The starting point to assessing the transferability of a loan portfolio is to review the loan agreement to identify any restrictions on the ability of a lender to effectuate a transfer of the relevant loan(s). For example, the borrower’s prior written consent may be required to the transfer of the loan(s) and the loan agreement may prescribe the circumstances under which the borrower may refuse to provide that consent. Furthermore, there may be restrictions on the transferability of certain types of loan portfolios, such as those including mortgages or consumer loans, and the transferor may also be subject to onerous internal confidentiality rules and data protection requirements. Although these are principally points of onshore law to be determined under the governing law of the loan agreement, to the extent that the borrower is incorporated in the BVI or the Cayman Islands and is a party to the transfer agreement(s), it is customary for offshore legal counsel to the lender to issue a legal opinion to confirm (among other things) that the relevant company has the requisite capacity and power to enter into the transfer agreement(s).

Most cross-border loans in Asia are supported by an offshore security package. A potential purchaser of a loan portfolio should therefore keep the following points in mind.

–  Careful consideration must be given to the method by which the outgoing secured party’s security interests are transferred to the purchaser or its nominee. For example, there is generally no way to assign legal title to a chose in action or other property right under BVI law. Therefore, if a party wishes to transfer legal title to a right in action under BVI law, this can normally only be accomplished by way of novation. However, it is possible for choses in action to be assigned in the BVI in equity, and this is the normal mechanism by which this is done.

–  Until the security provider is notified of the assignment, it may discharge any of its obligations for the benefit of (or making payment to, as the case may be) the original assignor. However, the assignment itself is valid between the assignor and the assignee, and the assignor may need to account to the assignee under the terms of the assignment. There is no requirement that notice to the security provider must be given in writing or that the security provider acknowledge receipt of the notice, although this is customarily done for evidential reasons.

–  If the security provider is a BVI company and has registered details of the security in its register of registered charges maintained by the BVI Registrar of Corporate Affairs (the “Registrar”), it must register a variation of charge with the Registrar to comply with BVI law. The Registrar will issue a certification of variation of charge and stamp the particulars of the variation of security as evidence that the variation has been duly registered.

–  If the security provider is a BVI company and has registered details of the security in its register of registered charges maintained by the BVI Registrar of Corporate Affairs (the “Registrar”), it must register a variation of charge with the Registrar to comply with BVI law. The Registrar will issue a certification of variation of charge and stamp the particulars of the variation of security as evidence that the variation has been duly registered.

In practice, a well-drafted assignment agreement will impose an express obligation on the relevant parties to complete all of the local law filings and register updates within a mutually acceptable timeframe. Offshore legal counsel should be retained to ensure that all such filings are correctly completed and that the transfer mechanics comply with BVI or Cayman Islands law (as applicable).

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This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice, please contact:

Peter Vas
Partner
Loeb Smith Attorneys
Hong Kong
E: peter.vas@loebsmith.com
www.loebsmith.com
Peter is recognized as a leading offshore lawyer in the Asia Business Law Journal A-List 2022 and Asian Legal Business Offshore Client Choice List 2022

In this Briefing Note we will focus on the Approved Fund, exploring its main features and benefits, and the requirements, and obligations that apply to the Approved Fund. The main features are as follows;

1. Structure. An Approved Fund can be structured as a BVI business company or a limited partnership.
2. It is limited to a maximum of 20 Investors. If, during any two consecutive months period, the number of investors in the Approved Fund exceeds twenty (20), it must notify the FSC in writing and simultaneously submit an application for the conversion and recognition of the Fund as either a Private Fund or a Professional Fund. Notice to the FSC must be submitted within seven (7) days of exceeding the specified limit after the two months period, unless at the time of the notification, the Approved Fund no longer exceeds the specified limit.
3. There is no minimum initial investment for each investor. There is no minimum initial investment amount set for each investor into an Approved Fund. However, in the event that an Approved Fund upgrades to a Professional Fund, its investors will need to certify that they are professional investors and will need to demonstrate that they have subscribed for an investment of at least US$100,000 (or its equivalent in another currency) in the Fund, or top-up their existing investment amount for meeting the US$100,00 requirement. There is no statutory equivalent to the grandfathering of the Incubator Fund’s sophisticated investors.
4. It is limited to a Maximum Net Asset of US$100 million or its equivalence in any other currency. If, during any two consecutive months period, the Approved Fund exceeds this US$100,000,000 threshold, it must notify the FSC in writing and simultaneously submit an application for the conversion and recognition of the Approved Fund as either a Private Fund or a Professional Fund.
5. There is no term limit on the Fund. The Approved Fund is not limited to a specific lifetime, like an Incubator Fund. The Approved Fund is aimed at providing a solution to open-ended funds that target friends and family, family offices and/or an investor base within a close network to run investment strategies indefinitely but without focusing mainly on building a verifiable track record. The structure has the advantages of (i) a shorter launch timeframe, (ii) fewer regulatory obligations, and (iii) less required functionaries and service providers as it can be operated without an investment manager, auditor or custodian.
6. A Summary of the Key Terms of the Offering to Investors with Investor Warning is required.
   1. There is no requirement to file audited financial statements. Whilst the Fund must have accounts showing a true and fair view of its financial affairs, there is no requirement for its accounts to be audited and filed with the FSC.
   2. Commencement. The Fund can commence business two days from the date that the FSC receives the application.
   3. Functionaries. The Fund must have a fund administrator but are not required to have a custodian or manager.

1. Reduced organizational costs as there is no need for a Private Placement Memorandum as a Summary of the terms of the offering with investor warnings and investment strategy information will suffice.
2. No requirements for authorized capital or share capital. Shares can be issued without par value.
3.  A ‘lighter-touch’ regulatory regime.
4. As there is no term limit for the Fund, it provides the management team with a platform that can focus on running the investment strategies without the constrains of time or the pressure of upgrading to a more regulated product like the Professional Fund or the Private Fund unless the performance of the Approved Fund triggers a mandatory upgrade.
5. Reduced service provider costs as there is no need for a custodian, manager or auditor.
6. Fast launch timeframe.

Approved Funds have limited functionary requirements, especially when compared to Professional Funds, Private Funds, or Public Funds. This means that the Approved Fund does not require an investment manager, custodian or auditor and it does not need to provide an offering memorandum to investors. It is only required to provide a summary of terms with a description of the investment strategy and appropriate warnings to investors so they could make an informed decision before investing in the Approved Fund.

Approved Funds must have a minimum of two directors at all times (one of which must be an individual). As part of the application to the FSC, the directors of the Approved Fund are required to submit their resume to the FSC to check if they are fit and proper persons.

Anti-Money Laundering: Approved Funds are subject to the BVI anti-money laundering regime and are required to have in place anti-money laundering policies and procedures and conduct client due diligence on their investors.

FATCA/CRS: Approved Funds will be BVI reporting financial institutions for the purposes of compliance with the US Foreign Account Tax Compliance Act (FATCA) and the OECD’s common reporting standard for automatic exchange of financial account information (CRS) and the intergovernmental agreements and domestic legislation implementing FATCA and CRS in the BVI (AEOI) and will therefore be required to, among other things, register with BVI FARS and deal with annual reporting for FATCA and/or CRS.

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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 formation and launch of a BVI Approved Fund and submitting an application to the BVI FSC for recognition, please contact your usual Loeb Smith attorney or any of the following:

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

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