Offshore Banking
International banking and Finance
Economics (Semester VI)
Submitted By: Karen Almeida
2021-A56-178
Date of submission: 20th March 2023
Content
1. Introduction
2. Working of an Offshore Bank
3. Why are Offshore accounts used
4. Evolution
5. Functions of Offshore Banking
6. Advantages of Offshore Banking
7. Disadvantages of Offshore Banking
8. Blacklists of offshore jurisdictions and their impact.
9. How to open an Offshore Banking Account
10. How is Offshore Banking Taxed?
11. Offshore Banking in India
12. Offshore banking in the future
12. Conclusion
14. Bibliography
Introduction:
A bank that is located outside the country of residence of its depositors is known as an
offshore bank. Typically, most offshore account holders are non-residents of the bank's
jurisdiction. The popularity of offshore banking is due to the various advantages it offers in
comparison with national banking, such as greater privacy, easy access, little or no taxation
and protection from political, local or financial instability. While the term originated in the
Channel Islands, offshore from the United Kingdom, and while historically most offshore
jurisdictions are located on islands, it is now used to refer to all banks offering the above-
mentioned advantages, regardless of their location. For example, banks located in
Switzerland, Luxembourg and Latvia are often referred to as offshore banks.
OFCs are jurisdictions where offshore banks are exempt from a wide range of regulations
which are normally imposed on onshore institutions. Specifically, deposits are not subject to
reserve requirements, bank transactions are mostly tax-exempt or treated under a favourable
fiscal regime, and they are free of interest and exchange rate restrictions. Moreover, in many
cases, offshore banks are exempt from regulatory scrutiny with respect to liquidity or capital
adequacy. Information disclosure is also low
At the macroeconomic level, the IMF defines OFCs to be financial systems with external
assets and liabilities out of proportion to the current account transactions of their domestic
economies. Countries may decide to establish OFCs for a number of reasons, including
gaining access to international capital markets, attracting needed foreign technical expertise
and skills, and introducing an element of competition in domestic financial systems while, at
the same time, somewhat sheltering domestic institutions. They also hope to benefit from
related income-generating activities and the creation of new jobs.
Most OFCs are countries, but some important OFCs are located within the border of
countries. This is the case, for instance, of the U.S. International Banking Facilities, the
Japanese Offshore Market, the Bangkok International Banking Facilities in Thailand, and the
Labuan International Offshore Centre in Malaysia.
Working of an offshore bank
Offshore banking is typically carried out through offshore establishments, that is offshore
branches or subsidiaries. Offshore branches are legally indistinguishable from parent banks
onshore. This facilitates the up- and downloading of assets and liabilities to and from parent
banks as intra-branch transfers. Shell branches or booking offices are a particular case of
offshore branches. Typically, they have low overheads and few employees and do not
actively engage in offshore banking activities, but rather serve as registries for transactions
arranged and managed from other jurisdictions. Offshore subsidiaries are autonomous legal
entities incorporated in OFCs. They may be wholly or partially owned by parent banks
onshore. 1O Offshore activities may also take place through so-called parallel-owned banks,
that is, banks established in different jurisdictions that while having the same owner(s), are
not subsidiaries of one another.
Typically, offshore banks engage in three types of transactions:
1. Eurocurrency Loans (including syndicated loans) and deposits
2. The Underwriting of Eurobonds
3. Over-the-counter (OTC) trading in derivatives for risk-management and speculative
purposes.
Eurocurrency transactions are the bulk of offshore banking operations. They include
transactions between banks and original depositors, between banks and ultimate borrowers,
and between banks themselves on the inter-bank market.
Why are offshore accounts used
Offshore accounts, also known as offshore bank accounts or offshore savings accounts, can
make it simpler to manage your financial commitments across multiple countries and regions.
They can be useful if you need to make, or receive, regular international payments and
transfers.
Most expats have a bank account in their home country and another account in the country
they're living in. Many also consider opening an offshore account, as this can be an effective
way to save, invest and manage money while abroad.
Offshore banking can provide you with flexibility and security. With the right offshore
account, you can readily do business in another currency and have money stored in an
international location.
In financial centres like the Cayman Islands, Bermuda and Hong Kong, foreign investors pay
little income tax—if they’re required to pay any at all. You can take advantage of these tax
benefits and diversify your investments.
Other Reasons to open an offshore account include:
• you're already living or working abroad
• you're planning to move abroad, for work, or to retire for example
• you're an international assignee and move countries regularly for work
• you make frequent trips between countries for business
• you get paid in a foreign currency, for example, for freelance work
• you own assets abroad such as investments, or property
• you have family members abroad who you support financially, for example, for a
child's school fees
Evolution
The imposition of distortionary regulations on the financial sectors of industrial countries
during the 1960s and 1970s was the main contributing factor for the growth of offshore
banking and the proliferation of OFCs.
Specifically, the emergence of the offshore interbank market during the 1960s and 1970s can
be traced to the imposition of reserve requirements, interest rate ceilings, restrictions on the
range of financial products, capital controls, financial disclosure procedures, and high
effective taxation in several OECD countries. In the United States, for example, capital
controls were implemented through the Interest Equalization Tax (lET, 1964),
The eurocurrency market (particularly in US dollars) flourished after the FCEA and FDIRP
restricted U.S. bank credit to foreigners. These restrictions did not apply to foreign branches
of U.S. banks, inducing many US. banks to refocus their operations to branches in London
and booking offices in the Caribbean for easier access to eurocurrency markets. Activity in
eurocurrency markets further increased after 1966, when U.S. money market rates rose above
dollar deposit rates, provoking a credit crunch as depositors sought higher yields, and
inducing banks to rely more on eurocurrency funding.
Similarly, the development of Eurodollar bond markets can be traced to the lET and FDIRP
which respectively made it unattractive for foreign firms to issue bonds in the United States,
and restricted foreign investment by U.S. firms unless financed abroad.
In Asia, offshore interbank markets began to develop after 1968 when Singapore launched
the Asian Dollar Market (ADM) and introduced the Asian Currency Units (ACUs), and Japan
established the JOM with characteristics similar to the mFs. The ADM was an alternative to
the London Eurodollar market for the investment of oil surpluses from Indonesia and
Malaysia, and ACU s enabled local banks to engage in international transactions under a
favourable tax and regulatory environment. 15 More recently, the cross-border assets of
Asian OFCs have on average grown at a rate of 4.3 percent over the period 1992-97, and at
end-December 97 accounted for 15.2 percent of total cross-border assets. (Data according to
the IMF)
Functions of Offshore Banking
1. Provides Some Protection from Political Shifts
Political shifts that impact the function of your domestic government often come with
increased financial risk. One of the great things about having offshore savings, checking, and
investment accounts is that they remain relatively untouched by whatever is happening at
home. Should your domestic assets suffer losses, there’s a good chance that the balances in
your international accounts will remain stable. They may even continue to bear interest as
things stabilize at home.
Consider what could happen if political decisions trigger a recession. You could see assets
like your domestic pension fund begin to lose money. Meanwhile, the term deposit account
you have with an international bank may continue to perform at a rate that’s equal to or better
than the returns you’re experiencing on that domestic fund.
2. Protection from Different Types of Economic Shifts
Not all economic shifts have to do with political changes or decisions. At times, factors
such as technology can shift the job market and lead to temporary hardships in local or state
economies. Natural disasters may undermine an industry and eventually affect the economy.
What happens if all of your savings and investments are tied back to those economies? You
end up taking a hit, possibly one from which you never fully recover.
By opening and continuing to grow offshore bank accounts based in economically stable
countries, you sidestep a number of these issues. As your assets at home shrink a little, the
offshore assets keep chugging forward. They can provide resources that you can call upon
even if your domestic wealth is severely compromised.
3. Protection from Domestic Lawsuits
Not everyone knows that assets held in offshore accounts aren’t subject to judgments
awarded by domestic courts. If you are sued for any reason and the outcome is not in your
favour, your domestic assets may be seized in order to settle the award granted by the court.
What would you do if those assets constituted your total current wealth? There would be no
alternative than to start over.
With offshore bank accounts in place, you have a foundation for getting back on your feet.
When, and as necessary, you can draw on those account balances to cover basic living
expenses or any other pending costs. Once you’re back on your feet and replenish your
domestic accounts, you can begin to deposit more funds in your offshore accounts.
4. Enjoy More Investment Options
There are excellent investment opportunities that you cannot access via a domestic
investment account. While you do want to make use of what’s at home, it pays to diversify by
securing investments via an offshore account. In some cases, the relationship between the
returns and the risk will be superior to similar domestic investment opportunities.
For example, choosing to open offshore foreign currency accounts can allow you to engage
in currency exchanges that make it possible to build more wealth. All it takes is being up to
date on the current rates of exchange between different currencies. In some cases, you can
manage the currency exchange through an international account faster. That’s important,
since rates of exchange between currencies can shift a number of times each day.
5. Competitive Interest Rates on Savings and Checking Accounts
Offshore accounts based in the right country can come with more favourable terms related
to balances and interest earned. For example, you may find that you can maintain lower
balances and still lock in a competitive rate of interest. In order to get that same interest rate
with a domestic account, you might have to maintain a balance that’s considerably higher.
Even allowing for any account fees that may apply, the result is that the balance in your
international checking or savings account could earn more interest over the period of a year.
Think of how much you could earn if those accounts were open for two or more decades.
6. Great Deals on Loans
As a depositor, you may qualify for certain types of offshore loans. While the qualifications
may vary based on the country where your accounts are based, this could be the ideal way to
invest in real estate, begin developing a property that you ultimately use for vacations or
during your retirement, or a number of other activities.
Assuming that you do qualify for a loan, there’s a good chance of being able to lock in
terms and conditions that work well. That includes enjoying a more manageable repaying
schedule and paying a lower rate of interest. As with any loan offer, it pays to look closely at
what the bank is offering. Once you understand the terms and find them to your liking,
proceed with the loan arrangements.
7. Saving for Retirement
Offshore accounts are often one of the ways people save for their retirement years. Thanks
to modern technology, you don’t have to physically be in an offshore location in order to
make deposits. Instead, they can be made via an online interface.
The interest rates on options like term deposit accounts tend to improve as your balance
grows. Renewing for longer terms also helps yield higher rates. Even as you continue to build
retirement resources in your home country, those offshore accounts provide you with even
more financial security.
8. Access to Offshore Funds When Traveling
If you tend to travel abroad on a regular basis, making use of the funds in an offshore
account could be in your best interests. Along with enjoying a more favourable rate of
exchange, you may find that processing debit and credit card payments come with fewer fees.
That allows you to get more from your account balance and stretch those funds accordingly.
It’s not unusual for offshore banking clients to use their demand deposit accounts for
purposes like international travel. The funds can be withdrawn any time that you like, making
them perfect for world travellers.
9. Covering Medical Costs While Abroad
What happens if you become ill while traveling abroad? Delays accessing domestic
accounts could pose problems. If you have a debit card attached to an offshore account, it’s
possible to utilize a combination of your travel insurance and those funds to cover your
medical care.
Remember that even if you’re in a country that extends medical benefits to visitors, there
may still be a balance that requires your attention. Between your debit card and the ability to
make international wire transfers using your account balance, it’ll be easy to cover the cost of
medical care.
10. Potential Tax Savings
While tax laws vary, you may be able to place funds in international accounts and save
money on domestic taxes. This is true for the principal balance as well as any interest that
you earn over the course of a year. This ties into the privacy that often comes with any type
of international bank account.
You may still need to provide some information to domestic tax agencies. In many cases,
the country where your accounts are based may provide limited information to those
agencies. Make sure you know what information to report and everything will be fine.
Advantages of offshore banking
These are some of the main advantages of offshore banking.
1. Tax benefits
Depending on the country where you live and the country where the bank is located, your
offshore account could be tax-free or at least taxed at a low rate. some offshore banks are
located in jurisdictions called tax havens, where taxes on inheritance or income are levied at a
lower rate or not at all.
2. Asset protection
An offshore account can be used to protect your assets in case you’re sued or your business
fails.
3. Convenience and flexibility
You’ll have easy access to your account. The process of opening an offshore bank account
is significantly faster and more convenient than when dealing with national banks. Many
companies now specialise in offering a full-service package for those looking to open a bank
account in a specific offshore jurisdiction.
4. Privacy
Many offshore banks offer higher levels of privacy than banks in the U.S. an alternative
term for a tax haven is secrecy jurisdiction, because most offshore banks offer higher levels
of secrecy than are available in other countries. This is possible thanks to legal provisions in
these jurisdictions prohibiting the disclosure of a client’s personal and account information to
the authorities, except in the event of a criminal complaint.
5. Currency diversification
Offshore banks allow you to hold money and make investments in different currencies.
having several accounts for different currencies allows you to diversify risk associated with
your home currency and profit from exchange rate fluctuations.
6. Investment opportunities
An offshore bank may open up access to investment opportunities you wouldn’t have in
your home country.
Disadvantages of offshore banking
These drawbacks could outweigh the advantages of having an offshore bank account.
1. High costs
An offshore bank, depending on whether it is a private or a retail bank, may require a
relatively high minimum deposit before you can open an account. The costs of setting up and
maintaining an account can be high. You may need to make a sizable minimum deposit and
maintain a hefty minimum balance. You also may have to pay additional fees for maintaining
the account and using the bank’s services.
2. Safety
You may not be protected if there is a financial crisis or if the offshore bank defaults, which
means that you may not be able to retrieve all or any of the money you have deposited. If the
offshore bank defaults because of financial difficulties, you might not receive protection from
the government. Unlike banks in the U.S., offshore banks may not be insured. Therefore, it is
crucial to carry out extensive research or to entrust a competent professional, who is familiar
with the banks you are considering and the legal requirements of your chosen offshore
jurisdiction, to conduct this research for you.
3. Increased regulatory scrutiny
Because offshore banking is often associated with tax evasion, money laundering and
organized crime, tax agencies and other authorities work hard to impose strict rules and
greater regulation on international finance, particularly with regard to offshore banks. If an
international regulator determines you’re violating tax laws or anti-money laundering
regulations, they can impose financial penalties or even levy criminal charges. Many wealthy
individuals, who might have benefited from the tax advantages of offshore banking, find it no
longer worthwhile to open bank accounts abroad.
4. Tax
While offshore accounts could provide a tax-efficient way to save and invest, you need to
disclose your income to any relevant tax authorities and declare any interest earned on
offshore accounts.
Blacklists of offshore jurisdictions and their impact
National and international authorities have developed several grey- and blacklists in order to
tackle uncontrolled offshore banking. These lists usually include jurisdictions that refuse to
co-operate on tax or other matters requiring the provision of information on their customers.
For example, the EU is drafting a common blacklist of uncooperative jurisdictions, which
should be finalised by September 2017. The plan is for this list to include not only the names
of offshore jurisdictions and tax havens, but also sanctions and other defensive measures
against these countries.
Common sanctions against blacklisted jurisdictions include:
• Increased disclosure requirements for individuals and companies using tax havens
• Withholding taxes on transactions with tax havens
• Prohibition on using interest accrued in blacklisted countries to offset tax
• Revision of tax treaties
• Political pressure on global corporations to refrain from investing in tax havens
• Reductions in international aid
Interestingly, those who defend offshore banking tend to criticise any attempt to regulate and
impose sanctions on offshore jurisdictions. They consider the process to be driven, not by
security or financial concerns, but by the desire of domestic tax agencies and banks to access
the funds held in offshore accounts.
Opening an Offshore Bank Account
Opening an offshore bank account is like opening an account domestically. First, you’ll need
to find a bank that conducts offshore banking. Then, you’ll need to prove your identification,
residency and banking history, often with notarized documents.
Here are some examples of documents you may need:
• Government-issued ID, such as a passport or driver’s license
• Proof of physical address, such as a copy of a utility bill
• Bank statements from the past year
Beyond documentation, foreign banks and governments work closely with law enforcement
to combat illegal bank activity, so they may ask you about the nature of your transactions.
Know there are fees associated with opening an offshore bank account. These are often much
higher than what you’d pay to open an account with a local bank, especially if you need legal
assistance setting up an account. Along with fees, the bank may require a high minimum
deposit.
How Is Offshore Banking Taxed?
If you’re a U.S. citizen, the income you earn both at home and abroad can be taxed.
According to Andrew Griffith, a certified accountant with over 15 years of experience in
income tax compliance, “If a person is required to file a U.S. income tax return, that person
should expect to have to pay income taxes on any income received—actually or
constructively—by that taxpayer, even if those sources are outside of the U.S.”
There are some exceptions, however. Griffith says that a tax treaty involving the U.S. or a
decision by Congress to exclude this from taxation are two factors that could change your tax
liability on foreign-earned income. The IRS offers a list of countries with tax treaties, as well
as the details of the treaties themselves.
In India the government's proposed income tax incentives aim to promote various business
activities such as ship leasing & financing, offshore fund management & offshore banking
activities at GIFT City. The union budget seeks to provide that income of a non-resident from
offshore derivative instruments, or over the counter derivatives issued by an offshore banking
unit, income from royalty and interest on account of lease of ship and income received from
portfolio management services in IFSC shall be exempt from tax, subject to specified
conditions.
Offshore Banking in India
Offshore accounts are 100 percent legal in India. The Special Economic Zone Act authorises
the opening of an offshore banking unit which shall be governed by the RBI rules.
Reserve Bank of India (RBI) permits Indians to open and maintain a bank account overseas.
Under the Liberalized Remittance Scheme of the RBI, sending money to an account overseas
is a legitimate purpose. RBI revised the LRS purpose code S0023 to ‘Opening of foreign
currency account abroad with a bank’ in Feb 2016. Foreign Exchange Management Act
(FEMA) also authorises the same.
Offshore accounts become an illegal activity when they are made for the purpose of evading
taxes in one’s home country. If the account in a foreign bank has income undisclosed to
income tax authorities or has funds from illegal sources, the account can be declared illegal,
under the FEMA.
Offshore banking in the future:
1. CATERING TO NICHE MARKETS IS THE FUTURE
Rather than managing account holder’s money in general, offshore banks are tapping
into how they can best serve different demographics. Essentially, it is about taking a more
bespoke approach to managing money at various stages of life.
But catering to a variety of markets doesn’t just stop there. Many overseas banks are now
accepting crypto as a form of currency to appeal to digital, tech-savvy generations.
Cryptocurrency is also attractive for those who see the security benefits it can offer.
2. PAPER CHAINS ARE FAST BECOMING A THING OF THE PAST
As banks move away from paper in favour of digital, security is on everyone’s minds.
This is because information is an important asset to many businesses, so protecting it is vital.
As such, banks are securing data with the most vigorous encryption security standards.
For account holders, this means digital bank transfers and communication become less of a
risk and the smarter thing to do. Paper chains are fast becoming a thing of the past.
3. INSTANT ACCESS, DAY OR NIGHT
In today’s digital world, you don’t need to travel overseas to open an offshore bank
account; everything can be done online or over the phone. And like most UK standard current
accounts, many offshore accounts now offer online and mobile banking features. So, account
holders can manage their offshore finances and investments while transferring funds with
ease.
4. BRANCHLESS BANKING
Offshore banks are following the same route of challenging onshore banks by going
branchless. This offers substantial benefits for account holders, as branchless offshore banks
don’t pass on as much overhead costs to the customer. Ultimately, this means customers can
earn better interest rates and other returns on their investments.
Conclusion:
Despite its misconceptions, the popularity of offshore banking is growing. Not only is it a
perfectly legal way of holding your money, but with the right professional advice, it is also
reassuringly simple to open an account.
This ease-of-use is prompting many offshore banks to change their offering to compete and
make overseas banking even more accessible. No longer is it limited to just the super-rich.
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