OFFSHORE BANKING

the small islands that were being revamped as tax havens.

1.2.4 OFFSHORE BANKING UNIT

An Offshore Banking Unit (OBU) is a financial service unit (normally a branch or subsidiary
of a non-resident bank), which plays an intermediary role between non-resident borrowers
and lenders. Generally an offshore banking unit is located in an international financial centre
or in the case of India. Found in Special Economic Zones. Offshore banking units are allowed
to accept deposits from foreign banks, from some onshore banks that permit deposits and
other offshore banking units, and the OBU may make loans to non-resident companies as
well.

The advantage of an offshore banking unit versus that of an onshore bank is that the offshore
banking unit is free of regulations and restrictions normally imposed on domestic financial
establishments as it pertains to foreign exchange and sometime tax concessions and relief
packages. The activities of an offshore banking unit are not subject to the local restrictions
as there might be on foreign exchange or other banking activities or regulations. Under law,
offshore banking units (OBUs) are not authorized to take domestic deposits or conduct
activity with local establishments or clients. All trade activity of the offshore banking unit
must be offshore.
For purpose of this document the offshore banking unit herein will sometime be referred to
as the OBU.
In most jurisdictions where offshore banking units are established, the OBU has a specific
function, has a defined range of financial functions and banking activities that can be
undertaken by the OBUS. In cased such as India and Australia foreign exchange activities
conducted by the OBUs are free of regulations that normally apply to onshore financial
entities, and receive tax concessions. These are simply economic strategies used to attract
foreign company investment, and engage in a lucrative foreign exchange business.
Some offshore banking units may be branches of either resident or non-resident banks. In
such cases, the ownership of the establishments is directly under control of the parent
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company and the accounts of the OBU are transposed onto accounts books of the parent
company. On the other hand, the OBU can be and independent establishment or a franchise,
where the name of the parent company is used, but the management and accounts of the
offshore banking unit are independent from that of the parent company.
However, in most cases offshore banking units are branches of locally owned and established
banks which set up the offshore banking unit to capitalize on international business and
foreign exchange benefits afforded the offshore banking unit. These companies cannot take
local deposits and assets of the offshore banking unit are held separately from parent
company.
The advantages of offshore banking units for some is that the existence of the offshore
banking unit establishment enables the company to conduct financial transactions with no
currency restrictions; enables the company to make loans and payments in multi currencies;
and enables the company to offer flexible international financial trade options that would not
otherwise be possible with the domestic bank.
The first application of an offshore banking unit was established in the euro market and soon
Singapore, Hong Kong India and other countries followed. In Australia, their tax policies
are not very favourable for offshore banking business, but the country in 1990, established
legislation for the provision of offshore banking unit, offering relaxed tax provisions. This
move ensured the country was able to compete as an international financial centre.
The additional benefits of offshore banking units may include tax exemptions on
withholding tax and other tax relief packages on specific activities, such as offshore
borrowing.
Legislation for offshore banking units are specific and defines the types of activities that can
be conducted by the offshore banking units, generally:
At least one of the parties to transactions should be an offshore company or person,
The activity must be conducted by an offshore banking unit locate in the jurisdiction and
The offshore banking unit must be a resident of the jurisdiction or conducting business at or
through a permanent establishment in the jurisdiction some of the offshore banking unit
activities and offshore banking services are: borrowing, lending, trading activities,
investment activity, hedging activity. Most entities who are eligible to be offshore banking
unit are banks, subsidiaries of such banks, other financial intuitions that are permitted to
foreign exchange activity, life insurance companies, and fund managers.

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In the United States, the International Banking Facility (IBF) is an in-house shell branch that
makes loans to foreign customers. Its function is to that of on offshore banking unit. IBF
deposits are limited to non-U.S. Residents, other IBFs, and banks owning an IBF, are free
from reserve requirements, federal deposit insurance assessments, and exempt from some
state income taxes.
Offshore banking units have a similar function to offshore banks, but the legal form or
structure of the entity is different and has a few more legislative restrictions. Offshore
banking units are found in specific zones, such are tax havens, trade-free or free trade zones.

1.2.5 OFFSHORE BANKING CENTRE

In comparison to international offshore banking centres like New York, Tokyo and the City
of London, Hong Kong is not considered as a major offshore banking centre regardless of
how important banking is to economy of Hong Kong. The banking industry in Hong Kong
is however one of the largest in Asia in terms of offshore banking and rapid growth. With
this background, Hong Kong is very soon on its way to being transformed into one of the
Hong Kong is
dominated by Chinese banks. An increased presence of foreign banks is just what is needed

offshore banking centres in the near future.

The Islands of the Bahamas has one of the leading offshore banking centres in the Caribbean.
The offshore banking centre of the Bahamas has assets valued at over US $200 billion,
ranking the Bahamas at number 10 internationally. The Bahamas offshore banking centre
thus stands very close in line with the United States, the United Kingdom, Switzerland and
Japan. The total number of banks operating in and from within the Islands stands at in excess
most important
offshore banking centres.
Put together, the Bahamas, Bermuda, Panama, the Netherland Antilles and the Cayman
Islands have an asset base of over US $2 trillion. In 2005, the Cayman Islands offshore
banking centre totalled 305 banking institutions. Offshore banks accounted for an asset base
of US $1.2 trillion in the offshore banking centre as opposed to US $10 billion held at
domestic banks. Though statistics for banking institutions in 2005 were relatively high, the

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figure represented a decrease from a total of 427 banks in the Cayman Islands offshore
banking centre; the main cause being a series of mergers and acquisitions that were
undertaken over the period 2001-2005 as a result of consolidation in the financial industry
on a global scale.
In Latin America, Panama offshore banking centre is considered the most advanced and
prosperous. Panama Company is tax exempted offshore entity. In excess of 100 banks make
ope,
Asia and the United States. Besides its aggressive trading activity concentrated around the
Canal Zone and other parts of the country, the use of the US dollar as legal tender, investor
friendly banking laws, free capital flow, relatively low inflation rates, free trade and a
developed service industry are major advantages that Panama offshore banking centre has
benefited from.
In Europe, Cyprus has made significant strides as an offshore banking centre. The tax regime
is friendly, with a corporation tax of 10%, zero foreign exchange controls and zero tax on
revenue earned from the sale of securities and dividends, among other. Switzerland offshore
banking centres are widely recognised as pioneers of offshore banking and its nature with
regard to banking secrecy and asset protection. Switzerland is also referred to as the banking
centre of Europe, with hundreds of branches of Swiss banks operating in nearly every corner
of the Earth.
1.2.6 OFFSHORE BANK ACCOUNT

erroneously associated with illegal activity, money

laundering, the offshore services, offshore business and offshore banking, offshore bank
accounts are all legitimate vehicles which are used for: global business activities; for asset
protection; privacy and; offshore banking and offshore services can be also reliably used as
tax planning tools.

Many jurisdictions in which offshore banking services and offshore bank accounts are
available have low operational cost whereby that is transferred to the client through more
competitive interest rates, and as such using an offshore bank accounting can in fact provide
another great benefit of increased savings or capital gains.

While a few decades ago offshore bank accounts were maintained mostly by individuals of
HNW and to some extent, international corporations, today, anyone can afford to hold an

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offshore account. Offshore bank accounts can be opened for as little as US1000 in some
jurisdictions.

Personal and business offshore bank accounts are widely accessible, the offshore banking
business is lucrative business opportunity and in turn very competitive business (globally).
Just look at all the offshore banks found on the internet. Generally, offshore banks accounts
are affordable to maintain and manage.

The key reasons for having an offshore bank account:

Asset protection - investments are protected from litigation

Higher returns - more competitive rates,
Investment diversification - the ability to use offshore bank account in international markets
Security and Safety - offshore banking jurisdictions have legislations and regulations in
place to ensure safety of interest
Tax deference - offshore bank account are major tool in tax planning
Financial privacy and confidentiality - under the legislation, confidentiality and privacy are
guaranteed

The specific on the services and types of offshore banks account will be determined mostly
by the banks. Offshore bank accounts are normally deposit or lending accounts, with the full
range of services in between. Corporate offshore bank accounts may have access to
specialized services such as letters or credit, lines of credit and other business oriented
offshore bank services like merchant account and the like.

An offshore bank accounts are used and managed like any other normal bank account, but
with extended reach. Many offshore bank accounts can operate in multi-currencies, sans the
exchange restrictions and fees that normally apply to foreign exchange transactions.

1.2.7 INTERNATIONAL OFFSHORE BANKING

International offshore banking is offshore banking activity that related directly to trade and
business activities on an international level. Import and exports activities are more or less
moot without the services of offshore international banking whereby letters of credit which
engage business in trade confidence are issued through the offshore banks. Onshore banks
facilitate this activity as well, but there is a greater benefit to offshore investors utilizing
offshore international banking, in that there are relaxations on foreign exchange activity, and

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easily facilitate tax planning measures. The letter of credit for both exports and import
purposes is the most important international banking tool in the business today, without it
trade international trade would be dead or non-existent.
International business of banking in offshore jurisdiction is becoming more and more
popular as: companies realize the benefits of an offshore bank account; as offshore banks
enhance and improve international banking services and products to be more competitive in
such an industry. Attractive business rates, tax management
Opportunities, and no taxation on capital gains, while cloaked in total privacy are just a few
of the very attractive features of international offshore banking.
A lower base cost of offshore banks translates into more affordable banking options, higher
earnings on investment. Offshore banking for international companies like Dominica
companies also benefits from greater access to international investment opportunities.
Domestic banks may not be willing to finance or fund international offshore activities or
business activities and in most situations to open a business account a credit history and
report is required as well as more comprehensive financial information. In order to establish
an offshore international bank account, no financial information is required from the
company, and hence the requirements are much more lax than on domestic market. Key
services offered by offshore banks for international banking purposes include:
Merchant services - accept global payments via debit and credit cards in multiple currencies.
Some domestic US companies will not accept international or non us credit and debit cards
with non US addresses, hence limiting the range of business to domestic markets.
Wire and electronic transfer in multiple currencies
Letters of credit and trade financing, loans
Corporate administration these and the other services offered by international offshore bank

Another advantage of offshore international banking is the anonymity with which the
international company can operate globally. An International Business Company (IBC) with
an offshore bank account is represented by a company name, rather than an individual with
a name and face, and if for some reason, the identity of the beneficial owners of the company
may hinder business relations; this is a good way to circumvent these challenges.
International bank accounts are especially valuable to persons who own and deal in real
estate globally. An international offshore bank account will give access to international
deposits; make payments with no questions asked about the source of funds. Once an account
is established it is confident that through its original due diligence that the source of funds

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