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You are here: Publications and Records > Commons Publications > Select Committees > Foreign Affairs > Foreign Affairs

Submission from the British Virgin Islands Financial Services Commission, 1 November 2007

 

Introduction

 

In July 2007 the Foreign Affairs Committee of the UK House of Commons announced that it would be conducting an inquiry with respect to the Foreign and Commonwealth Office's (FCO) responsibilities as they relate to the security and good governance of the Overseas Territories. In particular, the inquiry will focus, amongst other things, on the issues of transparency and accountability and regulation of the financial sector.

 

2. The BVI Financial Services Commission ('the Commission") uses this opportunity to apprise the distinguished Members of the Committee of the Territory's regulatory regime, for often the claim is unfairly made that the so-called offshore centres (of which the BVI is classified as one) are not properly regulated and are a haven for tax evasion, money laundering and terrorist financing. These claims are mostly made by those in the developed world with whom we are in material competition for business and too often no effort is made to give recognition to the regulatory advances of such jurisdictions as the BVI.

 

3. The Commission plays a key role in the sustainable development of the BVI economy. While the Commission has the responsibility for collecting fees on behalf of the Government, its primary function is the regulation and supervision of the financial services industry by insuring against abuse of the legitimate financial structures and maintaining integrity and professionalism in the BVI's financial services industry; in addition, the Commission has the responsibility of developing relations with foreign regulatory authorities, international associations of regulatory authorities and other regional and international organizations concerned with prudential regulation, the effective combating of financial crime and the promotion of international cooperation between regulators and law enforcement agencies.

 

4. Since its transformation from the Financial Services Department in 2002 to become an autonomous institution with responsibility for its own affairs, the Commission has strengthened its capacity and experience in providing quality service to the private sector, particularly in sensitizing them of the domestic and global initiatives relating to money laundering and the financing of terrorism. The Commission continues to participate in regional and international meetings at which international standards of prudential financial regulation are developed and promoted.

 

Structure

 

5. The Commission is an autonomous institution established under the Financial Services Commission Act, 2001. It was formally established as such in 2002. From a political administrative standpoint, the Commission is answerable to the Cabinet and the House of Assembly through the Minister of Finance who pilots all legislative initiatives in relation to the Commission. The highest body of the Commission is a Board of Commissioners which comprises a Chairman and six other Commissioners, including the Managing Director. One of the Board Members is required to be selected from outside the BVI and has to be a person with a financial services background. It should be noted that appointment to the Board is based on a fit and proper criteria with relevant knowledge, experience and expertise which could assist the Commission in the discharge of its functions; Members of the Legislature and public officers are disqualified from membership of the Board.

 

6. The Managing Director functions as the Chief Executive of the Commission and has responsibility for the Commission's day-to-day operations, with assistance from two deputy Managing Directors - regulation and corporate services. The Commission has seven Divisions with responsibilities in separate areas of the Commission's work - Banks and Fiduciary Services, Investment Business, Insurance, Insolvency, Legal and Enforcement, Policy Research and Statistics and Registry of Corporate Affairs - and each Division is headed by a director, save for the Registry of Corporate Affairs which is headed by the Registrar of Corporate Affairs. There are three other very significant portfolios - human resources, finance and information technology - respectively headed by a Human Resources Manager, Financial Controller and Manager.

 

7. There are two statutorily established committees within the Commission: the first is the Licensing and Supervisory Committee, which has the responsibility for receiving, reviewing and determining applications for licences, supervising licensees to ensure that they fully meet the fit and proper criteria for the conduct of financial services business and publishing the names of licensees; the second is the Enforcement Committee, which has responsibility for considering and determining the Commission's exercise of its enforcement powers with respect to licensees, reporting to the Board of Commissioners all enforcement actions taken against licensees and reviewing the Commission's enforcement powers and submitting recommendations to the Board for possible legislative initiatives. While these committees are required to report to the Board on a quarterly basis on the performance of their functions, they operate very independently in performing their functions and exercising their powers. This is considered essential for prudential regulation and effective enforcement.

 

Prudential Regulation

 

8. The Commission essentially regulates financial services sectors relating to banking and fiduciary services (trusts and company service providers), investment (including hedge funds and mutual funds), insurance (including captives), insolvency practice and company incorporation and administration. It takes its mandate from relevant key legislation (see next paragraph) pertaining to the various sectors of financial services, although its broad powers of licensing, regulation and enforcement are outlined in the Financial Services Commission Act, 2001. As a key player in the financial services world, the BVI recognizes the obligations that relate to such a role in ensuring global financial stability. Thus all of the Territory's financial services legislation are benchmarked against internationally established standards of prudential regulation as enunciated from time to time by standard-setting bodies like the FATF, CFATF, IOSCO, OGBS, IAIS, etc. This has necessitated a review of current legislation and enactment of new legislation as that becomes necessary in order to keep the Territory attuned to emerging standards of regulation.

 

9. The major pieces of legislation in terms of regulation and company administration that are administered by the Commission may be cited as follows:

 

(a) Banks and Trust Companies Act, 1990;

(b) Company Management Act, 1990;

(c) Insurance Act, 1994;

(d) Mutual Funds Act, 1996;

(e) Insolvency Act, 2003; and

(f) BVI Business Companies Act, 2004.

 

These legislation, including the most recent one, have undergone periodic amendments over the last several years as an attempt to both modernize the financial services business regime and ensure compliance with emerging standards of regulation. As noted in the immediately preceding paragraph, the Financial Services Commission Act, 2001 is the key legislation that outlines the Commission's broad powers of licensing, regulation and enforcement. Plans are now quite advanced to put in place a modernized regime that builds on the IAIS standards of prudential regulation by enacting a new Insurance legislation; the mutual funds regime is under review to modernize the investment business sector and formally regulate securities (although currently the BVI does not operate a securities portfolio); plans are underway to develop a comprehensive single Regulatory Code for the regulatory sector of the Commission's functions as well as to develop relevant guidelines on politically exposed persons.

 

Anti-money Laundering (AML) and Countering the Financing of Terrorism (CFT) Regimes

 

10. The BVI recognizes the negative effects money laundering and terrorist financing activities could have on its financial services industry and makes every effort to put in place necessary measures to counter such activities. Those engaged in these nefarious activities aim strenuously to abuse the legitimate financial structures for illegitimate purposes and if left unchecked they could bring about instability in the financial sector.

 

11. In 1997 the BVI enacted the Proceeds of Criminal Conduct Act designed to formally counter money laundering activities. The legislation thus introduced a new reporting regime for all suspicious activities relating to financial transactions. It established a Reporting Authority to which all such activities are to be reported; the Authority synthesizes all information received to determine whether or not further investigation is warranted and what recommendation should ensue. The Authority comprised the Attorney General, Managing Director of the Commission and the Director of the Authority. In 2003 the Financial Investigation Agency Act was enacted and the Financial Investigation Agency established in 2004. The Authority was transformed into a Steering Committee with the same membership but with much broader powers. The Commission is represented on the Board of the Agency by the Managing Director, with the other members being the Deputy Governor as Chairman, Attorney General, Financial Secretary, Commissioner of Police and Comptroller of Customs. The Commission considers the work of the Agency very crucial to its AML/CFT monitoring process with respect to regulated entities as well as the conducting of background checks of applicants for licences.

 

12. The Proceeds of Criminal Conduct Act, 1997 is complemented by the Proceeds of Criminal Conduct (Designated Countries and Territories) Order, 1999 and the Anti-money Laundering Code of Practice, 1999. While the Order in essence introduces supporting mechanisms for legal assistance and judicial processes, the Code of Practice outlines the framework for customer identification (including beneficial ownership), verification process and other relevant mechanisms for compliance. In 2007 the Proceeds of Criminal Conduct Act was amended to introduce a mandatory reporting requirement for financial transactions that are suspicious, in compliance with the CFATF recommendation following its last evaluation of the BVI.

 

13. In 1998 the Commission initiated and led a public-private sector dialogue with a view to imparting knowledge and appreciation of the ills of money laundering within the legitimate business structures of the Territory and the steps to be taken to check against such activity. This culminated the same year in the drafting and promulgation of the Anti-money Laundering Guidance Notes. These Guidance Notes are currently the subject of review and revision to take account of the new and emerging developments in the area of money laundering.

 

14. Furthermore, the Commission (prior to its transformation and since that transformation) had established a Financial Services Legislation Advisory Committee, comprising both public and private sector representatives, to review and advise on the need for specific legislative measures in order to buttress the existing systems of financial regulation, law enforcement and international cooperation. It also established a public-private sector Task Force on Taxation Matters to review and advise on tax competition issues as they relate to or affect the financial services sector. The BVI Business Companies Act, 2004 mandates the establishment of a Company Advisory Committee, which had since been established to review and advise on matters pertaining to company administration and to review and submit recommendations on legislative matters relating to companies. The Commission, in recent years, has instituted a system of forming focus groups to review and discuss new proposed legislation before they are finalized to be placed on the legislative wheels. Such groups comprise experts from the public and private sectors and their recommendations are, to the extent feasible and consistent with current policy, factored in the final draft legislation. This arrangement has proven extremely helpful to the Commission as it brings to the table varied experiences to aid the decision-making process. Indeed no legislative measure of significant impact is proposed without private sector consultation and input and the Commission routinely organizes workshops and seminars to discuss major legislative initiatives.

 

15. The Territory's CFT regime is essentially comprised in The Terrorism (United Nations Measures) (Overseas Territories) Order 2001 and The Anti-Terrorism (Financial and Other Measures) (Overseas Territories) Order 2002. Both enactments are Orders in Council. The Commission adheres to the compliance and prohibition measures outlined in both enactments. Indeed the Commission takes notice of the UN and EU lists of persons suspected of having links with terrorism or terrorist organizations to ensure that they or the entities they are associated or affiliated with are not licensed in the Territory.

 

16. The Commission plans to commence work on developing guidelines on countering terrorist financing using the FATF model. This should culminate in the sensitizing of the private sector of the key implementation tools with respect to CFT.

 

17. One of the functions of the Commission is to develop a continuing education programme for the practitioners in financial services business and accordingly the Commission has instituted a forum known as Meet the Regulator whereby it sensitizes members of the industry of current and emerging developments in the areas of AML and CFT and what their obligations are in respect thereof. This forum is held periodically - two to three times each year - and it brings together a large number of industry practitioners and regulators and is seen as a very useful interactive medium that develops confidence between the regulators and the industry with respect to regulatory, legal, enforcement and international cooperation matters, including AML/CFT matters. The Commission is set to continue this process for the foreseeable future.

 

International Cooperation

 

18. The BVI operates different regimes relative to international cooperation. These relate to regulatory, law enforcement and tax information exchange matters. The Commission administers a robust mutual assistance regime in relation to foreign regulators and law enforcement authorities.

 

19. The Financial Services Commission Act, 2001 ("the 2001 Act") vests the Commission with broad powers of enforcement which include the exercise of powers to respond to requests for mutual assistance. Thus the Commission exercises compulsory powers with respect to the disclosure of information and production of documents (sections 30 & 32). It may also apply for search warrants and submit applications to examine a person on oath before a Magistrate (section 33); it is vested with the power to conduct such examinations itself as it deems fit in any particular case (sections 33A & 33B). Section 33C of the 2001 Act empowers the Commission to take appropriate steps to cooperate with foreign regulatory authorities and other persons who have functions relative to the prevention or detection of financial crime, including money laundering, terrorist financing, misconduct in or misuse of information relating to financial markets as well as offences involving fraud or dishonesty. Section 33D specifically provides the mechanism for providing assistance to foreign regulatory authorities.

 

20. Prior to its transformation from a department of Government and since its establishment as an autonomous institution, the Commission has been engaged in providing assistance to foreign regulatory authorities (before 2002 the repealed Financial Services (International Cooperation) Act, 2000 was applied). From the law enforcement angle, the Criminal Justice (International Cooperation) Act, 1993 is utilized to render assistance in criminal law matters; the Mutual Legal Assistance (Tax Matters) Act, 2003 provides the legislative framework for the exchange of information in tax matters with countries that conclude a bilateral agreement with the BVI. The latter enactment was amended in 2005 to embody the requirements of the EU Savings Directive on the Taxation of Savings Income and thus implement the bilateral agreements entered into between the BVI and the EU Member States.

 

21. The Commission and the BVI Government recognize the pivotal role effective international cooperation plays in combating crime and the misuse of the financial system which, if left unchecked, could lead to global financial instability. Both therefore remain resolute in their policies of fostering greater cooperation to render assistance where necessary. It was in this vein that the Commission, in association with the Government, prepared and published a Handbook on International Cooperation and Information Exchange: A Guide for Law Enforcement Officials and Regulators. Apart from providing a better understanding of the BVI's mutual legal assistance regimes, the Handbook outlines the processes that need to be followed by foreign authorities in making requests for assistance. It is a simple, user-friendly guide and is published on the Commission's website at www.bvifsc.vg . The Handbook will be reviewed from time to time with a view to updating and modernizing it, taking account of new and emerging developments in the field of international cooperation. It is highly recommended for those persons and authorities with interest in learning of the BVI's international cooperation regime generally or with a desire to submit requests for mutual legal assistance.

 

Transparency and Accountability

 

22. The Commission operates a transparent system of regulation of licensed entities engaged in business within or from within the BVI. In terms of its own processes, the Commission (as noted earlier) is answerable to Cabinet and the House of Assembly through the Minister of Finance. The Board of the Commission holds an annual meeting with Cabinet to go through the Commission's annual report, strategic plans and budget, including a discussion on such other matters affecting or relating to Government policy. This is considered a very useful exercise that ensures that the political directorate with responsibility for overall policy direction is made fully aware of new and emerging developments in the international field of standard-setting in relation to finance and financial services.

 

23. With the enactment of the BVI Business Companies Act, 2004, the BVI removed the ring fencing of local companies and placed them on the same footing (in terms of obligations and liabilities) with international companies, thus ensuring a fair and transparent system of company incorporation and regulation. In addition, the BVI introduced a system of immobilizing bearer shares by requiring companies with bearer shares to lodge them with a custodian who is recognized and operating from within the BVI or who operates outside the BVI but is approved by the Commission for that purpose. The rationale for this measure is to ensure that in the event of a request for assistance, access to information on beneficial owners of business entities can be achieved.

 

24. It should be noted that contrary to what some believe, the BVI does not (and it never did) operate a secrecy regime with respect to its financial services; it has no legislation that institutionalizes secrecy as a part of any regulatory process. However, the BVI recognizes and subscribes to the common law principle of confidentiality. This principle must be distinguished from secrecy. Whereas secrecy connotes a prohibition of access, confidentiality represents a long established rule of keeping material or information with respect to a person confidential save as may be permissible under law. Thus while the BVI laws recognize and uphold the common law principle of confidentiality, they create a legitimate avenue for accessing information for regulatory and law enforcement purposes, including the rendering of assistance to foreign regulatory and law enforcement authorities.

 

Membership of Associations/Organisations

 

25. As a key player in the global financial services sector, the BVI recognizes the importance and value of associating with regional and international standard-setting institutions for prudential regulation, effective enforcement and international cooperation. Such an association not only affords the Territory the ability or opportunity to be a part of the development process with respect to the evolution of new standards, but also provides it with the opportunity to think ahead and devise and implement policies and laws to better regulate its financial services industry. The Commission plays a leading role in this regard with respect to all matters relating to and concerning the regulation of financial services and the fostering of international cooperation.

 

26. The BVI is an active member of the Caribbean Financial Action Task Force (CFATF) and Egmont, both respectively dealing with matters relating to money laundering and terrorist financing and intelligence gathering and dissemination. These are considered to be areas of enormous interest if the efforts of money launderers and terrorists and organized criminal groups are to be effectively countered.

 

27. Earlier this year the BVI was admitted to the International Organization of Securities Commission (IOSCO) after a vigorous scrutiny of its international cooperation regime. Thus the BVI became the first jurisdiction to be admitted to membership under IOSCO's Multilateral Memorandum of Understanding on Consultation and Cooperation and the Exchange of Information on the basis of its legislative compliance with the MMoU. The Commission is a member of the International Association of Insurance Supervisors (IAIS) and fully participates in the Association's deliberations. It was on 31st October, 2007 admitted as a member of the Offshore Group of Banking Supervisors (OGBS), after having previously served therein in an observer capacity, and is a founding member of the Offshore Group of Insurance Supervisors (OGIS), the International Trade and Investment Organisation (ITIO) and the Offshore Group of Collective Investment Scheme Supervisors (OGCISS). As a member of Association of Banking Supervisors of the Americas (ASBA), the BVI currently holds the directorship position representing the Caribbean region. The BVI participated in the OECD-Commonwealth Working Group on Tax Competition and recently served on the Working Group set up to review the FATF's 40+9 Recommendations on combating money laundering and terrorist financing. It was also a member of the OGBS Working Group that developed the Statement of Best Practice on Trust and Corporate Service Providers; indeed the BVI (along with Gibraltar) was the first jurisdiction to regulate trust and corporate service providers.

 

28. As a result of the BVI's membership of or observer status in these recognized institutions, the Commission has been able to develop a wealth of knowledge to guide the financial services industry along the right path, while at the same time checking against nefarious activities and sharing information with other jurisdictions. It hopes to continue this trend for the foreseeable future and to remain an active player in the shaping of standards of regulation and fostering of international cooperation.

 

The Provision of Resources

 

29. As an autonomous regulatory body with independent powers, the 2001 Act provides a funding mechanism for the Commission that takes into account the duties and responsibilities of the Commission. The Commission retains a percentage of the total revenue it collects on behalf of the Government, which could be anywhere up to the 15% mark; since the establishment of the Commission, this has ranged from 9 to 11 percentage points. This formula for resource allocation to the Commission has been considered adequate and it is a formula that works quite well.

 

30. The Commission is able to properly and fully resource its strategic plans, regulatory and enforcement processes, participation at overseas meetings, conferences with the private and public sector persons, information dissemination, duties relative to requests for mutual assistance from foreign regulatory authorities, etc. In addition, the Commission maintains a reserve fund as a contingency plan to ensure the due and uninterrupted functioning of the Commission's activities.

 

Assessments

 

31. As a member of the CFATF, the BVI has been undergoing periodic reviews to establish the Territory's compliance with internationally established standards in the areas of financial regulation, legislative reform, law enforcement and international cooperation, including compliance with current AML/CFT standards and recommendations of the CFATF. This process has been found to be extremely valuable as it affords the Territory the opportunity of benefiting from external independent objective assessments of its systems and processes; recommendations for remedial action have proved very helpful as the Territory continues to be a key player in international financial services.

 

32. The BVI is set to undergo its third round of CFATF mutual evaluation in the first quarter of 2008. Also the IMF will undertake its second assessment of the BVI later in 2008. It should be noted that these assessments seek to determine the level of compliance with standards established by the various standards-setting institutions like the OGBS, IAIS, FATF and CFATF. The Commission sees this exercise as an important continuing process which every key jurisdiction in the financial sector ought to be subjected to. The last reports of the CFATF and IMF in respect of the BVI can be found on the Commission's website at www.bvifsc.vg .

 

Evidence

 

33. The legislation and other documents cited in this submission may be found on the Commission's website at www.bvifsc.vg . However, the Commission may be requested to provide any additional information considered relevant by the distinguished Members of the Foreign Affairs Committee and stands ready to assist with its deliberations in any other way considered necessary.

 

How Can the UK Government Assist the BVI?

 

34. The Commission has matured over the years and has developed immense expertise and experience in the area of financial services regulation, AML/CFT, enforcement and international cooperation. It seeks not to be dependent, but rather to be progressive and self-reliant and to make positive contributions to the BVI economy for which it provides more than 50% of the revenue that goes to the public budget. It guards the interests of the jurisdiction jealously, while at the same time recognizing the threats to financial services and the need for bilateral and multilateral cooperation in running an efficient and effective stable economy and keeping crime and criminals far away from the legitimate structures of business operations.

 

35. The Commission believes very strongly that there are meaningful ways in which the UK Government can be of great assistance. While the BVI participates in quite a number of fora at which international standards of regulation, enforcement and cooperation are shaped, the fact remains that in some very important fora (such as within the FATF and the Financial Stability Forum (FSF)) the jurisdiction is not a member or observer and is not invited to participate. It is normally in the latter situation where very important decisions are taken that affect most of the so-called offshore jurisdictions without considering their interests. Accordingly, one would expect that the UK, when represented at such meetings, would protect the interests of its Overseas Territories against adverse and unfair decisions that, in some cases, singularly target the Territories. The Commission therefore invites the Foreign Affairs Committee to consider the following in their deliberations:

 

(a) The extent, if any, to which the UK advocates the interests of its Overseas Territories, especially in relation to the operation of their financial services industries;

 

(b) The need for prior consultation with the BVI Government before committing the jurisdiction to unfavourable measures specifically and generally affecting its financial services industry; the UK committed the BVI to the implementation of the EU Savings Directive on the Taxation of Savings Income without any prior consultation, thus potentially allowing a competitive advantage to the Territory's competitors outside the realm of the Directive;

 

(c) The need for equal and fair treatment of the Overseas Territories. When the UK committed the BVI and other Caribbean Overseas Territories to the EU Directive referred to in sub-paragraph (b) above, it left out Bermuda, thus enabling that jurisdiction to market itself without the strings of the Directive ;

 

(d) The importance of notifying the BVI of important developments around the globe (considering the UK's network of information gathering) and rendering such advice as may be necessary;

 

(e) The need for the UK to publicly acknowledge the strides made by the BVI to efficiently and effectively regulate its financial services industry and to buttress that fact in relevant fora where the jurisdiction is being unfairly criticized and its systems and processes are being misrepresented; in circumstances where the jurisdiction is represented, it is expected that its representatives will take on that responsibility, but the added voice of the UK does help to strengthen the jurisdiction's position; and

 

(f) Any suggested reforms or initiatives that the UK thinks should be considered by the BVI in relation to its financial services sector should be notified well in advance to enable the Commission to take an informed decision thereon and render necessary advice accordingly after relevant consultations; this obviates any unfair accusations of disinterest and non-compliance.

 

Conclusion

 

36. The Commission, consistent with the policy adopted by the Government, continues to engage the regional and international standard-setting institutions to ensure full compliance with established standards. It recognizes the importance of continued vigilance in the execution of its functions and the threats posed by organized crime, including money laundering and terrorist financing. While it adopts an independent approach in administering its financial services sector, the Commission is fully aware of the interdependence of world economies and its responsibility as a partner in maintaining global financial stability. It cannot deny the fact that criminals engaged in organized crime, money laundering, terrorist financing and other illegitimate use of the financial system have no and do not distinguish between borders; their activities permeate every jurisdiction and it is only through effective policing and cooperation at the international level that the activities of such criminals can be minimized or eradicated.

 

37. It is important to recognize at the same time that the BVI is in engaged in an activity (financial services) that places it on a competition pedestal with other so-called onshore and offshore jurisdictions. It therefore advocates the importance of a level playing field with its competitors and expects that the UK sees value in this approach and champions the cause of not only the BVI, but of all of its Overseas Territories. The Commission certainly does not consider it to be in the UK's best interest to allow a situation where the financial services sectors of its Overseas Territories are severely affected, considering the portion they contribute to government revenue, which in turn impact positively on important social and infrastructural developments.

 

38. The Commission commends the Foreign Affairs Committee in engaging in this process and similarly commends the Foreign and Commonwealth Office for inviting the Overseas Territories to render account of their service industries (amongst other things). It is hoped that this will be a regular exercise to enable the distinguished Members of the Foreign Affairs Committee and by extension Members of the House of Commons to learn more about the Overseas Territories and the developing relations they have with Her Majesty's Government in the UK.