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    OFFSHORE BANKING

    INTRODUCTION

    WHAT IS AN OFFSHORE BANK

    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 some or all of

    * strong privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking

    Act)

    * less restrictive legal regulation

    * 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 "offshore" from Britain, and mostoffshore banks are located in island nations to this day, the term is used figuratively to

    refer to such banks regardless of location (Switzerland, Luxembourg and Andorra in

    particular are landlocked).

    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 accountswhich may or may not be

    numbered bank accountsthey may have. Although offshore banks may decide not to

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    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 accused of being a 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

    argue that offshore banking offers a competitive threat to the banking and taxation

    systems in developed countries, and that OECD countries are trying to stamp out

    competition.

    Offshore banking unit

    A financial institution carrying out offshore trades.offshore banking has been regarded as

    an alternative to opening up a localmarket to foreignbanks. In effect, offshore bankingenables an institution to engage in banking and foreign-exchange activities free of the

    regulations of the host country, and many offshore banking centres offertax concessions

    to foreign companies operating within their borders as a way of attracting lucrative

    foreign-exchange business. The first offshore banking unit was the euromarket; others

    include Singapore, Hong Kong, Luxembourg, Bahrain, the Cayman Islands, the Channel

    Islands and the Netherlands Antilles. Australia's taxation regime has been historically

    unfavourable to the operation of offshore banking business. In the early 1990s, the

    commonwealth and state governments (particularly New South Wales) relaxed some tax

    provisions in an attempt to make Australia more competitive as an international financial

    centre.

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    Nature of Offshore Banking

    Offshore banking denotes carrying on banking activity which is insulated from the

    monetary regulations of the host country. Very often, such banking centres are set up

    deliberately to attract international banking business of dealing in non-resident foreign

    currency denominated assets and liabilities by exempting, reducing or eliminating

    restrictions upon banking operations as well as lowering tax and/ or other levies.

    International banks may also choose to set up branches or offices at centres abroad

    including offshore centres with a view to avoid conformity to stringent domestic

    monetary policy regulations. The basic characteristic of offshore banking is its

    segregation from the banking system of the host country. In a sense, the banking centres

    remain offshore and uncontrolled.

    Traditionally, offshore banking denoted carrying on banking activity at offshore financial

    centres in a physically neutral way. These centres are also known sometimes as tax

    havens and the bank offices brass plate or shell branches. Bahamas for example is

    tax haven.

    Several of the US international banks set up branches at an offshore centre such as

    Bahamas to get away from the restrictions of the US federal government on domestic

    banking in USA or set up a shell or brass plate branch to take advantage of low or

    complete absence of taxes.

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    ADVANTAGES AND DISADVANTAGES

    OF OFFSHORE BANKING:-

    Advantages of Offshore Banking

    1 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.

    2 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

    governement intervention. Advocates of offshore banking often characterise government

    regulation as a form of tax on domestic banks, reducing interest rates on deposits.

    3 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.

    4 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.

    5 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.

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    6 Offshore banking is often linked to other services, such as offshore companies, trusts or

    foundations, which may have specific tax advantages for some individuals.

    7 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 offshoring of capital.

    8 Many people are unaware of this factor and its appears to be a foreign concept to many.

    Most western countries do not offer any protection as to the details of your banking. The

    protection factors makes offshore banking one of the most popular banking solutions.

    Unlike many bank accounts, it is impossible to get account details, including the account

    balance, of an account in an offshore jurisdiction.

    9 In offshore banks, privacy laws are very stringent, as opposed to laws in the

    United States. People are jailed and made to pay heavy fines if they disclose any

    information regarding bank accounts in offshore banks. Offshore banking allows you to

    conduct business in the country in which you have your bank account with the local

    currency. It will help you to increase your profits, provided you are aware of all the

    details involved in investing and depositing your money.

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    Disadvantages of Offshore Banking

    A Offshore banking has been associated with the underground economy and organizedcrime, 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.

    B The existence of offshore banking encourages tax evasion, by providing tax evaders

    with an attractive place to deposit their hidden income.

    C 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.

    D 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.

    E 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.

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    European Savings Tax Directive

    In their efforts to stamp down on cross border interest payments EU governments agreed

    to the introduction of the Savings Tax Directive in the form of the European Union

    withholding tax in July 2005. A complex measure, it forced EU resident savers

    depositing money in any country other than the one they are resident in to choose

    between forfeiting tax at the point of payment, or allowing notification by the offshore

    banks to tax authorities in their country of residence. This tax affects any cross border

    interest payment to an individual resident in the EU.

    Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011,

    making disclosure increasingly attractive. Savers' choice of action is complex; tax

    authorities are not prevented from enquiring into accounts previously held by savers

    which were not then disclosed.

    Banking services:-

    It is possible to obtain the full spectrum of financial services from offshore banks,

    including:

    deposit taking

    credit

    wire- and electronic funds transfers

    foreign exchange

    letters of credit and trade finance

    investment management and investment custody

    fund management

    trustee services

    corporate administration

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    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.

    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 individualsnearly $6 trillion out of $17.5 trillionmay

    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

    are the fifth largest banking centre globally in terms of deposits.

    Terrorist Finance Tracking Program

    A series of articles published on June 23, 2006, by The New York Times, The Wall

    Street Journal and The Los Angeles Times revealed that the United States government,

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    specifically the Treasury Department and the CIA, had a program to access the SWIFT

    transaction database after the September 11th attacks (see the Terrorist Finance Tracking

    Program) rendering offshore banking for privacy severely compromised.

    Regulation of offshore banks

    In the 21st century, regulation of offshore banking is allegedly improving, although

    critics maintain it remains largely insufficient. 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:

    * The tightening of anti-money laundering regulations in many countries including most

    popular offshore banking locations means that bankers are required, by good faith, to

    report suspicion of money laundering to the local police authority, regardless of banking

    secrecy rules. There is more international co-operation between police authorities.

    * In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary

    requirements, which mean that the names of the recipients of US-source investment

    income are passed to the IRS.

    * Following 9/11 the US introduced the USA PATRIOT Act, which authorises the US

    authorities to seize the assets of a bank, where it is believed that the bank holds assets for

    a suspected criminal. Similar measures have been introduced in some other countries.

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    * The European Union has introduced sharing of information between certain

    jurisdictions, and enforced this in respect of certain controlled centres, such as the UK

    Offshore Islands, so that tax information is able to be shared in respect of interest.

    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."[1]

    In the 1970s through the 1990s it was possible to own your own personal offshore bank;

    mobster Meyer Lansky had done this to launder his casino money. Changes in offshore

    banking regulation in the 1990s in the form of "due diligence" (a legal construct) make

    offshore bank creation really only possible for medium to large multinational

    corporations that may be family owned or run.

    Other Requirements for Offshore Banking Centre

    One common feature of successful offshore centre is the presence of good

    telecommunication network, domestic as well as international. Actually financial centres

    are now a part of global information highway or cyber space. This is one aspect that has

    to be taken care of if a decision is taken to set up an offshore facility in India. A banker

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    should be able to reach his constituent or counterpart when he wants to irrespective of

    location.

    The freedom of movement of expatriate personnel of international banks is another aspect

    that has to be ensured. International travel has to be much easier. It is not frequency of air

    services but relative ease with which you walk through customs and immigration that are

    important. At most of the airports of the financial centres in Europe, USA and Asia it

    hardly takes 30 seconds to go through customs and immigration. The obtaining of visa

    has also to be made much more easier and free than what is today. Visas and travel

    documents are to be looked upon as matter of form since information is necessary from

    the view point of traffic control as well as security but nothing beyond that. An

    international financial service status may be created which is at par with diplomatic

    service for grant of travel facilities and clearance at the airports.

    Other infrastructure facility that have mattered in the decision to set up an offshore

    banking centre are good office accommodation, housing for expatriates working at the

    branches of the international banks located at the offshore centre, schools, medicals and

    recreational facilities. Provision of these facilities does not really pose any problem but

    they have to be met if an offshore centre is to be floated

    .

    Another factor that has influenced the successful functioning of an offshore centre is the

    location of the centre time zone-wise. India is definitely at an advantage as it is between

    London and Singapore. We are five-and-a-half hours in advance of London and two

    hours behind Singapore. We can transact on the same day with London and Singapore.

    Bahrain is the only centre which enjoys such a favourable location time zone-wise. Any

    proposed offshore banking facility in India would really be a bridge between the Asian

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    and Euro-dollar market. Mumbai with its tradition of banking and trade would be an ideal

    choice for locating the proposed OBC.

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    Bank secrecy

    Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to

    protect personal information about their customers, through the use of numbered bank

    accounts or otherwise. Effective bank secrecy is better achieved in certain countries, such

    as Switzerland or in tax havens, where offshore banks adhere to voluntary or statutory

    levels of privacy.

    Created by the Swiss Banking Act of 1934, which led to the famous Swiss bank, the

    principle of bank secrecy is sometimes considered one of the main aspects of private

    banking. It has also been accused by NGOs and governments of being one of the main

    instrument of underground economy and organized crime, in particular following the

    Class action suit against the Vatican Bank in the 1990s, the Clearstream scandal and

    September 11, 2001.

    Advances in financial cryptography (e.g. public-key cryptography) make it possible touse anonymous electronic money and anonymous digital bearer certificates to achieve

    financial privacy and anonymous internet banking

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    Offshore financial centres

    In terms of offshore banking centres, in terms of total deposits, the global market is

    dominated by two key jurisdictions: Switzerland and the Cayman Islands,[4] although

    numerous other offshore jurisdictions also provide offshore banking to a greater or lesser

    degree. In particular, Jersey, Guernsey and the Isle of Man are known for their well

    regulated banking infrastructure. Some offshore jurisdictions have steered their financial

    sectors away from offshore banking, as difficult to properly regulate and liable to give

    rise to financial scandal.

    List of offshore financial centres

    Offshore financial centres include:

    Bahamas

    Barbados

    Belize

    Bermuda

    British Virgin Islands

    Cayman Islands

    Channel Islands (Jersey and Guernsey)

    Cook Islands

    Cyprus

    Dominica

    Gibraltar is no more an offshore centre since 30th June 2006. No new Exempt Company

    certificates are being issued from that date. [6] [7]

    Ghana [8][9]

    Hong Kong

    Isle of Man

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    Labuan, Malaysia

    Liechtenstein

    Luxembourg

    Malta

    Macau

    Montserrat

    Nauru

    Panama

    Saint Kitts and Nevis

    Seychelles

    Switzerland

    Turks and Caicos Islands

    Selected Offshore Centres

    Bahamas

    Bahamas an archipelago of 700 islands stands with Nassau as capital. Nassau is favorably

    located time zone-wise especially in relation to customers located in Western hemisphere.

    Bahamas was an offshore tax haven in mid sixties with a few branches of foreign banks.It has grown since, to the top ten banking centres in the world with the asset base of the

    banking centre at $120 billion. There is large physical presence of banks. Of the 415

    licensed, 166 have a physical presence.

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    Banks in Bahamas have a sound capital base with capital asset ratio around 11 per cent.

    A license fee $25,000 is payable by a bank. Large and prestigious banks from 36

    countries operate. Offshore banks are not subject to any liquidity requirements and

    regulations are minimal. Banks have however to adhere to certain norms. There is a self

    regulatory code of conduct to deter the use of banks for criminal activities. The offshore

    centre is supervised by the central bank which ensures the maintenance of professional

    integrity.

    There are no taxes. Political stability and proximity to United States have rendered

    Bahamas an attractive offshore centre. The islands have developed business infrastructure

    and transport and communication.

    Bahrain

    The offshore centre at Bahrain was founded in 1975 to encourage offshore banking units

    (OBUS). It neatly bridges the gap between Singapore and London. The centre has now 65

    licensed OBUs. Bahrain has a very favourable time-zone and is located in the proximityof the worlds major oil producing countries.

    OBUS are allowed to deal in offshore advances and deposits without restrictions and

    regulations that apply to commercial banks. OBUS are not allowed to deal with residents

    of Bahrain, other than government and fully licensed banks. OBUS have to have physical

    presence and fully staffed.

    OBUS are not required to maintain any reserves and there are no formal solvency

    requirements. OBUS are however required to provide Bahrain monetary agency with

    monthly statistical information and a copy of their annual audited financial statements.

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    Bahrain has no corporate tax or personal taxes. There are no restrictions on repatriation of

    capital, profit or income.

    Cayman Islands

    Cayman Islands are self governing British dependent territory South of Florida and West

    of Jamaica. It is the fifth largest financial centre in terms of assets held after London,

    Tokyo, New York and Hong Kong and holds largest consolidated international claims

    among offshore centres. There are 550 banks and trust companies licensed by the

    government.

    Businesses transacted in Cayman Islands include Eurocurrency borrowing and lending,

    deposit placing and taking, issue of bonds and floating rate notes, consortium lending and

    international fiduciary and corporate services.

    Cayman Islands have no controls on international banking and trust activities and have

    flexible regulations for liquidity ratios and capital requirements. The Islands have access

    to Eurocurrency markets and there are no restrictions on Euro-dollar transactions. Profits

    may be retained or repatriated. There is no deduction of tax at source on interest.

    Applications for licenses are scrutinized and approved. Regular returns and compliance

    with government requirements is insisted upon. There are two kinds of bank licenses.

    Category A license could entitle a bank to engage in both local and offshore bankingbusiness. There are 85 banks in A category. Category B license entitles the bank to

    engage in business originating outside the islands. About 400 B licenses have been

    issued. Minimum capitalization is stipulated for the two types of banks.

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    Hong Kong

    Hong Kong is one of the freest money markets in the world and there is no distinction

    between resident and non-resident accounts. Hong Kong does not belong to the tax haven

    category. It has no exchange control and residents may place funds in the Euro-dollar

    market free of any regulation. Profits, dividends and interest can be fully repatriated.

    Panama

    Among the non-reporting centres Panama is quiet large in terms of asset and liabilities.

    Favourable tax environment, absence of controls on capital and incentives offered to

    foreign banks are the major factors that contributed to the growth of Panama as an

    offshore centre. In addition Panama has excellent communication facilities,

    internationally trained legal experts and international auditing firms. Banks can maintain

    numbered or coded accounts to offer secrecy and protection to depositors.

    Panama has encouraged offshore business mainly with a view to mobilize resources for

    development of Panama. The National Banking Commission set up in 1970 issues bank

    licenses. It regulates the credit system by setting the statutory reserve and liquidity

    requirements. Paid-up capital is defined in relation to productive assets or as a per cent of

    local loans. Banks are required to submit monthly statement of assets and liabilities and

    quarterly analysis of credit facilities and other assets in Panama.

    There are three kinds of licenses. The general license which enables the bank to function

    both in Panama and abroad; the international license which is exclusively for offshore

    operation and representative license for banks which keep their representative in Panama.

    Different amounts of paid-up capital are prescribed for general license and international

    license.

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    There are no taxes affecting offshore business. Interest and dividends received from

    foreign sources and interests on time deposits placed with local banks in Panama are not

    subject to tax. There is no withholding tax payable on the distribution of such income.

    Singapore

    Among the offshore centre Singapore has emerged as an important Asian based market in

    Euro-dollars. The Asian dollar market was created in 1968 at the initiative of the

    Singapore Branch of Bank of America. The Singapore market deals not only in US

    dollars but in other convertible currencies such as Deutsche mark, the Netherlands

    guilder, the Swiss franc and the yen. Some of the factors that are responsible for the

    establishment of a market in Singapore are the existence of a well-developed financial

    system, near absence of inhibiting controls on domestic and international financial

    transactions, stability of the government and the social system and favourable

    geographical location. The convertible foreign currency deposit accounts Unit (ACUs)

    transactions are kept separate from the banks other transactions.

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    Offshore Banking Strategies

    We generally leave the offshore banking business and questions about potential uses to

    our offshore partner banks; however, we often field questions regarding these issues and

    find it necessary to explain a few simple strategies often utilised. None of the

    information in this section and indeed in this website should be construed as tax advice in

    your home country. These strategies may or may not be legal in your home country. We

    can only advise on legal uses in the countries where we establish corporations and bank

    accounts on behalf of our clients.

    For clients looking to repatriate funds from an offshore account without having to cash

    out, a back to back loan may be an option. We work with several banks that are able to

    provide this service.

    Back to Back Loan

    Back to back loans are generally intended to hedge against changes in currency

    valuations. The concept is relatively simple. You deposit funds with the bank in one

    currency and the bank issues a loan in another currency using your deposit as collateral.

    With the continuously deteriorating US Dollar, this has been a great tool for many people

    in recent years. In practice, these loans have several uses which have contributed to their

    popularity.

    Scenario #1 (Business Loan)

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    You have an offshore company and bank account with funds you have been accumulating

    over time. A situation arises and you find your onshore

    business is in need of a cash infusion. You may be able to structure a back to back loan

    with your offshore bank. It is generally a simple concept. You deposit funds at the bank

    and using your deposit as security they draft a loan agreement at an interest rate and term

    decided by you. The bank loans the funds to you solving your cash flow problem and

    allowing you to show the cash as a liability on your books. This may be an instance

    when you actually prefer to pay a higher rate of interest. Your interest payments may be

    tax deductible expenses allowing you to save taxes in future years.

    Scenario #2 (Property Mortgage)

    You are building a new house or buying a piece of property and need cash. Your

    offshore bank can draft a back to back loan as a mortgage at an interest rate and term of

    your choosing (usually at a fairly high rate) allowing you to purchase the property and

    maintain a lien on the property by filing the mortgage. Many high net worth

    individuals prefer not to own property and investments in their own names and seek

    arrangements which make their assets more difficult to locate for potential adversaries.

    This is a popular strategy in these cases. Any searches for assets would turn up a fully

    mortgaged home rather than one owned free and clear. These loans may be kept topped

    up to 100% of the value of the home as well. As with the business loan, interest

    payments are often tax deductible providing future income tax savings which may come

    in handy, especially if you have the good fortune of being in the highest tax brackets.

    Private Annuity Contract

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    Private annuities can be used for a variety of purposes in estate planning. Although

    commonly used as a tool in transferring ownership of appreciated assets to family

    members, private annuities can also serve estate planners as a device for transferring cash

    from cash-rich estates. Additionally, these

    contracts can be used to guarantee income and to minimize estate tax liabilities.

    A private annuity is an annuity contract issued by an individual rather than a commercial

    insurance company. In the past, it was used most often to transfer appreciated property to

    family members. There is every reason to suggest it may be as effective for transferring

    cash from a cash rich estate, to assure income and for saving on estate taxes.

    As a contract, a private annuity is quite simple. The issuer of the contract agrees to pay

    the annuitant a periodic payment for the annuitant's life in exchange for a payment of

    cash or for the transfer of property. The annuitant cannot be in imminent danger of death,

    nor can the annuity contract be collateralized or otherwise secured. If it is known on the

    valuation date that the annuitant will die from an illness in a very short time, the value of

    the annuity is based on that fact.

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    Offshore Banking Jurisdictions

    The list of offshore banking jurisdictions and offshore financial centers continues to

    expand as tax competition and globalization continue to fuel demand for international

    low tax banking solutions. Here is a brief look at the recommended banking jurisdictions

    by Sterling Offshore.

    Isle of Man Banking

    Jersey and Guernsey Banking

    UK Banking

    Luxembourg Banking

    Austrian Banking

    Swiss Banking

    Liechtenstein Banking

    "Offshore" Financial Centres

    Asian Banking

    EU Banking

    Over the last few years, EU banks have benefited from measures aimed at liberalizing

    trade and business practices such as the Single Passport System. Other measures crafted

    to create tax and information sharing hegemony amongst all of the member states such as

    the EU Savings Directive 2005 were not as welcomed by some of the traditionally

    popular banking jurisdictions. The EU Savings Directive 2005 is explained in more

    detail in another section, but let us briefly discuss the positive impact of the Single

    Passport System.

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    District, actually operating as branches of the Isle of Man headquarters. This is mainly

    for privacy and tax advantages afforded to the clients and the banks themselves.

    Isle of Man banks offer a wide array of services including both private banking and

    commercial/business services. Many international companies requiring sophisticated

    credit card processing and other business support services often choose an Isle of Man

    bank. Several of these Isle of Man banks also offer a variety of investment vehicles and

    private banking services to international clientele. Sterling Offshore generally

    recommends our Isle of Man banking partners for business and commercial accounts.

    We also recommend them for private banking in certain circumstances.

    Jersey and Guernsey Banking

    Jersey and Guernsey banks were amongst the first to market to foreigners in the early

    stages of what is now the modern offshore banking industry. Both are still utilized for

    offshore banking; however, many of their banks are actually headquartered in Isle of Man

    with the Jersey offshore banks and Guernsey offshore banks largely being utilized as

    branches or representative offices. Many of the processes, services and even

    communications are actually being routed through Isle of Man so we generally just

    recommend an opening an offshore Isle of Man bank account if choosing amongst these

    jurisdictions.

    UK Banking

    London is the biggest financial center in the world and obviously the banking options and

    level of service is amongst the best in the world. While banking secrecy laws in UK may

    not match those of many other jurisdictions, UK bank accounts for structures set up

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    elsewhere still offer reasonable privacy. Additionally, funds transferred to and from a UK

    bank account will draw less suspicion than from jurisdictions labelled as "tax havens".

    Luxembourg Banking

    Many are surprised to learn that Luxembourg is the second largest banking jurisdiction in

    Europe (behind the UK) and the largest private banking country in Europe. Although not

    as rich in history or as well known to laymen as Switzerland, Luxembourg banks have

    gained enormous popularity over the years; especially since 1980 when it solidified its

    long history of favorable taxation and banking secrecy into law. Since that time,

    managed fund assets have grown from $3 billion to $1.85 trillion, 2238 managed funds in

    all, at the end of 2006. Total assets held by banks amounted to $1.1 trillion of that figure.

    Luxembourg Banking Laws and Regulations

    Luxembourg does not use the term offshore in any of its legislation, regulations or

    anything describing its company forms. The key to typical offshore tax status for

    Luxembourg business lies in the various forms of holding companies, collective

    investment vehicles and investment funds outlined in legislation such as the 1929

    Holding Company, Milliardaire Holding Company, Financial Holding Company,

    SOPARFI, Fond Commun de Placement, SICAV, SICAF and SICAR. Going into detail

    about each would be beyond the scope of this section, but these basically provide several

    options for favorable tax status for both resident holding and investment companies as

    well as non-resident companies. Individuals holding accounts with Luxembourg banks

    and financial institutions are also exempt from local taxation on capital gains, dividends

    and interest unless they reside in one of the EU member countries.

    One potential negative to banking in Luxembourg is their agreement to begin information

    exchange with the EU by 2009 as a result of the EU Savings Directive 2005; however,

    for individual clients not residing in any of the countries affected by this Directive and

    non-resident corporate clients, Luxembourg taxes will likely be non-applicable to you

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    allowing you to bank there with no local tax obligations. As always, it is advisable to

    seek the counsel of your tax professional to identify your status.

    Luxembourg Banking Services

    Most of our discussion of Luxembourg has focused on investing and this is generally the

    only use for which we recommend Luxembourg to our clients. Luxembourg does offer

    commercial banking services for non-resident businesses; however, there are more

    favorable options such as Isle of Man for most of these customers. Luxembourg is

    suitable for clients seeking private banking and investment services or for large

    businesses that may have an interest in establishing a physical presence in Luxembourg.

    Austrian Banking

    Austrian banks have a rich history dating more than 200 years. Austrian banks offer a

    variety of services; however, for foreign individuals and non-resident legal entities they

    are probably best used for private banking or for commercial entities looking to conduct

    business in the booming Eastern European market. Austrian banks have had a presence

    in Eastern Europe for over two centuries, but they have been rapidly expanding there as

    well as in Central and Southeastern Europe since 1990. This was a bit of a gamble at the

    time, but the gamble has paid off as many of these economies are among the fastest

    growing in the world.

    Banking secrecy is enshrined in the Austrian Constitution. This secrecy can only be

    lifted by an Austrian Court Order for the purpose of investigating a criminal case or one

    involving criminal tax fraud (forgery of documents). Tax evasion reaches the criminal

    threshold when the evaded tax amount is 75000 Euro or the foreign currency equivalent.

    While just slightly less appealing than the Swiss laws, Austrian banking secrecy is still

    very solid by international standards.

    Austrian banks are regulated by the Bankwesengesetz (The Banking Act) of 1994.

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    Austrian banks are slightly less expensive and a much lower profile option to Swiss

    banks. They offer solid private banking services as well as a few specialized products.

    We generally recommend Austrian banks for commercial entities conducting business in

    Eastern Europe and private banking clients, but we do have one bank in particular who

    offers specialized products to US and Canadian clientele.

    Swiss Banking

    Swiss Banking History

    Swiss banks and Swiss banking secrecy have their roots dating back more than 300 years.

    Swiss Banks have long been famous for their privacy, security and superior private

    banking services. Indeed, Swiss banks have proven themselves many times throughout

    history to be both secure and committed to the privacy of their clients. In fact, it was

    attacks on Swiss banking secrecy promulgated by Hitler in 1931 as well as French leftists

    looking to uncover account information regarding French Aristocrats in 1932 that caused

    the Swiss Parliament to codify the Swiss banking code into the Banking Law of 1934,

    which still governs today.

    Swiss Banking Laws and Regulations

    The Swiss Banking Law of 1934 is a comprehensive piece of legislation which is still the

    basis for the current legal and regulatory structure governing the Swiss banking industry.

    One of the most important components of the Banking Law of 1934 was a provision

    which criminalized violators of banking secrecy. It is important to note that Swiss

    banking secrecy cannot be lifted by tax authorities or for requests made by treaty partners

    for information requests relating to possible tax evasion. Tax evasion is only considered

    an administrative offense in Switzerland. Swiss banking secrecy may only be lifted in

    cases of serious criminal matters such as crimes relating to tax fraud, money laundering,

    drug trafficking, weapons smuggling and terrorist financing.

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    In line with internationally adopted practices, Switzerland has adopted mutual legal

    assistance treaties and cooperates with foreign governments on

    matters relating to serious crimes such as criminal tax fraud (falsifying or forging

    documents), money laundering, drug and weapons trafficking and terrorist financing.

    Although many in the offshore world see this as a potential sign of weakness and a

    harbinger of things to come, our view is that this is ultimately good for Switzerland and

    its image. Switzerland is not likely to allow this to be abused by foreign tax authorities.

    As mentioned earlier, tax evasion is only an administrative offense in Switzerland and

    thus does not rise to the necessary level of serious crime required to cooperate with

    foreign governments on these matters. They have also elected to reject the information

    exchange option of the EU Savings Directive, instead opting for the withholding route

    and preserving the privacy of their banking clients.

    Switzerlands storied history of privacy and neutrality is still alive and well today.

    Privacy and neutrality remain cornerstones of banking laws and regulations.

    Accordingly, Switzerland has refrained from applying for entry into the EU and it has

    rejected most attempts by the EU to impose itself and infringe upon Swiss Independence.

    Swiss Banking Institutions

    Over 500 licensed bank and securities dealers operate in Switzerland holding

    approximately 35% of the world banking deposits. These range from major international

    banks to smaller Swiss private banks. The options vary from small independent Swiss

    banks to large international banks, the two largest of which UBS and Credit Suisse hold

    over 50% of Swiss banking deposits. For a variety of reasons, but mainly due to

    international pressure placed on these two institutions by the USA and UK (where they

    have a substantial presence), we do not recommend either of these Swiss banks to our

    clientele seeking private banking.

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    Swiss Banking Services

    Swiss banks provide a variety of services but are best known, and indeed probably best

    utilized, for private banking and wealth management for high net worth clients. Swiss

    banks offer access to every international market and nearly every type of investment

    imaginable, all supported by some of the

    brightest financial minds in the world. The preferred Swiss banking partners of Sterling

    Offshore certainly fit this description.

    Liechtenstein Banking

    Liechtenstein banks are similar to Swiss banks but on a smaller scale. There are only

    sixteen Liechtenstein banking institutions and a few of those are actually branches of

    Swiss banks. Twelve of the banks were granted licenses within the last four years.

    Other than obviously being smaller and having fewer institutions, Liechtenstein shares

    many similarities with Switzerland including being an independent state outside of the

    EU.

    Liechtenstein Banking Laws and Regulations

    Liechtenstein banking laws and regulations closely resemble those of Switzerland. For

    instance, tax evasion is also considered an administrative matter and not a criminal

    offense. Liechtenstein only has one Mutual Legal Assistant Treaty and that is with the

    United States. It is important to note that this treaty does not include probes into matters

    concerning possible tax evasion since this is not considered a criminal matter.

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    After a couple of high profile money laundering cases earlier this decade, Liechtenstein

    implemented a law which increased internal regulation and auditing while also allowing

    for a process where foreign governments may request assistance into criminal matters.

    The foreign government must petition the Liechtenstein Court to have the authorities

    conduct an investigation. There is an appeal process allowing the accused party to

    possibly thwart the investigation. These are generally only for tax fraud (falsifying or

    forgery of documents), money laundering, terrorist financing, weapons smuggling and

    drug smuggling and other serious criminal offenses. For anyone concerned that this is a

    harbinger of things to come, the ruler of the Principality, Prince Alois told Bloomberg

    News in 2006 that Liechtenstein banking secrecy is very firmly anchored in

    Liechtenstein. He went on to say that any measure to change this or water down existing

    Liechtenstein banking secrecy laws would likely be rejected if put to a referendum to the

    people.

    Liechtenstein Banking Services

    Liechtenstein banks are most noted for their private banking facilities and indeed offer

    sophisticated, individualized services for clients. Access to international markets and a

    host of investment instruments are available. Investment income on non-resident

    accounts is not liable to local taxation. Commercial banking is generally not available

    and/or practical for foreign companies.

    In addition to those discussed previously, many other tax haven jurisdictions remain

    popular for banking including the British Virgin Islands (BVI), Cayman Islands, Belize,

    Panama, Bermuda, etc. For basic banking services, Barclays (Seychelles) is a fine

    institution and one that we often establish along with a Seychelles IBC.

    Asian Banking

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    More recently, the Asian banks have made a strong push into the offshore banking realm

    with both Hong Kong and Singapore gaining in popularity. Both of these require the

    company to be established in the jurisdiction. Additionally, company incorporation is

    generally more expensive with more restrictions than other popular jurisdictions.

    Sterling Offshore continually researches the offshore banking sector in order to advise

    clients on the best jurisdiction and bank for their particular needs. New agreements

    between countries are being signed regularly affecting international depositors to the

    institutions. We monitor these agreements and work closely with our partner banks to

    provide timely and accurate information concerning the offshore banking world to our

    clients.

    Offshore Asset Protection

    There is no better way to protect your affairs and privacy from potential adversaries than

    through the creation of a well constructed offshore structure. As many countries become

    increasingly more litigious, governments continue to encroach on civil liberties and

    privacy and technology continues to make it easier for hungry lawyers to search for assets

    while making the decision whether or not you are "sue worthy", many would benefit

    from establishing an offshore presence to protect at least a portion of their assets.

    Offshore Asset Protection Structures

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    A variety of offshore components may be utilized in an offshore asset protection structure

    including private foundations, offshore trusts, offshore companies, offshore bank

    accounts and/or an offshore brokerage account. It may even be possible to maintain assets

    in their current location while merely transferring ownership of the assets into an offshore

    asset protection structure as well.

    Offshore asset protection structures generally involve at least one offshore trust or

    offshore private foundation perhaps coupled with an underlying offshore company.

    Utilizing multiple jurisdictions is often desirable making it more difficult to locate and

    win judgements against any assets.

    Clients are advised that in order to set up a proper asset proctection structure, the client

    must be willing to give up "ownership" of the actual assets being placed into it. Not to

    worry though, as many legal and contractual safeguards are put into place as well as the

    possibility to appoint protectors or guardians ensuring the assets will always be utilized

    per the Foundation Charter or Trust Deed and associated documents as set out by the

    Founder/Settlor.

    While both offshore trusts and private foundations are useful in setting up asset

    protection structures, a fair amount of offshore trusts established are

    invalid and would be labeled "sham" trusts if ever challenged in a court. In fact, a leading

    international trust expert conducting a very informal poll of the trust practitioners in a

    popular offshore jurisdiction asked the practitioners how many of the offshore trusts

    established by them would likely be considered "sham" trusts by the courts if challenged.

    The answer was shocking: "75-80%..... but that is what the clients wanted" was the

    general response. Clients establish the trusts but the settlor remains very much in control

    of the administration of the trust in some cases. Often times, assets are never actually

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    placed into the trust which means they obviously cannot be under the protection of the

    trust. These are common occurrences which can lead to adverse court decisions.

    Offshore Foundation

    Due to the issues above and the fact that courts are able to "interpret" the legality of trusts

    at all, Sterling Offshore prefers the use of the offshore private foundation for most asset

    protection structures. Offshore foundations are much more versatile than the offshore

    trust, are based in civil law meaning they are not up for "interpretation" by the courts and

    offer a great deal of protection to the participants in the structure. The fact that the

    offshore foundation is also legally separate from the Founder and beneficiaries and has

    no legal "beneficial owner" makes it an invaluable tool in offshore asset protection. The

    foundation itself is the "owner" of all assets (which may include shares of a company)

    placed into it. This may be beneficial in countries with strict reporting requirements and

    tax consequences regarding "controlled foreign corporations" (see your tax advisor as this

    varies among countries).

    Offshore Bearer Share Company

    One of the best privacy tools still available today is the offshore bearer share company.

    While the availability of jurisdictions offering bearer share companies is decreasing and

    restrictions are generally increasing, Sterling Offshore still offers services in several

    jurisdictions that offer allow shares to be issue to "bearer". We offer a Seychelles bearer

    share company, Panama bearer share company, Belize bearer share company and BVI

    bearer share

    company. Panama and Seychelles offer the best terms regarding government fees and

    restrictions.

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    Opening bank accounts for bearer share companies is generally a bit more difficult;

    however, Sterling Offshore has several banking options with reputable banks with whom

    we can open bank accounts for a bearer share company.

    Perhaps a better alternative to the bearer share company is the issuing of registered shares

    to a nominee shareholder. We also frequently issue the shares in the name of a private

    foundation when setting up an asset protection structure or to a trust with the foundation

    as the beneficiary of the trust.

    Offshore Bank Account

    The last but probably most important component of a offshore asset protection structure

    is the offshore bank account. Unfortunately, this is probably also the weakest point of any

    structure and the likely target of any queries into your affairs. Especially considering the

    increasing disregard of legal structures and focus on the "beneficial owner" in some

    countries, it is critical to both create the right structure and establish the right offshore

    bank account for your offshore asset protection structure.

    Sterling Offshore is able to provide introductions for the purpose of establishing an

    offshore bank account. . The applications and requirements vary depending on the

    institution.

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    Offshore Banking Facts

    Offshore banking and offshore banks are often misunderstood and intentionally maligned

    by governments of high taxing jurisdictions. It is important to note that just like an

    offshore company, an offshore bank is merely a bank domiciled in a country other than

    that of the persons country of residence, domicile or citizenship. Hollywood has also

    done a good job of associating offshore banking with cigarette boats, private jets and

    criminals of all kinds. In reality, these offshore jurisdictions and offshore banks are very

    different than what typically conjures in the mind. Let us look at some myths and facts

    about offshore banking with an unbiased and historical perspective.

    Myth #1

    Offshore banks are only used to evade taxes.

    Fact: Popular offshore banking jurisdictions often provide a number of benefits over

    onshore banks including lower administration costs, higher interest rates, the ability to

    deposit and transact in multiple currencies, increased privacy, access to otherwise

    unavailable international investments, sophisticated private banking, the ability to

    facilitate international business transactions, etc. Additionally, offshore banking provides

    increased asset protection from potential extraneous lawsuits, unstable governments,

    unstable economic conditions, unlawful seizure, etc.

    Myth #2

    Offshore banking is only conducted by money launderers, drug dealers, weapons

    smugglers and terrorists.

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    Fact: There is no question that offshore banks are abused by some of these unwanted

    elements. Let us maintain a proper perspective on this however. These same elements

    have been offshore banking in the US and UK for many years due to the lax restrictions

    on foreign deposits in these two countries. Conservative estimates put the total amount

    of money held in US banks from proceeds of money laundering at $300 billion. In fact,

    many

    offshore banking jurisdictions have better laws and regulations than either of these two

    countries. All jurisdictions offered by Sterling Offshore have implemented the 40

    recommendations of the OECD (Organization for Economic Co-operation and

    Development) FATF (Financial Action Task Force). In 2006 the FATF commenced a

    review of all of the major financial jurisdictions and found only the USA to be non-

    compliant due to, amongst other things, insufficient information exchange concerning US

    depositors.

    Myth #3

    Offshore banks are less secure than onshore banks.

    Fact: Many of these banking jurisdictions offer banking histories and current conditions

    far superior to their international counterparts. Switzerland is estimated to hold over

    35% of the worlds banking deposits and our premier banking partner there has been in

    business for over 300 years. Cayman Islands is the 5th largest banking jurisdiction in the

    world. Panama has over 130 major banks including many of the largest international

    banks in the world.

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    Depositors need to consider all factors when choosing a banking jurisdiction. Many of

    these offshore banks and banking jurisdictions have histories far superior to that of banks

    in their own country. Many have lending practices that are much stricter than that of the

    banking institutions in their own countries. How safe are deposits for US depositors who

    have money held at any of the US banks that have been lending money at alarming rates

    with alarmingly low reserve requirements with the recent subprime debacle? Can anyone

    figure our the trillions and trillions of dollars in derivatives (supposedly backed by

    something) that have been spun out of these institutions? How safe is the US dollar which

    is no longer backed by anything of substance and only a guarantee by a government that

    cannot balance a budget? How about depositors in the UK with the debacle of Northern

    Rock and subsequent nationalization by the government?

    International Offshore Banking

    There is a staggering amount of money in the world, and more and more of it is in

    offshore jurisdictions.

    According to a study by consulting firm McKinsey and Company published in January,

    2007, the value of total global financial assets, including equities, government and

    corporate debt securities, and bank deposits, expanded to $140 trillion in the 12 months to

    the end of 2005, an increase of $7 trillion from a year earlier. That is a growth rate of

    5.3%.

    There are no consolidated figures for the growth in offshore assets - many jurisdictions

    simply don't release figures. But for those that do, it is clear that the rate of increase in

    banking, trust and fund assets dramatically outpaces McKinsey's global figure. In Jersey,

    for instance, banking assets were GBP159bn in December, 2004; by September, 2006,

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    they stood at GBP188bn. That is an annual growth rate of 10.2%, roughly double the

    global rate; and Jersey banking is by no means untypical of offshore

    performance. Indeed some other jurisdictions have shown higher growth rates; and fund

    assets have grown faster even than banking ones.

    With 'onshore' high-taxing countries chopping finer and finer in order to remove tax

    loopholes, and imposing ever more stringent anti-money-laundering rules, it is no

    surprise that more and more people move their assets offshore, if they are able to.

    The purpose of this special feature is to describe the history of offshore banking, and to

    contrast the offshore banking sector with its onshore rival.

    A Very Potted History of Offshore Banking

    If the words 'offshore banking' conjure up for you a shadowy figure wearing a Panama

    hat and crumpled white suit, smoking a cigar, and probably sipping cocktails from a

    hollowed out coconut, then you've clearly been reading too much John Grisham. Stop it.

    It isn't good for you. In an increasingly globalised world, in which more and more of the

    population are becoming internationally mobile, and need financial services which reflect

    their circumstances, offshore and international banking has moved on. The growing need

    for international banking on both a personal and corporate level has led to an increase in

    the number and quality of financial centres, both offshore and on, and the diversity of

    financial services offered.

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    As a result, there is a huge spectrum of different offshore banking services available to

    expats, international investors, globetrotters, international consultants and corporations,

    offering varying degrees of return, protection, and privacy. Before we look into the

    different sorts of offshore bank account available, however, a brief rundown of the

    background of this ever-growing industry is necessary, in order to understand the present

    situation.

    As more and more financial institutions became keen to establish themselves on an

    international level, regulators perceived a need for greater banking

    regulation, and introduced a set of minimum standards and safeguards, known as the

    Basle Accord (introduced 1988). The Accord outlined the requirements necessary for

    banks to obtain licenses, which included two minimum types of bank capitalisation- core

    capital and supplementary capital. Core (Tier 1) capital is basically a mixture of

    shareholder equity and disclosed reserves, and supplementary capital is a mixture of debt

    and equity instruments. (Wake up there, you at the back! There is a reason why we're

    telling you this).

    The Basle Accord set the minimum capital adequacy level for each type of bank capital at

    4%, meaning that many banks operating in countries under this accord were forced to

    increase their capital reserves and to invest in 'safer' investments. Recently introduced

    modifications to the original Basle Accord (originally enough, called Basle 2, and

    running to 541 pages) seek to align capital requirements with the underlying risks of

    loans made, and will further affect the amount of capital which each bank is required to

    hold. This may mean that banks in countries which are operating under the Basle Accord

    are forced to be more cautious about the instruments in which they invest, resulting in

    potentially less attractive returns. However, in non-Accord countries (which includes

    many offshore jurisdictions), regulation of this kind is usually down to the regulatory

    authorities of the jurisdiction, and the required capital adequacy levels can vary.

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    Other legislative issues have also had an effect on the offshore banking world. Initiatives

    by the OECD/FATF/G7 countries to combat money laundering have, in the process,

    severely damaged the banking secrecy laws of many offshore jurisdictions. 'Know your

    Customer' legislation has meant that privacy in high tax and certain low tax jurisdictions

    has been jettisoned in return for international acceptance. In addition, US rules have

    introduced 'Qualified Intermediary' status which also imposes more stringent controls on

    any institution wanting to avoid having to tax US-source income regardless of the

    nationality or tax status of the recipient. For all these reasons, opening an offshore

    account can now often require a small rainforest's worth of paperwork.

    The OECD's first shot across the bows of banking secrecy was fired in earnest with the

    release of a report in 2000 into improving access to bank

    information for tax purposes, endorsed by all 29 members of the organisation. Although

    the report was more a statement of intent rather than a detailed plan, it set the template

    upon which national tax authorities could obtain information about specific individuals or

    companies whom they have reason to suppose are engaged in tax evasion or criminal

    activity.

    Although many offshore jurisdictions have responded to the pressure brought about as a

    result of their blacklisting by the OECD and the FATF by strengthening legislation

    against money-laundering and introducing better controls over financial institutions, the

    high tax countries have failed to really galvanise a move towards any comprehensive

    dilution of banking secrecy, and the international framework of mutual assistance treaties

    remains largely as it was.

    Indeed, the high-tax countries themselves are gradually being forced by peer pressure and

    international regulations to tighten up their own regimes.

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    In January, 2007, for instance the UK took the latest in a series of EU-inspired measures

    when Economic Secretary to the UK Treasury, Ed Balls, published draft money

    laundering regulations for consultation.

    The regulations are designed to implement the EU's Third Money Laundering Directive,

    and have already caused controversy.

    Offshore Versus Onshore in 2007

    It is unlikely that the relative advantages of offshore will be undermined in the short term

    at least. The OECD's rather uneventful Global Forum on Taxation in Berlin in June 2004

    encouraged participants to continue to strive towards effective exchange of information

    and transparency by 2006, although it was also recognised that flexibility is required

    since many

    participants have not yet initiated negotiations towards the required signing of bilateral

    agreements.

    The OECD claims however that substantial progress has been made. A report from the

    Global Forum secretariat in 2006 stated that countries continue to improve their

    international cooperation to combat tax abuse by putting in place mechanisms which

    enhance transparency and exchange of information for tax purposes. Many of the

    economies reviewed have enhanced transparency by introducing rules on customer due

    diligence, information gathering powers and the immobilisation of bearer shares. Most

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    have entered into double taxation conventions and/or tax information exchange

    agreements, and many are engaged in negotiations for such agreements.

    The OECD also noted that none of its member countries, and very few non-members,

    now make domestic tax interests a condition for responding to a treaty partners request

    for information on a specific taxpayer. However, the Organisation argues that more

    progress can be made to improve global tax transparency, and stated that some countries

    still place constraints on international co-operation to counter criminal tax matters and a

    number continue to impose strict limits on access to bank information in civil tax matters.

    "The direction of change is clear," Paolo Ciocca, Chair of the OECDs Committee of

    Fiscal Affairs and Co-Chair of the Global Forum stated. "Onshore and offshore financial

    centres are prepared to work towards the implementation of mutually agreed standards. I

    look forward to the day when the centres that have met these standards are joined by

    other jurisdictions that have not yet achieved them," he added.

    Leasi P. T. Scanlan, Governor of the Central Bank of Samoa and also a Co-Chair of the

    Global Forum, said the report demonstrated the ability of OECD and non-OECD

    countries to co-operate in order to prevent their financial centres being misused for illegal

    tax avoidance and evasion. "This has been a huge undertaking but we now have a clear

    idea of where we stand. It is an important step in helping countries to work towards a

    level playing field so that these abuses do not simply shift from one financial centre to

    another," he observed.

    It must be made clear that although in most countries, having an offshore account is not

    illegal in itself, the illegality comes when the client doesn't declare the account, or the

    income from it. Banks in jurisdictions with strong banking secrecy legislation tend to

    place the onus for this reporting on the client themselves (which is not to suggest for a

    moment that they recommend not reporting the income, merely that they do not volunteer

    the information to other countries, and will usually reject requests for the client's personal

    details unless there is evidence of criminal activity).

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    Despite the efforts of the OECD countries to restrain the offshore banking sector, the

    reality is that in most offshore centres, deposit totals have shot up in recent years, and

    seemed to be having a particularly good year in 2006, with double digit percentage

    increases in many cases.

    Is Offshore Banking Legal?

    This is one of the frequently asked questions about offshore banking, and in short, YES,

    offshore banking is legal. Offshore banking is so legal that, it's always going to remain

    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.

    This article will clarify the distinction and examine why offshore banking remain legal.

    The term offshore was originated from the British Channel Islands, tax havens located

    literally offshore from the United Kingdom. Now the term is used to refer to all tax

    havens whether islands or not. Technically, just moving your money from an account in

    your country of residence to another jurisdiction is considered offshore banking, even ifit's not a tax haven. This is the main reason why offshore banking will always be legal.

    How can it be illegal to move money from one country to another?

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    Individuals and businesses, large or small, and even governments all have the need to

    move money around the world. If moving money from one country to another was illegal,

    our global economy would have serious problems and i don't see how we could make it.

    We are constantly ordering items from eBay and some do so from other countries. People

    use Paypal accounts to transfer funds when ordering online. Governments are involved in

    import export activity and have to pay for it somehow. So again, no one can stop you

    from taking your money to another country; it is a legal and everyday process that will

    remain that way.

    The thing that is NOT legal is banking offshore for tax evasion. Depending on which

    country u reside in, it is usually illegal to take money out of the country or making money

    overseas and never submitting it to your country of residence or declaring it. as stated,

    this depends on your tax status and country of residence. For instance, in the United

    States, the federal government requires all citizens to declare all taxable assets regardless

    of where they are located in the world. Failing to do so is committing a criminal offense.

    There are ways around this though, such as expatriating for certain amount of time to

    save on taxes. International companies can also reduce their tax burden through using a

    slick network of offshore bank accounts and IBCs. And another thing to keep in mind is

    that a lot of countries don't charge income tax on money earned out of the country and

    brought in. They also don't tax interest earned on accounts.

    So, if US citizens and UK and European citizens can't even save tax through offshore

    banking, how can it be beneficial?

    Saving on taxes is not the only advantage of using offshore banking accounts. There are

    many other benefits, including but not limited to:

    -Optimized account Privacy

    -Protection from aggressive litigations

    -More competitive account structures ad interest rates

    -global access to your money

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    -Ability to bank in multiple currencies

    -Access to global business opportunities

    And not to forget that those who reside in countries with corrupt or unstable economic

    systems have the opportunity to bank in an economically and politically stable

    jurisdiction.

    Characteristics of Offshore Centres

    The analysis of the select offshore centres presented reveals that the characteristics of the

    offshore banking centres are:

    (a) Local capital requirements are low or non-existent;

    (b) License fees are low;

    (c) Entry is relatively easy and

    (d) Taxes and levies on offshore business are virtually non-existent.

    ]

    In none of the offshore centres enumerated above minimum reserve requirements onoffshore liabilities are levied or withholding tax on income is deducted. A major feature

    of offshore centres is their proximity to important loan outlets or deposit sources.

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    Offshore Centre For India

    Introduction

    Mobilisation of resources to finance domestic economic development through the setting

    up of an Offshore Banking Facility was attempted earlier by Panama and Philippines. The

    existence of an offshore center, tax haven or international capital market benefits the host

    country enormously; through the capital inflows the financial center brings and increasesemployment and income.

    Objectives of the Offshore Banking Centre

    The raison d etre for setting up of an Offshore Banking Center (OBC) is that it would

    help foster a regional capital market which enlarges the flow of foreign capital to raise

    the level of domestic investment. The Expert Group on Foreign Exchange Markets in

    India (1955) set up by the Reserve Bank of India also suggested the setting up of the

    offshore centre within India to encourage offshore transactions towards development of a

    financial centre particularly for countries which have not yet achieved capital account

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    convertibility. According to the Expert Group the setting up domestic Offshore Banking

    (OBUs) is seen as an interim (but necessary) step towards development/sophistication of

    the Indian foreign exchange markets Units. Any future plans of full convertibility of the

    Indian Rupee according to the Group are greatly dependent on narrowing the gap

    between international financial markets and domestic markets. Domestic OBUs offer the

    benefit of providing Indian financial institutions global know-how/human

    skills/technology/infrastructure in a relatively controlled environment prior to opening up

    the foreign exchange markets to full impact of convertibility.

    India has a special position in South Asia in terms of productive network, skilled

    manpower and technology. Financial and banking services in India which are yet to adopt

    modern technology would be exposed to international finance and business based on

    electronic data processing and

    telecommunication networks if we set up an OBC. According to the Expert Group there

    are a multitude of benefits in setting up a centre such as: (a) increase in skilled

    employment (both direct and with multiplier effects); (b) imparting of valuable training

    and exposure to international banking for local financial institutions; (c) increasing depth

    and scope of services available to exporters/importers/investors; (d) increased investment

    in world class infrastructure and transfer of latest banking technology, especially treasury

    skills and products on an ongoing basis. In addition several other indirect benefits like

    attracting regional (South Asian) foreign exchange business and improved international

    perceptions of the country with foreign investors/institutions.

    International banks based at the offshore centre can augment the foreign exchange

    resources of India. Foreign commercial capital can play a key role in making rapid

    growth possible. India can absorb billions of Dollars in investment capital and spew

    everything from hot rolled steel to sewing machines. Since capital is obtained on

    commercial terms, it can be used to buy the machinery, equipment and raw materials at

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    the most competitive prices internationally. It also leads internally to the adoption of

    more rigorous investment criteria whit beneficial impact on resource allocation.

    The offshore banking centre would also enable the Indian banking system to handle the

    surpluses and needs of genuine international transactions. Indian banks operating at the

    OBC apart from borrowing in the interbank market can mobilize resources directly from

    abroad and attract deposits from persons of Indian origin resident abroad and surpluses

    from the overseas earnings of Indian companies. Indian banks could use the resources

    they mobilize to book approved loans to finance projects in India and undertake

    intermediary business in non-domestic currencies on their own account and on behalf of

    non-residents.

    The current trends in international liquidity when banks are fairly liquid and emerging

    improvement in the credit rating of India combined with a deregulation and

    administration of whatever controls we have intelligently and flexibly may attract an

    adequate number of international banks representing the spectrum of international capital

    market. The flow of foreign capital could help India experience rapid economic growth

    by investing in infrastructure and by adopting latest technology which would raise

    productivity and improve the competitive position of Indian manufactures in the world

    market.

    It is suggested that an offshore banking centre may be set up in Mumbai. Foreign banks

    of standing and repute representing different geographical areas across the continents

    may be invited to participate provided they keep separate books for their transactions at

    the OBC.

    Conditions for the success of the Offshore Centre

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    The factors that are generally considered essential for the successful working of an

    offshore centre are the absence of taxes, exchange regulations and bank supervision and

    control. While they are essential, they are not adequate to make a centre a success. It is

    the understanding they are not adequate to make a centre a success. It is the

    understanding and flexibility with which the government and central bank deal with the

    international banks that is more important. London had more offshore business than

    domestic business in almost all the 25 years of the exchange risk and inflation risk.

    Actually, the British financial circles and the financial system when confronted with

    replacement of sterling as a world liquidity medium by the dollar they just turned to

    dollar and started accepting dollar deposits and deploying them outside the United States.

    Similarly, Singapore until 1978 operated with an exchange control system and even today

    offshore banking is segregated from domestic banking system. Neither London nor

    Singapore which really were offshore centres par excellence can be called tax havens.

    The taxes are quite onerous in London; and Singapore has taxes which make it less

    attractive than other centres. Although, offshore business is subject to various taxes,

    banks still book their business in Singapore and London than in some tax haven or brass

    plate branches in the Caribbean or Pacific. In the case of Bahrain also which has all the

    features we would consider essential for the success of an offshore centre, such as the

    absence of taxes, exchange controls and bank supervision still has not made as rapid

    strides as Singapore. Bahrain has been successful because of its political acceptability to

    Arab World which has surplus funds.

    Fiscal the taxes that are relevant for international banks decision to open a branch at the

    offshore banking centre are the tax on net profits and the withholding tax on interest.

    Since international banking is carried out on small margins say a quarter per cent or one

    eighth per cent a tax on net profits as in the case of India would make it unattractive for

    the banks to come to India. They may prefer to book the transactions if it lends to Indian

    constituents at a no tax or lower taxes centre rather than India. The only exception would

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    be the case of a centre like London which has the skills and infrastructure in a degree to

    outweigh the tax advantage of booking the transaction at a tax haven. In Panama offshore

    banks transactions with non-residents are exempted from tax while those with residents

    are subjected to tax. In Singapore and Philippines offshore income is subjected to a lower

    rate. In regard to Indian banks which set up offices at offshore centre their offshore

    income may be exempted or treated on par with those of foreign banks.

    Tax on interest which is withheld at source acts as a much greater deterrent than tax on

    net profits. Since offshore banking is essentially an interbank transaction banks gave to

    pay tax on their borrowing, interest plus withholding tax. If there is a withholding tax in

    the borrowers country, the borrower has to pay the withholding tax himself to enable the

    lender to realize the return which he can obtain tax free in another country. Withholding

    taxes on interest are really a tax on solved by segregating offshore transactions and

    exempting them from any tax on interest paid as Singapore and Hong Kong have done.

    Exchange Control: It is assumed that the present exchange control will continue. This

    assumption is reasonable in the context of setting up of an offshore centre, since several

    countries operated their centres with exchange control such as UK and Singapore. But

    banks in the offshore banking centre be they international banks or Indian banks should

    have complete freedom to do intermediary business in nondomestic currencies. Dealing

    in foreign exchange or buying or selling of currencies on a spot or forward basis is a

    normal function of a bank in the international capital market which is what the offshore

    centre would be. A standard foreign exchange activity is the

    creation of deposits for lending purposes. A US bank will trade dollar for Deutsche marks

    or a Deutsche mark loan and vice versa. Even if one had dollars to make a dollar loan the

    forward exchange rate may be such that it is cheaper to take a deposit in another currency

    for the appropriate period of time and swap it into dollars on a matched basis.

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    Banks in the international markets also meet the needs of customers by spot and forward

    transactions enabling the constituent to match or cover his own currency position. But

    banks rarely confine themselves to merely matching transactions. Banks normally

    anticipate constituents requirements or market movement by taking a position for or

    against a particular currency. Such major exchange positions contribute significantly to

    profits. Banks do observe internal limits to open positions where they are either long or

    short in a currency on a spot or forward basis and to forward positions where they have a

    matched position overall concealing long and short positions within the overall maturity

    ladder.

    Banks at the offshore banking center may be allowed to square their position either

    through inter