Section 1: China outbound investment (COI)

Statistics show China's current outbound investment is totalled at US$660 billion. A whopping 60% of that investment is concentrated across Hong Kong, the Cayman Islands and the British Virgin Islands (BVI). With COI expected to double to US$1.2 trillion within the next decade, these and other Caribbean jurisdictions will likely continue to be the favourite offshore financial centres for use by Chinese investors.

Although the benefits of investing abroad are widely perceived from within the PRC, an increasing number of Chinese investors now realise that specific Caribbean issues arise if and when an investor-related dispute evolves. As a result, an understanding of the Caribbean dynamics of these investments is more important than ever and, if properly managed, can retain many of the advantages of Caribbean business structuring.

Official statistics published by China's Ministry of Commerce (MOFCOM) show that between 2004 and 2014, non-financial outbound direct investment grew from US$3.62 billion to US$102.89 billion. China was ranked third in the world in terms of foreign direct investment (FDI) outflows by the United Nations Conference on Trade and Development for 2012 and 2013. The 2014 China Outbound Direct Investments Statistics Bulletin by MOFCOM, the National Statistics Bureau and the State Administration of Foreign Exchange is expected to be published in September this year, but the clear message is that China's investment outflows are expected to surpass its inflows for the first time.

To encourage and facilitate Chinese investors going overseas, the regulations on outbound direct investments in China have been updated since March 2009. In particular, the Measures for the Administration of Check and Approval, and Record Filing of Overseas Investment Projects promulgated by the National Development and Reform Commission (NDRC) came into effect in May 2014. This further streamlined and simplified the regulatory scheme for COI and delegated significant regulatory power to the NDRC's lower levels.

According to the World Resources Institute, 68% of China's outbound direct investment stock in 2013 was in Asia. If one extracted the potential flows to the offshore financial centres (OFCs), the geographical distribution of China's outbound foreign direct investments stock varied materially. This shows the significant role OFCs play in COI.

With the preferential treatment given under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) and various policies promulgated by the central government to facilitate communication with businesses in the mainland, Hong Kong is usually the home to many direct holding companies of mainland entities. However, Chinese investors' needs for flexibility and confidentiality cannot always be fully satisfied with the legal regime in Hong Kong. This is where the Caribbean jurisdictions step in and is why they have become such familiar aspects of doing business into and now out of China.

Section 2: Investment vehicles and incentives

Of the several OFCs based within the Caribbean region, each is known to have a particular focus. The BVI, for instance, is the world's leading centre for company incorporations. According to the BVI Financial Commission's Statistical Bulletin for the third quarter of 2014, the BVI has over 480,000 active companies. It is also a leading domicile for offshore trusts and hedge funds. According to BVI authorities, more than 40% of the BVI's financial service business comes from China and other Asian countries. Such is the market penetration that “BVI” is a general term used to refer to the offshore companies in PRC and Hong Kong.

Bermuda's insurance and reinsurance business is highly regarded in the onshore world. Bermuda is the largest domicile in terms of active captive insurance companies with a total of 1,200 as of the end of 2014 and is continuing to see new captive insurance businesses relocating to the area. The Cayman Islands are known for investment funds and, according to the Cayman Islands Monetary Authority, have more than 11,000 registered mutual funds.

One of the main attractions of establishing investment vehicles in the Caribbean is the ease with which they can be set up and administered. A Cayman Islands or BVI company, for example, takes only a few days to incorporate. Cayman's laws allow investors to operate investment funds through a number of vehicles, the most commonly used being an exempted company, a segregated portfolio company, a unit trust or an exempted limited partnership.

In the Cayman Islands, exempted companies may redeem or purchase their own shares and operate as open-ended corporate funds. An exempted company can also be established as a segregated portfolio company, which makes it possible to provide a means for different groups to protect their assets when carrying on business through a single legal entity.

Many offshore jurisdictions are now recognised and approved as domiciles for major stock exchanges in the world, which gives Chinese investors access to capital markets in the US, UK and Hong Kong. The HKEx Fact Book for 2013 reports that, as of the end of 2013, Cayman companies represented 41% of companies listed on the Hong Kong Stock Exchange, while Bermudan companies represented 32%.

The use of offshore vehicles also introduces greater tax efficiencies when compared with onshore jurisdictions. In many instances, offshore jurisdictions are either tax neutral or have signed double taxation treaties with China.

Section 3: Confidentiality legislation

The rules regarding confidentiality and preventing public access to information is another feature to which Chinese investors gravitate. Information on shareholders in offshore jurisdictions is not generally public, unlike in Hong Kong where the names and addresses of directors and shareholders are made available for inspection to any person on payment of certain fees, unless the court considers it amounts to an abuse of legal rights, under the new Hong Kong Companies Ordinance that came into effect on March 3 2014.

The confidentiality regime existing in Caribbean OFCs remains one of the most significant attractions to Chinese investors.

Some – but not all – jurisdictions have their own “confidentiality legislation” which precludes (by creation of criminal offences) access to information from service providers. The BVI has codified the common law duty of confidentiality in relation to banks in the BVI Banks and Trust Companies Act, 1990 (Amended 1995). The BVI must therefore rely on the common law in relation to non-banking professional relationships.

The Cayman Islands have gone even further with the Confidential Relationships (Preservation) Law (2009 Revision) (CRPL) which protects business activities by prohibiting the disclosure of all confidential information arising during the course of a professional relationship. However, the CRPL is not a blocking statute as it contains a mechanism for information to be disclosed in certain limited circumstances. These include to the police and where an application is made under the CRPL to disclose documents. Where disclosure is made pursuant to the CRPL itself, the Cayman court will be careful to limit the manner in which the documents can be used.

However, the reality of absolute confidentiality is diluted as a result of various supra-national legislative initiatives. These initiatives include anti-money laundering legislation requiring trustees and other fiduciaries to report suspicious activity. In both Hong Kong and Cayman, suspicious activity includes, for example, where a client conducts a transaction which is inconsistent with a customer's known, legitimate business or personal activities or with the normal business for that type of account. Anti-money laundering laws both in Hong Kong and Cayman are similar with respect to tipping-off and make it a criminal offence to disclose information to the target of any investigation which is likely to prejudice that investigation into suspicions of money laundering.

In addition, many OFCs have signed Tax Information Exchange Agreements (TIEAs). The Cayman Islands, the BVI, and Bermuda have all entered into TIEAs with China. Under this regime, information is provided in response to individual requests rather than a routine exchange of information.

The current global initiative advocated by the G20 and supported by the Organisation for Economic Co-operation and Development (OECD) to improve transparency will change the way TIEAs operate. A system of automatic or routine information exchange is envisaged and will not only provide information on non-compliance with tax rules but will increase voluntary compliance among non-resident tax payers. The initiative, which will be implemented next year, has been gaining momentum in the offshore world and has been adopted by a number of countries including Cayman, Bermuda, the BVI and the Turks and Caicos Islands. Routine information exchange will start in October 2017 and apply to accounts opened on or after January 1 2016.

Section 4: Company registries

The information that can be obtained about companies registered in OFCs currently remains limited. The statutory requirements for companies to file registers listing directors and shareholders are of little value to a third party enquirer who is seeking to identify the individual owners of a registered company. Generally, the only documents that may be accessed are the Certificate of Incorporation, the Memorandum and Articles of Association and information confirming the identity of the company's Registered Office. Information as to the identity of the ultimate owners is not accessible to the general public.

Issues surrounding access to information were highlighted recently, as Caribbean islands responded to the UK government and the European Union's initiative to create public registers of legal and beneficial ownership information on overseas shell companies and trusts.

The proposal, aimed at increasing transparency, was rejected by a number of Caribbean islands. In early February 2015, BVI officials announced the result of the public consultation that more than 80% of BVI residents and financial services industry practitioners were against the proposal. Although the BVI government has not yet officially said no to the creation of a public register, by all indications, it will also reject the proposal. Public consultation to adopt steps to improve transparency within the BVI's existing system is ongoing. The BVI government is yet to confirm when this consultation is due to close.

The Cayman Islands government rejected the proposal stating that Cayman's existing regime already requires corporate service providers to make this type of ownership information available to law enforcement, tax and regulatory authorities. Cayman's government has said that it will instead seek to enact legislation to make the current process easier.

Turks and Caicos' Premier Rufus Ewing responded to statements made by the UK Opposition Labour Party Leader, the Rt. Hon. Edward Milliband, who charged UK Overseas Territories of not complying with UK directives on creating public central registries of beneficial ownership. Premier Ewing emphasised that the Island is in fact well regulated and compliant with global standards.

Section 5: Disclosure and evidence-gathering tools

Where your client is actually the one seeking information, confidentiality of course may be unhelpful. Three types of discovery orders are generally seen in the OFC offshore courts:

(i) a Norwich Pharmacal order, which allows information from a third party that has innocently become involved with or has facilitated another's wrongdoing. Once an order is granted, the third party must provide the applicant with full information including the location of assets and the identity of the wrongdoers.

(ii) a Bankers Trust order, by which it is possible to obtain information to identify the location of assets. For example, the order can be used to obtain account information from financial institutions in support of proceedings. An application for this order can only be made if a bank has funds relating to a claim, there is strong evidence that fraud has been committed and there is some urgency to the application.

(iii) orders used to assist in foreign bankruptcy proceedings.

Another route to obtaining information may be a court-to-court request or “Letter of Request” (also sometimes known as Letters Rogatory). The major OFCs are signatories to the Hague Convention on the Taking of Evidence Abroad in Civil or Commercial Matters via their status as Overseas Dependent Territories of the United Kingdom (including the BVI, Bermuda and Cayman). This means that a party may request, through its home court, the assistance of a foreign government and/or court in obtaining the production of evidence. Where disclosure is sought in the context of an injunction in existing proceedings, the applicant seeking information should be careful not to overlook the terms within an underlying contract, such as the joint venture agreement or trust instrument, as they may compel disclosure in certain instances.

Section 6: Dispute resolution

With COI expected to double in the next decade, OFCs such as the Cayman Islands, the BVI, and Bermuda will continue to play an important role in the resulting financial flows. The Caribbean will continue to enjoy popularity in China due to factors such as tax neutrality and confidentiality.

As investments both into and out of China structured via the OFCs continue to increase, it is inevitable that Chinese investors will face similarly increasing numbers of disputes in the OFCs themselves. The types of litigation already experiencing strong growth include shareholder and joint venture disputes as well as involuntary bankruptcy/insolvency as a dispute resolution mechanism.

Last year saw a number of disputes in the Caribbean involving offshore holding companies. These included:

• shares in a BVI company allegedly holding or associated with Gaddafi assets;

• shares in a BVI company holding the second largest private residence in London;

• shares in a BVI company allegedly owned by a Ukrainian oligarch subject to a US$30 million debt liability in Russia; and

• Cayman Islands companies owned by elusive tech tycoon William H. Millard who owed taxes of more than US$100 million in the Commonwealth of the Northern Mariana Islands.

These examples illustrate that disputes often require some element of asset recovery.

Chinese investors have been involved in the following types of disputes with an offshore element:

• an offshore construction project going sour;

• control of holding companies or master funds in the Caribbean jurisdictions;

• applying for or defending recognition and enforcement of foreign judgments or arbitral awards in the Caribbean courts, which sometimes includes applications for the appointment of (provisional) liquidators;

• beneficial owners' rights and potential cause of actions against trustee companies; and

• joint venture disputes involving one or more shareholders seeking to take control of the joint venture from other shareholder(s).

In addition, the recent draft of the new PRC Foreign Investment Law reignited the discussion on the future of the variable interest entity (VIE) structure, a creative design of contractual arrangements that gives Chinese companies in the restricted industries access to the foreign capital market. The proposed new law introduced the standard of “actual control” when defining “foreign investment” and seems to block the practice of VIEs by defeating its purpose once it becomes effective. Depending on how the final version and its interpretation end up, disputes are likely to arise from that aspect.

To be better prepared, Chinese investors need to first understand that Caribbean jurisdictions are neither 100% protected bunkers against creditors or other stakeholders nor informational black holes for relevant government agencies. As discussed above, there are tools in the offshore jurisdictions to be deployed in order to obtain information about offshore interests and assets, and there are official channels for government agencies to obtain such information.

Author biographies

Tim Prudhoe

Tim Prudhoe is a commercial litigator and arbitrator with extensive experience in relation to international financial centres. In addition to his work in the BVI, Turks & Caicos Islands, Bermuda and several other offshore jurisdictions, he also undertakes work in the English courts as a barrister. His unique combination of onshore and offshore trial experience is especially suited to multi-jurisdictional disputes, specifically involving insolvency and fiduciary disputes.

Tim is a frequent speaker at conferences both in the Caribbean and elsewhere, where he lectures on a wide range of topics including pre-judgment injunctive relief, directors' and other fiduciaries' duties. He has served as chair of judges in respect of the Society of Trusts and Estates Practitioners (STEP) Caribbean Conference industry awards and has been on the steering committee for the STEP Caribbean Conference for several years. He is an author for the main work of Gore Browne on Companies (chapters on non-standard incorporations and annual returns for companies: both evolving fields).

Prior to joining Kobre & Kim, Tim was based in the Caribbean where his work spanned the major offshore financial centres, representing clients across a wide range of jurisdictions in disputes involving contentious insolvency, commercial litigation and arbitral disputes relating to the fiduciary and financial services industries.

Shaun Z Wu

Shaun Wu is an experienced attorney who focuses on international litigation and arbitration, regulatory and internal investigations as well as the enforcement of high-value awards and judgments in complex, cross-border cases. He has particularly in-depth experience working with Asia-based clients, and especially on China-related matters.

Shaun has acted in a range of international disputes involving governments, state-owned enterprises, multinational corporations and high net worth individuals, including litigation and arbitration under the major arbitral rules (ICC, LCIA, HKIAC, SIAC, JCAA, UNCITRAL). He is admitted to the Chartered Institute of Arbitrators (CIArb) and the Hong Kong Institute of Arbitrators (HKIArb), and has published widely on international dispute resolution and cross-border enforcement. In addition, Shaun has experience managing court litigations across Asian jurisdictions as well as assisting clients in conducting internal investigations and compliance reviews.

Prior to joining Kobre & Kim, Shaun practised at King & Spalding, where he focused on international arbitration and cross-border dispute resolution.

离岸地区

Tim Prudhoe 和 Shaun Z Wu

高博金律师事务所

这个现像不仅仅是中央政府宏观经济政策的结果，也是由于中国投资者自己需要大量的资源和资金，先进的技术和管理，以及更广泛（而且更国际化）的品牌认知度和新商机。