The British Virgin Islands (BVI): an insight into the principles underlying regulation in the leading offshore financial centre

By Marcus Cake • June 14, 2006

The British Virgin Islands (BVI) is an overseas territory of the United Kingdom. It consists of over 50 islands and cays located in the Caribbean. Its population of approximately 20,000 live on 15 islands.

The BVI has incorporated over 700,000 companies, which by some estimates represents approximately 40% of offshore companies registered in “offshore” jurisdictions. It has achieved its leading position by offering a specific mix of corporate law, investor protection, simplicity and privacy that others have since copied. This BVI has unique attributes that mean it is always considered as a place to incorporate. Offshore companies created in the BVI, and other competing jurisdictions, are called International Business Companies or IBC’s.

Accorrding to Wikipedia:

“An International Business Company or “International Business Company (IBC) is an offshore company formed under the laws some jurisdictions as a tax-free company which is not permitted to engage in business within the jurisdiction it is incorporated in. Offshore Financial Centres which have allowed the formation of IBCs include Antigua, the BVI, the Bahamas and Gibraltar.”

Characteristics of an IBC vary by jurisdiction, but will usually include:

exemption from local corporate taxation and stamp duty, provided that the company engages in no local business (annual agent’s fees and company registration taxes are still payable, which are normally a few hundred U.S. dollars per year)

preservation of confidentiality of the beneficial owner of the company

wide corporate powers to engage in different businesses and activities

the ability to issue shares in either registered or bearer form

an abrogation of any requirements to appoint local directors or officers

The BVI has a cost-effective regulatory environment that has been recognised by the British government, the International Monetary Fund, the Organisation for Economic Cooperation and Development (OECD) as being compliant with the relevant international standards. Although, these same organisations demonise offshore jurisdictions to discourage their use and protect domestic tax bases. Eleven BVI companies are listed on the :aim: stock exchange including an E-Gaming company.

There are many quality profiles and other descriptions of the unique attributes of the BVI. I will not create my own. I suggest that you review the following:

The links above provide quantitative attributes of the BVI as a jurisdiction. The extract below is intended to provide an insight into principles underlying corporate regulation in the BVI.

I have extracted the following paragraphs from a speech delivered by the Managing Director/CEO of the BVI Financial Services Commission on The Regulatory Environment in the BVI in Shanghai in November 2005:

“Since the creation of the BVI International Business Company (IBC) in 1984, over 700,000 companies from across the globe have been incorporated in BVI, making the IBC the world’s most popular offshore incorporation vehicle.”

“Today, we value the fact that investment through BVI corporate entities contributed 6.73 billion dollars to the Chinese economy in 2004 alone. Such investment is not just on paper. It means real businesses and real jobs for real people.”

2005 sees the 21st birthday of our financial services industry, following the creation of the IBC Act. The Act created a generally recognised international brand for the BVI and made us the premier centre for incorporating offshore companies. It drew great strength from having been developed through close collaboration between the regulator, private sector and government. I cannot emphaise enough how private sector partnership underpins everything we do. It is fundamental to BVI’s approach, and the Financial Service Commission has continued to build on it strongly since we gained our independence from the BVI government three years ago.

The FSC Act that governs our operations gave the Commission a responsibility not only to supervise and protect the BVI’s financial services regime but also to assist in fostering the healthy development of our industry. We believe that the key to developing our industry and to maintaining the right environment for legitimate business lies in close cooperation with local practitioners. This input ensure that we have created a new corporate regime that enables BVI companies to continue to be accessible to whoever wants to meet their standards. They remain easy to register and to administer and to have a particularly cost-effective structure.

Also, all necessary steps have been taken to ensure that our Company Registry continues to meet the operational and legal requirements to provide an efficient and effective service. The ease with which BVI companies can be terminated once the purpose for which they were established has been accomplished continues to make them a particularly suitable vehicle for numerous strategic business activities, particularly mergers, acquisitions and joint ventures.

In this world of continuous change, we work hard at keeping our regulatory regime up to date. As we do so, our industry partnership helps us strike the right balance between ensuring that our laws, on the one hand, remain current and compliant with international standards and, on the other hand, do not become overly restrictive.

BVI’s success is not built from rushing into change. Our financial sector regime has always benefited from a policy of cautious, pragmatic gradual change. Our credo is “Do it right rather than do it fast. We realise this can sometimes be frustrating for our private sector partners, but we also know that they appreciate the positive results this approach brings.

It enables the Commission to ensure that our licensees, for example, maintain the same high standards of integrity and sound financial management that we demand of ourselves. It is one of the reasons why the excellence of our regulatory regime has been recognised by the British government, the International Monetary Fund, the Organisation for Economic Cooperation and Development (OECD) and the FATF as being compliant with the relevant international standards.

Yes, BVI is proud of its regulatory reputation. But this does not mean we believe in regulation for its own sake. Far from it. We firmly believe that over-regulation produces unnecessary bureaucratic burdens, stifles innovation, hampers success and destroys business. Yet at the same time, we would be doing ourselves and our clients a disservice if we did not recognise that inadequate regulation can lead to avoidable failures and undermine confidence, also destroying business.

So the Financial Services Commission takes a balanced, proportionate and risk-focused approach. Our emphasis has shifted from regulation to supervision, focusing now on internal controls, risk management systems and on-site compliance inspections.

As with any reputable finance centre, you can be confident that the BVI’s laws and regulatory modes and practices safeguard the privacy of legitimate business arrangements. We are not a black hole for enquiries, but equally we do not facilitate fishing expeditions. We play by international rules and permit the exchange of information through a robust statutory gateway regime for cross border co-operation, providing a requisite means test is passed.

This balanced approach enables us to crack down on unethical behaviours, such whitecollar crime, money laundering and terrorist financing, while at the same time protecting the confidentiality of legitimate transactions.

It is interesting to read about the history of the BVI and we can gain an insight into the present (click here to read the History of the BVI Financial centre). The BVI endeavoured to do the “right thing” in the eighties and signed a tax treaty with the US government. A change of government resulted in the US reneging on the treaty which caused financial difficulty for the BVI. The BVI accused the US of a “breach of faith”. This ultimately led to the formation of the International Business Company legislation.

The BVI may be utilised as a corporate base and the decision may not be driven by tax. The BVI IBC company may always be registered with “onshore” tax authorities and can lodge annual income tax returns. It will be interesting if such an approach would allow the BVI entity to utilise tax treaties of the “onshore” jurisdiction.

The BVI is a major part of the financial system. It is a cost-effective, compliant regulatory regime that has been recognised by the British government, the International Monetary Fund, the Organisation for Economic Cooperation and Development (OECD) as being compliant with the relevant international standards.

The BVI is likely to be suitable for specific types of companies undertaking specific types of activities. It will be well suited to businesses which trade/own in intangibles, and ecommerce companies. It may also provide entrepreneurs and shareholders with greater flexibility, reduced compliance cost, simplicity and more time focus on growing shareholder value.