OFFSHOREBANKING

Group Members

Sunita Singh 48

Diana D’souza 07

Aarati Haria 14

Divya Nair 26

Shweta Shetty 43

Niriksha Sompura 49

OFFSHORE BANKING

Offshore simply means anything outside of a country’s jurisdiction. So if I’m in the US which is considered onshore, any other country outside US jurisdiction is referred to as offshore.The term Offshore banking 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 bank is simply a bank located outside your country of residence, usually in a low tax jurisdiction and legal advantages. Thus Offshore bank and banking account are similar in the sense that these are bank accounts opened at a country other than your own.

The appeal of offshore banking is that it offers

greater privacy or bank secrecy ( a principle born with the 1934 Swiss Banking Act) : offshore banks may decide not to report income to other tax authorities

low or no taxation (i.e. tax havens): No tax deducted on interest earned. Interest on our offshore accounts is paid without the deduction of tax†

Offshore income may not be subject to tax. Depending where you live, income on an offshore bank account or investments may not be subject to tax in your country of residence, if that money is not remitted into your country of residence

No inheritance tax, capital gains tax or death duties. Jurisdictions such as the Isle of Man and Jersey, Channel Islands have no inheritance, capital gains taxes or death duties (probate may be required in certain circumstances)

easy access to deposits (at least in terms of regulation)

protection against local political or financial instability

Convenience: easy, international access

A safe haven for your money

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. In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient.

India is one of the new entrants in the area of offshore banking. It was only recently that the Reserve Bank of India (RBI) allowed the Indian banks to maintain an offshore banking unit. The special economic zones are where the offshore banking in India takes place.

ROLE OF RESERVE BANK OF INDIA IN OFFSHORE BANKING

The role of Reserve Bank of India has been very critical in initiating the process of offshore banking in India. For plenty of years, the various Indian banks had been trying to convince the Reserve Bank of India to introduce offshore banking in the country. Eventually, the Reserve Bank of India understanding the needs and prospects of offshore banking in India, allowed the setting up of offshore units in the special economic zones. Many of the Indian banks made use of that provision to set up offshore banks in India.

REPUTED OFFSHORE BANKS IN INDIA

With the introduction of offshore banking numerous banks made a beeline for setting up an offshore banking unit at the special economic zones. One of the banks which took to offshore banking in India is the Bank of Baroda. It set up an offshore unit in the city of Mumbai. Punjab National Bank is another banks which boasts of an offshore banking unit at Santacruz Electronics Export Promotion Zone or SEEPZ in Mumbai. The State Bank of India is also one of the banks with an offshore unit at SEEPZ.

OFFSHORE BANKING IN INDIA

Reserve bank of IndiaOffshore banking unit’s guidelines

Scheme For Setting Up Of Offshore Banking Units (Obus) In Special Economic Zones (Sezs)

The Government of India has introduced the Special Economic Zone (SEZ) scheme with a view to providing an internationally competitive and a hassle free environment for export production. As per the Government's policy, SEZs will be a 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. It was also indicated by the Union Commerce Minister in his speech announcing the Exim Policy for 2002-07 that for the first time, Offshore Banking Units (OBUs) would be permitted to be set up in SEZs. These units would be virtually foreign branches of Indian banks but located in India. These OBUs, inter alia, would be exempt from CRR, SLR and give access to SEZ units and SEZ developers to international finances at international rates.

2. The Scheme

2.1 Eligibility CriteriaBanks operating in India viz. public sector, private sector and foreign banks authorised to deal in foreign exchange are eligible to set up OBUs. Such banks having overseas branches and experience of running OBUs would be given preference. Each of the eligible banks would be permitted to establish only one OBU which would essentially carry on wholesale banking operations.

2.2 LicensingBanks would be required to obtain prior permission of the RBI for opening an OBU in a SEZ under Section 23(1)(a) of the Banking regulation Act, 1949. Given the unique nature of business of the OBUs,

Reserve Bank would stipulate certain licensing conditions such as dealing only in foreign currencies, restrictions on dealing with Indian rupee, access to domestic money market, etc. on the functioning of the OBUs. The parent bank's application for branch licence should itself state that it proposes to conduct business at the OBU branch in foreign currency only.No separate authorisation with respect to the OBU branch would be issued under FEMA. As currently in vogue with respect to designating a specific branch for conducting foreign exchange business, the parent bank may designate the branch in SEZ as an OBU branch. A separate Notification No. FEMA71/2002-RB dated September 7, 2002 issued by the Exchange Control Department (ECD) of RBI on OBUs is enclosed.

2.3 CapitalSince OBUs would be branches of Indian banks, no separate assigned capital for such branches would be required. However, with a view to enabling them to start their operations, the parent bank would be required to provide a minimum of US$ 10 million to its OBU.

2.4 Reserve Requirements2.4.1 CRRRBI would grant exemption from CRR requirements to the parent bank with reference to its OBU branch under Section 42(7) of the RBI Act, 1934.

2.4.2 SLR Banks are required to maintain SLR under Section 24(1) of the Banking Regulation Act, 1949 in respect of their OBU branches. However, in case of necessity, request from individual banks for exemption will be considered for a specified period under Section 53 of the B.R.Act, 1949.

2.5 Resources and deploymentThe sources for raising foreign currency funds would be only external. Funds can also be raised from those resident sources to the extent such residents are permitted under the existing exchange control regulations to invest/maintain foreign currency accounts abroad. Deployment of funds would be restricted to lending to units located in the SEZ and SEZ developers. Foreign currency requirements of corporates in the domestic area can also be met by the OBUs. If funds are lent to residents in the Domestic Tariff Area (DTA), existing

exchange control regulations would apply to the beneficiaries in DTA.

2.6 Permissible Activities of OBUsOBUs would be permitted to engage in the form of business mentioned in Section 6(1) of the BR Act, 1949 as stipulated in the enclosed ECD Notification no. FEMA71/2002-RB dated September 7, 2002 and subject to the conditions of the licence issued to the OBU branches.

2.7 Prudential RegulationsAll prudential norms applicable to overseas branches of Indian banks would apply to the OBUs. The OBUs would be required to follow the best international practice of 90 days' payment delinquency norm for income recognition, asset classification and provisioning. The OBUs may follow the credit risk management policy and exposure limits set out by their parent banks duly approved by their Boards.The OBUs would be required to adopt liquidity and interest rate risk management policies prescribed by RBI in respect of overseas branches of Indian banks as well as within the overall risk management and ALM framework of the bank subject to monitoring by the Board at prescribed intervals.The bank's Board would be required to set comprehensive overnight limits for each currency for these branches, which would be separate from the open position limit of the parent bank.

2.8 Anti-Money Laundering MeasuresThe OBUs would be required to scrupulously follow "Know Your Customer (KYC)" and other anti-money laundering instructions issued by RBI from time to time. Further, with a view to ensuring that anti-money laundering instructions are strictly compiled with by the OBUs, they are prohibited from undertaking cash transactions, and transactions with individuals.

2.9 Regulation and SupervisionOBUs will be regulated and supervised by RBI through its Exchange Control Department, Department of Banking Operations and Development and Department of Banking Supervision.

2.10 Reporting requirementsOBUs will be required to furnish information relating to their operations as are prescribed from time to time by RBI.

2.11 Ring fencing the activities of OBUsThe 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 out of convertible fund to meet their day to day expenses. These branches would be prohibited to participate in domestic call, notice, tem, etc. money market and payment system. Operations of the OBUs in rupees would be minimal in nature, and any such operations in the domestic area would be through the Authorised Dealer (distinct from OBUs) which would be subject to the current exchange control regulations in force.The OBUs would be required to maintain separate nostro accounts with correspondent banks which would be distinct from nostro accounts maintained by other branches of the same bank. The Ads dealing with OBUs would be subject to ECD regulations.

2.12 Priority sector lendingThe loans and advances of OBUs would not be reckoned as net bank credit for computing priority sector lending obligations.

2.13 Deposit insuranceDeposits of OBUs will not be covered by deposit insurance.

2.14 Choice of SEZOBUs would be permitted in SEZs approved by Government of India, where according to Government policy, OBUs can be set up.

TRENDS IN REGULATION OF OFFSHORE BANKING

Since offshore banking emerged and grew in response to restrictiveregulatory regimes, there are certain inherent risks that can potentiallyaffect international financial stability. Three can be readily identified.First, the contagion effect with the increasing integration of financialmarkets worldwide and the explosive growth in cross-border capital flows, problems in a bank in a OFC can be transferred rapidly to other market jeopardising the stability of those markets. Second, the lack of reliable data on activities in OFCs may hinder effective supervision. Third, competitive liberalisation may lead to lowering regulatory standards in OFCs in order to attract a higher share of global business.Internationally regulators have been addressing the systemic issues

posed by offshore banking. The `Basle Concordat’ of 1975 was implemented on best efforts basis for almost two decades. The bankruptcy of Bank of Credit and Commerce International (BCCI) in 1992 hastened the adoption of international supervisory standards. BCCI was a landmark in the sense that thereafter, it has become difficult for a bank incorporated in a jurisdiction with limited domestic market to carry on business in other countries. The standards adopted by the Basle Committee for Banking Supervision are as follows:

• All international banks should be supervised by a home countryauthority that capably performs consolidated supervision;

• The creation of cross-border banking establishments should receive the prior consent of both the host country and home country authority;

• Home country authorities should possess the right to gatherinformation from their cross-border banking establishments;

• If the host country determines that any of these three standards is not being met, it could impose restrictive measures or prohibit theestablishment of banking offices.

This was followed by the Report of a Working Group of the BasleCommittee which, inter alia, aims at improving access of home and host regulators to data necessary for effective consolidated supervision and ensuring all cross border banking operations are subject to home and host supervision. Subsequently there have been several international and regional supervisory and regulatory initiatives. These are aimed, inter alia, at curbing involvement of OFCs in financial crime such as money laundering, tax evasion, lax financial regulation including inadequate supervision.

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 SpecialEconomic Zones (SEZs). The SEZs have been set up with a view toproviding 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 antimoneylaundering directives of RBI from time to time.Unlike the OFCs in other developing countries which conduct offshorebanking in a significant manner, the OBUs in India have a limitedmandate. In fact, the approach appears to be facilitating the SEZ policyrather than introducing offshore banking in India. This is in line with the cautious policy stance adopted by the regulators in regard to the opening up of the financial sector. Notwithstanding the limited scope for offshore banking in the light of the relevant regulations, many Indian banks have set up OBUs in SEZs. Available feedback is encouraging.

Over the years, India has tightened the legal framework to combat money laundering and other cross border financial crime. These include the Prevention of Money Laundering Act 2002, passed keeping in view the FATF deliberations and recommendation and international initiatives at the United Nations and others. There are other laws such as The Smugglers and Foreign Exchange Manipulation (Forfeiture of

Property) Act of 1976, The Code of Criminal Procedures 1973, Prevention of Corruption Act, 1988, The Narcotic drugs and Psychotropic Substances Act of 1985.

BANKING SERVICES PROVIDED BY OFFSHORE BANKS

1) Deposit account A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the bank, and represent the amount owed by the bank to the customer. Some banks charge a fee for this service, while others may pay the customer interest on the funds deposited.

Major types

Checking accounts : A deposit account held at a bank or other financial institution, for the purpose of securely and quickly providing frequent access to funds on demand, through a variety of different channels. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts.

Savings accounts : Accounts maintained by retail banks that pay interest but can not be used directly as money (for example, by writing a cheque). Although not as convenient to use as checking accounts, these accounts let customers keep liquid assets while still earning a monetary return.

Money market deposit account : A deposit account with a relatively high rate of interest, and short notice (or no notice) required for withdrawals. In the United States, it is a style of instant access deposit subject to federal savings account regulations, such as a monthly transaction limit.

Time deposit : A money deposit at a banking institution that cannot be withdrawn for a preset fixed 'term' or period of time. When the term is over it can be withdrawn or it can be rolled over for another term.

Generally speaking, the longer the term the better the yield on the money.

2) Credit (finance)

Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment.[1] The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower.

Movements of financial capital are normally dependent on either credit or equity transfers. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds.

Credit need not necessarily be based on formal monetary systems. The credit concept can be applied in barter economies based on the direct exchange of goods and services, and some would go so far as to suggest that the true nature of money is best described as a representation of the credit-debt relationships that exist in society.

Credit is denominated by a unit of account. Unlike money (by a strict definition), credit itself cannot act as a unit of account. However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply.

Credit is also traded in the market. The purest form is the credit default swap market, which is essentially a traded market in credit insurance. A credit default swap represents the price at which two parties exchange this risk – the protection "seller" takes the risk of default of the credit in return for a payment, commonly denoted in basis points of the notional amount to be referenced, while the protection "buyer" pays this premium and in the case of default of the underlying (a loan, bond or other receivable), delivers this receivable to the protection seller and receives from the seller the par amount (that is, is made whole).

3) Electronic money Electronic money (also known as e-money, electronic cash, electronic currency, digital money, digital cash or digital currency) refers to money or scrip which is exchanged only electronically. Typically, this involves use of computer networks, the internet and digital stored value systems. Electronic Funds Transfer (EFT) and direct deposit are examples of electronic money. Also, it is a collective term for financial cryptography and technologies enabling it.

Wire TransferWire transfer or credit transfer is a method of transferring money from one person or institution (entity) to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office.

Bank wire transfers are often the most expedient method for transferring funds between bank accounts. A bank wire transfer is effected as follows:

The person wishing to do a transfer (or someone who they have appointed and empowered financially to act on their behalf) goes to the bank and gives the bank the order to transfer a certain amount of money. IBAN and BIC code are given as well so the bank knows where the money needs to be sent to.

The sending bank transmits a message, via a secure system (such as SWIFT or Fedwire), to the receiving bank, requesting that it effect payment according to the instructions given.

The message also includes settlement instructions. The actual transfer is not instantaneous: funds may take several hours or even days to move from the sender's account to the receiver's account.

Either the banks involved must hold a reciprocal account with each other, or the payment must be sent to a bank with such an account.

4) Foreign exchange market

The foreign exchange market (currency, forex, or FX) trades currencies. It lets banks and other institutions easily buy and sell currencies. [1]

The purpose of the foreign exchange market is to help international trade and investment. A foreign exchange market helps businesses convert one currency to another. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars.

In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The modern foreign exchange market started forming during the 1970s when countries gradually switched to floating exchange rates from the previous exchange rate regime.The foreign exchange market is unique because of

its trading volumes, the extreme liquidity of the market, its geographical dispersion, its long trading hours: 24 hours a day except on weekends the variety of factors that affect exchange rates. the low margins of profit compared with other markets of fixed income

(but profits can be high due to very large trading volumes) the use of leverage

5) Letter of credit

A standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking.

The LC can also be the source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. They are also used in the land development process to ensure that approved public facilities (streets, sidewalks, stormwater ponds, etc.) will be built. The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or canceled without prior agreement of the beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction, letters of credit incorporate functions common to Traveler's cheques. Typically, the documents a beneficiary has to present in order to receive payment include a commercial invoice, bill of lading, and documents proving the

shipment was insured against loss or damage in transit. However, the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped, or their place of origin.

6) Investment management

Investment management is the professional management of various securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or Exchange Traded Funds) .

The term asset management is often used to refer to the investment management of collective investments, (not necessarily) whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. Investment managers who specialize in advisory or discretionary management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".

The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen. Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue.

Fund manager (or investment adviser in the U.S.) refers to both a firm that provides investment management services and an individual who directs fund management decisions.

7) Trustee

Trustee is a legal term that refers to a holder of property on behalf of a beneficiary. A trust can be set up either to benefit particular persons, or for any charitable purposes (but not generally for non-charitable purposes): typical examples are a will trust for the testator's children and family, a pension trust (to confer benefits on employees and their families), and a charitable trust. In all cases, the trustee may be a person or company, whether or not they are a prospective beneficiary.

General duties of trustees Trustees have certain duties (some of which are fiduciary). These include

the duty to carry out the express terms of the trust instrument, the duty to defend the trust, the duty to prudently invest trust assets, the duty of impartiality among the beneficiaries, the duty to account for their actions and to keep them informed about the trust, the duty of loyalty, the duty not to delegate, the duty not to profit, the duty not to be in a conflict of interest position and the duty to administer the trust in the best interest of the beneficiaries. These duties may be expanded or narrowed by the terms of the instrument creating the trust, but in most instances cannot be eliminated completely. Corporate trustees, typically trust departments at large banks, often have very narrow duties, limited to those explicitly defined in the trust indenture.

A trustee carries the fiduciary responsibility and liability to use the trust assets according to the provisions of the trust instrument (and often regardless of their own or the beneficiaries' wishes). The trustee may find himself liable to claimants, prospective beneficiaries, or third parties. In the event that a trustee incurs a liability (for example, in litigation, or for taxes, or under the terms of a lease) in excess of the trust property they hold, they may find themselves personally liable for the excess.

Trustees are generally held to a "prudent person" standard in regard to meeting their fiduciary responsibilities, though investment, legal, and other professionals can be held to a higher standard commensurate with their higher expertise. Trustees can be paid for their time and trouble in performing their duties only if the trust specifically provides for payment. It is common for lawyers to draft will trusts so as to permit

such payment, and to take office accordingly: this may be an unnecessary expense for small estates.

OFFSHORE DEVELOPMENT - A FAVOURITE DESTINATION INDIA

Softwares are the ultimate need of the present business. Every business organization needs softwares to carry out their business processes successfully and efficiently. The organization always wants a well worthy software in a very optimum price, so they tend to look for a better option of solutions and off course in a lesser price to maximize the profits.

Due to the high market value of USD,UK-POUND and EURO the development cost of the software are most likely to be very high in these Developed Nations. Therefore, the business organizations are looking for a lower cost options and the same same quality of work as well. So, they are Outsourcing their Business Processes to the developing nations like India. India is considered as the best destination to outsource the IT related work in the last 5 years from the USA, UK and other European Countries. India is the leading beneficiary of the IT related outsourcing, because of the following reasons -

A large pool of Technically Qualified Professionals are available in India with above average IQ, which makes it a large force in the IT related works.

The most important advantage is the cost factor - in India a Professional Software Engineer or IT Professional is available to work for a monthly salary of less than USD500 equivalent which is not likely to be happened in US/UK etc. The quality of services provided by them is at par the International Standards and they are flexible to work in any time zone of this world.

The Geographical Distance is not a problem for the Software or IT related services. It is possible to implement the developed software online from any place connected to Internet unless it is a very complex application and the support needed for the maintenance can be provided from any place in the world via Internet. So, the Geography has now become History for the modern day technology.

THE FUTURE OF THE OFFSHORE INDUSTRY

Since the 911 incident, the international crackdown on money laundering has created a divide in the offshore industry, primarily between jurisdictions eager to comply with international standards of anti-laundering regulation and those that are less co-operative. The driving force behind those initiatives, have been influential organizations such as the Financial Action Task Force (FATF). The FATF was established by the G-7 countries in 1989 and is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. As the FATF seek to apply more international pressure, it will become increasingly difficult for the less well-regulated regimes to do business.

Another major issue is the exchange of information, the profile of which has been raised in the current climate. The recently agreed EU Savings Tax Directive will change the face of the offshore industry, although to what extent is somewhat harder to predict. Previously no information was exchanged automatically in Europe unless there were concerns about illegal activities on a bank account. However, with the introduction of the EU Tax Directive, customers living within the EU are likely to be forced to engage with these issues, either by having to pay a withholding tax or agreeing to exchange information. The new directive will affect not only the EU Member States but "all territories under their control", Switzerland and the USA. The UK has recently announced that if the Cayman Islands fail to voluntarily to comply with these new rules, the United Kingdom will legislate on its behalf.

To this effect, Hong Kong will soon become a much more important jurisdiction for tax planning as it is one of the only respectable and well-regulated "offshore" banking centres which will not be subject to the new EU directive on automatic exchange of information and withholding tax. Hong Kong should also be seriously considered for clients wishing to register an offshore company, as it is one of the few respectable locations in the world that tax on a “Territorial Basis”. Consequently, this means that corporation tax is ONLY charged on profits derived from a trade, profession or business carried on in territory of Hong Kong. Income sourced elsewhere, even if remitted to Hong Kong, is treated as tax free.

In general, the regulatory regime in respect of offshore banking may beexpected to move forward on the basis of following four broad principles:• First, consolidated supervision of banking operations through greaterco-operation between home country and host country regulators;• Second, higher transparency with reference to supervisory systems andprogrammes including dissemination of guidelines, publications ofdata of OFCs;• Third, technical assistance to upgrade regulatory systems, supervisorypolicies and procedures through adoption of `best in class’ processesand policies.• Fourth, setting up systems for independent monitoring of activities ofOFCs and complying with supervisory standards.

THE SCOPE FOR OFFSHORE BANKING IN INDIA

The favourable factors for an OFC in India are well known. These include availability of skilled and quality banking, legal professionals, vastly improvedtelecommunication 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 forall 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 liberalisation has paid rich dividend. 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, thequestion before us may not whether to have an OFC, but how can we setup a well regulated OFC that will be beneficial to the Indian economy.

OFFSHORE INVESTING

Investing beyond the borders of your jurisdiction, which is also referred to as offshore investing, has quite some advantages. We will name a few here, together with some of the disadvantages of investing abroad.Offshore investing makes up more than half of the world’s financial investments and is therefore quite significant. Offshore investing has the following advantages:

Confidentiality. Many wealthy persons investing in stocks and companies are not happy with publicity with regard to their moves. Other people might take advantage of their exposed knowledge, thus making it less interesting for the person in question to make a certain

investment. Confidentiality is not just important for unethical business, money laundering or drug trafficking. It is simply an important aspect of life to many people.

Asset protection. Offshore investment centres are popular places to redistribute income. Assets can be transferred to funds and family, without having to pay extra taxes or follwing complicated legal rules in the home country.

Tax reduction. Many of the popular jurisdictions to invest in offer significant tax reductions to foreign investors. However, the US as well as the EU jurisdictions are well aware of the tax reductions that are applicable to their richer citizens, and are therefore trying their best to prevent citizens from investing offshore, accusing them of tax evasion and considering tax evasion illegal.

Diversification of Investment. Offshore investment centers in general offer much more than the national banks and financial institutions. An offshore bank or investment centre has access to the world market and givs you the opportunity to trade in whichever currency you prefer. Any stockmarket is open for yur investments.

There are some disadvantages to offshore investing:

Cost. Investing offshore is pretty costly. Most banks require a minimum investment of between $100.000 and $1 million. In addition, there are rules in certain offshore centres that require proof of residence in the jurisdiction, which means that you would have to invest in property as well. In other cases, setting up an offshore corporation might be compulsory, leading to high investment fees for just the initial stages of investing your money.

Tightening Tax Laws. Many jurisdictions are now trying to prevent their citizens from offshore investing. The main reason is that they are losing on income, as taxes did not apply to foreign investments. The Internal Revenue Code (2004) has also made it much more difficult to profit from tax reductions in offshore centers.

Safety. Like in any business, offshore investing carries a certain risk. Be sure to do some research and to invest in a reliable and well-recognized company. Hire a professional to give

you advice, but count on steep prices for these people. Also include the costs of travelling for you and your money and advisors, commission fees and professional fees.

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. 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, that geographically remote island nations can competitively engage in. 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 services, 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, arguing with

Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a “race to the bottom” in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the off shoring of capital.

DISADVANTAGES OF OFFSHORE BANKING

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

Offshore jurisdictions are often remote, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem. Accounts can be set up online, by phone or by mail.

Developing countries can suffer due to the speed at which money can be transferred in and out of their economy as "hot money". This "Hot money" is aided by offshore accounts, and can increase problems in financial disturbance.

Offshore banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy. The Laffer curve demonstrates this tendency.

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 depositied their funds in an offshore banking centre (the Isle of Man).

Offshore banking has been associated in the past 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, 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 bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggerated than the reality.

OFFSHORE FINANCIAL CENTRE

Many leading offshore financial centres are located in small tropical Caribbean countries.

An offshore financial centre (or OFC), although not precisely defined, is usually a low-tax, lightly regulated jurisdiction which specializes in providing the corporate and commercial infrastructure to facilitate the use of that jurisdiction for the formation of offshore companies and for the investment of offshore funds.

"The use of this term makes the important point that a jurisdiction may provide specific facilities for offshore financial centres without being in any general sense a tax haven."

Characteristics of an offshore financial centre:

Jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents;

Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies

Centers which provide some or all of the following services: low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity.

Taxation

Although most offshore financial centres originally rose to prominence by facilitating structures which helped to minimise exposure to tax, tax avoidance has played a decreasing role in the success of offshore financial centres in recent years. 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.

Critics of offshore financial centres argue that a lack of transparency in offshore financial centres means that they are vulnerable to being used in illegal tax evasion schemes. A number of international organizations also suggest that offshore financial centres engage in "unfair tax competition" by having no, or very low tax burdens, and have argued that such jurisdictions should be forced to tax both economic activity and their own citizens at a higher level.

Regulation

Most offshore financial centres now promote themselves on the basis of "light but effective" regulation, and generally only seek to regulate high-risk financial business, such as banking, insurance and mutual funds.

Critics of offshore financial centres suggest that they are not effectively regulated in all areas, and in particular that they are vulnerable to being used by organised crime for money laundering. However, partly in response to international initiatives and partly in a defensive move to protect their reputations, most offshore financial centres now apply fairly rigorous anti-money laundering regulations to offshore business. Some even 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.

Confidentiality

Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions, particularly in relation to the beneficial ownership of offshore companies, and in relation to offshore bank accounts.

The criticisms are slightly difficult to assess. In most jurisdictions banks will preserve the confidentiality of their customers, and all of the major offshore jurisdictions have appropriate procedures for law enforcement agencies to obtain information regarding suspicious bank accounts.

However, there are certainly well documented cases of parties using offshore structure to facilitate wrongdoing, and the strong confidentiality laws in offshore jurisdictions have clearly played a part in the selection of an offshore vehicle for those purposes.

Offshore structures

The bedrock of most offshore financial centres is the formation of offshore structures. Offshore structures are characteristically involve the formation of an:

offshore company offshore partnership offshore trust private foundation

Offshore structures are formed for a variety of reasons.

IS SETTING UP OFFSHORE ILLEGAL?

No, setting up offshore is not illegal. However, withholding information about your offshore investments is illegal in some countries. An offshore jurisdiction should be perceived as just another foreign country, but with certain advantages. These can take the form of banking secrecy laws, advantages in forming companies for international trade through tax treaties, no interest tax, no inheritance taxes, no capital gains tax, no individual tax, and many others.

Depending on your personal needs or preferences, there will normally be one or more offshore jurisdictions offering the services you are looking for.

This is one of the most frequently asked questions concerning the legality of offshore banking, and in short, Yes, offshore banking is legal. Offshore banking is a benefit to all of society and is indispensible.

Using offshore banking for tax evasion purposes is what is not legal, and that is usually what is associated with offshore banking in general and is the cause of the misconception.

Offshore banking is also associated with criminal activities such as money laundering. Let's clarify the distinction of legal and legal and examine why offshore banking will remain legal

While 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, 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 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 cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organization for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

Is it legal to set up an offshore bank account so that a court order cannot take money from your accounts?

It is illegal to "conceal" assets offshore form the IRS, and/or to deny the possession of such assets in a written or oral statement when there is pending action or a judgment in place for creditor debt, alimony, restitution for personal injury suit and so forth. The reliability of offshore asset depositories are dicey at best and may become a nightmare rather than a haven for the depositer. If the action is in anyway connected with bankruptcy or any federal litigation such as the IRS, it is considered a federal felony and carries a mandatory prison sentence of 5-years for each count of which the person is found guilty.

As previously mentioned, offshore banking is often associated with illegal activities. One of these illegal activities is tax evasion. If you set up an offshore bank account, you will still need to report your savings. Not reporting all of your money in an offshore account can lead to you be brought up on tax evasion charges. It is important to note that you have the ability to prevent this from happening. As long as you choose to use your offshore bank account legally, there shouldn’t be any disadvantages to having one If you are planning on using your offshore account to avoid a lawsuit or to evade taxes, you may want to reexamine your decision. As previously mentioned, there are serious consequences for doing this. As long as you plan on using your offshore account in a legal way, you can benefit immensely from offshore banking.

Offshore Bank Accounts

In the current economic climate, many persons are turning to offshore banking as an alternative method of saving and investing their hard earned money.

Why setup an offshore bank account?

The main reason people setup offshore bank account is to save on taxes. Another reason is to keep money away from creditors reach.While it is not illegal in most countries to open an offshore bank account, if you are doing so for illegal reasons then be prepared not to be protected from the long arm of the law.

One major advantage of banking in the US is the fact that the government insures the money. This generally is not the case with an offshore bank account though. So, in the event of a catastrophe you may wiped out financially in one fell swoop!

The most famous of countries to have an offshore bank account in is: Switzerland.

Offshore Bank Account Features• True offshore banking• No bank references for the account signatory• No reporting requirements• No taxation• 24-hour online internet banking from any PC• Multi-currency accounts• Low monthly account management charges• International ATM debit and credit card facilities• ATM anonymous cash card (aka debit card)• Gold and business credit cards

Offshore Banking: What You Need to Know Before Opening an Account

Offshore banking, we have all heard about it before. Unfortunately, many are misinformed when it comes to offshore banking. We have all heard news reports of offshore accounts being used to front illegal activities or to avoid taxes. In fact, we have also seen it in the movies, being used a similar way. This has led many individuals to believe that offshore banking is illegal. Despite what you may believe, offshore banking is legal. However, how you use it may be considered illegal.Offshore banking is done through a bank that is known as an offshore bank.

Offshore banks are banks that are located in another country, other than the country that you reside in. For instance, if you live in the Untied States an offshore bank would not be located in the United States. Many popular offshore banks are located in Switzerland. There are a number of advantages to offshore banking, but there are disadvantages as well.

The biggest advantage of offshore banking is that you are offered privacy and stability. There are many individuals who place their money in offshore accounts for security purposes. When your money is in an offshore account, you can access it, but many choose not to. It is easier to access and spend your

money if it is at a local bank. That is why a large number of individuals use offshore banking to help them increase their savings.

Another advantage of offshore banking is that just about anyone can open an account. The most common users of offshore banking are corporations, the self-employed, or individuals who wealthy. Offshore banks may have restrictions on the amount of money that is needed to open an account, but it is not always a large amount. Whether you are a small business owner, wealthy, or you consider yourself middle class, you should still be able to open up an offshore bank account.

STATISTICS CONCERNING OFFSHORE BANKING

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. Tax havens 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. According to Merrill Lynch and Gemini Consulting'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. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts.

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%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion 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.[1] 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 (1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits.

Each year, an increasing number of investors around the world are attracted by international financial centers to establish business in a form of an offshore company, offshore trust, offshore mutual fund, offshore insurance company, open an offshore bank account or even start their own offshore bank. It is

estimated, that around 60% of the world's wealth is held on offshore accounts by using offshore companies or offshore trusts and that around 50% of the world's trade in goods are transacted through various offshore jurisdictions.

As the years have progressed, so has the application of offshore services along with the number of offshore jurisdictions offering such benefits. Offshore companies or offshore trusts are not the illicit hideaways from tax authorities as sometimes presented. When setup and managed correctly, they can in fact provide enormous tax savings and asset protection in a perfectly legal manner. In simple terms, an international business or offshore company is usually a normal limited liability company, which is used as a tool by corporations and individuals throughout the world to legally direct profits out of high tax countries into offshore jurisdictions or so called international offshore centers, thus taking advantage of the low or zero taxation and various double tax treaties.

CONCLUSION

Opening an offshore bank account could be the best thing you ever do. However, many people find

the process daunting - not least because they need to overcome the irrational fear that somehow

their money won't be as safe as banking at home.

Of course the truth turns out to be the opposite. If you bank with a reputable offshore bank, then yourmoney is much safer than before!

I trust the information in this report has given you something to think about, and to help you make a good decision regarding opening your own offshore bank account. Certainly that is my intention.

Once you step into offshore waters you'll find there is plenty more to whet your appetite - including

access to previously off-limits investment opportunities, more flexible business banking

arrangements, more tax-efficient ways of conducting your financial affairs, and lots more.