Offshore banking Banking advantages. An offshore bank is a bank regulated under international banking license (often called offshore license), which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale can be referred to as offshore financial centres. OFCs often also levy little or no corporation tax and/or personal income and high direct taxes such as duty, making the cost of living high.
With worldwide increasing measures on CFT (combatting the financing of terrorism) and AML (anti-money laundering) compliance, the offshore banking sector in most jurisdictions was subject to changing regulations. Since 2002 the Financial Action Task Force issues the so-called FATF blacklist of “Non-Cooperative Countries or Territories” (NCCTs), which it perceived to be non-cooperative in the global fight against money laundering and terrorist financing.
An account held in a foreign offshore bank is often described as an offshore account. Typically, an individual or company will maintain an offshore account for the financial and legal advantages it provides, including but not limited to:
- Strong privacy, including bank secrecy.
- Little or no corporate taxation via tax havens.
- Protection against local, political, or financial instability.
While the term originates from the Channel Islands being “offshore” from the United Kingdom, and while most offshore banks are located in island nations to this day, the term is used figuratively to refer to any bank used for these advantages, regardless of location. Thus, some banks in landlocked Andorra, Luxembourg, and Switzerland may be described as “offshore banks”.
Offshore banking has previously been associated with the underground economy[1] and organized crime,[2] tax evasion[3] and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain people who meet fairly complex requirements (such as perpetual travelers), the personal income tax laws of many countries (e.g., France, and the United States) make no distinction between interest earned in local banks and that earned abroad. Persons subject to US income tax, for example, are required to declare, on penalty of perjury, any foreign bank accounts—which may or may not be numbered bank accounts—they may have. Offshore banks are now required to report income to many other tax authorities, although Switzerland and certain other jurisdictions retain bank secrecy regimes that can be more difficult to deal with. This does not make the non-declaration of the income by the taxpayer or the evasion of the tax on that income legal and many OFCs have recently been important colleagues to onshore tax authorities and law enforcement against wrongdoers. Following the 9/11 attacks, there have been many calls to increase regulation on international finance, in particular concerning offshore banks, OFCs, crypto currency and clearing houses such as Clearstream, based in Luxembourg, which are possible crossroads for major illegal money flows. Most criminality involving the banking system has happened because of the regulations and controls being circumvented.
Banking advantages
- Offshore banks provide access to politically and economically stable jurisdictions. This will be an advantage for residents of areas where there is a risk of political turmoil, who fear their assets may be frozen, seized or disappear (see the corralito for example, during the 2001 Argentine economic crisis). However, it is also the case that onshore banks 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 the narrow range of services provided and technological advancements along similar lines to challenger banks such as Revolut and Starling. Advocates of offshore banking often characterize government regulation as a form of tax on domestic banks, reducing interest rates on deposits. However, this is scarcely true now; most offshore countries offer very similar interest rates to those that are offered onshore and the offshore banks now have considerable compliance requirements making certain categories of customers (those from the USA or from higher risk profile countries) unattractive for different reasons.
- Offshore finance is one of the few industries, along with tourism, in which geographically remote island countries can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance to and from the developed and developing worlds. Equally, well-resourced and developed OFC countries such as New Zealand and Singapore offer a safe and reasonably-well administered background for these similar financial services.
- Interest is generally paid by offshore banks without tax being 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 incomes. FATCA and CRS and other reporting mechanisms make the latter more difficult other than for the most blatant criminals.
- 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. The number of jurisdictions offering anonymous accounts (or bearer shares) has fallen considerably in the last 20 years.
- Offshore banking is often linked to other corporate structures, such as offshore companies, trusts or foundations, which may have specific uses and may still have tax advantages and bank security solutions incorporated in particular jurisdictions.
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