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:

• 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.

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 “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.

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

• 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.

DISADVANTAGES OF OFFSHORE
BANKING
 • 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.

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 FINANCIAL 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.