The Control of BVI-Issued Bearer Shares

1. INTRODUCTION

1.1 IBCs and bearer shares

The British Virgin Islands (BVI) is the world's largest centre for the incorporation of
International Business Companies (IBCs). Over 500,000 IBCs have been registered under the
International Business Companies Act, with over 380,000 IBCs believed to be currently
active.

Virtually all IBCs have included in their Memorandum and Articles the power to issue bearer
shares, although the exact extent of use of this power is not known. The possibility that a
large number of BVI IBCs may have actually issued bearer shares has placed BVI under
intense international scrutiny and has been the cause of considerable debate between BVI
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.

1.2 Amending the IBC Act

This debate has culminated in a general understanding that the issuance of BVI related bearer
shares should be controlled as part of the BVI's overall risk and reputation management
strategy, and that the BVI authorities should embrace within their regulatory regime the
control of bearer shares. This Aide Mémoire seeks to set out the safeguards to be introduced
by the FSC with a view to ensuring that BVI-related bearer instruments are not abused. The
paper is based on the principles and policies to be enshrined in a draft Bill, which is expected
to become law shortly as the International Business Companies (Amendment) Act, 2002.

The matter of controlling the issue of bearer shares is a sensitive issue for industry
practitioners, issuers of IBCs, the international law enforcement and regulatory commentaries
and the BVI authorities. Accordingly, the BVI authorities have approached the issue with
painstaking caution and pragmatism. The aim is to get it right the first time in a way that
takes full account of potentially conflicting stakeholder interests and concerns.

Thus the Bill and the principles enshrined therein have been fashioned on the anvil of
exhaustive debate and a prolonged search for a practical and workable solution.

The Bill, which is extremely short, with a limited number of clauses, has a particular
importance as a key component of the territory's risk minimization strategy, a strategy that
seeks to ensure the continued survival and growth of the BVI as a quality financial services
jurisdiction.

The Bill is an attempt to put on a statutory basis current principles of accepted good and best
practices that have been widely debated internationally and locally. It has taken a protracted
time for the Bill to be crystallized and its advent has caused a certain amount of consternation
both in BVI and elsewhere where IBCs are used. The BVI authorities have been seized of
those concerns and have factored them into the final Bill, however, and believe that the time
has been well spent. Public policy and the Bill have benefited from the dialogue which
ensued once the BVI Government first announced its intention to control the issuance of
bearer shares.

This Aide Mémoire has been specifically prepared as a consultative document to be circulated
within the BVI financial services community prior to anticipated imminent introduction and
enactment of the Bill, which is currently being finalized for introduction in the Legislative
Council. As it will not be possible for the final Bill itself to be widely circulated before its
introduction, it is hoped that the Aide Mémoire will clear up areas of doubt and
misunderstanding and will shed light on the principles, contents and purpose of the Bill.

2. THE CONTROL OF BVI-ISSUED BEARER SHARES

2.1 Defining Bearer Shares

Whilst there is no standard definition, the term 'bearer shares' is generally used to describe
negotiable instruments that accord ownership of a corporation to the person who physically
possesses (or bears) the shares. Bearer shares are neither an IBC phenomenon nor are they
new. They have been widely used in Europe by non-listed public companies for years and are
extremely popular in Latin America, the Far East and in some US states.

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.

Even the most ardent critics of bearer shares agree that they are widely used for a number of
legitimate purposes. They constitute a quick, easy, cost effective and non-bureaucratic means
for the transferability of ownership. They facilitate privacy of ownership in situations where
corporate secrecy has the legitimate function of restricting sensitive information from falling
in the hands of inappropriate competitors and potentially hostile buyers. They are also used
to provide asset protection in securities deals where there is a demand for security by
financiers.

Unfortunately, bearer shares have also been used in other ways that are of particular concern
to law enforcement authorities and financial regulators. Because their opaque structure can
effectively obscure ownership, thereby providing maximum anonymity, they reduce the
amount of information accessible to law enforcement and regulatory bodies in the event of an
investigation. As a consequence, bearer shares are vulnerable to misuse by the ethically
challenged. There is a growing body of evidence that the high level of anonymity provided
by bearer shares makes them particularly susceptible to use for nefarious purposes such as
money laundering, fraud and tax evasion.

It is this concern that has, over the years, resulted in calls from some quarters for bearer
shares to be eradicated, outlawed or converted into registered shares. The BVI authorities
believe that to do so would be overkill and that elements of control can be introduced which
will address the problem effectively

2.2 Responding to Concerns

From as far back as 1994, the BVI has been constructively engaged in dialogue with the
United Kingdom government, particularly the Foreign and Commonwealth Office and Her
Majesty's Treasury, about controlling the downside risk associated with the issue of bearer
shares. These discussions took on greater urgency and intensity during the CFATF, FATF,
KPMG and OECD reviews and assessments of the BVI finance industry's policies, practices,
procedures and laws. On these occasions, the BVI authorities robustly defended the issue of
bearer shares but agreed that BVI would develop measures to counter the risks the shares
posed.

Accordingly, during 2000, the BVI Government announced its intention to amend the IBC
Act to address the opaqueness of IBCs by:

(a) Restricting the mobility of bearer shares by mandating that, whenever and wherever they
are issued, such shares must be held in the custody of an approved custodian within
licensed financial institutions, under special custodial arrangements to be specified by law
and subject to FATF, CFATF and BASLE anti-money laundering and customer due
diligence principles and obligations; and

(b) Mandating that the particulars of Directors of IBCs be kept in the BVI.

A Bill to introduce an International Business Companies (Amendment) Act 2002 ("the Bill")
has been drafted to give statutory effect to this stated intention. It is intended for the Bill to
become law before the start of 2003. This Aide Mémoire seeks to inform local practitioners
and interested stakeholders of the important principles and policies enshrined in the Bill and
of the regulatory framework to be established under law for the immobilization of bearer
shares.

3. CUSTODIANSHIP

In brief, the IBC Bill will require that bearer shares be held in custody of either an
"Authorized Custodian" or a "Recognized Custodian". If bearer shares are not in the hands of
an appropriate custodian after a date to be specified in the Bill, there is a risk they may be
disabled and companies dissolved.

3.1 Authorized Custodian

An Authorized Custodian will be a person who holds a valid licence issued pursuant to the
Banks and Trust Company Act 1990 (BTCA), and whose licence specifically includes an
authorization permitting the holder to act as a custodian. Thus it is important to note that a
holder of a company management licence cannot be a custodian simply by virtue of holding
that licence. The onus will be for any existing holder of a licence under the BTCA to satisfy
the BVI Financial Services Commission ("the Commission") that he is fit and proper to be
permitted to act as a custodian of bearer shares. Current thinking is that only holders of
general licences under the BTCA will be eligible for consideration as Authorized Custodians.

3.2 Recognized Custodian

Recognized Custodians will be persons not licensed under the BTCA and not resident in the
BVI who are specifically approved by the Commission as Recognized Custodians. They will
be expected to be based in countries not subject to sanctions by the FATF, and be subject to
prudential and anti-money laundering regulation. Two categories of Recognized Custodians
are foreseen, as follows:

(a) Category I will consist of a select list of readily identified investment or securities
clearing organizations or settlement systems that specialize in the custody business and
who are specifically designated by the Commission as Recognized Custodians.

(b) Category II will be comprised of those regulated financial institutions, wherever located,
who are subject to FATF, BASLE and IOSCO customer due diligence obligations and
principles, and who satisfy the Commission that necessary and sufficient safeguards are
in place for the secure custody of BVI bearer shares pursuant to the rules established by
the Commission.

Accordingly, the onus will be on any entity not licensed under the BTCA which is desirous of
holding BVI-related bearer shares to apply for category II Recognized Custodian status and to
satisfy the Commission that it is a fit and proper organization to be so authorized.

4. RELEVANT REQUIREMENTS

Immediately upon the Bill being brought into law as an Act (i.e. the "effective date"), it will
no longer be possible for any company to issue bearer shares or to deliver them to any person
other than an Authorized or Recognized Custodian who has agreed to hold the shares.

The Bill will mandate that, where a bearer share is issued to, or deposited with, an Authorized
Custodian, the company issuing the share or the person depositing the shares shall provide the
custodian with the following:

The full name of the beneficial owner of the shares;
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
Any other information as may be prescribed.

(a)
(b)

(c)

It will be an offence for any Authorized Custodian to accept bearer shares unless
accompanied by the relevant information.

Similarly, any company that issues bearer shares in a manner contrary to that specified in the
Bill will be committing an offence.

Among the duties the Bill prescribes for Authorized Custodians are keeping records
(including prescribed notices and records of the transfer of bearer shares) within its custody at
its principal office in the BVI, and ensuring that the bearer shares remain at all times within
its custody and control.

4.1 Transition Period

With regard to existing bearer shares, industry practitioners will be pleased to learn that
cognisance has been taken of their general concerns about treatment of these, as well as of the
specific need for a transition period to facilitate the transfer of existing bearer shares from the
old to the new regime. In this regard, the Bill establishes a two-year grace period for all old
bearer shares to be brought under the new regime.

The BVI authorities believe that this is a sufficient period to achieve full compliance and to
demonstrate to the outside world the BVI's commitment to addressing their concerns. The
Bill thus includes specific provision for the Commission to apply to the Court to wind up a
company where more than two years has expired after the effective date of the Bill and where
the company still has bearer shares that are not held by a custodian in accordance with the
Bill's provisions.

An important by-product of the Bill will be that, immediately after the effective date, it will
no longer be possible for companies automatically to include the power to issue bearer shares
in their Memorandum and Articles. Companies seeking to retain this power or new
companies that wish to issue bearer shares will have to pay a higher licence fee than
companies who do not have this power.

It is expected that this will require existing companies eventually to remove the power to
issue bearer shares. Consideration is being given for the FSC to waive charging a fee when
this change is effected.

5. DIRECTOR INFORMATION

With regard to information in respect of Directors, the Bill will now make it mandatory for a
Register of Directors to be kept at the registered office of the company. It should be recalled
that the original proposal to address this concern called for the register to be kept at the public
registry.

The change to the registered office is intended to accommodate the concerns expressed by the
industry that, for reasons of privacy and confidentiality, this information should not be readily
accessible by the general public. Thus all companies incorporated after the effective date and
all existing companies will be required to keep and maintain accurate records of Directors at
their registered office.

For companies incorporated on or after the effective date, the Bill envisages full compliance
starting with, and upon the appointment of, the first Director.

The BVI authorities have been persuaded that seeking to require a historical record of
Directors for existing companies, which in some cases date back to 1984, would be a
logistical nightmare and that retroactive compliance would be practically and commercially
impossible.

It has, therefore, been decided that the registers for existing companies will be required to
contain information about Directors from the effective date. Existing companies will have
one year to comply with this requirement. Industry practitioners in particular should note that
the Bill does not seek retroactive information on Directors.

5.1 Listening to Industry

Practitioners will doubtless be pleased that, as mentioned, the information on the registers will
not be accessible to members of the public and will only be accessible by law enforcement
and regulatory officials in the exercise of compulsory powers under relevant legislation or by
court order. Once again, cognisance has been taken of local industry concerns and
sensitivities. Practitioners will be aware that, under compulsory powers legislation, the
requesting party must satisfy threshold criteria before the BVI authorities seek discovery
under the relevant Act, and that the BVI authorities meticulously and scrupulously screen all
requests for fishing expeditions and facilitate only genuine requests.

6. CONCLUSION

The BVI's position as the leading centre for IBCs brings with it responsibilities and
obligations to ensure that we do our utmost to safeguard against BVI corporate entities
playing a part in the erosion of law and order in other jurisdictions.

Reputation is fundamental to the survival, success and continued prosperity of any financial
centre. There is a delicate balance to be struck between facilitating legitimate businesses
activities and protecting the BVI's reputation as a locus for legitimate cross-border activities.
That is what the Bill seeks to achieve.

The approach set out in this Aide Mémoire balances the industry's concerns for privacy and
the BVI's concern to facilitate bonafide criminal investigations. It is very much in keeping
with our international commitment to safeguarding BVI corporate entities from abuse by the
fraudulent, the corrupt and the ethically challenged.

The Bill, and the due diligence principles which it introduces, will resonate well in well
established and highly regarded financial centres and with the supranational bodies who
continue to examine financial centres everywhere.

In seeking to provide a regulatory framework which offers two options for the custody of
bearer shares, the policy guiding this initiative is underpinned by the belief that regulatory
policies and legislation should reflect responsibility and at the same time provide flexibility.

The Bill has been prompted by the awareness that, as the offshore world's premier corporate
domicile, there is the likelihood of and potential for abuse of BVI corporate entities.

The proposals therefore seek to avoid an undue burden of regulation, while demonstrating
that the BVI authorities and financial community are doing what is needed to keep the
financial services industry clear, clean and well regulated in conformance with international
standards. The proposals also show our willingness to lead the way when necessary in
establishing international standards.

We cannot be complacent. We must all continue to work together to reduce the opportunities
for wrongdoers to abuse BVI structures and to exploit national boundaries and different legal
systems for their own dishonest purposes. "Hardening the target" and keeping the financial
system free from criminal activity and the spectre of scandal is a key part of ensuring the
integrity of our corporate vehicles and the stability of our industry.

11 October 2002