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Government of the British Virgin Islands

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FINANCIAL SERVICES

1. Introduction

1.1 Definition of Financial Services

According to Collins Dictionary of Economics, Financial Services is described as “that part of the economy concerned with transactions of financial institutions.” In the British Virgin Islands (BVI), financial institutions or financial services extend outside the classic definition. When one talks about financial institutions one automatically thinks of banks and investment brokers. Financial services in the BVI, however, encompasses the traditional as well as new age financial institutions. In the BVI, financial services includes the transactions of monetary intermediation, other financial intermediation, insurance and pension funding, and activities auxiliary to financial intermediation.

Monetary intermediation is the activity of obtaining and redistributing funds conducted by monetary institutions. Other financial intermediation involves the distribution and redistribution of funds other than that conducted by monetary institutions. This includes financial leasing and other credit granting. Insurance and pension funding involves long and short-term risk spreading with or without a savings element. Activities auxiliary to financial intermediation includes the provision of services involved in and closely related to financial intermediation but not themselves involving financial intermediation. Activities auxiliary to financial intermediation include administration of financial markets, security dealing activities, and other auxiliary activities. Examples are activities of stock exchanges, supervision of financial markets, dealing in financial markets in security on behalf of others, financial advisors, mortgage advisers, and insurance agents, adjusters, trust related activities, and actuaries.

In terms of the above, the British Virgin Islands’ main activities of financial intermediation are monetary intermediation, insurance and pension funding, and activities auxiliary to financial intermediation which include trust related activities.

1.2 Introductory Statement on Financial Services in the BVI 

With the decline of agriculture in the BVI over the past fifty (50) years, the socio-economic development of the territory has been dependent on the income and employment generation capacities of other relatively viable sectors such as hotels and restaurants (tourism), wholesale and retail trade, financial intermediation, construction, real estate, renting and business activities, and social security and public administration. For the past 20 years these sectors, combine, have been responsible for the tremendous growth in the real output of the territory. In 1977, the Gross Domestic Product (GDP) registered $27,690,000. The estimated GDP for the BVI for 1997 was $543,280,000. The GDP (at market prices) growth rate and average annual growth rate for the period (1977 – 1997) were 1,862% and 93.1% respectively.

It must be noted that while there are a number of viable sector that contributed to the development of the BVI’s economy. Over the past 50 years the BVI has evolved from an economy that was primarily agricultural based to one that was tourism dependent and presently to a tourism and financial services driven economy.

The development of financial services in the BVI can be traced back to the 1950s when the first bank, with origins in the United States Virgin Islands (USVI), was established to facilitate the transfer of funds between the BVI and the USVI as well as to provide a means where BVIslanders could save funds. The present financial services sector is “a far cry” from its humble beginning. The BVI is presently seen as “the world’s pre-eminent corporate domicile” with over 250,000 International Business Companies (IBCs) incorporated in the BVI. The BVI also continues to enhance and diversify its financial services sector by “moving deliberately but aggressively into other fields such as insurance, mutual funds, trusts, banking, and shipping.” Examples of such initiatives are the newly enacted Mutual Funds Act 1996 and the Limited Partnership Act 1996. Currently, the BVI has mutual funds worth over $55 billion incorporated in the BVI.

The guiding principle behind the BVI’s success is the basis for its motto “Quality Service and Vigilance.” The BVI enjoys many competitive advantages and assets that collectively represent “The BVI Advantage.” The BVI Advantages are as follows:

• High-Quality Service, Low-Key Approach
• Flexible, Innovative, User-Friendly Legislation
• Responsiveness to the Interests of the Global Financial Community
• Vigilance in Regulation and Supervision
• A Stable, Secure, Sophisticated Democracy
• Commitment to Legitimate Privacy
• Freedom from Restricted Fiscal Measures
• Dedicated, Talented Management and Workforce
• State-Of-The Art Telecommunications and Support Services
• Strategic Location, Serving the Americas, Europe and Asia
• Outstanding Environment and Lifestyle

2.1 Background

2.1.1 History

2.1.1.1 Banking

As stated above, the first bank, with origins in the USVI, was established in the late 1950s to facilitate the transfer of funds between the BVI and the USVI as well as to provide a means where BVIslanders could save funds. People, therefore, started to see money a store of value, a way to store wealth from one point in time to another. Money’s prominence as a unit of account, the standard unit of quoting prices, and a medium of exchange, the standard object used in exchanging goods and services also emerged during this period.

The BVI banking sub-sector remains relative rudimentary when compared with the other financial centers of the world due to the absence of a central bank, no exchange rate controls, and the use of the US dollar as the local currency. The banking sector, however, remains on the cutting edge of technology offering basically all the services that are offered anywhere in the world. Examples of such services are Automated Telling Machines (ATM), electronic transfers, automated balances, and pay-by-phone.

Licensing of Banks and Trust Companies

Over the past 40 years, the banking sub-sector has evolved and as of November 30, 1997, there were 12 banking licenses issued in the BVI, 6 general and 6 class I restricted. Holders of general banking licenses must have a minimum paid up capital of $2,000,000, deposit $500,000 in a manner prescribed by the governor and pay an annual license fee of $20,000. Holders of class I restricted banking licenses, on the other hand, require a minimum paid up capital of $1,000,000, a deposit of $500,000 in a manner prescribed by the governor and pay an annual license fee of $16,000. The six general licensed banks are Chase Manhattan Bank N.A., Bank of Nova Scotia, Banco Popular, Barclays Bank PLC, VP Bank (BVI) Ltd., and Guyer Zeller Bank (BVI) Ltd.

At the end of the first quarter 1997, the four commercial banks deposits totaled $631,843,000 with loans and advances of $343,411,000.

As of December 1997, there were 172 trust licenses issued. 73 of these licenses were general while 99 were restricted. Trust work provides for three categories of trust – charitable, personal and purpose - and they fall under the two categories of trust licenses.

Holders of general trust license must have a minimum paid up capital of $250,000, deposit $20,000 in a manner prescribed by the governor and pay an annual license fee of $10,000. Holders of restricted banking license, on the other hand, require no minimum paid up capital or no deposit requirement. They must, however, annual license fee of $300.

Banks and trust companies are licensed under the Banks and Trust Companies Act of 1990.

2.1.1.2 Trust Formation and Operation

BVI legislation provides a flexible vehicle for the establishment of trusts to hold shares in an IBC and in a variety of assets based outside the BVI. A company gains a wide range of competitive advantages by utilizing a BVI trust in combination with an underlying company formed under the BVI’s IBC legislation.

Operations of the BVI trust include the following:

• flexibility of planning
• protection of privacy, wealth, assets and inheritance wishes
• tax exemptions, competitive costs and swift, simple procedures
• strong network of experienced trust professionals in the BVI
• governmental commitment to a modern trust regime and effective partnership with the private sector

2.1.1.3 International Business Companies

In the early 1980’s, a Fiscal Review Committee (FRC) chaired by the Financial Secretary was commissioned to develop the requisite legislative framework to provide the necessary climate for the development of the financial services sector. The result was the International Business Companies (IBCs) Act 1984. In 1984, the pioneering IBC Act 1984 was enacted and has led to the BVI becoming the worlds’ pre-eminent corporate domicile with more than 250,000 companies incorporated in the BVI, as of December 31, 1997. In fact, the number of new registrations has averaged move than 30,000 in each of the last three years while in 1984; the IBC Act 1984 generated only 253 incorporation. This therefore illustrates the tremendous success of the IBC Act 1984.

The IBC Act 1984 allows legal corporate entity to incorporate and register in the BVI. The incorporation of an IBC is a quick and easy process – taking 24 hours in most cases and up to 48 hours in the more demanding cases. The IBC incorporation process involves three steps. First, a Registered Agent – a legal accounting, company management, or trust firm licensed to engage in such business in the BVI – must be retained. Next, an application for incorporation must be filed at the company registry. The final step is the payment of statutory fees, which are based on the company’s share capital. It must be noted that this process is enhanced by the online computer link between the Company Registry and the Registered Agents.

The fee to incorporate a company with capital up to $50,000 is $300; for an IBC with capital of more than $50,000, the fee is $1,000. The license fee for a company with no capital or par value is $350.

Table 1: Incorporate fees

Source: Financial Services Department

In an effort to compete for company formation business, other jurisdictions have introduced legislation similar to the BVI. The BVI, however, has maintained its leadership position thanks to the flexibility of its legislation, quality of financial services, efficiency of its Company Registry, commitment to privacy, and its integrity and stability as a jurisdiction.

2.1.1.4 Insurance

The BVI offers an extremely attractive environment for a comprehensive range of insurance services and products. The development and formulation of comprehensive insurance legislation and regulations, the Insurance Act 1994 and the Insurance Regulations 1995 involved extensive dialogue with the private sector so that the legislation and regulations would meet both clients needs and regulators requirements. In fact, over 500 companies were eliminated which could not and would not comply with the legislation.

The BVI is now seen as an extremely attractive environment for a comprehensive range of insurance services and products. In addition to the BVI’s reputation and integrity as a financial sector, it offers a number of competitive advantages that are particular to the insurance industry.

The following are a list of these advantages: -

1. Clients’ requirements, including the avoidance of excessive bureaucratic demands, are carefully balanced against regulators' requirements to maintain the islands enviable reputation.
   
2. Simple, sift procedures for the establishment and management of operations. A decision upon a fully completed application should be available within one year.
   
3. We are prepared to consider applications for the establishment of a company to conduct any type of traditional or non-traditional insurance or alternative risk transfer business, whichever side of the balance sheet it protects.
   
4. Highly competitive fees in terms of both government fees and other operating costs as well as freedom from oppressive fiscal burdens.
   
5. While companies are encouraged to hold their annual general meeting in the BVI, it is not a mandatory requirement.
   
6. Maintaining mandatory corporate bank accounts in the BVI is not a mandatory requirement.
   
7. Wide choice of all the services necessary to establish and maintain an insurance company; insurance management – reinsurance-legal – accounting and auditing – banking – communications.
   
8. The provision of a blanket of confidentiality, with appropriate gateways only for justifiable disclosure to assist regulatory and law enforcement agencies in the investigation of criminality.
   
9. Exemptions from any or all provisions of the Insurance Act may be granted in specific circumstances.
   
10. Adoption as a licensing strategy designed to preserve the status of the BVI as a user friendly and soundly related jurisdiction.
    
11. An open-door policy of continuing consultation between government and the private sector for the benefits of clients.

Any person carrying on insurance business of any kind in the BVI must be licensed under the act. “The act also provides that no person shall act as an insurance manager, agent, broker or adjuster unless granted a Certificate of Authority.”

2.1.1.5 Mutual Funds

According to the Financial Services Department, “[b]uilding on its position as the world’s pre-eminent corporate domicile, the BRITISH VIRGIN ISLANDS is a growing jurisdiction for the establishment of offshore mutual funds.” Currently, the BVI has mutual funds worth over $55 billion incorporated in the BVI. Mutual funds are categorized into public, private, and professional funds. Public funds are divided into “ordinary” mutual funds sold to the general public and “selective” public funds sold on a selective basis through intermediaries. Private funds are funds sold to less than 50 investors or offered for sale on a private basis. Professional funds are sold to market professionals or individuals with net worth over $1,000,000.

The BVI Mutual Funds Act was originally passed in 1996. “The introduction and development of a regulatory regime specifically for mutual funds complements existing IBC legislation and…signals the BVI’s intention to facilitate the growth of the jurisdiction into a[n] international multi-service offshore financial center. The growing private and public sector momentum recently influenced proposals to ‘fine tune’ the Mutual Funds Act which are currently being considered by the Islands’ legislators” (BVI Advantage). The provisions to the Mutual Funds Act will give investors more choices of mutual fund investment vehicles than currently available in any other offshore jurisdiction when passed.

A license is necessary to carry on business as a manager or administrator of mutual funds in or from within the BVI.

2.1.2 Legal Framework and Corporate Structure

2.1.2.1 Legislative Framework

The legislative framework, which provides for the operation of corporate vehicles in the financial sector of the BVI, comprises six (6) major pieces of legislations. These are as follows: -

1. The IBC Act, 1984
   
2. The Banks and Trust Companies Act, 1990
   
3. The Insurance Act, 1994
   
4. The Insurance Regulations 1995
   
5. The Company Management Act, 1990
   
6. The Trustee (Amendment) Act, 1993
   
7. The Mutual Funds Act, 1996

The relative success of the BVI Financial Services Sector has been attributable not only to the fact that the territory is a dependent territory of Great Britain, a status that has worked within the interest of privacy, but that the legislative framework reflects a degree of flexibility which has assisted in generating great demand throughout the financial world. There are cases where other jurisdictions have introduced legislation similar to the BVI’s in an effort to compete for company formation business but because of the flexibility of its legislation; the BVI has maintained its leadership position. Other factors that have worked in the interest of the BVI jurisdiction are the quality of its financial services, its commitment to privacy - relatively due to the fact that it is a British dependency - and its integrity and stability as a jurisdiction.

Complementing the degree of legislative flexibility that the BVI boasts, are the low taxes, confidentiality, stable political environment, excellent communications and infrastructure and of course the sophisticated private sector which has played a important role in the day to day incorporation activity.

2.1.2.2 IBC Act 1984

The International Business Companies Act of 1984 provides for the incorporation of international business companies. An international business company, for purposes of the ordinance, is a company that does not:

1. carry on business with persons resident in the British Virgin Islands
   
2. own interest in real property situate in the British Virgin Islands, other than a lease of property for use as an office from which to communicate with members or where books and records of the company are prepared and maintained
   
3. carry on banking business unless it is licensed to do so under the Banking Ordinance
   
4. carry business as an insurance or a reinsurance company; or
   
5. carry on the business of providing the registered office for companies

A BVI IBC gains a wide range of competitive advantages including:

1. exemption from all local taxes and stamp duties
   
2. asset security – abilities to transfer domicile; protect assets from expropriation or confiscation orders from foreign governments; transfer assets to another company, trust, foundation, association or partnership; merge or consolidate with any other BVI or foreign jurisdictions
   
3. maximum confidentiality and anonymity – availability of bearer shares; no requirement to file accounting or organizational information with Registrar of Companies
   
4. Statutory flexibility in filing Registers of Directors of Members at their own option and in their de-registering at any time
   
5. Ease of operation, maintenance and control
   
6. No statutory requirement to hold annual general meetings
   
7. Incorporations within one or two days
   
8. Excellent and flexible post incorporation follow-up services
   
9. Customized certificates and document verification to meet the business needs of individual IBC
   
10. No disclosure of minimum capital requirement
    
11. Highly competitive fees and costs 

In the BVI, there are two pieces of legislations which provide for company formation and post-incorporation services. The International Business Companies Act of 1984, stated above, and the Company Management Act of 1990. The Company Management Act provides for the licensing and control of the business of company management and related matters within the BVI.

2.1.2.3 The Banks and Trust Companies Act, 1990

The Banks and Trust Companies Act 1990 provides for three categories of Bank licenses and two categories of trust company licenses:

Banks:

1. General Banking License
   
2. Class I Restricted Banking License
   
3. Class II Restricted Banking License

Trusts:

1. General Trust License
   
2. Restricted Trust License

The requirements under the various categories are as follows:

General Banking License
The holders of a general banking license must have a minimum paid up capital of $2,000,000, deposit $500,000 in a manner prescribed by the governor, and pay an annual fee of $20,000.

Class I Restricted Banking License
The holders of a class I restricted banking may not take deposits from or make investments in or with any BVI resident except another licensee or an IBC. The minimum paid up capital requirement is $1,000,000, and a deposit of $500,000 in a manner prescribed by the governor is required. The annual fee is $16,000.

Class II Restricted Banking License
The holders of a class II restricted banking may not take deposits from or make investments in or with any BVI resident except another licensee or an IBC. In addition, the holders can only receive funds from undertakings named in the license. The minimum paid up capital requirement is $1,000,000, and a deposit of $500,000 in a manner prescribed by the governor is required. The annual fee is $16,000.

General Trust License
The holders of a general trust license must have a minimum paid up capital of $250,000, deposit no less than $20,000 in a manner prescribed by the governor, and pay an annual fee of $10,000.

Restricted Trust License
The holders of a restricted trust license may be accepted only from undertaking specified in the license. There are no minimum paid up capital or deposit requirements. The annual fee is 300.

The BVI does not grant offshore banking licenses to individuals or unproven entities. Banks with established records are invited to consider the BVI. Eleven of the twelve banks operating in this jurisdiction are classified as offshore.

2.1.2.4 Insurance Act 1994 and Insurance Regulations 1995

Under the Insurance Act 1994 and the Insurance Regulations 1995, every insurer licensed under this act shall: -

1. Any person carrying on insurance business of any kind in the BVI must be licensed under the Insurance Act 1994. “The act also provides that no person shall act as an insurance manager, agent, broker or adjuster unless granted a Certificate of Authority.”
   
2. The minimum fully paid up capital is $100,000 in respect of general business, $200,000 in respect of long-term business, and $10,000 in terms of companies writing only Credit Life Reinsurance business. The minimum paid up capital is $300,000 for companies involved in both general and long term.
   
3. The minimum margins of solvency are in lines with generally accepted standards based on 20% of net retained premium income for general business up to a net retained premium income of $5,000,000, plus 10% of the net retained income in excess of $5,000,000. Long-term business is subject to a minimum margin of solvency of $250,000.
   
4. A company incorporated with the objective of carrying on insurance business shall not have the power to:

1. issue bear shares
2. have a corporate body as a director
3. have less than two directions
4. continue in another jurisdiction without the written approval of the Governor

5. Maintain a principle office in the Territory at which it shall maintain permanently full and proper books and records of its insurance business as may be prescribed by the regulations:
   
6. Appoint and maintain an insurance manager resident in the Territory: and
   
7. All insurers must appoint an independent auditor and life insurers must appoint an actuary. Annual independently audited financial statements must also be submitted.
   
8. No distinctions are made between insurance and reinsurance companies.
   
9. Special provisions apply to companies wishing to carry on domestic business.

There are two categories of licenses issued under this Act, Long Term and General. Long Term licenses under this act include Life, Annuity, Health, Accidental Death and Disability, and various forms of Credit Insurance. General licenses, on the other hand, involve anything other than Long Term.

The application fee for both Long Term and General is $500. The annual fee for Long Term and General is $2,000 respectively. The annual fee for credit life is $1,000.

2.1.2.5 The Company Management Act, 1990

Company Management is exclusively offshore. It involves the provision of company management services for profit or reward in or from within the British Virgin Islands. The activity involves the registration of companies under the Company Management Act, 1990, or the International Business Companies Act, 1984.

To carry on company management work in the BVI, one must obtain a license under the Act. This license is obtainable by making application to the Governor. It is important to note that a license issued under the Act is valid until December 31st in the year in which the license was issued. Licenses are renewed in January 1st of the following year. The annual fee is $500. There is an additional fee of $10 for each company registered under the International Business Companies Act and or the Companies Act.

The business of company management like any other financial activity is subject to a number of controls. First, to ensure its effective administration, an Inspector of company managers is appointed by the Governor. This is to ensure the proper administration of the Act. The functions of the inspector are: -

1. to maintain a general review of company management in the BVI
   
2. to report to the Governor regarding any documents or records examined by or produced to him in the course of the performance of his functions
   
3. to examine in such a manner as he considers fit or necessary the affairs or business of any licensee for the purpose of satisfying himself that all provisions of the Act are being complied with and that the licensee is in a sound financial position and is carrying out his business in a satisfactory manner. On completion the inspector must report to the Governor the results of such examination, and
   
4. to examine and make recommendations to the Governor with respect to all applications for licenses.
   

As far as capitalization is concerned, no license shall be issued to any prospective company manager unless the amount of $25,000 or more share capital is paid up. 

In addition to inspection procedures, managers' licenses are subject to suspension and or revocation in situations where the Governor in his opinion finds that a licensee is carrying on the business in a manner detrimental to the public interest; and in the latter where the licensee has ceased to carry on the business of company management. Other areas that can evoke the revocation clause are bankruptcy, liquidation or dissolution.

2.1.2.6 The Trustee (Amendment) Act, 1993

The adoption of the Trustee (Amendment) Act of 1993 was motivated by the BVI’s desire to:

• Include certain provisions that had hitherto only been effective if specifically stated in trust instruments
  
• Provide for the establishment of purpose trust, clarify the law relating to “forced heirship”

The main features of the Trustee (Amendment) Act of 1993 are: -

1. up date provisions regarding the rules relating to perpetuities and the wait-and-see” rule
   
2. reduction in the oppressive of common law principles relating to the exercise of trustee powers
   
3. statutory recognition to the practice of giving the trustee, or protector of the trust, power to change the proper law of the trust to the law of another jurisdiction, and provision for the automatic transfer of assets for one trustee to another trustee in another trustee in another jurisdiction in certain pre-determined circumstances
   
4. provision for the BVI court to have jurisdiction in cases where the trust’s only real connection to the BVI is its proper law
   
5. provision for a settler of a trust to pass good title to trust assets not withstanding the laws of his domicile relating to inheritance or succession once the settler is of full age and sound mind
   
6. provision for the establishment of non-charitable trusts which neither require identifiable beneficiaries nor are subject to the rules against perpetuities and remoteness of investing
   
7. establishment of a statutory basis for the appointment of protectors of trust, and provision for the appointment of a managing trustee and by implication a custodian trustee
   
8. exemption of all trust and settlement deeds from registration under the provisions of the Registration and Records Act, and exemption of trustees from requirements for the filing of annual returns or trust accounts, the audit of accounts and reporting requirements relating to the trust
   
9. exemption form all taxation in the BVI provided that there is no BVI resident beneficiary or that the underlying assets do not consist of land, a business or a trade conducted in the BVI

The Act has, in face, proved central to the BVI’s development as a center for trust operations. With the adoption of the Trustee (Amendment) Act, 1993, the competitiveness of the BVI Trust Legislation has been enhanced. This enhancement has enabled the jurisdiction to offer a relatively highly attractive environment for the formation and operation of trust companies. The operation provides planning flexibility, much protection of privacy, wealth, assets and inheritance wishes along with tax exemptions and competitive costs. Procedures are swift and there is a strong net work of experienced trust professionals in the territory.

The trust legislation of the BVI is based on the English Common Law System, “and the BVI High Court follows English case law even when this is not technically binding, except where this specifically varies from local legislation or case law. It has also resulted in the BVI being the location-of-choice for reputable, well-capitalized international trust operations.

2.1.2.7 The Mutual Funds Act, 1996

A most recent piece of Legislation is the Mutual Funds Act of 1996 is flexible and innovative and sets quality benchmarks designed to protect the interest of investors, finance firms and the jurisdiction. The Mutual Funds Act, 1996 “embraces the policy of non-interference in the day-to-day operations of mutual funds and contains basic requirements which strikes the right balance between international regulatory standards of investor protection, commercial freedom and cost-efficient.” The Act, therefore, presents a scope for simple quick and straightforward licensing procedures.

The Act defines a mutual fund, therefore, as a vehicle organized under the laws of the BVI or any other country or jurisdiction which collects and pools funds for the purpose of collective investment in accordance with the principle of risk spreading. Simply put the investment practice involves a pool of people who give to an investor a pool of money to invest on their behalf. In so doing, there is a certain degree of confidence placed in the investment manager. This investment manager can be an IBC or CAP. 285 Company. The machinery is set up like a limited partnership.

Acting through the Registrar of Mutual Funds, the Act requires the Minister to recognize private and professional funds. Public funds, on the other hand, are registered by the Governor in council acting through the Registrar of Mutual Funds. 

A custodian of public funds, who is functionally independent of its managers or administrator and to have a name which is not misleading. The Act requires the Public funds to

• maintenance of adequate accounting records and annual audited financial statements available for the registrar’s inspection
  
• the production and filing a prospectus authorized by the fund’s directors and which contains information sufficient to enable an informed investment decision
  
• the filing of an annual certificate of compliance in respect of its operation in another jurisdiction

To carry on business as a manager or administrator of mutual funds in or from within the BVI requires a license. An application for such a license must be made to the Minister giving full details of the financial administrative and human resources available for the proposed business and an application fee of $250. A license will only be given to applicants “who have demonstrate that they are fit and proper to engage in the business proposed and who have adequate knowledge, expertise, resources and facilities necessary to for the proper conduct if their business.

Special provisions have been introduced to exempt recognized managers of mutual funds from the requirement to be licensed when certain conditions are met. The conditions are that: -

• the manager must be subject to the control of a person who is authorized to provide investment management services and who is of sound repute and is in good standing with its home country authority
  
• the manager must delegate its activities in the BVI to a local license holder
  
• the BVI license holder must take responsibility for compliance with BVI laws

The local license holder is required to submit, on behalf of the recognized manager, a simple notification along with a fee of $500.

2.1.3 Management and Organization Structure

In an effort to ensure the effective administering of the financial services sector the BVI Government created the Financial Services Department (FSD) to manage and regulate this sector. To be effective, a number of units were created within the FSD to focus on specific segments of the sector thus allowing for the formation and development of a proper regularitary system. Units within the financial services sector are Mutual Funds; Companies, Patents and Trademarks; Insurance; and Bank Trust and Companies Managers. Each of these units are headed by a Registrar except for the Insurance unit which is headed by a Supervisor of Insurance The respective laws stated above give the respective Registrars and Supervisor of the legislative power to effective regulate the sector.

The heads of the various units within the FSD report directly to the Director of Financial Services. The Director of Financial Services report to the Chief Minister. The Financial Service Department is, in fact, one of the departments in the Chief Minister’s portfolio.

Within the financial services sector, the FSD has close ties to with the private sector as see above with the creation of laws and the registration process. In fact, the FSD coopts the services of an Association of Registered Agents, who are licensed to act as a conduit through which incorporation activities must be channeled and reviewed before registration. 

3.1 Profile of Financial Services

3.1.1 Economic Dimensions

As stated above, the development of financial services in the BVI can be traced back to the 1950s when the first bank, with origins in the United States Virgin Islands (USVI), was established to facilitate the transfer of funds between the BVI and the USVI as well as to provide a means whereby BVIslanders could save funds. The foundation was thus laid for the development of a financial services sector, which is “the world’s pre-eminent corporate domicile” and the envy of the corporate world.

The present financial services sector is “a far cry” from its humble beginning. In fact, the development of the financial services sector has been spectacular to say the least. Over the past 40 years, the BVI has diversified its financial services from primarily commercial banking activity to an array of financial services activities. The BVI is presently seen as “the world’s pre-eminent corporate domicile” with over 250,000 International Business Companies (IBCs) incorporated in the BVI to date. The BVI also continues to enhance and diversify its financial services sector by moving aggressively into other fields such as insurance, mutual funds, trusts, banking, and shipping.

Table 2: IBCs registration

Source: Financial Service Department

Looking at Table 2, one can see the history of IBC registration since the passage of the IBC Act 1984. For the period 1984-1996, IBCs annual registrations has increased from 235 in 1984 to a staggering 41618 in 1996 reaching a cumulative total of 211,335 in 1996. A further analysis shows that the annual growth rate of registrations was variable throughout the period. Looking, in particular, at the period 1990 –1996 one can see that there were significant increases in 1992 and 1996 over their previous years' growth rates respectively, 26.4% and 28.1%. Noticeable declines, however, were recorded in 1991, 1994, and 1995 from their previous years growth rates, 26.9%, 26.4%, and 13.2% respectively. This illustrates how fickle the financial services sector is. Many praise the IBC registration figures; however, as the analysis above shows the registrations have been variable and must be studied.

The economic impact of IBC registrations to the BVI has been tremendous. In 1996, the total receipts from IBCs amounted to $225,100,000 . In fact, for the period 1992-1996 the total income received from IBCs increased 160.5%, from $86,400,000 in 1992 to $225,100,000. This revenue from IBCs registration has been partly responsible for the economic success the BVI has achieved over the past decade.

IBCs have been a tremendous revenue source for the BVI Government contributing positively to the government’s annual recurrent budget in the form of license fees. In 1996, government received $39,350,000 from IBCs license fees, 35.1% of government’s 1996 total recurrent revenue of $111,964,000. IBCs’ contribution in the form of license fees has increases significantly from 1992, 176.1% from the 1992 figure of $14,252,000. Likewise, IBCs license fees as a percentage of total recurrent revenue also increased. From 1992-1996, IBCs license fees as a percentage of total recurrent were 23.6%, 27.4%, 31.1%, 33.4%, and 35.1% respectively. This has resulted in the BVI Government attaining budget surplus in each of the past ten years. In addition, government has been able to use it surpluses to finance a much larger proportion of capital projects. This has many positive implications for the BVI. One such benefit is the relative reduction in outwards Balance of Payments (BOP) flows. The larger proportion of the capital projects the government finances the smaller are the outflows in terms of the interest payments and amortization. 

Although the contribution of IBCs, in the form of license fees, to total recurrent revenue, has be substantial. The sustainability of this revenue source is a major concern that is voiced by some.

Table 3: IBCs License Fees and Total Recurrent Revenue 
(millions of US $)

Source: Ministry of Finance

Over the past decade, financial intermediation or financial services has developed mainly in response to the growth in IBCs. In fact, the majority of activity in the financial services sector is driven by IBC activity. Table 4, below, shows total receipts in the BVI from IBC’s from 1992-1996. For the stated period, total receipt increased from $86,400,000 in 1992 to $225,100,000 in 1996.

As stated above, this has a positive impact on the economy. In addition, to the impact on governments’ budget and capital projects, financial services has also positively influenced the BVI’s economy through the creation of jobs, and investments. 

Table 4: Total receipts from IBC’s
(million of US$)

Source: Development Planning Unit.

For the period 1990-1996, employment has steadily increased. In fact, the labour force increased from 9077 employees in 1990 to 11,254 in 1996, an increase of 24.0%. The annual average increase in the labour force was 4.0%. The 1996 figures show that the financial services sector accounted for 6.2% of the labour force with 699 workers employed. This sector had the largest increase in the rate of employment. From 1992 – 1996, employment in the financial services sector increased by 36.3% or an annual average rate of 9.08%. In addition, to the employment generated in its sector, the financial services sector also contributed indirectly to increases in the labour force on a whole.

With the increase in the financial services activity, trust companies are continually coming to the BVI’s shores. With the increasing number of trust companies, accounting companies, and law firms coming to the BVI shores, there is continual demand for office spaces. This has results in an increasing number of housing starts and completion especially with respect to commercial buildings to satisfy the demand for office space. This has increased private construction activity especially with respect to commercial buildings. Looking at the data of building plans approved from 1992 –1996, commercial building plans was the only notable category that showed significant increases in building plans approved. From 1992-1996, commercial building plans approved, which accounted for 14.8% of building plans approved in 1996, increase from 20 approvals in 1992 to 36 approvals in 1996, an increase of 80%. The other notable category of building plans approved, residential, which accounted for 74.2% of building plans approved in 1996, decreased from 204 approvals in 1992 to 181 approvals in 1996, a decrease of 11.3%. In must be noted that between 1992 to 1995 residential approvals increased, but in 1996 reduced drastically. This trend was also the same for total building plans approved. Total building plans approved decreased from 252 approvals in 1992 to 244 in 1996, a decrease of 3.2%.

The increasing number of trust companies coming to BVI, thus, create employment and stimulate construction activity.

In addition, a number of government departments were created and expanded to accommodate the growing financial services sector. The Financial Services Department, for example, was created in 1993 specifically to regulating and overseeing the sector. With the continual expansion of the financial services sector, the Financial Services Department is also expanding to keep pace. In addition, to maintain its competitive advantage as well as create new one, a number of new units within the Financial Services Department were created namely Mutual Funds, Insurance, and Banking. This allowed the Financial Services Department to be more specialized. Already, this has resulted in numerous positive outcomes. Some outcomes include the creation of employment, improved regulations, and the creation of legislations specific to the various financial services sectors.

Table 5: Employment by Industry 1992-1994

Source: Development Planning Unit

Looking at Table 6, one can see that Financial Intermediation was the largest contributor to the BVI’s GDP in 1996, contributing 32.9% or $165,910,000. In fact, for the period 1992 – 1996, financial services contribution to GDP increased 261.8%, from $45,860,000 in 1992 to $165,910,000 in 1996. This industry had the highest growth rate by far of any other industry.


Table 6: GDP by Industry 1992-1996
(millions of US dollars)

Source: DPU

Commercial Banking

At the end of the first quarter of 1997, total deposits for the four commercial banks stood at $631,843,000 with loans and advances of $343,411,000. As a proportion of Total Deposits, Demand, Savings and Time deposits were 20.7%, 23.3%, and 55.9%. A 25% jump in the national prime interest rate was not enough to prevent total loans outstanding from expanding 3.8% to $343,441,000 compared to the fourth quarter 1996. Loans and advances outstanding at the end of the first quarter of 1997 increased 8.6% over the first quarter 1996. Total deposits expanded to $631,843,000 recording 29.6% and 2.4% growth rates over the first quarter 1996 and the fourth quarter 1996 respectively.

The distribution of bank liabilities and assets on the bases of domestic and non-domestic has been attributable to the maturity of the BVI market. Based on existing trends, the domestic market has matured considerably as there is not a lot of new business Obviously, the potential for growth is in offshore services. A few of our banks are affiliates of the Society of World Wide International Funds Transfer (SWIFT) an organization which can assist in exploring avenues for the generating of non-domestic assets. A close survey has revealed that local lending has been significantly funded by offshore deposits. As the offshore sector grows, bank and consumer liquidity increase. 

Commercial banks liquidity remains high, an obvious indication that the banks ability to meet the public's demand for cash remains highly acceptable. However, in addition to this liquidity status, most banks have adopted various strategies designed to engender consumer satisfaction. In some instances, bureaucratic controls have been reduced. There are instances where new job grading schemes have been introduced thereby creating greater efficiency and making the decision making process a lot quicker.

Of the 699 employees employed in the Financial Services Sector, 1996, 233 (33.3%) were employed in the commercial banks. This figure increased 21.4% from the 1994 figure of 192.

THE DEVELOPMENT BANK OF VIRGIN ISLANDS

The Development Bank of the Virgin Islands is the only government financial institution. It was set up in 1974 as a small department which would be able to offer loans to mainly to farmers and fishermen at favorable rates. The Development Bank of Virgin Islands borrow funds from The Caribbean Development Bank (CDB), and European Investment Bank, The Government tops up the capital with loans from the Social Securities Funds.

Since 1988, there has been a significant expansion in operations arising from increased lending and acceptance of deposit accounts. However, the bank financial performance remained mixed. The debt to equity ratio remains high, i.e. (11:3) in 1992, and operating profit was low. During 1990-1991, the institution made a loss on operations.

Loans from CDB increased by 1.24 million or 27.7 %, whereas loans from Social Security Board increased by 50 %. Certificates of Deposits by the Government grew by 100 percent, whereas Customer Saving Accounts and Accrued Interest and other Liabilities fell by 3 % and 3.8 % respectively. In 1992, Assets and Liabilities were valued at $16.7 million. In 1993, however, Assets and Liabilities were valued at $21.7 million, an increase of $5.0 million or 29.9 % over the previous year. In 1993 Loans and Advances represented an 89.4 percent share of total Assets and increased significantly by $4.8 million or 33.1 percent over the previous period. Cash fell by $235,000 or 17.2% from the same amount recorded in 1992. Interest Receivable, Fixed Assets and Prepayments contributed 3.6%, 1.4%, and 0.2% respectively. Deposits were up by $2.2 million or 121.3%, Certificates of Deposits were up by $ 2.2 million or 138.4 % and Long Term debt were up by 0.6% all over the previous year. Loans approved reached $6.9 million as opposed to $6.5 million which were disbursed. Loans in respect of small businesses and mortgages were most significant. Some 19.9% of the loans approved were for small businesses and 17.1% percent for mortgages.

3.2.1 Social Dimensions

Everyone is aware of the economic success of the financial services sector, for its always being highlighted by government officials and industry officials. Little or no attention, however, is paid to the social development or consequences resulting from the development of the financial services sector. Some of the major social issues are employment and family issues.

3.2.2 Employment

As stated above, the financial services sector had the largest increase in the rate of employment of any sector from 1992 – 1996, 36.3%. The majority of these employees, however, were recruited from overseas to fill positions in the financial services sector because of the lack of skilled labour within the work force. These workers come from all over the world and thus contribute to the diverse ethnic makeup of the economy. They also contribute to the growing immigrant population, which was 50.5% of the total population in 1997.

These issues are very critical. Many in the community question who actually benefits from the creation of jobs since, as stated above, the majority of jobs created in the financial services sector, which are high level jobs, are filled with employees from overseas. This has resulted in a sector that is managed by expatriates. While this issue is not seen as critical, it has the potential of becoming a very critical issue.

Other social issues associated with the creation of job are family related issues. Most of these workers that fill the jobs being created are from overseas. These workers leave their families abroad and relocate to the BVI. BVI, no being their new home, have to provide the requisite facilities and services for these as well as all other foreign workers. This has put significant strain on the health system whose goal is to provide quality health care for all and keep the BVI a healthy society. The growing population, from both local and foreign sources, has placed heavy demands or requirements on the health system.

3.2.1 Role of the Public Sector

The public sector’s role in the BVI financial services sector can be described as creator, facilitator, manager and regulator. As stated above, the creation and continued development of the financial services sector is spear headed by the public sector. In order to create niche market and remain competitive the public sector had to be creative in the development of the pioneering IBC Act 1984. The creativity of the public sector over the past 14 years to today continues with the enactment of numerous pieces of legislations such as Insurance, Mutual Fund, Company Management, and the Banking and Trust Act.

The public sector as a facilitator through continued dialogue with practitioners in this sector. They also involve them in development of new legislation. This dialogue is important to the success of the sector since problem can be discussed and a suitable solution created. In addition, through dialogue legislations can be more user friendly and attractive.

To maintain the BVI’s advantage the public sector has to effectively manage and regulate the financial service sector. Without such, the BVI competitive advantage can easily disappear with unscrupulous business practices, white-collar crimes, and bad press. 

Thus far, the BVI’s public sector has been successful in all for areas and this has contributed to the success of the financial services sector.

4. Problems/Constraints/Issues

While the financial services sector has developed at a spectacular rate and has contributed tremendously to the BVI’s economy, it is not without problems and faults. In addition, if the financial service sector is to continue on its present growth path, there are issues and constraints that must be addressed. This paper will aim to detail the problems, constraints, and issues facing the financial services department. The problems, constraints, and issues will be grouped into the following categories Legal Frameworks Issues, Management and Organization Issues, Global Issues and Trade Liberalization.

4.1.1 Legal Frameworks Issues

The current and legal framework while adequate must be currently updated and modernized if the financial services sector is to maintain its competitive advantage and successfully compete in the international market place. The BVI financial services sector boasts flexible, innovative, and user-friendly legislations. While this is true for the relatively recent legislation, older legislations such as insolvency and bankruptcy laws, which have been on the book for decades, must be modernized. In addition, with the world and international markets constantly revolving, especially with respect to the financial services sector, the majority of the laws have to be revised on a continuous basis.

The education and training policies of the BVI need to be reviewed. As stated above, majority of jobs created in the financial services sector, which are high level jobs, are filled with employees from overseas. This has resulted in a sector that is managed by expatriates. Our human resources are the most critical strategic factors. They must be educated trained and prepared for the jobs being created in this sector. This will involve revamping the school curriculum from primary school. Training policies also must be revised to address this issue.

With the current labour policy where work permit holders (foreign workers) are required to renew their work permits every year, we cannot attract professional expertise (top practitioners in the world) to help upscale the activities in the financial services sector.

The legislative process needs to be reviewed. Currently, laws, especially in the financial services sector, and taking to long to be passed and implemented.

4.2.1 Management and Organization

Like the legislative framework, the management and organization of the financial services sector is also responsible for the success of the financial services sector. Without sound management and organization, the success of the financial services sector would not have been possible. However, there are some management and organization issues that must be addressed if we are to remain competitive over the next millennium. 

Good governance of the financial services sector will require an autonomous well Regulatory Authority, The Financial Services Commission (FSC) capable of concentrating with laser –like intensity and public sector efficiency on the sector, is a must if we are to remain competitive during the next millennium. Currently there are some lapses in regulations. In line with the above the issue of regulations especially with respect to banks with the problems and constraints faced because of the absence of a central bank

The Regulatory Mechanism must have the wherewithal to attract and retain quality personnel to regulate the activities of the sector to deal effectively and efficiently with the problems as they arise. This is currently not happening.

Our infrastructure, physical, social services and hotels need more attention. Business hotels, conference facilities as well as the territory’s social and physical infrastructure must be upgraded to complement up scaled financial sector activities. When executives come to the British Virgin Islands, they should not meet third world accommodations and infrastructure in a country referred to as “the world’s pre-eminent corporate domicile.”
It is essential to secure quality management in these areas.

Licensees should have to subscribe to a good citizenship programme to ensure that they put back something in the country in return for the privilege of doing business from within the BVI. Currently, licensees are look at as draining our economy for they put very little back into the economy.

4.3.1 Global Issues and Trade Liberalization

The BVI’s economy is driven by external influences. Financial services, especially, is a global sector and thus its success is heavily dependent on external factors. In addition, globalization and trade liberalization, with international arrangements under the WTO framework, reduces the autonomy of the nation states to influence fundamental decision about international trade and foreign investment.

Education is very important when we talk about global issues and trade liberalization. We need to develop a world class standard. Our goal should be to make primary and secondary school students not merely computer literate but computer manipulative as well as au fait with a second language to ensure their participation in the 21st Century. This is the first step in developing future leaders of the financial services sector.

A procedure must be put in place with respect to new product development. It should aim to add greater value and benefit to the local community by capitalizing on the opportunities presented by the external environment. The development of a separate commercial Court in the BVI will enable the BVI to better itself to capitalize on the myriad of opportunities being created by our emergence as the preferred offshore domicile. In this light, the development of the BVI as an International Arbitration Center is a distinct possibility.

Telecommunications is an integral part of the financial services sector. Thus, “State of the Art” voice-data fax, telephone, and internet systems are a necessity. In addition,
A server based in another jurisdiction (CARIBSURF) should not service real time internet access, in the BVI. International competitiveness is too must at risk. A breakdown in the telecommunication industry can have a significant negative impact on the financial services sector.

5. Needs

As stated above, while the financial services sector has been extremely successful, there are still certain “needs” that must be addressed if this sector is to continue its tremendous growth into the 21st Century and continue to capitalize on opportunities presented by the external environment

5.1 Administrative and Legal

If we are to remain competitive during the next millennium, good governance of the financial services sector will require an autonomous well Regulatory Authority, The Financial Services Commission (FSC) capable of concentrating with laser –like intensity and public sector efficiency on the sector. In this same light, the creation of a Central Bank may be necessary.

Older legislations such as insolvency and bankruptcy laws, which have been on the book for decades, must be modernized. The majority of the laws pertaining to financial services have to be revised on a continuous basis, for the world and international markets are constantly revolving, especially with respect to the financial services sector.

An education and training policies is needed to effective manage our human resources, our most critical strategic factors. This will involve revamping the school curriculum from primary school. This policy will aim to prepare national to capitalize on the lucrative new jobs being created in the country.

A modified labour policy with respect to financial services sector is needed. Extending the duration of work permits to 3 to 5 years in appropriate circumstances to attract critically needed professional expertise (top practitioners in the world) to help upscale the activities in the financial services sector in the BVI.

A new or modified legislative process with respect to the financial services sector needs to be implemented. Currently, laws are talking long to be passed and implemented and this has a negative impact on the financial services sector.

In line with the above an extensive study should be undertaken to address the regulation of the financial services sector as a whole an in particular banks.

5.2 Social and Economic 

Licensees should have to subscribe to a good citizenship programme to ensure that they put back something in the country in return for the privilege of doing business from within the BVI.

The infrastructure, physical, social services and hotels, of the BVI need to keep pace with the economic development of the BVI. It is essential to have the health, telecommunication, and other physical and social services executive in this industry expect.”

New product development is essential to the continued success of the financial services sector. In addition, the BVI need to develop another sector to take pressure of tourism and especially financial services. In addition, this will also create a more equitable and balanced economy.

Bench marking procedure needs to be set up to ensure the international competitiveness and resilience of our programmes, policies, and procedures.

As stated above, “State of the Art” voice-data fax, telephone, and internet systems are a necessity. The BVI need its own server (internet), for international competitiveness is too must at risk

6. Policies, Strategies and Measures

The mission statement of the BVI with respect to the financial services sector is “to make the BVI a world class International Business and Financial Centre, specializing in the provision of an eclectic array of niche high quality products and services, to a highly sophisticated discriminating global clientele, for the economic benefit of the island.”

To BVI will insure it becomes the region’s foremost international business and financial sector by safeguarding its reputation as an innovative, stable, well regulated and well resourced centre for the conduct of legitimate cross border activities. This will be achieved by maintaining a “fit and proper” regulatory environment in which only fit and proper institutions owned, managed and effectively controlled by fit and proper individuals are licensed and authorized to provide services in and from within the BVI.

6.1 Policies 

The policies should aim at promoting sustainable economic growth, and improving economic resilience while building a diversified economy and enhancing the quality of life of the people. This will be possible by looking into country’s policies regarding financial services which includes, monetary, fiscal, and investment. These policies should aim at the following:

1. Updating our law and improving our regulations
   
2. Concentrate on human resources development in this sector
   
3. Improve or attraction of professional expertise
   
4. Improve our governance of the financial services sector
   
5. Improve social and physical infrastructure
   
6. Capitalize on the myriad of opportunities created by our emergence as the preferred offshore domicile
   
7. Improving our telecommunication and internet systems

6.2 Strategies and Measures

In order to implement the above policies the following strategies will be pursued:

1. Modernizing or amending legislations that have been on the books for years
   
2. Continuously revision law to mirror changes in the sector
   
3. Modifying work permit duration policies for top professional in the sector
   
4. Develop an autonomous well resourced regulatory authority
   
5. Develop a sound investment strategy for social and physical infrastructure
   
6. Environmental screening of the competitive external and internal environment knowing strength, weakness, opportunities and threats (SWOT) and responding accordingly
   
7. Development of a new product development policy
   
8. Develop “State of the Art” voice-data fax, telephone, and internet systems
   
9. Have a training programme as part of human resources 

Financial Services
Plan of Action

Financial Intermediation
Production Account 1990-1997