An offshore bank is a bank that is operated and regulated under international banking license (often called offshore license), which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale can be referred to as offshore financial centres. OFCs often also levy little or no corporation tax and/or personal income and high direct taxes such as duty, making the cost of living high.
With worldwide increasing measures on CTF (combatting the financing of terrorism) and AML (anti-money laundering) compliance, the offshore banking sector in most jurisdictions was subject to changing regulations. Since 2002 the Financial Action Task Force issues the so-called FATF blacklist of "Non-Cooperative Countries or Territories" (NCCTs), which it perceived to be non-cooperative in the global fight against money laundering and terrorist financing.
An account held in a foreign offshore bank is often described as an offshore account. Typically, an individual or company will maintain an offshore account for the financial and legal advantages it provides, including but not limited to:
While the term originates from the Channel Islands being "offshore" from the United Kingdom, and while most offshore banks are located in island nations to this day, the term is used figuratively to refer to any bank used for these advantages, regardless of location. Thus, some banks in landlocked Andorra, Luxembourg, and Switzerland may be described as "offshore banks".
Offshore banking has previously been associated with the underground economy[1] and organized crime,[2] tax evasion[3] and money laundering;[4] however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain people who meet fairly complex requirements (such as perpetual travelers), the personal income tax laws of many countries (e.g., France, and the United States)[5] make no distinction between interest earned in local banks and that earned abroad. Persons subject to US income tax, for example, are required to declare, on penalty of perjury, any foreign bank accounts—which may or may not be numbered bank accounts—they may have. Offshore banks are now required to report income to many other tax authorities, although Switzerland and certain other jurisdictions retain bank secrecy regimes that can be more difficult to deal with. This does not make the non-declaration of the income by the taxpayer or the evasion of the tax on that income legal and many OFCs have recently been important colleagues to onshore tax authorities and law enforcement against wrongdoers. Following the 9/11 attacks, there have been many calls to increase regulation on international finance, in particular concerning offshore banks, OFCs, crypto currency and clearing houses such as Clearstream, based in Luxembourg, which are possible crossroads for major illegal money flows. Most criminality involving the banking system has happened because of the regulations and controls being circumvented.
The most popular offshore financial centres are in jurisdictions with a history of political and economic stability. In terms of offshore banking centres and in terms of total deposits, the global market is dominated by the US, Switzerland and the Cayman Islands. A letter by the District Attorney of New York, Robert M. Morgenthau, published by The New York Times, states that the Cayman Islands has US$1.9 trillion on deposit in 281 banks, including 40 of the world's top 50 banks,[6] although official statistics published by the Cayman Islands Monetary Authority suggest the amounts held on deposit are actually around US$1.5 trillion.[7] Numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey, Guernsey, and the Isle of Man are also known for their well regulated banking infrastructure.[8] Some offshore jurisdictions have steered their financial sectors away from offshore banking, thinking it was difficult to properly regulate and liable to give rise to financial scandal.[9]
Since starting to survey offshore jurisdictions on April 2, 2009, the Organisation for Economic Co-operation and Development (OECD) at the forefront of a crackdown on tax evasion, will not object to governments using stolen bank data to track down tax evasion using offshore centers, such as in the 2008 Liechtenstein tax affair. The recent sharing of confidential UBS bank details about 285 clients suspected of willful tax evasion by the United States Internal Revenue Service was ruled a violation of both Swiss law and the country's constitution by a Swiss federal administrative court. Nevertheless, OECD has removed 18 countries, including Switzerland, Liechtenstein and Luxembourg, from a so-called "grey list" of countries that did not offer sufficient tax transparency, and has re-categorized them as "white list" countries. Countries that do not comply may face sanctions.
A notable exception is Panama, whose canal provides it with a unique type of immunity to international pressure. Given the enlargement of the canal to accommodate larger shipping, it is unlikely that Panama would succumb in the foreseeable future to international pressure toward transparency.
See main article: List of offshore financial centres.
Offshore banking constitutes a sizable portion of the international financial system. Some experts believe that as much as half the world's capital flows through offshore centers. OFCs are said to 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. A group of activists state that £13-20 trillion is held in offshore accounts yet the real figure could be much higher when taking into account Chinese, Russian and US deployment of capital internationally .[10] These often regurgitated figures have not stood up to scrutiny however,[11] and nor has the black hole theory that capital is hoarded away from the financial and tax systems in OFCs. Much like a criminal using a wallet identified and seized as proceeds of crime, it would be counterintuitive for anyone to hold assets unused. Moreover, much of the capital flowing through vehicles in the OFCs is aggregated investment capital from pension funds, institutional and private investors which has to be deployed in industry around the World.
Trillions in deposits and securities are held in offshore banks, mostly by international business companies (IBCs) and trusts. 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 (over 2 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits. However, data by the Swiss National Bank show that the assets held by foreign persons in Swiss bank accounts declined by 28.1% between January 2008 and November 2009.[12]
Both offshore and onshore banking centres often have depositor compensation schemes. For example: The Isle of Man compensation scheme[15] guarantees £50,000 of net deposits per individual depositor, or £20,000 for most other categories of depositor. Potential depositors should be aware that any deposits over the guaranteed 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.[16] Thus, banking offshore is historically riskier than banking onshore.
It is possible to obtain the full spectrum of financial services from offshore banks, including:
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.
Activists has stated that even just the lower estimate of £13 trillion on deposit in offshore accounts, if these assets earned an average 3% a year in income for their owners taxable at 30%, then the offshore funds would generate £121 billion in tax revenues, on the unrealistic assumption that no tax is paid (i.e. no one pays any tax on offshore holdings), and the equally curious narrative that 100% of those deposits would otherwise have been liable to tax. Projections are often predicated upon levying tax on the capital sums held in offshore accounts, whereas most national systems of taxation tax income and/or capital gains rather than accrued wealth.[20] Much of the capital held in offshore banks is taxed already at source and where the capital represents profits, is reportable by the beneficial owner and will be taxed according to that owner’s tax residence. Capital is always deployed in investments which also then generates further tax revenue on those activities that have been invested in onshore.
According to Merrill Lynch and Capgemini'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. A large portion, £6.3tn, of offshore assets, is owned by only a tiny sliver, 0.001% (around 92,000 super wealthy individuals) of the world's population. In simple terms, this reflects the inconvenience associated with establishing these accounts, not that these accounts are only for the wealthy. Most all individuals can take advantage of these accounts.
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, most of the world's drug money is allegedly laundered through offshore and lesser regulated jurisdictions such as Paraguay and the UAE and even the US, 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 increases significantly. Another few hundred billion may 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.In cases such as the 1MDB scandal the HSBC scandal and a host of Ponzi schemes including Bernard L Madoff Investment Securities, it has been demonstrated that a mixture of onshore and offshore individuals conspiring together to either turn a blind eye or actively collaborate in order for large scale fraud and money laundering to succeed. Some have been jailed and fined, some banks have closed yet other key actors remain relatively unscathed. Large fraud cases invariably involved the major global retail banks and real estate in the major onshore or mid shore financial centres in order for the criminals to launder the proceeds of crime into safer jurisdictions and the global financial system as a whole.
The New York Times, The Wall Street Journal, and The Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the CIA, had a program to access the SWIFT transaction database after the September 11 attacks (see the Terrorist Finance Tracking Program) further diminishing the value of offshore banking for keeping Illicit activity secret.
In the 21st century, regulation of offshore banking has increased exponentially but not evenly, although critics usually focus on the wrong areas. 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:
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."This viewpoint did not age well in the wake of scandals at Goldman Sachs, Wells Fargo, Barclays, HSBC, and others.
It is possible to own your own personal offshore bank which are in a different regulatory class to those that may offer services to the public, so they are really only used by medium to large multinational corporations or large family offices.