Offshore Financial Centres - Treasury Contents

Memorandum from the British Virgin Islands Financial Services Commission (FSC)

EXECUTIVE SUMMARY

  I.  On 30 April 2008, the United Kingdom Parliament Treasury Committee issued Press Notice No. 42 inviting written evidence on offshore financial centres (OFCs), and outlining 11 questions of particular interest to the Treasury Committee.

  II.  The British Virgin Islands Financial Services Commission (FSC), responsible for the regulation, supervision and inspection of financial services business operating in and from within the Territory, responds to the invitation for written evidence, outlining the following positions on a general level and in relation to the specific questions posed:

  III.  Generally, the view is taken that the Treasury Committee's inquiry into offshore finance centres must not be seen as centering on the longstanding debate between onshore and offshore jurisdictions. Rather, it should be focused on the pertinent issue of the standard of regulation and supervision of financial centres, whether onshore or offshore, and a demonstrated willingness to cooperate on matters of exchange and sharing of information. It should be noted that generally sophisticated criminals look to jurisdictions with well-established financial structures and reputation, whether onshore or offshore, to abuse and misuse the financial system. Thus regulatory and law-enforcement authorities across the globe have individual and collective responsibility to prevent the abuse of legitimate financial systems through adequate regulation and supervision and the maintaining of robust regimes of cross-border mutual legal assistance.

1) Offshore finance centres contribute to global financial development and stability by encouraging healthy competition. They act as stimulants to economic growth in other parts of the world by encouraging foreign direct investment, while at the same time serving as catalysts to good government. It is no doubt that OFCs are generally recognized as major players in the global economy as they provide a medium for efficiency and speed in promoting international commerce and reducing costs associated with red tape in a highly competitive global market.

2) The use of well-regulated financial centres is good for financial stability. Offshore financial centres are not inimical to global financial stability. Emphasis, in investigations and evaluations of OFCs undertaken by the International Monetary Fund (IMF) and other international bodies, has been properly placed on ensuring adequate regulation and supervision, a willingness to exchange and share information and foster closer cooperation in rendering mutual legal assistance.

3) Regarding the general question of transparency, OFCs subscribe to international standards for the regulation and supervision of financial sectors, and have been found to operate regimes to standards that are equivalent to, and in some instances, exceed those in onshore jurisdictions. Both onshore and offshore jurisdictions are obligated to put in place legislative and administrative measures to monitor their regulatory, supervisory and international cooperation regimes.

4) Complex financial instruments, including collateralised debt obligations (CDOs), have recently come under increased scrutiny, as financial analysts have found that their complexity may have played a role in the subprime mortgage and ensuing credit and liquidity crises and overall market turmoil. CDOs are as much a product of offshore finance centres as they are of onshore centres and the International Organisation for Securities Commissions (IOSCO) is currently in the process of developing guidance for credit rating agencies in rating complex financial instruments, in order to better guide and protect the financial market. The Virgin Islands, as a key player in global financial services, will continue to discharge its obligations by continuing its active participation in the IOSCO and other international initiatives to develop acceptable standards of regulation to ensure greater transparency and stability within the global financial market.

5) The notion that OFCs have been successful because of low or zero levels of taxation is a flawed argument. Those jurisdictions that had the same belief and ventured into financial services realized sooner to their shock that they had had to close down. The more successful United Kingdom Overseas Territories like the Virgin Islands have had to develop efficient systems that ensure good governance and strong legal systems, coupled with low levels of corruption, to ensure success. Operating transparent systems have always assured market confidence which attracts investors. The FSC strongly believes that good business is built on honesty and integrity, and that proper, appropriate regulation attracts, rather than deters, good business.

6) The United Kingdom has always been supportive of the Overseas Territories actively engaging in the business of financial services. It emphasizes the importance of transparency, proper and adequate regulation and supervision and putting in place a regime of international cooperation. The FSC has had no indication from the Government of the United Kingdom or any of its agencies that the policies of the Virgin Islands (whether tax-related or otherwise) are inimical to or have any negative impact on the tax revenue and policy of the United Kingdom.

7) Given that the Virgin Islands (as one of the Overseas Territories) has inherited much of the British legal system (and received support from the United Kingdom for charting a legitimate independent source of revenue—financial services—to fund its budget) and has excelled in developing efficient systems of financial management, good governance, strong legal systems with adequate checks and balances in government, it is internationally recognized for the soundness of its financial services industry. No effort has been spared in ensuring compliance with internationally established standards of regulation and compliance, fully cognizant of the fact that good reputation is cardinal to success.

8) The United Kingdom has taken a leading role in combating terrorist financing in relation to its Overseas Territories through the enactment of two relevant Orders in Council—The Terrorism (United Nations Measures) (Overseas Territories) Order 2001 and The Anti-terrorism (Financial and Other Measures) (Overseas Territories) Order 2001. In addition, the Virgin Islands has taken its own initiative in buttressing its anti-money laundering and terrorist financing regime by enacting the Anti-money Laundering Regulations, 2008 and the Anti-money Laundering and Terrorist Financing Code of Practice, 2008 (effectively revoking previous enactments on the subject). Through the legislative and administrative framework that the FSC has established, in cooperation with the Government of the Virgin Islands, for financial regulation, enforcement, countering money laundering and terrorist financing activities, promoting and fostering international cooperation, it continues along the tireless path of protecting its service industry and the reputation of the jurisdiction, while at the same time lending maximum support to the international efforts to ensure continued global financial stability.

9) The FSC (as a regulatory body) recognizes and values the relationship with the relevant government ministries and departments in the United Kingdom and counts on their continued support as it continues to operate a transparent, efficient and well-managed financial services industry for the good of the people of the Virgin Islands.

10) Prior to 1984, the Virgin Islands concluded a series of double taxation agreements as a way of steering its economy, in addition to receiving limited aid from the United Kingdom. Such agreements were concluded with Canada, Denmark, Japan, New Zealand, Norway, Sweden, Switzerland, United Kingdom and United States of America. These agreements were given the force of law in the Virgin Islands through a series of Orders made under the Income Tax Act (Cap. 206). The agreement with the United Kingdom was terminated in the 1960s. The agreement with the USA was the one most untilised, but this was terminated by the USA in January, 1983. Following the USA termination, the remaining countries effectively pulled back from their agreements as well. The Virgin Islands does not operate a double taxation treaty arrangement with any country.

11) The Virgin Islands has a binding agreement with the United Kingdom and other EU countries in the context of the EU Directive on the Taxation of Savings Income which requires the Government of the Virgin Islands to collect and transmit, under a withholding tax arrangement, a specified percentage of the interest income of United Kingdom and other EU citizens domiciled in Virgin Islands' banks. In addition, the Government of the Virgin Islands (with FSC participation) is currently negotiating tax information exchange agreements with other EU and non-EU countries which will facilitate requests of inquiries into tax-related matters.

12) The FSC operates systems and policies that are independent and transparent. It encourages and participates fully in matters of international cooperation, while at the same time ensuring proper and adequate regulation and supervision of all the business entities that fall within its jurisdiction. The FSC has had its regulatory, supervisory and international cooperation regimes independently evaluated by international bodies such as the CFATF, FATF, IMF and IOSCO and has in each case found to be compliant with established standards. Where recommendations had been made, these had been effected in cooperation with the Government of the Virgin Islands. The FSC continues to welcome evaluations of its financial services and related regimes.

  IV.  As the leading international financial institutions have shown in their studies, the existence of offshore financial centres is not inimical to global financial stability. These centres provide legal and legitimate services recognized and accepted under the WTO Rules, and have also been shown to be good for the stability of the financial system. The FSC believes in a continual review and updating of appropriate legislative and administrative regimes to ensure continued compliance with internationally established standards and to provide full cooperation to requests for mutual legal assistance. This way it will continue to be a part of the international efforts to assure global financial stability.

  V.  The FSC urges the Treasury Committee not to support large jurisdictions in any anti-competitive attempts to limit policymakers' inquiries and investigations to small financial centres, especially those like the Virgin Islands that have been shown to comply with and apply internationally established standards of regulation, supervision and cooperation.

  VI.  In addition, the FSC looks forward to the continued support by and collaboration with HMG and the relevant governmental agencies as the Virgin Islands continues to strengthen its systems and policies to aid the laudable efforts at ensuring global financial stability.

  VII.  Finally, the FSC calls on the Treasury Committee to take into full account the submissions contained in this summary and in the following report and to appropriately reflect those submissions in any report the Committee generates arising from its inquiry.

INTRODUCTION

  1.  On 30 April, 2008 the Treasury Committee of the United Kingdom House of Commons issued Press Notice No. 42 announcing a new inquiry it was undertaking into offshore financial centres. This followed on the hills of an inquiry in July 2007, by the Foreign Affairs Committee of the House of Commons into the FCO's responsibilities as they related to the security and good governance of the UK Overseas Territories (of which the Virgin Islands is one). That inquiry was designed to focus, amongst other things, on issues of transparency and accountability and the regulation of the financial sector. The Financial Services Commission of the Virgin Islands (FSC) responded to that inquiry in so far as it related to the financial services sector of the Virgin Islands by submitting a report in that regard (a copy of which is attached herewith as Appendix 1).

  2.  The FSC recognizes that it is one of several institutions around the developing world that is characterized as part of jurisdictions that are labeled (rightly or wrongly) as "offshore financial centres" or "offshore centres". This characterization does not affect institutions that belong to the developed world, generally referred to as "onshore" and which in the main do not suffer from the negatives associated with the characterization of "offshore", even though in reality they engage in the same types of business administered by the so-called offshore centres.

  3.  The irony, however, is that financial institutions and regulatory bodies in both the onshore and offshore worlds deal in the same areas of financial services and as a consequence are in material competition with each other. Thus the potential for abuse of the legitimate structures of the financial services sector is as real in the onshore world as it is in the offshore world.[453] Persons with the intent and inertia to promote and perpetrate their designs to launder money, finance terrorist activities, disguise ill-gotten gains for profit, evade payment of taxes, rob public treasuries to ship their loot to the onshore and offshore worlds and engage in other types of financial crimes look to jurisdictions they generally consider "safe" to house the products of their criminal activities. However, the more sophisticated criminals with large products of criminal activity look not only to "safe" jurisdictions; they also look to jurisdictions with well-established financial structures and reputation. The case of the then old and well-established Riggs Bank in the USA (otherwise known as the bank for diplomats and heads of state) is a good example in point. Indeed the aftermath of the terrorist attacks on the USA in September, 2001 had demonstrated the vital and major links for the funding of terrorist activities to have taken place in the onshore world rather than in the offshore world.

  4.  The global economy (founded largely on the principles of free market economics) as it stands today is inter-twined; it is truly globalized and inter-dependent with resulting benefits.[454] The free flow of capital and investment has long been a norm and is a principal driver in the stimulation of economic development. In that context, investors look to different available financial structures, both in the onshore world and in the offshore world, that would secure them appropriate returns and stimulate further investment. This has led to numerous innovations of legitimate structures geared towards facilitating business and economic growth. In some instances these innovations relate only to improvements in the existing structures, such as in the areas of company incorporations (where international companies play a crucial role in facilitating business world-wide) and insurance (where the use of captive insurance enables the coverage of certain activities that otherwise would not receive coverage through the traditional insurance system).

  5.  However, the FSC recognizes that the more sophisticated financial services structures become, the more the likelihood of criminals engaging in complex and unusual transactions that tend to mar the legitimate basis of those structures. It is precisely for this reason that the FSC subscribes unreservedly to the global effort in developing standards of effective regulation and monitoring, and fostering international cooperation to assist foreign regulators and law enforcement agencies (foreign and domestic) to verify the identities of persons and track down offenders. As the principal driver of the economy of the Virgin Islands, the financial services sector is conscientiously guarded against abuse and misuse through the enactment and continual review of relevant financial and enforcement legislation and the ongoing enhancement of the investigative agencies.

  6.  The FSC, as the sole regulatory authority for financial services matters in the Virgin Islands, plays a key role in sustaining the development of the Territory's economy and ensuring maximum compliance with the regulatory laws. This is generally carried out through a system of regular and effective supervision with the primary aim of preventing any abuse of the legitimate financial structures and maintaining vigilance, integrity and professionalism in the financial services industry. In this regard, the FSC engages on a continual building of the capacity and expertise of its employees, sensitizing them both to the requirements of their assignments and the FSC's international obligations to ensure adequate and proper regulation to established standards and to be fully engaged in the process of providing efficient and effective mutual legal assistance to foreign regulators and law enforcement agencies within the terms of the established laws.

  7.  By providing a separate response to the Treasury Committee in addition to that made by the Virgin Islands Government, the FSC in no way intends to detract from the Government's submission, particularly as there are broad areas that are within the sole competence of the Government. However, the FSC hopes that it can provide greater insight into its activities and outline in broad perspectives its role and obligations in promoting competitive financial services and lending credence to the global effort in fighting against activities that are incompatible with the establishment and promotion of legitimate business structures, while at the same time recognizing the legitimacy of financial services as a fundamental component of globalization. In addition, the FSC will seek to provide answers to the questions raised by the Treasury Committee that fall within its area of responsibility.

  8.  The FSC's response is in two Parts. The first Part makes general remarks about the development of the financial services sector in the Virgin Islands; the FSC's involvement in developing regional and international standards of regulation and compliance; the FSC's international cooperation, regulatory and supervisory regimes; and offshore finance centres and global financial stability and transparency. The second Part deals briefly with the specific questions posed by the Treasury Committee. The FSC, however, draws attention to the fact that the provisions of the first Part are essential and very closely linked to the answers provided in the second Part.

PART I: GENERAL

DEVELOPMENT OF THE FINANCIAL SERVICES SECTOR IN THE VIRGIN ISLANDS

  9.  As with many other so-called offshore centres, the Virgin Islands' entry into the field of financial services has been a gradual process, propelled in some respects by circumstances (as noted below). The International Monetary Fund, Commonwealth Secretariat and other international agencies had in the early years (late seventies and early eighties and indeed into the early nineties) encouraged and had been supportive of smaller jurisdictions developing and finding niches in financial services[455] and, in the case of the United Kingdom dependencies, one commentator has noted that this "suited Britain, because it meant its protectorates could become self-sufficient"[456] and in many ways reduce the burden of budgetary aid. Financial services as a medium of economic development was not only seen as legitimate, but it was also encouraged. Over time the small jurisdictions that ventured into this field reaped enormous benefits through prudent management processes, coupled with stability, good governance and strong legal systems. In most cases, a large number of these jurisdictions already had their tax systems in place (high, low or non-existent) and therefore the motivation for investor gravitation towards them was in reality not tax-based.

  10.  Prior to 1984, the Virgin Islands had concluded a series of double taxation agreements as a means of helping to steer its economy, in addition to receiving limited aid from the United Kingdom. Such agreements were concluded with Canada, Denmark, Japan, New Zealand, Norway, Sweden, Switzerland, United Kingdom and United States of America. These agreements were given the force of law in the Virgin Islands through a series of Orders made under the Income Tax Act (Cap. 206). The agreement with the United Kingdom was terminated in the 1960s, whilst that with the USA was terminated in January, 1983. By far the most important treaty and virtually the only one that was utilized was the one with the USA. Following the USA termination of the agreement with the Virgin Islands in 1983, the remaining countries effectively pulled back from their agreements as well, leaving the Virgin Islands without another efficient and effective medium (save tourism) with which it could continue to steer its economy.

  11.  Then in 1984, the Virgin Islands developed and enacted new legislation for the registration of international business companies. This enactment became the precursor to the emergence of a financial services industry in the Virgin Islands. Through hard work, prudential management and supervision, regular legislative reviews and the enhancement and strengthening of its legal and judicial systems, the Virgin Islands was able to develop a niche market in financial services through the domiciliation of international business companies. That impetus led to an expansion of the offerings within the financial services sector—insurance, fiduciary services, investment business[457]—and a greater adherence to emerging and well-established international standards of regulation and cooperation. The Government of the United Kingdom had been helpful in many ways in providing advice and comments on relevant legislative measures relative to the financial services sector.

  12.  Until December, 2001, the regulation of the financial services sector of the Virgin Islands fell to the then Government Financial Services Department. However, in accordance with the prevailing views of the late 1990s that required the establishment[458] of independent/autonomous financial services regulatory institutions that would properly and effectively administer the operation of financial services outside the purview of any undue governmental or industry influence or pressure, the FSC was established through the enactment of the Financial Services Commission Act (FSCA) in December, 2001 and became operational as such in January 2002.

  13.  Since that period the FSC has been operating in an independent capacity, but at the same time liaising with the Government on key policy matters with broad financial and social implications for the Territory. The FSCA enables the FSC to retain from 7 to 15% of the total annual revenues it collects on behalf of the Government as a means of buttressing its operational independence. The FSC, in the execution of its duties, is answerable to its Board of Commissioners and the House of Assembly; the Board holds annual formal dialogues with the Cabinet (the Executive Council before 2007) to discuss matters pertaining to the performance of the FSC, initiatives and future direction of the FSC, Government policy with respect to financial services and developments in the international financial markets as these relate to the Virgin Islands.

  14.  The FSC recognizes that the growth in financial services within the Virgin Islands brings with it certain risks, including exposure to criminals and others looking for weaknesses within the legal, regulatory and law enforcement systems to use the established financial services structures for illegitimate purposes. In effect, such criminals and other persons use jurisdictions with weak systems to enable them to enter the global financial services markets where they continue to carry on their nefarious activities. It is precisely this realization that had led the Virgin Islands since the early nineties to review and amend its financial services legislative regime to introduce prudential regulation and a mechanism for information disclosure and the rendering of mutual legal assistance.[459]

  15.  These defences were strengthened by the enactment of relevant anti-money laundering and mutual legal assistance legislation;[460] this includes the establishment in March, 2004 of the Financial Investigation Agency (following the enactment of the Financial Investigation Agency Act in December, 2003).

  16.  The regular review of these and other related legislation in the context of domestic policies and emerging international standards of regulation and international cooperation remains a vital feature of the work of the FSC in collaboration with the Government of the Virgin Islands.

THE FSC'S INVOLVEMENT IN DEVELOPING REGIONAL AND INTERNATIONAL STANDARDS

  17.  The FSC has long recognized the important roles international financial institutions play in ensuring global financial stability through a prudential process of engagement and the establishment of appropriate standards in regulatory, supervisory, enforcement and cooperation matters. In this vein, the FSC continues to participate in regional and international discussions geared towards establishing and enhancing proper and adequate regulation and supervision of the financial services industry, from service providers to the type of business that is conducted.

  18.  Such participation is not limited to organizations of which the FSC is a member; it extends to those where it enjoys associate or observer status. The FSC also takes account of the developments in those organizations of which it is not a member and in which it holds no other status (such as the OECD and European Union). The FSC pursues active membership of international standard setting institutions primarily as a means of keeping up-to-date with emerging developments and assisting to inform vital decisions that relate to or affect the so-called offshore jurisdictions in the global economy and help develop effective mechanisms for international cooperation.

  19.  The FSC is currently a member of the International Association of Insurance Supervisors (IAIS) and actively participates in its working groups that develop standards in specific interest areas. In March, 2007, it became the first institution to be admitted to the membership of the International Organization of Securities Commissions (IOSCO) on the basis of the organization's Multilateral Memorandum of Understanding on Consultation and Cooperation and the Exchange of Information; this followed an extensive review by the organization's Standing Committee 4 of the Virgin Islands' legislative and institutional regimes on international cooperation which were accepted as meeting IOSCO's established standards.

  20.  In October, 2007, the FSC was admitted as a member of the Offshore Group of Banking Supervisors (OGBS), after having previously served in the capacity of observer within the organization. It served as a member of the OGBS's Working Group that developed the Statement of Best Practice on Trust and Corporate Service Providers. The FSC is a founding member of the Offshore Group of Insurance Supervisors (OGIS), Offshore Group of Collective Investment Scheme Supervisors (OGCISS) and International Trade and Investment Organization (ITIO) and (save for the ITIO in relation to which the Government now has full responsibility) actively participates in their work.

  21.  Furthermore, the Virgin Islands' membership of the regional Caribbean Financial Action Task Force (CFATF) (of which it is a founding member) enables the FSC to regularly participate in the organization's deliberations in monitoring anti-money laundering initiatives amongst member countries and territories and devising policies for implementation. The FSC was admitted as an associate member of Fin-Net in 2007. The FSC also 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. The FSC played a key role in assisting the Government's process of reviewing the OECD's principles of transparency and effective exchange of information in tax matters which led to the Government's formal commitment to the principles in 2002.

  22.  The active involvement of the FSC at such regional and international levels affords it the opportunity to network with a broad section of institutions that seek to continually develop standards of regulation and encourage and foster cooperation at the global level, especially in relation to matters of cross-border trade and services. It is in this context that the FSC, with the full support of the Virgin Islands Government, readily accepts and promotes the idea of subjecting the jurisdiction to regular reviews of its financial services industry and law enforcement and international cooperation regimes.

  23.  Both the IMF and the CFATF have conducted such reviews; the CFATF is currently finalizing its third review of the jurisdiction, while the IMF is expected to undertake its second review sometime later in the year. Recommendations arising from these periodic reviews are fully considered and given effect to. The FSC considers these reviews as essential to providing an objective assessment of the systems and practices of the jurisdiction, especially as they relate to financial services regulation and supervision. They also provide the FSC the opportunity to further develop and enhance its service industry, while at the same time effectively countering the new innovations developed and engaged in by criminals and organized crime generally.

THE CENTRE STAGE OF INTERNATIONAL COOPERATION

  24.  It is an indisputable fact that international finance has taken on a solid centre stage in economic liberalization in an increasingly globalized world. The mobility of capital, new technology and the need to efficiently facilitate business endeavours and protect investments has led over the last several years to the enactment of legitimate business structures and related enforcement mechanisms. Concomitantly, the international community has recognized the importance of adopting necessary measures not only to protect those legitimate structures and strengthen the enforcement mechanisms, but also to keep at bay persons who would be bent on abusing those structures for criminal purposes and make a mockery of the law. With increasing cross-border trade and investment opportunities beyond national borders, coupled with migrant labour, the need for international capital flow has become inevitable.

  25.  Financial services is a truly lucrative market[461] which is also highly globalized as a service industry that attracts enormous competition. It is an industry that is active both in the onshore and offshore worlds and all jurisdictions engaged therein are generally in material competition with each other. As a commentator notes, "[g]lobalisation has vastly increased the opportunities for such business. As companies become even more multinational, they find it easier to shift their activities and profits across borders and into OFCs|.Financial liberalization—the elimination of capital controls and the like—has made all of this easier. So has the internet, which allows money to be shifted around the world quickly, cheaply and anonymously".[462] The reverse, whereby business activities and profits shift across borders and find their way into onshore economies, is equally true. The parasitic stigma associated with offshore jurisdictions—as opposed to onshore jurisdictions—as tax havens that divert profits and revenues simply on account of low or zero taxes is unfortunate. As already mentioned, many offshore jurisdictions have always had low or no taxation. They differ in this respect from those onshore jurisdictions which constantly adapt their tax systems to attract foreign capital. The tax exemption of foreign investments in the USA is one of many examples.

  26.  Whatever the arguments may be between offshore and onshore jurisdictions in matters concerning international finance and the offering of services in that regard (which the FSC views as a distraction), it should be noted that all such jurisdictions face the same or similar threats or potential threats of abuse of their legitimate business structures from criminals and organized crime, whether in the form of money laundering (including the banking of the proceeds of corruption), terrorist financing or other financial crimes. The FSC strongly believes that the issue really is not between offshore and onshore;[463] rather, it is whether the concerned jurisdictions have in place appropriate legislative mechanisms and administrative resources and capacities to police their financial services perimeters against abuse for unlawful purposes and render effective assistance to other jurisdictions to identify customers and apprehend criminals, including those who criminally evade their tax obligations. It is the recognition of this fact that has led, in recent years, to a greater focus on international cooperation—the development of standards of regulation, enforcement and mutual legal assistance.

  27.  The leading global standard setters in the field of international finance such as the FATF, OECD, OGBS, IAIS and IOSCO, supported by key agencies such as the World Bank and the International Monetary Fund and regional institutions, recognize the deficiency that will inevitably be gained in not promoting dialogue and cooperation between jurisdictions to apply meaningful standards that will keep criminals and organized crime at bay.

  28.  The FSC considers sacrosanct a jurisdiction's right to engage in lawful and legitimate business by employing appropriate legal structures and mechanisms. However, such structures and mechanisms must not operate at a level whereby they facilitate criminals and the abuse of the financial system; they must operate to protect such structures and mechanisms against abuse and promote international cooperation to lead a joint and cohesive fight against organized crime, market manipulation and fraud, money laundering, terrorist financing and other types of financial crime. In as much as it believes in the relevance of the principle of confidentiality in business relationships, the FSC does not subscribe to the institutionalization of secrecy laws. The Virgin Islands indeed has no secrecy legislation, even though from time to time assertions to the contrary appear in the international media which we might hope were better informed.

  29.  A fundamental aspect of the FSCA is its provisions on international cooperation. Section 33D fully empowers the FSC to provide assistance to a foreign regulatory authority and in so doing it may exercise any of the powers granted to it under the relevant sections of the FSCA—these essentially relate to the FSC's powers to request information and documents from any entity, appoint examiners to conduct investigations in relation to requests, apply for search warrants, examine or apply for persons to be examined under oath and disclose information. Such assistance extends to persons and authorities with "functions in relation to the prevention or detection of financial crime, including money laundering, financing of terrorism, misconduct in, or misuse of information relating to, financial markets and offences involving fraud or dishonesty".[464] The relevant sections of the FSCA are attached herewith as Appendix 2. It should be noted as well that in other areas of international cooperation, notably law enforcement and tax information exchange, the Virgin Islands has developed and long implemented appropriate legislation.[465]

  30.  The FSC's international cooperation regime is considered to be second to none. Between 2003 and 2007, the FSC went through a very rigorous evaluation process of its international cooperation regime by the International Organization of Securities Commissions (IOSCO) and at the end of it the FSC was admitted to membership of the organization. The FSC became the first institution to be admitted into IOSCO ordinary membership on the basis of the organization's Multilateral Memorandum of Understanding.

  31.  In addition, the FSC has developed and published, in association with the Government of the Virgin Islands, a handbook on international cooperation which details the procedures for preparing and submitting requests for mutual legal assistance in the areas of financial services (generally on a regulator-to-regulator basis), law enforcement, enforcement of foreign civil judgments and service of process and tax information exchange. A copy of the handbook is attached herewith as Appendix 3.

  32.  The FSC operates a robust system in the implementation of its international cooperation regime. Appendix 4 shows the number of requests received for the years 2004-08 (May), the requesting foreign institutions and the time frame within which they were disposed of. The FSC is fully cognizant of the importance of timely response to requests for information and has over the years been striving to improve on its record as the 2007-08 statistics in Appendix 4 show.[466] The FSC remains committed to a continual review of the regime to ensure continued improvement.

THE VIRGIN ISLANDS' REGULATORY REGIME—DUE DILIGENCE AND EFFECTIVE SUPERVISION

  33.  Prior to January, 2002, the regulation of financial services in the Virgin Islands vested in the Financial Services Department of the Government. Thus as a department of Government, the institution was governed by the rules of the public service, including the hiring and discipline of employees and the allocation of financial resources to regulate the financial services industry. In December 2001, the FSCA was enacted by the then Legislative Council (now succeeded by the House of Assembly) which effectively established the Financial Services Commission as a separate autonomous regulatory authority. The Financial Services Department was thus transformed into an operational FSC in January 2002. The structure of the FSC and its key areas of discipline for regulatory purposes are outlined in Appendix 1 hereof.

  34.  In essence, the FSC regulates and supervises business in the Virgin Islands in the areas of banking and fiduciary services (which includes trust and company service providers), insurance (which includes captive insurance/reinsurance), investment business (which includes public, private and professional mutual funds), insolvency practice and company incorporation and administration. Its supervisory role is expected to be enlarged to cover non-financial businesses with the imminent enactment of the Financing and Money Services Bill, 2008. The FSC also has responsibility for registering trademarks and patents within the portfolio of the Registry of Corporate Affairs.

  35.  Apart from the FSCA, the FSC takes its mandate from several other pieces of financial services legislation.[467] While the FSCA generally provides the powers and functions of the FSC, the enactments relating to banking, insurance, trust business, insolvency and investment business detail the requirements for the respective licensing regimes. Efforts are made on a consistent basis to benchmark these enactments against internationally established standards of regulation and to review them from time to time to effect necessary improvements.

  36.  The FSC is currently developing subsidiary legislation that would codify relevant standards of prudential regulation relating to insurance and banking. These draw from the Basel Core Principles as well as the IAIS Core Principles. A similar exercise is to be undertaken with respect to investment business and the other regulatory sectors under the supervision of the FSC.

Due Diligence Responsibilities

  37.  As the regulator of financial services business in the Virgin Islands, the FSC is required under the FSCA and other sector-specific legislation to carry out due diligence exercises in respect of all regulated entities. This entails conducting necessary background checks on persons (legal and individual) who relate or are connected to regulated persons. From a prudential standpoint, due diligence generally takes into account the fitness and propriety of a regulated person. This requires the FSC to exercise judgment and discretion with respect to the honesty, integrity, reputation, competence, capability and financial soundness of an applicant regulated person and the persons connected to it.

  38.  The laws relating to anti-money laundering and terrorist financing require all regulated persons in the Virgin Islands to provide information on persons with whom they establish business relationships or for whom they perform one-off business transactions. The required information includes the identity of the persons concerned, the beneficial owners of the person (in the case of legal persons), the nature and intended purpose of the business relationship or transaction and, in the case of trusts, details of the structure of the trust and classes of beneficiaries and charitable objects and all related matters.

  39.  The essence of these requirements is to forestall money laundering, terrorist financing and other forms of financial crime. However, the requirements are also considered essential to the Virgin Islands' international cooperation regime by ensuring that requests for mutual legal assistance are properly and effectively dealt with. Indeed one of the accusations leveled against offshore jurisdictions relates to the non-availability of timely information on beneficial ownership of corporate vehicles and the absence of proper and effective due diligence. These elements are considered relevant to effective cross-border cooperation, especially as they relate to information exchange.

Effective Supervision

  40.  The supervisory powers of the FSC are broadly outlined in the FSCA. The licensing and supervisory matters are vested in the Licensing and Supervisory Committee comprising the Managing Director, his two deputies and the heads of the various divisions of the FSC. Matters pertaining to enforcement are vested in the Enforcement Committee comprising the Managing Director, his two deputies and the heads of the Legal and Enforcement Division and Policy Research and Statistics Division. Between them, these committees oversee the FSC's responsibilities in ensuring effective supervision and enforcement.

  41.  The FSC conducts both on-site and off-site supervision of the regulated entities to ensure full compliance with established laws and policies. Where deficiencies are discovered, these are required to be corrected, failing which appropriate enforcement action is taken against the defaulting regulated entity. The FSC has and exercises enormous compliance and enforcement powers pursuant to Part V of the FSCA. Essentially, these require the FSC to conduct compliance inspections; appoint examiners to conduct investigations on behalf of the FSC; require the appointment of qualified and competent persons by licensees; take enforcement action which includes the imposition of administrative penalties; issue public statements where enforcement action is contemplated; revoke or suspend licences and certificates issued to regulated entities; make applications to the Court for protection orders; and issue directives. This process enables the FSC, in addition to ensuring compliance, to effectively respond to issues of international cooperation.

  42.  Effective supervision requires adequate provision of resources, both financial and human. As noted earlier, the FSC retains annually between 7 and 15% of total revenue collected and since its establishment the FSC has been retaining from 9 to 11% of collected revenue. The staff of the FSC have increased steadily over the years according to the demands of the role of the FSC and training is a fundamental feature of the institution.[468]

OFCS AND GLOBAL FINANCIAL STABILITY AND TRANSPARENCY

  43.  The focus of the Treasury Committee's inquiry relates to the relationship between offshore financial centres and global financial stability and transparency. This subject is not new and has been increasingly discussed, especially since the OECD process on transparency and fair competition in tax matters emerged in the late nineties. Offshore jurisdictions have particularly come under closer scrutiny, not least by countries or association of countries with which they are in material competition in the field of financial services.

  44.  This subject is driven more by concerns held by some countries in the developed world over the loss of tax dollars which are increasingly viewed as finding host in the offshore jurisdictions. The pro- and anti- offshore debaters continue to discuss the subject in varying fashions, but what is clear is that both onshore and offshore jurisdictions were guilty of administering lax rules in the past thus paving the way for illicit money to find its way into their jurisdictions.[469]

  45.  The emphasis nowadays is on the establishment of appropriate legislative and enforcement regimes that are efficiently and effectively supervised to keep criminals and organized criminal groups from making use of the legitimate structures of international finance. If deficiencies are allowed to creep into the financial system, the resulting effect could be unwarranted distortions and instability in the global market. The subject therefore becomes one of collective responsibility in which every jurisdiction plays its part by putting in place systems and mechanisms that will not only prevent the abuse of the financial system, but that will also facilitate the tracking down of criminals to bring them to justice.

  46.  Transparency requires openness and eschews secrecy that is deliberately designed to shelter the criminal. The FSC strongly believes that good business is built on honesty and integrity and that the greater number of investors, in both the onshore and offshore jurisdictions, are genuine persons who are taking advantage of legitimate services that the laws offer; they are not crooks. This is confirmed by a straight forward comparison of the number of business entities that are domiciled or licensed in a jurisdiction and the number of requests for mutual legal assistance that is received on a year to year basis to realize this. However, this is no reason for complacency as there will always be those that will domicile or seek licensing in a jurisdiction for nefarious purposes and it is those few that the world needs to gang up against.

  47.  Globalization embodies trade in goods and services and that includes financial services; its launching pad is trade liberalization. In this context, when the offshore financial centres open up their markets to investment through the enactment of appropriate and lawful legislation, they are acting legally and legitimately. The story only begins there. They must at the same time put in place appropriate and effective structures to prevent criminals from abusing the established financial systems. They must recognize that global financial stability is in everyone's interest. They must move on further to ensure an efficient and effective regime of international cooperation which enables the tracking down of perpetrators of crime and fosters information exchange.

  48.  It should be understood and appreciated that not all jurisdictions that are engaged in the provision of regimes of financial services accept and implement less-than-satisfactory rules of business establishment and conduct. Rather, those jurisdictions that recognize the central function of financial services in the growth of their economies, engage actively in ensuring efficiency and transparency to safeguard the niches they have been able to develop.

  49.  Professor Hines and Dhammika Dharmapala of the University of Michigan undertook a study in 2006 to find out the reason for the attractiveness of the so-called tax havens.[470] The study looked at over 200 jurisdictions and concluded that the so-called tax havens were, as one commentator puts it, "overwhelmingly small, wealthy and, especially, well governed, with sound legal institutions, low levels of corruption and checks and balances on government".[471] The study found that the lowering of taxes by itself does not bring about a high level of prosperity and the argument that offshore financial centres rely on low or no taxes to attract foreign business emanates from a flawed premise.

  50.  It has been stated time and time again that offshore financial centres play a crucial and legitimate role in creating discipline in the financial markets by affording tangible and viable alternatives to consumers. They enable citizens to legally structure their businesses in order to limit their tax liabilities.[472] This by itself provides healthy tax competition and encourages the establishment of tax-efficient platforms for the promotion and growth of global commerce. In a fiercely competitive world, offshore financial centres provide speed and efficiency in the operation of modern-day commerce without the traditional intricacies that cause inordinate delays and loss of business and profit.

  51.  It is the unfortunate case that quite often the offshore finance centres are lumped into one basket and stigmatized as parasitic, havens for criminals and poorly regulated. Nothing could be further from the truth. It should be noted that these so-called offshore finance centres differ from jurisdiction to jurisdiction in terms of the financial services offered and the standard of financial regulation and supervision present.

  52.  Estimates from the OECD, BIS and IMF show that offshore holdings are in the range of $5 to $7 trillion and account for between 6 and 8% of world-wide wealth under management.[473] These estimates derive from the fact that the greater number of offshore finance centres, though small in geographic size, are efficiently and effectively well-governed, exhibit low levels of corruption, adhere to democratic governance and are politically stable. The most successful of the offshore finance centres adhere to internationally established standards as a viable means of maintaining their edge in the specific niches they have been able to map out for themselves. A jurisdiction that operates a badly run finance centre can hardly expect to attract good business.

  53.  It is therefore clear that lumping offshore finance centres into a single negative basket without an evaluation and appreciation of their standards of regulation and compliance is unfair and unfortunate.[474] It is this arbitrariness that continues to engulf the debate between offshore and onshore. It is accepted in a great many quarters that jurisdictions should be recognized as being well-regulated or poorly regulated. Well-regulated jurisdictions, whether onshore or offshore, are good for the global system as they promote financial stability.

  54.  Most offshore finance centres (including the Virgin Islands) apply risk-based supervision regimes which they find manageable. In the Virgin Islands, the FSC regularly consults with the private sector industry to establish and evaluate current risk issues and take appropriate measures to remedy them or put viable plans in place to address them.

  55.  The efforts and progress made by offshore jurisdictions continue to be recognized and acknowledged by the world's leading standard setters. In September, 2007, the Financial Stability Forum (FSF) recognized that the IMF and IOSCO had noted significant progress among the offshore finance centres with respect to compliance with international standards.[475] In 2000 the FSF, in reviewing the report of its Working Group on Offshore Financial Centres, noted that "some OFCs are highly regarded" and offshore financial activities are not inimical to global financial stability provided they are well supervised and supervisory authorities co-operate. The report acknowledged that "There are | highly reputable OFCs that actively aspire to and apply internationally accepted practices, and there are some legitimate uses of OFCs" and "it is recognized that there may be jurisdictions not formally thought of as OFCs that are more problematic in terms of global financial stability than some OFCs".[476] The same report notes further that while offshore finance centres are perceived as small jurisdictions there are a number of countries in the developed world that have effectively succeeded in attracting large concentrations of non-resident business by offering economic incentives either throughout their jurisdiction or in special economic zones. The emphasis is thus on proper and adequate regulation and supervision, rather than on whether or not offshore centres have a place in the global market.

  56.  In its 2005 Progress Report on Offshore Financial Centres, the IMF noted that "Compliance with standards in the OFCs is, on average, better than in other jurisdictions assessed under the Financial Sector Assessment Programme (FSAP), reflecting in part the higher average income levels of the OFCs. Results on cooperation and information sharing principles, which play a key role in cross-border supervision, show a similar pattern".[477] The reference to "other jurisdictions" relates to non-OFC jurisdictions, meaning jurisdictions in the onshore world. The report went on further to indicate that "The results for cooperation and information sharing principles in the first round of assessments are consistent with the general finding that, on average, OFCs meet supervisory standards superior to those of other jurisdictions though with deficiencies in lower income jurisdictions".[478] The IMF noted that 50% of offshore centres comply with "every principle and recommendation directly concerned with cooperation and information exchange as opposed to 47% of other assessed jurisdictions".[479] The IMF's assessments under its Module 2 essentially evaluate a jurisdiction's supervisory and regulatory compliance regime with international standards in the areas of banking, securities, insurance and anti-money laundering and terrorist financing. These assessments are benchmarked against the standards established by the Basel Committee on Banking Supervision, IOSCO, IAIS and the FATF. In addition, assessments under the FSAP "consider risks to macroeconomic stability stemming from the financial sector and the capacity of the sector to absorb macroeconomic shocks".[480]

  57.  The fact cannot be denied that even in the well-regulated and supervised offshore and onshore finance centres there is always room for improvement and the continuing need for vigilance, as the threats for abuse by criminals is forever present. Hence the emphasis by international standard setting institutions on proper, adequate and sufficiently resourced regulatory and supervisory regimes to ensure transparency, creating an effective check against criminal and other unlawful activity and demonstrating a willingness to engage in information exchange and sharing to foster international cooperation.

CONSTANT REGULATORY IMPROVEMENT IN THE VIRGIN ISLANDS

  58.  As noted above, the FSC and the Government of the Virgin Islands always welcome objective evaluations of the Territory's financial industry. The FSC sees the outcomes as an opportunity to re-evaluate its systems and processes (in addition to its own regular reviews and reforms) in order to effect necessary improvements and develop new strategies. Following the Virgin Islands' formal commitment to the OECD principles of transparency and effective exchange of information in 2002 (in which the FSC played a significant role), the Territory moved to review and revise its companies regime to make it more transparent by removing the ring fencing of certain companies as against others. The new regime—established by the BVI Business Companies Act, 2004—carried out additional reforms which required the maintaining of information on directors and beneficial owners.

  59.  In 2000 a joint UK-Overseas Territories project on the Review of Financial Regulations in the Caribbean Overseas Territories and Bermuda was undertaken by KPMG. This project was designed to identify the strengths and weaknesses in the regulatory and supervisory regimes of the Overseas Territories and make recommendations for improvement. In the Virgin Islands report, the KPMG noted in relation to the then Financial Services Department (succeeded in 2002 by the FSC), that the institution "appears to be a well-run regulator with a strong commitment to achieving international standards. However, we do not consider the current regulatory structure to be fully in accordance with international standards. This is because the current position by which the Governor in Council (or Minister of Finance) is responsible for licensing and enforcement action relating to financial service activity means that the regulator is not operationally independent. We, therefore, recommend that the FSD should become an independent regulatory body and that the current powers exercised by the Governor in Council, Minister of Finance and the individual regulators are transferred to that body".[481]

  The report made two further recommendations to ensure full compliance with international standards: that there should be an increase in staffing resources and that the marketing role of the FSD should be transferred to another body. Following the publication of the KPMG report, the Virgin Islands undertook a comprehensive review of its regulatory regime and enacted the FSCA granting regulatory independence to the FSC and divorcing the marketing role to a newly established Government department called the International Finance Centre. The FSC then undertook a complete review of its human resource requirements and provided necessary adequate staff; it also institutionalized a training programme to properly equip its staff to efficiently and effectively carry out the functions of the FSC.

  60.  Following its review of the Virgin Islands in 2002, the IMF wrote of the FSC as having "adequate independence and authority to licence and supervise covered financial services, which include banking, insurance, securities (mutual funds, their management, and investors), and trust and company service providers, whether onshore or offshore|In particular, the professionals who staff the FSC, led by senior management and directors, are dedicated and experienced professionals with a clearly articulated goal of maintaining and, where possible, improving the framework and implementation of financial services supervision in the BVI."[482] Some weaknesses were identified in the IMF report in relation to which recommendations were made for corrective action. These have effectively been carried out through the review and enactment over the last few years of relevant legislation. As regards the practical aspects, the FSC has increased its level of on-site inspection and off-site supervision of regulated entities and instituted a regular dialogue with service providers in the financial services industry through a Meet the Regulator Forum and the establishment of public-private sector committees to work on specific relevant initiatives.[483]

  61.  As already noted, the FSC underwent a rigorous assessment of its international cooperation regime before it was admitted to membership of IOSCO. Prior to that the IMF had reported that "Cross-border information exchange and cooperation has been excellent in all areas".[484] The Virgin Islands has undergone three periodic reviews and evaluations by the CFATF and is looking forward to its second round of evaluation by the IMF later this year. This is a helpful process the FSC hopes to continue to engage in as a means of independently testing its systems and processes for continued compliance with international standards.

PART II: TREASURY COMMITTEE SPECIFIC QUESTIONS

GENERAL COMMENTS

  62.  Turning now to the specific questions raised by the Treasury Committee, the FSC invites attention to the submissions that have already been made in paragraphs 1 to 61 above which essentially address the issues relevant to the questions raised. There are many facets to the questions and it is the view of the FSC that they must not be considered in isolation. The FSC has not dealt in detail in this submission with tax-related questions which fall within the separate remit of the Virgin Islands Government.

  63.  The FSC would again urge the Treasury Committee to consider that—as has been recognized by international monitoring and standard setting bodies like the IMF, FSF, IOSCO, IAIS, OGBS and FATF—the real issue is not whether the OFCs have a role to play in the global market vis-à-vis the onshore jurisdictions or that they should be treated differently; the real issue is whether onshore and offshore jurisdictions that engage in financial services are properly and effectively regulated and supervised and demonstrate a willingness to exchange and share information to foster international cooperation, thereby reducing (or eliminating) the incidences of criminal and other unlawful activities through established legitimate financial structures.

THE QUESTIONS

1.  To what extent, and why, are Offshore Financial Centres important to worldwide financial markets?

  64.  The point has already been made that OFCs are not inimical to global financial stability; rather they contribute to global financial development and stability by encouraging healthy competition. They act as stimulants to economic growth in other parts of the world by encouraging foreign direct investment, while at the same time serving as catalysts to good government. There is no doubt that OFCs are generally recognized as major players in the global economy as they increase the efficiency and speed of international commerce and reduce the costs associated with red tape in a highly competitive global market.

  65.  The offering of financial services by onshore and offshore jurisdictions around the world is recognized under the WTO rules on trade in goods and services. Just as numerous other industries and business sectors add value to modern day economies, so does the financial services sector. The growth of financial services in the last thirty years has demonstrated mankind's resilience and continuing ability to innovate to expand economic growth through the use of legal structures. Economic growth in one particular sector propels growth in another.

2.  To what extent does the use of Offshore Financial Centres threaten financial stability?

  66.  As has been discussed above under the heading of OFCs and Global Financial Stability and Transparency, OFCs are not inimical to global financial stability. This assessment has been made by the FSF[485] which is a grouping of industrialized countries. The IMF has expressed itself similarly. Indeed no international standard setting institution has said that the use of OFCs threatens financial stability.

  67.  The emphasis, even in the wake of the debate on fair tax competition, has been on proper and adequate regulation and supervision, a willingness to exchange and share information and foster closer cooperation in rendering mutual legal assistance. The FSC believes that any reduction in the emphasis on regulation and supervision and effective international cooperation would itself threaten global financial stability and it is what the detractors of offshore in favour of onshore would achieve should they be allowed to succeed in their quest.

3.  How transparent are Offshore Financial Centres and the transactions that pass through them [to the United Kingdom's tax authorities and financial regulators]?

  68.  In addressing the general question of transparency, it has already been noted that OFCs operate regimes to standards that are equivalent and, in some instances, higher than those in the onshore jurisdictions. Full compliance with the FATF 40+9 Recommendations would leave no room that could compromise transparency.

  69.  Both onshore and offshore jurisdictions are obligated to put in place appropriate legislative and administrative measures that would identify applicants for business relationships and other customers (including beneficial owners of legal persons and, in the case of trusts, the beneficiaries thereof), verify their identities, keep appropriate records for specified minimum periods and engage actively in the reporting of transactions that are suspicious. The Virgin Islands subscribes to the FATF Recommendations and has appropriate legislative and administrative systems in place to monitor the activities of persons to ensure compliance with the requirements of the Recommendations.

  70.  It has also been noted earlier that the Virgin Islands had since 2004 abolished ring fencing in its business companies regime that was considered by the OECD to pose difficulty with transparency. With a strong international cooperation regime (as acknowledged by the IMF and IOSCO), the Virgin Islands has left no room for doubt concerning its ability and willingness to exchange and share information for regulatory, law enforcement and tax purposes. Indeed in 2005 the Virgin Islands voluntarily adopted and legislated in the Territory the EU Directive on the Taxation of Savings Income.[486]

4.  To what extent does the growth in complex financial instruments rely on Offshore Financial Centres?

  71.  Recently, with the sub-prime mortgage crisis in the USA and international market turmoil, much scrutiny has been given to complex financial instruments, including collateralized debt obligations (CDOs). Many economic analysts believe that due to the difficulty present in providing risk ratings for these complex financial instruments, they were inaccurately rated, thus leading to liquidity and credit crises in international markets.

  72.  Market analysts agree that these complex financial instruments, including the CDOs, are as much a product of onshore finance centres as they are of offshore finance centres, given that the fund industry has historically been subject to lighter-touch regulation across the globe, since its investors tend to be more sophisticated. IOSCO had since acknowledged the problems and is working towards establishing guidance for credit rating agencies in order to protect and guide the financial markets better.

  73.  As regulators across the globe learn ever more about complex financial instruments to establish comprehensively the constituent elements of adequate regulation for these products and their administrators, the FSC continues to play its role in participating in the IOSCO initiatives to develop acceptable standards of regulation to ensure greater stability within the global financial market.

5.  How important have the levels of transparency and taxation in Offshore Financial Centres been in explaining their current position in worldwide financial markets?

  74.  The importance of transparency in all aspects of the conduct of financial services, including taxation, continues to be emphasized by international standard setting institutions. These institutions have from time to time investigated relevant business vehicles in both onshore and offshore jurisdictions that may raise questions of transparency and have come up with standards of compliance to ensure systems that are transparent and fair.

  75.  The OECD's principles of transparency and effective exchange of information and the EU's Directive on the Taxation of Savings Income were designed to achieve greater transparency in the operation of financial services both in specific onshore and offshore jurisdictions that were considered to be key players in financial services. The Overseas Territories have been a part of these processes and the Virgin Islands, in particular, has not only accepted and subscribed to the requirements established by these initiatives, it has also gone ahead to put appropriate legislation in place to assist in achieving the objectives of the initiatives. These actions have been taken even though some of the Virgin Islands' key competitors in the area of financial services (such as Barbados, Singapore and China) had been left out of the initiatives.

  76.  As already noted, the notion that OFCs have been successful because of low or zero levels of taxation is a flawed argument. Those jurisdictions that had the same belief and ventured into financial services realized sooner to their shock that they had had to close down. The more successful OFCs like the Virgin Islands have had to develop efficient systems that ensured good governance and strong legal systems, coupled with low levels of corruption, to ensure success. Operating transparent systems have always assured market confidence which attracts investors.

6.  How do the taxation policies of Offshore Financial Centres impact on UK tax revenue and policy?

  77.  The FSC does not consider itself best placed to provide guidance on this subject and would direct the Treasury Committee's attention to the submissions of the Government of the Virgin Islands. However, as noted elsewhere in this paper, the United Kingdom has always been supportive of the Overseas Territories actively engaging in the business of financial services and using this new, legitimate and independent source of revenue to fund their budgets. The United Kingdom United Kingdom rightly emphasizes the importance of transparency, proper and adequate regulation and supervision and putting in place a regime of international cooperation.[487] The FSC has had no indication from Her Majesty's Government or any of its agencies that the policies of the Virgin Islands (whether tax-related or otherwise) are inimical to or have any negative impact on the tax revenue and policy of the United Kingdom.

7.  Are British Overseas Territories and Crown Dependencies well-regarded as Offshore Financial Centres, both in comparison to their peers and international standards

  78.  The standing of the Virgin Islands as a reputable offshore finance centre has already been articulated with supporting endorsements from the IMF. Equally the recognitions accorded to the Territory through its membership of such reputable institutions like IOSCO, OGBS and IAIS is testimony of its important role in the global financial market in charting a collective course of global financial stability. The FATF, during its assessments on the Non-cooperating Countries and Territories (NCCT) in 2000, found the Virgin Islands to be compliant with the established standards of compliance and cooperation and accordingly the Virgin Islands was never included on the NCCT list that was eventually published by the FATF. Furthermore, in its 2008 publication, the Global Financial Centres Index (GFCI) published by the City of London ranked the Virgin Islands amongst the top 30 leading financial services jurisdictions around the globe with London and New York ranking first and second respectively.[488]

  79.  The Virgin Islands (as one of the Overseas Territories) has inherited much of the British legal system (and received support from the United Kingdom for charting a legitimate independent source of revenue—financial services—to fund its budget) and has excelled in developing efficient systems of financial management, good governance and strong legal systems with adequate checks and balances in government. Today it is internationally recognized for the soundness of its financial services industry. No effort has been spared in ensuring compliance with internationally established standards of regulation and compliance, fully cognizant of the fact that good reputation is cardinal to success.

  80.  Research conducted by Alexa Rosdam and published last year under the heading "Are OFCs Leading the Fight Against Money Laundering?" finds that the standard of financial regulation, enforcement, AML/CFT and international cooperation in the so-called offshore financial centres of the British Overseas Territories and Crown Dependencies in many cases exceeds that of the onshore jurisdictions like the United Kingdom and the USA. However, notwithstanding the weight of evidence, the offshore jurisdictions continue to bear the onslaught of inquiries, investigations and reviews of their legislative and administrative frameworks which largely continue to demonstrate high levels of compliance.[489]

  81.  It is not widely recognized that more than fifteen years ago, the Virgin Islands (along with Gibraltar) was the first jurisdiction to regulate trust and corporate service providers in the financial services world and continues to fully participate in new endeavours designed to strengthen the global standards of regulation, supervision and compliance. The vast majority of EU Member States are only now introducing regulation of trust and corporate service providers as a result of the Third Money Laundering Directive.

  82.  The IMF's estimate of the offshore holdings of 5 to 7% of worldwide wealth under management (referred to earlier) attests to the investment confidence and high regard reposed in the offshore centres.

8.  To what extent have Offshore Financial Centres ensured that they cannot be used in terrorist financing?

  83.  The United Kingdom has itself taken a leading role in this in relation to its Overseas Territories through the enactment of two relevant Orders in Council—The Terrorism (United Nations Measures) (Overseas Territories) Order 2001 and The Anti-terrorism (Financial and Other Measures) (Overseas Territories) Order 2001. In addition, the Virgin Islands has taken its own initiative in buttressing its anti-money laundering and terrorist financing regime by enacting the Anti-money Laundering Regulations, 2008 and the Anti-money Laundering and Terrorist Financing Code of Practice, 2009 (replacing previous enactments). Through these measures, both the Virgin Islands Cabinet and the FSC, acting in accordance with delegated authority under the Proceeds of Criminal Conduct Act, 1997, seek to ensure full compliance with the AML/CFT obligations under the FATF 40+9 Recommendations.

  84.  In addition, the Virgin Islands' law enforcement institutions have been strengthened through increased staffing and the establishment in 2004 of the Financial Investigation Agency (FIA) which has responsibility for investigating both money laundering and terrorist financing activities and related matters in the Territory. The FIA also executes requests for mutual legal assistance and participates in cross-border investigations relating to money laundering and terrorist financing. As has been widely reported in the international press, the FIA recently concluded, in association with counterpart authorities in Bermuda, an extensive financial fraud investigation which eventually led to the successful confiscation of US$40 million.[490]

  85.  The FSC has established, in cooperation with the Government of the Virgin Islands, a powerful legislative and administrative arsenal not just to combat terrorist financing, but also to prevent money laundering and other types of financial crime, ensure effective financial regulation and enforcement, and foster international cooperation. Only in this way can its service industry and the reputation of the jurisdiction be protected and enhanced.

9.  What are the implications for the policies of HM Treasury arising from Offshore Financial Centres?

  86.  The FSC considers this to be a matter that is best addressed by the relevant authorities in the United Kingdom. However, it worth noting that the FSC (as a regulatory body in one of the Overseas Territories) recognizes and values the relationship with the relevant government ministries and departments in the United Kingdom and counts on their continued support as it continues to operate a transparent, efficient and well-managed financial services industry for the good of the people of the Virgin Islands.

10.  What has been and is the extent and effect of double taxation treaty abuse within Offshore Financial Centres?

  87.  As already noted above, the Virgin Islands no longer operates a double taxation treaty arrangement with any country.

11.  To what extent do Offshore Financial Centres investigate businesses and individuals that appear to be evading UK taxation?

  88.  This is not a specific area of responsibility of the FSC. However, it should be noted that the Virgin Islands does have a binding agreement with the United Kingdom in the context of the EU Directive on the Taxation of Savings Income which requires the Government of the Virgin Islands to collect and transmit, under a withholding tax arrangement, a specified percentage of the interest income of United Kingdom citizens domiciled in Virgin Islands' banks. In addition, the Government of the Virgin Islands (with FSC participation) is currently negotiating tax information exchange agreements with EU countries (including the United Kingdom) and non-EU countries, which will facilitate requests of inquiries into tax-related matters.

CONCLUSION AND RECOMMENDATIONS

  89.  The FSC continues to be a part of, and lend support to, continuing international efforts to initiate and implement standards of regulation and compliance in order to prevent criminals from abusing and misusing the financial system and thereby causing global financial instability. The FSC respectfully submits that the Treasury Committee should not view "offshore" in isolation and as something different from "onshore". To ensure that the international financial system is dealt with as a whole, the focus should be on encouraging greater international cooperation and on ensuring that all countries build the capacity to ensure adequate regulation and supervision. All onshore and offshore jurisdictions must be encouraged to exchange and share information in all areas of financial services. Furthermore, the FSC submits that large jurisdictions should not be supported in any anti-competitive attempts to limit policymakers' inquiries and investigations to small financial services centres.

  90.  As numerous studies by the leading international financial institutions and academics show, the existence of offshore financial centres is not inimical to global financial stability. These centres provide legal and legitimate services which are recognized and accepted under the WTO rules, and have also been shown to be good for the stability of the financial system. As has been rightly observed, "although international initiatives aimed at reducing financial crime are welcome, the broader concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether nominally on- or offshore, are good for the global financial system."[491]

  91.  The FSC is proud to play its part in ensuring the Virgin Islands' place as a leading, reputable global finance centre and in ensuring new economic opportunities and enhanced employment prospects for the Territory's citizens. The FSC believes in a continual review and updating of appropriate legislative and administrative regimes which it will, in cooperation with the Government of the Virgin Islands, continue to foster by ensuring continued compliance with internationally established standards and providing full cooperation to the execution of requests for mutual legal assistance.

  92.  The FSC calls on the Treasury Committee to take into full account all of the submissions made in this report and to appropriately reflect those submissions in any report it generates arising from this exercise.

  93.  Furthermore, the FSC looks forward to the continued support by and collaboration with HMG and the various relevant governmental agencies as the FSC endeavours to strengthen its systems and policies to ensure continued compliance with internationally established standards of regulation, supervision and cooperation.

June 2008

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453   In January, 2007, for example, a US Treasury-led Government Money Laundering Threat Assessment highlighted that Eastern European and Russian criminal organizations were abusing US shell companies for money laundering purposes. Back

454   Writing in The Economist on 23 February 2007, Joanne Ramos notes that "What is clear is that globalization has changed the rules of the game. It has produced many benefits for rich countries|OFCs, for their part, have by and large done well out of globalization, the best of them | have become sophisticated, well-run financial centres in their own right, with expertise in certain niches such as insurance or structured finance". Back

455   Barbados received assistance from the IMF in establishing its financial services industry in the 1970s. Back

456   Joanne Ramos, The Economist, 23 February 2007. Back

457   While the Virgin Islands has in place relevant legislation governing the establishment and supervision of banks, the FSC has deliberately steered away from encouraging any large scale establishment of banks. There are currently only five commercial banks and four offshore banks which are supervised by the FSC's Banking and Fiduciary Services Division. Back

458   In its Progress Report on Offshore Financial Centers released in February, 2005, the IMF reported at page 20 in respect of the Virgin Islands that "Primary legislation Provides the Financial Services Commission with adequate independence and authority to license and supervise covered financial services, which include banking, insurance, securities, trust, and company service providers". Back

459   The Banks and Trust Companies Act, 1990 and Company Management Act, 1990 were amended in 1995 to provide a mechanism for the disclosure of information to both domestic and foreign regulators and law enforcement agencies. In 2000 the Financial Services (International Cooperation) Act was enacted, but subsequently repealed and amalgamated in the FSCA in 2006. Back

460   The Drug Trafficking Offences Act, 1992, Criminal Justice (International Cooperation) Act, 1993, Proceeds of Criminal Conduct Act, 1997, Anti-money Laundering Regulations, 2008 (which replaced the Anti-money Laundering Code of Practice, 1999) and Anti-money Laundering and Terrorist Financing Code of Practice, 2008 (which replaced the Anti-money Laundering Guidance Notes, 1999) provide mechanisms for the disclosure of information and rendering mutual legal assistance. Matters relating to terrorist financing are generally dealt with in the Terrorism (United Nations Measures) (Overseas Territories) Order 2001 and the Anti-terrorism (Financial and Other Measures) (Overseas Territories) Order 2002. Back

461   "Financial services are lucrative and provide a much more stable income than crops and fickle tourists". Joanne Ramos, The Economist, 23 February 2007. Back

462   Joanne Ramos, The Economist, 23 February 2007. Back

463   Indeed Mihir Desai of Harvard Business School contends that even "if today's OFCs were somehow stamped out, something like them would pop up to take their place", thus making the point that none will be the wiser in the continuing debate between offshore and onshore, instead of concentrating on the real issues of proper supervision and promoting efficient and effective international cooperation. Back

464   Section 33C (1) (b) of the FSCA. Back

465   The Mutual Legal Assistance (United States of America) Act, 1990, Criminal Justice (International Cooperation) Act, 1993 and Mutual Legal Assistance (Tax Matters) Act, 2005. Back

466   Sometimes delays in processing requests for mutual legal assistance are occasioned by inappropriate or inadequate submissions by the requesting authority, including the need to verify information and obtain necessary clarifications. Back

467   Banks and Trust Companies Act, 1990, Company Management Act, 1990, Insurance Act, 1994 (recently revised with the enactment of a new Insurance Act, 2008), Mutual Funds Act, 1996 (currently under review with a view to a revision enactment), Proceeds of Criminal Conduct Act, 1997 (amended in 2008 to provide the FSC with extensive AML/CFT powers), Insolvency Act, 2003 and BVI Business Companies Act, 2004 (which effectively replaced the International Business Companies Act, 1984). Back

468   The UK National Audit Office, in its report "Foreign and Commonwealth Office: Managing risk in the Overseas Territories" (16 November 2007), recognized at page 21: "Regulators in key centres of Bermuda and the Cayman and British Virgin Islands have, thanks to fees levied on their flourishing financial sectors, achieved major improvements [in staff numbers] since 2000." Back

469   The likes of President Obiang Nguema of Equitorial Guinea, Ferdinand Marcos of the Philippines, Sani Abacha of Nigeria and Agusto Pinochet of Chile had largely been able to cause great damage to their national treasuries because of the financial facilities that were afforded to them by both onshore and offshore jurisdictions. Back

470   "Which Countries Become Tax Havens?", Dhammika Dharmapala, University of Connecticut-Department of Economics, and James R. Hines Jr., University of Michigan at Ann Arbor Law School, National Bureau of Economic Research (NBER) December 2006. Back

471   The Economist, 23 February 2007. Back

472   This position has been confirmed by the European Court of Justice in Point 85, AG's Opinion, Halifax plc and others v. Customs and Excise Commissioners [2006] 2 W.L.R. 905. Back

473   Offshore Financial Centres Background Paper, IMF, June 2000. Back

474   This is a tendency that well-regulated jurisdictions in the Caribbean (notably the most successful UK Overseas Territories and independent countries) suffer from without any acknowledgement of the strides achieved by them in incorporating international standards into their legislative and supervision regimes. The Virgin Islands and Cayman Islands took the lead in developing policies and regimes for immobilizing bearer shares. Back

475   Financial Stability Forum Press Release, 26 September 2007. Back

476   Financial Stability Forum, Report of the Working Group on Offshore Centres, 5 April 2000. Back

477   Offshore Financial Centres, The Assessment Program-A Progress Report, IMF, February 2005, at p. 3 Back

478   Ibid at p. 4 Back

479   Ibid, footnote 5 on p. 6 Back

480   Ibid, footnote 1 on p. 4 Back

481   Review of Financial Regulation in the Caribbean Overseas Territories and Bermuda, The British Virgin Islands, 2000, at page 3. Back

482   "British Virgin Islands: Overseas Territories of the United Kingdom, Assessment of the Supervision and Regulation of the Financial Sector", Vol. I Review of Financial Sector Regulation and Supervision, at p. 8 Back

483   Some of those committees are the Financial Services Legislation Advisory Committee, Company Law Advisory Committee, Joint Anti-money Laundering and Terrorist Financing Advisory Committee. Back

484   "British Virgin Islands: Overseas Territories of the United Kingdom, Assessment of the Supervision and Regulation of the Financial Sector", Vol. I Review of Financial Sector Regulation and Supervision, at p. 8. Back

485   Financial Stability Forum, Report of the Working Group on Offshore Centres, 5 April 2000. Back

486   Mutual Legal Assistance (Tax Matters) Act, 2005. Back

487   In an oral evidence presentation before the Committee of the House of Commons on 10 December 2007 to deal with the "Report by the Comptroller and Auditor General, FCO: Managing Risk in the Overseas Territories (HC4)", Sir Peter Ricketts KCMG, Permanent Secretary, FCO, emphasized the importance of the Overseas Territories having in place "regulatory arrangements so that they can be safe and effective financial centres" and that the FCO "are encouraging them to be proper, world-class, international financial centres". Back

488   The Global Financial Centres Index 3 March 2008. Back

489   The Journal of Money Laundering Control, Vol. 10, Issue 3 of 2007. Back

490   The UK's National Audit Office noted in 2007: "Since 2004 in the British Virgin Islands an independent Financial Intelligence Agency, funded jointly by the regulator and the Territory government, has been sufficiently resourced to investigate well-founded suspicious transactions and take several to the point of prosecution. The Agency is hopeful that successful prosecution in the USA will yield a share of proceeds from sequestered assets or fines levied there". National Audit Office report, "Managing Risk in the Overseas Territories", 16 November 2007, p. 24. Back

491   The Economist, 23 February 2007. Back

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Prepared 26 March 2009