Martin S Kenney considers the Anti-Money Laundering and Terrorist Financing Code in the British Virgin Islands and assesses customer due diligence; Beneficial ownership information and non-compliance
1. What trends, in terms of activity or focus, have you seen in the prosecution of business crimes in your jurisdiction in the last 12 months?
The British Virgin Islands Financial Services Commission (FSC) is responsible for pursuing enforcement actions against any individual or business that violates BVI financial services laws as well as monitoring and detecting financial crime and assisting in the prosecution of such crime. Over the past 12 months there has been a significant increase in the imposition of penalties for breaches of the Anti Money Laundering and Terrorist Financing Code (AMLTF Code), in particular for failure to either engage in customer due diligence or failure to review and keep up-to-date customer due diligence information in the required manner. Most enforcement actions were pursued in respect of breaches of the AMLTF Code, with over 30 breaches of sections 20 and 21 (failing to engage in proper enhanced customer due diligence and failing to review and keep up-to-date customer due diligence information in the required manner) and at least 18 breaches of section 19 of the AMLTF Code (failing to properly engage in or undertake customer due diligence). There was also a considerable increase in detections of breaches of section 31(5) of the Code for failing to adequately ensure that a third party introducer reviews and maintains customer due diligence information as required.
These figures stand in stark contrast to the figures for imposition of penalties in the period 2012–2014, where specific non-compliance relating to insufficient customer due diligence and record keeping, including failure to keep comprehensive and up-to-date ownership and identity information led to the imposition of penalties in 15 cases.
2. Are enforcement agencies particularly focused on any specific industries or crimes?
The financial services sector in the British Virgin Islands is consistently acknowledged to be well regulated and its legislative and regulatory practices meet benchmarked international best practice standards; however, the issues identified by the International Consortium of Investigative Journalists’ (ICIJ) in its recent investigative reporting raised a number of significant compliance implications for BVI licensees. In light of the bad publicity generated, enforcement agencies are particularly focused on the financial services industry and the apparent widescale failure to adhere to proscribed KYC policies and procedures. The FSC has initiated a series of investigative processes following on from such allegations. In the last quarter of 2015 the FSC concluded 26 on-site inspections at trust companies, thus it is fair to say that trust companies have come under the FSC spotlight, this is borne out by the increased number of administrative penalties issued against trust companies in the past 12 months.
3. Are enforcement agencies more or less focused on pursuing cases against corporations or individuals?
As of the 31st March 2016 there were 466,081 active companies on the BVI Corporate Register, in contrast the number of individuals resident in the BVI is estimated to be in the region of 30,000. It stands to reason that in a jurisdiction where the majority of entities are corporate that the enforcement agencies are more focused on pursuing cases against corporations, particularly given that the vast majority of those corporations conduct international business and the reputation of the BVI as a leading international financial services centre depends upon a consistent adherence to international standards and the confidence that those responsible for enforcement continue to monitor and investigate any cases of suspected breach.
4. Does the legal framework concerning the prosecution of business crimes allow for extraterritorial enforcement?
There are no BVI laws concerning the prosecution of business crimes that purport to have extra-territorial application as such, however given the fact that there are over 450,000 live companies on the BVI Register of Companies there may be circumstances where conduct of persons (such as employees or directors) abroad may become the subject of litigation in the BVI simply by virtue of the place of incorporation of the company. It is also worth noting in this context that domestic courts can assert extra-territorial jurisdiction over the following persons and or property:
5. What judicial or legislative developments have impacted the prosecution of business crimes in your jurisdiction in the last 12 months? Are there any significant proposals for reform of the legal framework that governs business crimes in your jurisdiction?
On January 1st 2016 the Anti-money Laundering (Amendment) Regulations 2015 came into effect, amending the Anti-Money Laundering Regulations 2008 (AMLR). The changes require the following beneficial ownership information to be held and kept up to date by registered agents in the BVI as and from 1st January 2016:
This has been described as the “on shoring of beneficial ownership information”. Eligible introducer arrangements will continue to allow detailed customer due diligence materials such as copy passports, to be held by third party introducers provided they are made available on request and without delay. Copies of all such identification data and documentation must be provided to the BVI Financial Investigation Agency, (FIA) the FSC or other competent authority in the BVI without delay, upon request and in any event within 48 hours. This is regardless of whether this information is held by the registered agent or by a third party.
A further change implemented as part of the BVI’s evaluation of the Revised FATF Recommendations is a requirement for BVI companies to file details of their directors at the Registry of Corporate Affairs. The details of the directors will, however, not be available to the public unless the company elects for the filing to be public.
It is too early to say whether these changes are likely to translate into more prosecutions, as noted above, there has been a considerable increase in investigations into non-compliance relating to insufficient customer due diligence and record keeping, including failure to keep comprehensive and up-to-date ownership and identity information; however, given that the BVI is due to have its AML/CFT regime evaluation by the Caribbean Financial Action Task Force take place in 2017, the enforcement agencies will be under pressure to ensure that any alleged or suspected non-compliance is followed up on thoroughly.
There have been no notable judicial developments impacting the prosecution of business crimes in the BVI in in the last 12 months.
6. How common is it for enforcement agencies in your jurisdiction to exchange information and cooperate internationally with other agencies? What are the consequences of cross-border cooperation on prosecutions of entities and individuals in your jurisdiction?
The FSC actively participates in regional and international cooperation. It is a member of the Offshore Group of Banking Supervisors, the Caribbean Group of Banking Supervisors and the Association of Supervisors of Banks of the Americas. The FSC has entered into a Memorandum of Understanding (MOU) with a number of foreign regulators including the Office of the Superintendent of Financial Institutions (OSFI).
In general, law enforcement, the FIA, and supervisors can engage in a wide range of international cooperation. A wide range of mutual legal assistance is available in criminal matters. The BVI has a comprehensive framework of international cooperation legislation and procedures to assist foreign judicial, law enforcement, prosecutorial, tax, and regulatory authorities. Law enforcement agencies, the FIA, and the FSC can and do engage in a wide range of international cooperation.
As a member of Egmont, the FIA freely exchanges information with its Egmont partners. It executes approximately 500 Egmont Group requests for protected information annually. For example in the year 2013 (the latest year for which the annual report of the FIA is currently available), a total of 490 requests for information were received by the FIA. These requests included requests from the FSC, Royal Virgin Islands Police Force, HM Customs, Governor’s Office, and Attorney General’s Chambers, as well as from foreign Financial Intelligence Units in the Egmont Group, and foreign law enforcement agencies which are members of Interpol.
Assistance can be provided for the full range of mutual legal assistance requests envisaged by the FATF Recommendations. Generally, mutual legal assistance requests are of three types: law enforcement; regulatory breaches/offences; and tax offences. The Governor and the Attorney General are the central authorities for law enforcement requests, the managing director/chief executive officer of the FSC for regulatory breaches and offences, and the Ministry of Finance is responsible for all matters regarding tax, including the exchange of information in tax matters. The competent authority with respect to the exchange of information under the British Virgin Islands TIEAs is the Financial Secretary or a person or authority designated by him. The International Tax Authority (ITA) has been appointed as the designated competent authority and reports directly to the Financial Secretary.
Mutual legal assistance under the Criminal Justice (International Cooperation) Act (CJICA) is granted if an offence has been committed under the laws of the requesting country or territory, or there are reasonable grounds to suspect that an offence has been committed and that criminal proceedings or criminal investigations have commenced in the requesting country. Generally, all requests for legal assistance are processed within a period of 30 days from the date of the receipt. Very urgent requests, such as those with close return court dates would be processed in a quicker time period. Generally, all mutual legal assistance provisions apply also to terrorism and terrorism-financing offences. In the year 2013 the FIA processed 46 MLAT Requests.
In the first quarter of 2016 there were 52 formal requests for information to the FSC, this represents an almost 100% increase in the number of formal requests as compared with the number of formal requests received in the first quarter of the preceding year.
As noted, the BVI laws allow for broad exchanges of information, both for investigations and prosecutions, and for regulatory matters, although requiring dual criminality for the provision of evidence and records. The Proceeds of Criminal Conduct Act (POCCA) specifically provides for the enforcement of external confiscation orders for money laundering. According to the authorities, the BVI has assisted foreign authorities in the freezing of substantial sums. There have been no prosecutions of individuals in the BVI in the past 12 months in respect of commercial crimes, this is in large part, I suspect, due to the fact that while an investigation into financial crime involving cross border co-operation may target a corporate entity in the BVI, the “mind” or beneficiary of suspected illicit activity is in the vast majority of cases found outside the jurisdiction.
7. What unique challenges do entities or individuals face when enforcement agencies in your jurisdiction initiate an investigation?
The FSC has a comprehensive array of inspection, investigation, surveillance, and enforcement powers. They include, inter alia, the authority to take action against persons carrying on financial services activities without the requisite licence. Licensed entities within the jurisdiction can be subject to a comprehensive system of on-site and off-site inspections. The on-site inspection programme covers all aspects of the licensees’ business and compliance with FSC requirements. The Compliance Inspections Unit co-ordinates the off-site monitoring and on-site inspections of licensed service providers. In addition to general on-site inspections the unit also has the power to carry out thematic inspections which focus on a specific compliance area and/or specific types of service providers, and allow for a more thorough examination of the compliance in that area and/or by that type of service provider. Factors taken into account to determine which service providers should be subject to inspection include the number of clients, the nature of the business of the clients and previous non-compliance.
In addition, the continuing off-site monitoring carried out by each regulatory division within the FSC may trigger an on-site inspection.
During a full on-site inspection the inspection team takes samples of ownership and identity information of the clients kept by the service provider. Determination of the sample size is based on criteria such as type of business and size of organisation. For example the on-site inspection would include reviewing information kept on end-user clients, trust clients, clients who utilise bearer shares, clients to whom nominee director and shareholder services are offered, as well as clients with which the business relationship has already ended (for example, because the company was struck off). For each one of these types/categories of clients separate sample sizes of files are reviewed
Depending on the outcome of the risk assessment, the sample size of clients/files reviewed will vary. In addition, where irregularities are found during the inspection, more files will be checked.
Following the inspection, the Compliance Inspections Unit reports to the Enforcement Committee, which decides on the appropriate action to be taken. The inspection reports assign ratings to the different compliance areas. The FSC has powers to direct that a qualified person be appointed to oversee the operations of a company under investigation and to provide regular reports to the FSC. In most cases where non-compliance is detected, the service provider is first given two to six weeks to rectify this non-compliance. Where the service provider does not rectify the non-compliance within the prescribed time limit, the Enforcement Committee may take further enforcement actions, such as issuing warning letters, cease and desist orders, public statements and the imposition of administrative penalties.
Unique challenges faced by entities when the FSC initiates an investigation include the fact that in the vast majority of cases the accounting records of companies and limited partnerships are kept at a location outside the British Virgin Islands. In these cases the registered agent is expected to produce a copy of the latest balance sheet and, if available, other financial statements on a sample of companies and, where applicable, limited partnerships.
Where an investigation concerns tax issues, the British Virgin Islands competent authority has broad powers, derived from the Mutual Legal Assistance (Tax Matters) Act (MLAA), to obtain any information held by any person, including other government authorities, believed to be in possession or control of that information. These powers are not subject to the British Virgin Islands requiring such information for its own tax purposes.
A Notice to Produce Information may be served on the registered agent of a company or limited partnership and/or on the person that is required or reasonably believed to keep the information requested. The FSC may also use its powers to obtain information for Exchange of Information (EOI) purposes under section 32 of the Financial Services Commission Act.
Any person who, without lawful or reasonable excuse, fails to comply with a Notice to Produce Information or any other request made by the competent authority commits an offence and liable (s 5(6) MLAA):
(i) on summary conviction to a fine not exceeding USD $5,000 or to imprisonment for a term not exceeding two years, or both; or
(ii) on conviction on indictment, to a fine not exceeding USD$100,000 or to imprisonment for a term not exceeding five years, or both.
The standard time for a person to provide the information requested as given in the Notice is 10 working days and an extension may be applied for provide reasonable grounds exist for doing so. It is standard practice to ask for an affidavit to accompany the information being provided to the British Virgin Islands competent authority.
Where a criminal offence is reasonably suspected during the course of an investigation, the police may apply to court for a search warrant, subpoena or order for seizure.
8. Do enforcement agencies in your jurisdiction provide incentives for individuals or entities to self-report a business crime or otherwise provide assistance to the government? If so, what factors should individuals or entities consider when assessing whether to self-report a business crime or cooperate with a government investigation?
There are no financial incentives for individuals or entities to self-report a business crime or otherwise provide assistance to the government in the sense that is known and understood in the U.S. where the SEC has paid out significant sums to “whistle-blowers”; however, there is nonetheless an obligation on certain individuals or entities who have reason to suspect that there has been a breach of the FSC Act or any financial services legislation. The AMLR and the AMLTF Code set out the internal reporting obligations of entities with respect to suspicious transactions.
All BVI business companies must appoint a registered agent. This agent must notify the FSC when it knows, or has reasonable grounds to suspect, that the company has committed a breach or an offence under the FSC Act or any financial services legislation.
The requirement also applies to an authorised representative, insurance manager or any other person who acts in the capacity of an agent with respect to a licensee, appointed under the FSC Act or any BVI financial services legislation.
Reporting of suspicion is important as a defence against a possible accusation of assisting in the retention or control of the proceeds of criminal conduct or of acquiring, possessing or using the proceeds of criminal conduct. Reports are generally made by a senior manager or director appointed by an institution to have responsibility for vigilance policy and vigilance systems (a Reporting Officer) who is responsible for (a) deciding whether suspicious transactions should be reported, and (b) reporting to the Reporting Authority if he/she so decides.
The Reporting Officer plays a very significant role in the monitoring and implementation of an entity’s AMLTF regime, including monitoring adherence to the entity’s internal control systems to ensure full compliance with all enactments relating to AMLTF. He or she effectively functions as the liaison between the entity and the Agency and with respect to the entity’s compliance with established AMLTF laws, policies and procedures. A Reporting Officer who fails to report in circumstances where he or she should have commits an offence and is liable to be proceeded against under section 27 (4) of the POCCA. Where the Reporting Officer is uncertain as to whether the details of the report received by him or her substantiate the suspicion, he should make a report of the suspicion to the Agency as failure to do so in such circumstances is also likely to be proceeded against under section 27 (4) of the POCCA.
Suspicion of criminal conduct in this context is more than the absence of certainty that someone is innocent. It is rather an inclination that there has been criminal conduct, thus when assessing whether to self-report a business crime the investigator or Reporting Officer responsible must have sufficient evidence to support such an inclination. Furthermore, if staff are negligent in their duty of vigilance they should be aware that they face criminal prosecution if they commit any of the offences under the POCCA as certain offences under the POCCA are concerned with assistance given to the criminal involving:
The determination of involvement is avoidable on proof that knowledge or suspicion was reported without delay in accordance with the vigilance systems of the institution.
It is always advisable to co-operate with a government investigation subject to respect for personal rights and privileges, such as the privilege against self-incrimination and legal or other privileges that might apply to information sought.
9. Do enforcement agencies in your jurisdiction use NPAs or DPAs? If so, how do such agreements work in practice and what can entities or individuals do to reach an NPA or a DPA with enforcement agencies? If not, do you believe it is likely that such agreements will become part of the legal framework in the next five years?
No enforcement agencies do not use NPAs or DPAs; however, the DPP has a wide discretion in determining whether to prosecute any case.
It is not likely that such agreements will become part of the legal framework; however, given that the very first deferred prosecution agreement in the United Kingdom was approved by one of the most senior Judges in the country in late 2015 and a second one in mid-2016, a precedent has been set in that jurisdiction. Court precedents of the courts of England & Wales tend to be viewed as persuasive by the BVI judiciary thus it cannot be ruled out the use of such agreements might be entertained in the BVI in the years to come, depending upon how any further such agreements are seen to work in practice in the United Kingdom.