As the British Virgin Islands (BVI) continue to recover from the devastation of Hurricane Irma, attention is properly focused on humanitarian relief and the repair of the BVI’s physical infrastructure. But there have also been important recent developments associated with the BVI’s legal infrastructure—changes designed to address the BVI’s reputation as one of the world’s premier tax havens, and as a popular destination for money laundered by corrupt public officials, organized crime networks, and others.
Thanks in part by a campaign by former UK Prime Minister David Cameron to remove the “cloak of secrecy” from Britain’s offshore territories, and in part to the embarrassing publication of the Panama Papers, the BVI recently enacted a new Beneficial Ownership Secure Search System (BOSS) Act, which went into effect last June.
The BOSS Act is the latest in a series of steps designed to clean up the BVI’s image. Previous moves have included signing an intergovernmental agreement with the United States on Foreign Account Tax Compliance and becoming a signatory to the OECD’s Common Reporting Standard for the automatic exchange of tax and financial information. In 2016, the BVI changed the law to make it mandatory – for the first time – for companies to report their lists of directors to the government. Overall, it’s not yet clear whether these moves have had any effect on the island’s offshore economy. Indeed, the BVI’s interest in preserving its status as a center of the world’s offshore economy has prevented more drastic steps and weakened those that have been taken. (The 2016 law changes, for instance, did not require the reporting of ownership stakes.) Half-measures are unsurprising given the centrality of secrecy to the BVI’s economic success – after all, you can’t expect turkeys to vote for Thanksgiving. While the BVI points out in its defense that its level of transparency is no worse than that of other UK offshore territories, and is in fact better than that of some US states, the fact remains that most of the BVI’s legal reforms have weighed business interests in secrecy more heavily than public interests in transparency.
The BOSS Act unfortunately seems to suffer from the same problem, though it is a step in the right direction.
The BOSS Act’s most important provisions concern new mandates on so-called Registered Agents (RAs). RAs are licensed entities that provide corporate services, in addition to a physical address, to offshore companies. Indeed, in order to incorporate a company in the BVI, one must hire a licensed RA. Under the BOSS Act, RAs are now required to meet several new requirements, mainly concerned with the collection and sharing of information:
- First, the BOSS Act requires RAs to take reasonable steps to collect and report to the government certain information on the corporation’s “ultimate beneficial owners” (UBOs) – that is, the real-live human beings who ultimately own or control the corporation. This mandate builds on a requirement, implemented by the 2016 law changes, that RAs collect and hold certain UBO information; the BOSS Act increases the scope of the information that RAs must acquire and introduces more stringent timelines for collecting the information, as well as more stringent penalties for violation.
- Second, the BOSS Act creates the BOSS for which it is named: a secure database accessible from the BVI, which will serve as the first centrally accessible database of BVI company information. The 2016 legal changes required RAs to hold UBO information and to provide it to BVI law enforcement or private parties only upon a court order or a request from a police authority. Now RAs are required to submit and regularly update this information to the BOSS database, representing the first time that UBO information is centrally collected and easily searchable by authorities. This will significantly reduce the time and administrative cost it takes for law enforcement to access a company’s UBO information. Perhaps even more significant, searches on the BOSS database are kept confidential from the queried entity (and the RA that supplied the information on that entity). This helps avoid the problem of the request for UBO information from the RA tipping off the UBOs that they are under investigation, in turn causing them to move their assets out of the BVI before the authorities can move against them.
- Third, under the BOSS Act both BVI authorities and UK authorities have access to the BOSS database. This is significant because the UK has robust investigative and enforcement capability in matters of anticorruption and financial crime. Moreover, it addresses the worry that the BVI government’s interest in protecting its offshore economy may induce an overly passive enforcement posture. Moreover, the Act specifically anticipates the conclusion of similar arrangements with other countries, raising the possibility that the US, EU, and other nations could gain access to the BOSS database.
While the BOSS Act represents an incremental improvement over the old regime, it is far from perfect. There are several major flaws from the point of view of transparency and accountability:
- First, the biggest deficiency is how easy it is to evade the BOSS Act’s reporting requirements by layering ownership through a “registrable legal entity.” The Act defines a registrable legal entity to include corporations listed on a stock exchange, foreign corporations (“foreign regulated persons”), as well as sovereign states and their “wholly owned subsidiar[ies].” The Act further provides that an RA “is not required to identify any beneficial owner of a corporate and legal entity…who holds its interest, directly or indirectly, in the corporate and legal entity through a registrable legal entity if the registered agent identifies that registrable legal entity for that purpose.” In plain English, this means if the UBOs first incorporate a company outside the BVI, and then make that entity the owner of the BVI corporation, then the BOSS Act’s new reporting requirements don’t apply, because the foreign corporation, not the actual human beings who own that corporation, will be listed in the BOSS database as the UBO. Obscuring ownership through layering is already common; the BOSS Act now makes this a perfectly legal way to avoid reporting UBO information.
- Second, the requirements of the BOSS Act apply only to “corporate or legal entities,” which are entities incorporated, continued, or re-registered as BVI business companies under the BVI Business Companies Act. A wide range of popular entities, including BVI partnerships, limited partnerships, trusts, mutual funds (and their subsidiaries), any company listed on a recognized stock exchange (and its subsidiaries), and foreign companies are not required to submit UBO information to the system.
- Third, the BOSS Act preserves, albeit in weakened form, the “third-party introducer” loophole, which this blog has previously discussed. Essentially, this loophole allows RAs to refrain from collecting UBO information themselves and instead rely on the assurances of corporate agents located outside of the BVI (the so-called third-party introducers) as to the existence and accuracy of UBO information. While the BOSS Act curtails this somewhat by requiring BVI RAs to hold certain UBO information, RAs can still rely on third-party introducers for the majority of what is usually considered “due diligence” information.
- Fourth, the BOSS Act’s penalties for RAs who violate the act – a maximum of $20,000 on summary conviction and $40,000 on conviction on indictment – are likely too low to deter many RAs from taking on dodgy clients. The Act would be much more effective if non-compliant RAs could lose their licenses.
- Fifth, despite former Prime Minister Cameron’s efforts to push the UK offshore territories, including the BVI, to create public UBO registries in line with the UK’s own new standards, so far the BVI, like other overseas territories, has refused to take such a radical step. Instead, the UBO information in the BOSS database is accessible only by law enforcement. This is a huge loss for transparency, as it keeps anticorruption activists from examining the company rolls for evidence of graft and abuse.
Ultimately, the BOSS Act is a step in the right direction for transparency, so long as you believe the type of transparency that matters is law enforcement’s ability to query the BVI’s registers for the worst of the worst: the sanctions evaders, shell corporations, and money launderers who enable terrorists, dictators, and drug lords to hide their money abroad. But the weaknesses of the BOSS Act leave it open to significant abuse. Most worrying is the ability of UBOs to avoid reporting requirements through vesting ownership in “registrable legal entities.” If passage of this law impedes the fight for further transparency, it will have been a high price to pay indeed. Still, it is important to recognize that the BOSS Act represents progress – after all, until fairly recently RAs weren’t required to hold any beneficial ownership information at all. As long as we treat the BOSS Act and other recent reforms as a foundation on which to build, rather than as a satisfactory resolution of the problem, then we may yet see significant progress on this issue.