other high value mega mergers using BVI joint venture vehicles followed. Probably the most famous of was the Alfa Telecom - Cukurova merger, which later became famous largely because it fell into seven years of acrimonious litigation. Part of the trend towards mega joint ventures was driven by innovative legislative drafting. Section 120(1) of the BVI Business Companies Act, which came into force on 1 January, 2005, allowed joint venture parties to provide that directors nominated by one of the parties could owe their primary duties to that party, rather than to the company as a whole. Like many brilliant ideas, sometimes it takes only a small innovation to lead to big changes. The late 2000s saw a steady increase in venture capital and private equity work in the BVI. Although part of this simply reflected global market trends, it undoubtedly started the metamorphosis of BVI company work. The latter part of the first decade of this millennium, right up to the global financial crisis of 2008, and slightly beyond, will probably be remembered as the golden age of BVI corporate practice. At that stage, the BVI product was flourishing at all points along the value scale. There was still a vibrant volume market for generic BVI companies acting as group holding companies, cashboxes and asset holding vehicles but these were complemented by the new growth in much more sophisticated corporate structures which created new opportunities to add value. It wasn’t all gold; the funds industry never quite reached the dizzying heights in BVI that it did in certain competitor jurisdictions, and the less said about the BVI’s attempt to build a captive insurance industry, the better. Nonetheless, there was so much offshore finance work in those heady days that one of the biggest problems was recruitment of good people to manage it all. And then the world changed. People all over the world remember the collapse of Lehman Brothers in 2008 as a turning point in the world’s economy and there is a natural inclination to extrapolate that to the BVI. There is a grain of truth to that; there is no doubt that credit markets dried up which sucked the life out of much of the business which had grown up in a business binge fuelled by the cheap and ready capital. However, I have always suspected that the real reasons why BVI offshore business began to reshape itself more dramatically in the years following Lehman were more subtle. One of the many consequences of Lehman’s collapse was a dramatic escalation in the amount of financial regulation around the world. In a sense, the surge of financial regulation following 2008 was nothing new for the BVI. The last two decades have also been characterised by the steady growth of anti-money laundering rules and financial services regulations – both onshore and offshore. This has in turn created ever increasing pressure in the low value sector of the market. Multiplying compliance obligations for banks and other institutions which deal with offshore structures creates a natural push towards only dealing with structures which are sufficiently high in value to make those compliance costs worth adherence. The low value sector of the market is simply being choked off by the cost of compliance. It is not stretching the truth to say that for many banks, opening a bank account for a low value offshore company is now simply more trouble than it is worth, and that has been strikingly evident recently in Hong Kong. Whether we like it or not, this trend is now irreversible. Regulatory creep is here to stay, and it will only grow both at home and abroad. In the BVI, the expanding regulatory creep has been bolstered by a second growing trend – tax information exchange. In and of itself, tax information exchange is nothing to be afraid of. Despite the popular perception in Hollywood and the media, offshore structures are used far less for tax planning than is commonly espoused and where they are used for tax planning, most countries have “forced disclosure” rules. Therefore, legitimate clients rarely have anything to fear from tax information requests. Like everything else, this new regime has a compliance cost. In the case of the most invasive forms of tax information exchange, the Foreign Account Tax Compliance Act (FATCA), the cost is substantial, and in many countries this will run into billions of dollars. For example,in the United Kingdom, it is estimated to be US$2.1 billion. I haven’t yet seen any credible estimates for the cost of compliance with FATCA in the BVI. Similar to financial regulation, this huge cost pressure actively drives the low value sector of the market away from our shores and into the arms of less responsible jurisdictions. These developments should not necessarily be viewed in an entirely negative light. The new world of increasing regulation and transparency also represents the green fields of opportunity. It represents change, and change can be painful, but as the old axiom goes - in every threat, there is an opportunity. The new regime of greater regulation and transparency creates a new open space for firms and jurisdictions
to stake their claims. The increased desire for substance offshore opens up a myriad of new opportunities. Robust compliant structures have more value in a world where everything is open to scrutiny. Those who can provide these services effectively will thrive; those who are not able to do so will not retain their clients in the financial services industry for the long term. The global history of offshore finance is littered with the corpses of jurisdictions and businesses which failed to adapt and were consigned to the graveyard of history. The challenge for the BVI and for industry practitioners within the BVI, is to ensure that in this brave new world, we are the colonists and not the corpses. The early signs are encouraging. The establishment of the Commercial Court in the BVI has been a resounding success, showing that BVI litigators can play a central role in multi-jurisdictional disputes and hold their own amongst the behemoths of cross-border dispute resolution. Similarly, the array of corporate restructuring options have enabled insolvency practitioners and restructuring lawyers to expand their roles. Raising capital now typically involves far more input and expertise at the offshore level than in yesteryear. However, other areas have lagged behind comparatively; there is still little work done within the jurisdiction for fund or trust administration despite the greater push towards “substance” in management in the offshore space. The challenges of operating in the higher value space are no less formidable simply because we have had the luxury of time to evolve. The competition is fierce. The BVI remains handicapped by the non-existence of any real banking infrastructure behind it. The pressure to add value and to innovate is constant. The never-ending barrage of international initiatives seeking the mythical hidden offshore tax booty creates a constant drain on time and resources. Although it is improving, Government is still too slow and too ponderous when responding to requests by the private sector for reform. None of these things are likely to change soon but despite all these challenges, and possibly, because of them, this is a fantastically exciting time for the BVI’s offshore industry. The truth is, nobody can predict exactly where as an industry, we are going to go next but it is going to be an exciting ride. For anyone who would rather be a passenger than a driver, they had better be careful not to fall out of the vehicle. BB January 2015 Edition
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