Offshore Banking

The term "offshore" is used to describe foreign banks, corporations, investments and deposits. A
company may legitimately move offshore for the purpose of tax avoidance or to enjoy relaxed
regulations. Offshore financial institutions can also be used for illicit purposes such as money
laundering and tax evasion.

Many countries, territories and jurisdictions have offshore financial centers (OFCs). These
include well-known centers such as Switzerland, Bermuda and the Cayman Islands, and lesser-
known centers such as Mauritius, Dublin and Belize. The level of regulatory standards
and transparency differs widely among OFCs. Supporters of OFCs argue that they improve the
flow of capital and facilitate international business transactions.

Offshore can refer to a variety of foreign-based entities or accounts. In order to qualify as

offshore, the accounts must be based in any country other than the customers or investors home
nation, existing somewhat separately from the persons other resources and assets.

Main Advantage of off Shore center

1. Local capital requirement is either non-existent or extremely low.

2. Taxes including with holding taxes on internal income and other forms of levies are
practically non-existent.

3. Entry of foreign banks/ local banks to conduct off shore business.

4. License fee for registration and operation is either nil or very low.

5. Protection against lawsuit judgments.

6. Avoidance of double taxation.

7. Low operational cost.

8. Unlimited market opportunities.

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Advantages of Offshore Banking

1. Offshore banks provide access to politically and economically stable jurisdictions. This
may be an advantage for those resident in areas where there is a risk of political turmoil
who fear their assets may be frozen, seized or disappear. However, developed countries
with regulated banking systems offer the same advantages in terms of stability.
2. Some offshore banks may operate with a lower cost base and can provide higher interest
rates than the legal rate in the home country due to lower overheads and a lack of
government intervention. Advocates of offshore banking often characterize government
regulation as a form of tax on domestic banks, reducing interest rates on deposits.
3. Offshore finance is one of the few industries, along with tourism, that geographically
remote island nations can competitively engage in. It can help developing countries
source investment and create growth in their economies, and can help redistribute world
finance from the developed to the developing world.
4. Interest is generally paid by offshore banks without tax deducted. This is an advantage to
individuals who do not pay tax on worldwide income, or who do not pay tax until the tax
return is agreed, or who feel that they can illegally evade tax by hiding the interest
income.
5. Some offshore banks offer banking services that may not be available from domestic
banks such as anonymous bank accounts, higher or lower rate loans based on risk and
investment opportunities not available elsewhere.
6. Offshore banking is often linked to other services, such as offshore companies, trusts or
foundations, which may have specific tax advantages for some individuals.
7. Many advocates of offshore banking also assert that the creation of tax and banking
competition is an advantage of the industry, arguing with Charles Tiebout that tax
competition allows people to choose an appropriate balance of services and taxes. Critics
of the industry, however, claim this competition as a disadvantage, arguing that it
encourages a race to the bottom in which governments in developed countries are
pressured to deregulate their own banking systems in an attempt to prevent the offshoring
of capital.

Disadvantages of Offshore Banking

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 1. Offshore banking has been associated 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.
2. The existence of offshore banking encourages tax evasion, by providing tax evaders with
an attractive place to deposit their hidden income.
3. Offshore jurisdictions are often remote, so physical access and access to information can
be difficult. Yet in a world with global telecommunications this is rarely a problem.
Accounts can be set up online, by phone or by mail.
4. 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.Worldwide Banking
5. Offshore banking is usually more accessible to those on higher incomes, because of the
costs of establishing and maintaining offshore accounts. The tax burden in developed
countries thus falls disproportionately on middle-income groups. Historically, tax cuts
have tended to result in a higher proportion of the tax take being paid by high-income
groups, as previously sheltered income is brought back into the mainstream economy.

Offshore Banking in Bangladesh

Off-shore Banking refers to international banking involving non-residents foreign currency-
denominated assets and liabilities. Off-shore Banking Units conduct their deposit taking and
lending activities with foreign investors without conflict with the domestic fiscal and monetary
set up and independent of the local commercial banking system. It may be further defined as the
prioritized banking operation where there is no permission for resident Bangladeshi citizen and
on contrary dealing with the non-residents 100% foreign owned & joint venture investment
enterprise inside the export processing zones which does not fall under the set regulations of
Bangladesh Bank and other regulators. It is completely a separate functions and distinct identity,
where its customers can enjoy unique package of tax benefit and the operations which are free
from local regulations to compete with domestic banks including local branches of foreign
banks. Its operations is being treated as a country within a country, commissioned by a separate
Banking License from Bangladesh bank, and free from minimum reserve requirement.

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Offshore Banking Unit (OBU)

Offshore Banking Unit mainly deals with non-residents Bangladeshi citizens, maintaining
exclusively foreign currency transactions, can borrow and lend in Foreign Currency with any
other local and global Banks, being treated its operation as a country within a country,
commissioned by a separate Banking License from Bangladesh Bank. and free from minimum
reserve requirement.

It may be further defined as the prioritized banking operation where there is no permission for
resident Bangladeshi citizen and on contrary dealing with the non-residents 100% foreign-owned
& joint-venture investment enterprises inside the export processing zones which does not fall
under the set regulations of Bangladesh Bank and other regulators. It is completely a separate
functions and distinct identity, where its customers can enjoy unique package of tax benefit and
the operations which are free from local regulations to compete with domestic banks including
local branches of foreign banks.

Nature of OBU Facilities Extended to the EPZ Company(s):

OBU may extend among the EPZ "A" type industry (s) irrespective of funded and non-funded
facility (s) which are as follows as working capital financing:

EXP Certifying
LC Advising
LC Advising
Export Negotiation
Export Bill Discounting
LC opening
LTR Creation
Short Term Loan
OD for working capital
Guarantee
NFCD Deposit
Current FC A/C Deposit
Miscellaneous Offshore Banking Unit

PROVISIOIN PERTAINING TO OBU OPERATIONS IN BANGLADESH

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In 1985 the establishment of OBUs in Bangladesh has been allowed to serve industrial enterprise
operating in the EPZ . The following major provisions as per the circular letter No.
BCD(P)744(27) OF December, 1985 of Banking Control Department, Bangladesh Bank apply to
the operations of OBUS in Bangladesh:-

1) The OBU will be a part of a bank whether incorporated in Bangladesh or outside Bangladesh
but it shall maintain its own separate accounts relating to offshore banking business.

2) The operation of the unit shall be subject to the relevant laws of Bangladesh except those in
respect of which exemptions are provided.

3) Any bank willing to operate an OBU in Bangladesh will have to obtain license from
Bangladesh Bank. The license may be issued at the discretion of Bangladesh Bank. In the event
the license is issued, the permissible functions as well as requirements to be fulfilled will be
incorporated in it. The bank applying for license for offshore banking unit must have well
established links with important international financial centers.

4) The OBU will be free to accept deposits from outside Bangladesh and borrow abroad. They
will also be free to make advances/ investments abroad and also make permissible transactions
with industries in the EPZs. Every bank while applying for license to establish an OBU should
voluntarily indicated the limit of the assets and liabilities up to which they would like to operate.

5) There will be no statutory capital and reserve or liquidity requirement for an OBU.

6) The OBUs will be allowed to carry on transactions in specified foreign currencies.

7) There would not be any restriction on the physical location of OBUs. These may be located
both in the EPZ or any other convenient location outside.

8) Banking transactions with residents of Bangladesh outside EPZ will not be permissible and
there would be no restriction on banking transactions with non-residents.

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