Regulation

Commercial Law Developments in the British Virgin Islands


By Michael J Burns, Managing Partner, and James McConvill, Consultant, Appleby, BVI (01/12/2011)

The British Virgin Islands (BVI) is the world’s premier offshore jurisdiction for the incorporation of business companies. Approximately one million companies have been formed in the jurisdiction. At the end of the first quarter of 2011, there were 456,146 active companies on the BVI register.  We have  seen an increasing number of BVI companies being set up for joint venture projects across Latin America over the last few years.

One of the key reasons for the BVI’s popularity throughout Latin America is that it offers flexibility to businesses (particularly for joint ventures), with BVI-domiciled companies not being over-burdened with regulation. At the same time it is important for Latin American businesses with BVI domiciled companies, and for the BVI itself, that the BVI  maintain its reputation as a responsible international financial centre, to protect the jurisdiction’s position into the future.

Over the last two years there has been a suite of regulatory reform in the BVI which has been collectively designed to take the BVI one step further in complying with (and indeed going beyond) international best practice policies and standards. This article provides an overview of these reforms.

Regulatory Code

One key measure designed to promote the BVI’s commitment to responsible and best practice regulation is the Regulatory Code 2009 (‘Regulatory Code’), which took effect on 1 February 2010.

The Regulatory Code is designed to support, and build upon the requirements contained in, primary financial services legislation in the BVI (eg, the Insurance Act 2008). The Regulatory Code can be unilaterally amended by the BVI’s regulator, the Financial Services Commission (‘FSC’).

Part I of the Regulatory Code sets out a number of “fundamental principles of business” applicable to all financial service licensees in the BVI. Part II is also of wide application, setting out the requirements that apply to every licensee, regardless of the type of license held. Part III sets out the additional requirements applicable to bank licensees; Part IV applies to insurance licensees; Part V applies to those licensed as trust companies and company managers, and Part VI applies to money service providers.

The Regulatory (Amendment) Code 2010, which came into effect on 31 March 2011, introduced a new Part VII of the Regulatory Code applying to investment business licensees under the Securities and Investment Business Act.

Securities and Investment Business Act 2010 and Mutual Funds Regulations 2010

The Securities and Investment Business Act (‘SIBA’) along with the accompanying Mutual Funds Regulations 2010 (‘MFR’), took effect on 17 May 2010 (with transitional provisions for existing companies and funds).

The overall purpose of the new legislation was to repeal and replace the Mutual Funds Act 1996 (‘MFA’) with SIBA and the MFR (which together regulate open-ended funds), and to govern persons that carry on “investment business” in or from within the BVI.

While the MFA regulated managers and administrators of open-ended funds, SIBA extended the scope of the regulation to govern persons carrying on “investment business” in the BVI—including brokers, dealers, investment advisors, custodians, operators of investment exchanges and market makers.

SIBA has been an important development for the BVI’s Latin American clients, particularly as there has been increasing interest in the BVI in recent years as a domicile for funds focused on Latin American-based projects (typically relating to energy and resources, or infrastructure) or funds with Latin American investors looking to invest in overseas projects.

(a)                Investment Business

SIBA provides that no person may carry on “investment business” of any kind in or from within the BVI unless licensed by the FSC to carry on that kind of investment business.

A person carries on investment business in the BVI if occupying premises in the BVI for the purposes of carrying on investment business, or if soliciting a person in the BVI for the purpose of offering to provide a service that constitutes investment business. In addition, and most importantly, a BVI business company that carries on, or holds itself out as carrying on, investment business outside the BVI is deemed to carry on investment business from within the BVI.

Investment business is defined by reference to certain activities as listed in the Schedules to SIBA and includes: dealing in or arranging deals in or managing “investments” (defined broadly); providing investment advice; providing custodial or administration services with respect to investments; or operating an investment exchange.

Licensees are required to comply on an ongoing basis with a number of requirements under SIBA including requirements relating to capital resources, the appointment and removal of directors, changes to ownership structures, insurance, corporate governance, segregation of client assets, and advertising.

(b)               Mutual Funds

Part III of SIBA now regulates mutual funds in the BVI, and is not substantially different from the regulation that applied under the old MFA.

There is now, however, an express requirement for private[1] and professional[2] funds to appoint an auditor and to maintain audited accounts. Private and professional funds are also required to have a minimum of two directors, Further, in order to be eligible to be categorised as a professional fund, every person investing into the fund must invest at least US$100,000, whereas previously the US$100,000 requirement was for a majority of investors to invest this amount.

Insurance Act 2008

The BVI is one of the top 10 largest offshore domiciles for captive insurance companies. According to the FSC, at the end of the first quarter of 2011 there were 185 captive insurance vehicles domiciled in the BVI.

While the US has traditionally been the main source of captive work for the BVI, this changed recently with Asia and Latin America emerging sources of captive work--- and typically larger, more “high-end” captive arrangements are coming into the BVI whereas US businesses had mainly used (and still use) BVI for smaller, so-called ‘831b’, captives.

The BVI insurance sector was revamped with the implementation of the Insurance Act 2008 on 1 February 2010, along with the Insurance Regulations 2009. In summary, the Insurance Act introduced a new regime for licensing, administration and supervision of insurance businesses in the BVI. Some of the more significant changes now in place through the Insurance Act include the introduction of:

  •  Multiple classes of insurance licences (Categories A, B, C and D);
  •  Provisions regarding the regulation and supervision of insurance managers, intermediaries (ie, brokers and agents) and loss adjusters; and
  •  Reporting duties of insurance managers.

Further Reforms

It is also worthwhile noting the Mortgaging of Aircraft and Aircraft Engines Act 2011, which took effect in July 2011.

Along with some other important initiatives, this Act is designed to enhance the attraction of the BVI’s Aircraft Registry by enabling the registration of charges over BVI-registered aircraft and aircraft engines owned by BVI incorporated companies. This is a significant development as banks and other financial services, including those in Latin America, prefer lending to companies whose aircraft or aircraft engines are registered in jurisdictions which offer arrangements for registration of their interest, just in case it becomes necessary to realise their security if a default occurs.


The new registration of aircraft mortgages and aircraft engines is similar to systems that already exist in offshore centres such as Bermuda and the Cayman Islands, however, the BVI Government is confident that the aircraft mortgage register will leverage off the BVI’s successful track record in registering companies, and will make the BVI a leading offshore centre for aircraft registration.

Furthermore, at the time of writing (September 2011), it was expected that changes to the BVI Business Companies Act would shortly be introduced. The proposed changes have already gone through a consultation process, and cover a wide range of matters (including the introduction of not-for-profit companies, and a framework for the use of foreign character names and the re-use of former company names). The proposed changes are considered to be uncontroversial.

Conclusion

The suite of recent regulatory reforms introduced in the BVI reaffirm that the jurisdiction is not a cheap and cheerful location to register companies offshore, but is (and always has been) a responsible financial centre that is committed to international best practice standards. Given quite strict tax rules relating to the use of offshore jurisdictions in certain Latin American countries, the BVI’s strong and effective regulatory regime is important to ensure that the use of structures involving BVI entities is appropriately considered as being legitimate.

The real attraction of the BVI is its ability, through modern, progressive regulation accompanied by a legal system based on English common law, to effectively balance the dual (and ostensibly competing) objectives of responsibility and flexibility.


 


[1]  Under s55(2) of SIBA, a private fund is a fund not authorised (pursuant to its constitutional documents) to have more than 50 investors, or an invitation to subscribe for or purchase fund interests on a private basis only.

[2]  Pursuant to section 55(2) of SIBA, a professional fund is a fund whose constitutional documents specify that its fund interests may be issued only to “professional investors”, and the initial investment of each investor into the fund shall not be less than the amount prescribed in the MFR (US$100,000).