We were decidedly pleased by the European Union’s recent decision to remove the Virgin Islands from its blacklist of “non-cooperative” tax jurisdictions.
However, with a Caribbean Financial Action Task Force anti-money laundering report due early next year, VI leaders must remain ever vigilant to the risks facing the financial services industry in a turbulent global economy.
Since its founding in the 1980s, the industry has grown accustomed to crackdowns from larger jurisdictions.
While VI lawmakers and other officials work to update the territory’s regulatory framework, regulators abroad often declare — sometimes capriciously and based on outdated information — that the territory is not doing enough.
VI leaders have hinted that this was the story behind the territory’s recent eight-month stint on the EU’s blacklist before it was moved to the grey list on Oct. 17.
As its benchmark to blacklist the territory, EU regulators had relied on the Organisation for Economic Cooperation and Development’s Global Forum Peer Review, a 2021 exercise that assessed compliance with international standards of transparency and exchange of information on request.
That review, VI leaders said, covered the 2016-to-2020 period and didn’t consider the impact of amendments to the BVI Business Companies Act that took effect at the start of this year.
Apparently as a result, the EU placed the VI on its blacklist in February only to remove it once the OECD Global Forum carried out a supplementary review and found that the VI had amended its framework on exchange of information on request.
The removal is a positive development, and we hope the EU and other regulators will ensure that any punitive measures they deal out in the future are based on up-to-date information.
But the VI can’t count on it. Leaders, therefore, should closely examine how the territory could have stayed off the list in the first place — and they likewise must work tirelessly to get off the grey list as soon as possible.
Of course, they already know this much. Indeed, the financial services sector has weathered an untold number of storms over its nearly four-decade existence.
The EU, the OECD, the FATF, the United Kingdom and others have frequently scrutinised the territory’s approach to tax information sharing, beneficial ownership registers, anti-money laundering rules, sanctions compliance, and many other areas.
VI regulators and the private sector work diligently to meet the continually changing regulatory landscape, and they have usually done an admirable job in keeping up.
However, maintaining a robust legal framework to govern the financial services industry — which remains a mainstay of the VI economy that brings in more than half of government revenue — is only part of the challenge facing policymakers.
The corporate domicile business that underpins the sector saw a steep drop-off in new company formations in the second quarter of 2023 — a 31.9 percent year-on-year slide to the lowest quarter in more than 20 years.
The February blacklisting may have contributed to this precipitous fall, but it was also likely tied to the economic slowdown in China, where investors have long relied on VI structures as a reliable conduit and third-party jurisdiction backed up by UK law.
According to the International Monetary Fund, the Chinese economy, as measured by gross domestic product, is forecast to grow by 4.6 percent in 2024, down from 5.4 percent this year. The world economy is expected to grow by three percent in 2023 and 2.9 percent in 2024, the IMF has said.
VI financial sector practitioners, regulators and lawmakers all must continue to be diligent in maintaining a sound regulatory framework and otherwise protecting the industry. This means being ever watchful, reacting quickly to emerging risks, persisting in efforts to diversify the sector and the wider VI economy, and exercising prudence in the use of taxpayer funds.
Next year is sure to bring further challenges, with the CFATF review coming at a time when the global economy seems to be growing more uncertain by the day.
The VI must be ready for anything.