The short answer is no. Bilateral investment treaties (BITs) are international treaties between two states where the states provide investors with a range of protections when they make foreign direct investments. But it is a little known fact that some of the most popular places in which investment vehicles are incorporated do not provide investors with these important protections. In other words, companies incorporated with tax efficiency in mind may not have important protections when they make investments internationally.
A number of offshore financial centres (offshore jurisdictions) connected to the UK are British Overseas Territories (Overseas Territories) or Crown Dependencies who do not have the authority to enter into international treaties, such as BITs, in their own right. They need to rely on the British government to extend investment treaties to them. This has resulted in only a handful of investment treaties being extended to these jurisdictions. It has also left a substantial number of investors, who register the parent company of their investment in these offshore jurisdictions, with no recourse to investment arbitration.
How does it work?
The UK has 14 Overseas Territories and three Crown Dependencies (all together referred to hereafter as the Territories). The Crown Dependencies are the Bailiwick of Guernsey, Bailiwick of Jersey and Isle of Man, all of which are popular offshore jurisdictions. Of the 14 Overseas Territories, Anguilla, Bermuda, British Virgin Islands (BVI), Cayman Islands, Gibraltar, Montserrat and Turks and Caicos Islands are all popular offshore jurisdictions. All of these jurisdictions have been designated as offshore jurisdictions by both the International Monetary Fund and the Financial Secrecy Index. These offshore jurisdictions generally tend to have low or zero taxation, moderate to light financial regulation and also possibly banking anonymity. As a result, they are very popular jurisdictions in which potential investors register offshore corporations or special purpose vehicles.
As the Crown Dependencies and Overseas Territories cannot enter into treaties in their own right, none of them have signed any bilateral or multilateral treaties directly with any states. Instead, the British government will consult with the Territories during negotiation or ratification of the treaty, but it is eventually up to the Territories to request an extension of the treaty; they cannot be compelled to do so. If the Territories do request an extension, UK BITs typically include a provision allowing the BIT to be extended to any other territory in accordance with an exchange of notes between the parties to the BIT.
Currently, the UK has approximately 99 BITs that are in force, but the protections available to the Territories are as follows:
- Crown Dependencies have 37 UK BITs extended to them (Antigua & Barbuda, Bangladesh, Belize, Bolivia, Cameroon, Dominica, Grenada, Guyana, Honduras, Hungary, Indonesia, Jamaica, Jordan, Kazakhstan, the Republic of Korea, Latvia, Lesotho, Malaysia, Malta, Mauritius, Mongolia, Nepal, Pakistan, Panama, Papua New Guinea, Philippines, Romania, Senegal, Singapore, St Lucia, Swaziland, Thailand, Trinidad & Tobago, Tunisia, Turkmenistan, Uzbekistan and Yemen).
- Turks and Caicos Islands have 11 UK BITs extended to them (Belize, Bolivia, Grenada, Guyana, Hungary, the Republic of Korea, Philippines, Singapore, St Lucia, Thailand and Tunisia).
- Cayman Islands have three UK BITs extended to them (Belize, Panama, St Lucia).
- Gibraltar has eight UK BITs extended to them (Antigua & Barbuda, Dominica, Grenada, Guyana, Hungary, Mauritius, St Lucia and Tunisia).
- Bermuda has six UK BITs extended to them (Bolivia, Grenada, Guyana, Hungary, Indonesia and Tunisia).
- In terms of multilateral investment treaties, the Energy Charter Treaty (ECT) is a useful example. The ECT is an international agreement providing protection for investments in the energy sectors of its member states (that is, states who sign or ratify the ECT). It has been extended to all of the Crown Dependencies, but there were no declarations extending application of the ECT to any of the Overseas Territories after ratification. The lack of clarity in the application of the ECT to Gibraltar demonstrates complexities that have arisen. When the UK was signing the ECT, the UK extended provisional application of the ECT to Gibraltar. But, as the UK did not issue a territorial declaration to Gibraltar at the time of ratification, it is not certain whether the ECT still applies to Gibraltar. However, the two tribunals who addressed this question directly found that the ECT does indeed apply to Gibraltar. In Petrobart v Kyrgyzstan, the tribunal found that just because the UK did not make a declaration regarding Gibraltar at the time of ratification did not mean provisional application had terminated. Therefore, the tribunal found that the ECT continued to apply provisionally to Gibraltar. In Stati v Kazakhstan, the tribunal found that it did not have to decide on the matter, as Gibraltar was part of the European Community which was a party to the ECT.
What does this mean?
Notably, offshore jurisdictions such as the BVI, Anguilla and Montserrat have no BITs extended to them. The BVI is an especially popular offshore jurisdiction and it will come as a surprise to many that an investor with a company registered in the BVI cannot bring an investment treaty claim against any state.
The Crown Dependencies undoubtedly provide more protection to investors, albeit still limited, than the Overseas Territories which simply do not provide substantial investment protection at all. For example, the Cayman Islands, another very popular offshore jurisdiction, only provides protection to investors investing in Belize, Panama or St Lucia. At the end of 2017, nearly 100,000 companies were active on the Cayman Islands General Registry; there is no question that a substantial proportion of these companies will be used to make investments in a wider range of countries than just Belize, Panama and St Lucia. This provides us with some insight into the number of investors who are left without investment protection. Of course, it is possible that the local investment law of the state hosting the investment provides investors with adequate protection or investors can rely on their own nationality (that is, the BITs entered into by the investor’s country of citizenship). However, the latter could potentially raise complicated jurisdictional issues under international law if the investor holds dual nationality, or the investor can be completely deprived of investment treaty protection if he or she holds only one nationality and his or her company made an investment back into his or her country of citizenship.
Investors need to take care
Meanwhile, investors continue to register the parent or holding company of their eventual investment in these jurisdictions, usually without being aware that they have no investment protection. A number of investors will discover this for the first time when they consult investment lawyers after a dispute arises. Lawyers will be well advised to warn their clients who are registering companies in the Territories that any investment made using these companies potentially have little to no investment protection.
This article first appeared on the Practical Law Arbitration Blog on 26 July 2018.