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AIDE MEMOIRE #3

Criteria for Approval of Authorised Custodians of Bearer Shares of BVI Incorporated Companies

Financial Services Commission

Aide Memoire #3.  7 May 2004

INTRODUCTION

Reason for this Aide Memoire

This Aide Memoire builds on Aide Memoire #2, “The Control of BVI-Issued Bearer Shares”, issued in October 2002 by the Financial Services Commission of the British Virgin Islands (“the Commission”).  Aide Memoire #2 clarified proposed legislation aimed at controlling the issue of bearer shares.

Subsequently, the BVI legislature approved the International Business Companies (Amendment) Acts of 2003 and 2004.  These provide the legal framework for immobilizing bearer shares and are due to come into force on 1 January 2005.  Legislators also approved the Financial Services Commission (Amendment) Act of 2004.  This Act details the regulatory framework for immobilizing bearer shares, in particular the rules governing custodians, and is due to come into force on 1 July 2004.

Under the new legislation, International Business Companies (IBCs) formed before 1 January 2005 will have until 31 December 2010 to place their bearer shares with a custodian and immobilize them.  IBCs formed after 1 January 2005 must do this from their date of formation.

To enable custodians of bearer shares of BVI-incorporated companies to be in place by 1 January 2005, the Commission will consider applications to act as custodians from 1 July 2004.

In preparation for this, the current Aide Memoire details the criteria the Commission will use for approval of custodians.

There are two categories of custodians: “authorized” and “recognized”.

Authorised Custodians

An authorized custodian may be:

These should apply in writing to the Commission for status as an authorized custodian approved to hold BVI bearer shares.

All applicants for approval as authorized custodians will have to satisfy the Commission that they meet the fit and proper criteria and that they have the necessary security and compliance systems and procedures in place for safe custody of their bearer shares.

Recognised Custodian

A recognized custodian may be an investment exchange or clearing organization that operates securities clearance or settlement systems in a jurisdiction which is a member of the Financial Action Task Force and that the Commission identifies and publishes in the Gazette.

A list of currently recognized custodians is provided at the Appendix.

CRITERIA FOR APPROVAL OF AUTHORISED CUSTODIANS

Statement of Objectives

The commission is responsible under section 50A of the Financial Services Commission (Amendment) Act of 2004 for approving authorized custodians of BVI bearer shares.  This section sets out the criteria for approval of authorized custodians.

The ongoing duties and responsibilities of custodians are set out in Section 8 of the International Business Companies (Amendment) Act, No. 4 of 2003.

Licensing Criteria

All applicants for approval as authorized custodians must meet the Commission’s “fit and proper” test.  This seeks to assets the honesty and integrity, competence and financial soundness of approved persons to fulfil their duties and responsibilities as authorized custodians.

To assess honesty and integrity, the Commission will consider, inter alia, the following,

1. Criminal records;
2. Financial position;
3. Civil actions against individuals to pursue personal debts;
4. Refusal of admission to, or expulsion from, professional bodies,
5. Sanctions applied by regulators of other similar industries; and
6. Previous questionable business practices.

To determine competence, the Commission will review, inter alia, the applicant’s formal qualifications and previous experience and track record.

To establish financial soundness and solvency, the Commission will assess, inter alia, the applicant’s historic financial stability and future financial projections.

For a body corporate incorporated and operating outside BVI, the Commission will also have regard to the prudential regulation and anti-money laundering regulations with which such a body should have complied.

Note:  The fit and proper requirements of the BVI’s other regulatory laws are equally applicable to the approval process for authorized custodians.

Any actual or potential change affecting the fit and proper status of persons performing custodian duties must be immediately notified to the Commission.  The Board of the licensed entity is responsible for monitoring and reporting such changes.

All applicants seeking approval as authorized custodians must satisfy the Commission that they have internal control systems and procedures in place for the secure custody of bearer shares, as below.

Authorised custodians should have documented procedures and policies for the secure custody of bearer shares.  These should include the following:

Know Your Customer/Customer Due Diligence (KYC/CDD) procedures, including Anti-Money Laundering/Combating the Financing of Terrorism (AMI/CFT) reporting obligations.

1. Suspicious transaction reporting;
2. Standard written custodian agreements;
3. Arrangements for safekeeping of shares;
4. Sound record keeping practices and procedures; and
5. Satisfactory management information systems.

Authorised custodians should have adequate and properly documented due diligence policies and procedures for the review and acceptance of bearer shares.

A properly documented account acceptance process will help to ensure that the custodian has sufficient information to make informed decisions and that the services customer wants the custodian to perform are legal and within the custodian’s capabilities.  The account acceptance process should include:

1. An assessment of the proposed relationship between the customer and custodian, including a review of the products and services needed by the customer; and
2. Customer information necessary to facilitate custody transaction where applicable.

Most importantly, KYC/CDD procedures should at all times be consistent with the BVI’s AMI/CFT regulations.  A critical aspect of the KYC/CDD procedures and policies is the identification and verification of beneficial owners of bearer shares.

Authorised custodians should have custodian agreements with all clients for whom bearer shares are held.  These should be standardized wherever possible, and any deviations from the standardized agreement should be reviewed to ensure adequate protection for the client.

Although the range and extent of services provided may vary among custodians, as a minimum, custody agreement should include the following:

1. Establish the duties and responsibilities of the custodian;
2. Require clients to authorize properly all instructions relating to bearer shares; properly authorized instructions are secure instructions that can be authenticated by such means as written instructions, test keys, SWIFT instructions or other electronic authentication methods.
3. Include the frequency with which the custodian required to report to the Commission as well as to the client.
4. Provide that where the custodian receives notice that the Commission is undertaking an investigation into the beneficial owner of bearer shares, the custodian shall not be prevented by the agreement with the client from granting the Commission access to its premises to inspect all relevant books, records and accounts held in its capacity as custodian of bearer shares for the beneficial owner; and
5. Not prohibit the access and inspection arrangements that are an important part of regulatory supervision.
6. Provide information on request to the Commission without the Commission having to visit premises and conduct a search of relevant files.

All bearer shares must be held under joint control and appropriate safekeeping measures must be in place.

Bearer Shares must be kept separate from the assets of the custodian.  This will involve holding bearer shares in the name of the beneficial owner, together with the number of shares held for each client.

The risk associated with the holding of bearer shares must be assessed and addressed by appropriate risk management techniques and internal controls.

Custodians should have in place an adequate system for the recording of appropriate information on bearer shares.  An adequate system is one which ensures that information on those who control BVI companies is readily accessible to the Commission.

Record-keeping services should meet the customer’s specialized needs and comply with applicable record-keeping and reporting requirements in the BVI, including those relating to anti-money laundering regulations and best practices.

All applicants for approval as authorized custodians should have internal control systems and procedures in place that will enable compliance with the duties and responsibilities set out in the International Business Companies (Amendment) Act, No. 4 of 2003, as outlined below.

The authorized custodian must notify the registered agent of the company within fourteen (14) days of the receipt of the bearer share (or shares), that it is the custodian of the bearer share.

The authorized custodian must keep a notice of the information relating to the beneficial owner of the bearer share.  Such information should include:

1. The full name of the beneficial owner of the bearer share;
2. The full name of any other person having interest in that share;  and
3. Any other prescribed information.

The authorized custodian must keep an notice when there is a transfer of beneficial ownership of, or interest in, the bearer share.  This must be submitted to the registered agent of the company who owns the bearer shares.

The authorized custodian must keep a record of the location of the bearer share at:

1. Its principal office in the BVI; or
2. At such office in the BVI as may be approved by the Commission in writing.

Where an authorized custodian transfers possession of a bearer share in accordance with the law, the authorized custodian must:

1. Make a copy of all notices provided to it by the company or the person that deposited the bearer shares.
2. Retain the copies for such period as may be prescribed; and
3. Deliver, with the bearer share, all original notices provided to it by the company that issued the bearer shares or the person that deposited the shares.

The authorized custodian must ensure that the bearer shares remain in his custody and control at all times whether or not the shares are kept inside or outside the BVI.

Access to bearer shares should be restricted to:

1. Senior personnel; and
2. Occasions when it is necessary in order to act on instructions relating to delivery or transfer of bearer shares.

There should be adequate physical infrastructure in place to ensure the security of the bearer shares, such as a secured vault and alarm systems.  Bearer shares should only be out of the vault when the custodian receives or delivers them.

Vault control procedures should at a minimum ensure segregation of the bearer shares from the custodian’s own assets, provide dual control over custody assets, restrict access to authorized personnel and maintain records of who has access to the vault and proper asset transfer.

Detailed records of all deposits and withdrawals of bearer shares should be kept.  The vault record should include the initials of the joint custodian’s member of staff, the date of vault transactions, description and amounts of bearer shares, identity of the affected accounts, and the reasons that assets are withdrawn.

In addition, the custodian’s management information system (MIS) should be reliable and secure and have adequate, scalable capacity.  Contingency plans and back-up facilities should be established to allow for timely recovery of operations.

Where an authorized custodian transfers possession of a bearer share in a company to another authorized custodian or to the company, it shall, within seven (7) days, send a notice of transfer I the prescribed form to the registered agent of the company.

The authorized custodian holding a bearer share in a company must not transfer possession of the bearer share to any person other than:

1. Another authorized custodian who has agreed to hold the bearer share;
2. The company where the bearer share is to be, or has been, converted to or exchanged for a registered share, redeemed or repurchased by the company, or cancelled or forfeited; or
3. The registered agent of the company

The company has an obligation to keep the authorized custodian informed of changes to the registered agent.

If it ceases to qualify as an authorized custodian or desires to cease acting as custodian in respect of a bearer share, the authorized custodian is required to give notice to:

1. The company;
2. The beneficial owner; and
3. Any person who has an interest in the bearer share.

In the event of a change of registered agent, the registered agent receiving the notice or bearer shares has an obligation to forward the relevant notice or bearer shares to the new registered agent of record. 

Appropriate accounting systems and internal controls must be in place to facilitate the reconciliation on a regular basis of all activities relating to bearer shares held by the custodian.  The reconciliation process should include:

1. Reconciliation of Clients’ Activities in Bearer Shares
2. Appropriate accounting systems and internal controls must be in place to facilitate the reconciliation on a regular basis of all activities relating to bearer shares held by the custodian.  The reconciliation process should include:
3. Counting of all bearer shares held for each client to ensure that they reconcile with the client’s activity summary in bearer shares;
4. Ensuring that reconciliation are carried out by a person who is independent of the production or maintenance of the records to be reconciled. 
5. Reconciling changes in the bearer share’s position each day that a change in the position occurs;
6. Reconciling bearer shares at a minimum period of twice a year, other than when a change occurs.
7. Investigating promptly any accounting and recording discrepancies of bearer shares;
8. Reporting any exceptions noted in the reconciliation process to management in a timely manner.

An authorized custodian must inform the Commission in writing without delay if it has not complied with these requirements or is unable in any material respect to reconcile its activities relating to bearer shares.

Custodians should ensure that reporting and record keeping systems provide activity and exception reports that allow them effectively to identify and monitor the risks in their custody operations.

Custodians must report regularly, as required by the Commission, on their holding of bearer shares and on any suspicious activity, in accordance with the legislation custodians should also provide heir clients with regular statement on bearer shares held, unless otherwise instructed by their clients.

Entities licensed to provide custodian services are required to engage an external auditor approved by the Commission to perform an annual compliance audit of the extent to which custody services are being provided in accordance with the stipulations set out in this Aide Memoire.

The Commission may require at any time a special compliance audit of the licensed custodian at the custodian’s expense.

The annual compliance audit will be regarded as acceptable to the Commission providing the audit is sufficiently guided by the stipulations set out in this Aide Memoire and by the Guidelines to Auditors for the Annual Compliance Audit of Custodians, which will be subsequently issued by the Commission.  The custodian should provide the Commission  with a Certificate of Compliance.

Applicants must provide a letter of consent from an auditor approved by the Commission, agreeing to conduct the compliance audit as required above.

The business plan of the entity in relation to its proposed custody services should include as a minimum the following:

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