The British Virgin Islands (BVI) is no Caribbean equivalent of a Saudi Arabia in oil riches. Nor is it a manufacturing powerhouse in the China mode. Its tiny geographical spread (153 square km) and a miniscule population of fewer than 30,000 people precludes all possibilities of it ever being a challenger to even Taiwan, leave alone mainland China. For all that, the islanders are an extremely prosperous lot, with an annual per capita income of $40,000.
That leads us logically to the question: what is the competitive advantage that the BVI collectively enjoys, that confers on it a level of prosperity comparable to First World standards?
Viewed purely in terms of a template first developed in 1990 by noted Harvard Business School professor Michael Porter, in his seminal work Competitve Advantage of Nations , nothing really strikes you first off. At least, nothing in the nature of a composite set of attributes that a nation possesses in a ‘Porterian’ sense that confers a national advantage and explains the degree of collective prosperity of BVI. Yet the affluence exists.
As it happens, the archipelago does offer something, and that too on a scale that few other nations are able to. That something can be summed up in one phrase — ‘financial secrecy’.
Easy rules
As the leaked documents — popularly known as ‘Panama Papers’ — of the Panamian law firm Mossack Fonseca reveal, every second entity under which the rich and powerful of the globe have stashed their wealth can be traced to a company incorporated in British Virgin Islands. Just how secure is this promise of ‘financial secrecy’ that has so obviously swayed the global elite into plonking their wealth in these companies? Quite a lot, one should think.
For starters, the semi-autonomous island nation under British protection has decreed, by law, that investors wishing to incorporate a company within its territory and endow it with their vast riches, need not identify themselves. It is enough if he appoints a resident of the island as an agent to carry out all that he himself would have had to do in any other jurisdiction. This includes signing off on the preliminary document (Memorandum of Association) leading up to the certificate of incorporation.
To reinforce its allure, the country’s legal framework further stipulates that incorporation of a company can only be done by an authorised agent. To ward off the curious and those with a penchant for snooping, the law further states that there is no need for such pesky little things as audited profit and loss accounts and balance sheets to be filed with the Registrar of Corporate Affairs.
The requirement of disclosing the list of members owning shares in the company too has been waived. Since the company cannot act on its own but only through the medium of Board of Directors, that too can be taken care of by the authorised agent under the BVI law. In other words, the authorised agent is the public face of the company to the outside world. So much so, that the actual shareholder or beneficiary might as well not exist!
Safeguarding identity
Such a structure goes a long way in safeguarding the identity of the real owner. A vast majority of the global super-rich think that way too, leading to an explosion of incorporated entities under BVI’s company legislation. An article in a somewhat dated issue of The Guardian mentioned that the island played host to a million companies. That number could have only gone up since then.
Michael Porter argued that the competitive advantage a nation enjoys offers a more enduring basis of economic growth than advantages with regard to factors of production such as cheap raw material or labour.
He had a point.
We have seen, over the years, that the labour cost advantage of countries such as South Korea and Taiwan were quickly competed away by China. More recently, the latter itself is finding it increasingly difficult to retain its cost differential vis-à-vis Vietnam and other emerging market economies.
That said, the competitive advantage at a national level requires the coming together of a number of productivity-enhancing factors such as education, skill development, and competencies that produced successes in select industries, spawning capabilities elsewhere, and so on.
That ‘X’ factor
So, if ‘financial secrecy’ is the secret ingredient, what prevents other nations from positioning themselves as a competitor when it comes to attracting offshore wealth?
The likes of Panama and BVI do possess that ‘X’ factor which makes for a winning formula. For a prospective investor to feel comfortable with a jurisdiction, the first requirement is that the territory should be extremely small — more so when a good chunk of such offshore wealth is accumulated from rather dodgy, if not outright criminal, activities.
A tiny nation with a pliable leadership gives that feeling of comfort to a prospective investor. Even if one is a wealthy individual like Bill Gates or Warren Buffet, it is rather difficult to dictate to the likes of a Putin or a Xi Jinping. But dealing with a quasi-dictator ruling over a banana republic is another matter altogether.
Moreover, as a small nation, there is not a lot you can do. You can’t be a manufacturing powerhouse, producing everything from steel and cement to readymade garments. Trust is about the only thing that they can offer as a nation. They wouldn’t want to do anything that undermines investor confidence. It is amazing how the threat of losing it all helps to stay focused. Ask a gambler preparing to cast the last throw of the dice about powers of concentration. So, yes, size is an advantage.
But an investor wouldn’t want to count only on the innate good sense of the ruler of an offshore tax haven.
Upholding the rule of law
It would help if the country also has a reputation for observing the rules of the game in letter and spirit and a respect for law. Here, the protection of a nation such as the United Kingdom in guaranteeing this helps.
The nation of shop-keepers is nothing if not pragmatic. After all, it is a nation which gave the world a language with the saying, ‘Honesty is the best policy’.
Mind you, they didn’t infuse the sentiment with anything remotely religious, such as promising the kingdom of heaven or release from perpetual cycle of births and deaths or anything like that. It’s just plain-speak that’s on the table. In the long run, you are better off staying honest than resorting to anything underhand.
So, a territory protected by the British can be counted upon to adhere to the straight and narrow path of the rule of law. You can’t say the same about the United States, which makes a fetish of its notion of ‘exceptionalism’ which, shorn of the diplomatic verbiage, means quite simply that none of the rules that applies to others applies to them. With such an attitude, a country can perhaps get by in geopolitical affairs, but will not rake in too many dollars in offshore wealth. To compound its other follies, it once invaded Panama, thus ruining the latter’s image of a placid haven of offshore wealth.
There is no question. The winner is... British Virgin Islands!