Flexible and Innovative Legislation Ensures Continued Success in the BVI

In the early 1980s, when the British Virgin Islands (BVI ) launched itself as an offshore jurisdiction, all involved were hopeful of success. However, even the wildest of optimists amongst them would have been hard pressed to envisage the extraordinary growth the territory has achieved in this extremely competitive market.

The jurisdiction has long held the position as the leading offshore registry for international companies and within a generation the economy has risen to the extent that income per capita is approximately US$40,000 per annum. As a result, it is now one of the wealthiest places on the planet, not to mention one of the most beautiful.

The BVI is the leading offshore domicile for company registrations, with around 750,000 companies registered here since 1984. This is more than any other jurisdiction by far, and the figures for this year are set to match, if not exceed, the impressive figures from last year, which saw some 65,000 new BVI Business Companies registered.

Some would say that innovative and progressive legislation, combined with the commercial approach to corporate governance and regulation, have been the reason for this success, while others would cite the close collaboration between the public and private sectors. Most would probably agree that all of these factors have resulted in a winning formula that has given rise to this premier offshore jurisdiction.

However, everybody in the BVI recognises that success also relies on being able to react quickly to changing circumstances. As such, several pieces of legislation in the BVI have been revisited to ensure that they are relevant, effective and attractive to investors. The results are modern and up-to-date laws based on well-established principles, reflecting the current economic environment.

A good example of this evolution in company legislation took place on 1 January, 2006, when the Business Companies Act 2004 (BVI BC Act) replaced the long-established International Business Companies (IBC) Act which lay at the heart of the BVI’s development as a leading offshore jurisdiction.

This new legislation has created a flexible, forward-looking, and, in many ways, radical framework within which highly sophisticated companies can operate effectively. It

maintains all of the benefits of the IBC Act, but removes some of the more old fashioned provisions, while introducing a handful of additional provisions to make the BVI Business Company a more effective transactional vehicle. It encourages flexibility for directors and shareholders of BVI - registered companies, while still retaining safeguards for creditors and minority shareholders.

Such has been the success that, in Asia particularly, the BVI brand has become synonymous with the very concept of an offshore company. From international joint-ventures looking for a neutral, but legally secure, home to smaller businesses eyeing the benefits of flexible structures and tax neutrality, the BVI is frequently the first point of call. The jurisdiction is currently ranked as the second largest investor into China and many people report that, both there and in Hong Kong, rather than giving a rationale to use a BVI company, a rationale for not using a BVI company has to be provided.

While this success in the Asian market has predominantly been as a result of its attractive products and services, the BVI has also been quick to recognise and seize opportunities. For example, it quickly recognised concern among investors surrounding the implications of Hong Kong’s transfer from Britain back to China in 1997 and, having persuaded these investors to move their assets to the jurisdiction, the BVI Government ensured that they stayed by enacting sound legislation and regulation.

This talent for seizing and making the most of opportunities by providing the right supporting environment has not only proved successful in ensuring the BVI remain the dominant force in company registration, but has also brought about success in other sectors such as investment business, trusts and captive insurance.

Mutual/Hedge Funds

The BVI has developed a reputation as an attractive and established jurisdiction in which to domicile offshore funds. With some 2,500 funds now operating in or from within the jurisdiction, the BVI is the second largest domicile of hedge funds, with approximately 10 per cent of the global market share.

The hedge fund industry has grown substantially since the introduction of the Mutual Funds Act 1996, which is the primary legislation governing the funds industry in the BVI.

The sector can draw upon the support of more than 500 managers and administrators licensed in the territory to provide fund support services to both mutual and hedge funds.

The legislation provides for three categories of regulated funds, and it is this distinction between public, private and professional funds that is a core strength of the BVI and something which other jurisdictions have either adopted or intend to adopt. It allows a tailored approach wherein a relevant level of regulation is applied to each category of funds.

As a result, the BVI has been able to achieve efficiency in regulation which facilitates the commercial reality of having a hedge fund ‘up and running’ in a timely manner. In fact, the distinction has permitted an average turnaround time of 48 hours for the recognition of a private or professional fund (assuming the application is in order). In addition a professional fund is permitted to commence business up to 14 days in advance of recognition’s being granted, thereby facilitating the launch of such a hedge fund immediately after incorporation.

Another major factor where the BVI really ‘scores’ is that it is significantly less expensive to establish and maintain a fund in the BVI than in its competitor jurisdictions. Legal fees and organisational costs to establish equivalent funds tend to be lower, and the current annual fund and corporate registration fees are considerably less than in the BVI’s main competitors. Where cost is a significant factor, this situation obviously benefits the BVI and unquestionably makes it the most cost-effective jurisdiction for smallto- medium size managers to launch their funds. However, the BVI attracts hedge funds of all sizes, because of the ease of incorporation and the flexibility of the regulation.

As a result, the BVI has attracted some of the biggest names in the sector, further endorsing the maturity and attraction of the domicile on the world stage.

Last year, Fortis Prime Fund Solutions, one of the world’s foremost hedge fund administrators, made a firm commitment to the British Virgin Islands through the acquisition of Hedge Funds Services (HFS), one of the principal administrators operating in the territory with approximately €2bn in assets under administration.

Then, in October, Jersey-based law firm Ogier, one of the largest and most renowned offshore law firms in the world, announced their entry into the BVI through a merger with WSmiths, a BVI firm whose practice area focuses on investment funds and related securities business, particularly in Asia and Latin America.

The new BVI BC Act has also had an impact on the funds sector, with one of its principal aims being to provide increased choice in the range of corporate vehicles available, thereby offering advantages of establishing an investment fund in the BVI . It has built on the old IBC Act by providing managers with more flexibility, including the ability to utilise Segregated Portfolio Companies and no stated par value shares as standard, with no requirements to account for share capital. Other tangible improvements relate to the solvency tests for distributions and redemptions, which are now more flexible and straightforward under the BVI BC Act.

BVI wins IOSCO membership

In April this year, the BVI Financial Services Commission (FSC) was welcomed as an ordinary member of the International Organization of Securities Commissions (IO SCO). IO SCO’s membership regulates more than 90 per cent of the world’s securities markets in over 100 jurisdictions, and this was widely seen as recognition of the BVI ’s robust

international co-operation framework and its long-standing commitment to comply fully with the standards and requirements as outlined by the IO SCO’s Multilateral Memorandum of Understanding concerning Consultation and Co-operation and the Exchange of Information (IO SCO MMOU).

In fact, the BVI became the first country to be admitted to ordinary membership of IO SCO based on changes made to its legislation, reaffirming its position as one of the most effectively regulated offshore jurisdictions in the world.

Trusts and Private Wealth Management

As Private Trust Companies (PTCs) have become increasingly popular in Offshore

Financial Centres (OFCs) in recent times, the BVI enacted special provisions for PTCs earlier this year to further strengthen its world-renowned trusts and estate planning offer. The coming into force of the Virgin Islands Special Trusts Act 2003 (VISTA ) and the BVI ’s Trustee Act 2003 (the Amendment Act), on 1 March 2004 were momentous occasions for the sector and jurisdiction alike.

Both are highly innovative and well reasoned statutes dealing with a number of important areas of trust law in which reform was long overdue and, as such, the last few years have seen considerable use made of the new statutory provisions.

To make it easier for trustees to deal with third parties, the BVI has also adopted many of the recommendations of the English Trust Law Committee, thus making the BVI the jurisdiction of choice when setting up trusts to use in commercial transactions.

More significantly still, the VISTA Act created an alternative trust regime which enables special trusts, known as VISTA trusts, to be established. In recent years, this VISTA legislation has generated an immense amount of positive international interest and a significant number of VISTA trusts have already been set up.

Both VISTA and the Trustee Amendment Acts were based on proposals made to the BVI Government by the BVI branch of the Society of Trust and Estate Practitioners (STEP). This demonstrates the close collaboration between government and the private sector in terms of working together to meet the needs of the jurisdiction’s international client base.

STEP BVI is now working on further proposals for trust law reform, so watch this space!

Captive Insurance

The BVI ’s captive insurance sector has continued to show substantial success, and can now proudly boast twelve uninterrupted years of growth since the introduction of the BVI Insurance Act in 1994. The jurisdiction now has the fourth highest number of captive insurance registrations in the world, with some 400 captives licensed in the jurisdiction by the end of last year, 250 of which have been formed in the past four years alone. They are currently supported by 22 licensed managers which, given the increasing number of managers expressing an interest in entering the jurisdiction, is only set to grow.

A large part of this is due to the oft-praised regulatory and legislative framework within which they operate, encompassing internationally accepted and business-enabling regulatory standards and laws. In fact, here too, rival jurisdictions have openly adopted parts of BVI legislation as their own. This is a sure indication that the BVI has become the benchmark by which others are compared.

The aforementioned Business Companies Act enables structures to be created that combine both the insurance and capital markets. Sophisticated structures such as catastrophe bonds and credit derivatives are increasingly being used to offer insurance-linked solutions to large and complex risks.

In addition, the Segregated Portfolio Companies (SPCs) legislation has undoubtedly attracted more captive business to the BVI. It provides an alternative for organisations with similar businesses and risks to form joint ventures while segregating their respective risks, assets and liabilities. During 2006, a total of ten SPCs were licensed with 50 segregated portfolios between them.

The unrestrictive nature of the BVI’s business environment has been another attraction. For example, the BVI does not insist upon the appointment of local directors; annual general meetings do not need to be held in the jurisdiction; and it is not obligatory for the captive to establish on-island bank accounts.

All this has combined to make the BVI mature enough as a domicile to have attained credibility with the regulatory bodies around the world, yet young enough to embrace new ideas and solutions.

Public/Private Partnership

Essential and sound legislation and prudent regulation can only go so far. It is the on island professionals who do the hard work and provide the necessary expertise on a day-to-day basis.

The BVI is the only Caribbean jurisdiction to boast the presence of all six of the largest offshore law firms in the region, and the legal profession in the territory continues to expand and strengthen with a steady influx of lawyers, barristers and solicitors. The world’s top accounting and auditing practices are also present in the BVI and have been for quite some time. Their professional services include not only the traditional accounting, audit and risk management practices, but also increasingly specialist areas such as forensic accounting, corporate restructuring and insolvency management services. In addition, there are of course the many leading international trust and corporate service providers who, through their efficient systems, procedures and people, have helped build the BVI into the world’s corporate domicile capital.

All this growth and success has been supported by the British Virgin Islands International Finance Centre (BVI IFC), which has played a pivotal role in the promotion and marketing of the BVI as a leading financial centre. The BVI IFC has implemented a world-wide programme of road shows to inform, educate, and discuss with the international professional and business communities the opportunities for growth in financial services on offer in the jurisdiction. Through this global programme, the success story of the BVI has been taken to many of the leading centres for international business, including London, New York, Hong Kong, Singapore, Miami, Geneva, Zurich and Shanghai, keeping the image and branding of the territory foremost in the minds of its stakeholders.

Established in 2002 as part of the Government’s commitment to support the financial services industry, the aim of the IFC is to give a voice to all segments of the finance sector while making sure that the territory retains the unique balance of a sound regulatory framework, an entrepreneurial business community and innovative legislation.

As such, the IFC’s ultimate objective is to protect and uphold the integrity, reputation and standing which the BVI has earned as a world-class jurisdiction for the conducting of international business.

Continuing to spread the positive message about the territory’s competitive advantage is the central focus of the BVI IFC. With the current and growing popularity of the BVI’s financial services products, the BVI IFC will surely have much to talk about over the coming months.