Offshore Banking (DOC)

Document Sample
Offshore Banking (DOC) Powered By Docstoc
While the term originates from the Channel Islands "offshore" from Britain, 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 (Switzerland, Luxembourg and Andorra in particular are landlocked).
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.
After September 11, 2001, there have been many calls for more regulation on international finance,
in particular concerning offshore banks being accused of being a crossroads for major illegal money
flows. Defenders of offshore banking have criticized 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 argue that offshore banking offers a competitive threat to the banking and taxation systems in
developed countries.
International banks may also choose to set up branches or offices at centers abroad including
offshore centers with a view to avoid conformity to stringent domestic monetary policy regulations.
The basic characteristic of offshore banking is its segregation from the banking system of the host
country. In sense, the banking centers remain offshore and uncontrolled. Several of the US
international banks set up branches at an offshore center such as Bahamas to get away from the
restriction of the US federal government on domestic banking in USA.
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
• less restrictive legal regulation
• low or no taxation
• easy access to deposits
• protection against local political or financial instability
In other words, offshore banking is just the practice of banking in another country with ―tax haven‖
jurisdictions characterized by low or zero taxation on interest, dividends, royalties and foreign
derived income as well as strict banking secrecy laws.

Offshore banking denotes carrying on banking activity which is insulated from the monetary
regulations of the host country. Very often, such banking centers are set up deliberately to attract
international banking business of dealing in non-resident foreign currency denominated assets and
liabilities by exempting, reducing or eliminating restrictions upon banking operations as well a
lowering tax and/or other levies.

Issue of Licenses
• No license may be issued under the Banking Ordinance to any person other than an eligible
company or qualified foreign bank.
• Eligible Company Cap 335
• A body corporation is an eligible company if it is wholly owned subsidiary of a local bank regulated
by the Eastern Caribbean Central Bank that is licensed under the Banking Act to do business in
• A qualified foreign bank is a foreign bank that upon commencement of this Ordinance is licensed
under the Banking Act.
• A foreign bank with minimum capitalization and assets, as prescribed by the
Minister, that is not licensed under the Banking Act but is licensed to do
domestic banking in its jurisdiction of incorporation.
• A financial institution, approved by the Minister, that is directly or indirectly
a wholly owned foreign subsidiary, (a company is a of another company if it
is controlled by that other company).

(a) An eligible company must be incorporated under the Companies Act as a company limited by
(b) Have objects or business activity restricted to offshore banking from within Nevis.
(c) Have at least one director who is a citizen of St. Kitts and Nevis with a residence in Nevis.
(d) Have a memorandum and articles of association acceptable to the Minister.
(e) Have an Authorized Capital of at least ECD2 Million, and capital of not less than ECD1 Million
Dollars has been Subscribed and Paid Up in cash, such cash shall be deposited in an account
maintained by the Permanent Secretary at the Eastern Caribbean Central Bank.
(f) Every applicant for a license under the Banking Ordinance must show that it is an eligible
company or a qualified foreign bank.
(g) Give the names and address of its directors.
(h) Give particulars of the off-shore banking it proposes to do from within Nevis.
(i) Give the names of any shareholders who are residents of Nevis and the number of shares held
directly or indirectly by residents of Nevis, and
(j) Provide such other information of a financial or other nature as the Minister may require in any
particular case.
(k) An application for a licence by an eligible company must be accompanied by a certified copy of
the memorandum and articles of association of the
(l) An application for a licence and all documents submitted pursuant to this Ordinance in support of
the application must be signed by the directors of the company making the application.
(m) An application for a licence by a qualified foreign bank must be
accompanied by such documents as are prescribed by the Minister.
(n) Any person who intends to apply for a licence under this Ordinance may submit a proposal to
the Minister for a licence, and the Minister may indicate whether or not a subsequent application
based on the proposal.

Offshore Banking in the Indian Context

India has made a cautious beginning in offshore banking by permitting for the first time Offshore
Banking Units (OBUs) to be set up in Special Economic Zones (SEZs). The SEZs have been set up
with a view to providing an internationally competitive and hassle free environment for export
production. SEZs will be specially delineated duty free enclave and deemed to be a foreign territory
for the purpose of trade operations and duties / tariffs so as to usher in export-led growth of the
economy. The OBUs virtually would be foreign branches of Indian banks located in India. These
OBUs, inter alia, would be exempt from reserve requirements and provide access to SEZ units and
SEZ developers to international finances at international rates.
The Reserve Bank of India (RBI) has permitted banks operating in India, whether Indian,
public/private sector or foreign, to set up OBUs in the SEZs. The OBUs would carry out essentially
wholesale banking operations. The OBUs will be set up as branches of the banks and therefore no
separate assigned capital will be required. All prudential norms applicable to overseas branches of
Indian Banks would apply to OBUs. Thus, the necessary risk management practices that are in
vogue internationally would have to be adopted by the OBUs. The OBUs will be regulated and
supervised by RBI. They will be required to scrupulously follow ―Know Your Customer‖ and other
anti- Money laundering directives of RBI from time to time.

What is the scope for offshore banking in India?
The favorable factors for an OFC in India are well known. These include availability of skilled and
quality banking, legal professionals, and vastly improved telecommunication systems ensuring
connectivity, the time zone advantage. The benefit by way of fillip to local economy is also well
understood. However, clearly the regulatory regime governing it would be critical. Accordingly the
proponents of offshore banking would need to address the key concerns of the regulator. Apart from
the apprehension of offshore banking being used for dubious ends and in financial crime, the
regulator would also be concerned about the systemic risks to the financial system. It would
perhaps not be inappropriate to evolve a regulatory framework with a road map for informed public
debate. Such a framework would need to address issues such as
• First, should only offshore banking be permitted or other activities within the umbrella of an OFC?
Some of the other activities may appear as meeting specific needs such as insurance, fund
management, trusts, etc.
• Second, for an OFC being set up should there be a single regulator for all the activities of the OFC
or different regulators mirroring the pattern in the corresponding onshore sub sectors? Also, should
there a single regulator for onshore and offshore banks?
• Third, should there licensing of firms in the OFC as it is currently stipulated for OBUs in SEZs? Or
should it be simple incorporation as is the practice in most OFCs? Or should licensing be restricted
to financial intermediaries?
• Fourthly, granted that licensing would be required for OBUs, who would be the eligible parties –
not just banks operating in India as per current policy, but also foreign banks, their subsidiaries/
affiliates? What would be the permissible activities? Here again the regulator would need to strike a
balance between the fundamental objective of ensuring financial stability and the business growth
compulsions of the OBUs. For instance, if private banking were to be permitted, the requirements of
confidentiality would need to temper the anti-money laundering safeguard measures.
The RBI is today well respected in the international community as a proactive regulator in the
adoption of international standards and the maintenance of financial stability while at the same
time, aiding development and growth. A slew of policies adopted by RBI in the last few years have
been aimed at strengthening the banking system.

These include adoption of prudential norms, consolidated supervision, connected lending, using
technology to upgrade settlement systems, payment systems, widening and deepening the various
segments of the financial markets, the unrelenting emphasis on upgradation of risk management
systems of financial intermediaries. The gradualist approach to financial liberalization has paid rich

The way forward appears to involve at the first step, an assessment of the robustness of the
existing legislative and regulatory framework may be done keeping in view the principles of cross
border cooperation, information sharing transparency, ongoing monitoring. Perhaps certain
overseas jurisdictions with whom India can have reciprocal arrangements can be identified, that will
ensure proper due diligence while licensing OBUs and subsequent supervision. In sum, the question
before us may not whether to have an OFC, but how can we set up a well regulated OFC that will be
beneficial to the Indian economy.
Features of Offshore banking in India:

• They will be permitted to be set up in Special Economic Zones
• These banks will be virtually (almost) foreign branches of the banks but located in India.
• The Overseas Banking Units (OBUs) would be exempted from CRR, SLR etc.
• 4. The OBUs would operate and maintain balance sheet only in foreign currency and would not be
allowed to deal in Indian Rupees except for having a special Rupee account to meet their day to day
expenses. These branches will not be allowed to participate in domestic call and money market etc.
• 5. These accounts can be opened by Non-Resident Individuals, Corporates, Trusts or Offshore

Financial services by Offshore banking in India

Offshore banks in India offer lot of financial services, including:
• Acceptance of Multi-Currency Deposits
• Multi-Currency borrowing option
• Loans against deposits in foreign currency
• Derivatives products
• Issuance of L/C, Bank Guarantee, Bill Discounting and collection & negotiation of trade bills
• Long term finance and short term finance (working capital) in all countries
• External Commercial Borrowings (ECB) etc.

Advantages of offshore banking

• Offshore banks provide access to politically and economically stable jurisdictions. This may be an
advantage for those resident in areas where there is a risk of political turmoil who fear their assets
may be frozen, seized or disappear.

• 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. Usually government regulation or intervention is a form of tax on domestic banks,
reducing interest rates on deposits. In indian context it is the SLR and CRR rates levied on the
banks every six month.
• 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 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.

Disadvantages of offshore banking
• Offshore banking has been associated 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 and terrorists

• The existence of offshore banking encourages tax evasion, by providing tax evadres with an
attractive place to deposit their hidden income.

• Offshore jurisdictions are often remote, so physical access and access to information can be
difficult. However this disadvantage in today’s context of global telecommunications is not a
problem. Accounts can be set up online, by phone or by e-mail.

• Developing countries can suffer due to the speed at which money can be transferred in and out of
their economy and can increase problems in financial disturbance.


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.

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%.

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 are the fifth largest banking centre
globally in terms of deposits.

It seems that widely publicized distortions of the truth have become accepted: banking offshore is
only for criminals, those seeking to escape justice and fair taxation!

What is important and crucial to understand is that it is in the very best interests of your
government and your local banking community to have you believe that banking or investing
offshore is illegal, immoral, and unethical.

In fact, it’s fair to say that your government and your local banking community are happy if fuel is
added to the fire to keep the likes of you and me in the dark, allowing us to feed on the fear and
suspicion surrounding offshore banking, investing and company formation.


The truth is that there is not, nor will there ever be a law preventing money being moved outside of
your country of residence.

Countries such as the US and the UK are heavily dependent on international trade - if it was
impossible to send funds out of the country all exports and imports would cease because our
country would no longer be able to pay to buy and sell anything!

We can move every penny or cent out of our current and savings accounts and transfer the whole
lot to anywhere else in the world.

This action would be completely legal.


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


No-one would deny that there is uncertainty in the world of offshore banking and investing at the
moment, with the proper planning, international banking can still offer the chance to achieve
enhanced returns and greater privacy to both international investors and expatriates.
Achieving tax efficiency may be becoming more complicated, but this does not mean that it is
impossible, and there are an increasing number of qualified individuals.

Shared By: