Offshore
Offshore
Offshore
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.
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
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.
● Checking accounts.
● Trust accounts.
● Retirement accounts.
● Trustee services.
● Letters-of-credit.
● Loans.
Opening an offshore bank account can usually be accomplished online or over the
telephone.
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.
First, the source of the funds has to be considered. Banks where the cash funds
(read “currency”) 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
“Know 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.
The benefits for the Indian Banks from these ventures are:
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.
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.
Many advocates of offshore banking also assert that the creation of tax and
banking competition is an advantage of the industry.
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.
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.
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
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.
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.