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After a series of financial crime scandals and with a FATF test due in Q2 this year, the British Virgin Islands is pushing to improve its compliance regime. Tim Cooper investigates.

British Virgin Islands companies need a proactive, tech-led compliance approach as the territory looks to bolster its anti-money laundering and terrorist financing regime.

The British Virgin Islands (BVI) is pushing to improve its compliance regime ahead of an anti-money laundering (AML) assessment that follows several recent financial scandals.

The Financial Action Task Force (FATF) will test the territory’s compliance with international regulations in Q2 2022 and publish findings in 2023.

According to BVI News, Kenneth Baker, BVI Financial Services Commission managing director, said the territory has been translating FATF recommendations into local law and regulation; and testing companies’ understanding of the new regime.

Money laundering scandals

Much depends on the private sector’s response. BVI is regarded as one of the world’s most dependable tax havens. But it is reeling from several corruption scandals that threaten this reputation, according to the International Consortium of Investigative Journalists (ICIJ).

In January 2021, BVI governor Augustus Jaspert announced an investigation into allegations of corruption and misuse of millions of dollars in public funds. These include a case involving $40 million earmarked for Covid relief allegedly siphoned to political allies, and $700,000 spent on one school fence.

The governor’s investigation is backed by the UK, which oversees the BVI as an overseas territory. The BVI governs domestic affairs and raises its own taxes but relies on the UK for defence and diplomatic matters.

The UK government said: ‘A consistent and deeply troubling array of concerns have been put to the governor… We cannot ignore such serious allegations.’

Notorious scandals

As one of the world’s most popular tax havens, BVI attracts legitimate businesses, celebrities and multimillionaires. But it attracts criminals too, said ICIJ.

It offers simple shell companies that allow owners to avoid registering their names in public. Funnelling money through BVI companies is legal, but shell companies created there are a regular feature in some of the world’s most notorious scandals, said the consortium.

The BVI also features heavily in the ICIJ’s Pandora Papers, released in October 2021, and its previous financial crime investigations the Panama Papers and Paradise Papers.

Over 50 per cent of the shell companies uncovered in the Panama Papers were created in the BVI. Most of the Pandora Papers’ records came from a BVI-headquartered provider.

The Papers investigate the shadowy offshore financial system that ‘benefits the wealthy and well-connected at the expense of everyone else,’ said ICIJ. They uncover a complex web of tax havens, shell corporations, offshore accounts and PO boxes that hide the true beneficial ownership of billions of dollars.

Meanwhile, in the UK, former attorney general Geoffrey Cox was revealed to have been giving legal advice to the BVI as it fought allegations of corruption made by his own colleagues in the UK government, according to The Independent.

Cox said this second job had ‘not been to “defend” a tax haven or, as has been inaccurately reported, to defend any wrongdoing but to assist the public inquiry in getting to the truth’, said the paper.

Freezing millions

Baker said the BVI has made progress in reducing financial crime in recent years – ‘but we have some way to go.’

The territory established mandatory entry onto a beneficial owners register in 2017. This has provided effective information to law enforcers, including support for one of the UK’s first unexplained wealth orders, which led to the freezing of millions of pounds of assets.

BVI has also committed to a public beneficial ownership register by 2023. This will enable businesses, investors and wider society to prevent misuse of BVI companies.

However, a Home Office report said UK law enforcers have continued to observe abuse of vulnerabilities in BVI’s AML regime by organised criminal networks. The territory needs more investigations and prosecutions in line with BVI’s risk profile; and more proactive, risk-based supervision and private sector engagement, said the Home Office.

Proactive technology

Companies must play a central role in the BVI’s FATF assessment preparations if the territory is to maintain its reputation as a dependable offshore financial centre. International rules and guidance have changed dramatically since the territory’s last task force assessment in 2008, and more changes are proposed in direct response to the Pandora Papers.

These proposals aim to improve transparency on beneficial ownership; controls on bearer shares and nominee arrangements; and increase a risk-based approach to AML and terrorist financing compliance.

BVI companies will need a proactive, risk-based stance in keeping up with regulation, and technology will be pivotal.
A global risk-based approach is difficult to implement, as there is no one-size-fits-all solution. But technology will make it easier.

Among other things, it can provide targeted know your customer (KYC) and verification measures on potentially high-risk transactions. Modern tech can help establish beneficial ownership and detect suspicious transactions. Effective tracking measures can match suspicious transactions to known offenders, politically exposed persons (PEPs), or high-risk individuals.

The British Virgin Islands are under intense scrutiny. But this gives companies based there an opportunity to show their compliance mettle.

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