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True transparency

19 July 2016

True transparency - read more

Countries must not pay lip service to corporate governance

Corporate governance is about many things which, if collectively and effectively implemented, help to grow a company (or any other legal entity), facilitate decision making, provide consumer confidence and create a good reputation.

It is about having the appropriate structure in place that is commensurate with the nature, size and complexity of a company. It ensures that the established structure has the appropriate checks and balances to guide and facilitate decision making that is balanced, objective and fair.

Good governance means that management oversight is relevant and appropriate, and the right people at the right levels make the decisions. It is ensures compliance with established internal controls and adherence to the laws that govern the conduct of the company’s business.

An effective governance regime creates transparency and accountability, where work carried out is above board and seen to be so. This means that each employee, director and member is held accountable with respect to the obligations placed on him or her.

Appropriate governance infuses ethics into the workplace and one’s own work, and holds companies responsible to customers and stakeholders. It is about responsibility to society and being a good corporate citizen, as well as establishing systems that support the rule of law and recognise the value of effective regulation and supervision.

A system of good governance facilitates the easy access, ready retrieval and provision of information to support a country in adhering to its international cooperation obligations. Corporate governance has many facets, but with one objective: that of business development and growth in a stable and conducive environment.

The Panama Papers

The British Virgin Islands (BVI) has recently been in the media spotlight following the publication of the so-called Panama Papers. This centred on publishing information about the beneficial owners of corporate entities that were held in confidence, not secrecy, by the relevant service providers.

The picture is often painted that offshore business is a bad thing, even though there is tacit acknowledgement that publication of the information does not necessarily indicate wrong doing.

As an international financial centre, the BVI is fully aware of the pivotal role it plays in global trade and finance through its corporate structures. It is equally aware of its legal obligations to prevent the abuse and misuse of its corporate structures; the same way it is aware of the importance to facilitate tracking down and apprehending criminals through international cooperation.

If only the critics of the BVI would care to read its laws and bring balanced criticism, as opposed to sensationalisation to their exercise, they would realise that the BVI does adhere to established standards of good regulation.

The Panama Papers have revealed one fundamental fact that, it seems, is being overlooked. The publication of beneficial ownership information of BVI companies effectively acknowledges that the legal obligation to source and maintain such information under BVI law is real, and the laws are complied with – even if not 100% of the time.

I am yet to see evidence in any country where compliance with the law has reached that threshold. If that was not the case, there would not have been information to publish.

International compliance standards

As a member of IOSCO (International Organization of Securities Commissions), IAIS (International Association of Insurance Providers), GIFCS (Group of International Finance Centre Supervisors), CFATF (Caribbean Financial Action Task Force) and many other international organisations, the BVI recognises that membership is benchmarked against compliance with the standards established by these organisations.

They are standards against which the BVI is continually assessed to establish the Territory’s level of compliance. The BVI values these assessments for many reasons, but above all to help the Territory discover how and to what extent its laws and systems of compliance accord with or fall short of the established standards.

This gives the Territory the opportunity to review its laws and systems from time to time to effect necessary reforms.

It is not a secret, however, that sometimes the BVI is required or expected to do more than what established international standards require of everyone, thereby robbing it of the benefit of a level playing field.

That is the case when, in certain instances, the Territory is called upon to adopt and adhere to EU Directives, notwithstanding that the BVI is not a member of the EU; or when the UK asks the BVI to implement certain measures that are outside the established international standards. In all of these, the BVI tries to cooperate, much to the chagrin of its industry stakeholders and to the detriment of its economy.

The new norm

The world of international finance is becoming an animal farm, whereby the weak are expected to do more and are perceived as a haven for one thing or another – never mind that their critics are doing the same thing or even worse.

A few NGOs are also playing the ‘holier than thou’ card against the weak, but being less than transparent in their own activities. In addition, new standards are evolving behind closed doors to promote the interests of a select few and then the weak are called upon to adopt and implement them. To add to all this, the weak are made to believe of an inclusive process after the key decisions have already been made.

In essence, hypocrisy is becoming the new norm and is considered morally acceptable. The BVI must therefore continue to believe in the principle that good regulation is good for business. Stakeholders within the BVI financial services industry must distinguish themselves in what they do and be responsible citizens of both domestic and international finance.

These statements must not be construed as sensationalism. Nor should they be considered an endorsement of any corporate entity, licensed or unlicensed, or an indication of any particular position of the Financial Services Commission (FSC) in relation to the Panama Papers or any corporate entity.

The statements are simply in the context of the benefits of good corporate governance and how practising it can protect and grow an organisation and develop a country’s reputation. It is the duty of every corporate entity to ensure that its governance regime is not found wanting in any way – when it is, its defences melt away. If you must ‘die’, then prefer to ‘die’ with an unblemished character.

Cost of compliance

A fundamental aspect of corporate governance that the FSC pays particular attention to relates to compliance. The cost of compliance failure can have negative effects on the operations of a company and the way it is perceived.

We seem to be in the new age of de-risking and restrictions in correspondent banking relationships – every time a financial institution receives a penalty, it is forced to take a fresh look at its business relationships to minimise risks and potential liabilities.

The publication of enforcement action, which is a requirement of BVI law and is in line with the principles of transparency and accords with established international standards, naturally attracts attention. It is not good attention; rather it is attention that could cost a corporate entity dearly. It is therefore vital that organisations take compliance seriously and invest adequately in compliance tools.

Business thrives on reputation – a good one that is – and when that reputation is dented, it negatively impacts the business.

The compliance officer is pivotal to the integrity and success of the modern corporate world. He or she must be placed in the driver’s seat to help protect the company against abuse and misuse to its own detriment. Company bosses must stop if they are considering the compliance officer as a spy within, on account of their statutory duty to report to the regulator on compliance matters.

The regulator carries out its own periodic onsite inspections and it can make discoveries on its own. In essence, the role of the compliance officer is to help the regulator to help the licensed corporate entity from getting into a crisis.

Accordingly, it is important that all corporate entities pay particular attention to the following:

  • Corporate governance is many things, each standing on its own but functioning as a collective; it should be taken seriously and implemented effectively to avoid trouble with the regulator.
  • Directors must not only recognise their fiduciary duty to their stakeholders, they must live that duty for the growth and good reputation of their business.
  • Every licensed corporate entity must develop and put in place an appropriate corporate governance framework – that is not only my view; it is also the law in the BVI.
  • Always weigh the cost of compliance against the cost of non-compliance – the latter is more costly and can have long-term negative effects on the growth of business.
  • Companies must recognise the roles of compliance officers in driving business growth and providing necessary protection. Therefore due regard should be paid to the advice of the compliance officers; this means respecting their right and obligation to have direct access to boards and allowing them the latitude to exercise professional independence and judgment.
  • In this modern age of technology, where hacking and theft of private documents and breaching the rules of confidentiality is becoming a business in itself, we should not be surprised if we see more confidential beneficial ownership information being published. Corporate entities have a duty to their clients to develop and maintain secure systems to protect their clients against unlawful activity. This will ensure that should misfortune befall them, they will not be found wanting with regard to their legal and regulatory obligations.
  • Ultimately, every corporate entity that is incorporated or registered in the BVI has an obligation to this Territory; it is part of an organisation’s corporate social responsibility to ensure that they do not dent the reputation of the Territory.

It is important not to pay lip service to corporate governance. We must recognise that modern business is caught up in rules and standards that must be adhered to.

Every country is (or is supposed to be) assessed and evaluated against those rules and standards, and failure to comply carries negative consequences that are detrimental to business.

The first and most viable step to avoiding those negative consequences is to build appropriate corporate governance structures, rules and principles as part of a corporate entity’s business plan.

The FSC is committed to the Territory’s financial services industry – that is, in ensuring that it is well regulated, lives up to established international benchmarks of regulation and compliance, and provides the necessary framework for engendering and fostering international cooperation

It is equally committed to providing such support as is consistent with its role as the regulator of financial services business in the BVI. The FSC would like to see greater compliance at all levels and less enforcement action. If it can achieve that, everyone becomes a beneficiary and the Territory’s reputation remains intact.

Mr. Cherno S. Jallow QC is Director of Policy Research and Statistics at the BVI Financial Services Commission

Further reading

Read more in the offshore finance debate in our article from Jersey Finance, ‘Public registries are not the answer’.

You can also read GoodCorporation’s take on the Panama Papers in their analysis ‘Tactical tax planning’.

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