OFFSHORE BANKING.pdf

8/20/2019 OFFSHORE BANKING.pdf

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OFFSHORE BANKING

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EXECUTIVE SUMMARY

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 offshore banks may decide not to report income to other tax

authorities, and have no legal obligation to do so as they are protected

by bank secrecy, this does not make the non-declaration of the income by

the tax-payer or the evasion of the tax on that income legal.

Following September 11, 2001, there have been many calls for more

regulation on international finance, in particular concerning offshore banks,

tax havens, and clearing houses such as Clearstream, based in

Luxembourg, being possible crossroads for major illegal money flows.

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.

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OFFSHORE BANKING

Offshore simply means anything outside of a country’s jurisdiction. 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.

For a depositor offshore banking is associated with the services of a bank

from the country other than his country of residence. If you have invested

or deposited funds to a bank outside the country (referred as ―Offshore

Bank‖), where you live, you are engaged in offshore banking. On the other

hand, any bank in your country of residence is often referred as a domestic

bank.

There are two main myths about offshore banking. First of all, the public

mistakenly links offshore banking to criminal activities, terrorism-financing

and money laundering. Secondly, people think that offshore banking

services are only for high-income class, since ordinary people cannot afford

them.

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

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required to declare on penalty of perjury, any offshore bank accounts—

which may or may not be numbered bank accounts—they may have.

Although offshore banks may decide not to report income to other tax

authorities, and have no legal obligation to do so as they are protected by

bank secrecy, this does not make the non-declaration of the income by the

tax-payer or the evasion of the tax on that income legal. Following

September 11, 2001, there have been many calls for more regulation on

international finance, in particular concerning offshore banks, tax havens,

and clearing houses such as Clear stream, based in Luxembourg , being

possible crossroads for major illegal money flows.Defenders of offshorebanking have criticised these attempts at regulation. They claim the

process is prompted, not by security and financial concerns, but by the

desire of domestic banks and tax agencies to access the money held in

offshore accounts. They cite the fact that offshore banking offers a

competitive threat to the banking and taxation systems in developed

countries, suggesting that Organisation for Economic Co-operation and

Development (OECD) countries are trying to stamp out competition.

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

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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. Jurisdictionssuch 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

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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.

Before the EU introduced the European Savings Directive (ESD) in July

2005, an offshore bank was simply a bank located outside your country of

residence, usually in a low tax jurisdiction. The appeal of offshore bankingis that it offers the potential for tax efficiency, the convenience of easy

international access and a safe haven for your money.

The History of Offshore Banking

In 1970’s the UK and Europe levied the highest, most punitive taxes

in the developed world, with high earners in the UK having their earnings

taxed at a rate of 85 per cent, giving rise to the phrase ―tax exile‖, where

the likes of the Rolling Stones, Michael Caine, Pink Floyd, Sean Connery

moved abroad for years at a time to avoid paying high rates of income tax.

And then the government and financial institutions in the Channel

Islands – predominantly Jersey and Guernsey – realized that, rather than a

person leave the UK to save tax, their assets could be moved ―offshore‖ to

Channel Island banks and tax could be saved that way. The Channel

Islands fall into two separate self-governing bailiwicks – Jersey and

Guernsey, both of whom are British Crown Dependencies, but neither is

part of the United Kingdom. The Channel Islands assisted dejected

investors with two key offerings: confidentiality and lower taxation. The

offshore banking industry was born. The Channel Islands bankers


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persuaded their clients that any deposits placed into offshore banks would

be anonymous, free from the scrutiny plaguing the mainland and the UK,

and would be liable for minimal taxation.

As word spread across Europe and indeed throughout the world,

other small island nations and jurisdictions seized upon the opportunity and

began strengthening regulations regarding banking practices and client

confidentiality in the hopes of attracting foreign depositors; thus becoming

offshore banking jurisdictions and offshore financial centers.

This became particularly popular in the small island nations of the

Caribbean, which many tend to associate with offshore banking jurisdictions. Investors and depositors seeking politically and economically

stable jurisdictions found their way to these offshore financial centers and

this practice continues today.

Rightly or wrongly, offshore banking has become synonymous with

"tax haven", jurisdictions characterized by low - or zero - taxation on

interest, dividends, royalties and foreign derived income, as well as having

some degree of banking confidentiality. Over time this term has evolved to

include other popular banking jurisdictions such as Switzerland, Austria,

Lichtenstein, Luxembourg and more recently the United Arab Emirates

(UAE), Singapore and Hong Kong.

These gained popularity for the same reasons the small island

offshore financial centers did: they implemented sound banking practices

codified in law and regulations guaranteeing confidentiality, low taxation

and security. Although an abridged and streamlined version of history,

these are, fundamentally, the roots of the modern offshore banking

industry.


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ADVANTAGES OF OFFSHORE BANKING

Offshore banks provide access to politically and economically stable

jurisdictions. This may be an advantage for those residents 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.


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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 oftax 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


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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 maintainingoffshore 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.

Offshore bank accounts are less financially secure. In banking crisis

which swept the world in 2008 the only savers who lost money were

those who had deposited 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.

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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 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, 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:

o Bahamas

o Barbados

o Belize

o Bermuda

o British Virgin Islands

o Cayman Islands

o Channel Islands (Jersey and Guernsey)

o

Cook Islandso Cyprus

o Dominica

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

Exempt Company certificates are being issued from that date.

o Ghana


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o Hong Kong

o Isle of Man

o Labuan, Malaysia

o Liechtenstein

o Luxembourgo Malta

o Macau

o Montserrat

o Nauru

o Panama

o Saint Kitts and Nevis

o Seychelles

o Switzerlando Turks and Caicos Islands

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;


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• Financial systems with external assets and liabilities out of

proportion to domestic financial intermediation designed to finance

domestic economies

• Centres 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 beingused 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 basisof "light but effective" regulation, and generally only seek to regulate

high-risk financial business, such as banking, insurance and mutual

funds.


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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 financialcentres 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 lawenforcement 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


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offshore trust

private foundation


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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 setup offshore

banks in India.

Reserve bank of India

Offshore 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


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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 Criteria

Banks 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 givenpreference. Each of the eligible banks would be permitted to establish only one

OBU which would essentially carry on wholesale banking operations.

2.2 Licensing

Banks 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.


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FEMA71/2002-RB dated September 7, 2002 issued by the Exchange Control

Department (ECD) of RBI on OBUs is enclosed.

2.3 Capital

Since 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 Requirements 2.4.1 CRR

RBI 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 deployment

The 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


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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 OBUs

OBUs 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 Regulations

All 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.


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2.8 Anti-Money Laundering Measures

The 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 Supervision

OBUs will be regulated and supervised by RBI through its Exchange ControlDepartment, Department of Banking Operations and Development and

Department of Banking Supervision.

2.10 Reporting requirements

OBUs 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 OBUs

The 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


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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 lending

The loans and advances of OBUs would not be reckoned as net bank credit for

computing priority sector lending obligations.

2.13 Deposit insurance

Deposits of OBUs will not be covered by deposit insurance.

2.14 Choice of SEZ

OBUs would be permitted in SEZs approved by Government of India, where

according to Government policy, OBUs can be set up.

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


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the banks with an offshore unit at SEEPZ.

Offshore banking: A lucrative proposition

ONE of the significant features of the Exim Policy is the proposal to permit

offshore banking units (or overseas banking units) in Special Economic Zones(SEZs). Offshore banking refers to the international banking business involvingnon-resident foreign currency-denominated assets and liabilities. It refers to thebanking operations that cover only non-residents, and does not includedomestic banking. An offshore banking centre is a place where deliberateattempt is made to attract international banking by offering many concessionsin the form of taxes and levies imposed at lower rates.

A more important relaxation is the exemption of the offshore banks fromrestrictions on operations. Offshore banking units in these centres can carry ontheir activities with international enterprises or investors without conflicting withthe domestic fiscal and monetary policy.

Offshore banking centres offer the following benefits:

Exemption from minimum reserve requirements. Freedom from control on interest rates. Low or non-existent taxes and levies: Entry is relatively easy, especially

for large international banks, in contrast to the situation in neighbouring

countries that may strictly limit or prohibit the entry of foreign banks. Licence fees are generally low: Close proximity to the important loanoutlets or deposit sources; for instance, Bahrain is an offshore base forpetro-dollars.

Offshore banking is an extension of the euro-currency concept to theEast, which provides a link between euro-currency markets and the finalborrowers. They provide essential time zone links that are truly world-wide, and ensure that the market operates 24 hours a day. Whileoffshore banking is an integral part of the euro-market, what

distinguishes it from the mainstream euro market is that it was speciallyset up by host countries to promote international banking.

Offshore banking units are branches of international banks or othersubsidiaries or affiliates. They do not carry retail business, but generallyprovide wholesale banking services — project financing, syndicated loans,issue of short-term and medium term instruments, such as negotiable


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certificates of deposits and capital notes — as well as merchant bankingactivities in foreign currency denominated bonds and equity shares.

The deals are mostly between banks or with large borrowers or multinationalcorporations. MNCs prefer transacting in offshore financial centres because ofcertain apparent advantages: Avoidance of high tax incidence; freedom fromexchange control; maintenance of secrecy of deals due to non-interferencefrom government and regulatory authorities; and deferring tax by floatingsubsidiary units in such centres and delaying their remittance of profits to theparent company, when it would be taxed.

Participation of the Indian banks

Few Indian banks, such as State Bank of India, Indian Overseas Bank, Bank of

India and Bank of Baroda, have set up offshore banking units for deposit takingand final lending at Bahrain, Hong Kong, Colombo, Cayman Islands, and soon. Indian Bank, Bank of Baroda and Union Bank of India jointly floated adeposit taking company, IBU International Finance, in Hong Kong for bothoffshore and onshore banking.

The benefits for the Indian banks from these ventures are:

Sizeable profits — as these ventures involve relatively low operatingcosts.

With multi-currency deposit bases, the banks would be able to servebetter the needs of their customers who have set up joint venturesabroad in the form of foreign currency finance.

The banks would strengthen the country's balance of payments throughrepatriation of profits from the venture.

Offshore banking centre in India

Financial experts have been pleading to establish an offshore banking centrein India. Geographically, India provides distinct advantages in attractingoffshore banking units, because it has a stable economic and politicalperformance, a vast market, technical manpower that could find employment inthese centres. Another advantage is that the Indian market would open a littlebefore the Tokyo market closes, and close before New York opens, thus


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providing a vital time link for international money market dealers.

In an era where many Indian corporations are functioning abroad, and manycorporations are granted permission to seek overseas finance, establishing anoffshore unit will help tap the resources:

Exporters would benefit in terms of finer margins on loans and better foreignexchange rates available via an offshore banking unit.

The benefits of multi-currency operations which, to an extent, minimisecurrency fluctuation risk, will be an added advantage.

Salaries paid by offshore banks and local expenditure incurred by themcontribute to the economy's welfare. For smaller countries, the benefit would

be greater. For a larger country such as India, however, this may not form asignificant portion of the total income.India may earn revenue in the form of licence fees, profit taxes imposed on

the banks operating in the area. It may also get the benefit of banks' funds inthe form of capital and liquidity requirements.

The country can gain improved access to the international capital markets.he domestic financial system may become more efficient through increased

competition and exposure of the domestic banks to the practices of offshorebanks.

The offshore banking centres will provide opportunities to train the local staff

which will, in turn, contribute to faster economic growth.The offshore banking units would help channelize non-resident Indian

investments.Setting up offshore banking centres would trigger enforced development of

more advanced communication facilities — a must for their functioning.

But establishing offshore centres also comes with a price:

The supervision and regulation of offshore banks may involve substantialcosts.

Encouraging offshore banking may result in the diminution in autonomy ofdomestic monetary policy, since it is difficult to draw a line always between theoffshore and onshore operations, particularly in the absence of exchangecontrol.

banking provides scope for tax evasion by residents. For instance,in Hong Kong, it was found that residents place deposits with offshore banks


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and take loans of the same amount. The interest on loan would be a deductibleexpenditure for taxation, while the income from interest on deposits is nottaxed.

Offshore banks may prove to be harmful competitors to the local banks and

may inhibit their growth.For long, Mumbai was considered suitable for establishing offshore bankinghere. The city has all the requirements — goods infrastructure in the form oftelecommunications and services, abundant and well-trained manpower andpresence of many international banks, both Indian and foreign, alreadyengaged in international banking.

The Sodhani Committee on Foreign Exchange Reforms (1996) hasrecommended allowing Indian banks and financial As against the general

recommendation of permitting offshore banking units only at Mumbai, thepresent proposal is to permit them at Special Economic Zones. This is a wisemove since both offshore banking centres and SEZs have many things incommon as regards administration and purpose. The establishment of offshorecentres in India was foreseen when the Foreign Exchange Regulation Act(FERA) was replaced by the Foreign Exchange Management Act, 1999(FEMA). Article 10 of FEMA included offshore banking units as one of theauthorities to whom the RBI could delegate powers for dealing in foreignexchange. The question is: Will these offshore banking units fulfil Mr Maran'scherished goals? The RBI is expected to bring out regulations regarding settingup these units in India. A lot depends on how far these regulations are liberaland pragmatic.


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TRENDS IN REGULATION OF OFFSHORE BANKING

Since offshore banking emerged and grew in response to restrictive regulatory

regimes, there are certain inherent risks that can potentially affect international

financial stability. Three can be readily identified. First, the contagion effect

with the increasing integration of financial markets 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 regulatorystandards 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 country

authority 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;


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• Home country authorities should possess the right to gather information 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 the establishment of

banking offices.

This was followed by the Report of a Working Group of the Basle Committee

which, inter alia, aims at improving access of home and host regulators to data

necessary for effective consolidated supervision and ensuring all cross borderbanking 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 Special Economic

Zones (SEZs). The SEZs have been set up with a view to providing 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


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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 scrupulouslyfollow ―Know Your Customer‖ and other antimony laundering directives of RBI

from time to time. Unlike the OFCs in other developing countries which conduct

offshore banking in a significant manner, the OBUs in India have a limited

mandate. In fact, the approach appears to be facilitating the SEZ policy rather

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


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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 bankand 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 cannot 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.

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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. 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

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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

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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 Transfer

Wire 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 cashoffice.

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

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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.

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

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(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, meaningthat 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, storm water 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 cancelled

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 Traveller’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

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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 morecommonly 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

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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

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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. Inthe 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.


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OFFSHORE DEVELOPMENT - A FAVOURITE DESTINATION INDIA

Soft ware’s 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 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 is 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


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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 9/11 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


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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 be

expected to move forward on the basis of following four broad principles:

• First, consolidated supervision of banking operations through greater co-

operation between home country and host country regulators;

• Second, higher tr ansparency with reference to supervisory systems and


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programmes including dissemination of guidelines, publications of data of

OFCs;

• Third, technical assistance to upgrade regulatory systems, supervisory

policies and procedures through adoption of `best in class’ processes and

policies.

• Fourth, setting up systems for independent monitoring of activities of OFCs

and complying with supervisory standards.

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.

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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 following 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 toprevent 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

gives you the opportunity to trade in whichever currency you prefer. Any

stock market is open for your 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


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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 centres.

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.


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Recommendations of the Expert Group on Foreign Exchange Markets in

India (1995) in Regard to Setting Up of Offshore Banking Units (OBU’s)

Before concluding we may note the recommendations of the Expert Group in

regard to the setting up of offshore banking units. The group hasrecommended that Offshore Banking Units (OBU’s) may be allowed to be set

up by scheduled commercial banks operating in India as part of and within the

existing bank titled ―domestic OBU’s‖. Foreign banks not operating in India

would not be permitted to operate only as domestic OBU. OBU is expected to

maintain its own separate accounting which will be audited separately and

strictly.

Sources of Funds

The Group recommended that OBU’s may obtain fund from: (i) acceptance of

deposits or borrowings in foreign currency from non-residents including foreign

entities and other foreign branches of Indian banks and issuance of foreign

currency certificates of deposits, the Reserve Bank of India (RBI) would lay

down account opening criteria; (ii) acceptance of funds as deposits/borrowings

from only those residents who are eligible to hold foreign currency accounts

(although these funds cannot strictly be deemed as offshore funds, the

objective of permitting this to be held in ―offshore books‖, is to increase the

source of foreign currency funds which are free of reserve requirements so thatliquidity and pricing of these is more in line with international rates), which will

greatly benefit exporters; and (iii) taking deposits from other domestic OBU in

India.

Development of Funds

The Group has suggested that OBU’s may deploy funds by way of:

(i) Lending to any non-resident;

(ii) Specific category of investments permitted by RBI;

(iii) Loans to other domestic OBU’s

(iv) Loans to domestic entities in foreign currency for project/


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infrastructure finance under the RBI’s general or specific permissions.

Other Business

According to the Group domestic OBU’s should also be permitted to: (i)undertake foreign exchange dealings with non-residents, other domesticOBU’s and authorised dealers not involving local currency; (ii) issueguarantees and do other business not involving domestic currency/localexposure; (iii) loan syndication and management in advising, negotiatingand confirming LCs in foreign currencies where both the parties are non-residents; and (v) financial advisory services.

Capital Adequacy and Supervision

The Group has suggested that the OBU will be subject to strict regulation by

RBI including capital adequacy, exposure norms, accounting standards and

gap limits. Besides prescribing eligibility criteria for allowing setting up of such

units, the RBI may also, according to the Expert Group, specify a limit on the

total assets/liabilities. The limit would be subject to review from time to time.

Incentives for OBU’s

According to the recommendations of the Group, (a) the liabilities of the OBU

will have to be exempt from CRR/SLR requirements, (the RBI, may, however,

prescribe minimum liquid assets requirements for prudential reasons if felt

necessary); (b) the rates of income tax should be low, not exceeding 10 per

cent; (c) there should not be withholding tax on deposits raised from non-

residents; and (d) transactions of OBUs should be exempt from stamp duty.

The Expert Group felt that these conditions would enable OBU’s to be

competitive with other such regional centres abroad so as to attract non-

resident business for its growth. The clear identification/separation of funds

flow in the domestic OBU’s and the parent bank will ensure that foreign

currency flow do not impact domestic monetary aggregates. This itself would


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ustify exemption from CRR/SLR requirements.

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

ust like an offshore company, an offshore bank is merely a bank domiciled in a

country other than that of the person’s 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 whattypically 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 benefitsover 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,


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weapons smugglers and terrorists.

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 formany 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

urisdictions 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 world’s 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.

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.


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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

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