## 1. Structure of Industry Population

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---

### Introduction
- The British Virgin Islands (BVI) is described as a well-established International Financial Center offering offshore financial services for over 25 years.
- Since 1984, there have been over 800,000 company incorporations.
- Infrastructure improvement: the VIRRGIN data management system at the Registry of Corporate Affairs allows electronic filing and prompt issue of certificates of good standing.
- Government revenue dependence: over 60 percent of government revenues derive from fees paid to the FSC; Trust and Corporate Services contributed over 90 percent of that amount, mainly via incorporation and renewal fees.
- Trust and Corporate Services identified as potential sources of financial risk (including money laundering and financing of terrorism) and major sources of reputational risk.
- Report objectives: review the structure of the Trust and Corporate Service Providers (TCSP) sector, assess legislative framework and effectiveness of implementation and enforcement, evaluate framework against the draft OGBS Statement of Best Practice for Trust and Corporate Services Provider, and comment on regulatory treatment of bearer shares.

### Overview of the Corporate and Trust Services Industry
- Industry composition and licensing:
  - The TCSP industry comprises 125 firms offering a mixture of services.
  - Registered Agents (RAs) under the BVI Business Companies Act (BCA) are required for every business company incorporated under the Act.
  - RAs may be licensed under either the Banks and Trusts Companies Act (BTCA) or the Company Management Act (CMA); licensing under either grants the right to act as registered agents.
- Functions of an RA under the BCA:
  - (a) Maintaining the registered office of the company;
  - (b) Maintaining the Register of Shareholders;
  - (c) Maintaining the Register of Directors;
  - (d) Maintaining Memorandum and Articles of Association of the company;
  - (e) Receiving Notices relating to issues including measures for the immobilization of bearer shares.
- Company management under the CMA:
  - CMA licensing empowers RAs to carry on company management, including incorporations and registrations under the BCA, registered agent services, registered office services, provision of directors or officers, and provision of nominee shareholders.
  - At the end of 2009, there were 20 RAs licensed under the CMA.
- Trust business under the BTCA:
  - Trust business includes acting as a professional trustee/protector/administrator of a trust or settlement, managing or administering any trust or settlement, and company management services as defined by the CMA.
  - BTCA requires a license under the BTCA to conduct trust business from within the BVI (whether such business is within or outside the BVI).
- Trust license categories and counts (Table 1: Structure of Industry Population):
  - Class I trust license: 2009 — 94; 2008 — 98; 2007 — 98; 2006 — 101; 2005 — 101
  - Class II trust license: 2009 — 7; 2008 — 2; 2007 — 2; 2006 — 0; 2005 — 0
  - Class III trust license: 2009 — 8; 2008 — 6; 2007 — 3; 2006 — 0; 2005 — 0
  - Restricted Class II trust license: 2009 — 105; 2008 — 104; 2007 — 107; 2006 — 108; 2005 — 111
  - Restricted Class III trust license: 2009 — 0; 2008 — 0; 2007 — 0; 2006 — 0; 2005 — 0
- Managed trust companies:
  - Regulatory Code conditions: business carried out and managed by a BVI trust company holding a Class I license.
  - Requirements include physical presence, a senior manager and director resident in the jurisdiction, a management agreement documenting delegated services (compliance function, segregated record-keeping, AML/CFT reporting), and at least one director from the Class I licensed trust company on the managed trust company’s board.
  - Legal liability remains with the managed trust company; statutory duties on directors apply to individuals regardless of employer.
  - FSC carries out compliance inspections of trust companies that administer managed trust companies.
  - There are currently 24 trust companies who administer managed trust companies.
- Fiduciary duties and RA obligations:
  - Registered Agents are considered fiduciaries and are under a duty (particularly trust companies) to ensure clients’ interests are protected.
  - CSPs may not always have strict fiduciary duties depending on services, but face burdens under companies legislation, the CMA, and AML/CFT legislation (know-your-customer, suspicious transaction reporting, record-keeping).
- Industry trends and challenges:
  - New incorporations under the BCA:
    - 2005 — 58,184
    - 2006 — 65,284
    - 2007 — 77,022
    - 2008 — 61,716
    - 2009 — 47,477
  - Slowdown in incorporations since a high in 2007 attributed to UK tax changes, the global financial crisis, and perceived “flight from quality.”
  - Responses: firms moving to “value added” products (independent directorship services, more sophisticated trusts); government modernizing the Trustee Act, passage of the VISTA, and Financial Services (Exemptions) Regulations 2007 allowing certain exemptions (private trust companies) from BTCA licensing where restricted conditions apply and service by an RA holding Class I trust license is required.
  - Skill shortages (e.g., qualified auditors) deter firms from moving into new areas; work permits and external recruitment options exist but limits apply.
  - Licensees pursuing new markets in Brazil, China, and India; degree of asset losses from the global financial crisis depended on diversification and business from Asia provided a buffer.
- RA operational and industry-standard issues:
  - RA regime places a high regulatory burden on RAs to ensure client compliance; practical difficulty because bulk of business activity and information is abroad.
  - RAs maintain stringent acceptance and termination policies and must file notices of intention to resign and actual resignation with the Registry.
  - Variability in industry standards: decline by one RA for risk reasons may be accepted by another; systems in acquired entities sometimes seriously delinquent.
  - Industry view: enforcement and detection by authorities are key drivers to maintaining appropriate standards.
  - RAs assert that declining registrations necessitate greater efforts to provide value-added services, which currently do not generate equivalent fees for the BVI government.

### The Legal Framework for the Regulation of TCSPs
- Principal statutes governing TCSPs:
  - (a) The Banks and Trust Companies Act;
  - (b) The Company Management Act;
  - (c) The BVI Business Companies Act;
  - (d) The Financial Service Commission Act; and
  - (e) The Regulatory Code.
- Additional enactments: Anti-money Laundering and Terrorist Financing Code of Practice and other AML/CFT legislation also govern TCSP activities.
- Statutory supervisory features:
  - Licensing regime; fitness and propriety requirements for owners and directors; approval for change of significant ownership; requirements for annual external audits and submission to the FSC; FSC powers to require information and conduct searches; record-keeping; sanction and enforcement powers.
- Noted weaknesses and enforcement concerns:
  - Under the BTCA, prohibition on conduct of unauthorized banking or trust business attracts fines of not more than $50,000 or a prison term not exceeding two years, or both. Examiners consider the $50,000 fine very low given potential damage; authorities should contemplate increasing this fine substantially.
  - The fine of $50,000 is the highest under the BTCA (as it is under the CMA).
  - Other fines perceived as low include:
    - BTCA s. 23 failure to implement insurance — $10,000 fine
    - BTCA s. 17C failure to prepare or submit audited accounts — $10,000 fine
    - BTCA s. 14 transfer of a significant ownership interest in licensee without FSC approval — $10,000 fine
  - No express power for the Commission to set aside transactions entered into in breach of section 14 was noted.

### The Financial Services Commission Act and the Regulatory Code
- FSCA key powers and provisions:
  - (a) Information gathering;
  - (b) Sharing information with other regulatory bodies;
  - (c) Compliance Inspections;
  - (d) Appointment of examiners external to the FSC;
  - (e) Wide enforcement powers (protection orders, directives, suspension or revocation of licenses);
  - (f) Powers to require removal of directors or other persons;
  - (g) Powers to issue the Regulatory Code;
  - (h) An Appeals Tribunal (excluding decisions on the grant or refusal of a license to an applicant);
  - (i) Power to levy fines on licensees (per the FSC (Administrative Penalties) Regulations);
  - (j) Power to compound offences.
- Regulatory Code:
  - Passed into law in December 2009 pursuant to section 41 of the FSCA.
  - Outlines conduct required of all FSC licensees, officers and agents; constitutes legal obligations on licensees.
  - Breaches of the Code constitute grounds for enforcement action pursuant to FSCA s. 37(1).
  - Non-compliance may attract administrative penalties under the Financial Services (Administrative Penalties) Regulations, 2006.
  - While not a criminal offence, breaches may affect fit-and-proper status of licensees, directors or officers.
- Regulatory Code content (high-level principles and detailed requirements):
  - Principles: integrity, management and control, financial resources, protecting customers’ interest, transparency, proper relations with the Commission.
  - Detailed requirements include: licensing processes; fit-and-proper criteria; corporate governance framework; systems for risk management, internal controls, internal audit, and record keeping; financial reporting and auditors; outsourcing; segregation and protection of customer assets; capital requirements; insurance requirements.
- Enforcement status:
  - Code is in force but not being fully enforced at this time.
  - FSC advises substantive amendments required (including to account for April 2010 passage of the SIBA).
  - FSC intends to give licensees time to implement requirements; will announce time frame for total compliance once amendments finalized; will commence inspections and enforcement after that time frame lapses.
  - FSC unable to confirm a specific industry program for monitoring RA progress toward compliance; recommended action: Commission should carry out surveys of licensees to assess compliance levels and identify main vulnerabilities.

### Inspection, Supervision and Resources
- Staffing and structure:
  - Banking and Fiduciary Services Division of the FSC has 14 members of staff, of whom 4 conduct examination.
  - Division works closely with Legal and Enforcement Division and the Inspections Unit.
- Monitoring methods:
  - Receipt and analysis of data from licensees; off-site examinations; semi-annual prudential returns; Risk Based Questionnaire every two years.
  - Audited accounts and other information required within six months of financial year end (identical provisions under BTCA and CMA).
  - New semi-annual return in process (may be electronic) with additional requirements relating to geographical base of clients.
- On-site examinations:
  - Duration: from less than a week to 14 days depending on size and complexity.
  - Prefaced by intensive information gathering and planning; use detailed checklists; may examine multiple licensees within a group.
  - Inspections include specific AML/CFT components and sampling of files.
  - Examiners brief management in exit meeting; finalized report forwarded to directors and management.
  - FSC uses a semi-automated system for on-site examinations (“K Review”) to generate preliminary draft reports and ensure equality of treatment.
  - FSC has written inspection manuals outlining procedures.
- Inspection activity (Table 3 — key indicators by year):
  - 2009: Number of Inspections 19; Number of BCs Covered 324,8451,225; Number of Trusts Covered 72.76; Percentage of Companies on the Register of Companies Managed by Inspected Licensees
  - 2008: Number of Inspections 23; Number of BCs Covered 179,4692,853; Number of Trusts Covered 45.51
  - 2007: Number of Inspections 14; Number of BCs Covered 86,948367; Number of Trusts Covered 25.15
  - 2006: Number of Inspections 12; Number of BCs Covered 35,414648; Number of Trusts Covered 12.47
  - 2005: Number of Inspections 5; Number of BCs Covered 61,023313; Number of Trusts Covered 24.96
- Risk-based scheduling:
  - FSC uses a risk-based approach considering size, regulatory history, types of business, levels of introduced business, and geographical location of clients.
  - Inspection cycle target: ensure an inspection cycle of four years is achieved.
  - Recommendation: consider increasing complement of examiners given national economy dependence on the sector and reputational risks.

### Enforcement Activity, Sanctions and Industry Reaction
- Enforcement enhancements:
  - Added personnel, established an Enforcement Committee in early 2007, and increased level of sanctions.
  - Sanctions types: administrative penalties, advisory letters, appointment of examiners and liquidators, public warnings, warning letters, directives.
- Notable case:
  - FSC applied for a protection order against a trust company and successfully defended a Court of Appeal challenge; Court upheld FSC’s power to obtain a protection order on an ex parte basis.
- Surveillance methods: contracting global monitoring services and in-house monitoring of financial publications to identify firms for investigation.
- Sanctions applied (Table 4 — number of actions):
  - 2009: Actions 60
  - 2008: Actions 52
  - 2007: Actions 6
  - 2006: Actions 8
  - 2005: Actions 4
- Industry perceptions:
  - Increase in enforcement activity viewed as positive but recent; some licensees feel FSC focuses mainly on minor offences.
  - Almost 50 percent of administrative penalties issued in 2009 related to late reporting breaches.
  - Concern that relatively low rate of inspections may impair ability to detect serious deliberately concealed breaches.
  - FSC improved industry contact: quarterly “Meet the Regulator” meetings; workshops on the Code; Managing Director meets executive of the ARA quarterly.
  - Some licensees report reluctance by FSC to provide clear compliance advice on day-to-day matters.

### Financial Requirements and Sector Impacts
- Capital and deposit requirements:
  - Under the Regulatory Code, Class I, II and III Trust Companies must hold at least $250,000 in capital.
  - For Class I or Class III licenses, regulatory deposit is calculated by number of BCs being managed; ranges from $30,000 to $80,000 (where more than 60,000 BCs are being administered).
  - Additional regulatory deposits required for subsidiaries.
  - For licensees under the CMA, the capital requirement is $25,000, which can be wholly in the form of cash deposits or $10,000 in cash and $15,000 in real estate or stand-by letters of credit.
- Operational impacts:
  - Implementation may require documentation of procedures into manuals and impose requirements for compliance personnel, placing financial pressure on RAs and the jurisdiction’s limited workforce.
  - Scarcity of specialized skills affects FSC staffing needs.
  - Regulatory Deposits and specific insurance levels could impact finances, particularly for smaller participants.
  - Corporate governance requirements (internal audit, segregation of duties) could challenge smaller firms.
  - FSC expects and has seen some consolidation within the sector as additional regulatory costs become evident.
- CMA offences: equivalent offence under the CMA carries a fine of $5000.

### Bearer Shares Regime
- BVIBCA and BCA Division 5 provisions:
  - Companies with bearer shares are required to deposit these shares with either authorized custodians or recognized custodians.
  - Authorized custodians (12) must be approved by the Commission pursuant to the FSCA; FSC must be satisfied of fitness and systems in place for secure custody.
  - Recognized custodians (6) are entities recognized by Order under the FSCA that carry out clearing activities or act as investment exchange in a jurisdiction within a FATF jurisdiction.
  - Recognized Custodians must maintain full custody and control; transfers only to another authorized/recognized custodian, to the company (for conversion to registered shares or redemption), or returned to the RA for deposit with another custodian.
- Disability and deadlines:
  - Under the BVIBCA, bearer shares are deemed disabled for any period they are not deposited with a custodian.
  - Deadline of December 31, 2009 for grandfathered bearer shares to be deposited as required by the Act.
  - While disabled, shares do not carry entitlements (e.g., voting rights) and any transfer or purported transfer is void.
  - Disability may be terminated by court application for extension to deposit or convert to registered shares.
- Assessment: Regime, together with RA statutory obligations to ascertain beneficial owner information and customer due-diligence obligations, appears to be in keeping with the FATF Recommendations (FATF Recommendation 33).

### Key Findings and Policy Implications
- Fiscal reliance and reputational risk:
  - Over 60 percent of government revenues derive from FSC fees; Trust and Corporate Services contribute over 90 percent of that amount.
  - The size and prominence of the TCSP sector pose significant reputational risk.
- Industry structure and regulatory exposure:
  - 125 TCSP firms; RAs are central to the supervisory model; end-2009 count of 20 RAs licensed under the CMA.
  - Managed trust company regime requires physical presence and specified contractual arrangements; 24 trust companies administer managed trust companies.
- Decline in incorporations and strategic responses:
  - New incorporations fell from 77,022 in 2007 to 47,477 in 2009.
  - Firms and government pursuing value-added services and new geographic markets; regulatory exemptions exist for private trust companies under conditions.
- Supervisory/legal gaps and recommended actions:
  - Consider substantially increasing the maximum fine of $50,000 for unauthorized banking or trust business under the BTCA (and analogous CMA provisions).
  - Review and consider strengthening fines for other breaches (e.g., failures to implement insurance, to prepare or submit audited accounts, and transfers of significant ownership without FSC approval).
  - Consider explicit FSC power to set aside transactions entered into in breach of BTCA s. 14.
- Areas requiring attention (paragraph 59):
  - (a) More regulatory resources in the inspection function of the Division and the FSC to ensure better coverage of the sector.
  - (b) Earliest possible full implementation and enforcement of the Regulatory Code.
  - (c) Greater monitoring of the progress of licensees towards meeting requirements of new legislation to identify and address vulnerabilities.
  - (d) Development of a documented risk based inspection policy to establish specific criteria for prioritizing inspections.
  - (e) Authorities may consider whether penalties for carrying out unauthorized business under the BTCA and CMA are sufficiently dissuasive and whether the overall offences regime under both Acts are sufficiently dissuasive; the power of the FSC to set aside transactions relating to unauthorized transfer of significant interests in licensees under the BTCA/CMA should be stated expressly in the law.

### Conclusions and Recommendations (excerpt)
- The BVI has a comprehensive legislative framework for supervision of TCSPs, largely in keeping with international standards; FSC leverages information technology and risk-based analysis; FSC staffed by competent and well-trained professionals.
- Authorities have addressed most key recommendations from the 2004 Report, including:
  - (a) Deepening the FSC’s engagement with the RA sector;
  - (b) Transaction testing by on-site inspection; internal auditing requirements introduced by the Regulatory Code;
  - (c) Ensuring that introduced business is an integral part of both on-site and off-site processes.

*Source: _cr10326 - 1. Structure of Industry Population; 26. The Financial Services Commission Act, in particular, provides a strong; 59. However, given the developments in the sector since the last assessment, there (PDF chapter).*

### 1. Structure of Industry Population ....................................................................................

### _cr10326 - 1. Structure of Industry Population ....................................................................................

### Introduction
- The British Virgin Islands (BVI) is described as a well-established International Financial Center offering offshore financial services for over 25 years.
- Since 1984, there have been over 800,000 company incorporations.
- Infrastructure improvement example: the VIRRGIN data management system at the Registry of Corporate Affairs allowing electronic filing and prompt issue of certificates of good standing.
- The government of the BVI derives over 60 percent of its revenues from the fees paid to the FSC. Of this amount, the Trust and Corporate Services sector contributed over 90 percent, mainly via incorporation and renewal fees.
- Trust and Corporate Services are recognized as a potential source of financial risk (including money laundering and financing of terrorism) and a major source of reputational risk.
- The report reviews the structure of the Trust and Corporate Service Providers (TCSP) sector, assesses the legislative framework and effectiveness of implementation and enforcement, evaluates the framework against the draft OGBS Statement of Best Practice for Trust and Corporate Services Provider, and comments on regulatory treatment of bearer shares.

### Overview of the Corporate and Trust Services Industry
- Industry composition and licensing:
  - The TCSP industry in the BVI is currently comprised of 125 firms offering a mixture of services.
  - A common feature: role as registered agents (RAs) under the BVI Business Companies Act (BCA). Under the Act, every business company incorporated under the Act requires an RA.
  - RAs may be licensed under one of two statutes: the Banks and Trusts Companies Act (BTCA) or the Company Management Act (CMA). Licensing under either the BTCA or the CMA grants the right to act as registered agents for business companies.
- Functions of an RA under the BCA:
  - (a) Maintaining the registered office of the company;
  - (b) Maintaining the Register of Shareholders;
  - (c) Maintaining the Register of Directors;
  - (d) Maintaining Memorandum and Articles of Association of the company; and
  - (e) Receiving Notices relating to a number of issues, including but not limited to measures for the immobilization of bearer shares.
- Company management under the CMA:
  - By virtue of licensing under the CMA, RAs are empowered to carry on the business of company management, including incorporations and registrations under the BCA, registered agent services, registered office services, provision of directors or officers, and provision of nominee shareholders.
  - At the end of 2009, there were 20 RAs licensed under the CMA.
- Trust business under the BTCA:
  - Trust business means acting as a professional trustee/protector/administrator of a trust or settlement, managing or administering any trust or settlement as well as company management services as defined by the CMA.
  - The BTCA provides that no trust business can be conducted from within the BVI (whether such business is within or outside the BVI), unless the person conducting this business holds a license under the BTCA.
- Trust license categories and counts (Table 1: Structure of Industry Population)
  - Class I trust license: 2009 — 94; 2008 — 98; 2007 — 98; 2006 — 101; 2005 — 101
  - Class II trust license: 2009 — 7; 2008 — 2; 2007 — 2; 2006 — 0; 2005 — 0
  - Class III trust license: 2009 — 8; 2008 — 6; 2007 — 3; 2006 — 0; 2005 — 0
  - Restricted Class II trust license: 2009 — 105; 2008 — 104; 2007 — 107; 2006 — 108; 2005 — 111
  - Restricted Class III trust license: 2009 — 0; 2008 — 0; 2007 — 0; 2006 — 0; 2005 — 0
- Managed trust companies:
  - The Regulatory Code establishes a regime for managed trust companies whose licenses are subject to the condition that their business is carried out and managed by a BVI trust company holding a Class I license.
  - Requirements include physical presence, a senior manager and director resident in the jurisdiction, a management agreement documenting delegated services (compliance function, segregated record-keeping, AML/CFT reporting), and at least one director from the Class I licensed trust company on the managed trust company's board.
  - Legal liability remains with the managed trust company; statutory duties on directors apply to individuals regardless of employer.
  - The FSC carries out compliance inspections of trust companies that administer managed trust companies.
  - There are currently 24 trust companies who administer managed trust companies.
- Fiduciary duties and RA obligations:
  - Registered Agents are considered fiduciaries and are under a duty (particularly trust companies) to ensure the interests of their clients are protected.
  - CSPs may not always have strict fiduciary duties depending on services provided but face heavy burdens under companies legislation, the CMA, and AML/CFT legislation to ensure compliance (know-your-customer, suspicious transaction reporting, record-keeping).
- Industry trends and challenges:
  - Slowdown in new incorporations since a high in 2007; industry reasons include tax changes in the United Kingdom, the global financial crisis, and perceived “flight from quality.”
  - Table 2: New Incorporations under the BCA
    - 2005 — 58,184
    - 2006 — 65,284
    - 2007 — 77,022
    - 2008 — 61,716
    - 2009 — 47,477
  - Consequences: some firms seek to move to “value added” products (independent directorship services, more sophisticated trusts). Government responses include modernizing the Trustee Act and passage of the VISTA, and Financial Services (Exemptions) Regulations 2007 allowing certain exemptions (private trust companies) from BTCA licensing where restricted conditions apply and service by an RA holding Class I trust license is required.
  - Other firms cite critical skill set shortages (e.g., qualified auditors) as deterrents to moving into new areas; work permits and external recruitment are options but limits exist.
  - Licensees pursuing new markets in Brazil, China, and India; degree of asset losses from the global financial crisis depended on diversification and business from Asia provided a buffer.
- RA operational and industry-standard issues:
  - The RA regime places a high regulatory burden on RAs to ensure client compliance; practical difficulty arises because the bulk of business activity and information is abroad.
  - RAs generally maintain stringent acceptance and termination policies and must file notices of intention to resign and actual resignation with the Registry.
  - Industry variability in standards: business declined by one RA for risk reasons may be accepted by another RA; systems in acquired entities sometimes seriously delinquent.
  - Industry view: enforcement and detection by authorities are key drivers to maintaining appropriate standards across the industry.
  - RAs assert that declining company registrations necessitate greater efforts to provide value-added services, which currently do not generate equivalent fees for the BVI government.

### The Legal Framework for the Regulation of TCSPs
- Principal statutes governing TCSPs:
  - (a) The Banks and Trust Companies Act;
  - (b) The Company Management Act;
  - (c) The BVI Business Companies Act;
  - (d) The Financial Service Commission Act; and
  - (e) The Regulatory Code.
- Additional enactments: Anti-money Laundering and Terrorist Financing Code of Practice and other AML/CFT legislation also govern TCSP activities (considered elsewhere in the report).
- Statutory supervisory features:
  - Licensing regime; fitness and propriety requirements for owners and directors; approval for change of significant ownership; requirements for annual external audits and submission to the FSC; FSC powers to require information and conduct searches; record-keeping; sanction and enforcement powers.
- Noted weaknesses and enforcement concerns:
  - Under the BTCA, prohibition on conduct of unauthorized banking or trust business attracts fines of not more than $50,000 or a prison term not exceeding two years, or both. Examiners consider the $50,000 fine very low given the potential damage from unlicensed business; authorities should contemplate increasing this fine substantially.
  - The fine of $50,000 is the highest under the BTCA (as it is under the CMA).
  - Other fines perceived as low include:
    - BTCA s. 23 failure to implement insurance — $10,000 fine
    - BTCA s. 17C failure to prepare or submit audited accounts — $10,000 fine
    - BTCA s. 14 transfer of a significant ownership interest in licensee without FSC approval — $10,000 fine
  - It was also noted there was no express power for the Commission to set aside transactions entered into in breach of section 14.

### Key Findings and Policy Implications (extracted from text)
- Fiscal reliance and reputational risk:
  - Over 60 percent of government revenues derive from FSC fees; Trust and Corporate Services contribute over 90 percent of that amount.
  - The size and prominence of the TCSP sector pose significant reputational risk.
- Industry structure and regulatory exposure:
  - 125 TCSP firms; RAs are central to the supervisory model; end-2009 count of 20 RAs licensed under the CMA.
  - Managed trust company regime requires physical presence and specified contractual arrangements; 24 trust companies administer managed trust companies.
- Decline in incorporations and strategic responses:
  - New incorporations fell from 77,022 in 2007 to 47,477 in 2009.
  - Firms and government are pursuing value-added services and new geographic markets; regulatory exemptions exist for private trust companies under conditions.
- Supervisory/legal gaps and recommended actions:
  - Consider substantially increasing the maximum fine of $50,000 for unauthorized banking or trust business under the BTCA (and analogous CMA provisions).
  - Review and consider strengthening fines for other breaches (e.g., failures to implement insurance, to prepare or submit audited accounts, and transfers of significant ownership without FSC approval).
  - Consider explicit FSC power to set aside transactions entered into in breach of BTCA s. 14.

*Source: _cr10326 - 1. Structure of Industry Population (PDF chapter).*

### 26.      The Financial Services Commission Act, in particular, provides a strong

### _cr10326 - 26.      The Financial Services Commission Act, in particular, provides a strong

### Legal and institutional framework
- The Financial Services Commission Act (FSCA) provides a framework for supervision of financial services with key provisions for:
  - (a) Information gathering;
  - (b) Sharing information with other regulatory bodies;
  - (c) Compliance Inspections;
  - (d) The appointment of examiners external to the FSC;
  - (e) Wide powers of enforcement (including powers to apply for protection orders, the issuing of directives, and the suspension or revocation of licenses);
  - (f) Powers to require the removal of directors or other persons;
  - (g) Powers to issue the Regulatory Code;
  - (h) An Appeals Tribunal (excluding decisions on the grant or refusal of a license to an applicant);
  - (i) Power to levy fines on licensees (per the FSC (Administrative Penalties) Regulations);
  - (j) Power to compound offences.

- The Regulatory Code:
  - Was passed into law in December 2009 and issued pursuant to section 41 of the FSCA.
  - Outlines conduct required of all FSC licensees, officers and agents; constitutes legal obligations on licensees.
  - Breaches of the Code constitute grounds for enforcement action pursuant to FSCA s. 37(1).
  - Non-compliance may attract administrative penalties under the Financial Services (Administrative Penalties) Regulations, 2006.
  - While non-compliance with the Code is not a criminal offence, breaches may affect fit-and-proper status of licensee, directors or officers.

### Regulatory Code content and current enforcement status
- The Regulatory Code sets out high-level principles: integrity, management and control, financial resources, protecting customer’s interest, transparency, and proper relations with the Commission.
- Key detailed requirements in the Code include:
  - licensing processes; fit-and-proper criteria;
  - corporate governance framework (role of Board and management);
  - systems for risk management, internal controls, internal audit, and record keeping;
  - financial reporting and auditors; outsourcing; segregation and protection of customer assets;
  - capital requirements; insurance requirements.
- Enforcement status:
  - Although in force, the Code is not being fully enforced at this time.
  - FSC advises the Code requires substantive amendments (including to account for April 2010 passage of the SIBA).
  - FSC intends to give licensees time to implement requirements; will announce time frame for total compliance once amendments are finalized; will commence inspections and enforcement after that time frame lapses.
  - FSC was not able to confirm a specific industry program for monitoring RA progress toward compliance; recommended action: the Commission should carry out surveys of its licensees to assess compliance levels and identify main vulnerabilities.

### Inspection, supervision and resources
- Staffing and structure:
  - The Banking and Fiduciary Services Division of the FSC has 14 members of staff, of whom 4 conduct examination.
  - Division works closely with Legal and Enforcement Division and the Inspections Unit.
- Monitoring methods:
  - Receipt and analysis of data from licensees; off-site examinations; semi-annual prudential returns; Risk Based Questionnaire every two years.
  - Audited accounts and other information required within six months of financial year end (identical provisions under BTCA and CMA).
  - New semi-annual return in process (may be electronic) with additional requirements relating to geographical base of clients.
- On-site examinations:
  - Duration: from less than a week to 14 days depending on size and complexity.
  - Prefaced by intensive information gathering and planning; use detailed checklists; may examine multiple licensees within a group.
  - Inspections include specific AML/CFT components and sampling of files.
  - Examiners brief management in exit meeting; finalized report forwarded to directors and management.
  - FSC uses a semi-automated system for on-site examinations (“K Review”) to generate preliminary draft reports and ensure equality of treatment.
  - FSC has written inspection manuals outlining procedures.

### Inspection activity (Table 3)
- Year 2009: Number of Inspections 19; Number of BCs Covered 324,8451,225; Number of Trusts Covered 72.76; Percentage of Companies on the Register of Companies Managed by Inspected Licensees
- Year 2008: Number of Inspections 23; Number of BCs Covered 179,4692,853; Number of Trusts Covered 45.51
- Year 2007: Number of Inspections 14; Number of BCs Covered 86,948367; Number of Trusts Covered 25.15
- Year 2006: Number of Inspections 12; Number of BCs Covered 35,414648; Number of Trusts Covered 12.47
- Year 2005: Number of Inspections 5; Number of BCs Covered 61,023313; Number of Trusts Covered 24.96

- FSC states it uses a risk-based approach to schedule inspections, considering size, regulatory history, types of business, levels of introduced business, and geographical location of clients.
- Inspection cycle target: review to ensure an inspection cycle of four years is achieved.
- Recommendation: consider increasing complement of examiners given national economy dependence on the sector and reputational risks.

### Enforcement activity, sanctions and industry reaction
- FSC enforcement enhancements:
  - Added new personnel, established an Enforcement Committee in early 2007, and increased level of sanctions.
  - Types of sanctions: administrative penalties, advisory letters, appointment of examiners and liquidators, public warnings, warning letters, directives.
- Notable case:
  - FSC applied for a protection order against a trust company and successfully defended a Court of Appeal challenge; upheld FSC’s power to obtain a protection order on an ex parte basis.
- System surveillance methods include contracting global monitoring services and in-house monitoring of financial publications to identify firms for investigation.
- Sanctions applied (Table 4):
  - Year 2009: Actions 60
  - Year 2008: Actions 52
  - Year 2007: Actions 6
  - Year 2006: Actions 8
  - Year 2005: Actions 4
- Industry perceptions:
  - Increase in enforcement activity viewed as positive but recent; some licensees feel FSC focuses on mainly minor offences.
  - Almost 50 percent of administrative penalties issued in 2009 related to late reporting breaches.
  - Concern that relatively low rate of inspections may impair ability to detect serious deliberately concealed breaches.
  - FSC has improved industry contact: quarterly “Meet the Regulator” meetings; workshops on the Code; Managing Director meets executive of the ARA quarterly.
  - Some licensees report reluctance by FSC to provide clear compliance advice on day-to-day matters.

### Financial requirements and sector impacts
- Capital and deposit requirements under the Code and CMA:
  - Under the Code, Class I, II and III Trust Companies must hold at least $250,000 in capital.
  - For Class I or Class III licenses, regulatory deposit is calculated by number of BCs being managed; ranges from $30,000 to $80,000 (where more than 60,000 BCs are being administered).
  - Additional regulatory deposits required for subsidiaries.
  - For licensees under the CMA, the capital requirement is $25,000, which can be wholly in the form of cash deposits or $10,000 in cash and $15,000 in real estate or stand-by letters of credit.
- Operational impacts:
  - Implementation may require documentation of procedures into manuals and impose requirements for compliance personnel, placing financial pressure on RAs and jurisdiction’s limited workforce.
  - Scarcity of specialized skills affects FSC staffing needs.
  - Regulatory Deposits and specific insurance levels could impact finances, particularly for smaller participants.
  - Corporate governance requirements (internal audit, segregation of duties) could challenge smaller firms.
  - FSC expects and has seen some consolidation within the sector as additional regulatory costs become evident.
- Note on CMA offences: In the case of the equivalent offence under the CMA, the fine is $5000.

### Bearer shares regime
- BVIBCA and BCA Division 5:
  - Companies with bearer shares are required to deposit these shares with either authorized custodians or recognized custodians.
  - Authorized custodians (12) must be approved by the Commission pursuant to the FSCA; FSC must be satisfied of fitness and systems in place for secure custody.
  - Recognized custodians (6) are entities recognized by Order under the FSCA that carry out clearing activities or act as investment exchange in a jurisdiction within a FATF jurisdiction.
  - Recognized Custodians must maintain full custody and control; transfers only to another authorized/recognized custodian, to the company (for conversion to registered shares or redemption), or returned to the RA for deposit with another custodian.
- Disability and deadlines:
  - Under the BVIBCA, bearer shares are deemed disabled for any period they are not deposited with a custodian.
  - Deadline of December 31, 2009 for grandfathered bearer shares to be deposited as required by the Act.
  - While disabled, shares do not carry entitlements (e.g., voting rights) and any transfer or purported transfer is void.
  - Disability may be terminated by court application for extension to deposit or convert to registered shares.
- Assessment: This regime, together with RA statutory obligations to ascertain beneficial owner information and customer due-diligence obligations, appears to be in keeping with the FATF Recommendations (FATF Recommendation 33).

### Conclusions and recommendations (excerpted)
- The BVI has a comprehensive legislative framework for supervision of TCSPs, largely in keeping with international standards; FSC leverages information technology and risk-based analysis; FSC staffed by competent and well-trained professionals.
- Authorities have addressed most key recommendations from the 2004 Report, including:
  - (a) Deepening the FSC’s engagement with the RA sector;
  - (b) Transaction testing by on-site inspection; internal auditing requirements introduced by the Regulatory Code;
  - (c) Ensuring that introduced business is an integral part of both on-site and off-site processes.

*Source: _cr10326 - 26.      The Financial Services Commission Act, in particular, provides a strong*

### 59.      However, given the developments in the sector since the last assessment, there

### _cr10326 - 59.      However, given the developments in the sector since the last assessment, there

### Key areas requiring attention (paragraph 59)
- (a) More regulatory resources in the inspection function of the Division and the FSC to ensure better coverage of the sector. This was a concern in the 2004 Report.
- (b) Earliest possible full implementation and enforcement of the Regulatory Code. As many of the requirements of the OGBS Statement is reflected in the Regulatory Code, compliance inspections will not fully test against the requirements of the OGBS Standards until the Code is in full effect.
- (c) Greater monitoring of the progress of licensees towards meeting the requirements of the new legislation to ensure that areas of vulnerability are identified and addressed.
- (d) Development of a documented risk based inspection policy to establish the specific criteria for the prioritizing of the inspection of licensees.
- (e) The Authorities may also wish to consider whether penalties for carrying out unauthorized business under the BTCA and CMA are sufficiently dissuasive and whether the overall offences regime under both Acts are sufficiently dissuasive. The power of the FSC to set aside transactions relating to the unauthorized transfer of significant interests in licensees under the BTCA/CMA should also be stated expressly in the law.

### Context and pagination markers
- Document reference: 18

### Appendix 1 — Comparison with OGBS Statement (extracts)
- Heading: OGBS Statement Requirement  BVI Legislative Provisions

- Fit and proper standards  
  - See: FSCA s. 16, CMA s. 4, BTCA s. 4  
  - Regulatory Code part 2 Division 2  
  - Guidance Notes on Fit and Proper Test  
  - Guidelines And Operating Procedures Of The FSC Licensing And Supervisory Committee

- Requirements for corporate governance  
  - Regulatory Code Division 3

- Requirements for compliance with  
  - (a) AML/CFT compliance, including customer due diligence  
  - (b) Applicable laws and regulations  
  - (c) Standards for directors and trustees  
  - See:  
    - (a) AML Regulations r. 4-9, AMLTF Code of Practice Part III, Regulatory Code Part 2 Division 4 and 8  
    - (b) Generally BTCA, CMA, BVBVIBCA, Regulatory Code and AML/CFT legislation  
    - (c) BVIBVIBCA Division 3, Trustee Act Part X, VISTA s. 5

- Requirement to demonstrate that business carried out with:  
  - (a) identification/segregation of customer funds;  
  - (b) safe custody and proper management of assets  
  - (c) orderly accounting records  
  - (d) adequate client documentation  
  - (e) transactions carried out by persons of expertise, knowledge and status, without conflicts and rules that govern confidentiality and withdrawal of services  
  - (f) transactions carried out expeditiously  
  - See:  
    - (a) Regulatory Code Part 2 Division 7  
    - (b) Regulatory Code Part 2 Division 7  
    - (c) BTCA s 17A-D, CMA s. 17A-D, Regulatory Code Part 2 Division 6  
    - (d) Regulatory Code Part 2 Division 7, BVI BVIBCA Division 2, AMLR r. 9  
    - (e) Regulatory Code Part 2 Division 3

- Requirement that business financially sound:  
  - (a) adequate records of both company and clients  
  - (b) adequate financial resources (paid up/liquid capital)  
  - (c) compliance with international accounting standards;  
  - (d) maintaining appropriate indemnity cover  
  - See:  
    - (a) Regulatory Code Part 2 Division 7, BVI BVIBCA Division 2, AMLR r. 9  
    - (b) BTCA s. 13, CMA s. 10, Regulatory Code Part V Division 1  
    - (c) Regulatory Code s. 59  
    - (d) Regulatory Code Part V Division 1

- Requirements for systems and procedures:  
  - (a) Compliance function;  
  - (b) effective reporting functions (AMLRO)  
  - (c) compliance management system  
  - (d) record keeping for all aspects of operations  
  - (e) manuals for different aspects of business  
  - (f) adequate span of control by skilled and experienced persons  
  - (g) personnel to be appropriately experienced  
  - (h) continuous professional development  
  - (i) procedures to protect against misleading information to public  
  - See:  
    - (a) FSCA Part V, Regulatory Code, Part 2 Division 4  
    - (b) AMLR r 13  
    - (c) Regulatory Code, Part 2 Division 4  
    - (d) AMLR r 9; Regulatory Code, Part 2 Division 7  
    - (e) Regulatory Code Part 2 Divisions 3 and 4  
    - (f) Regulatory Code Part 2 Division 3  
    - (g) Regulatory Code Part 2 Divisions 2 and 3  
    - (h) The Association of Registered Agents and the Society of Trusts and Estate Practitioners as well as the FSC are active in this area  
    - (i) Regulatory Code Part 2 Division 8

- Proper provisions for information sharing;  
  - (a) information on ultimate beneficial owners/controllers  
  - (b) monitoring of changes in ownership and control  
  - (c) appropriate mechanisms for reporting to authorities;  
  - (d) no barriers to flow of information  
  - (e) KYC information maintained in the jurisdiction  
  - (f) No barrier in flows of information from introducers  
  - See:  
    - (a) Anti Money Laundering and terrorism Financing Code Part III  
    - (b) Anti Money Laundering and terrorism Financing Code Part III  
    - (c) Regulatory Code Part 2 Division 8, Anti Money Laundering and terrorism Financing Code Part II  
    - (d) see (c) above  
    - (e) AMLR r. 9, Anti Money Laundering and Terrorism Financing Code Part III

- Countries to make proper provision for ensuring:  
  - (a) Clients interest protected if service provider cannot carry out business;  
  - (b) Experienced external auditors appointed to carry out full audit of business;  
  - (c) Independent reviews to be carried out to assess compliance with Statement of Best Practice, with appropriate sanctions.  
  - (d) Service provider to be embraced by national AML legislation  
  - See:  
    - (a) FSCA Part V particularly s. 39 and Guidance Notes on Revocation or Suspension including Solvent Liquidations, Insolvency Act  
    - (b) Regulatory Code s. 56 and 57, Guidance for Approved Persons Regime;  
    - (c) Compliance Inspections will move to meeting this requirement once the Regulatory Code is fully implemented and enforced;  
    - (d) AMLR and the Anti Money Laundering and Terrorism Financing Code

- Consideration of low risk areas  
  - The jurisdiction has applied a lighter touch to certain areas of business. For example, restricted trust licensees which do not carry out companies management business are not required to hold capital.

### Appendix pagination markers
- Document references: 19, 20

*Source: _cr10326 - 59.      However, given the developments in the sector since the last assessment, there (https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10326.pdf)*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10326.pdf_