OFFSHORE BANKING

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 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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OFFSHORE BANKING
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 offshore
banking have criticised these attempts at regulation. They claim the
process is prompted, not by security and financial concerns, but by the
desire of domestic banks and tax agencies to access the money held in
offshore accounts. They cite the fact that offshore banking offers a
competitive threat to the banking and taxation systems in developed
countries, suggesting that Organisation for Economic Co-operation and
Development (OECD) countries are trying to stamp out competition.
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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OFFSHORE BANKING
Low or no taxation (i.e. tax havens): No tax deducted on interest
earned. Interest on our offshore accounts is paid without the
deduction of tax†

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

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

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

protection against local political or financial instability

Convenience: easy, international access

A safe haven for your money

The quality of the regulation is monitored by supra-national bodies such as
the International Monetary Fund (IMF). Banks are generally required to
maintain capital adequacy in accordance with international standards. They
must report at least quarterly to the regulator on the current state of the
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OFFSHORE BANKING
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 banking
is 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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Austria. as well as having some degree of banking confidentiality.OFFSHORE BANKING persuaded their clients that any deposits placed into offshore banks would be anonymous. 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. offshore banking has become synonymous with "tax haven". fundamentally. thus becoming offshore banking jurisdictions and offshore financial centers.or zero . 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. As word spread across Europe and indeed throughout the world. Over time this term has evolved to include other popular banking jurisdictions such as Switzerland. This became particularly popular in the small island nations of the Caribbean. Investors and depositors seeking politically and economically stable jurisdictions found their way to these offshore financial centers and this practice continues today. 6 . the roots of the modern offshore banking industry. Lichtenstein.taxation on interest. royalties and foreign derived income. and would be liable for minimal taxation. which many tend to associate with offshore banking jurisdictions. free from the scrutiny plaguing the mainland and the UK. Although an abridged and streamlined version of history. low taxation and security. jurisdictions characterized by low . Singapore and Hong Kong. Luxembourg and more recently the United Arab Emirates (UAE). dividends. these are. Rightly or wrongly.

This is an advantage to individuals who do not pay tax on worldwide income. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks. Interest is generally paid by offshore banks without tax deducted. seized or disappear. 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. Offshore finance is one of the few industries. However. and can help redistribute world finance from the developed to the developing world. reducing interest rates on deposits. that geographically remote island nations can competitively engage in. along with tourism. 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. 7 . developed countries with regulated banking systems offer the same advantages in terms of stability. or who feel that they can illegally evade tax by hiding the interest income. or who do not pay tax until the tax return is agreed. It can help developing countries source investment and create growth in their economies.OFFSHORE BANKING ADVANTAGES OF OFFSHORE BANKING Offshore banks provide access to politically and economically stable jurisdictions.

Yet in a world with global 8 . by providing tax evaders with an attractive place to deposit their hidden income. Critics of the industry. trusts or foundations. claim this competition as a disadvantage. Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry. Offshore jurisdictions are often remote. Offshore banking is often linked to other services. arguing with Charles Tiebout that tax competition allows people to choose an appropriate balance of services and taxes. 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. which may have specific tax advantages for some individuals. DISADVANTAGES OF OFFSHORE BANKING The existence of offshore banking encourages tax evasion. higher or lower rate loans based on risk and investment opportunities not available elsewhere. however. such as offshore companies. so physical access and access to information can be difficult.OFFSHORE BANKING Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts.

tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups. This "Hot money" is aided by offshore accounts. and can increase problems in financial disturbance. along with clearing houses. Offshore banking is usually more accessible to those on higher incomes. terrorist groups. as previously sheltered income is brought back into the mainstream economy. 9 . Developing countries can suffer due to the speed at which money can be transferred in and out of their economy as "hot money". offshore banks and tax havens. Accounts can be set up online. and other state or non-state actors. 2001. 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). because of the costs of establishing and maintaining offshore accounts. offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers. However. Offshore bank accounts are less financially secure. Historically. Following September 11. Offshore banking has been associated in the past with the underground economy and organized crime. The tax burden in developed countries thus falls disproportionately on middle-income groups.OFFSHORE BANKING telecommunications this is rarely a problem. through money laundering. have been accused of helping various organized crime gangs. by phone or by mail.

No new Exempt Company certificates are being issued from that date. in terms of total deposits. o Ghana 10 . Some offshore jurisdictions have steered their financial sectors away from offshore banking. List of offshore financial centres Offshore financial centres include: o o o o o o o o o o o 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. 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 particular.OFFSHORE BANKING Offshore bank accounts are sometimes touted as the solution to every legal. as difficult to properly regulate and liable to give rise to financial scandal. 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. Jersey. Guernsey and the Isle of Man are known for their well regulated banking infrastructure.

OFFSHORE BANKING o o o o o o o o o o o o o o Hong Kong Isle of Man Labuan. 11 . 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. although not precisely defined." Characteristics of an offshore financial centre: • Jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents. Malaysia Liechtenstein Luxembourg Malta Macau Montserrat Nauru Panama Saint Kitts and Nevis Seychelles Switzerland 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). is usually a low-tax. "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.

OFFSHORE BANKING • 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. and generally only seek to regulate high-risk financial business. insurance and mutual funds. Although most offshore financial centres still charge little or no tax. moderate or light financial regulation. or very low tax burdens. such as banking. banking secrecy and anonymity. Regulation Most offshore financial centres now promote themselves on the basis of "light but effective" regulation. the increasing sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost of moving a transaction structure offshore. Critics of offshore financial centres argue that a lack of transparency in offshore financial centres means that they are vulnerable to being used in illegal tax evasion schemes. tax avoidance has played a decreasing role in the success of offshore financial centres in recent years. and have argued that such jurisdictions should be forced to tax both economic activity and their own citizens at a higher level. A number of international organizations also suggest that offshore financial centres engage in "unfair tax competition" by having no. Taxation Although most offshore financial centres originally rose to prominence by facilitating structures which helped to minimise exposure to tax. 12 .

a person needs a licence to act as a trustee. Some even argue that offshore jurisdictions are in many cases better regulated than many onshore financial centres. For example. particularly in relation to the beneficial ownership of offshore companies. partly in response to international initiatives and partly in a defensive move to protect their reputations. However. there are certainly well documented cases of parties using offshore structure to facilitate wrongdoing. and in relation to offshore bank accounts. 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. and in particular that they are vulnerable to being used by organised crime for money laundering. In most jurisdictions banks will preserve the confidentiality of their customers. and all of the major offshore jurisdictions have appropriate procedures for law enforcement agencies to obtain information regarding suspicious bank accounts.OFFSHORE BANKING Critics of offshore financial centres suggest that they are not effectively regulated in all areas. whereas (for example) in the United Kingdom and the United States. most offshore financial centres now apply fairly rigorous anti-money laundering regulations to offshore business. However. there are no restrictions or regulations as to who may serve in a fiduciary capacity. in most offshore jurisdictions. The criticisms are slightly difficult to assess. Confidentiality Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions. Offshore structures are characteristically involve the formation of an: offshore company offshore partnership 13 .

OFFSHORE BANKING offshore trust private foundation 14 .

Eventually. Many of the Indian banks made use of that provision to setup offshore banks in India.OFFSHORE BANKING 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. Offshore 15 . the various Indian banks had been trying to convince the Reserve Bank of India to introduce offshore banking in the country. the Reserve Bank of India understanding the needs and prospects of offshore banking in India. As per the Government's policy. 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. It was also indicated by the Union Commerce Minister in his speech announcing the Exim Policy for 2002-07 that for the first time. For plenty of years. allowed the setting up of offshore units in the special economic zones. 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.

Reserve Bank would stipulate certain licensing conditions such as dealing only in foreign currencies.1 Eligibility Criteria Banks operating in India viz. on the functioning of the OBUs. SLR and give access to SEZ units and SEZ developers to international finances at international rates.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. As currently in vogue with respect to designating a specific branch for conducting foreign exchange business. 1949. These units would be virtually foreign branches of Indian banks but located in India. No separate authorisation with respect to the OBU branch would be issued under FEMA. Given the unique nature of business of the OBUs. the parent bank may designate the branch in SEZ as an OBU branch. private sector and foreign banks authorised to deal in foreign exchange are eligible to set up OBUs. The Scheme 2. These OBUs.OFFSHORE BANKING Banking Units (OBUs) would be permitted to be set up in SEZs. 16 . A separate Notification No. 2. Each of the eligible banks would be permitted to establish only one OBU which would essentially carry on wholesale banking operations. inter alia. 2. restrictions on dealing with Indian rupee. access to domestic money market. would be exempt from CRR. Such banks having overseas branches and experience of running OBUs would be given preference. public sector. etc. 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.

4 Reserve Requirements 2.3 Capital Since OBUs would be branches of Indian banks.Act. 2. 1949 in respect of their OBU branches. in case of necessity. 1949. 1934. 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. no separate assigned capital for such branches would be required. request from individual banks for exemption will be considered for a specified period under Section 53 of the B.R. the parent bank would be required to provide a minimum of US$ 10 million to its OBU. 2.1 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.5 Resources and deployment The sources for raising foreign currency funds would be only external.4.2 SLR Banks are required to maintain SLR under Section 24(1) of the Banking Regulation Act. 2002 issued by the Exchange Control Department (ECD) of RBI on OBUs is enclosed. However. However. 2.OFFSHORE BANKING FEMA71/2002-RB dated September 7.4. 2. Deployment of funds would be restricted to 17 . with a view to enabling them to start their operations.

18 . which would be separate from the open position limit of the parent bank. If funds are lent to residents in the Domestic Tariff Area (DTA). Foreign currency requirements of corporates in the domestic area can also be met by the OBUs. 2002 and subject to the conditions of the licence issued to the OBU branches.7 Prudential Regulations All prudential norms applicable to overseas branches of Indian banks would apply to the OBUs.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. asset classification and provisioning. 2. existing exchange control regulations would apply to the beneficiaries in DTA. 1949 as stipulated in the enclosed ECD Notification no. The bank's Board would be required to set comprehensive overnight limits for each currency for these branches. 2. FEMA71/2002-RB dated September 7.OFFSHORE BANKING lending to units located in the SEZ and SEZ developers. 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 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 follow the best international practice of 90 days' payment delinquency norm for income recognition.

they are prohibited from undertaking cash transactions.OFFSHORE BANKING 2. 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 19 . 2. and transactions with individuals. with a view to ensuring that anti-money laundering instructions are strictly compiled with by the OBUs. 2. These branches would be prohibited to participate in domestic call. etc.9 Regulation and Supervision OBUs will be regulated and supervised by RBI through its Exchange Control Department. Further. tem. Department of Banking Operations and Development and Department of Banking Supervision. 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. money market and payment system. notice.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.10 Reporting requirements OBUs will be required to furnish information relating to their operations as are prescribed from time to time by RBI.

where according to Government policy.12 Priority sector lending The loans and advances of OBUs would not be reckoned as net bank credit for computing priority sector lending obligations.13 Deposit insurance Deposits of OBUs will not be covered by deposit insurance. The Ads dealing with OBUs would be subject to ECD regulations. Punjab National Bank is another banks which boasts of an offshore banking unit at Santacruz Electronics Export Promotion Zone or SEEPZ in Mumbai.14 Choice of SEZ OBUs would be permitted in SEZs approved by Government of India. REPUTED OFFSHORE BANKS IN INDIA With the introduction of offshore banking numerous banks made a beeline for setting up an offshore banking unit at the special economic zones.OFFSHORE BANKING subject to the current exchange control regulations in force. The State Bank of India is also one of 20 . It set up an offshore unit in the city of Mumbai. 2. 2. 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. One of the banks which took to offshore banking in India is the Bank of Baroda. OBUs can be set up. 2.

and ensure that the market operates 24 hours a day.OFFSHORE BANKING the banks with an offshore unit at SEEPZ. An offshore banking centre is a place where deliberate attempt is made to attract international banking by offering many concessions in the form of taxes and levies imposed at lower rates. Offshore banking units in these centres can carry on their activities with international enterprises or investors without conflicting with the domestic fiscal and monetary policy. Offshore banking units are branches of international banks or other subsidiaries or affiliates. but generally provide wholesale banking services — project financing.  Freedom from control on interest rates. in contrast to the situation in neighbouring countries that may strictly limit or prohibit the entry of foreign banks. especially for large international banks. They provide essential time zone links that are truly worldwide. such as negotiable 21 . Offshore banking is an extension of the euro-currency concept to the East. and does not include domestic banking. what distinguishes it from the mainstream euro market is that it was specially set up by host countries to promote international banking. Bahrain is an offshore base for petro-dollars. which provides a link between euro-currency markets and the final borrowers. Offshore banking refers to the international banking business involving non-resident foreign currency-denominated assets and liabilities. Offshore banking centres offer the following benefits:  Exemption from minimum reserve requirements. They do not carry retail business.  Licence fees are generally low: Close proximity to the important loan outlets or deposit sources. issue of short-term and medium term instruments. It refers to the banking operations that cover only non-residents. While offshore banking is an integral part of the euro-market.  Low or non-existent taxes and levies: Entry is relatively easy. A more important relaxation is the exemption of the offshore banks from restrictions on operations. for instance. syndicated loans. 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).

thus 22 . technical manpower that could find employment in these centres. Colombo. Indian Overseas Bank. Offshore banking centre in India Financial experts have been pleading to establish an offshore banking centre in India. India provides distinct advantages in attracting offshore banking units. a vast market. Cayman Islands. MNCs prefer transacting in offshore financial centres because of certain apparent advantages: Avoidance of high tax incidence. because it has a stable economic and political performance. Bank of India and Bank of Baroda. have set up offshore banking units for deposit taking and final lending at Bahrain.OFFSHORE BANKING certificates of deposits and capital notes — as well as merchant banking activities in foreign currency denominated bonds and equity shares. the banks would be able to serve better the needs of their customers who have set up joint ventures abroad in the form of foreign currency finance. The deals are mostly between banks or with large borrowers or multinational corporations. Another advantage is that the Indian market would open a little before the Tokyo market closes. and so on. Indian Bank. in Hong Kong for both offshore and onshore banking. and close before New York opens. Hong Kong. IBU International Finance. and deferring tax by floating subsidiary units in such centres and delaying their remittance of profits to the parent company.  The banks would strengthen the country's balance of payments through repatriation of profits from the venture. such as State Bank of India. Geographically. maintenance of secrecy of deals due to non-interference from government and regulatory authorities. Participation of the Indian banks Few Indian banks. Bank of Baroda and Union Bank of India jointly floated a deposit taking company.  With multi-currency deposit bases. when it would be taxed. The benefits for the Indian banks from these ventures are:  Sizeable profits — as these ventures involve relatively low operating costs. freedom from exchange control.

The offshore banking centres will provide opportunities to train the local staff which will. But establishing offshore centres also comes with a price: The supervision and regulation of offshore banks may involve substantial costs. It may also get the benefit of banks' funds in the form of capital and liquidity requirements. contribute to faster economic growth. will be an added advantage. however. he domestic financial system may become more efficient through increased competition and exposure of the domestic banks to the practices of offshore banks. In an era where many Indian corporations are functioning abroad. The benefits of multi-currency operations which. banking provides scope for tax evasion by residents. For a larger country such as India.OFFSHORE BANKING providing a vital time link for international money market dealers. The offshore banking units would help channelize non-resident Indian investments. since it is difficult to draw a line always between the offshore and onshore operations. in Hong Kong. India may earn revenue in the form of licence fees. the benefit would be greater. Salaries paid by offshore banks and local expenditure incurred by them contribute to the economy's welfare. For smaller countries. it was found that residents place deposits with offshore banks 23 . The country can gain improved access to the international capital markets. in turn. to an extent. minimise currency fluctuation risk. profit taxes imposed on the banks operating in the area. Encouraging offshore banking may result in the diminution in autonomy of domestic monetary policy. particularly in the absence of exchange control. establishing an offshore unit will help tap the resources: Exporters would benefit in terms of finer margins on loans and better foreign exchange rates available via an offshore banking unit. this may not form a significant portion of the total income. For instance. and many corporations are granted permission to seek overseas finance. Setting up offshore banking centres would trigger enforced development of more advanced communication facilities — a must for their functioning.

1999 (FEMA). already engaged in international banking. Offshore banks may prove to be harmful competitors to the local banks and may inhibit their growth. 24 . For long. The establishment of offshore centres in India was foreseen when the Foreign Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act. This is a wise move since both offshore banking centres and SEZs have many things in common as regards administration and purpose. Mumbai was considered suitable for establishing offshore banking here. The question is: Will these offshore banking units fulfil Mr Maran's cherished goals? The RBI is expected to bring out regulations regarding setting up these units in India.OFFSHORE BANKING and take loans of the same amount. the present proposal is to permit them at Special Economic Zones. A lot depends on how far these regulations are liberal and pragmatic. abundant and well-trained manpower and presence of many international banks. The city has all the requirements — goods infrastructure in the form of telecommunications and services. both Indian and foreign. Article 10 of FEMA included offshore banking units as one of the authorities to whom the RBI could delegate powers for dealing in foreign exchange. The Sodhani Committee on Foreign Exchange Reforms (1996) has recommended allowing Indian banks and financial As against the general recommendation of permitting offshore banking units only at Mumbai. The interest on loan would be a deductible expenditure for taxation. while the income from interest on deposits is not taxed.

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. BCCI was a landmark in the sense that thereafter. the contagion effect with the increasing integration of financial markets worldwide and the explosive growth in cross-border capital flows. • The creation of cross-border banking establishments should receive the prior consent of both the host country and home country authority. Second. The bankruptcy of Bank of Credit and Commerce International (BCCI) in 1992 hastened the adoption of international supervisory standards. First. it has become difficult for a bank incorporated in a jurisdiction with limited domestic market to carry on business in other countries. Internationally regulators have been addressing the systemic issues posed by offshore banking. there are certain inherent risks that can potentially affect international financial stability.OFFSHORE BANKING TRENDS IN REGULATION OF OFFSHORE BANKING Since offshore banking emerged and grew in response to restrictive regulatory regimes. Three can be readily identified. problems in a bank in a OFC can be transferred rapidly to other market jeopardising the stability of those markets. The `Basle Concordat’ of 1975 was implemented on best efforts basis for almost two decades. 25 . Third. the lack of reliable data on activities in OFCs may hinder effective supervision. competitive liberalisation may lead to lowering regulatory standards in OFCs in order to attract a higher share of global business.

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. This was followed by the Report of a Working Group of the Basle Committee which. • If the host country determines that any of these three standards is not being met. inter alia. would be 26 . inter alia. inter alia. Subsequently there have been several international and regional supervisory and regulatory initiatives. The SEZs have been set up with a view to providing an internationally competitive and hassle free environment for export production. These OBUs.OFFSHORE BANKING • Home country authorities should possess the right to gather information from their cross-border banking establishments. 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). aims at improving access of home and host regulators to data necessary for effective consolidated supervision and ensuring all cross border banking operations are subject to home and host supervision. at curbing involvement of OFCs in financial crime such as money laundering. The OBUs virtually would be foreign branches of Indian banks located in India. it could impose restrictive measures or prohibit the establishment of banking offices. These are aimed. tax evasion. lax financial regulation including inadequate supervision.

They will be required to scrupulously follow ―Know Your Customer‖ and other antimony laundering directives of RBI from time to time. many Indian banks have set up OBUs in SEZs. Over the years. the OBUs in India have a limited mandate. passed keeping in view the FATF deliberations and recommendation and international initiatives at the United Nations and others. the approach appears to be facilitating the SEZ policy rather than introducing offshore banking in India. The Code of 27 . The OBUs would carry out essentially wholesale banking operations. In fact. These include the Prevention of Money Laundering Act 2002. whether Indian. All prudential norms applicable to overseas branches of Indian banks would apply to OBUs. India has tightened the legal framework to combat money laundering and other cross border financial crime.OFFSHORE BANKING exempt from reserve requirements and provide access to SEZ units and SEZ developers to international finances at international rates. to set up OBUs in the SEZs. The OBUs will be set up as branches of the banks and therefore no separate assigned capital will be required. The Reserve Bank of India (RBI) has permitted banks operating 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. Thus. Available feedback is encouraging. would have to be adopted by the OBUs. The OBUs will be regulated and supervised by RBI. public/private sector or foreign. Notwithstanding the limited scope for offshore banking in the light of the relevant regulations. There are other laws such as The Smugglers and Foreign Exchange Manipulation (Forfeiture of Property) Act of 1976. the necessary risk management practices that are in vogue internationally. Unlike the OFCs in other developing countries which conduct offshore banking in a significant manner.

Major types Checking accounts: A deposit account held at a bank or other financial institution. 28 . these accounts let customers keep liquid assets while still earning a monetary return. Prevention of Corruption Act. through a variety of different channels. Savings accounts: Accounts maintained by retail banks that pay interest but cannot be used directly as money (for example. Because money is available on demand these accounts are also referred to as demand accounts or demand deposit accounts. at a banking institution that allows money to be deposited and withdrawn by the account holder. and the resulting balance is recorded as a liability for the bank and represent the amount owed by the bank to the customer. The Narcotic drugs and Psychotropic Substances Act of 1985. by writing a cheque). savings account. for the purpose of securely and quickly providing frequent access to funds on demand.OFFSHORE BANKING Criminal Procedures 1973. BANKING SERVICES PROVIDED BY OFFSHORE BANKS 1) Deposit account A deposit account is a current account. while others may pay the customer interest on the funds deposited. Although not as convenient to use as checking accounts. or other type of bank account. These transactions are recorded on the bank's books. Some banks charge a fee for this service. 1988.

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. Time deposit: A money deposit at a banking institution that cannot be withdrawn for a preset fixed 'term' or period of time. It is any form of deferred payment. Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. When the term is over it can be withdrawn or it can be rolled over for another term. Credit need not necessarily be based on formal monetary systems. it is a style of instant access deposit subject to federal savings account regulations. Movements of financial capital are normally dependent on either credit or equity transfers. also known as a lender. In the United States. such as a monthly transaction limit.OFFSHORE BANKING Money market deposit account: A deposit account with a relatively high rate of interest. the longer the term the better the yield on the money. also known as a borrower. Generally speaking. while the second party is called a debtor. The 29 . The first party is called a creditor. thereby generating a debt. and short notice (or no notice) required for withdrawals.

Credit is also traded in the market. bond or other receivable). commonly denoted in basis points of the notional amount to be referenced. various forms of credit are frequently referred to as money and are included in estimates of the money supply. delivers this receivable to the protection seller and receives from the seller the par amount (that is. which is essentially a traded market in credit insurance. digital cash or digital currency) refers to money or 30 . Unlike money (by a strict definition).OFFSHORE BANKING credit concept can be applied in barter economies based on the direct exchange of goods and services. digital money. However. Credit is denominated by a unit of account. As such. electronic currency. 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. electronic cash. 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. 3) Electronic money Electronic money (also known as e-money. The purest form is the credit default swap market. is made whole). credit itself cannot act as a unit of account. while the protection "buyer" pays this premium and in the case of default of the underlying (a loan. many forms of credit can readily act as a medium of exchange.

The message also includes settlement instructions.OFFSHORE BANKING scrip which is exchanged only electronically. the internet and digital stored value systems. requesting that it effect payment according to the instructions given. Typically. Also. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office. 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. this involves use of computer networks. Bank wire transfers are often the most expedient method for transferring funds between bank accounts. it is a collective term for financial cryptography and technologies enabling it. IBAN and BIC code are given as well so the bank knows where the money needs to be sent to. to the receiving bank. Electronic Funds Transfer (EFT) and direct deposit are examples of electronic money. The actual transfer is 31 . via a secure system (such as SWIFT or Fedwire). Wire Transfer Wire transfer or credit transfer is a method of transferring money from one person or institution (entity) to another. The sending bank transmits a message.

The purpose of the foreign exchange market is to help international trade and investment. even though the business's income is in U. 4) Foreign exchange market The foreign exchange market (currency. or the payment must be sent to a bank with such an account. it permits a U. It lets banks and other institutions easily buy and sell currencies. Its long trading hours: 24 hours a day except on weekends The variety of factors that affect exchange rates. A foreign exchange market helps businesses convert one currency to another. dollars.S. For example. In a typical foreign exchange transaction a party purchases a quantity of one currency by paying a quantity of another currency. The foreign exchange market is unique because of Its trading volumes.S. The extreme liquidity of the market. or FX) trades currencies. Its geographical dispersion. business to import European goods and pay Euros. 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 low margins of profit compared with other markets of fixed income 32 . forex. Either the banks involved must hold a reciprocal account with each other.OFFSHORE BANKING not instantaneous: funds may take several hours or even days to move from the sender's account to the receiver's account.

commercial letter of credit is a document issued mostly by a financial institution. the issuing bank and the confirming bank. the issuing bank of whom the applicant is a client. Letters of credit are used primarily in international trade transactions of significant value. and the advising bank of whom the beneficiary is a client. which usually provides an irrevocable payment undertaking.e. The parties to a letter of credit are usually a beneficiary who is to receive the money. Typically. used primarily in trade finance. bill of lading. cannot be amended or cancelled without prior agreement of the beneficiary. the list and form of documents is open to imagination and negotiation and might 33 ..) will be built. letters of credit incorporate functions common to Traveller’s cheques. meaning that redeeming the letter of credit will pay an exporter. The LC can also be the source of payment for a transaction. They are also used in the land development process to ensure that approved public facilities (streets. for deals between a supplier in one country and a customer in another. i. storm water ponds. Almost all letters of credit are irrevocable.OFFSHORE BANKING (but profits can be high due to very large trading volumes) The use of leverage 5) Letter of credit A standard. the documents a beneficiary has to present in order to receive payment include a commercial invoice. etc. sidewalks. and documents’ proving the shipment was insured against loss or damage in transit. In executing a transaction. However. if any.

6) Investment management Investment management is the professional management of various securities (shares. 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". asset selection. The provision of 'investment management services' includes elements of financial analysis.OFFSHORE BANKING contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped. corporations etc.g.) and assets (e. to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e. bonds etc. pension funds. mutual funds or Exchange Traded Funds) . (not necessarily) whilst the more generic fund management may refer to all forms of institutional investment as well as investment management for private investors. stock selection. or their place of origin. Investment management is a large and important global industry in its own right responsible for 34 . plan implementation and ongoing monitoring of investments. The term asset management is often used to refer to the investment management of collective investments. real estate)..g.

7) Trustee Trustee is a legal term that refers to a holder of property on behalf of a beneficiary. In all cases. the duty to account for their actions and to keep them informed about the trust. the duty not to be in a conflict of interest position and the duty to administer the trust in the best interest of 35 . Fund manager (or investment adviser in the U. 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. These include the duty to carry out the express terms of the trust instrument. the duty not to profit. and a charitable trust. the trustee may be a person or company. pounds and yen. the duty to prudently invest trust assets.) refers to both a firm that provides investment management services and an individual who directs fund management decisions. the duty to defend the trust. the duty not to delegate. A trust can be set up either to benefit particular persons. euro.S. General duties of trustees Trustees have certain duties (some of which are fiduciary). 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. a pension trust (to confer benefits on employees and their families). whether or not they are a prospective beneficiary. the duty of impartiality among the beneficiaries. the duty of loyalty.OFFSHORE BANKING caretaking of trillions of dollars.

Trustees are generally held to a "prudent person" standard in regard to meeting their fiduciary responsibilities. typically trust departments at large banks. in litigation. they may find themselves personally liable for the excess. Corporate trustees. though investment. 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. but in most instances cannot be eliminated completely. 36 . and other professionals can be held to a higher standard commensurate with their higher expertise. prospective beneficiaries. legal. or third parties. limited to those explicitly defined in the trust indenture.OFFSHORE BANKING the beneficiaries. Trustees can be paid for their time and trouble in performing their duties only if the trust specifically provides for payment. These duties may be expanded or narrowed by the terms of the instrument creating the trust. or for taxes. or under the terms of a lease) in excess of the trust property they hold. often have very narrow duties. 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. In the event that a trustee incurs a liability (for example.

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 most important advantage is the cost factor . which makes it a large force in the IT related works. Due to the high market value of USD. so they tend to look for a better option of solutions and off course in a lesser price to maximize the profits.OFFSHORE BANKING OFFSHORE DEVELOPMENT . because of the following reasons - A large pool of Technically Qualified Professionals is available in India with above average IQ. India is considered as the best destination to outsource the IT related work in the last 5 years from the USA. Therefore. the business organizations are looking for a lower cost options and the same quality of work as well. they are Outsourcing their Business Processes to the developing nations like India. India is the leading beneficiary of the IT related outsourcing.A FAVOURITE DESTINATION INDIA Soft ware’s are the ultimate need of the present business. UK-POUND and EURO the development cost of the software are most likely to be very high in these Developed Nations. So. The organization always wants a well worthy software in a very optimum price. Every business organization needs softwares to carry out their business processes successfully and efficiently. The quality of services provided by them is at par the International Standards and they are flexible to work in any time zone of 37 . UK and other European Countries.

primarily between jurisdictions eager to comply with international standards of anti-laundering regulation and those that are less co-operative. As the FATF seek to apply more international pressure. The Geographical Distance is not a problem for the Software or IT related services. The recently agreed EU Savings Tax 38 . 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. The driving force behind those initiatives. So. THE FUTURE OF THE OFFSHORE INDUSTRY Since the 9/11 incident. both at national and international levels. The FATF was established by the G-7 countries in 1989 and is an intergovernmental body whose purpose is the development and promotion of policies. the profile of which has been raised in the current climate. Another major issue is the exchange of information. it will become increasingly difficult for the less well-regulated regimes to do business. the international crackdown on money laundering has created a divide in the offshore industry. have been influential organizations such as the Financial Action Task Force (FATF). the Geography has now become History for the modern day technology. to combat money laundering and terrorist financing.OFFSHORE BANKING this world.

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. • Second. Hong Kong should also be seriously considered for clients wishing to register an offshore company. this means that corporation tax is ONLY charged on profits derived from a trade. The new directive will affect not only the EU Member States but "all territories under their control". as it is one of the few respectable locations in the world that tax on a ―Territorial Basis‖. However. consolidated supervision of banking operations through greater cooperation between home country and host country regulators. although to what extent is somewhat harder to predict. is treated as tax free.OFFSHORE BANKING Directive will change the face of the offshore industry. even if remitted to Hong Kong. Consequently. with the introduction of the EU Tax Directive. In general. either by having to pay a withholding tax or agreeing to exchange information. the regulatory regime in respect of offshore banking may be expected to move forward on the basis of following four broad principles: • First. higher transparency with reference to supervisory systems and 39 . Previously no information was exchanged automatically in Europe unless there were concerns about illegal activities on a bank account. 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. profession or business carried on in territory of Hong Kong. customers living within the EU are likely to be forced to engage with these issues. Switzerland and the USA. Income sourced elsewhere. To this effect.

together with some of the disadvantages of investing abroad. • Fourth. which is also referred to as offshore investing. has quite some advantages. OFFSHORE INVESTING Investing beyond the borders of your jurisdiction. Offshore investing has the following advantages: Confidentiality. We will name a few here. It is simply an important aspect of life to many people.OFFSHORE BANKING programmes including dissemination of guidelines. supervisory policies and procedures through adoption of `best in class’ processes and policies. Other people might take advantage of their exposed knowledge. setting up systems for independent monitoring of activities of OFCs and complying with supervisory standards. thus making it less interesting for the person in question to make a certain investment. Many wealthy persons investing in stocks and companies are not happy with publicity with regard to their moves. Confidentiality is not just important for unethical business. 40 . money laundering or drug trafficking. • Third. Offshore investing makes up more than half of the world’s financial investments and is therefore quite significant. publications of data of OFCs. technical assistance to upgrade regulatory systems.

Any stock market is open for your investments.000 and $1 million. However. In addition. the US as well as the EU jurisdictions are well aware of the tax reductions that are applicable to their richer citizens. and are therefore trying their best to prevent citizens from investing offshore. Most banks require a minimum investment of between $100. Tax reduction. Offshore investment centers in general offer much more than the national banks and financial institutions. there are rules in certain offshore centres that require proof of residence in the jurisdiction. Investing offshore is pretty costly. accusing them of tax evasion and considering tax evasion illegal. Assets can be transferred to funds and family. There are some disadvantages to offshore investing: Cost. Offshore investment centres are popular places to redistribute income. Diversification of Investment.OFFSHORE BANKING Asset protection. which means that you would have to invest in property as 41 . without having to pay extra taxes or following complicated legal rules in the home country. Many of the popular jurisdictions to invest in offer significant tax reductions to foreign investors. An offshore bank or investment centre has access to the world market and gives you the opportunity to trade in whichever currency you prefer.

Like in any business. but count on steep prices for these people. leading to high investment fees for just the initial stages of investing your money. The Internal Revenue Code (2004) has also made it much more difficult to profit from tax reductions in offshore centres. Tightening Tax Laws.OFFSHORE BANKING well. Be sure to do some research and to invest in a reliable and well-recognized company. Safety. 42 . commission fees and professional fees. Hire a professional to give you advice. as taxes did not apply to foreign investments. In other cases. Also include the costs of travelling for you and your money and advisors. offshore investing carries a certain risk. setting up an offshore corporation might be compulsory. The main reason is that they are losing on income. Many jurisdictions are now trying to prevent their citizens from offshore investing.

the Reserve Bank of India (RBI) would lay down account opening criteria. Foreign banks not operating in India would not be permitted to operate only as domestic OBU. (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. OBU is expected to maintain its own separate accounting which will be audited separately and strictly. and (iii) taking deposits from other domestic OBU in India. 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 that liquidity and pricing of these is more in line with international rates).  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. which will greatly benefit exporters. (iii) Loans to other domestic OBU’s (iv) Loans to domestic entities in foreign currency for project/ 43 .  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. The group has recommended 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‖.OFFSHORE BANKING 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.

(c) there should not be withholding tax on deposits raised from nonresidents. however. This itself would 44 . specify a limit on the total assets/liabilities. 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. prescribe minimum liquid assets requirements for prudential reasons if felt necessary). (the RBI. Incentives for OBU’s According to the recommendations of the Group. may. other domestic OBU’s and authorised dealers not involving local currency. 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 nonresident business for its growth. not exceeding 10 per cent. exposure norms. The limit would be subject to review from time to time. Besides prescribing eligibility criteria for allowing setting up of such units.  Other Business According to the Group domestic OBU’s should also be permitted to: (i) undertake foreign exchange dealings with non-residents. and (v) financial advisory services. accounting standards and gap limits. (b) the rates of income tax should be low. according to the Expert Group. (a) the liabilities of the OBU will have to be exempt from CRR/SLR requirements. (iii) loan syndication and management in advising.OFFSHORE BANKING infrastructure finance under the RBI’s general or specific permissions. negotiating and confirming LCs in foreign currencies where both the parties are nonresidents.  Capital Adequacy and Supervision The Group has suggested that the OBU will be subject to strict regulation by RBI including capital adequacy. (ii) issue guarantees and do other business not involving domestic currency/local exposure. the RBI may also.

It is important to note that just like an offshore company. higher interest rates. these offshore jurisdictions and offshore banks are very different than what typically conjures in the mind. drug dealers. Fact: Popular offshore banking jurisdictions often provide a number of benefits over onshore banks including lower administration costs. Offshore Banking Facts Offshore banking and offshore banks are often misunderstood and intentionally maligned by governments of high taxing jurisdictions. offshore banking provides increased asset protection from potential extraneous lawsuits. unstable governments. unstable economic conditions.OFFSHORE BANKING justify exemption from CRR/SLR requirements. access to otherwise unavailable international investments. Let us look at some myths and facts about offshore banking with an unbiased and historical perspective. In reality. Additionally. an offshore bank is merely a bank domiciled in a country other than that of the person’s country of residence. etc. Myth #2 Offshore banking is only conducted by money launderers. unlawful seizure. the ability to facilitate international business transactions. 45 . Hollywood has also done a good job of associating offshore banking with cigarette boats. private jets and criminals of all kinds. domicile or citizenship. sophisticated private banking. the ability to deposit and transact in multiple currencies. Myth #1 Offshore banks are only used to evade taxes. etc. increased privacy.

Panama has over 130 major banks including many of the largest international banks in the world. Cayman Islands is the 5th largest banking jurisdiction in the world. Conservative estimates put the total amount of money held in US banks from proceeds of money laundering at $300 billion. Depositors need to consider all factors when choosing a banking jurisdiction. amongst other things. 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). Many of these offshore banks and banking jurisdictions have histories far superior to that of banks in their own country. Let us maintain a proper perspective on this however. Fact: There is no question that offshore banks are abused by some of these unwanted elements. 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. Fact: Many of these banking jurisdictions offer banking histories and current conditions far superior to their international counterparts. 46 . many offshore banking jurisdictions have better laws and regulations than either of these two countries.OFFSHORE BANKING weapons smugglers and terrorists. 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. Many have lending practices that are much stricter than that of the banking institutions in their own countries. insufficient information exchange concerning US depositors. 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. In fact. Myth #3 Offshore banks are less secure than onshore banks.

Let's clarify the distinction of legal and legal and examine why offshore banking will remain legal While Offshore banking has often been associated with the underground economy and organized crime. withholding information about your offshore investments is illegal in some countries. setting up offshore is not illegal. no capital gains tax. but with certain advantages. This is one of the most frequently asked questions concerning the legality of offshore banking. Offshore banking is a benefit to all of society and is indispensible. there will normally be one or more offshore jurisdictions offering the services you are looking for. no individual tax. 47 . An offshore jurisdiction should be perceived as just another foreign country. and many others. Yes. via tax evasion and money laundering. advantages in forming companies for international trade through tax treaties. However.OFFSHORE BANKING IS SETTING UP OFFSHORE ILLEGAL? No. Offshore banking is also associated with criminal activities such as money laundering. offshore banking is legal. and that is usually what is associated with offshore banking in general and is the cause of the misconception. and in short. no interest tax. Depending on your personal needs or preferences. no inheritance taxes. These can take the form of banking secrecy laws. Using offshore banking for tax evasion purposes is what is not legal.

not by security and financial concerns. but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. being possible crossroads for major illegal money flows. Persons subject to US income tax. are required to declare on penalty of perjury. for example. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries. there have been many calls for more regulation on international finance. this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal. alimony. in particular concerning offshore banks. legally. the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad. and/or to deny the possession of such assets in a written or oral statement when there is pending action or a judgment in place for creditor debt. Although. Following September 11. Is it legal to set up an offshore bank account so that a court order cannot take money from your accounts? It is illegal to "conceal" assets offshore form the IRS. restitution for personal 48 . any offshore bank accounts—which may or may not be numbered bank accounts—they may have. offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain persons who meet fairly complex requirements. suggesting that Organization for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.OFFSHORE BANKING however. based in Luxembourg. tax havens. They claim the process is prompted. 2001. and clearing houses such as Clearstream. and have no legal obligation to do so as they are protected by bank secrecy. Defenders of offshore banking have criticized these attempts at regulation.

It is important to note that you have the ability to prevent this from happening. If you set up an offshore bank account. If the action is in any way connected with bankruptcy or any federal litigation such as the IRS. As long as you plan on using your offshore account in a legal way. you will still need to report your savings. Why setup an offshore bank account? The main reason people setup offshore bank account is to save on taxes. As previously mentioned. Not reporting all of your money in an offshore account can lead to you be brought up on tax evasion charges. Another reason is to keep money away from creditors reach. you may want to re-examine your decision. offshore banking is often associated with illegal activities. One of these illegal activities is tax evasion. As previously mentioned. The reliability of offshore asset depositories are dicey at best and may become a nightmare rather than a haven for the depositor. you can benefit immensely from offshore banking. it is considered a federal felony and carries a mandatory prison sentence of 5-years for each count of which the person is found guilty. many persons are turning to offshore banking as an alternative method of saving and investing their hard earned money. there are serious consequences for doing this. there shouldn’t be any disadvantages to having one If you are planning on using your offshore account to avoid a lawsuit or to evade taxes. 49 .OFFSHORE BANKING injury suit and so forth. As long as you choose to use your offshore bank account legally. Offshore Bank Accounts In the current economic climate.

if you are doing so for illegal reasons then be prepared not to be protected from the long arm of the law. This generally is not the case with an offshore bank account though. in the event of a catastrophe you may wipe out financially in one fell swoop! The most famous of countries to have an offshore bank account in is: Switzerland. So. Offshore Bank Account Features • True offshore banking • No bank references for the account signatory • No reporting requirements • No taxation • 24-hour online internet banking from any PC • Multi-currency accounts • Low monthly account management charges • International ATM debit and credit card facilities • ATM anonymous cash card (aka debit card) • Gold and business credit cards 50 .OFFSHORE BANKING While it is not illegal in most countries to open an offshore bank account. One major advantage of banking in the US is the fact that the government insures the money.

We have all heard news reports of offshore accounts being used to front illegal activities or to avoid taxes. The biggest advantage of offshore banking is that you are offered privacy and stability. That is why a large number of individuals use offshore banking to help them increase their savings. This has led many individuals to believe that offshore banking is illegal. but there are disadvantages as well. being used a similar way. There are many individuals who place their money in offshore accounts for security purposes. many are misinformed when it comes to offshore banking. It is easier to access and spend your money if it is at a local bank. In fact. When your money is in an offshore account. For instance.Offshore banking is done through a bank that is known as an offshore bank. but many choose not to. if you live in the Untied States an offshore bank would not be located in the United States. However. how you use it may be considered illegal.OFFSHORE BANKING What You Need to Know Before Opening an Account Offshore banking. Offshore banks are banks that are located in another country. Despite what you may believe. you can access it. Another advantage of offshore banking is that just about anyone can open an 51 . offshore banking is legal. Many popular offshore banks are located in Switzerland. Unfortunately. we have all heard about it before. There are a number of advantages to offshore banking. we have also seen it in the movies. other than the country that you reside in.

but for a personalized 'private banking' service. Offshore banks may have restrictions on the amount of money that is needed to open an account. Each offshore bank will have its own requirements. opening new bank accounts. wealthy. However.not least because they need to overcome the 52 . How much money do I need to invest offshore? There is no absolute low limit. transaction costs mean offshore investment is unlikely to be worthwhile for those earning less than £25. or individuals who wealthy. Offshore banks will take deposits down to £1.000 or more. costs are being reduced. so these are meant as a rough guide. but it is not always a large amount. The most common users of offshore banking are corporations. you should still be able to open up an offshore bank account.OFFSHORE BANKING account. Whether you are a small business owner. you may need to deposit £100. because of the internet.000. CONCLUSION Opening an offshore bank account could be the best thing you ever do. many people find The process daunting . However.000 a year. but the extra costs of taking advice. phone communication at a distance. or you consider yourself middle class. the self-employed.

and lots more. If you bank with a reputable offshore bank.including Access to previously off-limits investment opportunities. 53 . Once you step into offshore waters you'll find there is plenty more to whet your appetite . more flexible business banking Arrangements. Of course the truth turns out to be the opposite. then your money is much safer than before! I trust the information in this report has given you something to think about.OFFSHORE BANKING irrational fear that somehow Their money won't be as safe as banking at home. Certainly that is my intention. and to help you make a good decision regarding opening your own offshore bank account. more tax-efficient ways of conducting your financial affairs.

www.com www.OFFSHORE BANKING BIBLIOGRAPHY WEBSITES:       www.com www.org www.ehow.htm.rbi.in.theconvention.com 54 .bis.org.com/banking/cintro.moneycontrol.banknetindia. www.