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 regulations and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980's, jurisdictions that provide financial services to nonresidents on a big scale, can be referred to as offshore financial centres. Since OFCs often also levy little or no tax corporate and/or personal income and offer , they are often referred to as tax havens.
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 2000 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:
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 often been associated with the underground economy and organized crime,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 people who meet fairly complex requirements (such as perpetual travelers), the personal income tax laws of many countries (e.g., France, Malaysia, 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. 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 taxpayer or the evasion of the tax on that income legal. Following the 9/11 attacks, there have been many calls to increase regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, which are possible crossroads for major illegal money flows.
The most popular offshore financial centres are in jurisdictions with a history of political and economic stability. In terms of offshore banking centres and in terms of total deposits, the global market is dominated by Switzerland and the Cayman Islands. A letter by the District Attorney of New York, Robert M. Morgenthau, published by The New York Times, states that the Cayman Islands has US$1.9 trillion on deposit in 281 banks, including 40 of the world's top 50 banks, although official statistics published by the Cayman Islands Monetary Authority suggest the amounts held on deposit are actually around US$1.5 trillion. Numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey, Guernsey, and the Isle of Man are known for their well regulated banking infrastructure. Some offshore jurisdictions have steered their financial sectors away from offshore banking, as difficult to properly regulate and liable to give rise to financial scandal.
Since starting to survey offshore jurisdictions on April 2, 2009, the Organisation for Economic Co-operation and Development (OECD) at the forefront of a crackdown on tax evasion, will not object to governments using stolen bank data to track down tax evasion in offshore centers, such as in the 2008 Liechtenstein tax affair. The recent sharing of confidential UBS bank details about 285 clients suspected of willful tax evasion by the United States Internal Revenue Service was ruled a violation of both Swiss law and the country's constitution by a Swiss federal administrative court. Nevertheless, OECD has removed 18 countries, including Switzerland, Liechtenstein and Luxembourg, from a so-called "grey list" of countries that did not offer sufficient tax transparency, and has re-categorized them as "white list" countries. Countries that do not comply may face sanctions.
A notable exception is Panama, whose canal provides it with a unique type of immunity to international pressure. Given the enlargement of the canal to accommodate larger shipping, it is unlikely that Panama would succumb in the foreseeable future to international pressure toward transparency. A team of journalists took in their hands the task of providing data on Panama offshores with the initiative known as the Panama papers.
Offshore banking constitutes a sizable portion of the international financial system. Experts believe that as much as half the world's capital flows through offshore centers. Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. An estimated 13-20 trillion is hoarded away in offshore accounts.
Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts. Among offshore banks, Swiss banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands (1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits. However, recent data by the Swiss National Bank show that the assets held by foreign persons in Swiss bank accounts declined by 28.1% between January 2008 and November 2009.
Both offshore and onshore banking centres often have depositor compensation schemes. For example: The Isle of Man compensation scheme guarantees 50,000 of net deposits per individual depositor, or 20,000 for most other categories of depositor. Potential depositors should be aware that any deposits over the guaranteed amount are at risk. However, only offshore centres such as the Isle of Man have refused to compensate depositors 100% of their funds following bank collapses. Onshore depositors have been refunded in full, regardless of what the compensation limit of that country has stated. Thus, banking offshore is historically riskier than banking onshore.
In their efforts to stamp down on cross border interest payments EU governments agreed to the introduction of the Savings Tax Directive in the form of the European Union withholding tax in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU.
Furthermore, the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.
In 2013, the European Union's Economic and Financial Affairs Council passed new European Union (EU) directives that bankers in EU member states will share their clients' identities and transaction records automatically. This action was also encouraged by other important countries such as Australia and the US. This has been reported by most offshore service providers offering services outside of the European Union.
On 27 May 2015, Switzerland signed an agreement with the EU that will align Swiss bank practices with those of EU countries, and in effect will end the special secrecy that EU-resident clients of Swiss banks had enjoyed in the past. Under the agreement, both Switzerland and EU countries will automatically exchange information on the financial accounts of each other's residents from 2018.
It is possible to obtain the full spectrum of financial services from offshore banks, including:
Not every bank provides each service. Banks tend to polarise between retail services and private banking services. Retail services tend to be low-cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.
Assuming even just the lower estimate of 13 trillion on deposit in offshore accounts, if these assets earned an average 3% a year in income for their owners taxable at 30%, then the offshore funds would generate 121 billion in tax revenues, on the assumption that no tax is paid (i.e. no one pays any tax on offshore holdings), and that 100% of those deposits would otherwise have been liable to tax.[further explanation needed] Projections are often predicated upon levying tax on the capital sums held in offshore accounts, whereas most national systems of taxation tax income and/or capital gains rather than accrued wealth.
According to Merrill Lynch and Capgemini's "World Wealth Report" for 2000, one third of the wealth of the world's "high-net-worth individuals" -- nearly $6 trillion out of $17.5 trillion -- may now be held offshore. A large portion, 6.3tn, of offshore assets, is owned by only a tiny sliver, 0.001% (around 92,000 super wealthy individuals) of the world's population. In simple terms, this reflects the inconvenience associated with establishing these accounts, not that these accounts are only for the wealthy. Most all individuals can take advantage of these accounts.
The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered annually, equal to 2% to 5% of global economic output. Today, offshore is where most of the world's drug money is allegedly laundered, estimated at up to $500 billion a year, more than the total income of the world's poorest 20%. Add the proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and corruption. "These offshore centers awash in money are the hub of a colossal, underground network of crime, fraud, and corruption" commented Lucy Komisar quoting these statistics.
The New York Times, The Wall Street Journal, and The Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the CIA, had a program to access the SWIFT transaction database after the September 11 attacks (see the Terrorist Finance Tracking Program) diminishing the value of offshore banking for privacy.
In the 21st century, regulation of offshore banking is allegedly increasing, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as the International Monetary Fund (IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business.
Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that they have been insufficient. A few examples of these are:
"You ask why, if there's an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It's in the interest of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don't comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks."
In the 1970s through the 1990s, it was possible to own your own personal offshore bank; mobster Meyer Lansky had done this to launder his casino money. Changes in offshore banking regulation in the 1990s in the form of "due diligence" (a legal construct) make offshore bank creation really only possible for medium to large multinational corporations that may be family-owned or -run.
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