Friday, December 05, 2008The Competitive Arsenal

Cherno S. Jallow QCThe Central Role of Cutting Edge Financial Service Legislation in the BVI

The British Virgin Islands is well known as a superb tourist destination that offers quiet and peace in a well-preserved and pristine environment. Dubbed as “Nature’s Little Secrets”, it boasts of unspoilt beaches, a friendly environment, low levels of crime, variety cuisine and a stable environment and economy that are supported by a strong legal system and an adherence to democratic principles.

However, the BVI is perhaps best known globally because of its status as an international financial services centre. It is the premiere jurisdiction for the incorporation of international business companies and ranks high in the global index in insurance and mutual funds domiciliary. The financial services sector is, in effect, the most dominant sector of the BVI economy and is the leading revenue earner for the Government, netting more than fifty per cent of total annual Government revenue for at least the last eight years. In addition, the financial services sector is the leading provider of white collar jobs in the private sector and contributes significantly to the growth and development of the other connected sectors of the BVI economy, such as telecommunications services, transportation and housing.

The global attractiveness of the BVI financial services and products has not been an accident. It is the result of the combined efforts and foresights of the successive governments and the private sector to work together and identify the essential tools and products for steering growth in the economy. Whereas in the 1960s and 1970s much reliance was placed on the benefits afforded by the various double taxation treaties between the United States and the BVI, the focus changed dramatically following the unilateral termination in 1983 by the United States of the then existing double taxation treaty with the BVI. That era ushered in the international business companies’ regime which, through the International Business Companies Act (Cap. 291), created the legislative framework for the incorporation of international business companies in the BVI. This new regime propelled the BVI into becoming the leading jurisdiction for the incorporation of international business companies. It provided a legal framework that was simple and user-friendly and enabled the establishment of an efficient and effective administrative machinery for the incorporation of international business companies.

It will, however, be erroneous to think that the enactment of the International Business Companies Act (Cap. 291) was sufficient to propel the BVI into stardom of global financial services. The regime of financial services is both competitive and fragile and requires certain fundamentals in sustaining it. Those fundamentals may, in essence, be described as the need for political stability and adherence to democratic principles; a strong legal and judicial system coupled with respect for the rule of law; the adoption and implementation of internationally established standards of regulation and compliance (including international cooperation); the development and adoption of innovative legislation and a regular review of such legislation; identifying and drawing from a pool of appropriate talent and expertise; and the establishment of efficient and effective administrative structures to facilitate the conduct of business. The BVI has long recognized these fundamentals and observes them with fortitude.   From the enactment of the International Business Companies Act (Cap. 291) in 1984 to the present, the BVI has witnessed the development and enactment of many more significant pieces of legislation which are designed primarily to broaden the scope and strengthen the services within the financial services sector. The development of innovative legislation and the recognition and adherence to internationally established standards for the regulation and supervision of financial services have been pivotal in the growth of the Territory’s financial services industry.

The drafting of financial services legislation is not particularly different from the drafting of legislation in relation to other subject matters. The legislative process follows the same pattern: generally, legislation is initiated by the Government, considered and approved by the Cabinet, introduced into and enacted by the House of Assembly and finally assented to by the Governor. Some enactments come into force upon the assent of the Governor, while others take effect upon the issuing of a specific proclamation or notice appointing an effective date of commencement. The preferred mode of commencement generally depends on a variety of factors, including the nature and substance of the enactment, the urgency attached to the enactment, the administrative structures and/or funding required to support the implementation of the enactment, the need to enable adequate public education on the implications of the enactment and the need to develop and enact supporting subsidiary legislation.

The development and enactment of every piece of financial services legislation is preceded by conceiving the appropriate policy or policies to guide the actual drafting of the legislation. The policy development is central to the drafting of any sound legislation. This requires a proper and thorough consideration of the need for a specific legislation and its appropriateness to the times and circumstances of the BVI; the expected benefits to be derived from such legislation; the implications (financial, social, etc.) of having such legislation; the resources to be accorded to the implementation of such legislation; the identification of the mischief to be cured; the adoption of appropriate enforcement mechanisms (where needed); and, where applicable, the extent to which compliance with obligations under international treaties, bilateral agreements and established standards of financial regulation, supervision and cooperation is required. Quite often developing an appropriate policy requires extensive research, consultation and discussion, and awareness and recognition of domestic and external factors that influence or relate to the subject matter under consideration. An inadequate or ill-informed policy does little to guide the draftsman, generally leads to bad drafting and most certainly results in the enactment of bad laws.

As an international financial services jurisdiction, the BVI does not operate in a vacuum; it is a part of the global process that shapes and defines measures designed to ensure both economic growth and stability in the financial sector. Successive governments in the BVI stress the fact that the BVI is open to and encourages legitimate business and that the BVI will do everything possible to ensure the jurisdiction’s compliance with internationally established standards. Thus every policy that is developed in relation to financial services legislation is premised on the overall Government policy of maintaining the BVI as a clean jurisdiction in which to do business.

In essence, financial services policies for legislative purposes are formulated on the basis of regional and international initiatives that outline standards of regulation and compliance, domestic initiatives designed to engender and stimulate growth in the financial services sector and the economy generally, ensuring appropriate enforcement mechanisms and continued protection of the financial services industry, fostering cooperation to stem the tide of cross border criminal activity, and consultation with and recommendations emanating from the private sector. Policies that are appropriately well-thought out and designed are almost always likely to lead to the drafting of cutting edge financial services legislation. The BVI has therefore over the years placed great emphasis on formulating appropriate policies to guide the process relating to the enactment of financial services legislation. This ensures not only adherence to established standards of regulation and compliance, but also the creation of an appropriate balance between such adherence and the conduct of legitimate business in the Territory.

As part of the policy formulation process, the Financial Services Commission (“the Commission”) establishes industry specific consultative committees which are designed to meet from time to time to discuss issues of mutual interest, including a review of relevant financial services legislation to respond to new initiatives and/or revisit specific matters of law or practice with a view to improving and enhancing the current regulatory, supervisory and business regimes. The Insolvency Act, 2003, Virgin Islands Special Trusts Act, 2003, BVI Business Companies Act, 2004, Mutual Funds (Restricted Public Funds) Regulations, 2005 and Financial Services (Exemption) Regulations, 2007 are just a few of the most recent leading financial services legislation that have been the products of active engagement between the public and the private sectors. All of these mentioned legislation have been leading trend-setting legislative instruments that provide appropriate structures to enhance the conduct of financial services business in and from within the BVI.

For many years, foremost in the formulation of financial services legislative policy has been the Financial Services Legislation Advisory Committee which has a broad composition of public and private sector representatives. The Committee essentially reviews current trends and developments in the regulation and supervision of financial services, gauges the possible implications for the BVI, reviews existing legislation and renders advice on a way forward. The Company Law Review Advisory Committee and the Joint Anti-money Laundering and Terrorist Financing Advisory Committee are statutorily-established committees that are respectively charged with reviewing and advising on company law matters and money laundering and terrorist financing issues. Such reviews and advice invariably lead to the formulation of policies for legislative purposes. Legislative policies are also developed through the Commission’s regular Meet the Regulator Forum wherein suggestions for legislative initiatives are made and discussed to finality.

As the sole regulator of financial services business in the BVI, the Commission derives its powers principally from the Financial Services Commission Act, 2001 to regulate and supervise the financial services industry and also foster cooperation with foreign regulators and enforcement officials. The Commission also derives its powers from other sector specific legislation which provide the relevant frameworks for the conduct of certain types of financial services business. These legislation are the Banks and Trust Companies Act, 1990, Company Management Act, 1990, Insurance Act, 1994, Partnership Act, 1996, Mutual Funds Act, 1996, Insolvency Act, 2003, Virgin Islands Special Trusts Act, 2003 and BVI Business Companies Act, 2004. Most of these pieces of legislation are complemented by appropriate subsidiary legislation.

The Banks and Trust Companies Act essentially makes provision for the licensing and regulation of banks and trust service providers; the Company Management Act provides the framework for the licensing and regulation of company managers; the Insurance Act provides the regime for the licensing of insurance business, managers and intermediaries; the Partnership Act deals with the registration of general partnerships and limited partnerships; the Mutual Funds Act provides the framework for the regulation, authorization and control of mutual funds, including their managers and administrators that carry on business in or from within the BVI; the Insolvency Act – the first comprehensive regime of its kind in the region - provides a legal framework governing the insolvency of companies, general and limited partnerships and individuals, including the creation of a mechanism for insolvent persons to enter into arrangements with their creditors and other related matters; the Virgin Islands Special Trusts Act provides a specific framework for trusts of shares in companies and related matters, including the appointment and removal of directors in accordance with the terms of the applicable trust instrument; and the BVI Business Companies Act (which repealed and replaced the International Business Companies Act (Cap. 291) and buttresses the BVI’s stance as the leading global corporate formation jurisdiction) outlines the framework for the incorporation, management and operation of companies, including defining the relationships between companies and their directors and members. Though not a regulatory legislation, the Proceeds of Criminal Conduct Act, 1997 makes provision for the confiscation, recovery and restraint of the proceeds of certain criminal conduct and empowers the Commission to exercise certain powers in the formulation of codes of practice in relation to money laundering and terrorist financing.

While all of the above pieces of legislation have been designed to provide a viable investment regime in the BVI, account has been taken of the relevant international initiatives relative to them in order to protect and sustain the industry and thus contribute meaningfully to global financial stability. From time to time, these legislation are reviewed to appropriately respond to domestic and international initiatives. International standards are forever evolving and part of the BVI’s success in maintaining a viable and successful financial services centre is linked to the Territory’s ability to keep attuned to current and emerging international initiatives and voluntarily reviewing and putting in place appropriate legislation rather than having such initiatives forced on the jurisdiction. This approach enables the BVI to also develop foresight on pertinent issues that may relate to or affect the financial services sector and prepare appropriate legislative measures and thus provide helpful leadership without compromising its business base.

Indeed the BVI was one of the first few jurisdictions to establish the need and provide the appropriate legislative mechanism for the licensing and regulation of trust and corporate service providers (CSPs) even before the subject became an established standard of compliance and thus viewed as a practical and fashionable medium of appropriate regulation. In a recent study commissioned by the Financial Action Task Force (FATF), note was taken of the fact that many members of the FATF still fail to provide a licensing regime for CSPs and that there was no justification for such failure, especially considering that such failure represents a serious danger to a jurisdiction’s ability to comply with the FATF 40+9 Recommendations. At paragraph 154 of the study, the authors note further that:

“Some have raised doubts that such a licensing regime would be impractical, overly expensive, or threaten the commercial viability of CSPs. Yet the experience of imposing requirements in small jurisdictions like the Bahamas, Jersey, the Isle of Man and the British Virgin Islands indicates that such worries are overstated. If such small jurisdictions can successfully implement a robust system of CSP licensing, there is no reason why all FATF members cannot do likewise.”

The same study (at paragraph 458), citing the failure of many FATF member countries to establish beneficial ownership and control of corporate and unincorporated vehicles as a serious shortcoming, commended the BVI’s efforts in immobilizing bearer shares and providing a regime of establishing beneficial ownership by recommending that: “Publicising the efforts of jurisdictions like the British Virgin Islands in immobilizing bearer shares and establishing beneficial ownership of a large number of non-resident companies (International Business Companies) may help to catalyse sufficient political will to remedy this very grave shortcoming.”

The Banks and Trust Companies Act, Proceeds of Criminal Conduct Act and BVI Business Companies Act had been enacted and periodically reviewed in order to ensure up-to-date compliance with standards respectively established by the Offshore Group of Banking Supervisors (OGBS) in relation to banking and trust service providers, by the FATF in relation to money laundering and terrorist financing and by the Organization for Economic Cooperation and Development in relation to ring fencing (that is, the disparity in tax benefits) between domestic and international business companies.

A new Insurance Act was enacted on 31st January, 2008 by the House of Assembly and assented to by the Governor on 8th February, 2008. This new Act will replace the current Insurance Act, 1994 and, in effect, reforms the regime relating to the licensing, regulation and supervision of insurance business in and from within the BVI and of insurance managers, intermediaries and loss adjusters. The Act is expected to be brought into force before the end of 2008, following the completion and enactment of the Insurance Regulations and the Regulatory Code relative to insurance business. The combined effect of the new Insurance Act and the relevant subsidiary legislation is to ensure full compliance with the Core Principles of the International Association of Insurance Supervisors (IAIS), while at the same time providing the desired level of business flexibility and protection.

The Mutual Funds Act is currently being reviewed in the context of new and emerging developments governing the operation of hedge funds and securities markets. The review will entail the provision of a comprehensive regime for the licensing, regulation and supervision of investment business, registration of mutual funds and recognition of private and professional funds as well as offers of securities to the public.

The recent enactment of the Anti-money Laundering Regulations, 2008 and Anti-money Laundering and Terrorist Financing Code of Practice, 2008 provides additional tools in the BVI’s legislative arsenal to ensure compliance with the FATF 40+9 Recommendations and further protect the Territory from any abuse of its legitimate business structures.

The Commission is a member of a number of key regional and international bodies, such as the Association of Supervisors of Banks of the Americas (ASBA), International Organization of Securities Commissions (IOSCO), IAIS and OGBS and as a consequence is a key player in the formulation of policies and standards within those bodies. This therefore places serious responsibilities on the Commission to ensure full compliance with established standards. Ensuring a strong legislative arsenal in this regard, with the full cooperation and support of the Government, helps to maintain the BVI’s international profile and reputation as a legitimate and strong financial services centre and aids the Commission in fully discharging its duties.

To complement its financial services regime, the BVI also operates a robust international cooperation framework which is second to none. This framework is embodied in the Financial Services Commission Act, 2001 which enables a regulator-to-regulator mutual legal assistance. Indeed the BVI became the first jurisdiction in 2007 to be admitted to IOSCO membership on the basis of that Organization’s Multilateral Memorandum of Understanding, following a thorough review of the Territory’s international cooperation regime.

The BVI undergoes regular reviews by the Caribbean Financial Action Task Force and the International Monetary Fund of its laws, systems and practices in relation to compliance with established international standards of regulation, especially with respect to financial services, and, as already noted, its laws were reviewed by IOSCO for compliance with established standards of international cooperation. These reviews afford the Territory the opportunity to take stock of its legislative, regulatory, supervisory, cooperation and enforcements regimes and provide such remedial measures as are considered necessary in order to enhance and foster the conduct of business within the financial services sector, while at the same time maximizing its compliance levels with international standards. In their 2000 review of the BVI , KPMG noted that the Financial Services Department (as it was then called) appears to be a well-run regulator with a strong commitment to achieving international standards.” The IMF, in its review of the BVI in 2002, noted that the Commission has “adequate independence and authority to licence and supervise covered financial services, which include banking, insurance, securities (mutual funds, their management, and investors), and trust and company service providers”. All of these commendations derive from cutting edge legislation which provide the relevant legal framework to enable the Commission to discharge its duties responsibly, efficiently and effectively.

Good business is built on a foundation of clear, certain and foresight legislation which takes account of the legitimate needs of business and the current and emerging international standards of regulation and supervision. The BVI continues to be committed to such a process through the regular reviews of relevant legislation and the design and development of innovative legislation.

The principal challenge in developing financial services legislation resides in creating a balance between adhering to internationally established standards and the requirements of the financial services industry. In effect, it is a case of trying to create an equilibrium between the dictates of policy and governmental obligations on the one hand and the needs of the financial services industry and maintaining a competitive threshold on the other hand. The BVI is in material competition with a number of financial services jurisdictions and central to maintaining a competitive edge is the importance of ensuring a balanced regulatory and supervisory regime founded on sound and effective legislation. Proper and appropriate regulation in itself is good in assuring a stable, sound and successful business environment; over-regulation is expensive and counter-productive and is, without a doubt, a recipe for failure. Thus in formulating legislative policies, the BVI aims to strike the appropriate balance between meeting its international obligations and providing a business-friendly environment in which trade and commerce and related services thrive.

Admittedly, the increased formulation of international standards of regulation, supervision, cooperation and enforcement creates challenges of time and resource constraints. The Commission, for instance, expends enormous amount of time and resources in tracking emerging global developments that may affect the financial services sector, formulates policies and, where considered necessary, recommends the drafting and enactment of appropriate legislative measures. Time is taken to inform and seek views from the financial services industry of new and emerging developments which may impact the industry. The Board of the Commission plays a very crucial role in determining Commission policies with respect to such developments and provides guidance on the way forward. The combination of these and other factors, in effect, turn the resources and time expended into worthwhile investments for the Territory.

Regrettably, the continued bashing of the so-called offshore centres (including the BVI) by their competitors in the so-called onshore world and other interest groups does little to concentrate international attention to the core theme of ensuring adequate and appropriate regulation and supervision of international finance centres. Enormous amount of time and resource is expended in trying to educate the public (domestic and foreign) on the BVI’s legislative measures which truly measure up to international standards and, in some cases, measure far better than those in the developed world. This sometimes takes away valuable time in concentrating efforts in conceiving and devising appropriate legislation in a timely fashion.

Expertise in the drafting of financial services legislation can sometimes be a challenge. However, this has not been a particular constraint for the BVI and where additional capacity is required to engage such expertise, this is carried out in cooperation with the Government through the Attorney General’s Chambers.

The development and enactment of sound and appropriate financial services legislation that is accentuated with relevant developments in the establishment of standards of regulation and supervision is a sine qua non in developing and sustaining a viable financial services industry in the BVI. Generally, investors and their advisers look to appropriate, clear, certain and user-friendly legislation to inform their investment decisions (in addition to carrying out assessments on the other essential fundamentals already outlined in the introductory part of this article). The BVI’s robust arsenal of modern, innovative and up-to-date legislative regime provides comfort in this sphere.

The BVI has a reputation for developing modern and innovative legislation to respond to market developments and the challenges posed by new and emerging standards of financial services regulation and supervision. Its legislative measures have been a model to other jurisdictions to augment their own financial services industry. That by no means creates any competitive disadvantage for the BVI; rather, it strengthens the BVI’s leadership amongst its peers and its contribution to ensuring global financial stability through appropriate legislative schemes.

In emulating BVI legislation, it is always important to develop a professional understanding and appreciation of the legislation. Every piece of legislation is informed and guided by appropriate policy which takes the specific circumstances and needs of the BVI at a given time, coupled with the due consideration of any current or emerging domestic and international initiative.

The BVI continues to encourage legitimate investment that appropriately utilizes its legitimate structures for the conduct of business. It strongly believes that business founded on honesty and integrity is good business and sees investors in the domestic economy as genuine persons who are simply taking advantage of the legitimate services and structures that the laws of the jurisdiction offer. In all of these, the design of sound policies and development of innovative legislation to continually support and promote the financial services industry continue to occupy a centre stage in the overall national development process.

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