MARKET STATEMENT

British Virgin Islands

Regulation of Bearer Shares and Director Information

The British Virgin Islands Financial Services Commission (“FSC”) has recently issued an Aide Mémoire on the subject of the control of British Virgin Islands issued bearer shares which indicates an intention to amend the International Business Companies Act (the “Act”). The Aide Mémoire notes that over 500,000 international business companies (“IBCs”) have been registered under the Act, with over 380,000 IBCs believed to be currently active. Many IBCs have included in their Memorandum and Articles the power to issue bearer shares, although the actual extent of use of this power is not known.

The possibility that a large number of IBCs may have actually issued bearer shares has placed the British Virgin Islands under intense international scrutiny and has been the cause of considerable discussion between the British Virgin Islands authorities and a number of overseas authorities and governments including the UK government (further stimulated by the KPMG Report), the OECD, the FATF and the CFATF. In summary, it is proposed to enact amending legislation to be entitled the “International Business Companies (Amendment) Act, 2002” (the “Amending Act”) to require that bearer shares be held in the custody of either an “Authorised Custodian” or a “Recognised Custodian”. If bearer shares are not in the hands of an appropriate custodian after a date to be specified in the Amending Act, the shares will be disabled and there is a risk that the company may be wound up.

The Amending Act is not expected to have a substantial effect on the operation of companies administered by Conyers Dill & Pearman and its affiliated service companies since the Firm has for some time operated a policy not issuing bearer shares and requiring that we maintain the register of directors and share register of our client companies by acting as secretary to our client companies. The Amending Act may have a significant effect on other service providers in the British Virgin Islands who have stressed the confidentiality of bearer shares.

For the purposes of the Aide Mémoire, the term “bearer shares” is generally used to describe negotiable instruments that accord ownership of a company to the person who physically possesses or “bears” the shares. Bearer shares are transferred by delivery of the share certificate, unlike registered shares, which are transferred by written instrument. They thus provide for a high level of anonymity and very easy transferability. Law enforcement authorities and financial regulators have perceived that bearer shares are vulnerable to misuse by money launderers, fraudsters and tax evaders.

During 2000 the British Virgin Islands government announced its intention to amend the Act to restrict the mobility of bearer shares and to mandate that the particulars of directors of IBCs be kept in the British Virgin Islands. As noted the Amending Act will require that bearer shares be held in the custody of either an “Authorised Custodian” or a “Recognised Custodian”. An Authorised Custodian will be a person who holds a valid licence issued pursuant to the Banks and Trust Companies Act 1990 (“BTCA”), and whose licence specifically includes an authorisation permitting the holder to act as a custodian. Recognised Custodians will be persons not licensed under the BTCA and not resident in the British Virgin Islands but who are specifically approved by the FSC as Recognised Custodians. They are expected to be readily identified investment or securities clearing organisations or settlement systems that specialise in the custody business or financial institutions subject to regulation and customary due diligence obligations and principles. Such institutions will need to satisfy the FSC that necessary and sufficient safeguards are in place for the secure custody of bearer shares pursuant to rules to be established by the FSC.

Upon the Amending Act being brought into effect (the “Effective Date”), it will no longer be possible for any IBC to deliver bearer shares to any person other than an Authorised or Recognised Custodian who has agreed to hold the shares. The company issuing the shares or the person depositing the shares will be required to provide the Custodian with:

(a) the full name of the beneficial owner of the shares;
(b) the full name of any other person having an interest in that share or a statement to the effect that no other person has any interest in the share; and
(c) any other information as may be prescribed.

The Amending Act will include provisions enabling an IBC to redeem shares not deposited with a Custodian. It is anticipated that there will a two-year grace period for all old bearer shares to be brought under the new regime. The Amending Act will include provision for the FSC to apply to the court to wind up a company where the company still has bearer shares that are not held by a Custodian in accordance with the Amending Act’s provisions more than two years after the Effective Date. Going forward, companies wishing to include the power to issue bearer shares in their Memorandum and Articles of Association will have to pay a higher licence fee than companies who do not have the power, and existing companies with the power to issue bearer shares will be required to remove this power from their Memorandum and Articles if they do not wish to pay the increased fee.

With regard to information in respect of directors, the Amending Act will make it mandatory for the register of directors to be kept at the registered office of a company. However, its should be noted that the register of directors will not be kept at the public Registry or be available to the general public. Existing companies will have one year to comply with this requirement. Again, it is not anticipated that the provisions relating to registers of directors will affect the companies administered by Conyers Dill & Pearman or its affiliated service companies since the current practice is that a Conyers Dill & Pearman affiliated company acts as secretary of all newly incorporated companies and proper records, including a register of directors are kept.

The new Act seeks to achieve a delicate balance between facilitating legitimate business activities and protecting the British Virgin Islands’ reputation as a locus for legitimate cross-border activities.

Conyers Dill & Pearman will continue to monitor development in the offshore regulatory environment and to maintain the highest international standards. By taking this approach, clients of Conyers Dill & Pearman should be minimally impacted by any regulatory changes in the British Virgin Islands.

For further information, contact Guy Eldridge at ageldridge@cdp.bm