Bermuda. Aim high folks! We can all be successful! Good luck to us all! -BB August 2015 Edition

BUSINESS - GLOBAL

FATCA - THE HORSE MAY HAVE BOLTED by Dr. Angelo Venardos

G U ILT Y U NL E SS P R OV EN OTHERW I S E

he Foreign Account Tax Compliance Act (FATCA) â&#x20AC;&#x201C; a law passed in 2010 to tackle the abuse of using offshore financial accounts for the purpose of evading (United States) US taxes â&#x20AC;&#x201C; is now in effect after a two-year delay. FATCA requires foreign financial institutions (FFIs) worldwide to identify and report to the US, all financial accounts owned by US citizens and permanent residents or Green Card holders. Many Americans are therefore facing an enormous challenge while living and working abroad amid an expanding regime of regulations.

August 2015 Edition

The basic principle of FATCA is the assumption that every financial account held by US citizens overseas is potentially used for the purpose of evading US taxes. Every American who lives in London, Zurich, Singapore or Hong Kong needs to have a bank account simply because they need to be able to write cheques and pay utility bills just like anywhere else. The number of Americans living abroad is estimated to be 7.6 million, from whom there are about 440,000 Internal Revenue Service (IRS) tax forms filed for Section 911 Foreign Earned Income Exclusion every year. The vast majority of Americans living overseas who are not filing US taxes are not trying to evade taxes but in most cases, simply believe they do not need to file because they do not owe anything or they know they fall within the exemption threshold allowed under Section 911.

UNINTEND ED CON SEQUEN CES Banks and financial institutions around the world have been scrambling to put in place their own system of due diligence and developing infrastructure for the purpose of identifying those who may be subject to US tax liability. Yet, because the requirements for FATCA compliance are so cumbersome, an increasing number of Americans are reportedly denied banking services, particularly those seeking to open a new account. The impact on Americans living and working abroad has gone far and beyond. Whether you are a teacher working in China or a senior business executive running a multinational company in Asia, you are affected as long as you are American. There are many affected people more than willing to fulfill their US tax obligations but are very concerned about getting something wrong in the filing process.

CONS TITU TIONA LIT Y Critics of FATCA have often cited the new law as an infringement of freedom and the right to privacy of overseas Americans. The fact that Americans living overseas need to report all financial information regarding any asset or bank account to the IRS is staggering. Conversely, in the US, the IRS must have reasonable cause and obtain a subpoena to be able to retrieve bank account information. The increase of tax revenue expected from FATCA is relatively small, but, the price that Americans have to pay in terms of freedom and privacy is tremendous. To go after a small number of people in a way that takes away the freedom of 7.6 million Americans living overseas is over-reaching. Whether Americans are in the US or abroad, American citizens’ freedom is recognised in the constitution. This is ultimately a bipartisan issue - whether one is a Democrat or Republican, the concerns are the same. It goes back to the question of whether or not it is worth the freedom of every single American overseas. The answer from the US constitution is clearly no.

L EGAL GROUND S FOR A CHALLENGE With chapters in 40 different countries, the organization, Republicans Overseas has been garnering support from US officials and elected representatives to address the issues of FATCA deemed insensibly onerous. The organization plans to launch a challenge to the constitutionality of FATCA in a US court of law on three major legal grounds. Bilateral agreements know as Intergovernmental Agreements (IGAs), signed between the US and partner countries, are designed to facilitate compliance for FATCA. There are two types of IGAs: Model 1 requires a foreign government to report to the IRS. Information collected from financial institutions within its jurisdiction, whereas FFIs report directly to the IRS under Model 2 without involving a foreign government. Model 1 IGAs can be challenged under the Treaty Clause of the US Constitution because they have not been submitted to the US Senate for its

advice and consent. These are essentially treaties with foreign governments. Before the US signs a treaty, it needs to be ratified by two-thirds of the senate. Because this has not been properly done, Model 1 IGAs can be rendered unconstitutional. Secondly, excessive reporting of personal information is a violation of the Fourth Amendment to the US constitution, through which “the right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures” is ·guaranteed. When FFIs are required by law to report every single detail of financial information of every US citizen abroad to the IRS unconditionally, it is in reality seizure without probable cause or warrant. Thirdly, FATCA can be deemed a violation of the Eighth Amendment due to “cruel and unusual punishment” in the form of excessive fines and penalties. The 30 percent withholding tax (to be imposed on FFIs for non-compliance) is not a tax but a penalty designed to compel financial institutions to comply with FATCA and is grossly disproportionate to the offence of not complying with FATCA’s mandates. Similarly, fines and penalties also apply to the individual American. If one has a bank account with US $100,000 and has not declared it for four years, one can be fined up to US $50,000 for every one of those four years and could theoretically end up getting a US $200,000 fine. Even if it is an account that has no interest payments or income tax obligation, one is still liable for the fine.

A T WO - P R O NG E D A P P R OA C H The legal challenge is part of a two-pronged “attack” on FATCA. On the legal side, Republicans Overseas will file a lawsuit to challenge the constitutionality of FATCA; on the legislative side, the organisation will try to “repeal” FATCA through a bill that is likely to be part of an overall tax reform package. Rand Paul, the Kentucky senator and 2016 Republican presidential hopeful, is leading the effort to repeal FATCA. Senator Paul formally introduced legislation in the Senate in March 2015, to reverse the main requirements of FATCA, saying the law has wrongly deprived American ex-patriots of access to banking services, violated their privacy and forced many to renounce their citizenship. The senator first introduced legislation in 2013 to reverse the impact of FACTA, but it went nowhere in a Democrat-controlled Senate. With Republicans now in charge, he hopes to move the bill to the floor for a vote. It has no co-sponsors yet and was referred to the Senate Committee on Foreign Relations for initial review. Whether the bill advances or not, it gives Senator Paul a forum to raise some of his favourite issues - tax fairness, privacy and government over-reach - as he gears up his 2016 presidential bid. The lawsuit is actually complementary to the legislative efforts of Republicans Overseas because it makes it easier to gather support once people start seeing the process and understanding more about the issues. August 2015 Edition

FAT CA IS B ECOMING A BIPART ISAN ISSUE.

FAT C A STAT IST IC S

These are obviously fundamental rights that are very important to every American. Through the lawsuit, Republicans Overseas is trying to serve a purpose in addressing issues that are not as well understood in US domestic politics but could affect the lives of millions of Americans overseas, as well as some Americans at home.

80,000 plus

In 2014, 3,415 Americans renounced their citizenship, and the number may well exceed 5,300 in 2015, based on the first quarter number of 1,335. This compares to just 231 in 2008!

the number of countries the United States has reached provisional agreements with for streamlined information exchange, including the Cayman Islands. Discussions are beginning with China.

the number of financial institutions that have registered with the US Government.

80 plus

There are after all some 7.6 million Americans living in countries all over the world. Collectively, it’s the 13th largest “state” in the union based on population.

45,000

CO N C L U S IO N

the number of US taxpayers who revealed offshore bank accounts through the IRS offshore voluntary disclosure programs (OVDP) since 2009.

the number of banking professionals charged by the Department of Justice in offshore tax evasion matters from 2008 to April 2013.

Should FATCA be repealed and the US take its cards off the table, this would leave only the United Kingdom and European Union to play with the “Son of FATCA”.

In any event, the US has not signed up to the Common Reporting Standards (CRS), which are bilateral, not unilateral, and residency based, not citizenship driven. Without the global enforcer, there’s an increased likelihood of push back.

the number of US taxpayers charged by the Department of Justice in offshore tax evasion matters from 2008 to April 2013.

2,999

So the horse may have bolted, but the pendulum may swing back to a level playing field, where individuals’ privacy rights are protected. -BB

the number of US citizens who renounced their citizenship in 2013, the highest number on record.

Number of Published Expatriates Per Year 4000

3500 3415

3000

2999

2500

2000 1781

1500

1534

1000

932

762

500 398

434

431

1998

1999

2000

491

503

571

742

631 470 278

2001

2002

2003

2004

2005

2006

231

2007

2008

2009

2010

2011

2012

2013

2014

Source: U.S. Treasury Department Andrew Mitchel LLC

August 2015 Edition

BUSINESS - GLOBAL

INVESTMENT FUND PRODUCTS IN THE BRITISH VIRGIN ISLANDS by Tim Clipstone

he British Virgin Islands (“BVI”) has, for three decades, been at the forefront of the alternative investment funds industry and provides the corporate domicile for many of the largest hedge funds in the world. Its track record and continued popularity are largely built on the popular private and professional fund categories of regulated fund as well as the public fund category. The longstanding appeal of the BVI’s suite of funds is that they are appropriately regulated and competitively priced. Allied to the BVI’s modern corporate regime, they provide highly flexible and cost efficient regulated fund products. On 1 June 2015, the BVI added two further categories of regulated fund, being incubator funds and approved funds.

NEW PRODUCTS The two new investment fund products are designed to offer a fast and cost effective method for managers to start open-ended funds, by providing more flexibility to smaller capitalised funds, and giving such funds the option to be approved to conduct business within a lighter regulatory framework. The incubator fund, is a low cost structure designed to assist start-up managers looking to build a track record. The approved fund is suited to friends and family or family offices, where the costs of compliance are minimised to provide an effective and appropriately regulated fund. The requirements for the establishment of both funds recognise the challenges in setting up and running a small fund and gives flexibility in the early stages of its life cycle. Provisions are also available for straightforward mechanism for conversion to one of the BVI’s other fund unrestricted categories once it reaches the threshold for net assets. These new fund categories are expected to be very popular vehicles and meet broad market demand for low cost regulated vehicles.

CHARACTERISTICS PRODUCTS

THE

NEW

Both incubator funds and approved funds are limited to having no more than 20 investors and neither type of fund is required to undertake an audit, although both are required to prepare and submit 52

August 2015 Edition

annual financial statements to the BVI Financial Services Commission (the “Commission”) and have an authorised representative in the BVI. Both types of fund must have at least two directors, one of whom must be an individual.

INCUBATOR FUND An incubator fund is only suitable for ‘sophisticated private investors’. Such investors are persons who have been “invited to invest and the amount of his or her initial investment is not less than US$20,000.” The net assets of an incubator fund must not exceed US$20 million or its equivalent in any other currency. There is no requirement to appoint a fund manager, administrator or custodian for an incubator fund. Importantly, an incubator fund can only be approved for a limited period – initially two years, although it is possible to apply to the Commission to seek an extension for an additional 12 month period. It will be necessary to convert into a professional fund, a private fund or an approved fund prior to the end of this period or determine to liquidate or cease to be structured as an open-ended fund. As part of the conversion process, the incubator fund will need to have an audit undertaken of its financial status and regulatory compliance. The rationale for this is that the incubator fund is designed to give new managers a quick and cost efficient platform to grow assets and prove a strategy before being required to appoint the full range of service providers usually required of regulated funds.

APPROVED FUND The net assets of an approved fund must not exceed US$100 million or its equivalent in any other currency. Unlike an incubator fund, an approved fund is required to appoint an administrator.

EXISTING PRODUCTS The two new fund types are designed to complement the existing private, professional and public fund categories available to managers. The broad characteristics of private, professional and public funds are as follows:

PROFESSIONAL FUND A professional fund is only suitable for professional investors and the initial investment by each investor in the fund, other than exempted investors, is not less than US$100,000 or its equivalent in any other currency. A ‘professional investor’ is a person: (a) whose ordinary business involves, whether for that person’s own account or the account(s) of others, the acquisition or disposal of property of the same kind as the property, or a substantial part of the property of the fund; or (b) who has signed a declaration that he/she, whether individually or jointly with his/ her spouse, has a net worth in excess of US$1 million, or its equivalent in any other currency, and that he/she consents to being treated as a professional investor. The incubator fund conversion process allows for existing investors to be treated as professionals and waives the US$100,000 minimum initial investment for those who are grandfathered into the professional fund on the conversion.

PRIVATE FUND A private fund is an opened ended fund: (a) which is restricted to having no more than 50 investors; or (b) where the making of an invitation to subscribe for or purchase fund interests issued by the fund is to be made on a private basis only.

independent from the fund manager and the fund administrator.

PUBLIC FUND Given there is no statutory initial minimum investment amount for public funds and no investor qualification, it is common for public funds to be aimed at retail investors. As such, public funds are subject to a greater degree of oversight by the Commission than professional funds and private funds and are subject to compliance with the Public Funds Code. Public funds are required to have at least two directors at all times and an authorised representative in the BVI. Unlike professional funds and private funds, only individuals can serve as directors of public funds. Public funds must also have a fund manager, an administrator and a custodian.

GROWING POPULARITY OF APPROVED MANAGERS The new fund categories do not require the funds to appoint a separate investment manager; it is anticipated that many of these funds will be self-managed. However, the BVI is seeing a growing interest in the lighter touch approved manager regime, which would be ideally suited as a complement to the two new categories of fund, as well as the private and professional funds, allowing persons to manage open-ended funds with aggregate net assets of up to US$400 million and closed-ended funds with aggregate net assets of up to US$1 billion.

(b) by reason of a private or business connection between the person making the invitation and the investor.

With the incubator fund, the approved fund and the approved manager, the BVI has shown its commitment to provide appropriately regulated and cost effective structures for smaller and start-up managers, which supplement and enhance the current range of fund products on offer. Together these fund products complement the investment business licenses which are required for most investment business activities undertaken in or from within the BVI, including investment management, investment advice, custodial activities and administration activities.

Both professional and private funds are required to have at least two directors, one of whom must be an individual and have an authorised representative in the BVI. It is also necessary for both types of funds to have a fund manager, an administrator and a custodian at all times, although it is possible to seek an exemption from the Commission in respect of the requirements to appoint a custodian or a fund manager. Where a custodian is appointed, it must be functionally

As the fees involved in the establishment of any of the current range of fund products and investment business licences are already competitive with those of other jurisdictions, it is worth noting that the new fund products offer additional savings, given the ability to choose not to appoint the full range of service providers, at the fund’s inception. Such additional cost savings should result in these new fund products being popular amongst smaller and start-up managers. -BB

An invitation to subscribe for or purchase shares issued by a fund on a private basis includes an invitation which is made: (a) to specified persons (however described) and is not calculated to result in fund interests becoming available to other persons or to a large number of persons; or

BUSINESS - GLOBAL

RE-SITUATING THE BVI: OFFSHOREART.CO, INTERNATIONAL FINANCE AND CONTEMPORARY ART by Kristian Wilson

T ÂŠ The Andy Warhol Foundation for the Visual Arts, Inc./ARS, NY and DACS, London 2015

here is an intimate relationship between art and finance. In the public sphere, the state plays a predominant role in funding and maintaining national art collections. The private sphere is dominated by private patronage. For example, artists in medieval Italy were funded by wealthy families such as the Medici, and contemporary works are purchased by individual collectors such as Charles Saatchi. The important relationship between art and finance is reflected in the value of the global art market which was worth around US $57.5 billion in 2014. This historic relationship continues to find resonance in contemporary art. To take two disparate but informative cases, we can look to Venice, which was one of modern Europeâ&#x20AC;&#x2122;s first banking centres and a focal point for the Italian Renaissance. Venice continues its role as a nexus of wealth and art, being host to a major contemporary art exhibition, the Venice

August 2015 Edition

Center for Curatorial Studies Library, Bard College, Annandale-on-Hudson, NY

Views from the windows of Amazon Mechanical Turk workers. The artist placed jobs, or HITs, on Amazon’s outsourcing marketplace Mechanical Turks, asking the workers to take a snapshot or short video clip of the view from the window nearest their usual workplace. While staying within the terms & conditions of the service the action attempted to build a portrait of the network using these landscape images - and thus humanising these anonymous workers described by Amazon CEO Jess Bezos as ‘Artificial artificial intelligence”. The work is also interested in network interfaces, such as outsourcing websites or apps, as playing the same role as distance or off shoring, traditionally played in outsourcing labor.

Yuri Pattison outsourced views, visual economies (2013-2014) [video still] courtesy: the artist and mother’s tankstation, Dublin

Biennale, for which financial and artistic elites gather every two years. Similarly, Goldsmiths College Art Department is famous for young British artists such as Damien Hirst. Although Goldsmiths has a leading reputation for contemporary art, what is less known is its commercial heritage, as it traces its roots to the 12th century Goldsmiths Company, a medieval guild for goldsmiths, silversmiths and jewellers. Finance does not simply fund art, but informs art as well, and there is a long history of artistic works which engage with wealth. For instance, Quentin Metsys looked at the counting of wealth in The Money Changer and his Wife (1514), Hans Holbein looked at the products of wealth in The Ambassadors (1533) and El Greco looked at the effect of wealth in Christ Driving the Money Changers from the Temple (1600). Art is not only sustained by finance, but critically engages with it.

THE ROLE OF THE BVI These two processes, the role of finance in nurturing art, and the role of art in discussing finance, are relevant to the British Virgin Islands (BVI), which is inextricably linked to the modern financial landscape and is of increasing interest to contemporary artists. In terms of finance, the interplay of global financial flows with the BVI is well known. The BVI was the fourth largest recipient of global Foreign Direct Investment (FDI) in 2013, receiving inflows of US$92 billion. The jurisdiction is a key funds domicile, with one study observing that 55% of all hedge funds were domiciled in the BVI and the Cayman Islands. This financial predominance also extends to the art markets, where BVI structures are used to hold art through trusts and invest in art through funds. For instance, the Collection of Modern

Art Fund is a BVI domiciled contemporary art fund targeted at retail investors. Its collection includes work by Andy Warhol, Roy Lichtenstein and Pablo Picasso. Some financial services jurisdictions are also home to art funds and even galleries such as the Bruno gallery in the Turks & Caicos Islands. Other service providers are also engaged with the arts, such as the Sovereign Group, which supports the arts through the Sovereign Art Foundation and leading international law firm, Bedell Cristin, which has advised on fund and trust structures relating to fine art. A related and interesting development is how the contemporary art scene has begun to look at and represent the offshore world. Recently, contemporary artists have begun to use offshore narratives as a way of framing their work and theorists are increasingly looking at the cultural impact of offshore finance. August 2015 Edition

R E T H INKING ART AND FIN ANCE: OFFSHOREART.CO These themes are explored in a new curatorial platform, the website www. offshoreart.co which explores the interplay between offshore finance and art. The website is an innovative project by two exciting young curators Kathleen Ditzig and Robin Lynch. The curators describe www.offshoreart.co as “a platform that thinks through the offshore as a way of understanding global infrastructures and the narratives that support them.” Traditionally, the offshore world has been viewed as a niche area of international finance but Ditzig and Lynch have curated a number of works which show how “offshore is a concept that underpins the institutional life of exchange in our current era of globalism.” The platform identifies the art world and curatorial discourse generally as one such ‘offshore ecology’. This first iteration of the project includes the website www.offshoreart.co, the exhibition Round-tripping, and two Google+ hosted panel discussions in April, 2015. Round-tripping was an exhibition hosted at the Centre for Curatorial Studies at Bard College which was curated by Ditzig and Lynch. The exhibit featured round-tripping, a financial strategy in which capital goes from a central source to a foreign jurisdiction before returning to its originating country. The items selected in the exhibition have all undertaken similar circuits, but in the art world. Furthermore, the process is seen as one that generates value. For example, the original works, such as a lecture by Liam Gillick or a performance by Ulay and Marina Abramović, are “in each case transformed by the process of travel” and made into art objects and commodities. The exhibit presented works “that crystallise the process of generating cultural capital through travel.” One example is the Timetable Project: First Banks by Vince Leo, which examines an exhibition of Warhol’s Mao portraits at First Bank in 198788. Leo reproduced letters and responses from viewers of the show, which were paired with a chronology of banking history from 1781 to the present, American and Chinese history, and auction sales of the Mao portfolio. The work represents multiple layers of refraction, where Mao is transformed by Warhol’s portraits, which are themselves transformed by incorporation within chronologies of finance and history. As such, the work reveals the multiple stakes and meanings generated through its travel and representation. In addition to the exhibition, Round-tripping, Ditzig and Lynch organised two conferences, the video footage of which is available on the www. offshoreart.co. The first conference looked at Offshoring and Virtual Infrastructures, bringing together artists and theorists to discuss the global infrastructures which enable the emergence of offshore economies. This discussion focused on logistics and law. Meredith Lackey, a filmmaker and artist, discussed her research on fibre optic cables. Her work represented the colonial legacy of the cables, as they were routed through outposts of European empires such as the BVI. The cables also enabled offshore finance, given they are key nodes in the movement of international data. The interest generated for art focussed on how mundane objects such as cables, could enable wider economic structures to emerge and be reflected in a “poetic language of abstraction”. Bill Maurer, another speaker on the panel and the Dean of Social Science at the University of California, noted that the BVI success was founded on a second layer of infrastructure, the common law. He observed that 56

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international actors would incorporate offshore because they sought the stability of common law, particularly where their home jurisdictions lacked the same protections. He observed that, the discussion of offshore centres often focuses on secrecy which is a gross misconception of the reality. He discussed Global Shell Games by Jason Sharman, which found that Caribbean offshore centres were more compliant with global standards than the United States and the United Kingdom, observing that “a lot of the things we identify with offshore are happening in the US without so much a look by federal regulators”. The second conference on Incorporating Offshore: The stakes of going offshore for art, brought together artists, theorists and specialists invested in studying offshore systems of finance. There was a lively discussion about the interplay of art and finance. Angus Cameron, a Senior Lecturer at the University of Leicester, introduced Headless, an artistic project conceived by the artists Goldin & Senneby, which was based on a quasi-fictional search for a Bahamian company, Headless Ltd., where the offshore was represented through a shifting multiplicity of voices, media and performances. Nick Srnicek, the author of Inventing the Future, looked at how markets are represented through trading tools, observing that data is manipulated in ways that are both highly aesthetic and highly technical. Marianne Heier, an Oslo based artist, introduced her conceptual works, which represent the effects of wealth upon art, such as Diamond, a performance, speech and song at the Bergen Kunsthall. Nathan Newman, a New York based lawyer and trustee of the Bronx Museum, considered recent legal developments. Discussing regulation, he described the US Foreign Account Compliance Tax Act (FATCA) as “the biggest use of US imperial power” as it allows the US to dictate rules to foreign financial institutions, by requiring them to report to the Internal Revenue Service as if they were subject to the laws of its jurisdiction. Going forward, Ditzig and Lynch intend to focus on specific offshore or mid-shore jurisdictions, developing panels and exhibitions to further explore how the financial services industry configures the flow of capital, art and culture through international finance centres. For the coming year, they will be working in Singapore to study the Freeport, a free zone there which is one of the world’s main art storage sites. Their research into the Freeport will be a way to study the history of Singapore’s importance in the global submarine cable network and its existence as a mid-shore hub. Ditzig and Lynch have readily discussed the project with Ditzig elaborating further on the platform, stating that: “This will also be an opportunity for us to study Southeast Asia as an emergent art market, where many of its players use offshore incorporation and other offshore strategies to maintain a sustainable practice and career. This is an interesting area because the reasons for why a Vietnamese artist wants to incorporate his foundation or gallery in the BVI are very different to those of a Western organisation, such as the Artist Pension Trust. The differences in these narratives tell us more about how globalism works, but also how the local, regional and international art markets engage with one another. The fundamental project of offshoreart.co is to make information available, to make the structures of the art world and its relationship to globalism and finance clear.”

Images courtesy of the artist and Tracy Williams, Ltd., New York ©Barbara Bloom

Lynch added that: “We work in a large untransparent industry and doing such research makes clear the stakes of cultural work today. Adding to that, there are a lot of practices within our industry who seek to represent finance without investigating the multiple stakeholders and discourses involved with it. A large part of why we began this platform was as a way to counteract some of these tendencies. We are primarily a curatorial platform, so our research is not just to study the offshore as it pertains to the art world, but to actively enact it. We are constantly on the lookout for collaborators, whether it be theorists, artists, art organisations, collections or even offshore companies and professionals, to make exhibitions, conferences and public programs with.” Ditzig and Lynch have clearly been successful in creating a platform which brings together artistic practice and theory as it relates to the offshore industry, in curating content which translates artistic concepts to a wider audience and in playfully re-encoding themes and narratives of the industry in unexpected and informative ways. In some ways, the project itself can be viewed as an offshore centre, being a site of exchange, transformation and circulation.

RE S ITUATING THE BVI One of the strengths of the offshoreart.co platform is that, by thinking of offshore as part of a wider narrative of globalisation, identity, infrastructure, exchange, and the transit of people and capital, it prompts deeper thought about the role of the BVI and the narratives which frame it. For instance, there is general understanding of the BVI as a key node of the international financial system and its situation in a wider context of flows and exchange. Not only financial flows, but also of ideas, logistics, infrastructure, migration and identity. For example, the BVI has always been a transit point, with successive migrations of Arawak Indians, Caribs,

Spanish, Dutch, British and Africans. The BVI has been home to persons of various nationalities with differing dreams and desires, from empire builders to holiday makers, to pirates and slaves, to lawyers and accountants. Similarly, through infrastructure, such as the cable networks that transit the territory, the funds that flow through the islands, the laws that bind the Territory to the wider international community, and the flow of its goods and services, it is evident that the BVI has always been a critical node of globality. The BVI acts as an accelerant and a mixing pot in the flows of people, data, ideas, finance and services. In addition, the narratives about offshore, whether the imagined communities of art, the exotic fantasies of journalism, or the disciplinary discourse of regulation, show that the BVI is itself a vehicle of transit and exchange. As Caribbean writer Édouard Glissant observed, Caribbean culture and identity arises through complex and multiple interactions with history. This is also the scenario with the BVI. For example, ideas about the BVI constantly change as discussion of the islands passes through different communities, whether political, economic or artistic. As different voices in different places say different things about the BVI, its role and identity is reformed and remade in international discourse. In effect, the BVI is itself round-tripped, and much like Warhol’s Mao, the BVI also passes through multiple layers of refraction and is defined or transformed by the many stakes and meanings generated through its travel and representation. What is interesting about the www.offshoreart.co platform is that it evidences a wider engagement with offshore jurisdictions, outside of the traditional realms of law and finance, and points to an increasingly mature discussion about the role of offshore centres. By taking the concept of offshore outside of ordinary discourse, and by collating such a unique array of artworks and media, Ditzig and Lynch have revitalised, recalibrated and reified our notions of what offshore is and enabled unique insights into the BVI’s role within that concept. -BB August 2015 Edition

BUSINESS - BVI BUSINESS

WORKING TOGETHER TO "FUTURE-PROOF" BVIâ&#x20AC;&#x2122;S FINANCIAL SERVICES SECTOR by Julien Johnson

he 2015 rebranding of the BVI International Finance Centre (IFC) as BVI Finance 13 years after its creation, has signalled the start of a new era for the British Virgin Islands (BVI) financial services industry.

This evolving collaboration, spearheaded by BVI Finance, remains essential in positively differentiating the BVI from its competitors, supporting BVIâ&#x20AC;&#x2122;s products and services, while promoting its reputation as a stable and highlyregulated jurisdiction.

As the representative body and voice of the financial services industry in the BVI, this new brand reflects the way the jurisdiction is increasingly working with stakeholders in the financial services sector to promote and support the jurisdiction against a backdrop of increased global scrutiny and growing competition. The level of debate and inspection of international financial centres, such as the BVI has been profound, and it is highly likely that this will continue as issues around tax, corporate transparency and international capital flows are debated by politicians, regulators and other major stakeholders in the global economy.

The BVI, as a financial services jurisdiction, has long been an important part of the global economy, which is complemented by a culture of responsiveness to the needs of an ever-changing international financial and regulatory environment. Recognised as one of the twin pillars of the BVI economy, the financial services industry contributes 60% of government revenues and is linked to other areas of the economy, including tourism, which contributes approximately 40%.

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BVI Finance will continue to build on this legacy to remain ahead of its competitors and reinforce its role in connecting markets, facilitating global investment, trade and capital flows.

Under a refreshed banner, BVI Finance will continue to tap into new and emerging markets, while maintaining a strong relationship with key stakeholders both locally and internationally. In support of this initiative, BVI Finance has been working with new partners, the branding agency, Emperor, and communications advisers, FTI Consulting, to further refine the brand and cement the reputation of the jurisdiction among its key stakeholders. BVI Finance: The Voice of the Financial Services Industry The BVI as an offshore jurisdiction is at a critical point in its history. For three decades, it has experienced tremendous growth in its financial services industry, became one of the largest domiciles for company incorporations and established a global brand that reaches through the Americas, into Europe, and across the Asia-Pacific region. For the last few years however, the jurisdiction has faced challenges that threaten the core of its competitive position. Rising international pressure and new competitors have prompted a diversification of the BVI financial services industry through the creation of more value-added activities and a wider range of services beyond traditional channels of business. At the same time, the jurisdiction has become aware of areas where resources and investments are required, to facilitate a clearer understanding of how to better weather storms and enhance the positioning of the sector for future growth. In 2014, the BVI Government commissioned the internationally respected consulting firm McKinsey & Company, who worked with the industry and other stakeholders, to develop a pragmatic strategy and implementation plan that would chart a new direction for the financial services industry. The first initiative identified in the McKinsey report was to revamp the IFC to make it a focused, highly skilled unit that operates in line with international best practice. In this very spirit, the IFC was re-branded to BVI Finance, a world-class marketing body that serves to strengthen the jurisdiction through new sector strategies, new communication channels, strategic marketing initiatives in key existing and emerging markets, and re-engaging the private sector, using the concept known as “Team BVI”, to further strengthen public-private partnerships. Working closely with the private sector, BVI Finance is implementing a strategy to help steer the jurisdiction in a new direction, placing greater emphasis on the value of partnerships between the public and private sectors. This work includes a revamp of BVI Finance’s marketing materials and activities, reflecting the subsectors that the organisation represents. BVI Finance is strengthening its communications channels to better represent and promote the jurisdiction, through initiatives such as the revamped and soon to be launched BVI Newsletter, international marketing initiatives, public relations campaigns and industry events. Aligned with this, a new website is being launched to serve as the central channel for the dissemination of information and news of developments across the sector. These initiatives serve to strengthen the remodelled strategies aimed at promoting each financial services sub-sector; from core sectors including incorporations and funds to new growth areas such as aircraft and shipping registries. Bringing Principle into Practice BVI Finance also plays an important role in supporting and promoting the expansion of value-added services, while concurrently setting the conditions for attracting and retaining top talent and simultaneously developing BVIslander capabilities. The industry’s regulatory body, the BVI Financial Services Commission introduced two new funds, the Incubator Fund and the Approved Fund in May 2015. These are aimed at start-up managers and those managing funds for smaller groups of closely connected investors. The new funds complement existing funds and further demonstrate the jurisdiction’s commitment to collaborate

more effectively with the private sector to develop world-leading products. To implement the revamped strategy for the financial services industry, BVI Finance is working in close conjunction with the newly formed Implementation Unit tasked with driving the delivery of all McKinsey’s initiatives to enhance the jurisdiction’s position as a world-class business destination. BVI Finance is excited to play a key role in supporting the Implementation Unit and, as the voice of the financial services sector during this important phase of development, help put in place the foundations for the jurisdiction’s long-term growth and prosperity. A key part of this initiative is focused on maintaining the support of the individuals and communities in the private and public sector, both onshore and offshore, building and sustaining support for the reform and growth of the sector. With cross-party and cross-government support, the jurisdiction is wellprepared and ideally positioned to embark on this exciting journey to reinvigorate the financial services sector. BVI Finance stands ready and fully committed to communicating and contributing to the jurisdiction’s vision and future-proofing the BVI financial services industry. Priority initiatives to further develop and enhance BVI’s financial services industry 1. Revamp the International Finance Centre (now BVI Finance); ensuring that it is a focused, highly skilled unit that operates in line with international best practice. 2. Build on the strengths of the Financial Services Commission by strengthening the service culture and organisation to improve process transparency, response time and the quality of assistance provided to customers. 3. Attract value-added services for the BVI product offering by identifying and providing incentives to top priority companies to attract those services to the jurisdiction in collaboration with the private sector. 4. Bring immigration and labour policies and processes in line with international best practices to attract and retain the necessary skilled labour, needed to broaden and sustain a substantive offering. 5. Build local capability and talent by strengthening education at the secondary and tertiary levels, developing the Financial Services Institute (FSI) and overhauling internships and scholarship programmes to bolster development and qualification of BVIslander talent to sustain the industry in the long term, and create industry opportunities for BVIslanders. 6. Establish dedicated business development capacity to generate new product and customer ideas and strengthen the mandate of the Financial Services Business Development Committee. 7. Help accelerate critical infrastructure projects such as telecommunications and transportation which are needed to support the development of the economy. 8. Engage the population to identify current perceptions of financial services and design education and awareness building tools to promote better understanding of the importance of financial services to the BVI, its impact on daily life and its critical role in transforming the economic sustainability of the Territory. 9. Roll out Foreign Account Tax Compliance Act (FATCA) requirements and lobby France and the Organisation for Economic Co-operation and Development (OECD) to improve compliance ratings and the jurisdiction’s reputation in the international financial services arena. 10. Establish a dedicated unit staffed by world-class talent reporting at the highest level of government to co-ordinate and drive implementation of the Report’s recommendations across the financial services sector. -BB August 2015 Edition

BUSINESS - INSIGHT

A BRAVE

NEW

WORLD

CAN THE BVI INTERNATIONAL ARBITRATION CENTRE KNOCK NEW YORK, LONDON AND PARIS OFF THEIR PERCH? by Lord Goldsmith, QC

I . G RE ETINGS AND THANKS

t is an honour and a pleasure to be invited to give this inaugural Dr. J. S. Archibald QC Memorial Lecture..

I have to start by saying that you have chosen an interesting time to start a new arbitration centre here in BVI. I use the word “interesting” of course in the sense of the Chinese curse: “May you live in interesting times”. And the times are interesting for two reasons. First – because there is a rise in regionalism in the arbitration field which means you are moving with the fashion to be starting here but which also adds a significant competitive pressure from other new centres. Second, as I will explain, because there is a gathering storm on the arbitration horizon which threatens the practice of arbitration in a very fundamental way. To the extent that there are places - important places where the word “arbitrator” is already becoming a dirty word.

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What I will want to do this evening will be first to describe the opportunity which the new regionalism brings. Then to describe the growing threat to arbitration into which the arbitration community is sleep walking and finally to ask the question whether BVI can make it in the new world and be at least one of those centres who is knocking the traditional centres of New York, Paris and London off their perch. In this last part, I will anticipate a new set of principles not due to be unveiled till an important centenary event in London later this year. You will be getting a foretaste of that. What I think is known in the entertainment world as a “spoiler”. But before that, I must add my own short tribute to the man, the lawyer, the leader in whose memory this lecture series has been created. It is fitting that this first lecture focuses on the very work that Dr. Archibald was so passionate about – the development of the BVI as an arbitration centre of global pre-eminence. After being called to the bar in 1960, Dr. Archibald dedicated his life to the development and practice of the law and to public service. As well as setting up and running his own law firm, Dr. Archibald served in important roles as Director of Public Prosecutions, and the Attorney General of St. Kitts,

Crown Attorney for the BVI and President of the BVI’s Bar Association. He was awarded Queen’s Counsel in 1980 and served in a number of judicial capacities. In the latter part of his career, the Financial Services Commission appointed Dr. Archibald as the Chair of what became known as the International Arbitration Focus Group (IAFG). The IAFG was tasked with reviewing the BVI’s arbitration regime with a view to modernising it and advising on how the BVI could be established as a centre for international arbitration. By all accounts Dr. Archibald threw himself at the task with the same passion he threw at all things he took on and I understand that he is the architect behind nearly all of the changes that the BVI has introduced in the last few years that will help ensure the success of the BVI Arbitration Centre. Though I did not have the pleasure of knowing him, I have learnt of his commitment and passion for the law from his wife, Mrs Inez Archibald CBE, another dedicated public servant having served in many roles, including now for a number of years as Deputy Governor and daughters whom it was my pleasure to meet today. I thank Dawn Smith for making this happen. I know we will all want to make the events of today and tomorrow a fitting tribute to Dr. Archibald’s memory. Although I did not know Dr. Archibald, I have had the pleasure of being here several times and in neighbouring countries. When I was Attorney General, we would hold an annual conference of the Attorneys General of the Overseas Territories of the UK, most of which are here in the Caribbean which I would chair. In those days I was able to start my speeches by repeating the words which Ronald Reagan used to say were the most frightening words in the English language “I’m from the Government ... and I’m here to help”. Since then (but without that introduction) I have been fortunate to appear in a number of jurisdictions here and nearby and still do. My colleagues in London and New York express envy that I can practice in such glorious surroundings, but I try hard to tell them it is a terrible hardship having to put up with so much sunshine and blue sea.

The Caribbean has been slower to follow this trend. Trinidad and Tobago’s Dispute Resolution Centre Serving the Caribbean, established by the Trinidad and Tobago Chamber of Industry and Commerce in 1996 is an exception. Its International Chamber of Commerce Caribbean Court of Arbitration, which administers arbitrations under the ICC Rules, aims to be the “provider of choice” for out of court dispute resolution services. In 2011, the Centre mediated and arbitrated 20 disputes and states that is has experience arbitrating both domestic and international disputes. BVI will help the Caribbean to catch up. This rise in regionalism has, of course, been good for arbitration; promoting its increased use across the globe and for many types of disputes. More than that though, it is also good for the parties to resolve disputes. The bringing of arbitration “closer to home”, means that parties no longer need to go to “old world” centres of arbitration for reliable non-court dispute resolution. This increased access to reliable and neutral dispute resolution for parties outside of London, Paris and New York is of real value to all those who participate in international trade. As a result of dealing with disputes closer to “home” there are often resultant time and cost efficiencies. So, the costs of venue space and accommodation will often be cheaper in Singapore than they are in London, for example. The costs of lawyers may also be cheaper than in London and New York. Finally, but crucially, local tribunal members and lawyers may well have a better understanding of issues and realities on the ground and can thus add insight that non-local practitioners just wouldn’t be able to deliver.

III. WH E R E D O E S T H E M OV E TOWA R D S R EGI ON A LI S M LEAV E THE O L D WO R L D A R B IT R AT IO N C E NT R E S? So, where has this move towards regionalism left the “old world” arbitration centres?

The BVI International Arbitration Centre is part of a growing trend towards regionalism in arbitration.

First, I’d note that Ancient Greece and Rome were the real “old world” of arbitration. It is there that the first forms of what we understand to be arbitration was first seen and practiced, as early as 500 B.C. While London, Paris and New York, may now be considered the “old world” of arbitration, they were once the new world themselves.

Arbitration, once open to the criticism that it was the preserve of western practitioners for western disputes has grown into a worldwide industry, practised across the globe.

Yet, as a primarily commercially-driven enterprise, arbitration has always moved with the times, adapting to what was needed, and followed trade to whatever jurisdictions it was taking place in.

Ever-increasing globalisation, more cross-border deals and so more crossborder disputes, have led to a blossoming of regional arbitration centres.

In short, it is becoming increasingly clear, that the likes of London, New York, and Paris, no longer have the monopoly over arbitration. Of course, they still (currently) remain the real powerhouses of practice, but the loss of their market share is notable.

II. A MOVE TOWARDS REGION ALISM IN ARBIT RAT IO N

In 2014 alone Melbourne, Riyadh and Belgrade each opened their own arbitration centres. Three very different parts of the world. And this year, we have seen that Djibouti plans to launch an international arbitration centre. In so doing it joins the many other international arbitration centres already in Africa including in Algeria, Benin, Burkino Faso, Cameroon, the DRC, Egypt, Ghana, Morocco, Mozambique, Rwanda, Senegal, South Africa, Sudan and Tunisia. Some centres are fully fledged administrators of arbitration with their own rules (though usually very closely modelled on the UNCITRAL rules) and secretariat. Others, for example, one opened two years ago in Seoul Korea, are high-tech hearing centres catering for arbitrations administered by other centres in Asia or by the parties themselves.

IV. THE RISE OF THE NEW WORLD ARBITRATION CENTRES Notwithstanding their increasing loss of market share, it is fair to say that many, if not most, of the new centres have not yet given London, Paris or New York a run for their money. The globalisation of disputes such that arbitrations can now be run out of Senegal, for example, has not obviously resulted in a decline in arbitrations in London, Paris or New York. But there are exceptions. Some in the “new world” have made a real impact. And, in doing so, they have re-shaped the perception of and access to arbitration globally. August 2015 Edition

I am thinking here of Singapore and Hong Kong especially. Both relatively recent entrants to the world of arbitration, with Singapore’s International Arbitration Centre (SIAC) established in 1991 and Hong Kong’s International Arbitration Centre (HKIAC) established in 1985, but both now firmly established as world leading arbitration centres equal in stature to the old world centres of London, Paris and New York. Taking Singapore as an example, a 2010 survey by the School on International Arbitration at Queen Mary’s University in London revealed that 7 per cent of corporates chose their preferred seat of arbitration as Singapore. That is equal to the number who chose Paris and just above the 6 per cent that chose New York. Notwithstanding that 30% of corporates chose London as their favoured seat, these statistics reveal an increasing not just acceptance, but inclination towards, Singapore as the place of arbitration. Singapore’s arbitral institution’s (SIAC) figures have since 2008 been the fastest growing arbitral institution in the world. To illustrate, its new cases rose from 99 in 2008 to 259 new cases in 2013. Hong Kong’s case load is even higher with 293 new cases in 2012. It was the first Asian country to adopt the UNCITRAL model law. It has state of the art administered rules, with an innovative cost structure, an emergency arbitration procedure, expedited procedures and the only centre to have a model clause for the choice of arbitral law – which is very welcome for all practitioners who have struggled to follow the puzzling series of decisions of the English courts on determination of the arbitral law in CvD, Arsenovia and Sulamerica.1 Hong Kong and Singapore have between them made a major inroad into the arbitral space. I am as likely to be hearing or arguing a case in Singapore as in London and more likely than doing it in, what was once the undisputed leader, Paris. There has been a clear re-shaping of the market and, as Hong Kong and Singapore have shown, there is real room for some regional centres to become global players.

V. B VI’S PL ACE IN THE N EW WORLD So what does all of this mean for the BVI’s new arbitration centre? It would be wrong to suggest it does not face challenges. Any new centre trying to find a place in the world of arbitration will have difficulties. The rise of regionalism means a rise in competition. New arbitration centres have to fight harder than ever before to establish themselves. There is an additional challenge I wanted especially to talk about, that comes from the current TTIP debate between the US and Europe. If you have not been following this a few words of explanation may be helpful. When concluded, the Transatlantic Trade and Investment Partnership (TTIP) will be one of the most influential and ambitious trade and investment treaties ever executed. Its aim is to promote closer trade and investment ties between the world’s two largest economic blocs, the United States and the European Union, by pulling down barriers to trade such as customs duties and investment restrictions. The result is intended to be more business opportunities, more growth and more jobs – in real economic terms, it is anticipated that the TTIP could lead to a 0.5% increase in the EU’s GDP. 62

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All well and good – but the problem lies in the fact that one aspect of the proposed treaty is so called ISDS – Investor to State Dispute Settlement. These are the procedures for settlement of investment disputes under multilateral or bilateral investment treaties, so called BITs. Since their inception, these investment agreements have encouraged and protected EU investments abroad, as well as foreign direct investment in the EU. For its part, ISDS has given investors the ability directly to enforce the investment protections given to them. Traditionally, these are negotiated between States but in 2009, the Lisbon Treaty transferred competence for the protection of investments from EU Member States to the EU itself. This has given the EU a mandate and platform for the reform of traditional standards of international foreign investment protection. Those traditional standards are found in the 3,000 or so international investment agreements signed between the world’s investment importing and exporting states. EU Member States are party to approximately 1,400 of those, and with its new-found competence for such matters, the EU has set about modernising investment protection standards through investment agreements such as the TTIP, the CETA, (for USCanada relations) the EU- Singapore FTA and others. The TTIP debate has however, unleashed a storm of criticism - with NGOS and civil society vociferously in the lead, complaining that international arbitration for investment disputes is an undemocratic secret court system for preventing regulation of industry in the interests of citizens. It is partly driven by anti-big business ideology, fuelled by an anti-American feeling, thriving on examples of BIT cases alleged (but which are not yet decided) such as Philip Morris’ challenge to plain packaging for cigarettes in Australia and Vattenfal’s challenge do German regulation of the nuclear industry, but also by much ignorance of how the system actually works. The scale of the challenge cannot be underestimated. When the European Commission ran a consultation it received a staggering 150,000 responses which on a technical subject like investment arbitration seems extraordinary. The criticism of ISDS and of the TTIP’s investment chapter have been widely circulated. Having started on the European left they have some highprofile disciples such as Senator Warren and apparently Senator Hilary Clinton in the USA, as well as distinguished European and American economic and legal academics. Supporters of ISDS include President Obama, the ex and current EU Trade Commissioners, and the representatives of businesses large and small. However, the biggest failing in combating the criticisms of ISDS has been the failure of the business community to convey the importance to it of strong investment protections and effective ISDS mechanisms. The ISDS community has also been ineffective in addressing the substance of the criticisms clearly, succinctly and effectively. Arbitrations specialists have been speaking to themselves through the trade journals and arbitration chat forums. Not an effective way of engaging with opponents. With the battle lines now well drawn, we find ourselves at a key crossroads in the debate. On 28 May 2015, the International Trade Committee of the European Union will vote on the constraints that should be imposed on the EU negotiators of the TTIP. Between 8 and 11 June 2015, the EU Parliament will do the same in plenary session. Unless the pro-ISDS camp can make its voice heard and effectively counter the anti-ISDS arguments, the investment protection aspirations of the TTIP may well lie lifeless on the cutting room floor come mid-June. To highlight how delicate the situation is at present, I would like briefly to describe three salient and recent developments in the battle for hearts and minds: First, on 6 May 2015, EU Trade Commissioner Malmstrom published

a “concept paper” in which she described the form of ISDS that she feels addresses the main criticisms of ISDS – those criticisms being a perceived lack of transparency in international investment arbitration; underqualification of arbitrators; bias of arbitral tribunals in favour of investors; and a lack of consistency in treaty interpretation, owing partly to the absence of an appeal mechanism. For the anti-ISDS camp, these reforms still do not go far enough. For the proISDS camp these reforms do not, in many ways, guarantee improvements in efficiency, fairness or consistency. In many ways, therefore, they are a step backwards, not forwards. Ms Malmstrom’s proposals will not, in my view, result in a form of ISDS that gives all investors, large or small, an equal ability to enforce their rights. Nor will it be a cost or time efficient process. For example, the ability of the US and EU to agree binding interpretations of the TTIP to bind Tribunals mid-consideration of an investor’s claim is far more likely to impact a small investor. A small investor, unlike a corporate behemoth, will lack the status and influence to persuade its home state not to issue a joint interpretation that would prejudice its claim. As for cost and time efficiency, the proposal that any appeal mechanism should entitle for a manifest factual error by the arbitral tribunal, will mean that the appeal will be a de novo hearing of the claim on the merits. Presently, investment arbitration costs investors and host states tens of millions of dollars per claim, and it can take 10 years to reach a final outcome. Those figures are likely to increase rather than decrease if current proposals are implemented. It is perhaps unsurprising that the pro-ISDS camp is currently losing the battle when it cannot give voice to the concerns of the business community, cannot point to evidence that ISDS promotes greater investment, and when the form of ISDS proposed does not look like it will work efficiently or effectively for anyone.

The second recent development is that in the same concept paper and in her blog post on 5 May 2015, Ms Malmstrom called for an international investment Court to replace ISDS in the medium term. Ms Malmstrom envisages a WTO-style permanent court with tenured judges, set up to deal with claims under any and all international investment treaties. The objective would be to set up the court as a self-standing international body or as part of an existing multilateral organization. This is a bold idea that warrants careful consideration, but it is fraught with challenges and difficulties, and there is no reason at present to think that investment protection fit for the 21st century will be better served by a permanent court than by ad hoc international tribunals. For the time being, it seems to me that there is more headway to be made in arguing compellingly that the criticisms of ISDS are unfair and misguided, and that ISDS is crucial to achieving the full potential of the TTIP. To make that case, we need more empirical evidence. This brings me to the third recent development that I wanted to highlight. Two recent studies have just become publicly available, providing muchneeded empirical support for the oft-repeated claim that investment protection and ISDS increases investment flows. A recent Hogan Lovells survey discussed at the Investment Treaty Forum at the British Institute of International and Comparative Law in London on 8 May 2015 shows that of 301 senior corporate decision makers surveyed, 20% said that they would not invest overseas without the protection of an investment treaty, and 60% said that such treaties were “very important”. These voices were absent during the EU Commission’s TTIP public consultation process, and yet, extrapolating from the survey results, the business community seems to be saying that proper investment protection enforceable through ISDS could account for an 80% swing in the number of potential corporate investors. Last weekend, a study by the Netherlands Bureau for Economic Policy issued a paper showing that “ratified BITs increase on average bilateral FDI August 2015 Edition

stocks by 35% compared to those of country pairs without a treaty.” The study also recognised that the impacts were most marked where the treaties were between low, lower middle and upper middle income countries, which would include approximately half of EU Member State countries. Supporters of ISDS need more such evidence and support for ISDS and investment protection and need small and medium sized enterprises with international investment aspirations to make themselves heard. After all, it is they who have the most to gain in this debate. Until that happens, we can expect more of the criticism issued over the last week by Senator Warren, and by the 40 social democrat MEPs who registered their continuing public opposition to ISDS even in the form now proposed by Ms Malmstrom. What is important is to facilitate a fair hearing for the argument that foreign investment promotes prosperity for all, and that, in turn, effective and efficient ISDS promotes foreign investment and protection of the rule of law. You may ask whether this matters to the new BVI centre which may not have investment arbitrations in its sights. It’s important to recognise that this is not just another battle between different ideologies in the Old World that it is irrelevant except to those concerned with investment arbitration between EU and US. There is a problem for arbitration more generally. The attack on “secret courts” and “unaccountable judges” is just as toxic to the arbitration brand in other areas. As I said, some European Parliamentarians don’t even want to use the word arbitrator, so toxic has it become. This can have the effect to driving people away from arbitration even outside the investment field and into construction disputes, shareholders agreements, oil and gas contracts and so forth. This is a threat to the very substance of arbitration and could reverse the strong growth over recent years of arbitration as the preferred method of dispute settlement.

VI . T HE GOOD NE W S. CAN BVI ARBIT RAT ION SUCCE E D ? But it’s not all doom and gloom. There are, I think, some very good reasons why the BVI Arbitration centre can be a huge success. First and foremost, the BVI has an excellent new arbitration act. Based squarely on the UNCITRAL model law (with some modifications), the new Arbitration Act 2013 came into force on 1 October 2014 and in so doing replaced the old act which had not been updated since 1976. Adopting the UNCITRAL model law was important – people can now be confident that the BVI’s arbitration laws are fair and efficient and designed with modern international arbitration in mind. The new Arbitration Act 2013 covers all stages of the arbitral process from the arbitration agreement, the composition and jurisdiction of the tribunal, the extent and of court intervention to the recognition and enforcement of awards. The certainty and clarity of having a modern and well-known arbitration act cannot be underestimated. Linked but separate to this is the fact that the new Arbitration Act gives the parties to arbitration the right to be represented by a legal practitioner of their choice. There are no limitations in the new act as to where legal counsel must be qualified or their nationality etc. (Section 61: “Every party is, unless otherwise provided in the arbitration agreement, entitled to be represented in arbitral proceedings by a legal practitioner of his choice.”). Enshrining this right in legislation confirms that the BVI is committed to party choice – no entity wants to be told who it can and cannot engage to represent it in 64

August 2015 Edition

its disputes and it is good that the BVI recognizes where others have failed. 5. Similarly, the Arbitration Act 2013 also gives civil immunity to arbitrators for anything done in good faith in the exercise or performance of their capacity as arbitrator (the Act, section 101). Without this simple protection, the BVI would struggle to attract the best arbitrators to its jurisdiction. Fourth, and crucially, enforcement of arbitration awards is now no longer a problem. Until 24 May 2014, the BVI was not a party to the New York Convention thus rendering any BVI arbitral awards all but unenforceable outside of the BVI. This all changed on 25 May 2014 when, following a request from the BVI government to the UK government, the BVI became a party to the New York Convention. As a result, those participating in BVI arbitrations can be confident that the resultant award will be enforceable in the over 150 contracting states that have acceded to the New York Convention. Neither of these developments (the new Arbitration Act, and accession to the New York Convention) can be underestimated and they are evidence of the fifth factor that demonstrates the strength of the BVI’s offering – strong governmental support. It sounds trite, but in fact the importance of government support is something that is often overlooked; it is often seen as the reason why Hong Kong and Singapore broke away from the plethora of other regional arbitration centres that have opened up over the years. Both have had exceptional support from the government – be it through developing a legislative framework that is conducive to arbitration or through focused and deliberate policy decisions that encourage arbitration, including by spending commitments. It is clear that the BVI government is adopting a similarly hands on approach to work with partners in industry to ensure that the BVI’s offering is the best that it can be. This support must continue. Sixth, and equally as importantly as those features that have gone before, the BVI has a sophisticated, learned, ethical and impartial judiciary. Arbitration cannot flourish where there is an overactive judiciary that fails to understand the need for minimal intervention in the arbitral process. One of the key traits of London, Paris, New York, Hong Kong, and Singapore, is a sophisticated supportive, but non-interventionist judiciary who understands the need to support the arbitral process rather than impede through over activity. The BVI has a well-respected commercial court in place that is bolstered by the Caribbean Court of Appeal, with a final right of appeal to the Privy Council in England. These courts are well used to dealing with complex international disputes. Arbitration practitioners need have no concerns as to the ability of these judges to weigh in on the many complex issues that their arbitrations may throw up. Equally though, we can be confident that these same courts understand the importance of being seen to support rather than undermine arbitration. The BVI courts have a pro arbitration history and, even before the new arbitration act came into force, it has stayed court proceedings in favour of arbitration (Applied Enterprises Limited v Interisle Holdings Limited). Just as I have described its judiciary as sophisticated, learned, ethical, so too would I describe the lawyers of the BVI. This seventh feature is another essential ingredient to success. Successful arbitration centres need sophisticated and skilled practitioners to run and support the arbitrations taking place in the jurisdictions. And it isn’t just the BVI’s legal infrastructure that are the ingredients to its success. The eighth factor that I would throw into the mix is the BVI’s

reputation as a financial services centre. In 2012 it was suggested that the BVI was the world’s biggest provider of offshore entities, with more than 1 million companies incorporated at that time. The CIA World Factbook describes the BVI’s economy as “one of the most stable and prosperous in the Caribbean”. This matters. Most obviously, the BVI is well placed to develop a healthy and sophisticated domestic arbitration practice to meet the needs of these companies. But beyond this, the BVI is uniquely placed to leverage a domestic arbitration practice to win international arbitrations. For the majority of the BVI companies sit amidst truly international company structures. This can and should be leveraged to ensure it is not just BVI entities seeking to have their disputes heard confidentially in the BVI, but it is also their many international affiliates. Moreover, the use of arbitration to resolve financial disputes is on the rise. Again, the BVI’s expertise in financial services means that it is exceptionally well placed to develop its reputation as a centre for financial dispute resolution – it has a ready pool of experts who can hear and argue the most complex of financial disputes. Ninth, although still in its early stages, it is important that the facilities that will be offered at the BVI International Arbitration Centre will meet the standards now expected in international arbitration. BVI IAC’s remit, among other things, is to offer facilities for the conduct of arbitral proceedings. What the likes of Maxwell Place in Singapore or Arbitration Place in Toronto show us, is that increasingly the parties to arbitrations, and the practitioners, are raising the standards of what they would like from their hearing centres and their arbitral instructions. Let’s be clear. I am not saying that the BVI national Arbitration Centre should get to work on building a “cloud garden” (as proudly touted by Toronto’s Arbitration Place) if it wants to become a global player but I am saying that it should offer the services and facilities that its clients have become used to – comfortable surroundings that are conducive to work, easy and quick internet access, easy access to refreshment and accommodation; transcription and translation facilities adequate hearing rooms, able to accommodate small hearings and large events with multiple attendees, good document management systems.

One issue though I must mention: accessibility. None of these advantages considerable as they are will avail if arbitrators, parties and counsel cannot get here with the ease they expect in other centres. Air transport has got worse not better in my experience. Improving access to these beautiful islands is critical. The court works but people have to come here to use the court. Arbitration is a choice. I am unclear also whether the intention is to offer administered arbitration or simply the facilities for hearings. The Queen Mary survey I referred to earlier found a clear preference by users for institutional arbitration over ad hoc: 86 to 14%. I wholly endorse that conclusion. Running institutional arbitration does require greater input from the centre but users like it – it takes a lot of the strain off them to maintain the standards of awards for example so they are enforceable. Finally, and something that could well be overlooked, but the very nature of the BVI is an essential part of its success as an arbitration centre. It is politically stable, has good accommodation and a good and modern infrastructure. I have identified 10 factors here. Each of the key factors that I have touched on here fall within what will soon be known as The London Principles 2015, which we consider are the Principles necessary for an effective, efficient and “safe seat for the conduct of international commercial arbitration.” Which I told you before will be launched later this year in London.

V II. C O NC L U SIO N I want to conclude by wishing much success to this new venture. The legislative changes have put BVI on the way to adding to its reputation as a financial and legal centre, a welcome arbitration capability. It has the chance to be the best thought out and thus most popular in the Caribbean, but also serving other places. Arbitration need know no national boundaries. I look forward to the conference tomorrow. And I look forward to coming back soon to participate in a new centre whether as arbitrator or counsel. And if it does happen, if it is a success following the idea of Archie Archibald whoever has made it happen – and it has to include government - will be able to say: We were from the government and we were here to help. BB

XL Insurance Ltd v. Owens Corning [2001] 1 All ER (Comm) 530 C v. D [2008] 1 All ER (Comm) 1001 Abuja International Hotels Limited v Meridien SAS [2012]1 Lloyd’s Rep 461 Sulamérica Cia Nacional de Seguros S.A. v. ENESA Engenharia S.A. [2012] 2 All ER (Comm) 795 Arsanovia Ltd et al. v. Cruz City 1 Mauritius Holdings [2013] 2 All ER (Comm) 1

August 2015 Edition

BUSINESS - INSIGHT

R EMAR K S

by Dame Janice M. Pereira, DBE Chief Justice of the Eastern Caribbean Supreme Court at the BVI International Arbitration Conference May 21, 2015

It is my esteemed pleasure to offer these remarks at the opening of this

VI International Arbitration Conference under the theme “New Horizons of Opportunity.” Indeed I am elated at the opportunity to join in welcoming you on this occasion which is aptly described as an auspicious one.

Last evening, at the first lecture in the Dr. J. S. Archibald Memorial Lecture Series, I learnt that this week is being celebrated as “BVI Arbitration Week.” That inaugural lecture was given by none other than the esteemed and renowned Lord Goldsmith QC, who is London Co-Managing Partner and Chair of European and Asian Litigation at Debevoise & Plimpton LLP. Lord Goldsmith, a former Attorney General for England and Wales and current, provided a most fitting precursor to the commencement of this conference and the launch of the BVI International Arbitration Centre. I therefore wish to commend Business BVI and the BVI Financial Services Commission for organising this Conference. I also express my profound thanks to them for extending this invitation to me to offer these remarks. With the broad spectrum of accessibility that technology affords, the world is quickly becoming one global marketplace, despite the geographical divide. Technology has in many realms given the feeling that no place is too far from another. This has significantly enhanced the manner in which business is conducted internationally. Consequently, small island territories like the Virgin Islands must ensure that despite their geographical size and location, they are able to stand with the giant nations in providing a service which is integral in the area of commerce. Considering the trend that the world of commerce has taken over the last few decades, it is no surprise that arbitration has gained increasing popularity in many countries around the world. In his lecture,

August 2015 Edition

Lord Goldsmith, who is Vice Chairperson of the Hong Kong International Arbitration Centre, apprised us of the strides made by the arbitration centres in Singapore and Hong Kong and the fact that the Caribbean has been somewhat slow in such development. Indeed, the arbitration laws in many of our Caribbean states are archaic, and in some, virtually non-existent in terms of their operation and efficacy. It is apparent that the Virgin Islands has recognised the value of arbitration as an alternative method of settling disputes arising in both domestic and international commercial relations. Arbitration affords parties an often more expedient opportunity to reach a resolution as opposed to having to go through the often lengthier court processes. For this reason, conferences like this one are commendable, as they provide an opportunity for key players to meet and share information on the arbitration process and the benefits which may be derived from its utilisation. By so doing, stakeholders are kept abreast of the developments affecting commercial transactions and the localities, avenues and methodologies which may be deployed in resolving commercial disputes. This is necessary for the success of arbitration in any country, the Virgin Islands being no exception. In order for any country or territory to maximise the use of arbitral proceedings, it must ensure that the legislative framework is put in place and is able to meet the expectations of the process. I’m certain that in the Virgin Islands the coming into force of the Arbitration Act No. 13 of 2013 is most welcomed as it replaces the outdated Arbitration Act 1976, which was not well-suited to the demands that the revolution

of commercial litigation caused globally. By so doing, the Virgin Islands has shown its commitment to enact the relevant domestic laws to facilitate commercial arbitration and the enforcement of foreign arbitral awards. The Act has also adopted, with some minor modifications, the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration, which provides rules on arbitration proceedings and is recognised internationally. This is significant, as it embraces the UNCITRAL objective to achieve uniformity in the law of arbitral procedures and provide for the specific needs of international commercial arbitration practice. By so doing, the Virgin Islands has espoused this modern legal framework in an effort to support and facilitate commercial arbitration, including recognition and enforcement. The incorporation of the UNCITRAL Model Law into local legislation will assist greatly in aligning the law governing the arbitral procedure in the Virgin Islands with that of other countries around the world, taking into account the particular features and needs of international commercial arbitration. This will also ensure that in the Virgin Islands, arbitration will be conducted according to international standards, allowing for domestic arbitral awards to be recognised internationally. In Lord Goldsmith’s lecture, he outlined in clear and succinct terms the pros and cons of the development of an international arbitration centre in the Virgin Islands. In my view, he has highlighted various challenges which warrant serious consideration in ensuring BVI’s success in such an endeavour. Section 93 of the Act establishes the BVI International Arbitration Centre (the “BVI IAC”) as a body to administer arbitrations seated in the Virgin Islands. The BVI Financial Services Commission has been charged with the responsibility for setting up the BVI Arbitration Centre. Section 94(1) of the Act highlights the functions of the BVI IAC which include the following: (a) to provide the necessary facilities for the conduct of arbitral proceedings, and mediation; and (b) to provide such dispute resolution services as are essential to the conduct of arbitral proceedings. To further enhance the conduct of arbitral proceedings, in 2014, the Virgin Islands became a signatory to the New York Convention, which is the Convention on the Recognition and Enforcement of Foreign Arbitral Awards. By so doing, the Virgin Islands has ensured that arbitration awards which are made pursuant to the Act will be enforceable in all countries which are signatory to the New York Convention. This has remedied the hindrance which was previously encountered whereby arbitral awards from the Virgin Islands were not readily enforceable in other New York Convention member countries. There can be no doubt that the step of establishing an international arbitration centre is a timely one. It is one which should be seen and embraced as the next dimension or complementary process to the Commercial Division of the Eastern Caribbean Supreme Court. There is often much discussion concerning the perceived tension between the arbitration and court processes. This is normally driven when a party to an arbitration agreement is seeking to get out of the arrangement. It is not unusual also for a party to seek to initiate proceedings such as insolvency to circumvent arbitration. It is therefore important that arbitration agreements are carefully and comprehensively drafted. The times have moved on and courts are less inclined to view the arbitration process as an encroachment upon its domain, but rather as a legitimate regime which complements it. Indeed, it is no more than giving effect to the parties’ commercial bargain. The court must remain mindful of this and ensure at all times, that when called upon to intervene, if it does, it is in effect preserving and giving effect to the parties’ bargain.

The role of the court is not to destroy commercial contracts freely entered into but rather to give full effect to them. It is well recognised in the world of commerce that business men and women are much better placed to agree and decide for themselves the basis on and manner in which their potential disputes may be resolved. It is also recognised that judges may not always be the most commercially wise of persons and thus may not necessarily provide the most suitable recourse for a commercially sensible resolution. That said, it is equally appreciated that the court will always have a role to play in relation to arbitration, not the least of which is in respect of recognition and enforcement. Very importantly, the court will continue to be called upon to interpret the very provisions of an arbitration agreement and determine its scope. Indeed, the court may be called upon to decide whether a dispute has arisen and whether the arbitral mechanism has been triggered. In dealing with such matters, the court must always remain astute to ensure that it is giving effect to the parties’ bargain. In this regard, I wish to note that the Eastern Caribbean Supreme Court has been actively engaged in seeking to advance arbitration as a timelier, more cost-effective alternative for resolving disputes, particularly in the area of commerce. The court has seen a marked increase in the number of international commercial arbitral awards brought before it to be recognised and enforced. It was therefore deemed necessary to ensure that our judiciary is well-equipped to handle such matters when called upon to adjudicate at the stage of the arbitration process when judicial intervention is required. To this end, in October 2014, members of our judiciary benefited from participation in a high level meeting, the fourth of its kind, focusing on ‘The Role of the Judiciary in International Commercial Arbitration’. This meeting was jointly hosted by the Department of International Law of the Organization of American States (OAS) and the Judicial Education Institute ( JEI) of the Eastern Caribbean Supreme Court. All the developments which I have mentioned, will essentially make the BVI Arbitration Centre the nucleus of the arbitration operation in the Virgin Islands. Consequently, I am pleased that the topics and areas on the agenda for this conference include: contributions arbitration can make to the economy, the attraction of arbitration as an option for dispute resolution, the attitude and experience of the BVI Courts to arbitration, how to create opportunities driven by arbitration, an analysis of the Arbitration Act, 2013, finding our niche and plans for the BVI International Arbitration Centre. This diversity of topics to be covered and the wealth of experience which the various facilitators and presenters will bring to this conference assure that it will be a stimulating and informative session. My only regret is being unable to be in attendance throughout the session given the Court of Appeal’s full calendar here during BVI Arbitration Week. In closing, I take the opportunity to once again applaud the efforts of Business BVI and the BVI Financial Services Commission in organising this conference. I also commend the BVI Financial Services Commission, the Government and all the stakeholders on the bold and timely move in forging ahead with the establishment of an international commercial arbitration centre. You have the benefit of a commercial court judge who comes with an immense wealth of international commercial arbitration experience. I also assure you of the full support of the Eastern Caribbean Supreme Court. This unique confluence of skills, experience and opportunity underpinned by a modernised legal framework sets the stage for a successful arbitration centre. As Chief Justice, as well as on my personal behalf, I wish this initiative every success. At the end of this conference I have no doubt we will all be more enlightened as the arbitral process is placed into deeper and more meaningful context. -BB August 2015 Edition

BOOKSHELF We hope that you enjoy our selection of current books on leadership, politics, management, economics, business and geopolitics that we trust will provide insight and ideas and above all, will be fun reading.

Dealing with China by Henry A. Paulson Jr

The HEAD Game: High-Efficiency Analytic Decision Making and the Art of Solving Complex Problems Quickly by Philip Mudd

Filled with logical yet counterintuitive answers to ordinary and extraordinary problems - whether it be buying a new home or pivoting a failing business model - Mudd’s HEAD (High Efficiency Analytic Decision-making) methodology provides readers with a battle-tested set of guiding principles that promise to bring order to even the most chaotic problems, all in five practical steps.

Xi Jinping: The Governance Of China

Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future by Ashlee Vance

In the spirit of Steve Jobs and Moneyball, Elon Musk is both an illuminating and authorized look at the extraordinary life of one of Silicon Valley’s most exciting, unpredictable, and ambitious entrepreneurs—a real-life Tony Stark—and a fascinating exploration of the renewal of American invention and its new “makers.”

by Xi Jinping

This book is a compilation of Xi Jinpings major works from November 15, 2012 to June 13, 2014; it comprises 79 speeches, talks, interviews, instructions and correspondence in 18 chapters. Each item is accompanied by relevant notes about Chinas social system, history and culture for readers reference. It also includes 45 photos taken at different stages of Xis life, providing readers with more information about his work and life. The publication of this book in various languages is of great significance. It will contribute to interpreting the concepts and principles of governance of the CPC leadership, and help the international community to learn more about and better understand Chinas ideas, path of development, domestic and foreign policies, and response to international concerns about China.

August 2015 Edition

No Ordinary Disruption: The Four Global Forces Breaking All the Trends by Richard Dobbs, James Manyika and Jonathan Woetzel

The world not only feels different. The data tell us it is different. Based on years of research by the directors of the McKinsey Global Institute, No Ordinary Disruption: The Four Forces Breaking all the Trends is a timely and important analysis of how we need to reset our intuition as a result of four forces colliding and transforming the global economy: the rise of emerging markets, the accelerating impact of technology on the natural forces of market competition, an aging world population, and accelerating flows of trade, capital and people.

Dealing With China takes the reader behind closed doors to witness the creation and evolution and future of China’s state-controlled capitalism. Hank Paulson has dealt with China unlike any other foreigner. As head of Goldman Sachs, Paulson had a pivotal role in opening up China to private enterprise. Then, as Treasury secretary, he created the Strategic Economic Dialogue with what is now the world’s second-largest economy. He negotiated with China on needed economic reforms, while safeguarding the teetering U.S. financial system. Over his career, Paulson has worked with scores of top Chinese leaders, including Xi Jinping, China’s most powerful man in decades.

The Attackers Advantage by Ram Charan

The forces driving today’s world of structural change create sharp bends in the road that can lead to major explosions in your existing market space. But exponential change also offers exponential opportunities. How do you leverage change to go on the offense? The Attacker’s Advantage is the game plan for winning in an era of ambiguity, volatility, and complexity, when every leader and every business is being challenged in new and unexpected ways. The Attacker’s Advantage provides a stark and simple challenge: stay in a legacy world of incremental gains or defensiveness, or be an attacker by creating a new world, scaling it up quickly, ahead of the traditional players.

A Curious Mind: The Secret to a Bigger Life by Brian Grazer and Charles Fishman

Lee Kuan Yew by Graham Allison

A Curious Mind is a brilliantly entertaining, fascinating, and inspiring homage to the power of inquisitiveness and the ways in which it deepens and improves us. Whether you’re looking to improve your management style at work or you want to become a better romantic partner, this book—and its lessons on the power of curiosity—can change your life.

Your Strategy Needs a Strategy by Martin Reeves Knut Haanaes and Janmejs Ya

Executives are bombarded with bestselling ideas and best practices for achieving competitive advantage, but many of these ideas and practices contradict each other. Should you aim to be big or fast? Should you create a blue ocean, be adaptive, play to win—or forget about a sustainable competitive advantage altogether? In a business environment that is changing faster and becoming more uncertain and complex almost by the day, it’s never been more important— or more difficult—to choose the right approach to strategy.

The Strategist by Bartholomew Sparrow

When Lee Kuan Yew speaks, presidents, prime ministers, diplomats, and CEOs listen. Lee, the founding father of modern Singapore and its prime minister from 1959 to 1990, has honed his wisdom during more than fifty years on the world stage. Almost single-handedly responsible for transforming Singapore into a Western-style economic success, he offers a unique perspective on the geopolitics of East and West. American presidents from Richard Nixon to Barack Obama have welcomed him to the White House; British prime ministers from Margaret Thatcher to Tony Blair have recognized his wisdom; and business leaders from Rupert Murdoch to Rex Tillerson, CEO of Exxon Mobil, have praised his accomplishments. This book gathers key insights from interviews, speeches, and Lee’s voluminous published writings and presents them in an engaging question and answer format.

Michelle Obama: A Life Becoming Steve Jobs

Blending psychology, politics, spirituality, and confessional, The Road to Character provides an opportunity for us to rethink our priorities, and strive to build rich inner lives marked by humility and moral depth.

by Peter Slevin

by Brent Schlenger and Rick Tetzeli

The Road To Character by David Brooks

For more than thirty years, Brent Scowcroft has played a central role in American foreign policy. Scowcroft helped manage the American departure from Vietnam, helped plan the historic breakthrough to China, urged the first President Bush to repel the invasion of Kuwait, and worked to shape the West’s skillful response to the collapse of the Soviet empire. And when US foreign policy has gone awry, Scowcroft has quietly stepped in to repair the damage. His was one of the few respected voices in Washington to publicly warn the second President Bush against rushing to war in Iraq.

Becoming Steve Jobs takes on and breaks down the existing myth and stereotypes about Steve Jobs. The conventional, one-dimensional view of Jobs is that he was half-genius, half-jerk from youth, an irascible and selfish leader who slighted friends and family alike. Becoming Steve Jobs answers the central question about the life and career of the Apple cofounder and CEO: How did a young man so reckless and arrogant that he was exiled from the company he founded become the most effective visionary business leader of our time, ultimately transforming the daily life of billions of people?

An inspiring story, richly detailed and written with élan, here is the first comprehensive account of the life and times of Michelle Obama, a woman of achievement and purpose—and the most unlikely first lady in modern American history. Slevin deftly explores the drama of Barack’s historic campaigns and the harsh glare faced by Michelle in a role both relentlessly public and not entirely of her choosing. He offers a fresh and compelling view of the White House years when Michelle Obama casts herself as mentor, teacher, champion of nutrition, supporter of military families, and fervent opponent of inequality.

August 2015 Edition

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902, 9th Floor, Loke Yew Building, 50-52 Queen’s Road Central, Hong Kong Tel: (852) 2527 9396 Fax: (852) 2527 0762 Email: hkenquiry@heritagetg.com

Ground Floor, Coastal Building Wickham’s Cay II, Road Town, Tortola British Virgin Islands VG1110 Tel: (284) 494 7077 Fax: (284) 494 7078 Email: info@heritagetg.com

SPOTLIGHT: WEALTH MANAGEMENT IN ASIA

S P O T L I G H T: W E A LT H M A N A G E M E N T I N A S I A

by Alvin Ma

August 2015 Edition

HNWIS IN CHINA - WHERE DOES THE MONEY COME FROM?

long with China’s rapid economic growth and its four trillion yuan stimulus package, wealth in China continues to grow and thus results in tremendous growth in the number of high net worth individuals (HNWIs) there. In 2014, the number of HNWIs in China reached 2,806,000, a growth rate of 18% when compared to 2,378,000 HNWIs in 2013. The number is expected to reach 3,311,000 by the end of 2015*.

Among those HNWIs in China, data shows that more than 60% are private entrepreneurs, most of whom are in the trade and manufacturing business^. They thus focus much on means to expand and internationalise their business. To achieve this, they must be able to obtain worldwide information efficiently as well as establish international networks. Complementing China’s “go global” policy, Hong Kong is undoubtedly an ideal platform for mainland enterprises to expand their businesses to the global market. In recent years, more and more mainland companies have registered their companies in Hong Kong due to China’s relaxed restrictions on establishing offshore business. By setting up companies in Hong Kong, mainland businesses are able to include more sales channels and some even register their brand in Hong Kong to build an international image. It is estimated that there are more than 2,000 mainland companies now operating in Hong Kong, with more than 260 companies using the jurisdiction as their regional office or headquarters. Examples of those mainland investors using Invest Hong Kong’s free services are Beijing Tong Ren Tang and Kingdee Software. Apart from raising capital in Hong Kong, mainland companies will also establish their global networks, uplift their business standards and launch their international business plans in the cosmopolitan environment of Hong Kong. The first international project of China Mobile was to acquire a Hong Kong company – a stepping stone for global expansion. In view of the above, the emergence of Corporate Private Banking Service meets exactly the needs of HNWIs in China, who start their business expansion plan in Hong Kong.

3. Offshore HKD and/or USD cashflows (IPO proceeds or asset monetised financings) to be exchanged into RMB (via Jul 10 CEPA endorsed private capital corporate non-trade RMB conversion) and invested for short to medium (2 to 5 year) investment grade HK based RMB CDs/notes/bonds for purpose of FX translation hedge and principal preservations. In general, the private equity ratio for Hong Kong listed companies is around 8:12. The value of the assets thus for instance, could increase from 10 million to 80 million or above, which again shows the source of money. Apart from considering the business needs, HNWIs in China also have increasing needs in offshore investment which forms another reason why part of their money is reallocating to Hong Kong. From 2008 to 2014, the compound annual growth rate of the amount on offshore investment was around 75% and most of the HNWIs in China primarily made investments in Hong Kong*. In view of this, offshore financial banking service is becoming more and more important to HNWIs in China. - BB

Corporate Private Banking Service is a combination and hybrid of both corporate and private banking advisory solutions, i.e. 1. Pre-IPO Trust majority / founding partner / shareholder asset protection; corporate advisory on IPO’s (majority Shanghai Main, Shenzhen Main and SME GEM like ChiNext Board; HK Main, GEM and US NASDAQ); asset sales; buy-outs; carve-outs; venture capital and / or private equity integration. 2. Offshore HK based holding company set-up; guaranteed on onshore parent assets / free cashflows-Offshore HK based holding company financings (principal / interest financed by parent company pledged dividends / interest income) and on /off-shore asset monetisation (on/off-shore commercial and residential property/ land development secured for 50% LV to be drawn by HK based holding company in HKD and/or USD).

* Source: Boston Consulting Group (BCG) Global Wealth Market Sizing Data Base 2014; Bain & Company, high net worth population income wealth distribution model ^ Source: Forbes Chinese version of the private wealth research database # Source: Invest Hong Kong Special Administrative Region Government August 2015 Edition

VALUE-ADDED WEALTH MANAGEMENT SERVICES PROVIDED BY PRIVATE BANKING - HNWIS IN CHINA

igh net worth individuals (HNWIs) in China are more sophisticated in risk management and wish to have a more diversified portfolio to better manage their wealth. They have different needs in wealth management and private banks nowadays will not only provide traditional wealth management services but also value-added services which are tailored to their specific needs in an efficient way. For instance, organising knowledge-based seminars and lifestyle themed events that cater for their practical needs. Examples of the themes are investment immigration, trust and tax planning, next generation education, preventive healthcare planning, fine arts, wine and jewelry appreciation, private jets and yachts exhibitions and investment seminars.

INVESTMENT IMMIGRATION Investment immigration becomes more important to HNWIs in China along with the increase in offshore investment and global asset allocation. Recently, the number of investment immigrants increased tremendously, trend proven in research. Among the HNWIs in the research, 60% of the interviewees with RMB 10 million have already completed the process of investment immigration or have considered this. For those interviewees with RMB 100 million, 27% have completed the process while 47% have considered applying for it. This further proves the high demand for investment immigration. Both Hong Kong and Singapore are popular locations for investment immigration for the HNWIs in China. Since October 2010, the Hong Kong Government has increased the threshold of Capital Investment Entrant Scheme (CIES) to 10 million Hong Kong dollars (HKD), the equivalent of around RMB 8 million. In Singapore, the threshold for the Global Investor Plan (GIP) has also been increased to 2.5 million Singapore dollars (SGD) this year, which is equivalent to around RMB 13 million. Although the threshold has been increased, investment immigration to Hong Kong is still attractive to HNWIs in China. With Hong Kong being the special administrative region of China, HNWIs in China would still be classified as Chinese, which would be of great convenience when investing or conducting other business in Hong Kong. Immigrants can rely on private banks in Hong Kong for their wealth management and choose to live on Mainland China or they may choose to live in Hong Kong since cross-border traveling is very convenient. To tackle the increasing demand for investment immigration, competitive private banks in Hong Kong provide value-added services related to investment immigration. CITIC Bank International, for example, launched the CIES in 2015. However, investment immigration 74

August 2015 Edition

is quite complicated and involves not only investment but also legal and accounting matters. In view of that, the bank has already linked up with experienced immigration consultants to provide referral services. Regular seminars on investment immigration will also be organised to improve customers’ knowledge so that they can plan further. Since Singapore is also a popular choice for entrepreneurs, the bank has planned to establish its private banking business there to help HNWIs manage their wealth for further business development.

TRUST AND TAX PLANNING Once the HNWIs in China have completed their investment immigration application, trust and tax planning becomes the next important issue. HNWIs have demonstrated their interest in trust and tax planning. Setting up trusts can ensure succession and provide professional asset management for the beneficiaries to preserve family wealth. With the assistance of legal, tax and financial advisors, it is also possible to set up a tax efficient offshore trust structures. To cater for these needs, private banks have linked up with renowned trust institutions to provide customers with trust and tax planning services as well as organise regular discussion groups to equip customers with more knowledge on trusts for better planning.

NEXT GENERATION EDUCATION In the above-mentioned research, next generation education is revealed as the main reason why the HNWIs in China considered investment immigration. Some have already arranged for their children to study abroad and others already have plans in mind. In fact, the number of Chinese students studying abroad has increased by over 20% with the 2009 figure being 230,000 students*. To facilitate this prevalent interest, private banks have linked up with overseas education consultancies which have a lot of experience and wide school networks to provide consultancy services, including student assessment for school and faculty selection, entrance interviews, administrative works and visa applications. All of the services aim to help customers’ next generations to win a place in ivy league colleges around the world. They will also organise regular seminars on next generation education to keep customers updated on the latest trend. It is therefore important for private banks nowadays to provide not only the traditional wealth management services but also other services which cater for customers’ specific needs in order to remain competitive in the market.

PREVENTIVE HEALTHCARE PLANNING HNWIs in China care about their standard of living. The research showed healthcare services to be a prevalent concern*. In China, with the fast pace and irregular living schedules, some diseases have become a lot more common than in the past. Recently, the number of cardiovascular disease, heart disease, diabetes, reproductive system diseases and even cancer caused by high cholesterol habits are increasing. Persons have therefore started to discover the importance of preventive healthcare. Competitive private banks have already connected with renowned clinics with advance medical equipment to provide comprehensive medical check-ups, including body magnetic resonance imaging (MRI), the detection of coronary angiography, prevention of calcification and vascular imaging etc. Professionals also provide advice based on the medical reports to let customers get to know more about their body and prevent medical illness. Additionally, private banks will regularly organise preventive healthcare seminars conducted by medical professionals to satisfy customers’ needs.

ART PIECE, PREMIUM WINE AND GEMSTONES APPRECIATIONS Nowadays, investors tend to combine their interests with their investment. Research showed that over 10% of HNWIs would like to or will invest in art pieces ^. In Hong Kong, the emergence of newly alternative art pieces makes Hong Kong become a hot spot for art sales and auctions. Another popular investment is wine. In the market, premium wine is named as liquid gold because of its rapid growth recently. The price increase for limited and famous brands is even more tremendous. Since wine is tax free in Hong Kong, the number of wine lovers there is increasing which can ultimately lead Hong Kong to bypass New York and London and finally become the world’s leading sales and auction wine centre.

Since 2014, the government in Beijing revised the regulation for lowaltitude airspace management and over 100 commercial aircraft immediately registered. Business aircraft manufacturer have predicted that China will become the world’s fastest growing market, and in the coming five years, they expect the number of registered private aircraft will reach 1,000. As for the yachts, HNWIs in China prefer those 15 to 30 metres with private suites and catering equipment. In recent years, construction of marinas started in coastal cities such as Xiamen, Qingdao, Dalian, Zhuhai and Sanya to meet the needs of those HNWIs who own yachts. Competitive private banks cooperate with related consultancies to provide a chance for customers to visit the regular jet and yacht exhibitions and help them understand how to operate a whole crew in order to optimise their premium jets and yachts.

INVESTMENT THEMES DISCUSSIONS In addition to enjoying lifestyle activities, HNWIs also showed interest in investment seminars*. Competitive private banks will regularly organise investment seminars conducted by experts who provide insights on the macro environment as well as emerging themes. Specific product seminars will also be organised in order to deepen customers’ product knowledge. Professional private banks will not only stress on products and returns, but will also take into consideration the balance between returns and risks. In today’s market, investment experts will provide customers with detailed analysis of risks and market trends to deepen customers’ knowledge on risk management to enable them to better plan for future investments. -BB

Apart from wine, gemstones are also another popular alternative investment. In the past few years, there is an average 5% annual growth for 1-carat diamonds. For precious gems such as 5-carat pure pink diamond, the annual growth can be 20% or above. Even when the market is not doing well, the price of diamonds does not fall, it only grows less. Hong Kong is one of the three diamond trading centres in the world and is the key centre for Asia. Certificates issued by the Diamond Federation of Hong Kong under the Diamond Identification Centre (DFHK certificate) are the most authoritative and are recognised internationally. Therefore, HNWIs are highly inclined to invest in precious stones in Hong Kong. However, whether for investment or just appreciation, it requires specific expertise. As such, related events become more and more popular. Competitive private banks have already connected with different experts and organised regular investment and appreciation events to increase customers’ knowledge and enrich their social life.

KNOWLEDGE-BASED COMMERCIAL FLIGHT SYSTEMS AND YACHT EXHIBITIONS Other than high performance sports cars and stylish vehicles, HNWIs in China now show interest in cross-border travel through private jets and luxurious yachts. Their preferred private jet are those with 15 to 20 seats.

NOTES * Source: Bain & Company, high net worth population income - wealth distribution model ^ Source: Forbes Chinese version of the private wealth research database * Source: Bain & Company, high net worth population income - wealth distribution model

August 2015 Edition

UNIQUE RMB BASED NICHE SOLUTIONS HNWIS IN CHINA

RMBUSD 8.5

ATTRACTION OF RMB INVESTMENT

After the Reform and against the backdrop of US dollar weakening, coupled with political pressure, economic boom and price pressure, the trend of RMB gradual appreciation was much more obvious and has strengthened the market expectation on RMB appreciation. In addition to the domestic factors, the current market situation has further made RMB investment desirable. For instance, the Euro zone countries still failed to solve the debt crisis and in the U.S., the continuously weak dollar caused by the quantitative easing policy, reversed lately, as well as its risk of triggering another round of financial crisis when its debt limit reached the level, are all factors leading to increased demand in RMB investment. 76

August 2015 Edition

7.5

6.5

10 20 1/

1/ /3 12

07 1/ /3 12

05 12

04 20 1/ /3 12

/3 12

he Chinese Renminbi (RMB) is a regulated currency and has been pegged to United States dollar (USD_ since 2006. Compared to many other foreign currencies with sharp depreciation and fluctuation during the financial crisis, the RMB has attracted much attention due to its stability as well as its appreciation. In fact, RMB has been appreciating “steadily” over the past nine years, simultaneously with the China’s economic growth and the increasing foreign trade volume. On 19 June 2010, the People’s Bank of China announced its reform on RMB exchange rate mechanism, using a managed floating exchange rate regime with reference to a basket of currencies while abandoning the previous USD pegged policy. The market named this the “Further Reform of RMB Exchange Rate Regime and Enhancement on RMB Exchange Rate Flexibility” (the Reform).

Year

RMB USD increment (%)

RMB USD acc. increment (%)

2003

2004

2005

2.49

2006

3.29

5.86

2007

6.42

12.66

2008

6.52

20.00

2009

-0.02

19.98

2010

3.22

23.84

2011

3.15

26.99

2012

1.02

28.02

2013

2.70

30.72

2014

-2.36

28.36

Source: Bloomberg

HK BASED PRIVATE WEALTH MANAGEMENT FINANCIAL INSTITUTION (PWMFI) OFFERS CUSTOMERS UNIQUE RMB ADVANTAGES AND FINELY-ORCHESTRATED WEALTH MANAGEMENT SOLUTIONS The PWMFI in Hong Kong values the opportunities from RMB business.

THE DEVELOPMENT OF RMB INVESTMENT IN HONG KONG Until recently, retail investors in Hong Kong investing in RMB, could only exchange up to twenty thousand RMB a day as deposits or through nondeliverable forward contracts as an indirect investment tool. In July 2010, the People’s Bank of China entered into a supplementary memorandum of cooperation with Hong Kong Monetary Authority to widen the scope of RMB trade settlement. The amendments abolished restrictions on opening RMB accounts in Hong Kong and on inter-bank transfer of RMB in personal accounts. All these facilitate the use of RMB in areas outside mainland China and further lead Hong Kong to become an offshore platform for RMB. As a result, more and more RMB related wealth management products are being developed. RMB deposits in Hong Kong increased rapidly from 103.6 billion in July 2010 to 510.7 billion in April 2011, and by December 2014, recorded a 10 fold increase to 1,003.6 billion. Meanwhile, the number of institutions with RMB business increased from 77 to 121 over the same period and currently stands at 149. Along with the trend, more and more RMB investment products are being developed. Examples are Certificates of Deposits (CDs), unit trusts, insurance plans, structured products, stocks and Dim Sum Bonds which are now the most popular RMB investment product in the market. Dim Sum Bonds are similar in nature to ordinary bonds but denominated in RMB and issued in Hong Kong. The total value of Dim Sum Bonds issued is 406.6 billion as of December 2014, by many different issuers including Chinese government and related institutions, global financial companies and other private corporations from different sectors.

600,000 500,000

2. Pledge the RMB CD with loan ratio 80% to cash out US$800,000 (with current loan interest rate at around 2%). 3. Convert US$800,000 to RMB and invest in other Dim Sum Bonds. Asset Allocation

Issuer

Product Name

Yield p.a.

Asset Allocation

Portfolio Return* p.a.

100%

PRC Bank

PRC Bank 1 year RMB Certificate of Deposit

3.50%

180%

5.57%

40%

Vanke Real Estate

Vanke Real Estate Co., Ltd 4.48% p.a.. 03/13/2018

4.48%

20%

Poly Real Estate

Poly Real Estate Co., Ltd. 4.83% p.a. 08/06/2018

4.83%

20%

China Overseas Prop.

China Overseas Prop. Fin. Ltd. 4.54% p.a. 11/10/2020

4.54%

investment products such as unit trusts, structured products and stocks. More details on portfolio construction will be shared in the next topic on core-satellite asset allocation.

400,000 300,000 200,000 100,000

ar M

ct O

ec D

9 '0

'0 p

'0 pr A

Fe b

'0 ov N

Ju n

Ja n

Au g

'0 ar M

ct O

'0 ec

ay M

Ju l

1. Subscribe US$1million on RMB CD or deposit for 12 months, with average interest of 3.5% per annum.

The above illustration is only an example of a fixed income asset allocation model. In reality, the PWMFI will use customers’ investment objectives and risk tolerance level to further construct a customised portfolio with different

RMB deposits in HK (million)

Fe b

Being the offshore platform and wealth management centre for Chinese high net worth individuals, HK based PWMFI aims to grow and most importantly, to preserve customers’ wealth by utmost professionalism and care. By providing unique and innovative RMB investment products, customised portfolios could be formed to cater to the different financial needs of each customer. The portfolios could be tailor-made to lessen customers’ concern on exchange rate risk while enabling them to grasp the opportunities to invest in different regions and asset classes. The following is an example on asset allocation with RMB investment product for reference:

Looking forward, the development of RMB investment products would continue to be a focus in the market. The of small-QFII (Qualified Foreign Institutional Investor) or RMB Repatriation; Shanghai-Hong Kong and the soon to be launched Shenzhen-Hong Kong Stock Connect has led and will continue to lead to more advanced RMB products in Hong Kong. Asset managers should keep paying close attention to the trend to further improve Hong Kong’s product base and provide more suitable wealth management solutions to customers. -BB August 2015 Edition

August 2015 Edition

PIVOTING TO ASIA

August 2015 Edition

PIVOTING TO ASIA

THE GROWING BUSINESS JET MARKET IN ASIA:

BVI FLYING HIGH

August 2015 Edition

by Simon Lawrenson and Danielle Roman

he recent steps taken by the Chinese Government to liberalise lower altitude airspace nationwide, as part of its 13th Five Year Plan, is a positive move towards the facilitation of business or corporate aviation use, and is indicative of a wider recognition of the growing importance of this type of aviation in Asia. Despite a period of economic uncertainty following the global economic slowdown that started in 2008, the number of billionaires in the Asia-Pacific region has continued to balloon, with China reportedly home to a record 213 members of the 2015 Forbes Billionaires List (an increase from 152 the previous year). The expansion in wealth generated by this high-net-worth individual (HNWI) community has helped to maintain confidence and generate steady growth in the Asian business jet market. August 2015 Edition

Bombardier, a leading business jet manufacturer, estimates around 2,225 business jet deliveries in China within the next 20 years, with an increase in deliveries in other emerging markets and fast-growing economies such as Indonesia and the Philippines. Business jet manufacturers have also been creative in catering to the lifestyle preferences of Asian buyers to meet this growing demand: Gulfstream has place on board for a rice cooker; Airbus can offer a round table for playing mah-jong; and Embraer incorporates a system to allow the technologically minded owner’s iPad to adjust the lights and temperature inside the cabin. In addition to the rise in the volume of HNWIs, there has been a significant growth in the number of listed companies and multinational conglomerates in Asia which are key clients for business jet manufacturers. Hong Kong enjoyed another record-setting year in 2014 and remains the world’s second largest initial public offering (IPO) market in terms of capital raised. In 2015, Deloitte forecasts Hong Kong will raise between US $23.2 billion and US $28.3 billion from around 110 IPOs. As companies grow and their ambitions become increasingly global, the increased need for business travel has led companies to seek opportunities to purchase or lease business jets, both as an investment and a key transportation asset. The business jet market in Asia nevertheless remains comparatively nascent, particularly when viewed against its peer markets in North America and Europe. With regulatory and political hurdles still to be overcome, and legal uncertainty in emerging market jurisdictions throughout the region, buyers and financiers in Asia continue to seek tax efficient, creditor friendly, costeffective and low-risk structures to acquire the aircraft. Offshore companies, particularly British Virgin Islands (BVI) business companies, have become the acquisition and financing vehicle of choice. This article examines why BVI buyers, lessors and financiers of business jets in the Asia Pacific market trust in “Brand BVI”.

T H E BVI ADVANTAGE

•

Modern and flexible legislative framework: The jurisdiction offers commercial parties a legal regime founded on English corporate and common law principles that are modern and flexible, and which provide creditor friendly security enforcement procedures.

•

Adaptability: BVI SPVs are adaptable, with no minimum capital requirements, no requirement to employ locally resident directors, or to hold director or shareholder meetings physically in BVI. There is also no statutory requirement to prepare or file any financial accounts (though there are requirements to ensure an accurate understanding of the financial status of the company can be determined).

•

Confidentiality: The identity of shareholders and directors of BVI SPVs are not required to be made a matter of public record, which is a concern for many high profile or high-net worth individuals.

L E ND E R P R OT E C T IO NS While some business jet acquisitions are cash purchases, it is common for buyers to finance their acquisition by way of secured loan or lease. A typical secured financing would, for instance, contemplate the borrower’s (i.e. the BVI company) obligations being supported by an aircraft mortgage, a security assignment of contracts relating to the maintenance and operation of the aircraft (such as insurance policies, aircraft and engine manufacture warranties and operating / management agreements) and potentially a guarantee by the high net worth individual or corporate beneficial owner. A lender may also take security over the shares in the BVI company which holds title to the aircraft, and this enables the lender, its nominee or its receiver, to potentially assume legal and economic control of the BVI company upon exercise of its enforcement powers under the share security agreement. This security agreement will include a suite of ancillary documents which facilitate, amongst other things, taking control of the BVI company and, indirectly, the underlying aircraft upon enforcement of the security.

There are a number of reasons for the BVI’s popularity in this niche market, including:

In addition, there are further steps that can be taken to ensure a lender’s security is protected and provided with priority under BVI law against unsecured creditors and any subsequent secured creditors.

•

Investor confidence: High net worth individuals, leading aircraft purchasers, lenders, arrangers and lessors have been utilising BVI companies as part of their acquisition and financing structures for many years. The BVI is widely recognised as providing political, economic and legislative stability. Market participants have developed a clear understanding and confidence in a tried and tested jurisdiction.

• Where an aircraft holding BVI company creates security over any of its assets (as described above) details of the security may be filed in the “Register of Registered Charges” maintained by the Registrar of Corporate Affairs in the BVI. This is a publicly searchable register and also acts to put third parties on notice of the existence of such security. The filing also provides priority under BVI law.

•

Tax neutrality: BVI is a tax neutral jurisdiction and except for certain nominal fees for optional filings, there are no taxes, withholding, stamp duty, fees or other charges that are payable in respect of the execution and delivery of aircraft acquisition and financing documents. BVI companies are exempt from income and corporate tax and the BVI Government does not levy capital gains tax on companies incorporated under the BVI Business Companies Act.

•

Where a lender has taken security over the shares of a BVI company, then a note can be entered on the company’s shareholder register to provide evidence of the existence of such security. Again, this acts to place third parties examining the register on notice of the existence of such security. It is also possible, where the parties agree, to file the annotated register with the Registrar of Corporate Affairs in the BVI, thereby placing on public record, the existence of such security.

•

Efficiency and pricing: It is possible to incorporate a BVI Special Purpose Vehicle (SPV) on the same day and the certificate of incorporation along with the stamped, registry-sealed memorandum and articles of association are generally received within 24 hours. The cost of incorporation and on-going corporate administration of a BVI company, as well as related BVI legal fees, are also extremely competitive when compared with other leading financial centres.

•

The BVI SPV’s articles of association may also be amended to include certain provisions to reflect the terms of the security agreement and protect the interests of the lender.

August 2015 Edition

The security package, together with the filings and annotations, combine to create a clear and effective security package that will be recognisable and enforceable under BVI law – and which is attractive and acceptable to borrowers and lenders alike.

NEX T S TE PS The BVI is now building on its attractiveness as a key jurisdiction for the Asia Pacific business jet market, with the enactment of the Mortgaging of Aircraft and Aircraft Engines Act, which provide a framework for registration in the BVI of security over aircraft and, separately, aircraft engines. This complements the jurisdiction’s status as a U.S. Federal Aviation Authority Category One aircraft register under the International Aviation Safety Assessment programme. The jurisdiction’s intent is to open up its aircraft register for the registration of non-BVI operated aircraft from 2016. A registrar has been appointed to establish and maintain a register of aircraft mortgages and a register of aircraft engine mortgages. The register will be available for inspection by the public. Lenders will no doubt be comforted by the ability to file a priority notice in respect of an aircraft or

engine mortgage; clear provisions on the enforcement; transfer and discharge of mortgages as well as de-register registered aircraft. As civilian airspace within China slowly liberalises, emerging markets in the Asia-Pacific region continue to grow. Parallel to that growth, the number of billionaires and multinational corporates in Asia will increase and business jets are likely to be much sought after for years to come. While legal and political systems and confidence in those systems within the Asia Pacific region are still developing, purchasers and financiers will wish to structure acquisitions and business jet financings in a stable, creditor friendly, tax neutral jurisdiction. The BVI is well placed to meet this anticipated growth in demand and, with its aircraft and mortgage register soon to be open for business, may offer a “one-stop-shop” few jurisdictions can match. Mourant Ozannes has an international reputation as one of the leading offshore aircraft finance practices, advising on the laws of the British Virgin Islands. Mourant Ozannes specialises in advising on the financing and leasing of commercial aircraft, corporate jets and other related assets, including engines and helicopters. Mourant Ozannes’ team of aircraft finance specialists in Hong Kong and elsewhere in its global network, have advised the world’s leading financial institutions, multinational corporates, airlines and operating lessors on a variety of structures, including debt financing, predelivery payment financing, cross-border leasing, operating leasing, sale and leasebacks, exportimport and export credit financings. -BB August 2015 Edition

PIVOTING TO ASIA

'BUSINESS IN ASIA: OPPORTUNITIES AND CHALLENGES' A TEAM BVI ASIA ROUNDTABLE DISCUSSION BVI House Asia convened a panel of Team BVI Asia practitioners at its offices in Hong Kong late spring for a roundtable discussion on the current state of doing business in Asia, as well as regional issues and trends impacting the BVI under the theme “Business in Asia – Opportunities and Challenges”. The panelists discussed the developments, the opportunities, threats and outlook for the future. Alan Collins, Executive Director, Newhaven (Hong Kong) Ltd

Jonathon Clifton, Managing Director Asia, OIL

August 2015 Edition

Robert Grieves, Roundtable Moderator, Chairman and CEO of Hamilton Advisors

Paul Christopher, Managing Partner, Mourant Ozannes (Hong Kong)

Richard Hall, Partner, Conyers Dill & Pearman

John Rogers, Partner, Walkers (Singapore) Limited Liability Partnership

Richard Hall, Partner with Conyers Dill & Pearman based here in Hong Kong. We advise on all offshore jurisdictions including, in particular BVI and the whole range of legal matters and topics that are relevant to the region. Alan Collins, Executive Director of a firm called Newhaven HK. We have offices in various offshore jurisdictions including the BVI. I look after the Hong Kong operations, which deals with Hong Kong, China and Far East Asia. We provide solutions for clients for corporate planning, trusts and wealth management. We particularly focus on the BVI, where we have an office which is very busy and hopefully it continues to be so. Jonathon Clifton, Group Managing Director, OIL and part of the Vistra Group. The Vistra Group has roughly fourteen hundred people now. I am based here in Hong Kong, and we do a lot of work with the BVI, ranging from simple incorporations to a range of corporate services through to wealth planning and succession planning. Paul Christopher, Managing Partner for Hong Kong Mourant Ozannes. We operate in a number of jurisdictions in Hong Kong. Fifty percent of the work we do is BVI related, covering funds, corporate finance, litigation and international trusts for private clients. John Rogers, Managing Partner of Walkers in Singapore. We have offices here in Hong Kong and Singapore, with a large focus on the BVI. My colleagues have been focusing on finance, corporate and funds, and we have about 45 lawyers in Asia.

Q: OFFSHORE FINANCIAL CENTERS HAVE BEEN DESCRIBED AS THE PLUMBING OF THE GLOBAL FINANCIAL SERVICES INDUSTRY. JONATHAN, CAN YOU TELL US A LITTLE BIT MORE? HOW DOES THIS WORK? AND HOW DOES IT WORK FOR SUCH THINGS AS CROSS-BORDER TRADE? A: Jonathon Clifton: I think it is an interesting analogy, the concept of the plumbing and wiring of the global economic system. I think it’s been gaining traction over the past few years. If you think about the concept of globalization as something that’s become well known to many people in the vocabulary of economics over the past 30 to 40 years. What isn’t so well known is the role that the BVI and other offshore centers play in actually enabling globalization. So when you think about it, anything that involves cross-border activity, where one organization buys another organization, whether it is a joint venture investing into a new country, or whether it is setting up a factory and facilitating capital flow - all of this requires a system to enable the work. The plumbing analogy is used to describe what these entities or structures actually enable. They enable the cross border capital flow that we see. It’s often banks and financial institutions that people are aware of, but it is also important to be able to articulate the role that the offshore centers play. I guess anything that involves cross-border activities or transactions we would describe as, or use the analogy of, the plumbing business. A: Jonathon Clifton: I think I will also probably use the analogy of a five-star hotel. When we look at a five-star hotel we see at all the beautiful rooms and appliances and pools, but if the plumbing doesn’t work or if the wiring isn’t there, then the whole thing falls apart. Again, there are a lot of perceptions about the role that the industry plays and often it is linked to negative perceptions, but part of the benefits of bringing people like this group together is to try to put forward an alternate view to help explain that.

Q: SO IN 2015, WHAT IS THE TREND? ARE THESE STRUCTURES BECOMING MORE IMPORTANT OR LESS IMPORTANT? A: Jonathon Clifton: I think when you go to a macro-level, you have to ask yourself, do you believe that globalization will continue? Do you believe that companies and countries will continue to operate outside of their own borders and jurisdictions? For me, the answer is yes. So, if you believe in globalization, then from our perspective, there will be an increasing demand for the underlying entities, whether it’s for holding assets, whether it’s for cross border services, such as facilitating capital flows or raising capital and debt, since all of that plays a part in globalization. We are seeing continued growth in the underlying demand for these structures. There are multiple reasons for why clients might choose to set up a structure, but as a whole, at a macro level we are seeing very consistent growth across the whole industry.

Q: IF WE LOOK AROUND THE REGION, CAN YOU PINPOINT WHERE DEMAND IS THE STRONGEST? A: Jonathon Clifton: I think the obvious country for the past 15 or 20 years has been China. China has been a significant originator of business. But again, it is not a purely China market, I think there are number of countries across South East Asia where we are really starting to see increasing demand, so places like Indonesia, Vietnam, Thailand, we really see growth in those markets. Hong Kong originated business, Singapore originated business, Taiwan originated business, all of these countries have different reasons for demand, but at a macro-level and underlying demand level volumes seem to be growing.

Q: WHAT SHOULD WE LOOK TO THE BVI TO BE DOING IN OTHER STRUCTURES IN THE REGION? A: Richard Hall: The primary use for BVI companies is to facilitate transactions as they go forward. We see them throughout corporate structures. The priority in my practice is the IPO market. For example, quite often the founder has a BVI holding company that he uses to wrap a trust structure around, to ensure asset protection, and family wealth planning advice feeding into the BVI structure, etc. These have been very popular practices in China recently. Once they have the regulation in place to hold that company, meaning the foreign capital license, then that means their assets are fully protected. The BVI company might then feed them into a listed company underneath that. It is not uncommon that some of these listed companies have 80 or 100 BVI subsidiaries. Lots of the property companies that we deal with for example have each development ringfenced through a certain structure. They will then use these to securitize debt, to allocate different debt streams through different project phases, e.g., early stage development, late stage development, etc. As far as we are concerned, the BVI in Asia is purely to facilitate business, in a perfectly legitimate business sense.

Q: THANKS, RICHARD. COMING BACK TO YOU, JONATHAN, ENGLISH COMMON LAW BACKS ALL OF THESE STRUCTURES. CAN YOU ELABORATE ON THE IMPORTANCE OF THIS? A: Jonathan Clifton: The professional and independent infrastructure that the BVI can provide is one of the underlying reasons why the BVI plays an important role in China. That gives a lot of confidence and assurance to investors in countries such as China and across Asia in different stages of their own evolution. Being able to utilize or effectively outsource their legal infrastructure to jurisdictions such as the BVI, which is well known for being trustworthy and robust, all of that plays a part in the globalized demand for the BVI. August 2015 Edition

Q: IS IT A GLOBALIZED LEGAL STRUCTURE THAT HELPS PROVIDE CERTAINTY? A: Paul Christopher: Business thrives on certainty. With the BVI underpinned by English common law, the commercial court in the BVI and infrastructure, it provides legal certainty, which in turn reduces costs. For example, people can price in the fact that the risk of uncertainty might not be there otherwise, particularly in areas like financing. A: Alan Collins: One of the things that we find particularly great about the BVI as a jurisdiction is the depth of support and the understanding of the BVI legal system, and the availability of seasoned and highly skilled professionals who deal with both the legal and financial aspects.

Q: JOHN, CAN YOU REMIND US WHAT WE HAVE TO BE MINDFUL OF WHEN DOING BUSINESS IN ASIA? A: John Rogers: For us, the key is relationships. We have been fortunate to be in the region for quite a long time, and for me personally going on 15 years. You learn a region as you go along. We have to recognize regional diversity as we travel, work and build relationships in different places in Asia. The demands of each country may be different, therefore adapting to it and making it relevant to BVI products is very important. Taking the time to understand each country is quite important. BVI has a luxury in that it has momentum, 25 years of momentum that has been used heavily in the region, which helps. It opens doors and creates a high level of awareness. A part of our job now is to navigate through what hasn’t been utilized so much before, and make it relevant. That means that the foreign banks that we act for, they are looking to their money to get the mobilization point right and get the cash flows across border. But they also want to have some certainty as to the rule of law. There is also relevance to the family wealth / corporate grey area in Asia with so much of the Asian corporates with a wealthy family behind it. Each country has a certain number of dominant families behind it that allows a lot of BVI products to come into play; it can be trust planning for the founder or succession planning for his children. There might be a listing here now in regional business, which develops those companies and subsidiaries up to a sufficient level, then we can take them private. Navigating through the private and corporate side is increasingly important. Being based in Singapore, we deliberately went there strategically six years ago with a focus on ASEAN, recognizing that there were a number of smaller demand countries south of here with needs 86

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that have to be understood. We are seeing more demands from other countries, like the Philippines, and Vietnam, which Jonathan talked about. Again, these are very time-consuming investments in relationships.

Q: JOHN, YOU ARE TALKING ABOUT ASEAN AS A BIG GROUP HERE. WHERE DO YOU SEE THE KEY OPPORTUNITIES IN SOME OF THESE SMALLER COUNTRIES THAT YOU HAVE MENTIONED? A: John Rogers: For those countries to be part of a successful ASEAN, the very family oriented domestic dominance doesn’t lend itself very well to an ASEAN flow. So the governments on one hand want to see more cross border interaction, but there will be a bias back to the older families doing well domestically. But we already see some of those families in Thailand or the Philippines setting up private equity and family offices in Singapore, looking for family investments throughout the region, outside of their own patch. They will use an offshore company to put that together. Singaporeans are looking for a Singapore arbitration center, as the BVI has a strong rule of law with the opportunities potentially for BVI law to be used in arbitration in Singapore. So we have done some work with the arbitration center in Singapore, trying to make sure that there are lawyers that can be relevant to the situation of arbitration and litigations there, again trying to tie the laws of the region to us, and get the cash flows monitored and flow the work towards them.

Q: WOULD YOU EVER USE THE ARBITRATION CENTER IN HONG KONG, OR ARE YOU FOCUSED ON ASEAN? A: John Rogers: It’s not really our call. The clients will decide where they sit. We have some degree of visibility into the increased use of Singapore. That may or may not have something to do with Hong Kong and China’s relationship, so you can see some of the documents that we are working on now, picking Singapore as the city of arbitration. But the government law is still the BVI. So we have to be aware of that. Not everyone will necessarily go to the BVI to have litigation or arbitration, and

LEFT TO RIGHT Robert Grieves, Roundtable Moderator, Chairman and CEO of Hamilton Advisors John Rogers, Partner, Walkers (Singapore) Limited Liability Partnership Paul Christopher, Managing Partner, Mourant Ozannes (Hong Kong) Jonathon Clifton, Managing Director Asia, OIL Alan Collins, Executive Director, Newhaven (Hong Kong) Ltd Richard Hall, Partner, Conyers Dill & Pearman

Singaporeans are trying to promote it being done locally. Our job is to make sure that the BVI law firms stay relevant.

Q: BEFORE WE LEAVE THIS TOPIC, ANY ADDITIONAL THOUGHTS? A: Jonathan Clifton: Two things that we see quite often in our business now are a focus on speed, i.e., how quickly they can turn around an order or requests, and price. If we want to compare Asia to the general western European or North American market, those two things are unique in Asia. So the question around price and speed is an interesting one. I think the BVI has done a very sound job at pricing its services at the right level. It’s not the cheapest, it’s not the most expensive, but it matches the market very well. So, as this market evolves and becomes more sophisticated, what should the BVI do about pricing? In the past two decades, speed and price have been spot on for the market. For example, BVI House Asia has emphasized this notion of providing a quicker turnaround time than other jurisdictions. So it reinforces the view that the BVI is a jurisdiction that is focused on the market, and will turn around things more quickly than others. A: Alan Collins: We are in the same business as Jonathon, but at a much smaller scale. I have to echo what he says, and the availability of so many service providers in Hong Kong experienced in dealing with BVI matters is great for the public and for the BVI. It drives a very high level of quality inwards to keeping price extremely competitive. One of the great things that BVI House Asia has done is, we all are sort of rivals in the same sort of business and we are gathered together now in these kinds of situations working for the common good of the industry and the BVI, which is a very positive development in 25 years of history of BVI services in this part of the world. I think we are really maturing and moving along the right direction. A: John Rogers: I just want to add one thing that the BVI infrastructure that we must not ever lose

sight of. What we are doing now, we can do very quickly. These all depend on our turnaround. The infrastructure of the government, of the people in the BVI forming a critical mass delivering on what we promise that we will do overnight must not be understated. There is a tradeoff between employment here and employment in the BVI, of which we are all mindful. But the two must coexist. Because without the sales force set here representing and being available and responsive, and without the infrastructure back at base, the product won’t sell as well.

Q: THANK YOU ALL VERY MUCH. TURNING TO ANOTHER TOPIC, HOW IS OFFSHORE FINANCE SPECIFICALLY WORKING IN ASIA? A: Richard Hall: We operate on many different levels; we are also seeing a change and an increased use of more complex structures. Hong Kong has been using the BVI for about 30 years and as a result, a lot of local companies are familiar with how it works and feel comfortable with how it works. They are more than willing to use it with their structures; they have worked with law firms here for 25, or almost 30 years August 2015 Edition

in some cases. They are very familiar with the product. They are also delighted that the product moves with the times. We have the new Business Companies Act in 2004, and we have to say that must be the best piece of corporate legislation out there, and all of the things that the BVI did in 2004, Hong Kong did it last year, that’s ten years. The BVI is used in many different ways in different areas, but certainly we use it in all levels across all structures from simple holding company structures. People will be using trust in the wealth management level, and again I agree in this case, it is a more difficult market. The willingness to pay for bespoke trust structuring advice is limited here, but this is not a BVI specific problem, more like a general phenomenon of offshore jurisdictions. There is a general willingness to get to a very high level of wealth to pay for that specialist bespoke structure, and some of that I think is because of the inheritance rules, especially in Hong Kong, that are so simple. There are very few taxes that you really have to look at, and lots of the private wealth banks will pretty much give you your bespoke package off the bat. If you sign up for your $5 million US dollar account, and they give you a trust structure on estate planning, the ability to add value there could be limited. We see funds using BVI fund structures here, and we see lots of joint venture arrangements. People are very comfortable using BVI joint venture companies, they like the rule of law and the availability of professionals to help them drive their structures, and the quick turnaround. They are much more comfortable investing in the PRC, or Vietnam or Malaysia or wherever, as they know that with a BVI company, whenever they have a dispute, they can end up in Singapore arbitration, or they can end up in the BVI court with the rule of law, rather than something that they see as, maybe not quite as transparent or quite certain. People are willing to pay for the certainty of structure. Then, within general corporate spheres, we see BVI companies doing everything, lots of SPV debt issuance, lots of listed companies that will use a BVI SPV (special purpose vehicles) to issue bonds and notes. Especially in Singapore, they will flow the proceeds back to the listed companies, using them for estate planning purposes, particularly for subsidiary and holding company structures through IPOs and general corporate. Across Asia, they work across all levels for all purposes. They are great products, and great structures to use.

Q: ARE THE TRANSACTIONS AND FINANCINGS BECOMING LARGER? A: Richard Hall: Some are big, some are small. We see some very large note issuance and bond deals. We have a current example, in China State Grid up in the PRC, which is the sixth largest PRC company by capitalization. They used a BVI company as their SPV when they issued their first bond to the market. I think that was around $2 billion US dollars, so very large debt issues can be run through very simple one dollar one share holding companies.

Q: ARE THERE MORE FINANCINGS BEING DONE THROUGH RMB ISSUES? A: Richard Hall: I think that will come with time. It will be interesting to see what happens with the ASEAN issues that John was referring to, what happens with the Asian Infrastructure Investment Bank when that gets up and running, whether it is used to serve a convertible, tradable currency or the central government currency. It ebbs and flows. We had a big push with the Hong Kong stock exchange 18 months ago to have dual currency listed companies because they are in favor of pushing up the currency, and being able to facilitate trade in it. It kind of drifted sideways a bit. I’m not sure the businesses have been really persuaded by the upsides of doing a dual currency trading structure; a lot of it depends on the central bank and how 88

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much they facilitate the free flow of currency. And I think the more it frees up, the more you will see people prepared to issue.

Q: IS THERE ANYTHING THAT YOU WOULD LIKE TO ADD? A: Jonathon Clifton: We have seen a real growth in demand for asset protection, particularly around intellectual property, if you look at the growth in IP or trademark registration in countries such as China, Japan and Korea, which occupy three of the top five spots globally. Typically for Japan and Korea, they would have done cross border directly in the past, like a Japanese company investing in a third country, but new markets are opening up in terms of the use of BVI companies, specifically for holding IP asset protection. I think it will be a bit of horses for courses across the region by diverse demand and solutions available.

Q: ALAN, IS THERE ANYTHING YOU WOULD LIKE TO ADD TO WHAT JONATHON HAS JUST SAID? A: Alan Collins: Apart from asset protection, there is also succession planning, as these are quite hot topics at the moment. It is interesting that it’s not just the cost of advice which has been somewhat of an inhibitor to the trust practice, in particular to succession planning and asset protection. It’s also the reluctance, not only in this part of the world, but in every part of the world, I suppose, to go through that process of how to protect assets by putting them into the hands of trustees. I think there is an increase in sophistication in Hong Kong and China, understanding the benefits of succession planning using trusts, asset protection in the best possible sense of the word in terms of preserving family wealth for future generations, ensuring that it’s managed effectively. BVI has become increasingly successful in wealth succession planning. In the past 25 years, the BVI has been a jurisdiction where BVI companies have become the gold standard in terms of offshore corporate structures. And that in a way, I suppose, has created a situation in which people are now starting to become aware of BVI companies. There are thousands of BVI companies in the hands of individuals or perhaps in the hands of nominee shareholders with aging beneficial owners or aging shareholders who will now be facing the prospect of providing for the orderly succession of those assets and BVI companies. And I think that actually provides a very real opportunity for BVI planning, in terms of very flexible tax structures and variable risk transfer shares, a popular vehicle for providing a kind of a Rolls-Royce of nominee arrangements.

Q: THANK YOU VERY MUCH FOR THAT, ALAN. PAUL, YOUR THOUGHTS ON THE SAME TOPIC? A: Paul Christopher: We see that the BVI has been heavily used over the years for wealth planning in Asia, and it’s very well recognized in Asia. I would echo that there is this reluctance about what to pay for the structuring advice, and in our experience that’s right up until a point that families have a very bad experience, and then they’re actually in a bad situation. That’s when they understand the value of the advice that can be given, and the fact that when having all of your assets in a structure it is actually very important to get the advice right, and sometimes it is very, very specialist advice.. Asia has its own unique challenges around wealth and succession planning. I think that’s probably highlighted by a recent report that suggests amongst the very wealthy Asian families, something like 91 percent foresee their business continuing into the future, i.e., when they are looking to plan for a

succession, they are not looking to divest that business and turn it into some form of bankable assets, so they are looking for continuity, and looking to create an institution going into the future. I think the BVI is well placed with trust, like the VISTA trust, very well placed with private trust companies as well as the levels of control that they provide to the patriarchs and settlors. So I think it’s the experience of having worked in the wealth-structuring side of big institutions. It’s good news.

Q: REGARDING THE BVI IN ASIA, ARE THERE ANY REGULATORY FRAMEWORKS WE SHOULD BE TALKING ABOUT IN TERMS OF, CHALLENGES OR OPPORTUNITIES? A: John Rogers: We have been relatively fortunate for a long time, in that some of the regulatory environments in Asia have been less focused on the BVI than in some of the European and US markets. That said, I think the BVI is ahead of the curve. It is important that we were invited last week to the Singaporean Law Society to look at new regulations for the lawyers there. There is a whole draft set of rules to apply to the lawyers and lawyers taking on new clients and AML (anti-money laundering), and we can with some relief say this is where the BVI has been for years, so that is a very real and current example of where we need to sell the story, but we don’t have to be defensive about it. We actually have very good AML. Still, I think we have to be mindful of external pressures. Particularly about issues of members’ pressures on measures if they are as strong as they are under Mr. Cameron in the UK, for example. What we are having to deal with are changes abroad as a result of the regulatory pressures in the US or the UK. And as they become universal our challenge is to navigate those changes in Asia. So we don’t see huge amounts of regional pressure to change the way BVI operates, in contrast to some of the other regions in which we are operating. But we have to be mindful of how it might impact our services, and how they might change the environment. So we’ll watch the regulations very closely. A: Richard Hall: I very much agree with a lot of what John has to say. Though it is not an Asian-driven process, I think much of the headwinds that confront the industry are generally European driven. I think it is the beneficial ownership register which seems a political football that’s convenient to kick but seems unworkable in practice.

Q: DON’T ALL THE NEW REGULATIONS CREATE A LEVEL PLAYING FIELD AROUND THE WORLD AND IMPACT ALL THE JURISDICTIONS THE SAME WAY? A: Jonathon Clifton: I think it depends. If we are talking about regulations at a macro-level, yes, that is heading towards a level playing field, but if we head down the path to certain jurisdictions - let’s take the BVI, for example -- this comment is more relevant to service providers than to law firms. The question of eligible introducer regimes is a hot topic of the moment. There are lots of discussions, dialogue and debate about what’s the best way forward. I think Alan and I would share a single view here that we need to be very careful around what we do with this regime -- it’s been the backbone of driving the real volumes of growth that we’ve seen in Asia, so that’s why we have the potential around some jurisdictional arbitrage. If the BVI go down the path of discontinuing the regime, and other jurisdictions were to continue it, then I think some issues will be created. But I think on a macro level around AML and KYC (know your customer) it is a level playing field. When we start talking about jurisdictional specific implementation, then I think there’s not necessarily a level playing field. A: Alan Collins: I concur with Jonathan. I think in the past there might have been what one describes as flight to the bottom, where people were going

to jurisdictions with lower regulation, and perhaps lower costs. But then you increase the level of global regulation, I think there’s now been created a situation where there’s a flight to quality. And generally speaking, service providers are improving in quality. And the product as a result improves in quality. I think it’s for the good of the industry, really. One of the impacts the whole offshore industry is experiencing in Hong Kong and other places is an indirect form of regulation, which is regulation of the banks, because of stringent KYC, and other issues that they have. It becomes more difficult for offshore companies and indeed onshore companies in Hong Kong to deal with banks, but again that provides a higher level of quality and service in the industry. A: Richard Hall: I agree with Jonathan, I think he’s absolutely spot on. We have seen in the course of the last 18 months up until about six months ago, the tendency for clients, who would normally have gone straight to BVI as their preferred jurisdiction choice, to choose other, what we personally consider to be slightly weaker jurisdictions. The net result of this being that after about a year of that, people have discovered the second they want anything done, they want a legal opinion written, they want some advice, there simply isn’t the infrastructure that John was talking about, the support in Asia and within the home jurisdictions to enable that to be done on any sort of timeline that they are anticipating. They are quite used in Asia to be able to pick up the phone, speak to Alan and Jonathan, get a company delivered to their desk in the afternoon, being able to speak to lawyers around the table and get legal opinions written overnight, documentation filed with regulators within 24 hours. The whole transaction can be done very seamlessly and smoothly. As a result of that, we’ve seen people who moved to other jurisdictions come back and you almost want to make them apologize for their foolishness. A: Paul Christopher: I think what’s interesting is the BVI government. It’s clearly demonstrated that it wants to be a good world citizen. It’s keen to engage with regulators from other jurisdictions and supranational bodies, and to be reviewed and so on and so forth. And I just think the way that the offshore industry is going, the ability to deploy capital in and out of jurisdictions going forward and the barriers that are likely to be used politically in doing that, it is very important to have a government that is focused on maintaining those relationships. A: Alan Collins: I think one point that needs to be mentioned is that, for many years in Hong Kong we have had personal data privacy protection legislation. The provisions regarding transfer of personal data outside of Hong Kong have been inactive for various legal reasons. But they could be coming into force. That is now a very significant ramification for everybody who is transferring personal data from Hong Kong to other jurisdictions. This is something that in the future will necessarily be the subject of some attention from the industry and from the BVI government.

Q: WHAT MAKES AN OFFSHORE JURISDICTION COMPETITIVE? A: Alan Collins: It’s branding. The BVI has an excellent brand and has had for many years. Jurisdictions which come up with one critique or another have tried to make serious inroads into the BVI’s market share. But they have not succeeded. Some of it’s because people know the BVI, they know the level of support and they know the strength of the infrastructure. It is a very strong brand. In Hong Kong, everyone refers to offshore companies as BVIs regardless of the jurisdictions they are from. BVI is a generic term for offshore companies in this part of the world, it is that strongly entrenched. August 2015 Edition

A: John Rogers: I think to answer the original question, tax can be a factor in all this and not having taxes, or zero tax is important. I believe this goes back to our other points. Some clients, might need a double tax treaty, so we might not be relevant because we have zero tax. The clients are actually looking for a double tax treaty network, and they’re really looking for another offshore jurisdiction, like Mauritius or Seychelles, because the demand is actually looking for a different product. That’s the point about trying to understand what we are selling and what people are trying to buy and match up that supply and demand. Because it won’t always be that our offshore elements are required for the deal.

Q: IN CHINA, THERE IS NOW LOW FERTILITY, AND THEIR POPULATION GROWTH LOOKS LIKE IT IS GOING TO SLOW. HOW DO DEMOGRAPHIC FACTORS FIGURE INTO HOW THE BVI IS GOING TO BE USED OVER TIME? A: Jonathon Clifton: I think the industry, and particularly the BVI, see China as a long-term bet. I think, too, that one of the key trends we have all seen in the past three years is outbound investment. It’s only in the last couple of years that the amount of capital flowing from China to the rest of the world exceeded the amount of capital coming into China. That’s important for two reasons, because the BVI and Cayman are still the number one and number two offshore jurisdictions to facilitate flow from China to the rest of the world. That’s the first point. The second point is that the RMB continues its liberalization and there is a central government policy to promote outbound Chinese investment. So you are trying to triangulate those points with the continued growth of Chinese investment going into the world. You look towards the plumbing to enable that, and again it’s the BVI, a top-end offshore jurisdiction. We are talking about China as one country where you know there will be booms and busts over the next few years, but on balance, I think China’s going to continue to be a major source of growth for the industry. A: Richard Hall: You’ve had 10 to 20 years predominantly of inbound investment, where Chinese entrepreneurs in particular have become very familiar and comfortable with BVI structures. They normally would have moved private equity money into their BVI holding companies; they have been very comfortable with how it all worked. They like the lawyers that they work with, they like the legislation, they like the flexibility, they like the fact that as John says the government is prepared to change things such as the Chinese names in the corporations and they all have transliterations rather than direct translations so that there can be the cultural sensitivities to the use of the lucky sounding names instead of a direct translation without understanding it. But because of the 20 years of people becoming familiar with BVI in that direction, when they start sending the money back out, they will be more than happy and very comfortable to use it the other way round. And I think the success of the money coming in and the people working on building that familiarity enables the Chinese entrepreneurs looking to take the money out, to use them as almost as a default. The BVI is one of the default organizations to go to, for the money coming out, because of its familiarity.

Q: OVER THE NEXT FIVE TO TEN YEARS, WHAT ARE THE KEY AREAS IN ASIA FOR THE BVI TO INVEST IN AND FOCUS ON? A: Richard Hall: In terms of growth, I think that we will see a greater use of BVI companies for listing vehicles, and accepted onto the exchange as successors. Other jurisdictions are still very much default jurisdictions, but I think the BVI will become more accepted as that momentum builds. Then people will become more familiar with them in terms of other growth 90

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opportunities. I think as families age and people become more prone to litigate over wealth those areas will become more important. A: Alan Collins: I agree and I think the number of BVI companies out there holding wealth for families as they age is growing. It’s really an embedded value in the BVI company base, because there’s going to have to be some action taken in respect of all those companies, whether it is going to be a VISTA trust or some other kind of structure to deal with the orderly succession of those who have shares. As mentioned before I think this is a great sort of elephant in the room to a certain extent for the BVI company with such a large accumulated base of corporations which are going to require some dealing going forward, whether it is a structure or even a sort of probate or administration of BVI, so I think we’re going to see a lot of growth there, and private trust companies, family offices, are going to be one of the drivers of that as well. A: Jonathon Clifton: I have other comments around drivers and usage, but perhaps the two comments I would make would be: the first area I’d say is focus. I think focus is an interesting one in BVI’s case. A part of it, competitive advantage, is the fact that it hasn’t focused solely on one solution. Part of its advantage is the fact that it can provide multiple solutions through multiple demand drivers. So I think keeping that sort of broad brush of functions of BVI is a point rather than trying to focus down too much. The second point is one you kind of mentioned in the question around disrupters. So, we often sort of think about, “What’s the Uber of the industry? How could this industry be disrupted?” I don’t know the answer, but I think one of the questions that the BVI will need to think about is how do they better leverage and utilize technology. You go back, particularly from an Asian context, speed, efficiency, turnaround time, all these things will become more important moving forward. So how does the jurisdiction invest in leveraging technology in a way that perhaps it isn’t at the moment? If I had the answer I’d tell you, but I don’t. A: Paul Christopher: I think the close relationship between private law in the business world and the way that the BVI is used for that is important. We see that business becoming more institutional going forward, because we certainly see that the BVI is used more frequently in some of the very large deals that are done now. Without question, BVI is one of the jurisdictions that is used by the blue chip institutions in this part of the world. I think what’s important is the ability to deploy and redeploy capital, the BVI Government maintaining international relationships is absolutely critical. And in Asia, with all the barriers, governments that work with offshore jurisdictions create opportunities. It’s a question of being smart, in terms of the access the jurisdictions have within each of these governments. A: John Rogers: Not to finish off by being pessimistic, but I just think we have to be realistic about the threats. I think that the BVI is the established means of getting through that traditional emerging market period. That said, emerging markets are going to move to somewhere. The Singapore government wants Singaporean companies used more commonly. Hong Kong’s got the drivers for a fund industry, Seychelles and others are on the move. So I wouldn’t like to just forget about the fact that there are a lot of competitive factors in play here, and that momentum is the great strength. We have to keep investing and keep front of mind the fact that BVI is the one to use because the competition is real. But I think the BVI has a tremendous head start in a number of areas we mentioned today, and it’s been a very positive and accurate reflection of where we see it. But on the realistic sense, from what we have experienced relatively frequently at the coalface, the competition is quite real. -BB

TOURISM AND REAL ESTATE

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T O U R I S M A N D R E A L E S TAT E

MOVING BEYOND OUR BUBBLE ARE WE POSITIONED TO RECEIVE THE PUCK IN LUXURY TOURISM?

oving beyond the bubble...quite an interesting concept! Are we open-minded enough in the British Virgin Islands (BVI) to move beyond the norm and exceed expectations?

Since the early 1960’s when Lawrence Rockefeller set eyes on Little Dix Bay, the BVI has been thrust into the tourism spotlight. Have we embraced it? At times we have and at other times we tend to go with the flow, flowing with the ebbs and tides of world tourism trends. In the past five years, we have been battered by changing economic climes and now, there is the new dimension of Cuba to contend with. We have seen our arrival numbers stagnate, but we are now poised to experience significant growth. Are we doing what is necessary to take full advantage? Are we building infrastructure and training our nationals to capitalise on opportunities? Are we certain that our environment can handle the anticipated influx? Are we marketing to our full potential and reaching that niche market that identifies with the BVI? Are we doing enough to have a first-class sustainable tourism product? These are some of the questions that the BVI Tourist Board (BVITB) team asks itself in the dead of night while the rest of the BVI sleeps. These are some of the questions that keep us awake, but the overriding question becomes - are we positioned to move beyond the bubble? Are we positioned to take the puck?

Remarks by Sharon Flax- Mars Director of Tourism at the BVI Business Outlook Conference January 14, 2015 Scrub Island Resort

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It is important to recognise that we are competing on a global stage. Our luxury guests are not only looking at the Caribbean; they are looking at Dubai, they are looking at Asia, they are looking right in their own backyards. Years ago, the BVI did not look at the likes of Antigua and Barbuda, Dominica, St. Lucia and St. Kitts and Nevis as rivals for visitors, but these islands have made a concerted effort to improve and expand their tourism products. They are working hard to improve and expand their infrastructure and to improve service levels. We need to be steps ahead! The United States, removing restrictions on travel to Cuba will create an even more pressing need for the BVI to differentiate itself as the luxury Caribbean destination of choice. Cuba will add a new dimension and yet another choice to the traveller who is looking for a “new and novel” experience. Their cruise ports, marinas and yachting sector can greatly benefit from their close proximity to the United States. While the luxury sector in Cuba will need to be developed in order to compete with what the BVI currently offers it is evident from the interest of hospitality management companies that they see Cuba as the “new Caribbean frontier”.

This means we have got to think differently, invest differently, train differently and change the paradigm if we are to be in a position to receive the puck. We need to not only be in a position to receive it, we need to move beyond the bubble and go after it! What does that really mean? It means that we need to change the paradigm and the way we envision luxury. What really is luxury? Who is the luxury traveller? Luxury in essence is in the eye of the beholder, in this case the discriminating traveller, the traveller who expects the best in terms of product and service. Luxury is not necessarily a price point, it is an expectation of receiving and enjoying the best. Can the BVI deliver that luxury product? Can we deliver that luxury experience? Yes we can! We have been hard at work making changes. Over the past few years, both government and private industry have been working towards our positioning as a major luxury destination. Our cruise port expansion project is on stream and so are major upgrades at some of our premier luxury properties. The BVITB has been working diligently with the indigenous service and product providers to provide key training to exceed expectations. The reality is that there is work to be done to ensure that the BVI is what I call “destination wide luxury ready”. To ensure that we are ready to receive the luxury puck, it is necessary to we continue our focus on a minimum of two areas of concentration 1. Ensuring that all BVIslanders and residents understand and appreciate that tourism is our business and is the mainstay of our economy. This is not simply those who work on the front lines of tourism. Our children need to be educated from an early age, both socially and academically about the importance of tourism and delivering a consistently high quality product and service. It is important that all of our civil servants understand and appreciate that although their mandate is not tourism, the “tourism trump card” must enter into the thought process when decisions are being made within their ministries and departments. Yes it may mean another meeting or two, but there should be more synergies and more communication. All BVIslanders should be able to speak intelligently about our major islands, attractions and culture rather than shrug and say ‘I ain’t know’ or to be dismissive in their responses. Every person who resides in the BVI should be able to speak about the Territory and not simply shrug and say ‘I ain’t from here’. Our guests do not distinguish between locals and non-locals. Our people are a

very important part of the tourism product. Often time our visitor will talk about the nice hotel or private island resort or the teak on the deck of the catamaran, but the one thing that will either make or break the vacation experience is the “personal component” A luxury experience becomes very personal and aspirational and the luxury traveller expects consistency, the luxury traveller expects knowledge and consistent service throughout the destination. The luxury traveller expects anticipatory service. We believe that at this critical juncture in our tourism evolution, we need to change the approach and ‘retrain’ the entire destination as to what true service is all about, across all sectors. 2. Improving our tourism product and infrastructure. Those who know me well, know that I always talk about my mom who was a hospitality pioneer here in the BVI. She was a humble woman, but set high standards for herself, her children and her business. She was infamous for her musings and two come to mind when we look at positioning the BVI to take the luxury puck. She would say, “not because something is old means that it should be dirty”’ and “cleanliness is next to Godliness”. To improve our product, we need to really address the cleanliness of our country. We need to take a top down holistic view. We need to reach into our communities and look at the way our yards and gardens are kept. We need to look at the cleanliness of our government buildings and our ports. We need to maintain our beaches, oceans and shorelines and protect our natural resources, educating our society about the importance of sustainability. We need to involve our business community, churches and service groups. We need to ensure that stripping paint is repainted, that sidewalks are power washed, that broken doors and windows are fixed, that there is regular maintenance in place at our businesses and in our public spaces. I remember when community really meant community and we all took pride in our villages. We need to ensure that there is diversity in our product offerings, choices for activities and attractions and choices of accommodations. Luxury may mean different things to the luxury traveller but one thing I have found consistent among all luxury travellers is that cleanliness and a high level of guest service are expected. To receive the luxury puck we also need to be forward thinking and not try to be like every other ‘Caribbean destination. The luxury traveller is looking for a destination with a difference. I always loved a tag line from the BVITB years ago that said ‘yes August 2015 Edition

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we are different, we are not for everyone’. To receive the luxury puck, we need to pay close attention to the tag again - ‘yes we are different, we are not for everyone’. The luxury traveller does not want a generic ‘Caribbean experience’, we need to give them a BVI experience. We need to give them an experience with a difference, one that exceeds expectations. Martin Luther King said he had a dream. At the BVITB, we have a vision - if we can realise this vision, we will be in a position to receive the puck, to embrace the puck and to make it to the 19th hole, yes the 19th hole. Let’s imagine leaving the United States Virgin Islands via a high speed ferry which has first class and coach cabin configurations with a high level of on board guest service, after being welcomed by BVI greeters at both the Cyril E King Airport and the Wymoth Blyden Sea Terminal with a warm smile and a bottle of BVI Spring water. Imagine arriving at a BVI sea port to be met by smiling port ambassadors and immigration and customs personnel who are very pleasant and can call visitors by name after identifying same from their documents. Imagine a speedy process and an arrival lounge that is welcoming and also provides seating and information geared to sensitising the BVI visitor. Imagine having a database at the ready at immigration and customs where they can identify our repeat guests and acknowledge this.

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A guest arrives at the Terrance B. Lettsome International Airport and is met by welcoming greeters and an air conditioned arrival lounge with seating and play area that is geared to better accommodate families. A vision where all experiences and all stays in BVI, whether on land or sea accommodations, where the visitor is provided with at least one wow moment. Can we achieve this in the British Virgin Islands? I am confident that we can, but we have to be bolder and even more innovative than ever before. We have made strides over the years, but the competition is fierce so we have to do what BVIslanders do, we have to take our game to the next level and move beyond the bubble in terms of service and product offerings. Imagine moving beyond the bubble, changing the paradigm so that we are poised to receive the puck. It can be done. -BB

F E ATURE R ESEA R CH ART I CLE

SEEKING TRUTH FROM FACT:

RATIONALE AND USE OF OFFSHORE JURISDICTIONS IN THE PRC* Kristian Wilson**

Originally published in the Tsinghua China Law Review, 6TSINGHUA CHINA L. REV (2014).

* I would like to thank Stephen Adams, Alasdair Hunter and Simon Pascoe of Bedell Cristin for their support and constructive feedback. I would also like to thank Bill Maurer, Jing Li, Dylan Sutherland and William Vlcek for taking their time to correspond, provide feedback or point to useful sources on this topic. ** Mr. Wilson is an attorney in the Singapore office of Bedell Cristin, an international offshore law firm which practices the laws of the BVI, Jersey, Guernsey and Mauritius. He practices BVI law and specializes in mergers and acquisitions, joint ventures, finance, private equity and general corporate law. He may be reached at kristian.wilson@bedellgroup.com.

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I. INTRODUCTION

jurisdictions in the PRC from a legal perspective.

In 2013, inflows of foreign direct investment (“FDI”) to the People’s Republic of China (“PRC”) amounted to US$127 billion, making the PRC the world’s second largest recipient of inward FDI after the United States.1 Slightly behind the PRC were the British Virgin Islands (“BVI”) which had received FDI inflows of US$92 billion, making the BVI fourth in the world.2 It is noteworthy that not only are the PRC and the BVI among the top four recipients of FDI, there is also a strong relationship between the two jurisdictions in terms of FDI flows. For instance, the BVI is frequently cited as one of the top three sources of FDI into the PRC (together with the Cayman Islands (“Cayman”) and Hong Kong). In 2010, the BVI was the second-largest investor in the PRC, providing US$10.4 billion (9.1%) of total inward FDI into the PRC.3

A. Foreign Direct Investment

The question then arises as to why a small island located in the Caribbean should be both a significant recipient of global FDI and a leading contributor of FDI into the PRC. This paper will look at the reasons behind this phenomenon, by examining the role of the BVI in structuring inward investment into the PRC and considering how the BVI is used to structure outward investment by PRC enterprises. This paper will also consider other offshore jurisdictions, as well as the role of Hong Kong and Macau (which are often considered to be quasi-offshore jurisdictions) in Chinese FDI. This article will focus on the use of offshore jurisdictions from a legal perspective and consider the interplay of offshore structures with PRC law. This paper is divided into seven parts. Part I provides an overall introduction. Part II examines key definitions and perspectives. Part III looks at the economic development of the PRC and the context in which the use of offshore structures has emerged. Part IV looks at how offshore structures are used to finance PRC enterprises. Part V looks at how offshore jurisdictions have been used by PRC enterprises to structure their outward investment. Part VI will look at the future role of offshore jurisdictions in the PRC. Lastly, Part VII will make some concluding remarks.

II. DEFINITIONS AND METHODOLOGY Before looking at the role of offshore jurisdictions in Chinese FDI, it will be useful to clarify what is meant by “FDI” and “offshore.” We will investigate the nature, purposes and use of offshore

There are many ways of measuring economic activity, but when considering the role of offshore jurisdictions in the PRC, the concept of FDI is frequently used. FDI is a useful concept for understanding the extent of economic activity involving offshore jurisdictions, but only when well-defined. The Organization for Economic Co-operation and Development (“OECD”) provides the following definition of FDI: “FDI is defined as cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy. The lasting interest implies the existence of a long term relationship between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the enterprise. Ownership of at least 10% of the voting power, representing the influence by the investor, is the basic criterion used.”4 An interesting feature of this definition of FDI is that the focus is not on the financial nature of the investment. Instead, the key attributes of FDI relate to influence, ownership and voting power. These attributes necessarily engage legal concepts, as they concern property rights and voting rights. B. Offshore Many terms are used to describe offshore jurisdictions,5 but for the sake of clarity and consistency, this article adopts the term “offshore” which is widely used and also defined by the OECD. The OECD defines offshore financial centers as: Jurisdictions with financial centres that contain financial institutions that deal primarily with nonresidents and/or in foreign currency on a scale out of proportion to the size of the host economy. Nonresident-owned or controlled institutions play a significant role within the centre. The institutions in the centre may well gain from tax benefits not available to those outside the centre.6 This is a broad definition and also captures such jurisdictions as the United Kingdom, Hong Kong and Singapore. However, an International Monetary Fund (“IMF”) working paper suggests that the definition should also include “centres which provide some

U.N. Conf. on Trade and Dev., 15 Global Investment Monitor 5, U.N. Doc. WEB/DIAE/IA/2014/1 ( Jan. 28, 2014).

Id. at 6 (Interestingly, the BVI would have been higher, if not for the fact that FDI flows to Russia rose 83% to US$94 billion, causing Russia to be ranked third. The rise in Russian FDI was “predominantly ascribed to the large acquisition by BP (United Kingdom) of 18.5% of Rosneft (Russia Federation) as part of Rosneft’s US$57 billion acquisition of TNK-BP, which is a company registered in the British Virgin Islands”). 2

Ken Davies, China Investment Policy: An Update (OECD Working Papers on International Investment 2013), available at http://www.oecd.org/china/WP-2013_1.pdf.

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT, OECD FACTBOOK 2013: ECONOMIC, ENVIRONMENTAL AND SOCIAL STATISTICS 86 (2013).

Other terms include ‘tax havens’ and ‘international finance centers.’ Neither term is particularly useful to the analysis as the first term is pejorative and excludes other uses of offshore jurisdictions (such as legal structuring) and the second term is so ambiguous that it risks becoming meaningless. Therefore this article uses the term ‘offshore’ which is familiar to most readers. 5

OECD Glossary of Statistical Terms – Offshore Financial Center Definition, http://stats.oecd.org /glossary/detail.asp?ID=5988 ( Jan. 4, 2006).

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or all of the following services; low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity”7 as well as providing services such as banking services, fund management, insurance, trust businesses, tax planning and company incorporation. Again, this definition can still include many jurisdictions that are considered onshore. This is a fundamental point in thinking about offshore centers, as activities that are considered offshore, such as banking, fund management, and tax arbitrage, also take place onshore, just at a different level of intensity. However, for the purposes of this article, the primary focus will be on the BVI and Cayman, which are Caribbean offshore jurisdictions that offer a number of the services described by the IMF. In particular, each jurisdiction specializes in some of these activities. The BVI specializes in company incorporation, being the world’s leading offshore incorporation jurisdiction, whereas the traditional focus of Cayman is on banking and funds. Both jurisdictions, however, play a leading role in Chinese FDI. Both the BVI and Cayman are common law jurisdictions whose ultimate court of appeal is the Privy Council in London.8 The two jurisdictions are notable for the quality of their commercial law and the caliber of the professionals working in such jurisdictions.9 The territories specialize in the establishment of offshore structures, such as companies, partnerships, trusts and funds. The jurisdictions are popular among international investors due to their tax neutrality (with no income, corporate or withholding taxes), light regulation (with no foreign exchange controls or takeover codes) and flexible corporate legislation. C. Legal Perspectives on the Role of Offshore Jurisdictions in FDI There is a growing body of literature on the role of offshore jurisdictions in Chinese FDI, although it is still not widely studied as a topic. However, what is notable from the limited studies in this

area is that there is an over-emphasis on the question of taxation and little analysis of the legal, practical and commercial rationale for the use of offshore jurisdictions. This emphasis is understandable, given that a key benefit of using offshore jurisdictions is that they provide a tax neutral platform to structure investments, thereby avoiding the need to have a further layer of tax in any investment structure. However, this over-emphasis on the role of taxation leads to a misconception about the nature and types of offshore transactions.10 As a result, much commentary is preoccupied with notions of round- tripping, tax and transparency, and fails to adequately address the key drivers behind the use of offshore jurisdictions, which are essentially legal in nature and concern the management of legal and commercial risks.11 Therefore, in order to seek truth from facts,12 this paper will focus on the legal rationale behind the use of offshore jurisdictions by examining examples in which offshore vehicles have been used in the PRC. A legal perspective is essential to understanding the role of offshore jurisdictions in Chinese FDI, given that the key attributes of FDI are to acquire management, ownership and control. These concepts necessarily engage legal principles. These concepts also prompt legal questions such as, how will such management, ownership and control be recognized and enforced, and is the legal environment sufficiently robust to protect these rights? In essence, an investment involves legal risks and it is essential to ensure that an investor has legal protection from such risks, whether by ensuring that the legal structure is secure or that legal complications in the regulatory environment have been overcome or protected against. These are fundamental reasons for why offshore vehicles feature in Chinese FDI, as they are used to structure investment into PRC companies and are used by PRC enterprises to structure their external investment in order to minimize risks and overcome legal complexity. These points will be considered in further detail in this article.

7 Int’l Monetary Fund [IMF], Monetary and Exchange Affairs Dept., Offshore Financial Centers IMF Background Paper, http://www.imf.org/external/np/mae/oshore/2000/eng/back.htm ( June 23, 2000). 8 The Judicial Committee of the Privy Council was formerly the ultimate court of appeal for the British Empire, other than the UK, but is now the final court of appeal for a number of Commonwealth countries and British Overseas Territories such as the BVI. It is composed of justices who also sit on the Supreme Court of the United Kingdom and is essentially the Supreme Court by another name. See further Judicial Committee of The Privy Council FAQs, http://www.jcpc.uk/faqs.html#1 (last updated 2014). 9 In particular, the BVI has developed a strong reputation for the quality of its commercial law, given that it has a dedicated commercial court with a permanent commercial judge (who is also Queen’s Counsel) and that some of the leading barristers in the UK frequently appear before its court. In addition, the legal professionals that work within the industry are generally drawn from international law firms in common law countries such as the UK and Canada. 10 Most commentary on offshore centers (which is generally Western) operates under the assumption that offshore jurisdictions are used primarily for tax avoidance and confidentiality, and that the use of offshore structures by the PRC suggests that Chinese FDI is routed through such centers in order to avoid tax or to mask the identity of their beneficial owners. Not only does this outlook fail to engage with the practical and commercial use of offshore structures, but this also demeans Chinese economic success. For an alternative view, See Bill Maurer and Sylvia J. Marsh, Accidents of Equity and the Aesthetics of Chinese Offshore Incorporation, 39 J. AM. ETHNOL SOC’Y 527, 532 (2012) (noting that the Chinese firms using the BVI are “the darlings of the U.S. press because they are the people behind some of China’s most dynamic and innovative enterprises”). 11 See William Vlcek, Byways and Highways of Direct Investment: China and the Offshore World, 39 J. CURRENT CHINESE AFF. 111, (2011). (In contrast to some literature, Vlcek recognizes that “the common portrayal of the [offshore jurisdiction] today as a tropical island “tax haven” fails to acknowledge that it provides other forms of regulatory arbitrage beyond taxation. It may be the home to mutual (hedge) funds, captive insurance and re-insurance firms, trust companies, and shipping registries, as well as an international business company (IBC) registry.” However, the analysis should also be extended to cover the fact that offshore jurisdictions provide legal protection and legal certainty as opposed to simple regulatory arbitrage.). 12 “实事求是”: The idiom suggests one should take a pragmatic understanding of phenomena from the facts, rather than basing analysis on dogma. This idiom is meaningful to our analysis, given both its relevance to economic reforms and its emphasis on looking at facts rather than relying on suppositions or value judgments.

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III. RECENT CHINESE ECONOMIC DEVELOPMENT In order to have a clearer understanding of the interplay between offshore jurisdictions and Chinese law, it will be instructive to take a short look at the economic development of the PRC. By looking at the growth of the PRC, we will have a deeper insight into how its laws developed and how the developing investment climate fostered the use of offshore structures. The modern economic development of the PRC has its roots in the Third Plenary Session of the 11th CPC Central Committee in 1978, which implemented the policy of reform and opening up. Shortly afterwards, the PRC approved the establishment of four Special Economic Zones (“SEZs”) between 1980 and 1984. At first, the policy makers had a dilemma as to how to push forward with economic reforms and opening up, without incurring social and political consequences. The solution was to establish these SEZs, which were initially conceived to be free trade and export processing zones, which would be used in a limited capacity and, if successful, would act as a blueprint for the rest of the nation.13 The initial SEZs had modest success and fourteen more SEZs were approved in 1984, with further SEZs approved in the years thereafter. Furthermore, in 1985 the objectives of the SEZs were clarified and expanded upon: to experiment with the development of an outward-looking market oriented economic system, and to serve the country as a ‘window’ and a ‘base’ along these lines. As it was later summarised, the rest of the domestic economy could be connected to the outside world through the window, without the door wide open. The SEZs functioned as a laboratory where various methods aimed at overcoming the drawbacks associated with a central-planning system could be developed. Fresh concepts that originated in market economies outside China could be introduced into, absorbed by, and tested in the SEZs.14 As a result, the SEZs were allowed to operate under a different set of legal and financial rules as they had special tax incentives for foreign investment, less red tape and greater independence in setting international trade policy. In essence, the PRC had set up its own form of offshore centers, which operated within the PRC, and yet had different tax, regulatory and policy rules from the rest of the onshore PRC.15 In addition to creating the SEZs, the PRC also acquired two further

economic zones in the form of Hong Kong and Macau. Hong Kong was handed over to China in 1997, when it became a Special Administrative Region. The Hong Kong Basic Law provides for the principle of “one country, two systems.” Hong Kong shares attributes with offshore jurisdictions in that it provides financial services to non-residents on a scale incommensurate with its domestic economy and is a significant banking and company incorporation center. Additionally, Hong Kong has a low tax environment with a well- developed legal system and is also the leading source and destination for Chinese FDI. Similarly, Macau was handed over to China in 1999 and became a Special Administrative Region. Like Hong Kong and other offshore financial centers, Macau can be considered as offshore to the extent that it provides financial services to non-residents on a scale that is disproportionate to its domestic economy. However, unlike Hong Kong, Macau has taken active steps to position itself as an offshore jurisdiction. For instance, just prior to the handover, the Governor of Macau signed and approved the Offshore Law of Macau which provides for the incorporation and regulation of offshore vehicles in Macau, although it has not achieved widespread use as an offshore financial center. The reasons for this are unclear, but one reason may be that Macau operates under a civil law system, and such systems are generally ill-suited for the incorporation of offshore companies.16 Another reason may be that Macau has achieved success as a gambling center and otherwise captures FDI flows by virtue of the gambling revenue that passes through it.17 Unlike the SEZs, the PRC did not expressly set out to endow Hong Kong and Macau with offshore attributes, as these regions were handed over rather than created. However, the PRC has accepted their positions as quasi-offshore centers by virtue of the one country, two systems principle and minimal central interference with the operation of such regions. The economic reforms in the PRC, the establishment of the SEZs, and the handovers of Hong Kong and Macau are instructive for two key reasons. First, they illustrate the tension between the need to establish a more open economic system while simultaneously externalizing this system from the dominant political narratives within China. Second, the existence of the SEZs, Hong Kong and Macau illustrates that the PRC was prepared to accept the coexistence of two systems: the dominant legal and economic system in the mainland and the different system of rules and tax incentives in the SEZs, Hong Kong and Macau.

Ge Wei, Special Economic Zones and the Economic Transition in China, in 5 ECONOMIC IDEAS LEADING TO THE 21ST CENTURY 43 (1999).

Id. at 49.

See e.g., Ronen Palan, The Emergence of an Offshore Economy, 30 FUTURES 63, 69 (1998).

For example, civil law jurisdictions often have increased costs and complexities because corporate acts are public. As a result, many corporate activities require compliance with onerous civil law procedures and/or must be sworn before a notary, which often increases costs and delays. Additionally, it is often argued that common law jurisdictions are more open to legal change and innovation and protect investors more effectively. For an interesting study on such differences, see Francisco Reyes & Erik P.M. Vermeulen, Company Law, Lawyers and “Legal” Innovation: Common Law versus Civil Law, Kyushu U. Legal Res. Bull. (Apr. 9, 2012), http://www.law.kyushu- u.ac.jp/programsinenglish/Erik.pdf. 16

For a meaningful analysis on this point, see William Vlcek, Taking Other People’s Money: Development and the Political Economy of Asian Casinos, THE PACIFIC REV (forthcoming 2012).

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On one level, offshore jurisdictions are simply an extension of the type of deregulated and free-market space which the PRC was experimenting with. However, given the political narratives in the PRC at the time, and the impracticality of achieving such a level of deregulation, this pure form of a deregulated free market space was simply not feasible within the PRC.18 However, the use of such a space offshore was more politically acceptable as this would not distress the internal political narratives. On another level, since the PRC allowed the exercise of two separate and co-existing systems in the same territory, then there is little practical or conceptual difficulty with adopting the tax and legal principles of a third system that exists outside of such territorial space.

IV. INWARD INVESTMENT: FINANCING PRC ENTERPRISES THROUGH OFFSHORE STRUCTURES A. Round-Tripping As mentioned in Part II, most literature on Chinese FDI assumes that a substantial proportion of Chinese activity in offshore centers is due to the round-tripping of funds.19 Round-tripping describes the process whereby capital is moved overseas and then returned to the PRC in the guise of foreign investment, by virtue of being routed through a company incorporated in the BVI or Cayman. The round- trip is made in order to benefit from certain tax and regulatory benefits made available to foreign investors under PRC law. There are a number of problems with this analysis. First, this approach is founded on a number of assumptions about the nature of Chinese FDI. As facts on Chinese FDI are scarce, this means that such theories are necessarily based on inference rather than fact. As a result, most literature that focuses on the topic of round-tripping tends to speculate about the level and extent of round-tripping or disregards the role of offshore jurisdictions entirely. This latter observation leads to a second problem, namely that some literature on this subject simply excludes offshore jurisdictions from an analysis of Chinese FDI on the assumption that it is round-tripped

capital.20 This approach is particularly unhelpful as it essentially fails to engage the topic in any meaningful way. It replaces analysis with supposition, and fails to develop an understanding of the particular historic, economic and legal circumstances within the PRC, which necessitated the use of offshore jurisdictions.21 This blind approach to the role of offshore jurisdictions in Chinese FDI is a significant issue. Not only does it raise questions of methodology, but it also fails to address a number of facts that undermine the validity of the theory. First, the round-tripping theory is based on the premise that there is something unusual in the use of offshore jurisdictions in the PRC. A natural conclusion to draw from this premise is that such flows are not representative of normal commercial activity. However, studies have found that FDI levels in the PRC are actually normal and correspond with other nations in similar periods of development. For example, when looking at outward FDI, Cheng and Ma noted that “the growth of China’s aggregate FDI outflows during 1998 to 2002 were quite similar to those of South Korea during the same period and to Japan’s outflows in the period of 1968 to 1992.”22 A further study looked at Chinese overseas FDI and noted that the structure of outward FDI from the PRC mirrored international patterns in this respect.23 On a related, but significant point, Sutherland, Matthews and El-Gohari looked at FDI flows from the BVI and Cayman to and from the PRC and noted that the net FDI flows stood at a surplus of around US$16 billion in the 2004 to 2006 period, concluding that “if round-tripping alone was the answer, they should roughly balance themselves out” but instead the picture is more complex.24 Secondly, the round-tripping theory overlooks the fact that other nations have made significant investments into the PRC. For example, Li conducted a study of venture capital investment into the PRC and found that the majority of venture capital investments were made by U.S. Funds. Taking a sample of 467 private equity and venture capital transactions in the mainland PRC from 1990 to 2005, Li noted that “as to the origin of investors, it is obvious

18 Indeed, it is not practical for most large states, given that laws are created as a compromise between different interest groups and to regulate various types of different activity. However, in small offshore states, it is more feasible to create such pure deregulated and tax neutral spaces. The advantage of this approach is that it provides the developed states with the tools that they are unable to craft themselves. 19

See Xiao Geng, People’s Republic of China’s Round-Tripping FDI: Scale, Causes and Implications (ADB Institute Discussion Paper 7, 2004).

See, e.g., Ivar Kolstadt & Arne Wiig, What Determines Chinese Outward FDI?, 47(1) J. WORLD BUS. 26 (The authors asserted that as financial flows from offshore jurisdictions “likely reflect motives different from other FDI flows, and since data on key explanatory variables is not available for these locations, we exclude them in the subsequent analysis”. Not only is this type of unsupported assertion unhelpful to an analysis of the role of offshore jurisdictions, it is also, unfortunately, an approach that is frequently taken.). 20

21 There is, however, some insightful analysis in this area. See Vlcek, supra note 11. See also Sutherland, D., El-Gohari, A., Buckley, P. J. & Voss H., The Role of Caribbean Tax Havens and Offshore Financial Centres in Chinese Outward Foreign Direct Investment 25, 25–26 (2nd Copenhagen Conference on: ‘Emerging Multinationals’: Outward Investment from Emerging and Developing Economies, Copenhagen Business School, 2010), available at gdex.dk/ofdi10/Dylan- Sutherland%20 %20-%20et%20al.pdf. 22

Leonard K. Cheng & Zihui Ma, China’s Outward Foreign Direct Investment, in CHINA’S GROWING ROLE IN WORLD TRADE 545, 547 (Robert C. Feenstra and Shang-Jin Wei, eds., 2010).

Shujie Yao, Dylan Sutherland & Jian Chen, China’s Outward FDI and Resource-Seeking Strategy: A Case Study on Chinalco and Rio Tinto, 17 ASIA PAC. J. ACCT. & ECON. 313, 313–25 (2010) (“in general a large share of all global FDI has been carried out by a relatively small number of the very largest TNCs (UNCTAD, 2007). China’s OFDI is also concentrated in hands of a small number of large business groups (Morck, Yeung and Zhao, 2008; Sutherland, 2009). In this regard, the considerable concentration of China’s OFDI in a comparatively small number of big business groups mirrors international patterns”). 23

24 Dylan Sutherland, Ben Matthews & Ahmad El-Gohari, An Exploration of How Chinese Companies Use Tax Havens and Offshore Financial Centres: ‘Round-Tripping’ or ‘Capital Augmenting’ OFDI? (TMD Working Paper Series 3, 2009); see also Daniel H. Rosen & Thilo Haneman, China’s Changing Outbound Foreign Direct Investment Profile: Drivers and Policy Implications, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS, ( June 24, 2009) http://www.iie.com/publications/pb/pb09-14.pdf (“despite the rapid growth of China’s OFDI, it is important to emphasize that China’s net FDI position is still negative, with an inward FDI stock of $876 billion compared with an outbound stock of only $170 billion in 2008”).

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... that most of them are foreign venture capitalists. Being the unquestionable leader in the global venture capital industry, the U.S. also excelled in the Chinese market in the sense that 129 out of the total of 290 VC funds and 92 out of the total of 211 VC firms came from the U.S.”25 Third, it is important to recognize that not only does the PRC use offshore financial centers to structure investment, but many European and U.S. investors also use offshore jurisdictions. Taking the private equity industry again as an example, a recent study found that 55% of all hedge funds were domiciled in the BVI and Cayman and 12% of all private equity funds were domiciled in these two jurisdictions.26 Given the significant role that the BVI and Cayman play in the global funds industry, it is not surprising that they are significant contributors to Chinese FDI because other nations also use such jurisdictions to structure their investments. Fourth, the round-tripping argument fails to account for the fact that the PRC has instituted a variety of legal restrictions for the round-tripping of funds.27 In particular, most literature on the topic fails to recognize that (i) in 2005 the State Administration of Foreign Exchange (“SAFE”) issued Circular No. 75 which required PRC residents to register with the local SAFE branch before establishing or controlling any offshore company with assets or equity in a PRC company for the purpose of an offshore equity financing, (ii) in 2006, six Chinese ministries jointly issued the amended Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (“M&A Rules”) which required central government approvals for any round-trip investments (and it should be noted that virtually no approvals have been granted under the M&A Rules), (iii) in 2008 a new Enterprise Income Tax Law removed preferential tax treatments for foreign investment, thereby removing a key rationale for round-tripping, and (iv) in 2009 the State Administration of Taxation issued Circular No. 698 which applied certain reporting requirements on the transfer of a direct or indirect interest in a Chinese tax-resident enterprise meaning that such transactions may give rise to a tax liability unless a reasonable business purpose is established.28 However, since the implementation of such laws, the use of offshore jurisdictions in

Chinese FDI has continued, which suggests that round-tripping is not a key driver for the use of the BVI and Cayman in Chinese FDI.29 Fifth, the round-tripping theory ignores the critical role that offshore jurisdictions play in providing legal and practical solutions. Specifically, offshore structures are used to manage legal complexity and ensure investor protection through structuring the deal offshore. This usage accords with the definition of FDI discussed in Part II which concerns questions of ownership and control, which are essentially legal issues. This fundamental point was recognized by Maurer who observed that, although the PRC had removed FDI tax preferences, Chinese companies continued to make use of offshore jurisdictions. He therefore concluded that “tax minimization through the Caribbean offshore thus seems to be less a motivating factor than property rights, investment seeking and institutional arbitrage.”30 These key factors will be explored in the following sections. B. Access to Capital A key rationale for the use of offshore jurisdictions in the PRC has been the need for Chinese enterprises to access finance and capital. Offshore financial centers assist with raising finance as they provide a legally secure and internationally accepted platform for fundraising. The question of access to finance has been a concern for PRC enterprises, given that the domestic financial markets have historically been undeveloped, have given preferential treatment to state-owned rather than private enterprises, and have existed in a legal and regulatory framework that has made fundraising difficult. Lending in the PRC has traditionally been the sole preserve of state owned banks. This has resulted in preferential treatment for state owned enterprises and made it difficult for private enterprise to access finance. As Poncet notes, “Chinese private companies are often discriminated in terms of property rights protection and market opportunities in comparison to state or foreign enterprises. Despite the large size of the banking sector, many private enterprises

Li Jing, Venture Capital Investments in China: The Use of Offshore Financing Structures and Corporate Relocations, 1 MICH. J. PRIVATE EQUITY & VENTURE CAP. L. 39 (2012).

Press Release, Stefan Jaeklin, Oliver Wyman et al., Domiciles of Alternative Investment Funds, (2011), available at http://www.alfi.lu/sites/alfi.lu/files/files/Publications_Statements/Press_releases / Oliver-Wyman-presentation-written-21-11-11.pdf. 26

27 See e.g., HOWARD CHAO & WALKER WALLACE, O’MELVENY & MYERS LLP, ONSHORE FINANCIAL INVESTING IN CHINA (Feb. 2011) (for a more detailed discussion of Circular No.75). 28 It is generally considered that Circular 698 is not triggered if a reasonable business purpose can be established, such as incorporating an offshore holding company in anticipation of a listing. However, in 2013, the local SAT office in Heilongjiang found a Cayman subsidiary of a U.S. private equity fund liable for tax on the basis that the transfer of shares held in a listed Cayman company was a taxable event. The rationale was that the ‘effective management’ of the listed company was the same as its PRC subsidiary and therefore the listed company was tax resident in the PRC. Circular 698 was not engaged, and it is unclear whether other local SAT offices will follow the same approach, but this does suggest that consideration should be given with any offshore structuring as to the effective management of the company and as to its business purposes. 29 Unfortunately, most literature continues to cite Xiao as authority for the argument that round- tripping is a significant factor, despite the fact that these laws came into effect after Xiao published his article on round-tripping in 2004. As a result, it is inappropriate to rely upon Xiao’s analysis for an understanding of FDI in the PRC after 2005. However, some commentators continue to do so. E.g., Daniel H. Rosen & Thilo Haneman, supra note 24, at 3 (asserting that round-tripping is a factor and that “some analysts think it could be more than one third of all inward FDI” despite only citing Xiao’s 2004 paper as a source in support of this contention.). 30 Bill Maurer, Jurisdiction in a Dialect: Sovereignty Games in the British Virgin Islands, in EUROPEAN INTEGRATION AND POSTCOLONIAL SOVEREIGNTY GAMES 130, 142 (Rebecca AdlerNissen & Ulrik Pram Gad eds., 2013).

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are excluded from the credit market, because lending of state banks is determined by policy reasons, rather than by commercial motives. Such an uneven playing field motivates private entrepreneurs to look for a foreign investor.”31 In the absence of local financing options, PRC enterprises were able to find foreign investment through the use of companies incorporated in the BVI and Cayman, which offered tax-neutral platforms for finance-raising acceptable to international lenders. Foreign banks were prepared to lend to BVI and Cayman companies and international investors were willing to invest in such vehicles. This advantage was noted by the OECD, which observed that, not only do PRC enterprises avoid domestic constraints by incorporating in an offshore jurisdiction, but “by transferring capital to these offshore financial centers, large Chinese enterprises may also diversify domestic risks and gain flexibility in corporate financing and intra-corporate restructuring.”32 As a result, the BVI and Cayman offered an effective and inexpensive platform for PRC enterprises to access international capital and transcend the limitations of the local financial markets. A specific advantage of using offshore companies in financing structures can be seen in their use in debt financing transactions. Offshore companies offer certain advantages due to their ability to provide security over their assets and take security over their shares. This is a key issue in structuring an acquisition finance deal, as “a PRC target does not generally have the ability to give credit support (by way of guarantee or security over its assets) to a lender of offshore acquisition debt.”33 The ability to take adequate security is a key consideration for lenders, which illustrates one important use of offshore companies engaged in financial transactions. Another related reason for using offshore jurisdictions has been the desire to raise finance through an IPO listing on the international capital markets.34 The popularity of this approach can be seen by looking at the number of offshore companies listed on the Hong Kong Stock Exchange (“HKSE”). For instance, in conducting a review of the companies listed on the HKSE as of the end of 2012, the author found that 1,137 companies, or approximately 75% of all listed companies on the HKSE Main Board and Growth Enterprise

Market, were incorporated in an offshore jurisdiction.35 Offshore companies are used to affect such listings because they are accepted listing vehicles for many international exchanges, such as the New York Stock Exchange, London Stock Exchange and HKSE. The fact that such companies operate in a light regulatory environment and offer maximum corporate flexibility has only increased their popularity for listings.36 The need for an adequate listing vehicle has been important, given that there are a number of institutional and legal factors in the PRC which have impeded the listing of shares of PRC enterprises. Xu examined the various limitations on the domestic listing markets, noting that: In the shareholding system in China, the transfer and trading of legal person shares are largely restricted. They can only be disposed in a restricted private sale, typically associated with low liquidity and unfair price. This discourages the exiting of venture capital investments in China through domestic listing. Another obstacle for foreign venture capital investment in China is foreign exchange control, which requires investors to obtain government agency approval to convert the proceeds of stock sales to foreign currencies before they remit outward.37 In order to overcome such constraints, PRC enterprises would incorporate an offshore BVI or Cayman company as a holding company in order to gain the greater flexibility and liquidity offered by an international listing. This was of fundamental importance for private equity and venture capital investment into the PRC, as a key concern for such investors was that the fund would be able to realize its investment, either by way of a private sale or IPO exit. The incorporation of BVI and Cayman companies therefore became a popular route for venture capital investment in PRC enterprises, as “among the 18 China Venture-backed IPOs listed on NASDAQ between 2000 and 2005, 13 of them were incorporated in the Cayman Islands or British Virgin Islands, while others were incorporated in the U.S. or Hong Kong.”38 Additionally, many other initial public offerings of PRC enterprises listed in Hong Kong and Singapore were also structured by using companies incorporated in Cayman and BVI.

Sandra Poncet, Inward and Outward FDI in China, in CHINA AND THE WORLD ECONOMY, CONSEQUENCES AND CHANGES 1, 11 (David Greenaway et al. eds., 2009).

OECD, OECD Investment Policy Review: China 72 (2008), www.oecd.org/china/WP-2013_1.

Pierre-Luc Arsenault, Jesse Sheley & David Patrick Eich, Chapter 5: China, in THE PRIVATE EQUITY REVIEW 172 (Kirk August Radke ed., 2012) (Offshore vehicles are sometimes preferable to US companies in acquisition finance for similar reasons. For instance, the authors note that in one transaction involving a PRC enterprise, as “the target was incorporated in the United States (Florida) as opposed to, for example, the Cayman Islands, it was subject to US tax laws that limit the security that can be given to secure the acquisition debt without adverse US tax consequences”). 33

34 Of course, IPOs, much like debt financing, can be used for both internal FDI (raising funds for the development of existing PRC enterprises) and external FDI (raising funds for expansion into external markets). 35 HKEX, HKEx Fact Book (2012), https://www.hkex.com.hk/eng/stat/statrpt/factbook /factbook2012/fb2012.htm (Based on a review of the public information contained in this source. The relevant jurisdictions comprise Bermuda, BVI, Cayman and Jersey, with the actual breakdown being Bermuda (487 companies), BVI (3 companies), Cayman (644 companies) and Jersey (3 companies) out of a total of 1,547 companies. The slight presence of the BVI and Jersey is explained by the fact that they were only recently admitted as accepted jurisdictions on the HKSE, although their use is now increasing, with further listings of such companies in 2013 and 2014). 36 For example, in terms of regulation, the BVI and Cayman have no foreign exchange controls or takeover codes. In terms of corporate flexibility, the corporate laws of each jurisdiction allow many corporate actions to be conducted efficiently (the BVI is particularly flexible in this respect, given that BVI companies have no concept of share capital, which allows for redemptions and distributions to be conducted with ease). Another important factor is that, as common law jurisdictions, the principles of corporate governance applicable to offshore companies are familiar to other common law

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Xiaoqing E. Xu, Venture Backed IPOs and the Exiting of Venture Capital in China, 11(3) J. ENTR. FIN. & BUS. VENTURES 39, 41 (2006).

Id. at 41. attorneys.

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It should be noted that the desire to use offshore structures to encourage investment was not just motivated by financial concerns, but also for commercial and legal reasons. A study by Quer, Claver and Riendra looked at the main problems and challenges faced by Chinese enterprises. Challenges included (i) limited experience in mergers and acquisitions, (ii) a lack of international experience, particularly market knowledge, (iii) the fact that state ownership of many enterprises made them vulnerable to political risk in countries where the assets sought were strategic, and (iv) the fact that the less developed status of the home stock markets and lack of transparency resulting from state ties made their governance weaker.39 Many of these factors relate to questions of risk and corporate governance, for which legal issues must. For this reason, it is also appropriate to give consideration to the legal environment behind the use of offshore jurisdictions. C. Legal Considerations As noted above, the BVI and Cayman are common law jurisdictions, based on English law, whose ultimate court of appeal is the Privy Council in England. As common law jurisdictions, there are shared legal principles and cultural values with other common law jurisdictions, such as the U.K., U.S. and Hong Kong. As a result, the onshore legal professionals that set up such structures are comfortable with the BVI and Cayman and have trust in the jurisdictions and the professionals that administer and advise in respect of such offshore structures. Given the shared legal culture, the BVI and Cayman were often the first choice for onshore counsel when considering an appropriate corporate vehicle with which to structure an investment into the PRC. Not only were the legal principles in the BVI and Cayman familiar, but they also offered a high level of flexibility, given that they can be used to ring-fence liabilities, are internationally recognized by regulators, are tax-neutral, have low administration costs, no filing requirements, minimal regulatory interference, and a high degree of corporate flexibility. Additionally, foreign law contracts are enforceable in the BVI and Cayman, which allows for deals to be structured and agreements drafted using the most appropriate governing law for the deal. In effect, BVI and Cayman companies offered a blank canvas, which could be adapted to meet the demands of local regulatory and legal requirements without imposing any further requirements or legal impediments to

structuring a deal. Given the legal flexibility in structuring investments through a BVI or Cayman company, they have been frequently used to overcome imperfections in PRC law. They offer advantages in both negotiating the complexity of PRC regulation, and in providing a secure legal environment for structuring investment. For example, offshore jurisdictions are frequently involved in M&A deals involving PRC companies.40 In terms of M&A transactions, BVI and Cayman companies have often been used to effect the indirect acquisition of a PRC companies.41 It is usually preferable to structure the acquisition of a PRC company offshore, as such transactions are generally not subject to PRC jurisdiction and review (although certain antitrust and tax provisions may have effect).42 As a result, it has been easier and more cost effective to structure an acquisition offshore. Similarly, offshore companies are often preferred for mergers, as the merger regime in jurisdictions like the BVI is straightforward and also provides for cross-border mergers. In contrast, mergers are not frequently seen in the PRC43 and cross-border mergers are not recognized under PRC law, which prevents PRC companies from entering into such mergers and limits the possibilities for structuring M&A deals within the PRC. A growing area of M&A activity involving PRC entities and offshore vehicles can be seen in going-private transactions, which are generally structured as mergers.44 A going-private transaction is one where a PRC enterprise, typically listed on a U.S. stock exchange through a BVI or Cayman company, is acquired by a third party and delisted. Offshore companies are frequently used to effect such transactions and are frequently the listed target, given their popularity as listing vehicles. For instance, “five of the nine significant Chinese companies that announced or closed a goingprivate transaction in 2011, were Cayman companies that accessed the public markets through a conventional IPO.”45 It is often preferable that the listed target be an offshore company, as opposed to a U.S. vehicle, for example, given the lighter regulatory regime which allows for deals to be conducted efficiently. For instance, a company incorporated in a U.S. state will be subject to U.S. federal proxy rules, may require majority approval by shareholders who are unaffiliated with the purchaser, and may include go-shop periods. However, where an offshore company is the target, this may result in lower litigation risks, lower costs, reduced review by the SEC and less time involved in concluding the transaction.46 For example, a

39 DIAGEO QUER ET AL., CHINA’S OUTWARD FOREIGN DIRECT INVESTMENT: DRIVING FACTORS, THEORETICAL BACKGROUND AND STRATEGIC IMPLICATIONS (2008), available at http://www.eiba2008 .ttu.ee/public/Papers/21.pdf. 40 Daniel H. Rosen & Thilo Haneman, supra note 24, at 4 (“around 60 to 70 percent of total Chinese OFDI volume can be attributed to M&A deals” which are generally structured using special purpose vehicles in third countries). 41

Other types of acquisition, such as the acquisition of direct equity interests in PRC companies or the purchase of assets owned by PRC companies are outside the scope of this article.

Note that the law in this area is complex, given that a number of different PRC laws govern the acquisition of control or a minority interest in PRC companies and certain sectors of the economy may be prohibited or restricted to foreign investors. For a good summary of the regulatory background, see Arsenault et al., supra note 33, at 160–61. 42

The PRC does recognize two domestic types of merger: merger by absorption and merger by new establishment.

There are a number of ways to structure a merger with an offshore company. Taking the BVI as an example, a BVI company can effect a merger either by way of statutory merger, a squeeze-out transaction or by way of scheme of arrangement. 44

Arsenault et al., supra note 33, at 167.

See e.g. Morrison & Foster, The MoFo Guide to U.S. Privatisations (2012), http://www.mofo. com/files/Uploads/Images/121119-The-MoFo-Guide-to-US-Privatizations.pdf.

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merger conducted with a BVI company is often faster and more costeffective, given that a statutory merger under BVI law simply requires shareholder approval by the holders of a majority of the shares (or class of shares) present and entitled to vote on the merger, unless the constitutional documents of the company provide for a greater percentage.47 Given that purchasers often have a significant equity stake in the target, the use of an offshore company increases the chance of the going-private transaction proceeding quickly and successfully.

[I]f the transaction is structured offshore in which capital is actually injected into the holding company outside China, the parties will have the liberty to mutually choose from other laws than the Chinese law ... parties may get access to more efficient legal rules that are not entirely available in China” and therefore provide for “special economic rights such as liquidation preferences, anti-dilution adjustments and other rights in the investment contracts, as well as to effectively monitor the invested company.52

In addition to M&A transactions, offshore companies have frequently been used in private equity deals in the PRC.48 A review of private equity activity is instructive, given that such investments illustrate the interplay between finance (such as the need for PRC enterprises to access funding and private equity investors to ensure an exit) and law (given the need for legal certainty and adequate legal structures to ensure that such investments are protected).

A related concern for private equity investors has been the relative lack of investment targets. This has historically been due to the corporate form of PRC enterprises. For example, the PRC only recognizes two types of companies: limited liability companies and joint stock companies. Only joint stock companies are able to issue shares and list on stock exchanges. In order to attract international investment, it was thus necessary for a PRC enterprise to be structured as a joint stock company. However, there were higher costs, larger capital requirements and greater approvals required to incorporate a joint stock company, which meant that by 2004 the PRC had 1.3 million limited liability companies and only 8000 joint stock companies.53 Therefore, it was difficult for venture capital to directly invest in PRC enterprises as there was a lack of valid targets. As a result, it was often a simpler solution to incorporate an offshore holding company in order to attract venture capital investment.

It has been observed that, when financing firms in developing markets, venture capital funds are exposed not only to industry and firm level risk, but also legal and institutional failure. Key concerns for such investors are “intellectual property protection, shareholder protection, government intervention, supply of risky capital, transparency of financial reporting requirements and IPO markets for exits.”49 These concerns are paramount in the PRC, which has historically been “characterised by a lack of clearly codified information, unpredictable government regulation, and uncertain market conditions directed at entrepreneurial activities.”50 A key aspect of private equity deals is that such transactions are structured to provide certain preferential rights to the investor. These include preferred voting rights, rights to dividends, or rights upon liquidation. However, it has been difficult to replicate such structures in the PRC, as similar legal concepts do not exist. As Liang notes: [N]o Chinese legislative document, judicial interpretation or court ruling has provided explicit guidance on how a company could issue multiple classes of shares, including preferred shares, to different groups of shareholders. The concept of anti-dilution provisions, common in the Western legal context, thus remains unfamiliar and largely without a secure legal foundation in Chinese law.51 Of course, as Liang notes, there are ways to attempt to resolve or alleviate this problem. However, the usual solution to such problems is to structure the deal offshore. As Li observes:

In addition to providing legal solutions and legal certainty in the absence of an adequate legal infrastructure, offshore companies have also been used to negotiate imperfections within the wider regulatory framework. For example, offshore companies have been used to ameliorate the strictness of regulations governing internal investment and ensure the efficient allocation of capital into the PRC. One such example can be seen with historic investments into the PRC from Taiwan. Historically there were various restrictions imposed upon investors and companies from Taiwan on making direct investments into the PRC. For example, the ‘be patient, go slow’ policy in the mid-1990’s imposed investment caps on projects at US$50 million, reduced the limits for equity in PRC joint ventures to 30%, and placed restrictions on investment in certain sectors of the PRC economy. As the political and economic climate improved during the 1990s, the existing investment restrictions were increasingly seen as having “slowed the process of exchange and made transactions inefficient”54 as it was difficult for Taiwanese

Contrast Cayman use official title of jurisdiction, or its abbreviation, which requires approval by a special resolution, requiring at least a two thirds majority of the shares present and voting. However, where the intention is for the foreign investor to invest along with the Chinese partner, this structure is not always appropriate or used, given the ownership limitations and prohibition on round-trip investments following the M&A Rules, see Arsenault et al., supra note 33, at 163. 49 Sophie Wang et al., Venture Capital Performance in China 6 (2013) (unpublished manuscript) available at http://www.asb.unsw.edu.au/schools/bankingandfinance/Documents/Venture- capitalperformance-in-China.pdf. 50 Id. at 6. 51 Liang Tao, The Enforceability of Anti-Dilution Provisions in Private Placement Transactions in China, 6 TSINGHUA CHINA L. REV. 45, 46–47 (2013). 52 Li, supra note 25, at 30–31. 53 Id. at 13–19. 54 Karen M. Sutter, Business Dynamism Across the Taiwan Strait: The Implications for Cross- Border Strait Relations, 42(3) ASIAN SURV. 522, 527 (2002). 47 48

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investors to fund large scale investment in the PRC. In order to overcome such structural impediments, entrepreneurs were driven to find innovative solutions to achieve their commercial aims of investing into the PRC and increasingly used investment vehicles incorporated in Hong Kong, the BVI and Cayman, which would allow them to indirectly invest into the PRC, by routing their investment through a third jurisdiction, and teaming up with other international investors to attract the necessary capital for investment projects.55 This shows again how offshore jurisdictions can be used to provide practical solutions in order to overcome structural inefficiencies and gain access to international capital. The key point to note is that the primary motivation is not tax arbitrage, but to obtain management control and access to new markets. Again, this rationale accords with the wider definition of FDI noted in Part II. A contemporary example of such regulatory arbitrage can be seen with the use of variable interest entities (“VIEs”). The basic VIE structure is one in which an offshore entity (typically a BVI or Cayman company) is established to hold a wholly-owned foreign enterprise (“WFOE”) in the PRC. The WFOE enters into certain contracts with a domestic Chinese entity formed under PRC law, which gives the WFOE the ability to control the domestic enterprise through contractual methods rather than equity ownership. This allows the foreign investor to avoid certain ownership restrictions under PRC law.56 A further advantage is that, by structuring ownership through such contractual methods, the offshore holding company is permitted to consolidate its accounts with the WFOE and domestic Chinese entity, which facilitates the listing of the holding company. A number of well-known PRC enterprises, such as Sina, Baidu and Alibaba, have used this method in order to structure their Chinese operations and achieve an international listing.57 This structure permits foreign investors to invest in sectors of the Chinese economy that would otherwise be restricted to foreign investment and to circumvent certain approval requirements under the M&A Rules on the basis that the VIE does not involve the acquisition of a PRC company by a foreign investor or involve a direct equity transfer. The benefits of the VIE structure can be

seen in that it has brought much needed capital, management expertise and the transfer of technology and know-how to the PRC without compromising PRC controls on direct equity ownership of restricted enterprises. There are, however, a number of risks associated with VIEs. The regulatory regime governing the structure is uncertain. The contractual arrangements governing the VIE may contravene PRC law and that there are structural risks in terms of monitoring and ensuring compliance at the level of the PRC enterprise. However, this has not prevented VIEs being used in the financing and listing of large PRC enterprises.58 A key point to note, however, is that notwithstanding the presence of offshore vehicles in the VIE structure, the use of offshore jurisdictions is not central to the regulatory arbitrage envisioned by the VIE, which occurs at the PRC level rather than the offshore level. Instead, the offshore company simply acts as a holding company. In effect, any company could perform the role of holding company, but the BVI and Cayman are frequently chosen due to their unique advantages described earlier. Offshore companies have been used for a variety of purposes in order to navigate difficulties in the Chinese legal landscape. An analysis of Chinese FDI requires a legal approach because the regulatory landscape governing investment into the PRC has undergone a transitional process, requiring novel legal solutions found in offshore jurisdictions.59 The use of offshore jurisdictions has been bound to the economic development of the PRC in that investors have crossed the river by feeling the stones.

V. OUTWARD INVESTMENT: FINANCING EXPANSION THROUGH OFFSHORE STRUCTURES The statistics on Chinese outward FDI are as impressive as those relating to inward FDI. For example, by “the end of 2006, more than 5,000 Chinese firms had established 10,000 overseas subsidiaries, joint ventures, and representative offices in 172 countries.” In 2006, the total FDI flow of the PRC had reached US$21.16 billion.60 By 2012, the volume of outward FDI from the PRC had effectively trebled to US$62.4 billion.61

Id. at 527.

For example, the China National Development Commission and the Ministry of Commerce jointly issued the Catalogue of Industrial Guidance for Foreign Investment, which separates foreign investment into various industries and classifies each industry as encouraged, permitted, restricted or prohibited. 56

57 See Chao et al., supra note 27, at ; see also David Schindelheim, Variable Interest Entity Structures in the People’s Republic of China: Is Uncertainty for Foreign Investors Part of China’s Economic Development Plan? 21 CARDOZO J. INT’L & COMP. L. 195 (2012) (noting that the laws concerning VIEs are complex and it outside the scope of this paper to explore the relevant legal framework in great detail. However, for a useful overview of the legal and commercial framework, the reader is referred to these works). 58 Arguably, the PRC has tacitly accepted such structures (although notices have been issued which expressly prevent their use in some sectors of the economy) and will not expressly prohibit these structures, given the significant market uncertainty that would result from taking such actions. 59 It can also be argued that offshoring not only provided novel solutions but also provided PRC investors with insight and access to novel systems of law. The work of Bill Maurer and Sylvia J. Martin, Supra Note 10, is instructive here. They argue that part of the appeal of offshore jurisdictions such as the BVI to the PRC was the accidental discovery by Chinese investors of the common law principles of equity. This article is too nuanced to summarize here but it does provide a meaningful and alternative view from an anthropological perspective. 60 Leonard K. Cheng & Zihui Ma, China’s Outward Foreign Direct Investment, in CHINA’S GROWING ROLE IN WORLD TRADE 553 (Robert C. Feenstra & Shang-jin Wei, eds., 2010), available at http://www.nber.org/chapters/c10475.pdf. 61

OECD, FDI in Figures April 2013, available at http://www.oecd.org/daf/inv /FDI%20in%20figures.pdf.

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Offshore jurisdictions also play a significant role in outbound investment by PRC enterprises. According to an OECD review of the PRC’s outward investment, 80% of the PRC’s outward FDI flows headed towards three economies from 2003 to 2006, namely Hong Kong, the BVI and Cayman.62 Given the leading role of BVI and Cayman in Chinese outbound FDI, it is important to look at the reasons for their use in structuring outward investment. In effect, some of the reasons for the use of other jurisdictions in Chinese outbound FDI are the same as those applicable to inward investment into the PRC. As the OECD notes: Part of the attraction of offshore financial centres as OFDI destinations may result from the fact that the Chinese government’s long-term capital controls have hampered the deepening of China’s domestic capital market. In the face of domestic financial constraints, these financial offshore centres can be effectively used as locations of regional headquarters, holding companies or special vehicle enterprises for which efficient financial services and unconstrained financial flows are crucial.63

it was adopted as one of the key platforms of Chinese economic policy. The policy was further promoted in the Eleventh Five Year Plan (2006–2010) and is a dominant narrative behind the outward expansion of PRC enterprises. The essence of the policy is that PRC enterprises should invest overseas in order to gain access to resources and expand markets and operations.66 Offshore companies play a role in the go global policy by facilitating the investment of PRC enterprises overseas and providing them with the legal protections and tools necessary to ensure effective and prudent investment in foreign countries. Certainly, these benefits have been recognized within the PRC. For instance, an article in the China Daily considered the role of offshore companies and noted that:

Again, the key rationales for the use of offshore jurisdictions are efficiency, avoiding domestic constraints, and obtaining access to finance. This reinforces the structural importance of offshore companies for PRC investment.

According to Ministry of Commerce researcher Wang Zhiyue, offshore companies certainly have their worth as they provide an alternative way of thinking for our “goglobal” policy. In addition, Dong Yuping, a researcher in the Chinese Academy of Social Sciences considered that offshore companies have their positive aspects. Offshore companies provide an operating platform for overseas finance and investment and provide a buffer zone against liability and risk.67

Aside from structural reasons, offshore companies also provide access to overseas skills and knowledge. For instance, Clegg and Voss described how the BVI and Cayman “are gateways for FDI because they offer professional services and institutional support unavailable in China.”64 Such support has been provided by law firms, trust companies and other service providers, both onshore and offshore, that set up and administer such structures.65 This is unsurprising, given that an express objective of the reform and opening up was to acquire foreign skills and knowledge. The use of offshore jurisdictions, however, has not only complimented the policy goals of the reform era but also served as useful tools for China’s new policy of going global, as illustrated below.

In terms of the specific factors which lead to the use of offshore companies in going global, Korniyenko and Sakatsume observed that PRC enterprises had a number of domestic constraints to outward expansion, including a cumbersome government approval process, problems with access to finance, a lack of currency convertibility and a lack of experience.68 In addition to these internal factors, there are also external constraints, such as the problem of negotiating complex foreign regulations, the need to ensure legal certainty in an investment structure, the need to protect any investment against risk, and the need to ensure corporate flexibility in managing an investment. All of these are factors that tend toward the use of offshore vehicles.

A. Going Global The use of offshore jurisdictions in Chinese outward FDI reflects China’s recent “go global” policy (走出去战略). This policy was officially adopted in the Tenth Five Year Plan (2001–2005), where

OECD, supra note 32, at 72.

Id.

An important point to consider is that, in going global, PRC enterprises were confronting the complexity of dealing with new and foreign jurisdictions and differing laws and practices. This is often a problem with cross-border transactions, which are frequently complex, involving diverse corporate structures and

64 Jeremy Clegg & Heinrich Voss, Chinese Overseas Direct Investment in the European Union 16, EUROPE CHINA RESEARCH & ADVICE NETWORK (2012), available at http://www. chathamhouse.org /sites/default/files/public/Research/Asia/0912ecran_cleggvoss.pdf. 65 Interestingly, many law firms and trust companies have recently set up offices in Hong Kong and Mainland China, thereby directly contributing to the development of skills in the PRC and creating local employment. 66

See OECD, supra note 32, at 83.

Duojia Zhongguo Qiye yi Li’an Fangshi Bishui, Mao Shu Youxi Rengzai Jixu (多家中国企业以离岸方式避税猫鼠游戏仍在继续) [Many Chinese Companies Use Offshore Methods for Tax Evasion; The Cat and Mouse Game Is Still Continuing], ZHONGGUO RIBAO (中国日报) [CHINA DAILY], Aug. 2, 2011, available at http://www.chinadaily.com.cn/dfpd/jingji/2011- 08/02/ content_13029717_11.htm (“在商务部研究员王志乐看来, 离岸公司为我国国有企业“走出去”, 提供了另一种思维,值得肯定。对此, 中国社科院金融所研究员董裕平也认为, 离岸公司有其积极的一面。离岸公司为企业海外投资、融资提供了一个操作平台和风险规避的“缓冲层””). 67

106

Yevgeniya Korniyenko & Toshiaki Sakatsume, Chinese Investment in the Transition Countries, 19 (European Bank for Reconstruction and Development Working Paper No. 107, Jan. 2009).

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multiple jurisdictions with different legal systems. Often, the variety and complexity of actors and jurisdictions can be cumbersome and costly. As a result, there is often value in simplifying the legal structure to such deals, and BVI companies are often chosen to play this role because they operate within a simple and predictable legal framework and are easy to interpose within international transactions to ensure that the deal occurs at the offshore level.69 The use of BVI and comparable offshore companies offers a standard that lawyers from many jurisdictions are familiar with and the flexibility of the offshore corporate form permits their use in all manner of legal environments. To take one example, BVI and Cayman companies are often used in project financing. One advantage, as noted above, is that they have modern security regimes and allow security to be taken over their assets with free choice as to the governing law of the underlying security agreement with minimal formalities. Additionally, at least in the case of the BVI, there is a statutory regime for the public registration of security, which allows secured parties to take priority over competing security interests.70 The ease and flexibility with which security can be taken is of importance in project finance and assists with the ability of a group to raise finance, given that lenders are familiar with these offshore structures and can be certain of the integrity of any finance and security package. Although these are general reasons for the use of offshore vehicles in outbound FDI by the PRC, it would be instructive to consider a few specific examples in order to have a clearer idea as to their practical usage.71 For this reason, the following sections will look at the role that offshore companies play as holding structures and as joint venture vehicles. What will become apparent is that offshore companies are used in a variety of different roles to overcome an array of different legal problems and to protect against various forms of risk.72 B. Holding Companies A key use of offshore companies is as investment holding companies. Offshore companies are used in this capacity by a variety of different actors, from state bodies to multinational

corporations. A prominent example is The State Administration of Foreign Exchange (“SAFE”), which is a public body in the PRC responsible for managing China’s foreign exchange reserves and has approximately US$567.9 billion in assets. SAFE has a number of sovereign wealth enterprises under its administration, which are comprised of three enterprises incorporated in Singapore, the U.K. and the BVI. The BVI enterprise, Beryl Datura Investment Limited, is responsible for infrastructure investments around the world.73 Given the role and nature of this entity and the total assets administered by SAFE, it could be assumed that this enterprise alone may well be responsible for a significant proportion of the PRC’s outward FDI that flows through the BVI. It is also possible to understand the use of offshore companies by examining their use in listed group structures. For example, a review of prospectuses relating to BVI listed companies with PRC operations reveals that BVI companies are not only used as the listing vehicle, but also as holding companies in the group structure. For example, the listed BVI company, Winsway Coking Coal Holdings Limited, another listed BVI company and one of the leading suppliers of imported coking coal into the PRC, has six BVI subsidiaries, and China New Town Development Company Limited, a developer of new towns in the PRC, has eight BVI subsidiaries, which are described in the prospectus as investment holding companies. It should be noted that this use of offshore companies is not unique to the PRC, as other listed companies employ the same structures. For instance the Canadian listed company, China Gold International Resources Company Ltd has a number of offshore subsidiaries, including BVI and Cayman companies. To understand the rationale for the use of offshore companies as holding companies, a review by Sutherland et al is instructive. They conducted a review of listed Chinese companies on the HKSE, New York Stock Exchange and NASDAQ and found that of 72 sample firms, 62 firms were incorporated in Cayman, and of these firms, 42 also had one or more BVI holding companies directly held by the Cayman listing vehicle.74 They observed that the holding companies were generally used to control the underlying operating companies and as a means to effect the acquisition and/or sale of underlying companies by structuring the deal offshore.75

69 See e.g. Peter Buckley, Dylan Sutherland, Hinrich Voss & Ahmad El-Gohari, The Economic Geography of Offshore Incorporation in Tax Havens and Offshore Financial Centres: The Case of Chinese MNEs, 1 J. ECON. GEOGRAPHY 16 (2013) (“qualitative research on Chinese investors using the BVI shows they have particular regard for the BVI’s legal system (Maurer & Martin, 2011). This may explain why the overwhelming majority of property rights transactions in our sample firms are undertaken in the BVI”). 70 This is unlike the regime in Cayman, which does not have a public system of security registration and, although a Cayman company is required to maintain an internal register of charges, failure to do so does not render the security void. As a result, BVI companies are usually preferred vehicles (from the lender’s perspective) in project finance transactions. 71 It should be noted that information about the use of offshore vehicles in outbound FDI is limited, so it is difficult to obtain and present information in a systematic way. However, it is possible to use publicly available information and illustrate some incidences of the use of offshore vehicles. 71 It should be noted that information about the use of offshore vehicles in outbound FDI is limited, so it is difficult to obtain and present information in a systematic way. However, it is possible to use publicly available information and illustrate some incidences of the use of offshore vehicles. 72 One such example is the use of offshore companies to effect reverse mergers within the U.S. and thereby achieve listing through the back door. This form of regulatory arbitrage suggests that PRC entrepreneurs have learnt from their experience of structuring inward FDI and have applied the same tools to outward investment. An important point, however, is that like the VIE structure the offshore company is not integral to the arbitrage. Instead, it is simply used as the vehicle to effect the reverse merger, as a result of its corporate flexibility and ability to be used in cross-border mergers. 73

See The SWF Institute, available at http://www.swfinstitute.org/swfs/safe-investment-company/.

See Lutao Ning & Dylan Sutherland, Internationalization of China’s Private Sector MNEs: An Analysis of the Motivations for Foreign Affiliate Formation, 54(2) THUNDERBIRD INT’L BUS. REV. 170 (2012) (where the authors conducted a review of 104 privately owned Chinese MNEs , which were held by offshore holding companies, as well as their 227 foreign affiliates). 74

75 See Sutherland et al., supra note 21, at 13–15. Also note generally that there are other reasons for the use of offshore holding companies such as (i) their low costs and tax neutrality, (ii) the ability to ring fence assets, (iii) the ability to separate parts of the group to partition regulatory or commercial risks, (iv) to ensure protection against creditors (such as by shifting dividends up to the holding company), and (v) for the efficient structuring of inter-group financing.

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C. Joint Ventures In addition to their use as holding companies, offshore companies are frequently used to structure joint ventures.76 Joint ventures also feature heavily in Chinese outward FDI as a means to share legal and financial risks in overseas investment projects. Taking PRC investments into Africa as an example, by 2011 the PRC had invested a total of over US$40 billion, making Africa the fourth largest investment destination for China. In addition, there were over 2,000 Chinese enterprises doing business in Africa by the end of 2011.77 Joint ventures are generally the preferred form of investment by PRC enterprises into Africa, with the OECD noting that “China’s FDI flows to Africa have mainly taken the form of equity joint-ventures with local enterprises. Chinese enterprises consider that finding a suitable local firm as a business partner is very important for project success.”78 By partnering with a local partner in Africa, PRC enterprises can gain access to local borrowing facilities, resources, tax breaks and goodwill. Additionally, “political considerations in SSA [(“SubSaharan Africa”)] sometimes make JVs the only feasible mode of entry into the area. Many SSA nations are still considered less developed, which often means that their political environments and business systems are unpredictable. The SSA partner in a JV can insulate the other partners from this instability because of its understanding of the nation’s problems and its ability to navigate through them.”79 As offshore companies are frequently used to structure jointventures, or serve as investment holding vehicles within a jointventure structure, it is unsurprising to find that they are frequently used in Chinese FDI into Africa. Relevant examples include the recent acquisition and joint-venture between the Zijin Mining Group Co., Ltd and the China-Africa Development Fund Co., Ltd80 of interests in gold mining, production and refining facilities relating to mineral projects in Congo, where BVI companies were used in a number of different capacities, such as acquisition vehicles, holding vehicles and investment vehicles.81 A similar example can be seen in the recent joint venture entered into by a BVI subsidiary of Zhongda International Holdings Limited and certain South

African companies in respect of the construction and operation of an electronic infrastructure project in South Africa. 82 Similarly, Hoifu International Trading entered into a joint venture agreement with Profit High International Enterprise Limited, where a BVI company was used as the joint venture vehicle for the purpose of pursuing Africa-related business development.83 Of course, there are risks involved in investment into foreign jurisdictions, as the “downside of a joint-venture is that it is sometimes difficult to manage the joint-venture because cooperative partners may have differences in business cultures and management processes.”84 In addition to management and cultural risks, a joint venture with a foreign partner can also involve legal risk, and the PRC has frequently confronted such risks in its African investments. For example, Zhu conducted a review of disputes involving PRC enterprises in Africa and noted that, with the development of business relations between Chinese and African parties: [T]he civil and commercial communications between both sides become more and more frequent ... having resulted in large amounts of disputes. Whether the disputes can be settled efficiently, effectively and reasonably will have a great impact on the development of business relations.85 Unfortunately, Zhu noted that it had been difficult to ensure that such disputes were resolved efficiently. In particular, the key issues facing PRC investors in Africa are that (i) there is a lack of effective bilateral or multilateral judicial assistance mechanisms between China and African countries, which results in protracted and uncertain litigation, and (ii) that the lack of mutual knowledge in respect of Chinese and African legal systems caused unnecessary delays, leading Zhu to conclude that, in the case of dispute, PRC enterprises “do not know what remedy can be resorted to immediately, or sometimes they will fear or worry to litigate in the other party’s country, which will lead to the slow settlement process.”86 These fundamental concerns show why offshore companies

U.N. Conf. on Trade and Dev., supra note 1, at 7 (A prominent example being the TNK-BP joint- venture).

Zhu Weigdong, A Brief Analysis of the Disputes Arising from China-African Civil and Commercial Transactions, 7 J. CAMBRIDGE. STUD. VOL 74, 75 (2011).

OECD, supra note 4, at 110.

Herbert A. Igbanugo, Joint Ventures in Sub-Saharan Africa: A New FCPA Minefield, The African Counsel Newsletter (Sep., 2012), available at http://www.igbanugolaw.com/resources/Joint-VenturesIn-SSA-A-New-FCPA-Minefield.pdf. 79

80 The China-Africa Development Fund was established for the purpose of investment into Africa, in line with the go global policy. First phase funding amounted to US$1 billion, intended to rise to US$5 billion. Interestingly, the investment policies of the fund provide that it will establish joint ventures for investment in Africa, with such joint ventures being established either within or outside Africa, and to acquire interests in enterprises and projects with major assets in Africa, notwithstanding that the enterprise is incorporated outside Africa. As a result, the use of offshore companies is permitted and perhaps envisaged by such policies. See further http://www.cadfund.com. 81

HKSE, Announcement Regarding Proposed Acquisition of Platmin Congo (BVI) (2010), available at http:/www.zjkn.cn/portals/1/LTN20100507861.pdf.

HKSE, Announcement Regarding Connected and Discloseable Transaction Involving the Formation of a Joint Venture for the EMS Project in South Africa (2010), available at http://notice.singtao.com/ ADMA/00909/epdf/e909_EMS%20Project_19May10.pdf. 82

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HKSE Announcement Regarding Formation of a Joint Venture Company (2013), available at http://www.hoifuenergy.com/eng/2013/LTN20130306274_C.pdf.

Qiang Ding, Michele E.M. Akoorie & Kathryn Pavlovich, Going International: The Experience of Chinese Companies, 2 INT’L BUS. RES. 148, 150 (2009).

Zhu, supra note 78, at 75.

Id. at 80–81.

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are frequently used in investment and joint-venture structures in overseas investment. By structuring investment through an offshore company, a PRC investor can protect itself from liability or the risk of expropriation and the parties can take comfort that disputes can be resolved in a neutral third jurisdiction which offers stability, predictability and security with no home field advantage to either party.87 Of all the offshore jurisdictions, the BVI is frequently chosen to establish joint-ventures. Part of the appeal is the quality of its legal infrastructure and expertise in respect of shareholder disputes. The Economist recently noted that the “courts in the British Virgin Islands hear a good share of all disputes involving international joint ventures.”88 This is certainly evidenced by the level and nature of commercial litigation before the BVI courts, which frequently concern disputes relating to shareholder rights and corporate governance matters. For instance, a review of reported BVI judgments maintained with the Eastern Caribbean Supreme Court showed that between 2011 and 2013, among the many cases before the court, at least fifteen judgments had been reported which specifically involved PRC entities and these judgments related to the type of matters that one would expect to see in a commercial court, such as property rights, the ownership of shares, shareholder remedies and procedural matters.89 Clearly, the BVI provides a useful forum for the resolution of disputes.90 Therefore, when faced with the uncertainty and risk of investing into a legally uncertain or undeveloped jurisdiction, one way of containing the legal risks is to structure the joint venture in the BVI or similar offshore jurisdiction, in order to rely on the familiar and predictable protections of the offshore jurisdiction. By incorporating an offshore company as the joint venture vehicle, the parties can take comfort that the courts will generally enforce foreign judgments. In addition, the parties are also able to rely on the stable corporate governance principles of a common law jurisdiction, as well as gain the corporate flexibility of an offshore vehicle, which can be tailored to meet the terms of the deal and can operate with standard U.S. or U.K. style shareholder protections. This also avoids the legal risks of structuring the investment in a

foreign jurisdiction, which may involve the risk of protracted and uncertain litigation, expropriation, unforeseen costs or political interference with any legal process. Outward FDI raises similar problems for PRC investors as those faced by foreign investors seeking to invest into the PRC. Just as foreign investors have used offshore structures to ensure efficient investment into the PRC, Chinese investors have adopted the same tools and strategies to protect their outward investments.

VI. THE FUTURE OF OFFSHORE JURISDICTIONS IN THE PRC It is likely that offshore jurisdictions will continue to play a role in Chinese FDI, although the role of such jurisdictions is likely to evolve and adapt to the changing nature of the Chinese economy, the continuing development of PRC law and the evolving needs of PRC enterprises. Certainly, there has been a change in the use of offshore jurisdictions in the PRC, as Hong Kong has taken a more dominant role in Chinese FDI. For instance, between 2004 and 2009 inward FDI into the PRC from Hong Kong rose by 141%, whereas the increase was 69% for the BVI and 36% for Cayman.91 In terms of outward FDI, flows from Hong Kong rose by 1,365% in the same period, while flows from BVI rose 1,489% and Cayman 171%. These figures show the increasing importance of Hong Kong in Chinese inward FDI, due to Hong Kong’s tax benefits and preferential 92treatment under the Closer Economic Partnership Agreement. However, in terms of outward FDI, both BVI and Hong Kong play increasingly important roles.93 The importance of offshore companies in inbound FDI into the PRC could become less pronounced as PRC laws mature. For example, the PRC will likely develop and permit the use of preferred shares and related shareholder protections. Certain Chinese regulators have already expressed their intention, in the Twelfth Financial Plan, to explore ways to establish a preferred stock system94 which would improve the environment for private equity investment and corporate governance in the PRC. Similarly, there has been an improvement in internal listing options, such

87 Frequently, the BVI is chosen as a joint-venture vehicle, not only for the reasons noted above, but also because it has unique statutory provisions that allow for a director of a BVI company, when acting in a jointventure, and where permitted by its constitutional documents, to act in the interests of a shareholder or shareholders, even though it may not be in the interests of the company (see section 120(4) of the BVI Business Companies Act, 2004). This overcomes a common tension for directors acting in joint ventures, where they are sometimes divided between their loyalty to their appointing shareholders and their duties to the company. 88

Unbundling the Nation State, THE ECONOMIST, Feb. 8, 2014, at 50.

Note that this research only related to reported judgments available from the website of the Eastern Caribbean Supreme Court and such research would not disclose any matters which were unreported, did not proceed to trial, or were resolved through arbitration (which is not only popular with PRC investors but is also private rather than public). 89

90 BVI law has a number of protections which assist with the effective resolution of disputes and allow investors to protect their rights, such as member’s remedies (which are provided for under the BVI Business Companies Act 2004) and the availability of injunctive relief, among other protections and actions open to aggrieved parties. 91

William Vlcek, From Road Town to Shanghai: Situating the Caribbean in Global Capital Flows to China, BRIT. J. POL. INT’L REL. (2013) (compiled from the China Statistical Yearbook).

See Sutherland et al. supra 21, at 19 (regarding tax benefits, for instance, PRC law imposes a 10% withholding tax on dividends paid by an FIE to a foreign holding company, unless the foreign jurisdiction has a tax treaty with the PRC, in which case different arrangements may apply. Hong Kong has an arrangement whereby taxes on dividends are subject to a rate of no more than 5%, explaining its increased use in structuring investments into the PRC.). 92

93 It is also clear that offshore companies continue to be used in other capacities in the PRC’s special administrative regions. For instance, in Macao, approximately 50% of all company ownership comes from outside the region, with the BVI accounting for about 18% of all shareholdings, See Macao Economic Bulletin, 2nd Quarter (2013), available at http://www.amcm.gov.mo/publication / Publication_main8.htm. 94

See Liang, supra note 51, at 61.

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as the Shenzhen SME Board, which was established to provide a platform for small and medium enterprises to list their shares and for venture capital funds to achieve an exit. Historically, venture capital did not have the opportunity to raise funds in this manner, given that “the domestic stock markets were designed primarily for large state owned enterprises to raise funds, in which VCs had little role to play.”95 Of course, such developments are not without their risks. For instance 2013 saw a moratorium on initial public offerings in the PRC, which created uncertainty as to the viability of the domestic listing markets. However, the continual development of PRC law does evidence its growing sophistication in commercial matters, and suggests that the scope for offshore structures in inward FDI may be reduced as the legal environment continues to improve.

suggesting that these issues are increasingly important. As a result, there is a current need to review existing corporate structures and prepare for forthcoming succession issues. In practice, consideration is already being given to this issue in respect of listings, given that offshore trust structures are increasingly used in pre-IPO planning exercises in order to avoid such risks in the lead up to an IPO.97 Again, these are areas in which offshore structures are prominent, as BVI, Cayman and Jersey trusts are frequently used as wealth management tools in this area.98

VII. CONCLUSION

However, offshore structures will likely continue to play a significant role in Chinese outward FDI. As the go global policy continues to gain momentum, as PRC companies become more involved in complex cross-border projects, and as PRC enterprises continue to operate in difficult legal environments, there is clearly a continuing need for offshore companies.96

Offshore jurisdictions have fulfilled an array of legal and structural needs in the course of the PRC’s economic development and may well continue to play this role. The prominence of offshore jurisdictions in Chinese FDI can be mainly seen as serving a legal need. Legal solutions were required in order to ensure the effective management, ownership and control of investments into the PRC and such solutions were found by utilizing offshore structures.

Additionally, with changing Chinese demographics, and the rise of a new middle class, it is likely that offshore jurisdictions will be utilized in new and innovative ways. The generation that found wealth in the reform and opening up period now needs to consider how to manage, preserve and transfer that wealth. A key concern arises in succession planning, as many Chinese entrepreneurs hold their wealth through corporate structures (both offshore and onshore). On the occurrence of significant events, like death or divorce, disputes frequently arise as to the ownership, control and division of assets. These individuals will need to consider how their assets should be passed on. These are significant issues, and it is notable that a number of the reported BVI judgments involving PRC entities concern questions of succession and share ownership,

One cannot understand the role of offshore structures in the PRC without also understanding the rationale behind Chinese economic reforms. The PRC has moved from a state system to a market economy in a very short time. Legal reforms have occurred gradually and PRC policymakers have learned at the same time as they have implemented such changes. As a result, where legal deficiencies have arisen, offshore companies have been used to find practical solutions. Furthermore, the economic reforms were designed with a need to experiment and innovate. PRC enterprises found such innovation through the use of offshore structures and continue to adapt such innovative legal techniques through the use of offshore structures in their outward expansion. -BB

95 Jerry Cao, The Sustainability of Private Equity in China, ASIA PRIVATE EQUITY INSTITUTE, PRIVATE EQUITY INSIGHTS (2014) available at http://apei.smu.edu.sg/sites/default/files/ apei/pdf /peinsights2013q4i.pdf (Cao also notes that “around 44% of the 164 companies listed on the Shenzhen SME Board had been backed by one or more VC or PE funds” which attests to the success of the exchange). 96 And clearly there is a need for BVI companies in this respect, as the use of BVI companies in outbound FDI has increased by 1,489% in a five year period, and given the various legal reasons outlined in this article. 97 For instance, where an individual holds a significant stake in an offshore company, and the intention is to list the company, there is a period in which the IPO may be at risk, given the long lead time to final listing. If any succession issues or disputes emerged during this period, there is a risk that the controlling interest in the listing vehicle might be paralyzed while such issues were being determined. As a result, offshore trust structures are often used to resolve this risk, given that a corporate trustee will be the shareholder of record and will not have the succession or capacity issues that can occur with individuals. 98 Note, however, that the PRC already provides for trusts under the Trust Law, 2001. It is unclear to what extent that this law may give rise to an indigenous private wealth management industry within the PRC. These questions are outside the scope of this article but do merit further investigation.

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BUSINESS BVI GUIDES

MOVING TO THE BRITISH VIRGIN ISLANDS by Business BVI Staff Writer

any dream of living in paradise, waking up to the sound of breaking waves, relaxing on white-sand beaches and living in a place where both the sky and sea are blue and the people are friendly and laidback. Once you have decided to make this dream a reality and just before you take the leap you need to consider the practicalities such as informing your loved ones of your decision (highlighting the benefits to them as you do so), researching the cost of living and finally securing a job that is going to enable you to make this life style change. The British Virgin Islands, a beautiful collection of 60 islands, cays and rocks in the north eastern Caribbean some 60 miles east of Puerto Rico offer what many expatriates are looking for. The strong economy, characterized by a growing tourism and financial services sector, a strong public sector and a growing private sector continues to draw people from virtually every country in the world. The process of emigration is fairly straight forward once you know what to expect and how to go about it.

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WORK PERMIT AND IMMIGRATION MATTERS Once you have found your ideal job in the British Virgin Islands, if you are not a citizen of the BVI, you must obtain a work permit. This permit allows you to legally work in the Territory for a specific employer. Even if individuals plan to work for a few months, a Temporary Work Permit must be obtained. While work permits are being processed, perspective employees must reside outside of the BVI. Work permit applications are filed by the employer and not the employee. A new work permit application form must be filed with supporting documents, such as: •

Cover letter from employer

•

Prospective employee’s resume

•

Proof of qualifications for the job

•

Copy of newspaper advertisement of the job

•

1 passport sized photo of applicant

Work permit applications are processed within 30 working days. Once the work permit is approved, the application is forwarded to the Immigration Department. Immigration then grants a clearance letter which will be

enter the BVI. Upon entering the BVI, all expatriates must have a return ticket to their home country. Once in the BVI, the employee can receive his work permit by visiting the Labour Department. The Territory’s new work permit cards are a highly sophisticated holographic cards, that can also be used as a pictured identification card and are the size of a regular bank card. It is very important that work permit holders have their work permit cards on their person at all times. Once the card is received, employees must take the card and job letter to the Immigration Department. There a stamp is placed in the employee’s passport showing that the employee is a legal resident of the BVI. Once this process is completed, employees are legally permitted to work, reside and travel in and out of the British Virgin Islands. Labour Department

284 468 3701 ext. 4708/ 4780

Immigration Department

284 468 3701 ext. 4700/ 4770

SOCIAL SECURITY Social Security is a compulsory insurance plan to which employers, employees, self employed individuals must contribute. It is designed to protect insured persons from financial distress by providing partial income replacement when particular contingencies arise. Sickness, maternity, invalidity, age, funeral, survivor’s and employment injury benefits are paid to qualified persons. All working individuals between the ages of 15 and 65 years must register with the Social Security Board and obtain a BVI Social Security card. This is a one time registration. To register, persons must fill out an Employee’s Registration Form and submit proof of birth, i.e. birth certificate or passport. Forms may be collected and filed at the Board’s office in Road Town. Social Security payments are mandatory. Contributions for private employees and self-employed persons are 81/2 percent of insurable earnings. Employees contribute 4 percent of that total and 41/2 percent is contributed by employers. Civil servants contribute 71/2 percent; 31/2 percent by employee and 4 percent by Government. Social Security contributions can also be voluntary for persons who have worked in the Territory and are living abroad or for persons who no longer work but are not at the eligible age of 65 to collect benefits. This contribution is 7 percent of earnings established by the Board. Social Security Board

284 494 3418

TRAVELLING TO THE BRITISH VIRGIN ISLANDS used by the employee to enter the Territory. The employer will be given the clearance letter and a medical form to forward to the employee. A thorough medical must be done and a medical certificate granted before entering the BVI. Once the employee enters the Territory, the medical certificate must be approved by the BVI Health Services Authority. If any additional vaccinations or tests are needed, these can be done by the Government’s health clinic. It is important to note that citizens of particular countries must obtain a visitor’s VISA to enter the British Virgin Islands. This can be obtained at the nearest British embassy in the applicant’s home or residing country. A full list of qualifying countries can be obtained from the Deputy Governor’s Office website at www.dgo.gov.vg. Additionally, while the need for passports to enter the BVI for United States and Canadian citizens have been extended; citizens of those countries are urged to obtain passports to

The Terrance B. Lettsome International Airport is located on Beef Island. It is the Territory’s main airport with internationally recognised airport code, EIS. Some travelers fly into the United States Virgin Islands’ island of St. Thomas at the Cyril E. King International Airport, code STT. After arriving at this airport take a 10 minute taxi ride to the waterfront ferry terminal in Charlotte Amalie where you can catch various ferries over to the BVI. The ferry ride is usually 45 minutes to West End, Tortola or 60 minutes to Road Town, Tortola. In St. Thomas, persons may also travel via sea plane to the BVI’s Sister Island of Virgin Gorda. If you choose to arrive in the BVI, via the USVI, you must clear immigration in the British Virgin Islands.

SHIPPING TO THE BVI Shipping personal effects from home furniture, personal goods and even vehicles can easily be done through a shipping agent in the Territory. Once you have identified the agent you would like to use, you will be informed of the closest company to your address in your home country that you can have items delivered to or packed for pick up. As the sender, you must provide shipping agents with a list of items to be shipped as well as their estimated costs. Make certain you receive all documents and agreements pertaining to your shipment from the partnering agent in your home country in order to retrieve your goods once they have landed in the BVI. Once completed, items are then shipped to the Territory. Once they have arrived you will be notified by the local shipping agent who will sign release forms to be presented to port authority and Customs officials to clear your items. The cost of shipping items to the Territory varies widely. Ensure that you research estimates from companies before deciding on a final shipping August 2015 Edition

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agent. Once your items arrive in the Territory, you will only then be charged for the service. It is always recommended to insure items with the shipping agent. To declare goods with Customs you must have an itemised list of goods shipped and their costs. Government waives up to $1000 for new residents on goods imported. The following is a break down of duty charges for other items: • Vehicles 20% • Household goods/furniture 15% • Electronics/ computer hardware 15% • Clothing 10% • Reading materials 0% Her Majesty’s Customs 284 494 3701 Ext. 6800/6802

tenants and home owners are responsible for finding living arrangements and negotiating the best rent or lease. Many landlords offer short term leases to accommodate the Territory’s migrant labour force. The average starting rent of a two bedroom apartment in the BVI is approximately $800. Most land lords require two months rent as a refundable deposit along with proof of income such as a job letter, before renting to new tenants. If you are in the market to purchase or build a home, all expatriates must obtain a Non-Belonger Land Holding Licence. The application process is managed by the Ministry of Natural Resources and Labour. To obtain this licence the following documents are needed with a completed application form: •

A police certificate

• Four consecutive newspaper clippings of the property’s sale ad

MAIL Though the Territory does not have home mail boxes, the mailing service is much like most postal services world wide. Without a private mail box, persons can collect mail sent to them at their community post office. Residents may apply for private mail boxes by submitting an application with the BVI Postal Service at the main Post Office in Road Town, Tortola. The annual cost for these mail box rentals is $35 for a letter size box. In 2006 the BVI launched its internationally recognised postal codes. These postal codes allow other mail services to have an exact and distinctive code for the Territory. This works just the same as zip codes in the United States and postal codes in the United Kingdom and Canada. This allows mailing companies to process mail to be shipped to the Territory more efficiently. Ultimately, this allows residents in the BVI to obtain their mail in a more timely manner. Residents can also obtain United States mail boxes through various companies in the BVI. This allows persons to have their international mail sent to a US post box and delivered by their hired company to the BVI. This is an excellent resource when ordering items online or to receive mail quickly from the United States. Major courier companies such as UPS, FedEx and DHL also operate in the BVI.

•

A valuation report of the property

•

A financial statement showing one year of banking practices

•

Two references

•

Sale agreement for the property

•

Proposed purpose of property

•

A detailed description and time table of any works to be done on the property.

The Ministry of Natural Resources and Labour reserves the option to ask for additional supporting documents from applicants. A non refundable fee of $200 is required for processing of the application. For corporate groups the application fee is $500. The average processing time for a Non-Belonger Land Holding Licence is 12 to 14 weeks. Once a licence is granted, property owners must follow development agreements that were stated when applying for a licence. Failure to do so may result in a fine of 40 percent of the cost of the property or forfeiture of the property. Property taxes are payable annually to the Government’s Inland Revenue Department. If home owners are seeking to rent their property, non-belongers or persons that are not citizens of the BVI, must seek permission from the Ministry before undertaking such a venture.

Van Dyke. Plane services may also be obtained to travel from Tortola to Anegada and Virgin Gorda.

DRIVER’S LICENSE Visitors to the BVI may obtain a Temporary Driver’s Licence from the Licensing Department or car rental companies. For $10, drivers will get a temporary licence that is good for 3 months. If stopped by authorities, visitors must have this temporary licence along with their passport. If you plan to live and drive in the BVI for longer than 3 months, a BVI driver’s licence must be obtained. To obtain such a licence, once the temporary licence has expired, driver’s must file an application at the Vehicle Licensing Department, along with supporting documents; work permit, passport, BVI Social Security card, and temporary licence. Additionally, a written driver’s test must be taken. The written test is administered from 8:30 a.m. to 1:30 p.m. daily. Once a driver passes this test, a BVI licence will be granted. If a new resident is importing a vehicle into the Territory or purchasing a vehicle in the BVI, the vehicle must be registered and licensed in the BVI. Drivers may purchase licence plates from the Vehicle Licensing Department, then have the car insured and inspected before the car is registered and qualified to be driven in the BVI. Vehicle Licensing Department 284 468 3701 ext. 4938/ 4939

BANKING The British Virgin Islands hosts a variety of private and public banks that are recognised internationally. Some of these institutions are: Banco Popular, Scotia Bank, First Bank. First Caribbean and VP Bank.

Post Office 284 468 3701 ext. 4996

Ministry of Natural Resources & Labour 284 468 3701 ext. 2147/ 2137

HOUSING

Inland Revenue Department 284 468 3701 ext. 2155/ 3140

Presently the BVI does not host any credit unions. Once becoming a resident of the BVI, to obtain a bank account, persons are required to show proof of identification, passport as well as a social security card. Some banks allow residents to use a United States social security card when registering for an account. Account holders may then begin to build a financial identity within the BVI’s banking system. Persons may apply for credit cards, loans and mortgages and even consolidate accounts from their previous country of residence.

TRANSPORTATION

HEALTH SERVICES

The British Virgin Islands does not have a formal public transportation system. However, taxi services may be called from any location on islands. Various ferry services operate inter-island shuttles throughout the major islands of the British Virgin Islands, Tortola, Virgin Gorda, Anegada and Jost

Health care in the British Virgin Islands remains relatively inexpensive to consumers in comparison with other developing Territory’s. Peebles Hospital, the main hospital servicing the BVI is on the island of Tortola. The new Peebles Hospital was officially opened in mid December 2014.

The real estate market in the BVI is growing steadily. At times it may seem difficult to find your right home in paradise, but with persistence and a good realtor, in no time you can be listening to the waves, watching the sun come up from the hill tops or living in a town that still has more greenery than most in other parts of the world. Unlike some countries, the British Virgin Islands does not have a Housing Authority. Prospective 114

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A number of private clinics also service residents of the BVI. These clinics have on staff senior medical professionals that are general doctors as well as practising physicians in a wide range of specialisations such as gynecology and obstetrics, cardiology as well as dermatology. Supporting these clinics are various private pharmacies with competitive pricing for the latest medicines.

EDUCATION There is a wide variety of child care facilities in the BVI. Day care centres accept children as young as 4 months old. The cost of this type of care ranges from $160.00 to $430.00 monthly. The average school year begins in early September and ends in late June. Children that will be at least 5 years old within the school year and up to 16 years old are required by law to attend some form of matriculating educational facility, this also includes home schooling by a child’s parent.

Of the parents, the following documents are needed: •

Work permit card

• Passport •

Contact information

Once the child is approved by the Education Department to attend a public school, a letter is sent to the Immigration Department and the appropriate authorisation is placed in the child’s passport, declaring the child a legal resident of the BVI. There are a number of private primary and secondary schools in the BVI. Monthly tuition for such schools starts at $300. Parents wishing to home school their children are required to submit a course outline as well as the home school programme they intend to follow. Closing dates for school registration are April 30 for entrance beginning in September of the same year and November 30, for entrance in January of the upcoming year.

If expatriate parents are travelling with children to take up residency in the BVI, the parents must seek permission from the Immigration Department to have the child in the BVI for the purpose of attending school. There is a separate application to have the child enrolled in the school system. When in the BVI, the Education Department will facilitate the processing of applications for entrance into the BVI school system. It is important to note that if a parent plans to enroll a child in a private institution or home school their children, they must also register with the Education Department. Parents are then responsible for the filing of applications at private institutions.

The Territory currently has two tertiary institutions. Students may obtain accredited associates degrees from the H. Lavity Stoutt Community College as well as certification for various courses. The BVI also hosts a campus site for the prestigious University of the West Indies. Students are able to enroll in classes and participate in face to face as well as teleconference and distance learning courses. Applications to attend these institutions are available at their offices on Tortola.

Parents have a choice of two schools when entering the public school system. While there are numerous primary schools, there is only one public secondary school on Tortola, Virgin Gorda and Anegada. Students living on Jost Van Dyke must commute to Tortola to attend high school. The following information about the child or children is required when applying to attend public schools: • List of previous schools attended • Birth certificate • Immunisation card • School report or transcript • BVI Health Services authorisation of child’s immunisation card

LIBRARY SERVICES

Education Department 284 468 3701 ext. 2036/ 2037

There are five public libraries in the BVI that are located on the Territory’s four main Islands. Two on Tortola; in Road Town and East End, one on Virgin Gorda, Anegada and Jost Van Dyke. To obtain a permanent library card, persons must be residing in the Territory for at least 6 months. If visiting the Territory for shorter than six months, visitors may obtain a temporary card by paying a refundable fee of $5 and submitting the name of one reference that can return borrowed books in your absence. Library Services

284 468 3701 ext. 4931/ 4932

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BUSINESS BVI GUIDES

FAST FACTS ABOUT THE BRITISH VIRGIN ISLANDS by Patlian Johnson

Demographics/Social

Government 28,514

Population* Population Density Population growth rate

British Overseas Territory Head of State

98.2%

Literacy Rate

Queen Elizabeth II represented by the Governor

79.32

Life expectancy at Birth

Judicial System

Common Law

Methodist, Anglican, Roman Catholic

Geography/Climate

Communication 57.08 mi

Area (BVI) Rainfall (average annual) Temperature (average) Time Zone

Capital City

Dependency Status

64%

Nationality Ratio

Major Religious Denominations

wn To

2.5%

(annual average)

* 2012 estimates

Ro a

183.2 km2

40 in 28˚C

284

Country Phone Code Zip Codes

VG1110, VG1111, VG1112 4

Telecommunication Providers

Atlantic Std Time

2015 PUBLIC HOLIDAYS

Economy Currency

United States Dollar

GDP (nominal)* US$

923, 211 million

GDP per capita (nominal)*

US$ 32,377

New Year’s Day

Commonwealth Day Good Friday Easter Monday Whit Monday

Inflation Rate (2013)

1.5%

Sovereign’s Birthday Territory Day

Unemployment Rate* Labour Force* Major Industries

18, 247 Tourism Financial Services

Source: Central Statistical Office * 2012 estimates

116

3.1%

August 2015 Edition

Thursday, 1st January

Anniversary of H. Lavity Stoutt’s Birthday

Monday, 2nd March Monday, 9th March Friday, 3rd April Monday, 6th April Monday, 25th May Saturday, 13th June Monday, 29th June

Festival Monday

Monday, 3rd August

Festival Tuesday

Tuesday, 4th August

Festival Wednesday

Wednesday, 5th August

St. Ursula’s Day

Monday, 19th October

Christmas Day

Friday, 25th December

Boxing Day

Monday, 28th December

GOVERNMENT The British Virgin Islands (BVI) is a self-governing Overseas Territory of the United Kingdom (UK) with the Queen as the Head of State, represented locally by the Governor. The Governor is responsible for external affairs, defence and internal security, the Public Service, administration of the Courts and disaster preparedness and response. The ministerial system of government is led by an elected Premier, a Cabinet of Ministers and the House of Assembly. Government’s main source of revenue comes from financial service levies followed by payroll taxes and import duties. To ensure sustained growth, the BVI government continues to implement measures aimed at increasing revenue collection and managing expenditure levels. The Protocols for Effective Financial Management negotiated with the UK and the 2012 amendments to the Public Financial Management Act, 2004 set out the Government’s commitment to fiscal sustainability. This will be accomplished through medium term planning, regular review and reporting of economic and fiscal affairs, delivering value for money by efficient procurement processes and by managing risk.

SOCIETY Population The population of the BVI is diverse and growing. The majority of persons are of Afro-Caribbean decent. Minority ethnicities include Caucasians, East Indians, Middle Eastern, Chinese, and Portuguese. The major force driving population growth has been immigration, mainly to meet the shortage in local labour supply. Approximately 68% of those employed are foreigners, thus accounting for a diverse and varied labour force. The Government is the major employer, followed by the tourism industry and the financial services sector. Annually, there are 12 paid public holidays and the Virgin Islands Labour Code sets modest requirements for paid sick and holiday leave. Trade unions are virtually non-existent and work days lost through industrial action are infrequent. Local law provides for a work permit regime. Under this system, a foreigner will only be granted a work permit if a qualified local is not available to fill the position. The Government has set a minimum wage of $4 per hour.

EDUCATION Publicly provided education is free at the primary, secondary and now tertiary levels thereby facilitating access by all children. Education is compulsory up to the age of 16 and the Education Act, 2004 regulates all aspects of the Territory’s education system including early childhood education. The Ministry of Education & Culture operates 17 primary schools and four secondary schools, including a technical-vocational school and a school for differently abled students. There are also several private primary and secondary schools; some parochial and some secular. The H. Lavity Stoutt Community College (HLSCC) is a two-year tertiary institution offering Associate Degrees in the areas of Business, Natural Science, Social Services, Hospitality, Computer Studies, Marine Studies and Financial Services. Through affiliations with other tertiary institutions, the HLSCC also offers Bachelor’s and Master’s degree programmes in various disciplines. The college also offers specialty courses based on the needs of the labour market.

HEALTH Currently, primary health care is provided by Peebles Hospital and a number of Government-run health clinics. Additional services are provided by a small

private hospital and private medical clinics. Patients requiring treatment beyond the scope of Peebles Hospital are referred to Puerto Rico, the US Virgin Islands, Jamaica, Barbados and the United States (US) mainland. The BVI Health Services Authority established under the BVI Health Services Authority Act, 2004 is responsible for managing the public health care service throughout the Territory including the general administration and functioning of Peebles Hospital and the recruitment and training of health care professionals. The BVI Government has embarked on extensive development of the health care infrastructure and administration with the aim of improving primary health care services. The new Peebles Hospital is now completed and expected to be operational in 2015. The state of the art facility includes a physical therapy unit, psychiatric ward and hydrotherapy pool. The Government has unveiled its National Health Insurance (NHI) Scheme with implementation expected in 2015. The NHI Scheme will provide affordable, universal health care to BVI residents while providing a dedicated source of funds for strengthening the local health care system.

ECONOMY ECONOMIC INDICATORS

MEASURE

2012

2013

Nominal GDP (US$ millions) – revised estimates

909,355

923,211

Nominal GDP Growth (%)

-0.68

1.52

Inflation (%)

2.2

1.5

Unemployment (%)**

3.1

GDP per capita ($) – revised estimates

32,155

32,377

Source: Central Statistical Office The BVI economy is based on two distinct economic pillars, namely tourism and financial services. Growth in both industries has resulted in expansion of the construction sector, both private (residential and commercial) and public, the real estate sector (residential and commercial) and the wholesale and retail sectors. For the majority of the past decade, economic growth has been positive with the exception of the negative effects of the global economic crisis. However, the economy is rebounding and is still one of the strongest in the Caribbean. Prices in the BVI have increased moderately over the last five years with an average growth rate of 2-3%. The BVI’s principal trading partner is the United States with the majority of importedgoods originating from the US inclusive of Puerto Rico and the US Virgin Islands. Similarly, the vast majority of BVI exports, primarily services in the financial services and tourism industries, are used by US consumers. The BVI is not a major exporter of goods.

MAJOR SECTORS Tourism at a Glance With its crystal clear waters and white sand beaches, breathtaking scenery, intricate coral formations, tranquil atmosphere and warm people, the BVI is a popular destination for sports enthusiasts as well as those who want a peaceful vacation. The largest island Tortola is the major hub for most visitors and the starting point for discovering the other islands. Major attractions include the nature trails at Sage Mountain National Park, the huge boulders at The Baths on Virgin Gorda, the pristine waters of White Bay on Jost Van Dyke, the wreck August 2015 Edition

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of the Rhone off the coast of Salt Island and the flamingos at Nutmeg Point on Anegada. Yearly scheduled activities which attract numerous visitors include: the Emancipation Festival in August, the BVI Music Fest in May, and the BVI Spring Regatta in April. Sailing is one of the most popular activities for tourists. The year round trade winds and numerous islands, inlets and cays have given the BVI the title of the â&#x20AC;&#x2DC;sailing capital of the worldâ&#x20AC;&#x2122;. Other water sports such as scuba diving, snorkelling, wind-surfing, kite boarding and kayaking are also extremely popular. The BVI is also a popular port of call for major cruise ships. The current cruise pier facility is undergoing a significant transformation to be completed in 2015. The improvements include an extension of the pier to accommodate larger ships and the development of the landside to comprise of shops, restaurants and entertainment amenities. The Government continues to upgrade tourist attractions and infrastructure and encourages private investment and public private partnerships in the sector. Other infrastructural developments include expansion of the Terrance B. Lettsome International Airport and upgrades to various ports of entry throughout the BVI. The Government continues to upgrade tourist attractions and infrastructure and encourages private investment and public private partnerships in the sector. Other infrastructural developments include expansion of the Terrance B. Lettsome International Airport and upgrades to various ports of entry throughout the BVI. TOURIST ARRIVALS AT A GLANCE TOURIST ARRIVALS

2012*

2013*

Actual Change %Change

Overnight Excursionist

351,404

366,108

14,704

401,744

375,739

(26,005)

(6%)

TOTAL

753,148

741,847

11,301

1.5%

(Cruiseship and day trippers)

Source: Central Statistical Office * Estimate

FINANCIAL SERVICES AT A GLANCE FINANCIAL SERVICES

2012

2013

7 102 87 21 3

6 110 82 21 3

Captive Insurance Domestic Insurance Insurance Managers Mutual Funds

157 34 14

147 37 14

Professional Professional (cumulative active) Private Private (cumulative active) Public Public (cumulative active) Incorporations

95 1590 31 577 6 151

112 1558 36 550 6 125

64,062 459,005

53,329 459,882

Banking and Fiduciary Banking (general and restricted) Trust (general) Class I, II & III Trust (restricted) Company Managers Money Services/Financing Business Insurance

BVI Business Companies BVI Business Companies (cumulative active) Insolvency Practitioners Source: BVI Financial Services Commission

FINANCIAL SERVICES The growth of the financial services sector in the BVI was mainly due to the success of the International Business Company (IBC), now known as the BVI Business Company subsequent to the enactment of new incorporation legislation. The BVI Business Company Act, 2004 was first unveiled 30 years ago in 1984. In the ensuing years, the BVI secured business that was redirected from Panama during the Noriega regime and from Hong Kong when it was handed back to China in 1997. The Asian market thus accounts for a large portion of company incorporations in the BVI. Modern and innovative legislation, a robust regulatory framework, clever marketing, economic and political stability, quality technology and communication facilities and a full range of legal, banking and account services have contributed significantly to the continued growth of incorporations. Closely related sectors such as captive insurance, investment business (mutual funds), trust and estate formation, company management, corporate restructuring, securitisation, insolvency and shipping and trademarks have developed. The industry is regulated by the Financial Services Commission (FSC) which is an autonomous body responsible for the licensing, regulation, supervision and inspection of all financial services business.

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Marketing of the financial services sector is conducted by the International Finance Centre (IFC), a department within the portfolio of the Premier’s Office which has organised various road shows in some of the major financial centres including London, New York, Hong Kong, China, Dubai and Qatar. The Financial Investigation Agency (FIA) which was launched in 2004, functions as a specialist investigative law enforcement arm of the Government with the objective of curbing financial crime. Its primary focus is to investigate the BVI financial services industry and support the Virgin Islands’ mutual legal assistance regimes. The BVI London Office and the recently opened BVI Asia House in Hong Kong were commissioned to establish a presence in Europe and Asia to take advantage of economic opportunities but not limited to financial services and tourism.

BUSINESS COMPANIES The BVI is one of the largest centres for the incorporation of business companies with around one million companies incorporated since the initial enactment of the IBC Act in 1984. Approximately 459,000 are still active today. Because of the flexibility of its use BVI business companies have been used in a plethora of business transactions and structures including structured finance and securitisation, succession planning, IPOs and listings on stock exchanges and joint ventures etc. The incorporation regime has changed somewhat with the introduction of new company legislation, the BVI Business Companies Act, 2004 which replaced the IBC Act repealed on January 1, 2007. The core features of the IBC Act which made it a success remain and improvements have been made to ensure the longevity of the BVI market share. The new Act for instance widens the range of corporate vehicles available for use and simplifies the statement of capital and the registration of charges.

investments, managers, custodians, those providing administration services with respect to investments, and operators of investment exchanges are now required to be licensed. SIBA introduces the authorised representative regime where all BVI funds are required to appoint an authorised representative, resident in the BVI and licensed by the FSC. The new legislation also provides a framework for dealing with insider trading and market abuses. In addition, all existing public, private and professional mutual funds previously authorised under the repealed Mutual Funds Act, 1996 were required to comply with the relevant sections of SIBA by December 31st, 2010. The BVI continues to update its regulatory regime to meet the needs of stakeholders. The Approved Managers Regime came into force at the end of 2012 and creates a new regulatory environment for fund managers by reducing the regulatory burden under SIBA. The SIBA (Amendment), 2012 facilitates the new regulations for the Approved Managers Regime. The professional fund is the most popular of funds registered and recognised in the BVI. 69% of active funds being professional funds, 25% private funds and 6% public funds, based on 2013 figures.

BANKING The Virgin Islands is characterised as a conservative banking jurisdiction. At the end of 2012, there were seven banking institutions licensed to operate in and from within the BVI with total assets of approximately US$2.5 billion. The domestic market is serviced by six commercial banks which offer a wide range of competitive services: Scotia Bank (BVI) Limited, First Caribbean International Bank, First Bank Virgin Islands, Banco Popular de Puerto Rico, VP Bank (BVI) and the National Bank of the Virgin Islands. The banking sector is also regulated by the FSC under the Banking and Trust Companies Act, 1990 and subsequent amendments.

INSURANCE (CAPTIVE)

INSOLVENCY

The BVI captive insurance market is one of the fastest growing and largest in the world with the majority of business originating from the US. Other countries of origin include Guernsey, Taiwan, Switzerland, the Middle East and South America. In addition to this excellent geographic spread of business, there has also been a significant distribution of captives from an industry segment standpoint. The captives cover finance and insurance, construction, health care and retail trade industries. The domestic insurance market is, however, smaller in comparison. The new Insurance Act, 2008 which replaced the 1994 legislation, provides a modern structure for the licensing, supervision and administration of insurance business in the BVI while simultaneously meeting international insurance standards. The Insurance Regulations 2009 which replaced the 1995 regulations, provides clarity on details relating to insurance business in and from within the BVI. Both came into force on February 1, 2010.

The BVI boasts of a modern, comprehensive insolvency regime that meets the needs of the growing incorporation, investment and financial services activities in the BVI. The governing legislation, the Insolvency Act 2003, makes provisions for the licensing and regulation of insolvency practitioners, a wide range of liquidation and rehabilitation alternatives, a director’s disqualification regime and the establishment of an Official Receiver’s office.

INVESTMENT BUSINESS The BVI is one of the premier jurisdictions for fund domiciliation and is now is regulated by new state of the art legislation. The Securities and Investment Business Act (SIBA) and Regulations came into force on May 17, 2010 and replaced the Mutual Funds Act, 1996 (as amended 1997). SIBA sets out the new legislative framework under which the Financial Services Commission (FSC) regulates individuals, mutual funds and other investment related entities conducting business in and from within the BVI. Persons such as investment advisers, those dealing in investments or arranging dealings in

TRUST MANAGEMENT Trust management forms a major component of financial services activity in the Virgin Islands. The BVI trust sector has experienced moderate growth since 1995. Revised legislation, together with the highly flexible BVI Business Company, has opened up wider markets for the BVI trust. Trusts are formed under the Trust Ordinance, 1961 which is based on the English Trustee Act, 1925 and which was updated and amended by the Trustee Amendment Act, 1993 and 2003. The amendment Acts considerably modernise and update the legislation, creating a more flexible regime for trusts. Changes include provisions to make trusts more attractive in a commercial context and a new set of conflict of law rules that contain robust, comprehensive, and carefully crafted provisions to protect BVI trusts against “forced heirship” claims. In addition, the rules surrounding trust duty have been updated to make it clear what documents are subject to trust duty and how this must be paid. At the same time, rules which require no public register of trusts are retained, thereby protecting confidentiality. August 2015 Edition

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The Virgin Islands Special Trusts Act, 2003 (VISTA) is another piece of legislation which updated the trust regime. VISTA trust, overcomes many problems associated with the “prudent man of business rule”, which typically made trusts unattractive vehicles to hold assets which settlors intended trustees to retain. The Act enables a shareholder to establish a trust for his company which disengages the trustee from management responsibility and permits the company and its business to be retained as long as the directors see fit. The majority of BVI trusts are exempt from all taxes, provided there are no beneficiaries resident in the BVI, and that the trust does not conduct any business in the BVI or own any land in the jurisdiction. There is a large and sophisticated community of professional advisers on trust matters in the Virgin Islands. Companies offering trust services must be licensed under the Banks and Trust Companies Act, 1990.

SHIPPING MEASURE

2012

2013

Annual Vessel Registrations Total Vessels Registered

242 3,680

245 3,743

Source: Virgin Islands Shipping Registry As the sailing capital of the world and an esteemed corporate domicile, the BVI is also a popular jurisdiction for the registration of ships. As a Category One Register, within the Red Ensign Group, large vessels of unlimited tonnage and mega yachts of up to 3,000 gross tons can be registered in the Territory. In both instances, the owners must be a Virgin Islands citizen, British citizen, British Overseas Territories Citizen, British subject, a British national under the Hong Kong Order, 1986, a national of a European Union member state, or a body corporate incorporated in a member state of the European Union or a British possession, including the Virgin Islands. If clients do not meet the nationality requirement, they may register a company in the BVI in order to register a vessel. Registration procedures also require the de-registration of the vessel from its current registry, a survey of the vessel and the submission of ownership documents to the Registrar of Shipping. The registration fee is $550, and an annual fee of $100 is payable to maintain registration. In addition, there will be legal fees charged by the firm chosen to assist with registration.

TAX INFORMATION EXCHANGE AGREEMENTS The purpose of Tax Information Exchange Agreements (TIEAs) is to promote international co-operation in tax matters through exchange of information. TIEAs grew out of the work undertaken by the Organisation for Economic Cooperation and Development (OECD) to address the lack of effective exchange of information among financial centres. Information exchange is based on requests relating to specific criminal or civil tax matters that are under investigation and are not intended to facilitate fishing expeditions. The BVI has a long tradition of providing legal assistance to foreign regulatory and law enforcement authorities and continues to be committed to the OECD’s principles of transparency and effective exchange of information. Under the guidelines provided by the OECD and the new international tax standard emanating from the G-20 Summit in April 2009, jurisdictions are required to sign at least 12 TIEAs. To date the BVI has signed 26 TIEAs, some of which are not yet enforced. This secures a spot for the BVI on the “white 120

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list” of countries including the US, UK and Canada which have substantially implemented the internationally agreed tax standard, as stipulated by the OECD. In addition to the US, the BVI has agreements with the UK, Australia, France, the Netherlands, New Zealand, Greenland, the Faroe Islands, Aruba, China, Portugal, Czech Republic, Ireland, Germany, India, Canada, Saint Maarten, Curacao, Guernsey, Poland, Japan and the Nordic group of countries including Denmark, Finland, Iceland, Norway and Sweden.

REAL ESTATE Buying and Selling Property in the BVI Foreigners planning to purchase property in the BVI require a Non-Belonger Land Holding License. Agreements to purchase property are therefore made contingent upon such a license being obtained by the purchaser. Application for a Non-Belonger Land Holding License is made to the BVI Government through the Ministry of Natural Resources and Labour. If the application for a license relates to undeveloped or partly developed land, the applicant will be required to make a commitment to the BVI Government to expend a specified sum on development within a specified time period. The purchase of property by all persons including citizens and foreigners is subject to a Government stamp duty subsequent to transference of the property. The rate of 12% of the purchase price or appraised value whichever is higher, is payable by any foreigner and citizens are required to pay 4%. The stamp duty on leaseholds is lower. Other costs associated with the purchase of property in the BVI include: legal fees (usually between 1.5% to 2% of the purchase price), bank fees, 10% deposit to the seller’s agent to be held in escrow on the signing of the purchase agreementpending acceptance and completion. There are no restrictions on an overseas investor re-selling a developed property. The property must however, be advertised for four weeks in the local press to give any local person the opportunity to purchase the property on the same terms.

BVI COMMERCIAL COURT The BVI now has a state of the art Commercial Court to serve the expanding needs of commercial litigation in the Territory and the Eastern Caribbean. The commercial court is a division of the Eastern Caribbean Supreme Court (ECSC) and will hear commercial matters from the nine-member Organisation of Eastern Caribbean States (OECS) comprising of Anguilla, Antigua and Barbuda, Dominica, Grenada, Montserrat, St. Kitts and Nevis, St Vincent and the Grenadines, St Lucia and the BVI. Operational since May 2009, the court was officially opened on October 30, 2009 and specialises exclusively in domestic and cross-border commercial and insolvency matters. Prior to the establishment of the Commercial Court, all cases were handled by the High Court. PUBLISHER’S NOTE: The information in this guide has been carefully collected and prepared, but it remains subject to change and correction. Use these contents for general guidance only and seek extra assistance from a professional adviser on all any specific matters. Readers can contact the relevant authorities mentioned in this Fast Fact Guide.

BVI Tourism Offices Puerto Rico, Caribbean & Latin America Chirino Office Plaza, Ste 202 #1739 Carretera 8838 San Juan, PR 00926-2745 Tel: (787) 782-8800 / 721-2525 Fax: (787) 782-8801 E-mail: tdardet@bvitourism.com E-mail: erivera@bvitourism.com Italy Aigo Communicazione Pizza Caiazzo 3 20124 Milano, Italy Tel: 39-02-667-14374 Fax: 39-02-669-2648 E-mail: staff@aigo.it Germany Schwarzbachstr 32 D-40822 Mettmann Bei Düsseldorf Germany Tel: 49-2104-28-66-71 Fax: 49-2104-91-26-73 E-mail: g.romberg@travelmarketing.de

GOVERNMENT LISTINGS Government Ministries

Central Administrative Complex Road Town Tortola British Virgin Islands Website: www.bvi.gov.vg Premier’s Office Tel: (284) 494-3701 ext 2152/2058 Fax: (284) 494-6413 E-mail: premieroffice@gov.vg Ministry of Finance Tel: (284) 494-3701 ext 2144/3306 Fax: (284) 494-6180 Website: www.finance.gov.vg Ministry of Health and Social Development Tel: (284) 494-3701 ext 2174/2172 Fax: (284) 494-5018 E-mail: ministryofhealth@gov.vg Ministry of Communications & Works Tel: (284) 494-3701 ext 2183/2163 Fax: (284) 494-3873 Ministry of Natural Resources and Labour Tel: (284) 494-3701 ext 2147/2137 Fax: (284) 494-4283 Ministry of Education and Culture Tel: (284) 494-3701 ext 2151 Fax: (284) 494-5421

Statutory Bodies/ Associated Agencies

Financial Investigations Agency 2nd Floor LM Business Centre Fish Lock Road Road Town, Tortola Tel: (284) 494-1335 Fax: (284) 494-1435 E-mail: fia@bvifia.org Website: www.bvifia.org BVI International Finance Centre Haycraft Building, Pasea Estate Road Town, Tortola Tel: (284) 494-4335 Fax: (284) 468-1002 E-mail: info@bviifc.gov.vg Website: www.bviifc.gov.vg BVI Tourist Board 2nd Floor, Akara Building De Castro Street Road Town, Tortola Tel: (284) 494-3134 Fax: (284) 494-3866 E-mail: info@bvitourism.com Website: www.bvitourism.com The BVI Commercial Court Old Banco Popular Building Main Street Road Town, Tortola Tel: (284) 468-2724 Fax: (284) 468-2729 cdecsc@gov.vg

Financial Services Commission Pasea Estate Road Town, Tortola Tel: (284) 494-1335 Fax: (284) 494-1435 E-mail: webmaster@bvifsc.vg Website: www.bvifsc.vg Telecommunications Regulatory Commission Fishlock Road Road Town, Tortola Tel: (284) 494-6786 Fax: (284) 494-6786 Website: www.trc.vg Virgin Islands Shipping Registry Sebastian’s Building Administrative Drive Road Town, Tortola Tel: (284) 468-2902/2903 Fax: (284) 468-2913 E-mail: vishipping.gov.vg Website: www.vishipping.gov.vg Government Overseas Offices BVI London Office 15 Upper Grosvernor Street London WIK 7PJ United Kingdom Tel: + 44 207 355 9570 BVI House Asia Suite 5106, 51/F., Central Plaza, 18 Harbour Road, Wanchai, Hong Kong Tel: (852) 3468 8533 Fax: (852) 3107 0019

United Kingdom 15 Upper Grosvenor St. London W1K 7PJ Tel: + 44-207-355-9585 Fax: + 44-207-355-9587 E-mail: infouk@bvi.org.uk New York 1 West 34th Street Suite 302 New York, NY 10001 Tel: 800-835-8530 / 212-563-3117 Fax: 212-563-2263 E-mail: info@bvitourism.com Immigration/Labour Information

Immigration Department 2nd Floor RJT Edifice Building Wickham’s Cay 1, Tortola Tel: (284) 494-3471 or 494-3701 ext. 4700/4770 Fax: (284) 494-4399 E-mail: immigration@bvigovernment.org Labour Department 2nd Floor, Ashley Ritter Building Road Town, Tortola Tel: (284) 494-3451/9 or 494-3701 ext. 4708/4780 Fax: (284) 494-4399 E-mail: labour@bvigovernment.org Emergency Numbers

Police, Fire & Ambulance 999/911/112 Virgin Islands Search & Rescue 767 BVI Electricity Corporation 494-3911 Fire and Rescue 494-3473 Hospital 494-3497 Police Headquarters 494-3822 Water and Sewage 494-3416

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OVER&OUT SETTING THE DNA

FIRST COMMERCIAL COURT JUDGE REFLECTS ON TIME IN BVI

Interview conducted, condensed and edited by

Russell Harrigan and Freeman Rogers

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When Justice Edward Bannister arrived in the Virgin Islands to head the territory’s new Commercial Court, he had to hold proceedings at the Prospect Reef Resort. It was 2009, and the courthouse was still under construction. The territory has come a long way since then. The Main Street facility was completed soon after Mr. Bannister’s arrival, and in the succeeding six years, he oversaw the court’s rapid rise to international renown. Shortly after a special sitting in honour of his March 31 retirement, Mr. Bannister sat with Business BVI and reflected on his time in the territory.

HOW WAS SITTING?

TODAY’S

SPECIAL

It was very, very nice. Very touching. An awful lot of people took an awful lot of trouble and made very flattering speeches. 0

YOU CERTAINLY COMMAND A VERY HIGH LEVEL OF RESPECT IN THE TERRITORY, FAR BEYOND THE LEGAL COMMUNITY. I VENTURE TO SAY THAT WHENEVER THE HISTORY OF THE COURT IS WRITTEN, YOUR NAME WILL BE REFERRED TO FOR HAVING SET THE INITIAL TONE. TO WHAT DO YOU ATTRIBUTE THAT WIDE RESPECT IN THE BVI? All I’m conscious of outside the court, is very broadly welcoming people at every single level. We both find that very nice, very refreshing, and it helps to make life more pleasant and easier. We just find everywhere people are easy to get on with. I can’t improve on that answer. 0

I THINK IT’S FAIR TO SAY THAT

SETTING THE DNA OF THE COURT WAS ONE OF THE BURDENS YOU HAD. WHAT THREE THINGS WOULD YOU SAY WERE THE MOST CRITICAL FOR PUTTING THAT DNA IN PLACE? I think the most important thing is a really ruthless efficiency. If it’s not efficient, it doesn’t matter how clever you are or what brilliant thoughts you have: It’s a waste of time. So the first thing to do — and it has to be maintained — is to make sure that the court is administered very efficiently, and that the lawyers do their part efficiently, which they have done. You can’t let that slip: That’s got to be maintained. Apart from that, obviously you’ve got to try not to make mistakes: That’s quite important. Also — I don’t know where to put this: one, two or three — it’s got to be an environment which people don’t feel uncomfortable in. This doesn’t mean you’ve got to be gladhanding people or anything like that, but it’s very important that litigants, especially new ones — I’m talking about lawyers — should not feel intimidated. Otherwise, their clients are prejudiced. So I think it very, very important to create an atmosphere where

within the bounds of politeness and respect between the bar and the bench, people are able to present their cases to the best of their ability. Obviously, that doesn’t go too far: If someone starts wasting time they have to be stopped, because that’s inefficient. Atmosphere is very important. It shouldn’t be informal — it’s a very formal process, and it has to be — but there’s a difference between formality and offensiveness, or rudeness, or being too brusque, or making people feel ill at ease. It’s perfectly possible for people to feel at ease in a formal setting if it’s run properly. 0

ONE OF THE THINGS YOU’VE BECOME KNOWN FOR IS THE SPEED AT WHICH YOU DELIVER YOUR DECISIONS. I GUESS THAT GOES BACK TO YOUR COMMENT ABOUT EFFICIENCY. It does. The volume of work here does fluctuate, but it is so large that if I was to let judgments [accumulate], I’d just sink. There are instances in England, for example, where judges have just collapsed because they cannot keep up. So the essential thing to

do is to make sure you don’t have a backlog. It’s partly because litigants are anxious to know the answer, so provided it’s not done so speedily it’s done negligently, they like to have the answers as quickly as possible, so they can get on with their lives. If you have a one-man court like I have, I just have to keep up to speed. It’s like running a newspaper: You can say, “We’d like to put in this this week, but we’re too busy or too tired,” and six weeks later you’re putting in stale news. 0

THE COURT IS VERY HIGHLY RESPECTED HERE AND ABROAD, INCLUDING IN ASIA, WHICH IS A GROWING MARKET FOR THE BVI. DO YOU HANDLE A LOT OF CASES RELATED TO THAT PART OF THE WORLD? That we do. I’m just about to give judgment in one which in various manifestations has been on running since I came here. They’re different proceedings, but involve the same group of companies, which operate out of [the People’s Republic of China] and Hong Kong. We have a lot of large amount of Hong Kong/PRC litigation that comes August 2015 Edition

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through this court. We regularly have witnesses from Hong Kong and the PRC, and sometimes we see them by video link, but very often they come here in person. And usually it’s necessary to provide translation services. We have access here to very good interpreters. I couldn’t give you a headcount, but we do have a very large number of Asian cases. Singapore, Indonesia, Vietnam — much less. We get them, but the Singaporean courts are very strong, so the stuff will only come here tangentially, really, if it’s based in Singapore, because of a BVI company involved. But HK, PRC yes. 0

Well, some cases you have to spend more time because it’s just much more fact or documents: It’s just vast. A lot of it will turn out to be ultimately irrelevant, but it has to be considered.

August 2015 Edition

IS THERE ANY CASE THAT YOU PARTICULARLY ENJOYED? There are very few cases which I don’t find interesting. There are some routine jobs which I do rather than sending them to the master, because I think it’s important that these things are done quickly and the masters aren’t here all the time. Things like assessing costs or liquidators’ remuneration are simply not interesting. They’re very mechanical; they’re just tedious processes which have to be gone through. 0

IS THERE A CASE THAT YOU WOULD SAY WAS THE MOST DIFFICULT?

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But some of the hardest cases are some of the smaller applications where there’s no authority — you’ve got a brand new point — and you just have to decide what you think the answer is. It may not be a very, very large case in one sense — it may be just a short, sharp point — but you’ve got to make your mind up about it. And some of those can be quite difficult.

WHAT DO YOU CONSIDER THE MOST PRECEDENT-SETTING WORK YOU’VE DONE HERE? There have been precedents set. In a sense, one of the most radical things that has happened is that with the help of [former Chief Justice] Hugh Rawlins and [former Justice of Appeal Michael] Gordon we changed the rules about in what circumstances you could get permission to serve BVI proceedings on foreign defendants. When I came here, the rules were not really suitable to the kind of international stuff which now goes on. So we changed those, and it’s now much more in harmony with the kind of work we get here. People can still challenge it, obviously — the defendant who says, “This doesn’t

fall within the rules” or “This has got nothing to do with the BVI” — in which case you have to listen to the challenge. Those things are not precedents, but they have changed the scope of the jurisdiction’s work because they’ve made it much easier to capture defendants, some of whom have no objection to having their cases tried here. They don’t always object. Of course, they’re free to do so if they wish. 0

HOW DO YOU VIEW THE BUSINESS COMPANIES ACT? There are bits in it which I would change if I was the legislature, although I’m not going to say what they would be. But I think that for an offshore jurisdiction like this, it’s a pretty workmanlike statute. Everybody would change bits in statutes given a free hand, but I have had no trouble with it since I’ve been here. It is an offshore statute, there’s no doubt: It doesn’t provide the transparency, and it’s not designed to, but I tend to think that transparency’s an illusion anyway.

DOES THAT LACK OF TRANSPARENCY MAKE THE COURT’S WORK MORE DIFFICULT? No, it doesn’t. All it makes difficult is the lives of people who for one reason or another — whether they’re tax authorities or anybody else — want to delve inside these companies: hostile entrepreneurs who’ve got a gripe, or judgment creditors who suspect that the judgment debtor may be behind a wealthy BVI company but can’t be sure. There are ways of bursting it open: There is a route whereby the court can make an order that the registered agent says who the ultimate beneficial owner is, and that is resorted to sometimes. 1

AS YOU KNOW, THE UNITED KINGDOM HAS URGED THE VIRGIN ISLANDS AND OTHER OVERSEAS TERRITORIES TO CREATE A CENTRAL REGISTER OF BENEFICIAL OWNERSHIP. DO YOU WISH TO COMMENT ON THIS ISSUE? I don’t think I really ought to. It’s a political thing.

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BVI BAR ASSOCIATION

SPECIAL SITTING TO SAY FAREWELL TO JUSTICE BANNISTER PHOTOGRAPHS PROVIDED by the Department of Information and Public Relations/GIS

which we have had, that one judge is tied up. For that period it would be ideal to have two judges, because then the general life of a court — routine stuff — could carry on at the same time there is a logjam over a five-week case. So there are periods like that where it would be hugely beneficial to have another judge, but it tends to be intermittent. I don’t think there’s enough for two on a regular basis. 1

BEYOND THE COURTS, WHAT WILL YOU MISS MOST ABOUT THE BVI? These are going to sound very selfish, I suppose. The climate. And we are going to miss the scenery enormously. And there are individuals we will miss, with whom we’ve become very friendly. And there are just features of life here, really. I regret leaving. People’s manner is very attractive: the way people behave and interrelate. You just don’t get that in England. I’ll watch a man walking along, and think, “Why can’t I walk like that instead of being tense-limbed?” And you see ladies, and they sort of flow. In England, nobody flows at all: They’re all too cold. There are odd things like that. It’s an atmosphere thing: going up by the high school, seeing people loitering — it’s just sort of part of the place. All of that. Huntums Ghut I will miss enormously. I can’t tell you why. Guns and Chicken bar, which I promised myself I’d go and have a drink in before we leave. What a wonderful thing. It’s very, very difficult to put a finger on it. 1

WHAT DO YOU PLAN TO DO WITH YOUR TIME NOW? I don’t know exactly. I think that if people came along, I would do intermittent arbitrations. And I think odd invitations may come to sit irregularly in some courts. 1

WOULD YOU SPEAK? I wouldn’t do public speaking because I don’t have an idea in my head. I’m not good at having ideas. I can respond to problems, but if you ask me to sketch a plan for a novel I could sit there for a week and the paper would still be blank. In other words, I am not creative.

WHAT DO YOU WISH TO BE REMEMBERED FOR DURING YOUR TIME IN THE BVI? Well, I don’t want to be remembered as anybody who’s held the place up or has damaged it in any way. I suppose really the simplest way of putting it is that I have done what I was engaged to do.

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NEEDLESS TO SAY, YOU’LL HAVE MORE TIME FOR THE GRANDKIDS? More time for the grandkids. And we are in the business when we get back of selling our house, and that may take a while. But that’s in the country, and I would very much enjoy gardening, which I miss. -BB