On April 28, U.S. officials arrested BVI Premier Andrew Fahie in a Miami airport. The U.S. accused Fahie of offering a drug smuggler—who turned out to be an informant for the U.S. Drug Enforcement Administration—use of the BVI island of Tortola as a waypoint for U.S.-bound cocaine. Fahie has pled not guilty.

On Thursday, the local legislature ousted Fahie in a vote of no confidence, replacing him with Deputy Premier Natalio Wheatley, who served as acting premier after the arrest.

Fahie’s arrest was a political crisis for the BVI, “home” to about 400,000 companies with registered offices in the tiny territory.

But then it got worse.

After news of Fahie’s arrest broke, a commission established by BVI British governor John Rankin to investigate unrelated claims of corruption released its findings ahead of schedule.

The report slammed the conduct of the local government, which Fahie led. Rankin said that the report concluded that “almost everywhere the principles of good governance such as openness, transparency, and the rule of law are ignored…it is highly likely that serious dishonesty may have taken place across a broad range of government.”

The report reached a bombshell conclusion: that the U.K. government should suspend the BVI’s constitution, dissolve local government, and impose direct rule for at least two years. Rankin said the measures are necessary to “protect [the people of the BVI] from such abuses and assist them to achieve their aspirations for self-government.”

Wheatley criticized the recommendation, saying that “direct rule would undermine all the progress that our people have made over generations.” Fellow Caribbean governments also blasted the suggestion, with the Organization of East Caribbean States calling the possibility of direct U.K. rule “a retrograde step in the evolution of the democratic process.”

Tax havens

The crisis is not just unwelcome news to the 30,600 residents of the British Virgin Islands, but also to the hundreds of thousands of companies—including subsidiaries of major global companies—registered in the British territory.

Registering a company in the British Virgin Islands is a common practice among companies and individuals looking to minimize their tax burden. The BVI has a 0% corporate tax rate, and does not require BVI-registered companies to publicly disclose their directors or shareholders.

As a result, the British Virgin Islands have more companies than people: 400,000 companies are registered there, or about 13 per resident, holding about $1.5 trillion in assets, according to Bloomberg. The corporate presence in the BVI is enough to technically make the territory the world’s 11th-largest source of foreign direct investment at $42 billion in 2020, according to the World Bank.

The list of BVI-registered companies includes New York–based fashion company Capri Holdings—owner of the Versace, Jimmy Choo, and Michael Kors brands—and major Hong Kong–based conglomerate Chow Tai Fook. 

China- and Hong Kong–based businesspeople have long registered their companies in the British Virgin Islands (along with other offshore tax havens). Data from independent analyst David Webb suggests that Hong Kong alone has over 7,100 BVI-registered companies. Chinese firms have also set up BVI-registered companies to help them list on overseas stock exchanges like Hong Kong’s.

Major companies aren’t the only ones taking advantage of the British Virgin Islands’ low taxes and confidentiality rules. Leaked documents like the Panama Papers and the Pandora Papers detail how the world’s rich and powerful use the BVI to minimize their tax burden and obscure their wealth.

Push to reform

Governments are now pushing to increase corporate tax rates and clamp down on money laundering and corruption.That puts the U.K. in an awkward position. The country has endorsed measures like the G7’s minimum 15% corporate tax rate, but owns the world’s most popular tax havens, including the BVI, the Cayman Islands, and Bermuda.

Russia’s invasion of Ukraine and efforts to sanction the wealth of those close to Russian President Vladimir Putin are also heightening scrutiny of tax havens like the BVI. One oligarch, Alexei Mordashov, moved $1.3 billion in shares to the BVI the same day the EU sanctioned his assets, according to Bloomberg.

In March, U.K. Foreign Office Minister Amanda Milling made an urgent trip to the Islands to discuss how the tax haven would implement the U.K.’s sanctions against Russia.

For now, discussions about the British Virgin Islands’ future haven’t covered its tax haven status, with Rankin saying that the anti-corruption commission wasn’t “an investigation into the BVI financial services sector.” Nor has London made a decision on whether to impose direct rule, Milling said on a visit to the territory this week.

But upon taking office on Thursday, Wheatley admitted that a lot of work needs to be done to reassure the financial sector about the BVI’s future. “They would have been very concerned with what they were reading in the international news,” he said.