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British Virgin Islands suffers amid push against money laundering

Published:Wednesday | October 15, 2014 | 12:00 AM

By Demetri Sevastopulo in Hong Kong

THE BRITISH Virgin Islands has long attracted Chinese companies looking to incorporate offshore but the Caribbean haven is facing pressure in Hong Kong from a global push to tackle money laundering.

HSBC and Standard Chartered, two international banks with a significant Hong Kong presence, have made it very difficult for BVI companies to open bank accounts in the Chinese territory over the past two years, according to lawyers involved in setting up companies in the offshore financial centre.

"You are seeing stronger compliance and the banks themselves are being more risk-averse so they are making it harder to open accounts," said Elise Donovan, head of the BVI office in Hong Kong responsible for Asia.

Ms Donovan said senior executives at the banks involved had assured the BVI that it was not being singled out and that they recognised that it had a good anti-money laundering regime.

Europe and the US are stepping up anti-money laundering measures to crack down on tax evasion and terrorism funding, which is forcing banks to strengthen compliance. G20 finance ministers are expected to discuss reforms to tackle tax avoidance when they meet in Cairns this weekend.

HSBC has become more cautious since 2012 when it paid $1.9bn in fines for processing drug-trafficking money and sending funds through countries facing sanctions. Last month, Standard Chartered agreed to suspend clearing services for high-risk clients in Hong Kong in a deal with US regulators.

Christopher Bickley, a partner at the law firm Conyers Dill & Pearman, said banks were now making it "torturous" to open BVI accounts, spurring companies to incorporate in Samoa and the Seychelles.Fiona Le Poidevin, chief executive of Guernsey Finance, which promotes the island as a financial centre, said it was "quite a telling story" that HSBC was refusing to open BVI accounts.

The BVI has been favoured by Chinese companies in Hong Kong for more than three decades. As the UK prepared to hand Hong Kong back to China in 1997, companies rushed to create offshore vehicles in the jurisdiction to protect their assets. Sixty per cent of the BVI's government revenue comes from financial services, with Asia - predominantly Chinese companies - accounting for a little less than half of that.

Before the 2007 global financial crisis, BVI boasted roughly 750,000 companies, or 34 incorporations for each of its 23,000 residents. Incorporations plummeted to 404,000 in 2007 partly as a result of the crisis - but also because dormant companies were no longer included on the register - before climbing to a post-crisis peak in 2011, but they have fallen each year since.

Michael Gagie, a partner at Maples and Calder, which specialises in BVI and Cayman Islands law, said there had been "a little bit of a shake-up" in Hong Kong following new guidelines from the Hong Kong Monetary Authority, the banking regulator, that have resulted in tougher compliance standards.

HSBC and Standard Chartered declined to comment on the BVI issue. HSBC would only say that it was "adopting the highest or most effective financial crime controls and deploying them everywhere we operate", while Standard Chartered said "we do continue to tighten controls more generally".

HKMA introduced new anti-money laundering guidelines in 2012 but said it had "not asked banks not to open accounts for corporate customers that are domiciled, incorporated or trade in a particular jurisdiction, such as the British Virgin Islands or Cayman Islands".

The BVI suffered a blow last year following a mass leak of investor names that hit its reputation for confidentiality. France also put the BVI on a black list for sharing information with regulators too slowly. Ms Donovan said the BVI had taken corrective measures and hoped to come off the list soon.

As the BVI deals with the hurdles, Orlando Smith, BVI premier, spent last week in Hong Kong and China to drum up business. In an interview he said the jurisdiction faced several challenges, including the leaks case, and industry-wide issues such as tougher regulation. "But the reality is that our financial services remains strong. Our revenue from this continues to grow."

Jonathon Clifton, Asia managing director at Offshore Incorporations, said the past two years had been "pretty tough" for the industry due to economic and political pressures, but that the BVI had suffered most because of the bank account issue. He said the BVI's share of the market for Chinese incorporations had fallen from 80 per cent to 60-65 per cent since 2012.

The Seychelles gained 20,747 new incorporations from around the world last year, an annual rise of 24 per cent, said Mr Clifton. New registrations in Samoa rose 38 per cent to 5,648.

Lawyers said HSBC had not explained why BVI was coming under more pressure than places such as the Seychelles and Samoa. Mr Clifton said it was targeting the territory partly because of the number of times it appeared on so-called "suspicious transaction reports" and that the BVI was therefore "a victim of its own success".

One person familiar with the issue said HSBC staff had explained that there were some problems integrating its risk systems globally, which meant that one BVI transaction involving multiple jurisdictions could end up being flagged several times.

HSBC denied having any such problems. It said it had "developed global standards shaped by the highest or most effective standards of financial crime compliance available in any jurisdiction where HSBC operates and are now in the process of deploying these globally on a consistent basis".

Offshore incorporation competition pushes BVI to diversify

As the BVI faces growing competition in the low-cost, high-volume offshore incorporations business, it is trying to diversify into other areas such as private wealth management.

During a trip to Hong Kong last week, Orlando Smith, BVI premier, said he was "not worried at this point" about the falling number of companies incorporating in the territory. He also visited Shenzhen, which is developing a new economic zone called Qianhai. BVI signed two agreements with Shenzhen this year aimed at boosting Chinese business for the BVI.

But the BVI is just one of several offshore centres trying to capture a bigger slice of China's rising wealth. Geoff Cook, chief executive of Jersey Finance, said the territory was receiving rising interest from China.

Mr Cook said Chinese companies that have made money overseas were increasingly using Jersey-based trusts to protect assets that they do not want to repatriate to China and added that Chinese president Xi Jinping's anti-corruption campaign had also helped Jersey gain business.

Mr Cook said that over the past five years, first-generation Chinese entrepreneurs were increasingly looking to offshore financial centres as "a way of migrating financial wealth" to their children. While China, India and the Middle East account for 20 per cent of Jersey's business, he said it hoped to increase their share to 50 per cent over the next decade.

Ms Le Poidevin said that while the BVI and Cayman Islands were still "embedded in the Chinese financial services area", Guernsey was attracting interest from wealthy Chinese families who wanted a place to park their money outside China.

She added that Jersey was positioning itself as a "one-stop shop" that provides services such as helping Chinese children apply to UK schools and universities. She said Asia accounts for 2 per cent of Jersey's existing financial business, but that 4 per cent of new business was coming from Asia.

Twitter: @AsiaNewsDemetridemetri.sevastopulo@ft.com

(c) The Financial Times Limited 2014