New rules for companies incorporated, and investment business managers licensed, in the British Virgin Islands took effect in late 2012. Michael Burns, Nadia Menezes and James McConvill discuss the reforms.
(a) Background
The British Virgin Islands' ('BVI') remains the world's leading offshore centre for the incorporation of international business companies, with approximately 450,000 active companies currently registered in the Territory.
Approximately one million companies have been formed in the BVI since the enactment of the original International Business Companies Act 1984, which was later replaced by the BVI Business Companies Act 2004 (the 'BC Act'). The BVI is also the second largest domicile for offshore funds (behind the Cayman Islands), with over 2,400 funds registered in the BVI as a result of the jurisdiction's reputation for effective regulation of funds accompanied by competitive regulatory fees.
One of the key strengths of the BVI which explains its continued success in an increasingly crowded market for offshore incorporations is that it is considered to be a responsible, respected financial centre. The attractiveness of the BVI as providing a prompt, low-cost and flexible option to incorporate special purpose vehicles and other entities (particularly funds), has been embraced across the world, with many now referring to an offshore international business company as simply a "BVI".
The BVI's attractiveness for funds and business companies through balancing responsible and flexible regulation has recently been enhanced through two sets of legislative initiatives that came into effect in the Territory in late 2012.
These initiatives, contained in the Investment Business (Approved Manager) Regulations 2012 (introduced through amendments to the BVI's Securities and Investment Business Act 2010, "SIBA") and the Mutual Legal Assistance (Tax Matters) (Amendment) Act 2012 and the Partnership (Amendment) Act 2012 (working collectively to introduce new record keeping and retention obligations for BVI companies and limited partnerships), are discussed below.
(b) "Regulation Light": Approved Business Manager Licensing Regime
The new regime for the approval of investment business managers came into effect in the BVI on 10 December 2012.
Amendments were made to the BVI's Securities and Investment Business Act 2010 ("SIBA") to provide for the implementation of the Investment Business (Approved Manager) Regulations 2012 ("Regulations"). The Regulations are accompanied by the Approved Investment Managers Guidelines (the "Guidelines"), published by the BVI Financial Services Commission (the "Commission").
The new "regulation light" regime is designed to maintain and enhance the BVI's attractiveness as a jurisdiction for investment business managers and the funds that they manage, by dis-applying various provisions of the SIBA and the BVI's Regulatory Code 2009 which would otherwise apply to those seeking an investment business licence to operate in or from within the BVI.
As a result of the changes, investment business managers who are approved under the new Regulations will not be required to be licensed under the existing (and more onerous) Part I of SIBA (being for a Category 3B or 3E or Category 4A or 4B investment business license), however they still can be if they so choose. Eligible investment business managers can now submit a straight-forward application (accompanying the Guidelines) and then (assuming the Commission does not object) commence business at least seven days after that without needing to wait for formal approval from the Commission (for applications under Part I of SIBA, this can typically take at least four weeks).
To ensure that the new approval regime is responsible and operates to reduce and properly manage risks, the Regulations set out the functions that approved investment business managers are able to perform. The Regulations provide that the Commission, when taking into account any risks posed by or associated with approval of a certain investment business manager, may provide for restrictions and conditions in relation to any approval that is granted.
An approved investment business manager under the new regime can act as investment manager or investment advisor to any number of private or professional funds recognised under SIBA (which may include funds which are domiciled outside the BVI) as well as closed-ended funds domiciled in the BVI having the characteristics of a private or professional fund. The approved manager can also act for non-BVI feeder funds investing substantially all of its assets into BVI-domiciled master funds.
To ensure that the new regime does not expose the BVI or investors to unnecessary risks (outside the norm of investment business), there are restrictions imposed in relation to assets that may be held under management. For approved investment business managers, the aggregate assets under management in open-ended funds cannot exceed US$400 million and the capital commitments of all of the closed-ended funds under their management must not exceed US$1,000 million.
With a view to enabling the Commission to properly monitor and supervise approved investment business managers, an approved manager is required to provide the Commission with an annual return by 31 January of each year (setting out a summary of the business it is presently carrying on), and is required to prepare and submit financial statements to the Commission (although there is no audit requirement for approved managers).
The Regulations also provide for the keeping and maintenance of a register of approved investment business managers, and for ongoing obligations that apply to approved managers (including that managers must have at least two directors at all times (one of whom being an individual)), a requirement for an authorised representative regulated in the BVI, and to notify the Commission of any change to information provided by the manager when initially applying for a licence).
(c) Promoting Transparency: New Record Keeping and Retention Obligations
Recent changes made to the record keeping and record retention obligations of BVI companies and limited partnerships through the Mutual Legal Assistance (Tax Matters) (Amendment) Act 2012, and the Partnership (Amendment) Act 2012 (the "Reforms") came into effect on 12 November 2012.
The Reforms were introduced in response to recommendations contained in the Phase 1 Peer Review Report on the BVI produced by the Global Forum on Transparency and Exchange of Information for Tax Purposes (the "Report"), published in August 2011. The Report had noted that in the BVI there was an absence of any legal obligation on BVI companies to retain underlying documentations (particularly accounts) relating to transactions, and that there was no specific requirement in the BVI on maintaining records and underlying documentation for the desired minimum period of five years (considered necessary to ensure an effective mutual legal assistance regime for tax matters).
In direct response to the observations in the Report, the Reforms have introduced a requirement that BVI companies and limited partnerships are now required to keep "records and underlying documentation" at the offices of their registered agent in the BVI, or at such other places (whether within or outside the BVI) as determined by the directors of the company or general partners of the limited partnership. Where the records and underlying documentation are kept in a place other than the original place for which the registered agent has been notified, there is a requirement to inform the registered agent of the new place within fourteen days.
Further, there is now a requirement for "records and underlying documentation" to be retained for a minimum period of five years (from the date of completion of a transaction, or termination of business relationship, to which the records and underlying documentation relate). Unfortunately, there is a lack of guidance at present regarding what comprises "records and underlying documentation", although accounts of a company or limited partnership are expressly included. Hopefully this will be addressed in subsequent amendments.
The records and underlying documentation that are retained must be sufficient to show and explain the transactions of the company/limited partnership's transactions and to enable a proper evaluation of the company/limited partnership's financial position.
(d) Conclusion
The reforms emphasise the BVI's positioning as a responsible and dynamic financial centre.
The real genius of the BVI is its ability, through modern, flexible commercial laws modelled on successful laws across the globe (including the UK and Delaware), accompanied by a legal system based on English common law and which is committed to international best practice standards, to effectively balance the dual (and one would think, conflicting) objectives of responsibility and flexibility. This genius is protected and indeed enhanced through the recent reforms discussed in this article.
Sherri Ortiz, formerly Executive Director of the BVI International Finance Centre, summed it up nicely recently, in stating that: "Whether it is in ensuring full compliance with the new global regulatory legislation, or ensuring that domestic rules mix the demands of a supportive business environment and high standards of transparency, the BVI stands out."
Originally published in www.intercontinental-finance-com.
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