Under the Anti-Money Laundering (Amendment) Regulations, 2022 (“Amendment Regulations”) and the Anti-Money Laundering and Terrorist Financing (Amendment) Code of Practice, 2022 (the “Amendment Code”) the BVI has expanded the definition of “relevant person” to include virtual asset service providers (“VASPs”) and has expanded the definition of “relevant business” to include the business of carrying on or providing virtual asset services when a transaction involves virtual assets valued at US$1,000 or more. The Amendment Regulations and the Amendment Code are now in force and effective (from 19th August 2022 and 29th August 2022 respectively), but the specific sections of the Amendment Regulations that relate to VASPs will not come into force until 1 December 2022. Our subsequent briefings on the Amendment Regulations and the Amendment Code will cover other changes introduced.

The BVI’s Virtual Assets Service Providers Act (“VASP Act”) is not yet in force and has not yet been published. The requirement for VASPs to comply with the updated BVI AML/CFT/CPF regime from 1 December 2022 is a distinct requirement that may also be covered in the Virtual Assets Service Providers Act when it is eventually published.

Even though the BVI’s VASP Act has not yet been published, it is likely that the definition of “virtual asset”, and “virtual asset services provider” will be very similar to the definitions within the FATF Glossary as follows:

“Virtual asset” as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes. Virtual assets do not include digital representations of fiat currencies, securities, and other financial assets that are already covered elsewhere in the FATF Recommendations;

“Virtual asset service provider” as any natural or legal person who is not covered elsewhere under the Recommendations and as a business that conducts one or more of the following activities or operations for or on behalf of another natural or legal person:

i. Exchange between virtual assets and fiat currencies;

ii. Exchange between one or more forms of virtual assets;

iii. Transfer of virtual assets; and

iv. Safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets;

v. Participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.

These changes are being made as part of the BVI’s effort in implementing the amended Financial Action Task Force (“FATF”) Recommendation 15 (New Technologies) of the FATF’s International Standards for Combating Money Laundering and the Financing of Terrorism & Proliferation and the FATF’s Updated Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers. The FATF Recommendation 15 requires that VASPs be regulated for anti-money laundering and countering the financing of terrorism (AML/CFT) purposes, that they be licensed or registered, and subject to effective systems for monitoring or supervision.

With effect from 1 December 2022, VASPs providing a virtual asset service need to comply with the updated BVI AML/CFT/CPF regime. Accordingly, by way of summary, VASPs will be required to, among other things:

1. appoint a money laundering reporting officer (“MLRO”) who (1) is required to be of sufficient seniority to perform the functions reposed on an MLRO under the Amendment Code and the Amendment Regulations, (2) must be a natural person, and (3) have access to all relevant information and material of the VASP to enable him/her to perform the functions reposed in him/her under the Amendment Code and the Amendment Regulations. See required qualifications and obligations of MLRO below.
2. establish and maintain written internal reporting policies and procedures and internal controls for, among other things, (A) customer identification (including requesting, collection and verification of client/customer due diligence and conducting fraud, adverse media, politically exposed persons, and sanctions screening), (B) record keeping and internal reporting to (i) enable its directors, or as the case may be, partners, all other persons involved in its management, and all key staff, to know to whom they should report knowledge or suspicion of money laundering; (ii) ensure that there is a clear reporting chain under which suspicions of money laundering will be passed to the MLRO;
3. ensure that the MLRO has reasonable access to all relevant information which may be of assistance to him/her and which is available to the VASP; and (iv) ensure full compliance with the requirements of the Amendment Code.
4. comply with the new “travel rule” in relation to transfers of virtual assets. FATF Recommendation 16 (Wire transfers) requires that countries collect identifying information from the originators and beneficiaries of domestic and cross-border wire transfers in order to create a suitable AML/CFT audit trail. This includes the obligation to obtain, hold, and submit required originator and beneficiary information associated with virtual asset transfers in order to identify and report suspicious transactions, take freezing actions, and prohibit transactions with designated persons and entities. The requirements apply to both VASPs and other obliged entities such as financial institutions when they send or receive virtual asset transfers on behalf of a customer.

The updated BVI AML/CFT/CPF regime sets a de minimis level for one-off transactions of US$1,000, above which the VASP is required to collect customer due diligence.

In order to be appointed as an MLRO, a person is required to possess the following qualifications:

1. he or she must at the minimum hold a diploma with a post qualification experience of not less than 3 years;
2. he or she must be fit and proper;
3. he or she must have a broad knowledge of anti-money laundering and terrorist financing matters, including the relevant regional and international treaties (including United Nations Resolutions) relating to the combating of money laundering and terrorist financing;
4. he or she must have a good appreciation and understanding of BVI laws relating to money laundering and terrorist financing; and
5. he or she must possess the ability to make independent and analytical decisions and not be easily susceptible to undue influence.

The MLRO’s responsibility includes ensuring compliance by staff of the VASP with:

1. the provisions of the BVI’s AML/CFT/CPF regime, the Proceeds of Criminal Conduct Act, the Anti-money Laundering and Terrorist Financing (Amendment) Code of Practice, and other enactments relating to AML/CFT/CPF;
2. internal reporting and policies and procedures relating to AML/CFT/CPF compliance.

The MLRO will be the main point of contact with the BVI regulatory authorities (e.g. the BVI FSC and FIA).

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on the application of BVI’s Anti-Money Laundering Regime to Virtual Asset Service Providers, please contact your usual Loeb Smith attorney or :

E: gary.smith@loebsmith.com
E: robert.farrell@loebsmith.com
E: santiago.carvajal@loebsmith.com

The Claimant sought injunctive relief in the form of an interim freezing order and disclosure orders from the High Court against a number of defendants as part of his attempts to recover cryptocurrencies which had been taken from him fraudulently. The Claimant was the victim of a scam which induced him to transfer approximately 2.1M USDT and approximately 230,000 USDC from his personal wallets.

The Claimant believed that the website ‘www.tda-finan.com’ (the “Website”) (which is no longer available) was affiliated with TD Ameritrade (which is a regulated entity in the United States) due to the deliberate misuse of a corporate logo which was designed to make the Website appear legitimate. As a result of this deception, the Claimant deposited USDT and USDC into a number of digital wallets associated with the Website and also purported to make certain trades through his account. So as to prolong the appearance of legitimacy, the Claimant’s account appeared to reflect those trades.

In February 2022, the Claimant’s open trades on the Website were abruptly closed without any input from him. The Claimant naturally became suspicious and unsuccessfully attempted to withdraw funds from his account. The Claimant’s account was then blocked, and after a number of exchanges by email with a representative of the Website, it became apparent to the Claimant that he had been defrauded.

The Claimant instructed counsel and engaged an ‘intelligence investigator’ in an attempt to recover his assets. The investigators were able to trace, approximately, 2.175M of USDT and USDC to a number of addresses maintained with a number of large crypto-exchanges (all of which were named as defendants to the case) (the “Crypto-Exchanges”).

The Claimant sought to bring the following claims:

• a claim of fraudulent misrepresentation, deceit, unlawful means conspiracy and unjust enrichment against those who had operated the Website; and
• a claim in constructive trust against both those who had operated the Website and each of the Crypto-Exchanges, given they control the exchanges into which the misappropriated cryptocurrency had been transferred.

In order to proceed with these claims, the Court had to consider whether the freezing order and disclosure order should be granted, and if they should, whether the Claimant’s application to serve notice of proceedings outside of England and Wales (with English law being the governing law of the claim) using an alternative method of service, should be permitted.

Whilst the location of the fraudsters was unknown (albeit there was some evidence to suggest they were based in Hong Kong), the Crypto-Exchanges were located in the Cayman Islands, Panama, the Seychelles and Thailand.

The Court was satisfied that there was a serious issued to be tried in England and Wales on the basis that; (i) the misrepresentations regarding the Website were made to the Claimant in England and (ii) that (applying the principle in Ion Science Limited & Duncan John v. Persons Unknown, Binance Holdings Limited, Payment Ventures Limited[2]) the lex situs of the crypto assets that were the subject of the fraud is the country where the rightful owner is domiciled (in this case England). Finally, the Court concluded that the governing law of the claim was also English law on the basis that the loss sustained by the Claimant took place in England.

The Court also concurred that the Claimant had a prima facie case against each of the Crypto-Exchanges as constructive trustees as they had control of the exchanges to which the missing assets had been traced by the Claimant’s investigator.

The Court conceded that damages would not have been an adequate alternative remedy for the Claimant, because awarding damages would not prevent the further dissipation of the Client’s assets. Mr. Justice Trower noted that the “balance of convenience” came down “firmly” in favour of granting the relief sought.

On the topic of disclosure orders against the Crypto-Exchanges, the Court made the requested orders having considered that the disclosure of the information sought had a “real prospect” of helping the Claimant recover his crypto-assets and also noting that the order should be granted notwithstanding any duty of confidentiality owed by the Crypto-Exchanges to any third parties.

The Court then considered the means by which notice of the orders made would be served on the fraudsters. Counsel for the Claimant had requested service by email and also by NFT in the form of an airdrop into the accounts associated with the Website, into which the Claimant first deposited his crypto assets. The Judge, Mr. Justice Trower, was bold in his assertion that there “could be no objection” to the request, noting that service by this means would “embed the service in the blockchain” and would only enhance the prospect of the fraudsters being made aware of the Court orders and the proceedings more generally. However, Mr. Justice Trower did observe that it was important that service was also made by email and that he might not have been content to order alternative service solely by NFT.

The decisions in this case are to be welcomed as they only serve to enhance the prospects of recovery of lost assets for victims of fraud. The willingness of the Court to embrace the benefits of blockchain technology to serve notice on those who seek to hide behind its anonymity should be applauded and we can only hope that the Court will continue along this trajectory.

Indeed, as fraudulent activities in respect of cryptocurrencies and other digital assets are on the rise, the frequency of such applications will likely only increase and it is surely only a matter of time before crypto businesses established in the Cayman Islands are dealing with such matters on a regular basis.

The case also serves as a warning to those who operate crypto exchanges that the Courts are more than willing to entertain claims based on constructive trust where the misappropriated assets are traced to accounts hosted by them. One can only hope that this will spur these organisations into action to take all necessary steps to combat fraudulent activities, such as freezing the accounts into which misappropriated assets are transferred on receipt of notice.

[1] [2022] EWHC 1723 (Ch)

[2] (unreported) [2020] (Comm.)

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on Digital asset litigation, please contact your usual Loeb Smith attorney or :

Robert Farrell
E:robert.farrell@loebsmith.com
T: +1 345 749 7499

The Report found that the most common jurisdictions where crypto open-ended funds are domiciled are:

Cayman Islands – is the preferred place with almost half of the market (49%).

British Virgin Islands (“BVI”) with 13%. The BVI has overtaken the United States as the second most popular location. Each location saw its share of the market increase slightly year on year, Cayman Islands from 48% to 49% and British Virgin Islands from 11% to 13%.

The United States saw their market share reduced from 46% to 10% during 2021.

The Report lists factors which influence the decision on crypto hedge fund domiciles and the most popular answers were due to ‘crypto friendly’ (22%), ‘regulations’ (20%) and ‘fund friendly’ regulations (17%). This indicates that as many governments and authorities still take a rather unfriendly or indifferent approach towards the crypto industry, or rather are still trying to figure out the correct mix of regulations, other jurisdictions like Cayman and the BVI have stepped up and provided solutions that appear to tick most of the boxes for making them attractive as domiciles for these types of investment funds.

As per the Report, the total assets under management (“AUM”) of crypto open-ended funds increased by 8% to about $4.1 billion in 2021, compared to $3.8 billion reported by respondents to the Report in 2020. According to the Report, there were fewer funds with lower levels of AUM at the end of 2021, while at the other end of the spectrum, the number of funds managing larger amounts of assets was considerably higher.

A significant detail shown in the Report is that 89 hedge funds accounted for an estimated US$436 billion in AUM.

According to the Report, the average management fees for 2021 in crypto open-ended funds remained the same (2.2%). The lack of significant change in management fees is likely to reflect the fact that running costs could have remained at a similar level in relation to previous years. The average performance fee slightly decreased (from 22.5% to 21.6%). The decreased performance fees are likely to be a result of competitive pressures starting to increase, as more funds enter the cryptocurrency space and compete to attract new investors, leading to slightly lower overall fees.

The Report raised concerns regarding the upcoming higher organizational cost of crypto open-ended funds as worldwide regulations are becoming more detailed and investors are demanding more professional and institutional set-ups.

The Report identified High-net worth individuals (“HNWI”) as the most common investor type in crypto open-ended funds, with more than 80% of surveyed funds stating them as their usual type of investor. HNWIs are followed by family offices accounting for 66% and fund-of-funds representing just over 53% in third place, where HNWIs are also the largest investors within these fund-of-funds.

Having in mind that the Report surveyed retail crypto open-ended funds, the average number of investors per fund is 54. However, a more representative value could be the median number of investors, which is 30.

The Report found that the average investment made into crypto open-ended funds is $1.63M but most funds have a ticket size of less than $0.5M.

The Report states that 29% of the crypto open-ended funds surveyed have at least half of their daily cryptocurrency trading volume in Bitcoin compared with 56% in 2020.

The top three sectors that crypto hedge funds have invested into are Store of Value (Bitcoin and Litecoin) with 86%, DeFi (Uni, Aave and Sushi) with 78%, and Infrastructure (Ethereum) with 74% based cryptocurrencies.

In 2021 more altcoins have been traded by over 40% of the funds compared to last year where only one altcoin (Ethereum) was traded by more than 40% of the funds. 2021 shows that Ethereum (ETH, 83%), Solana (SOL, 51%), Polkadot (DOT, 48%), Terra (LUNA, 45%), and Avalanche (AVAX, 42%), were the top traded coins (stable coins were excluded).

However, the recent incident of the collapse of LUNA could become a setback for the general crypto industry in the short term.

Market Neutral: The most common (30%) investment strategy among crypto open-ended funds is Market Neutral. These funds aim to profit regardless of the direction of the market, usually using derivatives to mitigate or eliminate broader market risk.

Quantitative Long Short: This investment strategy makes up for a quarter of all currently active crypto funds with a 25%. Quantitative funds, also called quant funds, are investment funds where crypto are chosen based on numerical data compiled through quantitative analysis. Liquidity is key for these strategies and restricts these funds to only trading more liquid cryptocurrencies.

Discretionary long only: This investment strategy represents a 14% of all the crypto fund. For crypto open-ended funds involved in investing in early token and coin offering and investing and holding in other more liquid cryptocurrencies and digital assets.

Discretionary long/short strategy: This investment strategy represents a 12%. For crypto open-ended funds, discretionary long/short strategy involves buying cryptocurrencies and digital assets that are expected to increase in value and selling short cryptocurrencies and digital assets that are expected to decrease in value.

Multi-strategy funds: Lastly, the multi-strategy funds (a combination of all the above) represent a much smaller proportion with barely 12% of the market.

In terms of performance these strategies had very different results. Market Neutral funds gave an average performance of +37%, Discretionary Long an average performance of +420% and Quantitative Long/Short an average performance of +116%. Against the trend from previous years, the crypto hedge funds had a median performance of 63.4% in 2021, slightly outperforming BTC’s price, which went up about 60%.

Custodian: Interestingly, as the crypto ecosystem continues to mature and institutional investors’ demands are allocated, the Report shows that the digital asset custody market has expanded. This has led to the utilization of independent custodians. Compared to the 2020 data, the use of independent custodians has increased from 76% to 82%, with funds opting either for third-party, or exchange custodians. For example, quantitative fund, discretionary long/short and multi-strategy funds may have their cryptocurrencies and digital assets directly with the exchanges that they use to trade continuously. Therefore, having a well-defined and updated risk management policy is more important than having a custodian.

Independent Directors:  The Report reflects that in 2021, there has been an increase in the percentage of crypto open-ended funds with an independent director on their board from 38% to 51%. This number increased due to three main reasons:

A growing number of newly formed, governance-conscious funds driving demand for independent directors;

existing crypto hedge funds becoming more structured and financially capable of hiring senior talent; and

A growing supply of board directors possessing industry-specific expertise and knowledge as the industry further matures.

Administrator: 91% of the crypto open-ended funds surveyed for the Report have appointed and use independent third-party administrators. The main service required by these funds from the administrators is to independently calculate and verify the net asset value and prepare all the required information for the auditor.

Institutional and/or sophisticated investors are increasingly unwilling to invest in a crypto open-ended fund that has not appointed an independent fund administrator.

Regardless of the choice of fund administrator, the valuation policy needs particular focus. Most funds will have their valuation methodologies and frameworks set out in the Private Placement Memorandum (PPM). It is important for any fund to ensure that it complies with the key terms of the offering set out in its offering documentation.

Institutional and Sophisticated investors are familiarized with the Cayman Islands and BVI and the regulatory regime for open-ended funds. These investors feel more comfortable investing in crypto open-ended funds established in Cayman and BVI as these two offshore jurisdictions have a track record, infrastructure and regulation that facilitate the operation of these funds.

The investment funds industry is slowly starting to consider the cryptocurrencies and other digital assets as other underlying assets that an open-ended fund can invest in.

The tax neutrality of the Cayman Islands and the BVI provides the perfect location for crypto open-ended funds and investors to manage their tax affairs in the most effective manner.

The laws of the Cayman Islands and the BVI are a combination of common law and statute and are based heavily upon English common law. This gives Cayman Islands and BVI law and their respective legal systems a common origin with those of many of the jurisdictions of its users, including the United States. It also means that a fund registered in the Cayman Islands or the BVI and its participating shares are well recognised and accepted around the world.

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on Crypto open-ended funds, please contact your usual Loeb Smith attorney or :

Santiago Mtnez-Carvajal
E: santiago.carvajal@loebsmith.com
T: +1 345 749 7593

The benefits and advantages of establishing virtual assets businesses in the BVI include:

(1) Stability and reliability. As an autonomous British Overseas Territory that applies English common law rules and principles, it has a well-tested and efficient judicial system, with a final right of appeal to the Privy Council.

(2) Incorporation and maintenance costs. BVI companies are cheap to incorporate and maintain in good standing. There were around 370,000 active BVI companies at the end of 2021, many of which are virtual assets businesses.

(3) Tax neutrality. No income, corporate, capital gains or wealth taxes, withholdings or other similar taxes are imposed on BVI companies as a matter of BVI law.

(4) Exchange controls. There are no exchange controls and restrictions as a matter of BVI law.

(5) Confidentiality. Shareholders and directors of a BVI business company are generally a matter of private record.

(6) Corporate flexibility. The objects, capacity and powers of a BVI company are generally unrestricted. Most decisions can be taken by the board of directors of the relevant company, with only certain matters requiring shareholder approval. There is considerable flexibility to tailor the memorandum of association and articles of association to meet a client’s requirements.

The BVI has not developed a specific regulatory framework for virtual assets. Therefore, whether an entity will need to be licensed or registered with respect to its virtual assets-related activities in the BVI will be determined in accordance with existing financial services legislation.

Firstly, dealing, arranging deals in, or managing investments, providing investment advice, custodianand/or administration services with respect to investments, and operating an investment exchange is regulated under the Securities and Investment Business Act (SIBA).

The BVI Financial Services Commission (FSC) has confirmed that a virtual asset, which is a medium of exchange to which no benefits or rights other than ownership attaches (such as a utility token enabling the holder to purchase goods and services), will generally not constitute an “investment” under the SIBA. Careful consideration will need to be givenif any other benefits or rights are attached to the virtual asset as these will determine whether it then comprises an “investment”.

Secondly, the Financing and Money Services Act (FMSA) regulates the business of international financing and lending in the peer-to-peer fintech market, including peer-to-business and business-to-business markets and the transmission of money in any form, including electronic money, mobile money or payments of money. The FSC has confirmed that the transmission of virtual assets and related products will not be caught by the FMSA. However, a virtual assets business that deals with fiat currency on behalf of customers should carefully consider its position under the FMSA.

Thirdly, the Banks and Trust Companies Act (BTCA) regulates “banking business” – which is defined as the “business of accepting deposits of money that may be withdrawn or repaid on demand or after a fixed period, or after notice, by cheque or otherwise, and the employment of such deposits, either in whole or in part, (1) in making or giving loans, advances, overdrafts, guarantees or similar facilities; or (2) the making of investments, (in each case) for the account and at the risk of the person accepting such deposits.” A virtual assets business and/or exchange with activities that include dealing in or holding fiat currency should therefore ensure it is not inadvertently conducting “banking business” under the BTCA.

Finally, anti-money laundering (AML) legislation in the BVI requires “relevant persons” conducting “relevant business” (such as funds and providers of money transmission services) to establish certain AML policies and procedures. Although certain types of activities (such as ICOs of utility tokens) are unlikely to be caught by these regulations as they do not fall within the scope of investment business under the SIBA, directors should be mindful of the AML framework as a matter of good corporate governance – and as a way of future-proofing the business.

PETER VAS is a partner at Loeb Smith Attorneys in Hong Kong. Other members of the corporate group at the firm who also contributed to this article are GARY SMITH, SANTIAGO CARVAJAL, SANDRA KORYBUT, and VIVIAN HUANG

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In December of 2019, British Virgin Islands (“BVI”) introduced a regulatory regime for the recognition of private investment funds, the Private Investment Funds Regulations, 2019 (the “Regulations”). Under these Regulations, closed-ended funds (including, real estate, private equity and venture capital funds) which were previously not regulated in the BVI, are required to be registered with the Financial Services Commission (“FSC”) as private investment funds prior to carrying on business.

Simultaneously, the FSC published guidelines that extended certain obligations of the Incubator Fund and the Approved Fund to Private Investment Funds, in order to clarify that the ability of a Fund to ensure the protection and security of fund property and the preservation of investors assets is core to a Fund’s operations.

The Regulations require a Private Investment Fund to, at all times, have an appointed person responsible for the safekeeping of the Fund’s assets. Similarly, the Securities and Investment Business (Incubator and Approved Funds) Regulations, 2015 requires Incubator Funds and Approved Funds to have, at all times, appropriate arrangements in place for the safekeeping of fund property.

The safekeeping arrangements that a Private Investment Fund, Incubator Fund or Approved Fund must have in place will depend on the type of assets that the Fund may hold as the FSC considers each safekeeping arrangement based on the particular asset type of the Fund.

A Private Investment Fund, Incubator Fund or Approved Fund is required at the time of applying for authorization or recognition with the FSC, and at all times thereafter, to be in a position to demonstrate that safekeeping arrangements are in place. Where Safekeeping Arrangements have ceased or are altered, the Fund is required to notify the FSC of such changes within 14 days of the cessation or of the changes being made.

These safekeeping arrangements must be disclosed in the offering documents or investor’s warning for each Private Investment Fund, Incubator Fund or Approved Fund. The FSC may request further information and documentation to confirm that the safekeeping arrangements are in place when the application for authorization or recognition is made, or at any time thereafter.

The FSC has divided the type of assets and the corresponding safekeeping arrangements that are required as follows.

Where a Private Investment Fund, Incubator Fund or Approved Fund invests in financial instruments such as stocks, bonds, futures, contracts for difference, options, etc., the Fund should maintain appropriate safekeeping arrangements with an appropriately licensed and/or qualified person with expertise in dealing in such assets. Normally, this person can be a traditional custodian, but administrators and other functionaries or service providers may be engaged for these purposes. A Private Investment Fund, Incubator Fund or Approved Fund may also establish such an arrangement with a prime broker that establishes custodial arrangements for the transactions being undertaken on behalf of its Fund clients.

Where a Private Investment Fund, Incubator Fund or Approved Fund invests in tangible assets such as land, real estate, equipment, private equity, etc., a traditional custodian or prime broker is not required.

However, a Private Investment Fund, Incubator Fund or Approved Fund must ensure that it appoints a person that has the responsibility of securing that documentation with respect to the Fund’s ownership of such assets is maintained and safeguarded according to the Regulations. The Private Investment Fund, Incubator Fund or Approved Fund must warrant that such person has sufficient expertise and resources to carry out the function.

Where a Private Investment Fund, Incubator Fund or Approved Fund operates as a feeder fund (or sub-fund) in a master/feeder fund structure or operates in a fund of funds structure and places all its investments in another fund or in a number of funds, the Private Investment Fund, Incubator Fund or Approved Fund must make sure that a person is responsible for ensuring that the underlying fund or funds have appropriate (i.e. depending on the relevant asset class) custodial or safekeeping arrangements in place in relation to the underlying fund assets and that they understand these arrangements. This person would also be responsible for monitoring the investments in, and redemptions from, the underlying funds.

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This publication is intended to merely provide a brief overview and general guidance only and is not intended to be a substitute for specific legal advice or a legal opinion.

For specific legal advice on the safekeeping arrangements for BVI Funds, please contact your usual Loeb Smith attorney or:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: vivian.huang@loebsmith.com
E: yun.sheng@loebsmith.com
E: santiago.carvajal@loebsmith.com
E: faye.huang@loebsmith.com
E: sandra.korybut@loebsmith.com
E: robert.farrell@loebsmith.com

The IIF reported that there was an almost four-fold increase to USD160 billion in bonds issuance with a sustainability-linked pricing ratchet in the first six months of 2021 compared against the prevous year. Market participants almost certainly drove this increase because they recognised that implementing a sound ESG strategy facilitates access to new pools of capital and opportunities to lock-in favourable pricing.

For example, SSAB, a Swedish company that aims to be the first fossil fuel-free steel producer, has issued a USD230 million equivalent five-year senior unsecured sustainability-linked bond with a maturity date of 2026. Under the terms of the relevant bond instruments, a redemption premium will be payable at maturity if SSAB fails to meet specific sustainability performance targets linked to greenhouse gas emissions. We expect the volume of sustainability-linked bonds to continue to grow in 2022.

The IIF has also reported that about 85% of all ESG-linked debt issuances occur in Europe and North America. However, there is evidence that ESG-linked debt is gaining traction in other regions. For example, Chinese real estate company Minmetals Land, Japanese real estate group Mori Hills, and India’s Adani Electricity Mumbai have brought, or are reportedly planning to bring, various sustainable and green bonds to market.

In contrast to green bonds, where proceeds are used in certain green projects, general sustainability-linked financings have also been used for various corporate purposes and are based on specific ESG targets, rather than a limited set of green projects. This has further opened the market to a broader spread of issuers, a trend that we expect to continue in 2022.

With a growing focus on ESG-linked products, standards have intensified. While there are now a raft of regulations and proposals in the market, such as the Green Loan Principles, the European Green Bond Standard and the Sustainable Finance Disclosure Regulation, there are concerns that greenwashing may cloud the distinction between genuine ESG-linked debt issuance and opportunism.

Therefore, lenders and other finance parties committed to monitoring compliance with ESG targets must agree on reporting standards with the relevant obligor group, and must ensure appropriate external review mechanisms are implemented.

Companies in the British Virgin Islands (BVI) and the Cayman Islands are widely used in cross-border finance transactions, including those with ESG-linked investing elements. These jurisdictions have various features that make them attractive to lenders and other finance parties, as well as borrowers and other obligors for ESG-linked financings. Some reasons for this are:

• The BVI and the Cayman Islands are widely recognised as creditor-friendly jurisdictions due to the range of self-help remedies available to secured creditors in an enforcement. The BVI also has a straightforward system of registering security interests that protects the priority of security interests.
• BVI and Cayman Islands companies may have unlimited objects and purposes, including in relation to ESG initiatives, and there is significant flexibility in how such companies are structured in terms of capital structure, management roles and shareholder involvement.
• BVI and Cayman Islands companies are subject to low ongoing maintenance costs. Financial statements do not need to be prepared in relation to companies that are not regulated by the BVI Financial Services Commission or the Cayman Islands Monetary Authority.
• Except for the payment of nominal filing fees in connection with the optional filing of a security interest that is granted by a BVI chargor, there are no income, corporate or capital gain taxes, withholdings, levies, registration taxes, or other similar taxes or charges imposed on companies in the BVI or the Cayman Islands in connection with the execution, delivery or performance of finance documents by a BVI or a Cayman Islands company, or the finance parties.

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PETER VAS is a partner at Loeb Smith Attorneys in Hong Kong
Contact details:
T: +852 5225 4920
E: peter.vas@loebsmith.com