International Financial Centres (IFCs) have undergone profound change over the past few years. From seismic shifts in global regulation through to the growing and increasingly diversified demand for financial services and innovative products, these developments have led to a widening of horizons and increasing sophistication of the offshore corporate services industry.
Despite this progress, it is clear the that the toughest tests for IFCs lie ahead. The scale of the economic turmoil created by COVID-19 has caused long-term disruption to all major economies, resulting in trade being paused and businesses being plunged into crisis. Nevertheless, with greater integration and regulatory co-ordination than ever before, IFCs are better prepared to rise to the challenge.
As conduits to investment, trade, and global growth, IFCs have been able to help businesses navigate uncertainties and the evolving and ever-complex regulatory environment; having also and repeatedly weathered both geo-political and environmental storms. And, despite industry predictions that there would be a decline in the usage of IFCs like the British Virgin Islands (BVI), demand for services continues and the staying power of IFCs has been proven time and time again.
But what has been the sustaining power of IFCs over the years? As we emerge from the pandemic and look to build-back, it is essential that we take a closer look at the areas that have been the key drivers to enable IFCs to continue to stand strong.
Robust Regulatory Environment
Those within the industry recognise that to maintain a leading position as a key financial centre, there needs to be a strong track record of effective regulation. IFCs have an established resilience and capacity to respond and adapt to new regulation.
Typically, IFCs are the first to adopt international standards set by global regulatory bodies such as the Financial Action Task Force (FATF) and the OECD. In addition to this, they have often achieved a higher compliance rating compared to other global financial jurisdictions. IFCs are able to provide businesses with enhanced security and confidence as a result of the trusted and proven structures as well as the neutrality of these jurisdictions.
As has been demonstrated by the pandemic and the recent presidential elections, political tensions have been heightened. And with businesses craving political and economic stability, the appeal of incorporating and transacting through offshore structures like the BVI – which offers great neutrality – dramatically increases.
Regulatory innovation is also a key area in which IFCs are taking a profound lead. With a raft of new innovation centred around the digital economy and the opportunities offered by fintech, existing policies need to be updated at the same pace as the evolution of the sector. For example, when it comes to crypto-currencies or crypto-assets, there is no bespoke regulatory regime at present and the majority of transactions that take place hinge on trust of the underlying technology. At the recent V20 Summit, unifying the world’s virtual asset service providers, crypto industry leaders and the FATF, alongside other industry regulators, met to share views and feedback on the progress of the implementation of the FATF Travel Rule. At the summit, crypto industry leaders called on regulators to scale up their engagement with the sector to create better understanding for the implementation of regulation to enable innovation whilst complying with global standards. Therefore, there is a pressing necessity to regulate the sector so that industry players can reap the benefits of crypto-technology.
That is why many IFCs have already invested in regulatory innovation to encourage greater activity. The BVI recently launched its Fintech Regulatory Sandbox, joining many other IFCs which have been quick to establish regulatory sandboxes. This initiative provides fintech businesses the ability to test new fintech products in a controlled environment and within a bespoke supervisory framework whilst protecting market participants. These types of initiatives, that have long been established in IFCs, have proactively stimulated innovation and leveraged technology to bring about new financial products and services that directly augment businesses and their many processes.
Embracing Digital Innovation
We have already seen the importance and the need to provide the right regulatory environment for crypto-currencies or crypto-assets, amongst other areas, to align with their pace of innovation and development. However, this has only been enhanced by the pandemic and the technological adoption and digital innovation that all major economies have embraced which, for example, have enabled deals, transactions and other financial activities to continue. For jurisdictions that are lagging in innovations, digital innovation is critical; not only to overcome the barriers created by COVID-19 but to also stay in line with the technological transformation that is taking place across the world.
By 2030, it is likely that currency managed on distributed ledger technology (DLT) will be commonplace and could be instrumental in driving global business. Those that are pioneering stateless, digital assets are seeking jurisdictions that encourage and help these classes of assets. And IFCs have led the way in facilitating this new global technology. A 2019 report estimated that over 80 per cent of crypto hedge funds were domiciled in IFCs, with the BVI continuing to attract a growing proportion as a result of the favourable funds regimes and growing expertise in the country.
Though market volatility has undermined cryptocurrencies in the past, they are still rapidly evolving. Digital currencies have great potential to accelerate transactions and lower fees. They can also foster financial inclusion, especially in developing markets where access to traditional banking may be lacking. Take Africa, for example. In Uganda, mobile money was introduced in 2009 and since then, it has rapidly evolved from person-to-person transfers to include other services such as facilitating loans and savings. Elsewhere, other sophisticated platforms are springing up, including Kuda, a Nigerian mobile finance platform, which last year raised nearly US$1.6million in pre-seed funding. The region is a key hub for fintech innovations which are radically transforming the delivery of financial services and, as innovative incubators for these technologies, IFCs have played an active role in providing supportive regulatory and business environments for the fintech developments.
The BVI’s “incubator” funds, which target small startup funds, have enabled businesses to attract and pool a small amount of investment and manage it through their own fund while avoiding admin costs. These incubator funds have also enabled a new manager to get established without having to appoint local directors, therefore speeding up the entire process significantly. Therefore, IFCs are actively fostering this innovation, and emerging markets in particular – where digital innovation is rife – have benefitted from the flexible regulatory frameworks that IFCs offer.
Connectivity With Emerging Markets
One of the key areas that has driven the staying power of IFCs is their connection to emerging markets. In a report by the Overseas Development Institute (ODI), the ODI looked at the valuable role IFCs play in development finance and that offshore centres are excellent conduits for foreign direct investment into emerging economies.
IFCs stimulated US$1.6 trillion of additional finance to developing countries between 2007 and 2014, much of which went into Africa. By using IFCs to access the continent, those making foreign direct investment have been safe in the knowledge that their investment will be subject to the established legal framework of reliable jurisdictions.
China, for example, has been increasing investment in the African continent at a steady rate. Chinese infrastructure projects have gained the most attention over the past few years, and IFCs have been a vital conduit to have funded them. According to the 2017 Capital Economics report, mainland Chinese and Hong Kong companies made up more than 40 per cent of the US$1.5 trillion in assets mediated through the BVI, which continues to underscore the BVI’s growing status as a hub for Chinese overseas investment.
IFCs continue to play a major role in the continued growth of China and a number of other emerging economies in Asia, with many showing strong usage of offshore structures to facilitate cross-border trade and investment. For example, 75 per cent of Hong Kong’s Hang Seng Index was made up of companies with direct linkages to the BVI. IFCs have shown to be a sound platform for business establishment, growth and diversification and will be crucial in helping to stimulate even more growth in emerging economies in the post-pandemic era.
Perhaps the greatest asset to IFCs staying power is the accessibility of highly specialised financial services experts in locales across the globe. As different markets around the world find themselves at varying stages of the pandemic, sophisticated IFCs have highly focused pools of experts adapting to increasingly complex environments and attending to the changing needs of their global clients. The experience and expertise of practitioners doing global business is not only available in respective IFC jurisdictions, but also on the doorsteps of their clients who may be 12 hours ahead on the other side of the world.
This has been a key differentiator for the BVI, for example, which has invested greatly in developing a wide-ranging network of professional expertise beyond its home base.
The Future And Beyond
In spite of crisis, market volatility, regulatory transformation and increased scrutiny, IFCs keep getting stronger through continuously adapting, evolving, and innovating. IFCs continue to play a major role in the global economy – their commitment to international cooperation and adhering to regulatory standards have ensured their relevance and attraction.
This proven track record of stability and security provides a clear message that IFCs have staying power and a clear role in helping countries, businesses and individuals to not only mitigate risks as we traverse through this unchartered terrain, but to also unlock valuable opportunities as we emerge from the pandemic.