BVI Offshore Business: Grey Area

The lists of tax havens published by the Organisation for Economic Co-operation and Development () (OECD), – especially the so called “grey list” – became the cause of hard battle for business between international financial centres. This competition will probably intensify during this month.

OECD grey list, which includes jurisdictions not fully compliant with international standards on tax transparency, has a sub-division into tax havens and other financial centres. This list is regularly revised, but the only jurisdiction which was moved from the “grey” to the “white list” at this moment is Bermuda. The BVI, the Cayman Islands and Bahrain are, in their turn, very close to meeting the OECD requirement of 12 tax information exchange agreements signed. However, this might be not enough: for example, Cayman will also need to undergo peer review before it can move to the white list.

The Channel Islands, the Isle of Man, Cyprus, the Seychelles are already on the white list, and some of these financial centres are making heavy promotion of their services based on the fact they are identified as top quality and regulatory compliant jurisdictions. For example, the Channel Islands have been lobbying for companies based in grey list centres, like Cayman and BVI, to move to their corporate registry.

The OECD list was requested by the G20 group of large states; all jurisdictions included on both lists will be reviewed at the November meeting of the organisation. The countries which do not comply with the strict requirements by that time will face stringent fiscal sanctions that could harm the economies of some of them.

Some offshore analysts are warning that thousands of hedge funds registered in offshore tax havens probably will fold in 2009. The restructuring company Zolfo Cooper that makes such forecast is preparing for a surge of activity in offshore tax havens.

Zolfo Cooper has a presence in the offshore jurisdictions like British Virgin Islands and the Cayman Islands where many hedge fund holding companies are incorporated. By words of company’s head Simon Freakley, in the British Virgin Islands there are 10,000 hedge funds registered, and as many as 4,500 of them will close this year. He also said that in case of court procedure the provisional liquidation in the BVI or Cayman Islands is needed to be able to handle the activities that may be located in the US or Europe.

The State Customs Service of Ukraine reported that in 2008, a total amount of UAH 3.64 billion (USD 1 - UAH 7.79) has passed through offshore jurisdictions. 262 companies from Ukraine were involved in the export transactions, and the biggest volumes of the exported goods were addressed to companies registered in the British Virgin Islands (UAH 3.47bn), Gibraltar (UAH 106.7mn), Belize (UAH 25.7mln), the Bahama Islands (UAH 7mln). After reviewing copies of the customs freight declarations, in these operations actual non-resident receiver is mainly other country than the one which a Ukrainian company had contract with.

It was also revealed that, since the beginning of the year, 68 companies registered in Ukraine have performed import transactions via companies registered in offshore countries – to the total amount of UAH 64 million. Basic suppliers of goods from offshore countries are Liberian offshore companies (UAH 41.8mln); among other major importers, there are the Bahama Islands (UAH 7.65mln), Belize (UAH 4.96mln), the British Virgin Islands (UAH 2.78mln), Bahrain (UAH 2.12mln).

The special taxation system in Ukraine extends only to import operations with offshore jurisdictions – only 85% of charges for paying goods, works and services imported from offshores are included in gross expenditures of Ukrainian companies.

Many of the largest publicly traded corporations in the U.S., including major banks that now receive federal bailout money from the Government, are using subsidiaries in offshore tax havens, which let them avoid paying U.S. taxes. This information can be found in the new report by the Government Accountability Office (GAO) published last week.

GAO searched publicly available data on the companies filed with SEC, and found that 83 of the 100 largest publicly traded corporations and 63 of the 100 largest federal contractors maintain subsidiaries in countries considered to be tax havens. Citigroup has set up 427 tax haven subsidiaries in offshore tax havens including 35 in the British Virgin Islands and 90 in the Cayman Islands. In this list there are also Bank of America which has 115 subsidiaries in offshore countries, Morgan Stanley with 273 subsidiaries, the American International Group, etc. There are other well-known companies in the list  including Pepsi, Coca Cola and Ceterpillar. Other offshore tax havens mentioned in the report are Switzerland, Luxembourg, Hong Kong, Panama and Mauritius.

Meanwhile, Citigroup is expected to receive $50 billion from Government. Bank of America has already received additional $20 billion of Government aid, on top of previous $25 billion.

This report was severely criticized by the Treasury Department. In a letter included in the report it was noticed by the deputy assistant secretary for international tax affairs that there was no universal definition for an offshore tax haven. Thus, any list  of tax havens may be considered a blacklist and used for applying sanctions or other negative measures that would “inappropriately negatively affect our economic and other relations with listed countries.”

It should be said that GAO auditors did not verify the companies’ transactions in the named offshore jurisdictions including BVI, that the subsidiaries really helped the companies reduce their tax burden. The results of the report were based just on the fact that subsidiaries are located in the jurisdictions considered tax havens, and on the traditional purpose of those subsidiaries to cut tax costs.

The Chinese joint venture Wahaha Group, which is involved in a long-lasting dispute with Danone, announced that it has received a new adjudication order from the High Court of the British Virgin Islands. By the decision of the BVI court, the claim of Danone was rejected, and the interim freezing of Chinese group’s assets was revoked, along with the order that would allow KPMG to take over the assets of Wahaha’s non-joint ventures as the receiver.

The previous decision of the BVI Court on asset freezing was based on the words of the Chairman of Danone Asia Pacific Management, while the defendant – Wahaha Group – was absent from the court. KPMG then allegedly violated China’s judicial sovereignty by sending BVI and Samoa court orders without the permission of the Chinese authorities. Now, after another claim was made in the BVI High Court and the judgment was pronounced more than one month ago, KPMG is still yet to apologize and provide the required financial compensation to Wahaha.

On December 17, 2008, the BVI High Court opened the court case which overruled Danone’s claim. The adjudication order, which went into effect on December 19, not only made the freezing and receiving orders invalid, but also requested Danone to pay related fees that Wahaha incurred during the case. Additionally, the Chinese group will have the right to decide whether or not to cease if Danone fails to submit a stay pending appeal to the appellate court within 2 weeks.

Legal councel of Wahaha Yang commented on the new verdict of the High Court of BVI, saying that it showed fairness and justice of the international judicial environment and that it will definitely affect the results of the Stockholm arbitration case.

Recently the Australian Securities and Investments Commission (ASIC) has published the fresh list of unlicensed overseas callers - overseas companies that have made unsolicited calls to Australians, and not currently holding their license. The new companies that appear and are functioning in Australia should be licensed by ASIC; without the Australian licence, their operations are unlawful. Among these businesses, there are 8 companies that are located, registered, or pretending to be registered in the British Virgin Islands. These are:

Capital Advisory Corporation, registered in Thailand but claiming to have offices (mail addresses) in Hong Kong and the British Virgin Islands; BVI-registered Global Trade and Transfer Ltd; International Currency Advisors, having one of its addresses in the BVI; PCA Management Trust LL, claiming to have alternate address in the BVI; Price Warner Company Ltd, based in the British Virgin Islands; Philippines-based Pryce Weston Incorporated, which indicates that it has other offices or mail addresses in Hong Kong, BVI and US; Uni World Global Management Limited having its registered office in the BVI; and Worldleader Investment Insider/Worldleader Investment Ltd., which also claims to have its office in the British Virgin Islands.

The companies that have come to the ASIC attention in recent times and have been added to the updated list are: Associated Financial Services, First Standard Consolidated, Pace Capital Corp, Rive Financial SA and Yutaka Commodities, Inc. (none of them is registered in the BVI). The Commission has noted however that this list is not comprehensive, because new company names are coming all the time which are to be added.

The Australian Securities and Investments Commission has published also the list of fake international regulators (overseas share market regulators) about which ASIC is aware; the Commission noticed that no genuine government regulators are existing under the names on the list. To see if a regulator really exists, or to check overseas scam warnings, it would be necessary to see the members list of the International Organisation of Securities Commissions.

Publisher of BVI News Online Merrick Andrews is going to file formal complaint to the British Virgin Islands governor and deputy governor. The subject of the complaint is the ban of one of the publication’s reporters from attending magistrate court proceedings.

Andrews said he had not received information from the magistrate, and he sought the assistance of police officers concerning court matter on November 21. After this case, he tried to contact the Governor and Deputy Governor of the BVI, but without success. Now, having not received any kind of verbal respond, he is preparing formal letter on the matter.

Magistrate Valerie Stephens banned the BVI News Online reporter from her court because of the report concerning burglary at the magistrate’s home; also, being requested to pull the story, the editor refused to do it. The magistrate is convinced that the story should not be published because it “compromised her security”, but Andrews said the report was in relation to a burglary, and not to the magistrate’s security.

By words of a reporter, that is a sad week for journalism and freedom of expression in the BVI, and another sad fact is that the territory has no media association. The publisher/editor said that they are going to continue to fight the injustice from the justice system.

The dispute between the French Group Danone and China-based joint venture Wahaha Group which is already continuing for one-and-a-half year long has finished with Danone paying 570 million yuan to the Chinese company, and its high-profile legal actions worldwide have been questioned by shareholders.

In June 2007, Danone filed a complaint against the BVI company Ever Maple Trading Ltd., which, by its words, has the controlling stock of Hangzhou Hongsheng Beverage Co Ltd. - the parent company of Danone’s joint venture partner, Hangzhou Wahaha Food and Beverage Sales Co. Later on, the counter-claim of the Chinese Group has followed, which sued Danone for conducting its business illegally.

In November 2007, the High Court of the BVI brought several BVI firms registered under Wahaha Group into receivership, and froze their assets until further decision. An international auditing firm KPMG, which had been appointed the receiver of each of the BVI companies, became also involved in the dispute between the companies. One month later, Danone filed the case against the parent of the BVI company in Samoa, again applying for appointment of KPMG as the receiver. Danone alleged that the non-joint ventures impaired its interests, while Wahaha claimed the ventures have nothing to do with Danone.

Now, Wahaha sent a petition to the court, accusing KPMG of violating Chinese laws, and affecting its normal production and operation for which the company asked for compensation and a public apology from the auditing firm. KPMG is said to have violated China’s judicial sovereignty by sending BVI and Samoa court orders, because foreign institutions and individuals are not allowed to deliver documents and conduct  investigations in China without permission from relevant Chinese authorities.

Also, according to the laws of BVI and Samoa, a company shall not be ordered to be taken over unless its property is really threatened, and it is suspected of non-normal operation. Danone, however, is still normally operating investment company, as well as the non-joint ventures of Wahaha invested by Danone. British Virgin Islands is the most popular offshore jurisdiction in the world, but it has only one judge. It can be said that Danone cheated the BVI court when applying for arbitration in the event that the BVI company was absent, according to a source at the BVI company.

Sweden organized co-operation with the neighbor countries to put more pressure on tax havens and make them loosen their secrecy laws allowing people to avoid paying Swedish taxes. The Copenhagen-based Nordic Council has been negotiating with several jurisdictions which have rules and regulations making it easier for people to avoid paying Swedish taxes. During this year, Swedish tax authority, Skatteverket, is likely to sign an agreement with at least one offshore jurisdiction that will allow the agency to access information on companies, accounts, and banking transactions. Among tax havens with which discussions on this agreement have been commenced there are the Cayman Islands, the British Virgin Islands, Guernsey, Jersey and Bermuda. The full list of countries has not been made public.

Swedish Tax Authority has reckoned that the country loses annually about $7.65 billion in tax revenues because of people placing their money offshore. However, by words of Torsten Fensby, project leader for Nordic Council’s tax haven project, even this agreement with one of the above-named offshore jurisdictions would not affect tax revenues in Sweden. The capital will likely shift to another country with secrecy laws, but with every new agreement the possibilities for international tax avoidance will be reduced.

In the beginning of May, BVI court confiscated more than US$45 million from a Bermuda-based IPOC International Growth Fund Ltd.  which pleaded guilty of serious frauds. Further on, Justice ordered three other defendants – BVI-registered companies Lapal Limited, Albany Invest Limited, and Mercury Import Limited – to pay a total of $2.2 million in costs and $300,000 in fines for their part in the offences. The court order, which prosecutors say may be the largest court order of its kind ever made in the Commonwealth, came after a 17 month investigation by authorities in the British Virgin Islands and Bermuda, and after the Bermuda- and BVI-based companies pleaded guilty to providing false information and perverting the course of justice. Criminal charges were filed against the four companies on April 21, and the defendants were committed to the High Court on April 25.

It was alleged that between 2004 and 2005, the IPOC group gave wrong information about the source of $40 million which had been lodged with the court as part of a separate, civil matter. At the centre of that legal case there was a long dispute between IPOC and Alpha Group. Through its lawyers in the BVI, Alpha alleged that $40 million in legal costs put up by IPOC were sourced from the proceeds of crime, but it was argued by IPOC that the money originated from consultancy services supplied to a number of companies, including those registered in the U.S. A matter settlement agreement was concluded in the end of November 29 between the IPOC Fund and BVI-registered LV Finance Group Limited, owned by Alpha Group.

The investigation and prosecution of the IPOC case by the BVI authorities was carried out with the co-operation of authorities in Bermuda; a Memorandum of Understanding concerning the IPOC investigation was signed between the two jurisdictions in July 2007. The Bermuda and BVI governments spent a combined $2.3 million on the investigation.