British Virgin Island Registers 500,000 Companies, Unleashes Storm

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British Virgin Islands, that outpost of sun, sand and offshore banking, has been swept up in the fury following the enormous leak of documents about the financial dealings of some of the world’s richest people.

U.K. Prime Minister David Cameron is being urged to end the overseas territory’s status as a sort of financial no-man’s land. His late father, Ian, a stock broker and investment manager, had helped establish a company in none other than the BVI. At an EU referendum campaign event on Tuesday, Cameron was forced to deny that he had any offshore trusts or shares stemming from his father.

For decades, the BVI has quietly – and lucratively – greased the wheels of global finance. More than half of the companies linked to the articles by the International Consortium of Investigative Journalists, based on leaks from a secretive Panamanian law firm, were said to have been incorporated in the British Virgin Islands.

The opposition Labour Party, Jeremy Corbyn, called for an independent investigation of the tax affairs of Britons linked to reports, including Cameron’s family.

The uproar also reached Iceland, where the prime minister resigned following revelations that he and his wife had set up a company in the British Virgin Islands in 2007.

As much as anything, the Panama Papers have exposed Britain’s awkward and tangled relationship with its 17 crown dependencies and overseas territories. In the BVI, the official language is English, the flag, the Union Jack, the anthem, “God Save the Queen.” The queen appoints the governor, who in turn appoints a prime minister.

But while financial services account for roughly half the economy, the British Virgin Islands (population: 28,000) operates outside various U.K. rules governing finance and taxes. Corbyn, the British Labour leader, is calling for what is known as direct rule, which would end the territory’s privileged status.

According to the ICIJ, 113,000 of the nearly 215,000 companies known to have been established by the Panama firm, Mossack Fonseca, were set up in the British Virgin Islands, with thousands more in other British jurisdictions. The Panama firm has denied any wrongdoing.

After centuries of British control dating back to the days of Blackbeard the pirate, the British Virgin Islands gained separate status as a crown colony in 1960. Until financial services industry took off in the 1970s, the islands operated a poor rural economy. Ironically, the BVI benefited from the U.S. invasion of Panama in 1991, which prompted offshore businesses to find new havens, albeit temporarily.

Tighter Regulations

The U.K. passed legislation in 2015 outlawing bearer shares, which have been used by investors to protect anonymity because they don’t include the name of the owner on the certificate. The U.K. has also passed a law establishing a public registry of company beneficial ownership, which comes into effect this month.

In November 2014, Cameron wrote an open letter to overseas territories, urging them to follow suit by making beneficial ownership open to the public. They ignored his call. Under pressure from Cameron, the prime minister of the British Virgin Islands, Orlando Smith, late last year announced changes to require companies to file a register of directors. The register, which came into effect in January, isn’t public.

Smith also tightened money laundering rules to require financial institutions to keep a record of beneficial ownership of BVI companies. Again, the information isn’t public. The prime minister’s office didn’t respond to emails and telephone messages on Tuesday.

In 2009, Britain took over day-to-day control of the Turks and Caicos Islands after an inquiry found widespread government corruption. Direct control went ahead even though former premier Michael Misick challenged the move in a court of appeal in London. In 2012, Britain handed back control after a general election.