NOTHING TO SEE HERE, FOLKS, WE'RE NOT A TAX HAVEN

So Andrew Fahie, the prime minister of the British Virgin Islands got busted by the Feds in Miami for (allegedly) being a drug-smuggler and money launderer.

Oh well, the naysayers down there are telling anyone who asks, we all knew he was a crook. Now that he's gone, the weather is great, the fish is fresh and don't believe the hype that the entire country was built on phony companies designed to help people launder money and evade taxes.

We're not a tax haven.

Instead, what the British Virgin Islands is, are 65 dots of land – only 15 are inhabited - with names like Tortola, Virgin Gorda, Anegada and Jost Van Dyke, poking out of blue waters northeast of Puerto Rico and west of the Leewards. The population of about 28,000 is culturally linked to Great Britain but constitutionally independent. More importantly, it is very interdependent on its neighbor to the south, the US Virgin Islands. So much so, that US dollars are the official currency. And English is spoken. What's not to like?

That said, BVI is now the biggest and most robust of all the Caribbean offshore financial centers. Since the beginning they’ve sold more than a million BVI registered International Business Corporations (IBCs).

Tourism accounts for almost half the economy, and financial services accounts for just about the other half. Although the numbers are always shifting, there are around 420,000 IBCs registered there, which includes subsidiaries of 140 businesses listed on stock exchanges in New York, London and Hong Kong.

Especially Hong Kong.

In fact, it’s believed that as many as 40% of those BVI registered companies are beneficially owned in Asia. Although what that means is complicated by the fact that BVI does not, stubbornly, publish lists of beneficial owners, so no one knows for sure. Yes, they require that beneficial owners be listed when the company is formed, but the names are held secretly.

Of the rest, nearly 20% of the IBCs are said to have “ultimate beneficial owners” in Latin America and the Caribbean, with the remaining 40% held through people supposedly in Europe and North America.

As worrying, more than half of the 200,000 offshore companies set up by the infamous Panamanian lawyers Jurgen Mossack and Ramon Fonseca - and exposed in the Panama Papers leak - were registered in the BVI.

BVI currently shelters (at last count) around $1.5 trillion (£1.19 trillion) in assets, and by their own admission, two-thirds of the companies holding those assets are in BVI for what-s called “corporate structuring."

In less polite places, that’s called tax avoidance or tax evasion.

No, they insist in earnest tones and with a straight face, “We are not a tax haven.”

Given that there are so many IBCs registered in the BVI, it is perhaps not surprising to know that more than 50% of the shell companies revealed in the Panama Papers were registered in there. The total was 113,648 out of just over 200,000.

For many years, BVI has had to cope with the label “tax haven,” which, granted, does spread a lingering whiff of sleaze over some of the most beautiful islands in the Caribbean. Optics being what they are, governments and the financial players in many islands have recently tried to wipe away that smell.

But none of them have gone to the extent that BVI has.

In the fall of 2016, a small group of public relations hacks arrived on the island from the UK, to harvest all the non-tax haven facts they could. Seven or eight months later, the company they worked for, Capital Economics, published a very glossy 137 page report titled, “Creating Value – The BVI’s Global Contribution.”

Right there on page 5, it says it: “The BVI is not a tax haven. It has no banking secrecy rules and compares well against many other jurisdictions on international standards for transparency, tax information exchange, anti-money laundering and measures to combat the financing of terrorism.”

In case anyone missed that reference, there it is again on page 95: “The BVI is not a tax haven.”

Surprise surprise, BVI itself paid for the report, with significant contributions from financially interested parties on the island.

So much for any hint of independent analysis.

Quite the contrary, rather than reading like a serious report - with apologies to Capital Economics – it sounds and feels like a very expensive press release.

The heart of it are statistics that show companies registered there create jobs around the world and pay taxes in other parts of the world and, because of the tax breaks they get in the BVI – which means, no tax – they can create wealth in other parts of the world.

Even if the math is fuzzy, there's talk about “maximum tax leakage,” which is money not paid in taxes by companies using BVI companies. The BVI figure outs it at only $750 million. But the Tax Justice Network says that’s nonsense, and puts the tax avoidance figure at over than five times that, or $3.9 billion.

Truth be told, it probably doesn't matter because no one is going to get the message – and likely no one outside the BVI even cares - because the point of the exercise was, “The BVI is not a tax haven.”

It’s actually kind of sad because one can understand what the people in BVI wanted to do, and why. But someone on the island should have known that the first rule of public relations, advertising and marketing is, never try to sell a negative.

All they accomplished – and someone should have warned them – is to draw attention to all the arguments that say, yes BVI is a tax haven.

Anyway, critics point out that by selling the idea of no tax, and levels of secrecy that are higher than many neighboring jurisdictions, the BVI is vulnerable to individuals and corporations who understand how to exploit that.

They also add that while the BVI has made some progress towards transparency, the real problem is that while they now demand to know the beneficial ownership of the companies they register, that list is not made public. That they’re not really transparent. That they’re too secretive.

That is especially worrying when you talk about beneficial ownership. Seeing as how it can be disguised through various administrative contortions, unless names are published and can be checked – ie, the money behind the companies can be followed – then in the case of BVI, Chinese participation in general, and both capital flight and money laundering involving Chinese businesses, political organizations and nationals, remains hidden.

For years, repeated requests from other governments for beneficial ownership information was simply ignored. But in January 2016, the BVI government announced that it would require all companies registered on the island to supply beneficial ownership information, for the newly created register of beneficial owners. As of January 2017, that register is alive and well in Tortola. But unlike so many other governments who have yielded to international pressure to come clean, the BVI register is still a state secret.

When Alex Cobham of the Tax Justice Network saw the report that insisted BVI wasn't a tax haven, he told the media, “The 'not a tax haven' line is basically only one you ever hear from tax havens.”

Embarrassingly, someone in an official position on the island was quoted as saying that, despite paying for the report, “It is independent.”

An impossible sell!

Then came this from Ryan Geluk, who was a member of the BVI Finance board of directors. “Tax haven is a term, is a buzz word; it is not a label...”

Really?  

"...it is not a credible legal category of jurisdiction. It’s just a negative connotation that’s being put on by NGOs which we – over the years – have really dispelled.”

Really?

The premier at the time, Dr. Orlando Smith, who was also Minister for Finance and Tourism, chipped in by labeling the report, “An authoritative, evidence-based report...”

Which sounds fine, until you’re reminded that it was the government and parts of the private sector who paid for it. Would it have been published if the authoritative evidence had been negative? As long as they paid for it, of course not. 

Someone else on the island in an official position, wanted the world to know, “Not only does the BVI enable cross border trade and investment, it both supports millions of jobs globally and generates substantial tax receipts for governments worldwide.”  

I hate to say it but, except for the generation of tax receipts for governments worldwide, the same could have been said of the Cali Cartel.

Finally, the BVI’s then Permanent Secretary to the Ministry of Finance, Neil Smith, might want to revisit his odd comment in support of the report. “If you see articles that say jurisdictions like the BVI are facilitators of illegitimate activity, that is incorrect. Yes, it occurs, but it also occurs in jurisdictions that are not seen as offshore financial centers."

Try that again? If it occurs, then how is the original contention incorrect?

John Christensen, co-founder of the Tax Justice Network - an international advocacy group based in the UK that pushes for change in areas such as tax evasion, offshore havens, financial globalization and transparency – acknowledges that BVI, along with Bermuda, have come under pressure during the past three years. “And they have actually made some spectacular progress. They have signed up for automatic information exchange. But we have to be very nuanced in our assessment. They are not prepared to create a public registry of trusts and they know full well the effectiveness of the weapon of secrecy.”

In the end, however, TJN doesn’t have much sympathy for BVI trying – even if it was an ill-thought out amateur way - to make itself appear more acceptable.     

Christensen says he refuses to look the other way when they claim there are reasons why nearly 50% of the anonymous companies revealed by the Panama Papers were registered in BVI. “They (BVI) have been shown to be involved in all manner of tax abuse and corruption cases. The commitment to secrecy was further demonstrated by the BVI government’s repeated granting of a license to operate to Mossack-Fonseca during the 2000s, despite the latter being unable or unwilling to name company owners when required to do so.”

Transparency International (UK) very much agrees. “Although Mossack-Fonseca was fined by the BVI’s regulators for multiple AML failings, it took a massive leak for the jurisdictions’ Financial Services Commission to figure out what was going on in its own backyard. Both this and the embarrassingly inadequate sanction it imposed raise serious questions about its ability to proactively identify poor practice and deter non- compliance.”

Thinking about this, maybe it’s not their motives that should be questioned. Maybe, despite being the number one tax haven in the Caribbean, TI-UK is right, they’re just not very good at it.

In late November 2011, Mossack-Fonseca received a formal request in their Tortola, BVI office from the BVI’s Financial Investigation Agency (FIA). The government was asking about a company that was being registered there called Lynden Management.

By law, the BVI requires companies to furnish a number of details, which had not yet been included in this particular file. Accordingly, the FIA asked Mossack-Fonseca for: “The name(s), contact details and physical address of the ultimate beneficial owner(s), registered director(s) and shareholder(s) of the above-referenced company; a copy of all due diligence records in respect of the above-referenced company; details of any bank accounts or assets known to be held in the name of the abovereferenced company; full details of any company connected to or concerned with the aforementioned company; the name(s), contact details and physical address of the settler, trustee and beneficiary of any trust(s) connected to or concerned with the aforementioned company; and, a copy of the Certificate of Incorporation.”

At the bottom of the letter, signed by the director of the FIA came this reminder: “Take note that section 4 (4) of the FIA Act, 2003 states that ‘any person failing or refusing to provide the information required under Section (2) (d) commits an offence and is liable on summary conviction to a fine not exceeding Twenty Thousand Dollars or to imprisonment for a ten not exceeding two (2) years or both’.”

Under that there was this: “You have seven (7) days to respond to this request.”

This is pretty standard stuff, and part of the box-checking exercise the FIA goes through with all applicants for company status. Most applicants either respond and furnish the documents – because they want the company – or withdraw the application and try another offshore jurisdiction where they might not have to supply whatever information it is that they don't want to supply.

This time it was different.

A week later, there were no documents from Mossack-Fonseca’s office, which was only a mile away. Instead, there was a letter from Mossack-Fonseca saying that it’s their Singapore office that has responsibility for the Lynden Management account.

So, it appeared that the company being registered in the BVI was actually managed by directors in Singapore.

Not quite.

Mossack-Fonseca then had to admit, that the two company directors in Singapore were not actually people, they were a pair of companies, both of which were registered in the Bahamas.     

In the meantime, three weeks after the FIA made its original request, Mossack-Fonseca’s BVI office responded, “The Beneficial Owner of the company is Mr. Bidzina lvanishvili whose address is Georgia Irakly ll Square 3, Tbilisi.”

That was a step in the right direction, but that was all. None of the other issues were addressed. No documents were enclosed.

For the record, at the time, Ivanishvili was not yet a full-fledged oligarch with a hidden yacht or three. He was just another 55 year old Putin chum who was listed by Forbes Magazine as being worth somewhere between $5.5-$6.5 billion. The richest man in the Republic of Georgia, he earned his fortune after the fall of Communism, selling electronics and through banking.

A year later, Ivanishvili got himself elected Prime Minister of Georgia. A year or so after that, he lost an election and left politics. He was – is – most definitely a Politically Exposed Person (PEP) which would require enhanced due diligence on behalf of the BVI authorities.

But it looked like either Ivanishvili himself, or Mossack-Fonseca, or both were not overly anxious to help the FIA do that. Nor did the FIA appear to be overly anxious to put their foot down and reject the application.

At this point, all they were getting out of Mossack-Fonseca in Panama was the insistence that they’d been urging their own the Singapore office, multiple times, to supply a copy of the man’s passport and proof of his address. A simple electricity bill would do.

By 2014, nearly three years after the application was submitted, none of the required documents had yet appeared.

Clearly, one of the products being sold to clients by Mossack-Fonseca in Panama, was “ofuscación.” Obfuscation.

In furtherance of that, word eventually arrived from Panama that they’d just heard from their office in Singapore that Lynden Management was held in a trust with Credit Suisse. What they didn't say was that Ivanishvili was in the midst of a lawsuit against Credit Suisse, having accused them of losing $100 million of his money in a bad deal investment. Still, Singapore told Panama and Panama assured the SVI, Credit Suisse was more than happy to vouch for Lynden Management, if that would help make this go away.

In fact, it didn’t, because Ivanishvilli’s passport was still required.

It wasn’t until August 2015, close to four years after the saga began – during which, a Politically Exposed Person was allowed to use his BVI company, formed a political party and won an election to high office – that a copy of that passport finally arrived.

Enclosed with it was... nothing.

Apparently, they’re still waiting on his utility bill.

*****

(c) Jeffrey Robinson 2022

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