Offshore Banking

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: greater privacy 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 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, the personal income tax of many countries 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 accounts—which may or may not be numbered bank accounts—they 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. Advantages of offshore banking 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. 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, arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a "race to the bottom" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital. Disadvantages of offshore banking Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering. 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, 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. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy. The Laffer curve demonstrates this tendency. Offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggerated than the reality. European Savings Tax Directive In their efforts to stamp down on cross border interest payments EU governments agreed to the introduction of the Savings Tax Directive in the form of the European Union withholding tax in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU. Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed. Banking services It is possible to obtain the full spectrum of financial services from offshore banks, including: deposit taking credit wire- and electronic funds transfers foreign exchange letters of credit and trade finance investment management and investment custody fund management trustee services corporate administration Not every bank provides each service. Banks tend to polarise between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client. Statistics concerning offshore banking Offshore banking is an important part of the international financial system. Experts believe that as much as half the world's capital flows through offshore centers. Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. According to Merrill Lynch and Gemini Consulting's “World Wealth Report” for 2000, one third of the wealth of the world's “high net-worth individuals”—nearly $6 trillion out of $17.5 trillion—may now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts. The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output. Today, offshore is where most of the world's drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world's poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption. "These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption" commented Lucy Komisar quoting these statistics. Among offshore banks, Swiss banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands (1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits. Regulation of offshore banks In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as the International Monetary Fund (IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business. Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that they have been insufficient. A few examples of these are: The tightening of anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local police authority, regardless of banking secrecy rules. There is more international co-operation between police authorities. In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary requirements, which mean that the names of the recipients of US-source investment income are passed to the IRS. Following 9/11 the US introduced the USA PATRIOT Act, which authorises the US authorities to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal. Similar measures have been introduced in some other countries. The European Union has introduced sharing of information between certain jurisdictions, and enforced this in respect of certain controlled centres, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest. Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal: "You ask why, if there's an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It's in the interest of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don't comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks." In the 1970s through the 1990s it was possible to own your own personal offshore bank; mobster Meyer Lansky had done this to launder his casino money. Changes in offshore banking regulation in the 1990s in the form of "due diligence" (a legal construct) make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run. Offshore financial centres In terms of offshore banking centres, in terms of total deposits, the global market is dominated by two key jurisdictions: Switzerland and the Cayman Islands, although numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey, Guernsey and the Isle of Man are known for their well regulated banking infrastructure. Some offshore jurisdictions have steered their financial sectors away from offshore banking, as difficult to properly regulate and liable to give rise to financial scandal. List of offshore financial centres: * Antigua and Barbuda * Bahamas * Barbados * Belize * Bermuda * British Virgin Islands * Cayman Islands * Channel Islands (Jersey and Guernsey) * Cook Islands * Cyprus * Dominica * Gibraltar is no more an offshore centre since 30 June 2006. No new Exempt Company certificates are being issued from that date. * Ghana * Hong Kong * Isle of Man * Labuan, Malaysia * Liechtenstein * Luxembourg * Malta * Macau * Mauritius * Monaco * Montserrat * Nauru * Panama * Saint Kitts and Nevis * Seychelles * Switzerland * Turks and Caicos Islands FAQ`s Offshore Banking For a depositor offshore banking is associated with the services of a bank from the country other than his country of residence. If you have invested or deposited funds to a bank outside the country (referred as “Offshore Bank”), where you live, you are engaged in offshore banking. On the other hand, any bank in your country of residence is often referred as a domestic bank. There are two main myths about offshore banking. First of all, the public mistakenly links offshore banking to criminal activities, terrorism-financing and money laundering. Secondly, people think that offshore banking services are only for high-income class, since ordinary people cannot afford them. What are the benefits of offshore banking? Offshore banking services provide wide range of benefits and opens up distinct opportunities. Opening such an account provides a powerful tool for keeping money secure and making it exempted from taxes. Using an offshore bank account provides opportunities that are not available to domestic banking users. The most important of those are bank secrecy / confidentiality and exemption from taxes on gains. Income generated in form of interest on deposits is not taxed by the income tax. Customers also get possibility to invest globally. Perhaps the most important benefit that offshore banking provides is that the account is strictly private. The confidentiality of all operations conducted through the account is protected by the legislation. The account is protected from creditors, tax authorities and other interested parties. It is to some extent a defense tool. How do I get an offshore bank account? Very easily. Open an Offshore Bank Account In Sterling, US dollars or Euros in minutes Why to go offshore? Offshore banking centers open wide range of opportunities for its users: access to innovative banking products, anonymity, safety, politically and economically safe environment. Benefits of going offshore are discussed here Can I avoid taxes with offshore banking? Most offshore banking centers are at the same time tax havens (low or no tax jurisdictions). Some offshore jurisdictions exempt all incomes from all taxes, while others exempt only those incomes that were generated by sources outside the jurisdiction. Although offshore banking centers do not tax your incomes, your home country may be taxing foreign generated income. So you must check your country’s legislation: if your countries authorities do not tax income generated from foreign sources, then your offshore incomes shall not be taxed, but if they do (like US does), you should report them, otherwise it will be considered as tax evasion. Is offshore banking legal? Answer to this question is quite simple: it is legal; nobody is arrested for having offshore bank account. Opening offshore bank account is absolutely legal service provided by a financial institution that is licensed in full compliance with the legislation of a tax haven. What can be illegal is when a person holds offshore bank account, receives an income and does not report this income in his home country, if the country’s legislation requires that. In other words using offshore banking is legal, but using offshore banking for illegal operations, such as tax evasion is illegal. Read more… Is offshore banking safe and secure? Offshore jurisdictions are politically stable countries with strong economies and developed financial sector. Financial sector is tightly regulated to eliminate risk of bank failures and ensure a good image of a jurisdiction making offshore banking highly secure. Is my information kept anonymous and confidential? Most financial institutions in offshore banking centers provide anonymity to their clients. Generally bank secrecy is ensured by a country’s legislation. Degree of bank secrecy varies from one jurisdiction to another; therefore if you are interested primarily in bank secrecy, you should check the legislation first to be sure to what extent your personal information is protected. Read more… Which one is the best tax haven? What country is the best option? It is difficult to answer this question. Simple answer is: “it depends”. It depends what exactly you are looking for. If it is bank secrecy, then Panama may be a good choice. If you are resident of UK and want to go offshore, then you may want to choose services provided by Channel Islands (Jersey, Guernsey, and Isle of Man). The answer varies according to your priorities. We provide here description for major tax havens, so it is up to you which one to choose. Which banks provide offshore bank accounts? Offshore bank accounts are provided by both local banks operating at offshore banking centers and also by reputable international banking institutions, such as HSBC and Barclays. Actually you can open an HSBC Offshore Bank Account In Sterling, US dollars or Euros in minutes. Is offshore banking really linked with criminal affairs and criminal financing? Despite the fact that offshore banking provides bank secrecy, high degrees of privacy and confidentiality, this sector is strictly regulated and supervised business and this leaves very small space for criminal affairs. Opening an offshore bank account is not as simple as it may seem at the first sight. There are a few organizations like Financial Action Task Force (FATF), Basel Committee and the Offshore Group of Banking Supervisors (OGBS) that impose strict regulations on offshore banking sector of a tax haven. Tax havens that do not comply with the regulations imposed by these organizations risk to see themselves in a black list. This makes it almost impossible to transfer funds banking institutions from jurisdiction that is in the black list. Such approach makes tax haven authorities interested in to reduce or completely eliminate illegal transaction and makes very hard for criminals to engage in money laundering. So it is very important that the bank your choice has good reputation and is incorporated in a tax haven that has good reputation. Benefits of Internet Banking •24/7 access to your money •Make international transfers* •View balances & transactions •Pay bills like credit card and utility bills* •Transfer money to someone or between accounts •Set up, change or cancel standing orders* •View or cancel Direct Debits