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The Caribbean has been hit hard by the recession with no country likely to show positive growth in 2009. However the BVI is better placed than many. The BVI economy is almost entirely dependent on tourism and financial services. It is one of the more prosperous in the Caribbean, with a GDP per head of approximately $40,000.
Politically, tourism is the more important of the two, as it employs a greater number of people within the BVI, and a larger proportion of the businesses in the tourist industry are locally owned, as are a number of the highly tourism-dependent sole traders. Economically however, financial services associated with the BVI’s tax haven status are by far the more important. Nearly 50% of the Government's revenue comes directly from licence fees for offshore companies. (There are approximately 450,000 companies registered in the BVI.)
In announcing the government’s budget for 2009 (27 February 2009) Premier O’Neal said that the BVI expect revenues to amount to US$279.8 million in 2009 against operational expenditure of US$252.48 million. This decline of 1.7% over the previous year estimates is directly attributable to the global slowdown, he said. O’Neal admitted that the slowdown creates “significant challenges” for the BVI economy. O’Neal also announced in the BVI House of Assembly that company incorporations in the BVI had also fallen back, due to the global slowdown. The number of companies incorporating in 2008 was down by 20% on the 2007 figures. In particular, the captive insurance and mutual fund sectors of the BVI’s financial services industry have been hard hit by the recession.
In 2000, KPMG were commissioned by the British Government to produce a report on the offshore financial industry generally, and the report indicated that nearly 41% of the offshore companies in the world were formed in the British Virgin Islands. In 2007 the Financial Times reported that the British Virgin Islands was the second largest source of foreign direct investment in the world (behind Hong Kong) with over US$123,000,000,000. Almost all of these sums are directly attributable to investment through the BVI's offshore finance industry.
Government and politics
A new constitution was adopted in 2007 and came into force when the Legislative Council was dissolved for the 2007 general election. The Head of Government under the new constitution is the Premier (prior to the new constitution the office was referred to as Chief Minister), who is elected in a general election along with the other members of the ruling government as well as the members of the opposition. A Cabinet is nominated by the Premier and appointed by the Governor. The Legislature consists of the Queen (represented by the Governor) and a unicameral House of Assembly made up of 13 elected members plus the Speaker and the Attorney-General.
The current Governor is David Pearey (since 2006). The current Premier is Ralph T. O'Neal (since 22 August 2007). The Governor is appointed by the Queen on the advice of the British Government. Defence and Foreign Affairs remain the responsibility of the United Kingdom.
The BVI says it operates a “robust regulatory and supervisory regime” in financial services, with a well-proven track record of international cooperation. The BVI already have tax information exchange agreements (TIEAs) with 12 OECD countries and, on August 14 2009, joined the OECD’s "white list" (along with Cayman).
The government has been eager to assure onshore authorities that the BVI operates a transparent regime with strict money-laundering and tax-evasion standards. A UK National Audit Office report on the BVI noted that it is better equipped through its Financial Investigation Agency, which dates back to 2004, to investigate financial crime, than many other offshore centres.
The British Virgin Islands have a total population of about 22,000, of whom approximately 18,000 live on Tortola.
Stability & infrastructure
The BVI a target for drug traffickers, who use the area as a gateway to the United States. According to the Foreign & Commonwealth Office, drug trafficking is "potentially the most serious threat to stability in the BVI". This is a particularly pressing issue as the many uninhabited islands in the BVI, together with the archipelago’s proximity to Puerto Rico, which is seen as a gateway for illegal drugs entering mainland United States, have made the region a “natural” staging point for the drugs trade.
The BVI has relatively little fund industry infrastructure – certainly not in comparison with Cayman or elsewhere in the Caribbean. It is primarily a location for fund registration.
Threats to this fund domicile
Whilst BVI has not been singled out for criticism by President Obama in the way that Cayman has it nonetheless faces the threat of a changing political environment across the developed world with respect to their views of offshore centres.
The changing political climate in the G20 countries could be a threat to BVI. Its involvement in the asset management business is almost entirely through fund registration. Unlike in Cayman there is little other infrastructure to support the fund business (there is no fund administration done in BVI, for example).