British Virgin Islands growing rich as a global tax haven

The BVI government collects more than $200 million in corporate fees every year.

In addition to attracting sun-seeking tourists, the British Virgin Islands are a favourite destination for foreigners to set up offshore companies.  (LOS ANGELES TIMES FILE PHOTO)  

By MARCO CHOWN OVEDStaff Reporter

Mon., April 4, 2016

Stashing money overseas isn’t just for criminals. Legitimate banks and law firms have entire departments devoted to moving wealth offshore.

They call it “aggressive tax planning” or “tax avoidance” and it’s perfectly legal — though it costs Canada an estimated $6 billion to $7.8 billion in lost taxes annually. With that money, we could build a downtown relief subway line every year.

Instead, tiny countries like the British Virgin Islands (population 30,000) have grown rich by funneling streams of cash from one corner of the world to another and siphoning off tiny sums for themselves. They’re the global economy’s ATM.

As any bank card user knows, those fees add up. The BVI government collects more than $200 million in corporate fees every year, paying for a $100-million hospital and a massive pier, capable of docking the largest of the world’s cruise ships.

Critics of tax havens call them parasite economies that feed off other countries’ tax revenues.

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Mossack Fonseca's branch in Road Town, British Virgin Islands, shares a building with the local government's Tourist Board. After Star reporter Marco Chown Oved was detained and deported from the BVI, an Australian documentary crew that was also part of the ICIJ parntership entered the country posing as tourists and captured images, including this one, with a concealed camera.

Nicholas Shaxson, a tax haven researcher and author of the book Treasure IslandsTreasure Islands, says they’re even worse: “The gains that go to tax havens are very small compared to the revenue losses incurred elsewhere.”

Like many tax havens, the BVI is built on secrecy. Business is conducted by email, billions of dollars move through accounts and only law firms and banks know the real owners of offshore companies.

Investors call it an “international financial centre” that greases the wheels of the global economy, providing a low-cost way to transfer money from investors in rich countries to business ventures in poor ones. Critics call it a “secrecy jurisdiction” and argue that legitimate businessmen shouldn’t require anonymity to make foreign investments.

Law firms and banks are the only ones who know the real owners of offshore companies. Despite recent reforms to crack down on the “black” money that comes from corruption and money laundering, “grey” money, which may not have been declared to tax officials, has never been more plentiful.

It’s a “trust me” system that guarantees nearly total discretion for anyone trying to evade or avoid taxes. Now, thanks to an unprecedented leak of more than 11.5 million documents from the BVI’s leading law firm, Mossack Fonseca, the Star has joined the International Consortium of Investigative Journalists (ICIJ) and more than 100 other media outlets to lift this veil of secrecy.

How it works

Each tax haven has a specialty: the Cayman Islands have secret bank accounts; the Cook Islands have private trusts; Luxembourg attracts opaque “foundations.” In the BVI, it’s the cheap and easy incorporation of anonymous offshore companies.

Financial services account for up to 80 per cent of BVI’s government revenues, yet there are no income taxes, no sales taxes and no corporate taxes for commercial activities that occur off the island. The only cost is an annual corporate registration fee.

More than a million companies have been incorporated since 1984 and almost half a million remain active — that’s more than 16 companies for every man, woman and child on the islands.

Many of these companies are ghosts. No more than a certificate in the corporate registry and a post-office box. There are no residency requirements for directors or shareholders, and because there aren’t many banks, most of the money never passes through the country.

This opacity has made BVI companies attractive vehicles for corruption and criminality. The ICIJ’s investigation shows how Russian oligarchs used BVI corporations to hide and move the secret wealth. Victims of Bernie Madoff’s Ponzi scheme traced payouts to anonymous companies based on the islands. More recently, BVI companies have become a popular way to launder the proceeds from logging and mining projects in the developing world.

“The common resources of the people in some of the poorest countries in the world are being siphoned off for private gain and being stashed overseas in secrecy jurisdictions,” said Mark Hays, a senior adviser with the U.K. anti-corruption organization Global Witness. “Time after time, in case after case, that looting can’t be achieved without the willing participation of the global financial system: banks, lawyers and shell companies in secrecy jurisdictions around the world that are the tools of the trade.”

Of the 92 tax havens listed on the Tax Justice Network’s secrecy index, the BVI ranks 21st, behind only the most opaque jurisdictions like Switzerland, Macao and Jersey in the Channel Islands. Yet the BVI plays a disproportionately large role in the offshore finance world. In 2010, the International Monetary Fund estimated that its companies controlled $600 billion in assets.

Because the BVI is a British Overseas Territory, it provides what BVI-based Canadian lawyer Martin Kenney calls a reliable legal system, where disputes can be appealed right up to the Privy Council in London.

“That’s a huge attraction for good people or bad. The paradox is that the fraudster knows all too well not to hand his money to another thief,” Kenney said.

To set up a company in the BVI, you need a local agent, and there are dozens of law firms on the islands that specialize in this. They also provide extra services such as providing “nominee” directors and shareholders to appear on public documents, masking the corporation’s real owner.

Road Town, the capital city of the British Virgin Islands, is a small town that welcomes yachts and cruise ships, but nearly 80 per cent of government revenues come from the offshore financial industry.

According to leaked emails, Panama-based law firm Mossack Fonseca will register a company for $825 (U.S.). For another $450, it will supply directors. For “enhanced anonymity” — costing $3,000 — Mossack Fonseca will register a company, provide directors and shareholders and open a bank account in St. Lucia or the Bahamas. Annual fees run from $622 to $2,600.

Mossack Fonseca also ages companies, filing paperwork every year. After a few years, these “shelf” companies are sold to people seeking a corporate entity with a documented history. The older the company, the higher the price. Last year, Mossack Fonseca had several 4-year-old BVI companies on offer for $6,120 each.

Once you have an anonymous corporation, you can hide international transactions in a corporate labyrinth. Called “layering,” many schemes involve multiple shell companies or private trust funds that exist solely to own other companies. The most sophisticated operators set up dozens of entities in different tax havens.

“You could have a string of 20 companies in 20 countries, owning the end point of a bank account somewhere,” lawyer Kenney said.

“You layer it with layer upon layer upon layer of separate vehicles all designed to fragment the title of ownership of assets between the ultimate owner, through the layers down to the end point where the value sits — in Vancouver real estate or a bank account in Switzerland,” Kenney said.

Trouble in Paradise

After almost 30 years of constant growth, new incorporations in the BVI have started to decline, and with them government revenues.

While some blame the global economic downturn, the chill in offshore investment has also been caused by an international movement to end corporate anonymity, undermining the central pillar of the BVI’s business model.

“Competitive advantage is the only thing they have got going for them and it could disappear tomorrow,” said Bill Maurer, an anthropologist at the University of California at Irvine who studied the financial sector in the BVI.

After decades of operating in relative obscurity, the BVI became the poster child of the offshore tax haven world in 2013, when secret banking documents leaked from Luxembourg and Switzerland showed that BVI companies had been used by the wealthy to buy mansions, yachts and works of art.

Ever since, the BVI has made very public efforts to crack down on illegal “tax evasion” while quietly continuing to encourage legal “tax avoidance.”

Under pressure from the G20 and the U.S. to collect better data on corporate ownership, the BVI made numerous reforms and last August, the BVI was deemed “largely compliant” with the Organization Economic Co-operation and Development’s tax transparency standards. In December, France finally took the BVI off its black list of tax havens. Yet loopholes for secrecy remain.

One rule requires local agents to collect identification documents for beneficial owners. But agents can avoid this obligation by obtaining a letter from an “introducer” (most often a foreign law firm) swearing it holds the owners’ IDs.

While all companies hypothetically have a record of their beneficial owner somewhere, that record isn’t attached to the corporate registration, nor to the agent who set up the company. It could be anywhere, sitting in the office of a lawyer whose only link to the company is a few emails sent to an agent in the BVI.

This system hasn’t been successful in providing accountability. According to an analysis of the Mossack Fonseca leaked document database conducted by The Guardian, the law firm couldn’t find ownership information for nearly 20 per cent of government requests, effectively admitting it didn’t know who was behind its own companies.

The BVI’s bad reputation has even started to taint the U.K., which remains technically responsible for its overseas territories and dependencies, many of which are considered tax havens, including Jersey, Guernsey, Isle of Man and British Anguilla.

British Prime Minister David Cameron has vowed to crack down on money laundering and tax dodging on British soil. At a meeting in London last December, he got overseas administrators to agree to collect beneficial ownership information in a government registry, but couldn’t convince them to make the registry public.

The BVI government says it’s being treated unfairly. Few countries collect any beneficial ownership information, let alone publish it publicly. What’s more, it claims, corporate secrecy in some American states, such as Delaware, is far stronger than in the BVI.

“The U.K. has its work cut out for it with these jurisdictions,” said James Henry, former chief economist with the consulting firm McKinsey and now a fellow at Columbia University and Yale. “It will be difficult for them to insist that these places, which have become very wealthy, give up their livelihood.”

In the end, the BVI is beholden to the flow of global capital and could one day fall victim to the offshore economy it was instrumental in helping develop.

“This is a global industry. It wouldn’t really matter if the BVI disappeared off the earth. Not for very long.” Henry said. “The money would just find another way.”

BVI OFFSHORE SCHEMES

Tax law is complex and varies so much from country to country that it is difficult to talk about what’s legal and what’s not.

Here are two examples of financial behaviour that have proven popular in the BVI:

Between 2006 and 2012, the BVI was the second biggest source of foreign investment in China, ahead of the United States, Japan and Singapore and behind Hong Kong, according to the Tax Justice Network. Yet, the money isn’t foreign, the TJN claims; it’s Chinese money that has been “round tripped.”

“Local Chinese send their wealth offshore, dress up that wealth in offshore secrecy, then return it to China illegally disguised as foreign investment,” the group writes in its BVI country report. This investment benefits from lower taxes but it’s also a way to launder bribes or proceeds from corruption.

Using the BVI has become so commonplace in China that “BVI” is used as a verb. It means “to open a company” with no underhandedness implied.

Canadians have also used the BVI to take advantage of a tax treaty that allows profits from international business to be brought back into Canada as dividends.

According to a report prepared by Unite Here, a private sector union, one Vancouver family set up three companies in the BVI to funnel profits from a Las Vegas casino to a private trust in Liechtenstein. That trust paid family members dividends, which were brought to Canada at a low tax rate.

“The richest families in Canada, they’re the very ones who have lots of trusts and numbered corporations that take advantage of tax law. But these corporations are nothing more than people with lots of money. As soon as you have a corporation, you can do a hell of a lot to reduce the incidence of tax,” said NDP deputy revenue critic Murray Rankin. “Let’s say that’s 100 per cent within the law, does that make it right?”