It’s a real-world Treasure Island, a tiny Caribbean paradise that, on paper, is home to nearly half a million companies.
But suddenly the 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.
A vital link in the global money chain and the legal address for countless investment funds, the British Virgin Islands were singled out in the far-reaching investigations by a group of news media outlets into shell companies and tax shelters.
The revelations about the islands have sent shock waves across the Atlantic, where some are now urging U.K. Prime Minister David Cameron to end the overseas territory’s status as a sort of financial no-man’s land.
On Tuesday, Cameron himself was drawn into the fray amid news that his late father, Ian, a stock broker and investment manager, had helped establish a company in none other than the BVI. While there was no suggestion of illegal activity, the development was a political embarrassment for Cameron, who has positioned himself as a leader in the global crack down on tax havens. 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.
Now, amid calls for the U.K. to tighten control over the British Virgin Islands, the future of a world capital of shell companies is at stake. 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.
“They are still our responsibility," Vince Cable, a Liberal Democrat who served as the U.K.’s secretary of state for business from 2010 to 2015, said Tuesday of the territory. “We’ve got rogue micro states who are flaunting basic standards and someone has to take them in hand.”
British Ties
The reverberations from what are being called the Panama Papers have only just begun. The scandal widened Tuesday as Cameron insisted he held no offshore funds and the leader of 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
Cameron has done more than any other U.K. government to crack down on tax evasion while in office, yet Cable and others say it’s not enough. 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.
"There was a lot of pushback here on the open register from the City of London and institutions,” said Cable, who worked on getting the legislation through.
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.
One reason Britain hasn’t demanded more may be concern about undercutting the competitiveness of its overseas territories, said Jolyon Maugham, a tax lawyer at Devereux Chambers in London.
"A public register of owners would have a profound effect,” Maugham said. “Tax havens compete with one another. If one becomes more transparent than their peers, they will lose business."
The British Virgin Islands, which reportedly has nearly 500,000 active registered companies, has committed to the Organization for Economic Cooperation and Development’s convention to tackle tax evasion and avoidance. Under the convention, the BVI has agreed to the exchange of financial account information with tax authorities in other jurisdictions. Smith told the islands’ assembly in December that the OECD had recognized the BVI as “largely compliant” with its tax convention and that the U.K. government had agreed it was no longer appropriate to label the territory as a tax haven.
“There’s a slight crack in the armor, but only slight,” said Richard Murphy, director of Tax Research LLP . “Some data will be exchanged. That assumes they receive honest data. We need this information on public record with it verified by the banks." Cable said the U.K. government has a precedent if it wants to impose direct rule.
In 2009, it 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.
