Offshore
Content
NAME: NITHIN .T. VARGHESE STD: T.Y.B.B.I ROLL NO: 29 SUBJECT: INTERNATIONAL BANKING AND FINANCE ASSIGNMENT: OFFSHORE BANKING CENTERS SUBMITTED TO: PROF. MADKE DATE: 13/8/2010
INDEX
Introduction Offshore Banking Banking Services offered by Offshore banking Extent Of Offshore banking Participation Of Indian Banks Advantages Of offshore banking Disadvantages of Offshore Banking Problems with offshore banking Offshore banking centers Types Regulation Effects on international trade Ship and aircraft regulation
INTRODUCTION:
Offshore finance is,at its simplest,the provision of financial services by banks and Other agents to nonresidents.These services include the borrowing of money from non residents and lending to non residents.This can take the form of lending to corporate and other financial institutions,funded by liabilities to offices of the lending bank elsewhere or to market participants .It can also take the form of the taking of the deposits from individuals and investing the proceeds in financial markets elsewhere. An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:
y y y y
greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability
While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra.
OFFSHORE BANKING:
Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements[1], the personal income tax of many countries[2] makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts²which may or may not be numbered bank accounts²they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows. Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted, not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.
BANKING SERVICES OFFERED BY OFFSHORE BANKING
Just about all banking services offered by non-offshore banks are offered by offshore banks, such as Checking accounts. Savings accounts and Certificates of Deposit. Trust accounts. Retirement accounts. Securities custody accounts. Securities clearing services. Investment management accounts. Trustee services. Foreign exchange and multi-currency transactions. International trade financing. Letters-of-credit. Wire Transfer services, inbound and outbound. Loans.
Opening an offshore bank account can usually be accomplished online or over the telephone.
THE EXTENT OF OFFSHORE BANKING:
It has been reported that as much as half the capital in the world flows through offshore banking and financial centers. While offshore banking centers are the home to only approximately 1% of the world¶s population, it is estimated that they hold approximately 26% of the world's wealth, including over 30% of the net profits of all of the multinational corporations headquartered in the United States. Other estimates say that offshore banking centers hold approximately one third of the wealth of the world¶s wealthiest people, amounting to some $6 trillion U.S. dollars, and made up of funds on deposit as well as securities held by international business companies, trusts, and other offshore entities. Litigation Considerations The most common offshore banking issues that give rise to litigation center around two areas: 1. Taxation of the income that is paid into or sent to the offshore bank account or generated by the funds in the offshore bank account. Taxation litigation has to examine the source of the funds in order to determine if the income has already been taxed or is more appropriately taxable elsewhere. Taxation litigation also requires examining which country¶s tax laws apply in the specific case at hand. An economic substance analysis is often a significant part of taxation litigation cases. 2. Allegations of money-laundering involving the funds passing through the offshore banking accounts. There are three basic aspects to most money laundering allegations: First, the source of the funds has to be considered. Banks where the cash funds (read ³currency´) are first deposited serve an important gatekeeper role for the entire financial system making sure that only funds from a legitimate business enter the world¶s financial system. This currency aspect is obviously aimed at the illegal drug business, and there are very stringent banking regulations in place in the United States ± at least eight major laws that stretch back to the Bank Secrecy
Act in 1970 ± to help detect large inflows of currency into the financial system. Accordingly, an offshore bank or other foreign bank receiving funds by wire transfer or cashier¶s check from a United States bank is justified in feeling somewhat comfortable that the funds were thoroughly screened before they were accepted for deposit at the United States bank. Second, money laundering involves more than just detecting large amounts of currency entering and flowing around the world¶s financial system. If funds that are the result of an illegal activity do manage to avoid detection and enter the world¶s financial system at any point in the world, then those funds can be wired around the world to anywhere the owner of the funds specifies. This is where the ³Know Your Customer´ rule comes into play. Financial institutions are required to know what business their customer is in, and basically how they operate in respect to their normal patterns of receiving funds into and sending funds out from their accounts. Know Your Customer requirements had their roots in the Bank Secrecy Act in 1970 and were strengthened in the PATRIOT Act in 2001. Third, and this clearly overlaps with the Know Your Customer requirements, banks in the United States are required to essentially conduct a basic Economic Substance Analysis for their customers that have large volumes of funds flowing into and out of their accounts in order to determine their typical funds flow patterns, and that these patterns are logical and in line with the business operations of the customer. If the funds flows are found not to comply with what the bank thinks is normal for the particular type of business, then the bank is required to report the activities to the appropriate federal governmental authorities.
PARTICIPATION OF INDIAN BANKS IN OFFSHORE BANKING
A Few Indian Banks, such as State Bank Of India Indian Overseas Bank Bank of India and Bank Of Baroda have set up offshore banking units for deposit taking and lending at Bahrain Hong Kong Colombo Cayman Islands and so on Indian Bank Bank of Baroda and union Bank of India jointly floated a deposit taking company IBU International Finance in HongKong for both offshore and onshore banking. The benefits for the Indian Banks from these ventures are: IMPROVED PROFITS: Banks profits improve as these ventures involve relatively low operating costs. BETTER CUSTOMER SERVICE: with multi currency deposit bases the banks would be able to serve better the needs of their customer who have set up joint ventures abroad in the form of foreign currency finance. BALANCE OF PAYMENTS: The banks would strengthen the country¶s balance of payments through repatriation of profits from the venture.
ADVANTAGES OF OFFSHORE BANKING
y
Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However, developed countries with regulated banking systems offer the same advantages in terms of stability. Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits. Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere. Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals. Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry.
y
y
y
y
y
y
DISADVANTAGES OF OFFSHORE BANKING
y
Offshore bank accounts are less financially secure. In a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid, although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009. Both offshore and onshore banking centres often have depositor compensation schemes. For example The Isle of Man compensation scheme guarantees £50,000 of net deposits per individual depositor or £20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapses. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore. Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.[3] Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts.
y
y
y
PROBLEMS WITH OFFSHORE BANKING
Offshore banks are banks located in a tax haven outside the country and are used by domestics to avoid taxation as well as to obtain other legal and financial advantages. However, there are several problems with offshore banking procedures as they exist today, including lack of financial security, associations with the underground economy and organized crime, lost government tax revenues and others.
LACK OF F INANCIAL SECURITY
1. Offshore banking locations have been criticized for their relative instability compared with established domestic banking industries. During the financial and banking crisis of 2008, only one bank's depositors actually lost money on regular savings deposits (as a result of bank turmoil), and this was an offshore bank on the Isle of Man in the Irish Sea. Offshore banking locations are more risky than domestic banks because they do not offer the institutional safeguards offered by many countries (for example, the FDIC which guarantees savings deposits in the United States).
ASSOATIONS WITH UNDERGROUND ECONOMY
2. After September 11, 2001, offshore banks came under greater scrutiny for their possible ties to both the underground economy (the economic activities which may or may not be legal but which exist outside of established economic markets) and the organized crime groups that utilize the underground economy for their purposes. One illegal activity offshore banks may implicitly help criminals with is money laundering, the practice of disguising illegal monies by moving them through legal or semi-legal pathways to disguise their source.
HARM TO GOVERNMENT TAX REVENUES
3. One of the main incentives to utilize offshore banking comes from their tax advantages. However, for all of those who do not participate in offshore banking, taxation rates will rise as the increasing share of non-taxed income increases the tax rates for tax-paying citizens due to the government seeking to replace missing revenue. There is considerable debate between economists about the extent to which the government loses revenue to offshore banking activities, but the IMF estimates that between $600 billion and $1.5 billion is laundered annually, roughly 2 to 5 percent of global economic output.
TAX COMPETITION: A RACE TO THE BOTTOM
4. Offshore banking may be hurting government in other ways. Offshore banking may encourage a "race to the bottom" between governments over taxation, as those governments with the highest tax rates (or which impose the highest costs on business with various regulations) will be the most affected by capital drain to offshore banks, as compared to lower-taxation area whose citizens have less incentive to move funds offshore. This creates an incentive for governments worldwide to reduce taxes and deregulate the banking industry, which may lower costs initially but could lead to financial instability in the long-run.
CHANGING TAX BURDENS
5. Offshore banking may also disproportionally shift the tax burden away from the upper-class, at the expense of the middle-class. Offshore banks are more accessible (typically) to those in the upper-class, with more disposable income. The middle-class, who utilizes the domestic banking industry, pays taxes while higher-income agents avoid taxes all together. However, offshore banking is becoming increasingly accessible, now offering low-cost savings accounts that can be maintained from anywhere, weakening this argument
OFFSHORE BANKING SECTOR
Financial center where many of the financial institutions have little connection with that country's financial system, but have located themselves there to benefit from less regulation and/or lower taxes.
TYPES OF OFFSHORE FINANCIAL SECTOR
Offshore Financial centres can be classified into three main groups depending on offshore banks sources and uses of the funds the liquidity of the market and type of transactions. PRIMARY OFCs: Primary ofcs are large international full service centres with advanced settlement and payment systems, operating in liquid regional markets where both the sources and uses of funds are available.London, the US International Banking Facilities (IBFs) and the Japanese Offshore Market (JOM) Belong to this category. SECONDARY OFCs: Secondary OFCs differ from primary OFCs in that they intermediate funds in and out of their region, according to whether the region has a deficit or surplus of funds. Such OFCs include Hong Kong and Singapore Asian Currency Units (ACUs) for South East Asia,Bahrain,and Lebanon for the Middle East,Panama,for Latin America and Luxembourg for Europe. BOOKING OFCs: Booking OFCs do not engage in the regional intermediation of funds, but rather serve as registries for transactions arranged and managed in other jurisdictions These OFCs are sometime referred to as tax havens and include most Caribbean OFCs.
REGULATION OF OFFSHORE BANK
Offshore centers benefit from a low burden of regulation. An extremely high proportion of hedge funds (which characteristically employ high risk investment strategies) who register offshore are presumed to be driven by lighter regulatory requirements rather than perceived tax benefit. Many capital markets bond issues are also structured through a special purpose vehicle incorporated in an offshore financial centre specifically to minimise the amount of regulatory red-tape associated with the issue. Offshore centres have often been seen as venues for laundering the proceeds of illicit activity. However, following a move towards transparency during the 2000s, some now argue that offshore jurisdictions are in many cases better regulated than many onshore financial centres For example, in most offshore jurisdictions, a person needs a licence to act as a trustee, whereas (for example) in the United Kingdom and the United States, there are no restrictions or regulations as to who may serve in a fiduciary capacity Some commentators have expressed concern that the differing levels of sophistication between offshore financial centres will lead to regulatory arbitrage,and fuel a race to the bottom, although evidence from the market seems to indicate the investors prefer to utilise better regulated offshore jurisdictions rather than more poorly regulated ones. A study by Australian academic found that shell companies are more easily set up in many OECD member countries than in offshore jurisdictions. A report by Global Witness, Undue Diligence, found that kleptocrats used French banks rather than offshore accounts as destinations for plundered funds.
EFFECTS OF INTERNATIONAL TRADE
Offshore centres act as conduits for global trade and ease international capital flows. IFC Forum advocates this view. International joint ventures are often structured as companies in an offshore jurisdiction when neither party in the venture party wishes to form the company in the other party's home jurisdiction for fear of unwanted tax consequences. Although most offshore financial centres still charge little or no tax, the increasing sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost of moving a transaction structure offshore. Recently, several studies have examined the impact of offshore financial centres on the world economy more broadly, finding the high degree of competition between banks in such jurisdictions to increase liquidity in nearby onshore markets. Proximity to small offshore centres has been found to reduce credit spreads and interest rates, while a paper by James Hines concluded, "by every measure credit is more freely available in countries which have close relationships with offshore centres. Low-tax financial centres are becoming increasingly important as conduits for investment into emerging markets. For instance, 44% of foreign direct investment into India came through Mauritius last year while over two thirds of FDI into Brazil came through offshore centres. Blanco & Rogers find a positive correlation between proximity to an offshore centre and investment for LDCs; a $1 increase in FDI to an offshore centre translates to an average increase of $0.07 in FDI for nearby developing countries
SHIP AND AIRCRAFT REGISTRATION
Many offshore financial centres also provide registrations for ships (notably Bahamas and Panama) or aircraft (notably Aruba, Bermuda and the Cayman Islands). Aircraft are frequently registered in offshore jurisdictions where they are leased or purchased by carriers in emerging markets but financed by banks in major onshore financial centres. The financing institution is reluctant to allow the aircraft to be registered in the carrier's home country (either because it does not have sufficient regulation governing civil aviation, or because it feels the courts in that country would not cooperate fully if it needed to enforce any security interest over the aircraft), and the carrier is reluctant to have the aircraft registered in the financier's jurisdiction (often the United States or the United Kingdom) either because of personal or political reasons, or because they fear spurious lawsuits and potential arrest of the aircraft. For example, in 2003, state carrier Pakistan International Airlines re-registered its entire fleet in the Cayman Islands as part of the financing of its purchase of eight new Boeing 777s; the U.S. bank refused to allow the aircraft to remain registered in Pakistan, and the airline refused to have the aircraft registered in the U.S.
INDEX
Introduction Offshore Banking Banking Services offered by Offshore banking Extent Of Offshore banking Participation Of Indian Banks Advantages Of offshore banking Disadvantages of Offshore Banking Problems with offshore banking Offshore banking centers Types Regulation Effects on international trade Ship and aircraft regulation
INTRODUCTION:
Offshore finance is,at its simplest,the provision of financial services by banks and Other agents to nonresidents.These services include the borrowing of money from non residents and lending to non residents.This can take the form of lending to corporate and other financial institutions,funded by liabilities to offices of the lending bank elsewhere or to market participants .It can also take the form of the taking of the deposits from individuals and investing the proceeds in financial markets elsewhere. An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:
y y y y
greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability
While the term originates from the Channel Islands being "offshore" from the United Kingdom, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra.
OFFSHORE BANKING:
Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements[1], the personal income tax of many countries[2] makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts²which may or may not be numbered bank accounts²they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. Following September 11, 2001, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows. Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted, not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.
BANKING SERVICES OFFERED BY OFFSHORE BANKING
Just about all banking services offered by non-offshore banks are offered by offshore banks, such as Checking accounts. Savings accounts and Certificates of Deposit. Trust accounts. Retirement accounts. Securities custody accounts. Securities clearing services. Investment management accounts. Trustee services. Foreign exchange and multi-currency transactions. International trade financing. Letters-of-credit. Wire Transfer services, inbound and outbound. Loans.
Opening an offshore bank account can usually be accomplished online or over the telephone.
THE EXTENT OF OFFSHORE BANKING:
It has been reported that as much as half the capital in the world flows through offshore banking and financial centers. While offshore banking centers are the home to only approximately 1% of the world¶s population, it is estimated that they hold approximately 26% of the world's wealth, including over 30% of the net profits of all of the multinational corporations headquartered in the United States. Other estimates say that offshore banking centers hold approximately one third of the wealth of the world¶s wealthiest people, amounting to some $6 trillion U.S. dollars, and made up of funds on deposit as well as securities held by international business companies, trusts, and other offshore entities. Litigation Considerations The most common offshore banking issues that give rise to litigation center around two areas: 1. Taxation of the income that is paid into or sent to the offshore bank account or generated by the funds in the offshore bank account. Taxation litigation has to examine the source of the funds in order to determine if the income has already been taxed or is more appropriately taxable elsewhere. Taxation litigation also requires examining which country¶s tax laws apply in the specific case at hand. An economic substance analysis is often a significant part of taxation litigation cases. 2. Allegations of money-laundering involving the funds passing through the offshore banking accounts. There are three basic aspects to most money laundering allegations: First, the source of the funds has to be considered. Banks where the cash funds (read ³currency´) are first deposited serve an important gatekeeper role for the entire financial system making sure that only funds from a legitimate business enter the world¶s financial system. This currency aspect is obviously aimed at the illegal drug business, and there are very stringent banking regulations in place in the United States ± at least eight major laws that stretch back to the Bank Secrecy
Act in 1970 ± to help detect large inflows of currency into the financial system. Accordingly, an offshore bank or other foreign bank receiving funds by wire transfer or cashier¶s check from a United States bank is justified in feeling somewhat comfortable that the funds were thoroughly screened before they were accepted for deposit at the United States bank. Second, money laundering involves more than just detecting large amounts of currency entering and flowing around the world¶s financial system. If funds that are the result of an illegal activity do manage to avoid detection and enter the world¶s financial system at any point in the world, then those funds can be wired around the world to anywhere the owner of the funds specifies. This is where the ³Know Your Customer´ rule comes into play. Financial institutions are required to know what business their customer is in, and basically how they operate in respect to their normal patterns of receiving funds into and sending funds out from their accounts. Know Your Customer requirements had their roots in the Bank Secrecy Act in 1970 and were strengthened in the PATRIOT Act in 2001. Third, and this clearly overlaps with the Know Your Customer requirements, banks in the United States are required to essentially conduct a basic Economic Substance Analysis for their customers that have large volumes of funds flowing into and out of their accounts in order to determine their typical funds flow patterns, and that these patterns are logical and in line with the business operations of the customer. If the funds flows are found not to comply with what the bank thinks is normal for the particular type of business, then the bank is required to report the activities to the appropriate federal governmental authorities.
PARTICIPATION OF INDIAN BANKS IN OFFSHORE BANKING
A Few Indian Banks, such as State Bank Of India Indian Overseas Bank Bank of India and Bank Of Baroda have set up offshore banking units for deposit taking and lending at Bahrain Hong Kong Colombo Cayman Islands and so on Indian Bank Bank of Baroda and union Bank of India jointly floated a deposit taking company IBU International Finance in HongKong for both offshore and onshore banking. The benefits for the Indian Banks from these ventures are: IMPROVED PROFITS: Banks profits improve as these ventures involve relatively low operating costs. BETTER CUSTOMER SERVICE: with multi currency deposit bases the banks would be able to serve better the needs of their customer who have set up joint ventures abroad in the form of foreign currency finance. BALANCE OF PAYMENTS: The banks would strengthen the country¶s balance of payments through repatriation of profits from the venture.
ADVANTAGES OF OFFSHORE BANKING
y
Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil,who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However, developed countries with regulated banking systems offer the same advantages in terms of stability. Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits. Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere. Offshore banking is often linked to other structures, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals. Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry.
y
y
y
y
y
y
DISADVANTAGES OF OFFSHORE BANKING
y
Offshore bank accounts are less financially secure. In a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 The Isle of Man authorities were keen to point out that 90% of the claimants were paid, although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009. Both offshore and onshore banking centres often have depositor compensation schemes. For example The Isle of Man compensation scheme guarantees £50,000 of net deposits per individual depositor or £20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapses. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore. Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering.[3] Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts.
y
y
y
PROBLEMS WITH OFFSHORE BANKING
Offshore banks are banks located in a tax haven outside the country and are used by domestics to avoid taxation as well as to obtain other legal and financial advantages. However, there are several problems with offshore banking procedures as they exist today, including lack of financial security, associations with the underground economy and organized crime, lost government tax revenues and others.
LACK OF F INANCIAL SECURITY
1. Offshore banking locations have been criticized for their relative instability compared with established domestic banking industries. During the financial and banking crisis of 2008, only one bank's depositors actually lost money on regular savings deposits (as a result of bank turmoil), and this was an offshore bank on the Isle of Man in the Irish Sea. Offshore banking locations are more risky than domestic banks because they do not offer the institutional safeguards offered by many countries (for example, the FDIC which guarantees savings deposits in the United States).
ASSOATIONS WITH UNDERGROUND ECONOMY
2. After September 11, 2001, offshore banks came under greater scrutiny for their possible ties to both the underground economy (the economic activities which may or may not be legal but which exist outside of established economic markets) and the organized crime groups that utilize the underground economy for their purposes. One illegal activity offshore banks may implicitly help criminals with is money laundering, the practice of disguising illegal monies by moving them through legal or semi-legal pathways to disguise their source.
HARM TO GOVERNMENT TAX REVENUES
3. One of the main incentives to utilize offshore banking comes from their tax advantages. However, for all of those who do not participate in offshore banking, taxation rates will rise as the increasing share of non-taxed income increases the tax rates for tax-paying citizens due to the government seeking to replace missing revenue. There is considerable debate between economists about the extent to which the government loses revenue to offshore banking activities, but the IMF estimates that between $600 billion and $1.5 billion is laundered annually, roughly 2 to 5 percent of global economic output.
TAX COMPETITION: A RACE TO THE BOTTOM
4. Offshore banking may be hurting government in other ways. Offshore banking may encourage a "race to the bottom" between governments over taxation, as those governments with the highest tax rates (or which impose the highest costs on business with various regulations) will be the most affected by capital drain to offshore banks, as compared to lower-taxation area whose citizens have less incentive to move funds offshore. This creates an incentive for governments worldwide to reduce taxes and deregulate the banking industry, which may lower costs initially but could lead to financial instability in the long-run.
CHANGING TAX BURDENS
5. Offshore banking may also disproportionally shift the tax burden away from the upper-class, at the expense of the middle-class. Offshore banks are more accessible (typically) to those in the upper-class, with more disposable income. The middle-class, who utilizes the domestic banking industry, pays taxes while higher-income agents avoid taxes all together. However, offshore banking is becoming increasingly accessible, now offering low-cost savings accounts that can be maintained from anywhere, weakening this argument
OFFSHORE BANKING SECTOR
Financial center where many of the financial institutions have little connection with that country's financial system, but have located themselves there to benefit from less regulation and/or lower taxes.
TYPES OF OFFSHORE FINANCIAL SECTOR
Offshore Financial centres can be classified into three main groups depending on offshore banks sources and uses of the funds the liquidity of the market and type of transactions. PRIMARY OFCs: Primary ofcs are large international full service centres with advanced settlement and payment systems, operating in liquid regional markets where both the sources and uses of funds are available.London, the US International Banking Facilities (IBFs) and the Japanese Offshore Market (JOM) Belong to this category. SECONDARY OFCs: Secondary OFCs differ from primary OFCs in that they intermediate funds in and out of their region, according to whether the region has a deficit or surplus of funds. Such OFCs include Hong Kong and Singapore Asian Currency Units (ACUs) for South East Asia,Bahrain,and Lebanon for the Middle East,Panama,for Latin America and Luxembourg for Europe. BOOKING OFCs: Booking OFCs do not engage in the regional intermediation of funds, but rather serve as registries for transactions arranged and managed in other jurisdictions These OFCs are sometime referred to as tax havens and include most Caribbean OFCs.
REGULATION OF OFFSHORE BANK
Offshore centers benefit from a low burden of regulation. An extremely high proportion of hedge funds (which characteristically employ high risk investment strategies) who register offshore are presumed to be driven by lighter regulatory requirements rather than perceived tax benefit. Many capital markets bond issues are also structured through a special purpose vehicle incorporated in an offshore financial centre specifically to minimise the amount of regulatory red-tape associated with the issue. Offshore centres have often been seen as venues for laundering the proceeds of illicit activity. However, following a move towards transparency during the 2000s, some now argue that offshore jurisdictions are in many cases better regulated than many onshore financial centres For example, in most offshore jurisdictions, a person needs a licence to act as a trustee, whereas (for example) in the United Kingdom and the United States, there are no restrictions or regulations as to who may serve in a fiduciary capacity Some commentators have expressed concern that the differing levels of sophistication between offshore financial centres will lead to regulatory arbitrage,and fuel a race to the bottom, although evidence from the market seems to indicate the investors prefer to utilise better regulated offshore jurisdictions rather than more poorly regulated ones. A study by Australian academic found that shell companies are more easily set up in many OECD member countries than in offshore jurisdictions. A report by Global Witness, Undue Diligence, found that kleptocrats used French banks rather than offshore accounts as destinations for plundered funds.
EFFECTS OF INTERNATIONAL TRADE
Offshore centres act as conduits for global trade and ease international capital flows. IFC Forum advocates this view. International joint ventures are often structured as companies in an offshore jurisdiction when neither party in the venture party wishes to form the company in the other party's home jurisdiction for fear of unwanted tax consequences. Although most offshore financial centres still charge little or no tax, the increasing sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost of moving a transaction structure offshore. Recently, several studies have examined the impact of offshore financial centres on the world economy more broadly, finding the high degree of competition between banks in such jurisdictions to increase liquidity in nearby onshore markets. Proximity to small offshore centres has been found to reduce credit spreads and interest rates, while a paper by James Hines concluded, "by every measure credit is more freely available in countries which have close relationships with offshore centres. Low-tax financial centres are becoming increasingly important as conduits for investment into emerging markets. For instance, 44% of foreign direct investment into India came through Mauritius last year while over two thirds of FDI into Brazil came through offshore centres. Blanco & Rogers find a positive correlation between proximity to an offshore centre and investment for LDCs; a $1 increase in FDI to an offshore centre translates to an average increase of $0.07 in FDI for nearby developing countries
SHIP AND AIRCRAFT REGISTRATION
Many offshore financial centres also provide registrations for ships (notably Bahamas and Panama) or aircraft (notably Aruba, Bermuda and the Cayman Islands). Aircraft are frequently registered in offshore jurisdictions where they are leased or purchased by carriers in emerging markets but financed by banks in major onshore financial centres. The financing institution is reluctant to allow the aircraft to be registered in the carrier's home country (either because it does not have sufficient regulation governing civil aviation, or because it feels the courts in that country would not cooperate fully if it needed to enforce any security interest over the aircraft), and the carrier is reluctant to have the aircraft registered in the financier's jurisdiction (often the United States or the United Kingdom) either because of personal or political reasons, or because they fear spurious lawsuits and potential arrest of the aircraft. For example, in 2003, state carrier Pakistan International Airlines re-registered its entire fleet in the Cayman Islands as part of the financing of its purchase of eight new Boeing 777s; the U.S. bank refused to allow the aircraft to remain registered in Pakistan, and the airline refused to have the aircraft registered in the U.S.
