For the Virgin Islands financial services sector, the negative headlines just keep coming. For those charged with defending the sector’s reputation, the latest hit came Saturday from a familiar antagonist: the United Kingdom’s Guardian newspaper. The article, “Vast hidden profits: from Asia’s palm oil giants to a tiny British tax haven,” reported allegations that an Indonesian agribusiness conglomerate used VI companies to systematically evade taxes, depriving an impoverished country of needed revenue.
The newspaper blamed the incident squarely on a key feature of incorporating in the VI: the absence of a requirement to divulge details of a company’s ownership publicly.
“Due to a lack of transparency of these shell companies, it is difficult to document reasons for the use of these companies, including whether they are being used to reduce income and/or withholding taxes legitimately or otherwise,” the Guardian reported in an article based largely on court documents in Indonesia and previously confidential files obtained from a VI trust company in last year’s data leak.
Mounting pressure
Pressure is mounting on governments worldwide — from large economies like the United States and the UK to specialist financial services centres like the Cayman Islands and the VI — to force the companies they incorporate to be more transparent.
Some activist groups and European leaders argue that what’s needed to combat corruption, money laundering and tax evasion is a requirement to create a public registry that details the ultimate “beneficial ownership” of each company.
Leading the charge is UK Prime Minister David Cameron, who said in October that his government will soon add beneficial ownership to the information that anyone can look up at Companies House, the UK’s company registry.
A spokeswoman for the UK’s Treasury Department told the Beacon Monday that the VI, as well as other overseas territories and Crown dependencies, will be encouraged, but not forced, to follow suit.
Public consultation
The VI government is still determining its response to such pressure: During a public consultation that ended in March, stakeholders were asked if the territory should create a central registry of beneficial ownership and if it should be public.
For many industry practitioners here, the answer, at least to the second question, is a resounding “no.” They argue that maintaining client privacy — which they assert has many legitimate uses — is paramount to retaining the territory’s position as a global leader for company incorporations. Any change could cause clients to move to jurisdictions that don’t publicise beneficial ownership, quickly making a huge impact on the VI’s industry, they say.
“It would be bad,” said Kenneth Morgan, a director of the VI office of the trust company Rawlinson & Hunter. “A lot of the people who use the BVI to structure private wealth, quite legally, legitimately, would be undermined.”
Michael Riegels, QC, one of the founding partners of the VI law firm Harneys, spoke similarly, calling any move to publicise beneficial ownership an “economic disaster” for the VI.
“The BVI is already suffering loss of market share as users of offshore companies gravitate towards less well regulated jurisdictions,” Mr. Riegels wrote in an e-mail. “Introducing a register of beneficial ownership would turn the trickle into a flood.”
Industry practitioners defend the territory’s current system of ensuring compliance by VI-registered entities. Unlike in many jurisdictions, in the VI, company formation agents confidentially maintain client information, but they are regulated and audited to ensure international standards are met.
Company registries
The UK’s company registry, Companies House, has its London office in an eight-storey grey stone edifice at 4 Abbey Orchard Street in the Westminster district. Anyone who goes inside — or who uses the registry’s website — can access details about a company’s directors and shareholders. In some cases, information is also available about a company’s accounts and claims made against the company’s assets.
Soon, if the UK government’s plans are carried out, beneficial ownership will be added to that list. The UK’s Department for Business Innovation and Skills published a 74-page discussion paper last month outlining the plan to create a public registry of beneficial ownership, along with comments received during the consultation period and government’s response.
The paper explains specific plans for the registry:
• Every person who owns or ultimately controls at least 25 percent of a UK-registered company has to declare ownership. This includes the beneficiaries of trusts.
• Beneficial owners will be required to list their full name, nationality, country of normal residence, and residential address, as well as the date on which they acquired the interest in the company and how it is held. Everything but the residential address will be public.
• Information will only be allowed to be withheld from the registry in “exceptional circumstances.”
• Other means sometimes used to obscure a company’s ownership, such as the use of bearer shares — which convey ownership to the person who physically possesses the shares — or the use of other companies as directors, will be discouraged under the new rules.
UK reaction
The discussion paper was based in part on a questionnaire that asked for comments on various government proposals. The consultation received 325 responses, with 115 coming from businesses and non-profit organisations and 210 coming from individuals and others.
And while respondents were generally supportive of creating a central registry and agreed with what should be in it, they were divided on a key question.
“Whilst there was no objection to enforcement agencies having access to beneficial ownership information, some respondents were unsure of the benefits of public access,” the paper stated.
While many of the NPOs and a “significant number of private individuals” argued for publishing the information, groups representing law firms and chartered accountants countered that the loss of privacy for the beneficial owners outweighed any benefits, the paper stated.
“They also raised various commercial concerns, including the potential negative impact on UK competitiveness and inward investment as a result of public access – particularly if the UK were to be a ‘first mover’ in this space,” according to the paper.
Impact on VI
Citing the belief that a public registry would encourage “good corporate behaviour,” UK officials decided to open the register to the public.
It is still possible that the VI will follow suit: A four-month public consultation period ended on March 14, and during an April press conference Premier Dr. Orlando Smith said his government would need time to determine how the VI would proceed.
“It is important that we look at it very closely and analyse it before we make a determination and make a statement,” Dr. Smith said.
In public statements, Mr. Cameron has said that he doesn’t believe the Crown dependencies and overseas territories such as the VI are “tax havens” deserving stigma from the international community. But he has also urged them to follow the UK’s example of a public beneficial ownership registry as a way to demonstrate transparency. However, Yvette Hodgson, a spokeswoman with the Treasury Department, said Monday that the UK “cannot pre-empt” the outcome of the OTs’ and CDs’ public consultations on creating a registry.
“The democratically elected governments of the OTs and CDs will pursue the national strategies they deem fit,” she wrote in an e-mail.
Registry’s difficulties
That freedom to pursue an independent course is welcome news to VI industry observers, several of whom believe the UK’s public registry will prove difficult to implement.
“The idea is largely unworkable in practice,” said Mr. Riegels, the Harneys cofounder. “[For] simple companies owned directly by shareholders, one can usually determine who the beneficial owner is, but that becomes very difficult for more complex arrangements.”
He added that for many of the complex legal structures used by VI practitioners, such as specialised trusts and structured finance vehicles, it can be hard to pinpoint a beneficial owner.
“These might be very rare situations in the UK, but they are not at all uncommon in BVI,” he said.
Martin Crawford, the CEO of the OV Group, the parent company of Offshore Incorporations Limited, agreed that there are formidable challenges to creating a central registry, public or private.
“I don’t think the UK government fully understand how it’s going to implement it,” he said in a November interview.
Current system
Additionally, many observers believe that the VI’s current system is the best way to balance the needs of law enforcement and regulators against company users’ rights to confidentiality.
In the VI, anyone forming a company must use a licensed registered agent, who maintains a company’s information privately. (Registered agents are usually employed by trust companies, though not all of them form trusts, a more sophisticated type of legal structure.) When the client is an individual registering a company for himself or herself, the agents have to ask for information identifying the client as the company’s beneficial owner. In cases where another foreign company or a lawyer wants to register an entity in the VI on another person’s behalf ¬— a tactic known as layering that some users employ to increase confidentiality — the agent must ensure that beneficial ownership information is available quickly upon request.
Regulators’ role
Those requests can come from the VI regulator — the Financial Services Commission — or the Financial Investigation Agency, which gathers intelligence on the sector and handles incoming requests from foreign law enforcement agencies.
“The present model is that the regulators must be able to have access to the information when they call on the service providers to have it,” said Colin O’Neal, a former commercial attorney who currently serves as the deputy chairman of the FSC.
He added that confidentiality has legitimate uses both for companies, which are often concerned about competitors knowing their actions, and for individuals who seek privacy. Working as a commercial lawyer, Mr. O’Neal previously formed VI companies for billionaire foreign clients who wanted to confidentially purchase apartments in exclusive districts of London.
“The owners of those companies were, I guess, what you would consider ultra-net-worth individuals for whom anonymity could literally be a matter of life and death,” he said.
Generally, the existing regulatory model has worked fairly well, according to Robert Briant, the managing director of the VI office of the law firm Conyers, Dill & Pearman. Mr. Briant feels that having a regulator licence and regularly audit incorporators is a more effective check on wrongdoing than a public registry.
“BVI’s methodology is excellent, frankly, and better than what’s being proposed in the UK,” he said.
Activist groups
But non-profit advocacy groups like the UK-based Global Witness beg to differ. They argue that giving regulators the exclusive right to scrutinise the companies they oversee hasn’t worked. Giving the right of inspection to the public, they say, adds an important check on the existing system.
“It will allow citizens to hold companies to account, companies to know who they are doing business with, and law enforcement from around the world to chase down criminals who have abused UK companies,” the group wrote in a press release congratulating Mr. Cameron for his pledge to create a public registry.
Pressure from activist groups like Global Witness has been mounting against financial centres for many years, but it ramped up in 2009 in the midst of the global economic crisis.
Preliminary efforts focused on the banking system: The cover of a March 2009 report, “Undue diligence: how banks do business with corrupt regimes,” featured an illustration of a piggy bank with its feet covering its face and the words “see no evil, hear no evil.”
But recent campaigns from the group, and other NPOs like ChristianAid and the Tax Justice Network, have focused more on corporate transparency.
Modeled after the popular “For Dummies” series of how-to books, a paper on Global Witness’ website called “An idiot’s guide to anonymous companies” purports that it is easy to use corporate vehicles to launder money, evade taxes and hide stolen assets.
The groups’ campaigns have come at the same time as the Washington DC-based International Consortium of Investigative Journalists has used a “data leak” of about 2.5 million files from two VI trust companies to write a scathing series of stories alleging that VI structures were repeatedly used for questionable purposes.
Those outside pressures helped bring corporate transparency to the forefront at the 2013 G8 Summit in London, where members agreed to create action plans on transparency.
‘Action plans’
So far, only two G8 members — the UK and France — have agreed to create public registries of beneficial ownership. But the European Parliament, one branch of the European Union government, has also voted in favour of creating public registries.
The US, which regulates company formation at the state level, has been taking another approach. In his country’s action plan, President Barack Obama pledged to compel the states to regulate registered agents and create central registries of beneficial ownership open to law enforcement and tax authorities.
“Although all states currently make some basic information available through public registries, states may choose to make beneficial ownership information publicly available,” the US action plan states.
However, previous efforts by the US Congress to pass laws requiring the states to create registers of beneficial ownership open only to the authorities have failed repeatedly in recent years.
Meanwhile, it’s unclear if the UK model will ever be adopted as the global standard to combat money laundering and other crimes: Such international rules are traditionally made by the Financial Action Task Force, not the G8.
Mr. Briant, of the law firm Conyers, doubts that the UK standard will be adopted globally, mainly because he believes that the FATF will eventually realise that licensing company formation agents and allowing authorities, but not the public, to investigate will prove to be a more effective method of regulation.
VI options
With the ever-growing call for additional transparency and greater regulation, some industry observers believe that the VI should do its best to push back in order to protect the status quo.
Mr. Crawford, of the OV Group, said that the VI may be able to use its traditionally strong links to China, which is not a G8 member, to exert influence as the global rules on central registries are drafted.
“I think what the BVI should be saying is ‘Yep, the minute Delaware [creates a public registry] we will do it,’ and using that tactic for as long as it can get away with it,” he said. “The BVI has done everything it possibly can by international standards and I think it’s just unfair.”
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