PROJECT REPORT

ON

OFFSHORE BANKING

BACHELORS OF COMMERCE-BANKING & INSURANCE

SEMESTER V

SUBMITTED BY

KHEVNA AMIT DESAI

ROLL NO. 82

Submitted in part fulfillment of the requirements for the award of the Degree
of Bachelor of commerce Banking and insurance

PROJECT GUIDE

PROF. SYED MUBASHAR HASAN

2016-2017

SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS

B ROAD CHURCHGATE, MUMBAI- 400 020

1
 SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS

B ROAD CHURCHGATE, MUMBAI 400 020

BANKING AND INSURANCE

Tel No: 022 22870269 E-mail:sydbbi03@gmail.com

Date:

CERTIFICATE

It is certified that Ms. KHEVNA AMIT DESAI Roll no. 82 student of

T.Y.B.com(Banking and insurance) SEM-V 2017 has successfully completed the
project as a part of partial fulfillment of the course and he/she has done this
project under my guidance and due consultation.

PROF. SYED MUBASHAR HASAN

Signature of the Internal Project Guide Principal

External Examiner:

Signature

Date:
2
 DECLARATION

I Ms. KHEVNA AMIT DESAI student of the Bachelor of commerce Banking and
insurance Semester V (2017-2018) Roll No. 82, hereby declare that I have
completed this project on OFFSHORE BANKING. Wherever the data/information
have been taken from any book or other sources the same have been
mentioned in the Bibliography.

The information submitted is true and original to the best of any knowledge.

Place: Mumbai

Date:

SIGNATURE:

KHEVNA AMIT DESAI

(Roll No. 82)

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 CERTIFICATE

I SYED MUBASHAR HASAN, hereby certify that Ms. KHEVNA AMIT DESAI of
Sydenham college of commerce and economics T.Y.B.B.I has completed the
project on OFFSHORE BANKING for the academic year 2017-2018. The
information submitted is true and original to the best of my knowledge.

Prof. SYED MUBASHAR HASAN

(B.sc, MBA, M.I.R.P.M)

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 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude deep regards to my

guide PROF. SYED MUBASHAR HASAN for this his exemplary guidance,
monitoring and constant encouragement throughout the course of his project.
The blessing, help and guidance given by him time to time shall carry me a long
way in the journey of life on which I am about to embark.

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 PREFACE

I have great pleasure in presenting this project on OFFSHORE BANKING. I have

made a sincere effort to make this project informative and I am sure if it would
help in understanding the concept of OFFSHORE BANKING in a better way.

I am very thankful to Prof. SYED MUBASHAR HASAN for their response and
suggestion which have necessitated for the successful project.

MUMBAI

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 Design of the study

Scope:
The researcher has tried to study about the OFFSHORE BANKING. The project has
been designed to cover the concept of offshore banking in detail.
The project tries to take a glance over the various aspects of offshore banking like its
meaning, types, advantages & disadvantages, services, need & importance etc.

Objective:
To analyze and compare the performance of Offshore Banking.
To cover various aspects relating to Offshore Banking.
To evaluate the risk of offshore banking.

Research methodology:
The researcher has collected all the information by help of the research methodology
tools i.e. primary datas and secondary datas.
For primary data the researcher has visited State Bank of India, Seeps branch and
collected relevant information.
For secondary data the researcher have referred a relevant websites of bands, some
books related to the project topic

Limitations:
The researcher has tried to study about Offshore Banking in depth, however no other
financial institution is included.
The study is focused on the working of the offshore banks.

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 INDEX
Sr.No Topic Page no.
1 INTRODUCTION TO OFFSHORE BANKING
1.1 Introduction
1.2 Features
1.3 Myths
1.4 History
1.5 Development and appearance
1.6 Advantages, Benefits and Importance
1.7 Disadvantages
OFFSHORE FINANCIAL CENTERS
2 2.1 Offshore Financial Centers
2.2 Introduction
2.3 Definition
2.4 Characteristics
2.5 Offshore financial centers in india
3 OFFSHORE BANKING- A RECENT TREND
3.1 Need for offshore banks
3.2 Offshore banking
3.3 Online Offshore banking
3.4 Offshore bank accounts
3.5 Offshore jurisdiction
4 OFFSHORE BANKING IN INDIA
4.1 Offshore banking in Indian context
4.2 Role of RBI in Offshore banking
4.3 FEMA
4.4 Reputed Offshore banks in India
4.5 Offshore banking centers in India
4.6 Offshore development in India
4.7 Scope of Offshore banking in India
4.8 Statistics concerning offshore banking
5 LEGAL ASPECTS
5.1 Regulation of Offshore banking
5.2 Changing legislations
5.3 Future trends in Offshore Banking
6 DATA ANALYSIS
6.1 Questionairre
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 INTRODUCTION TO OFFSHORE BANKING
1.1 INTRODUCTION
An offshore bank is a bank or an investment institution located outside the country of
residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides
financial and legal advantages.
These advantages typically include:
Greater privacy (bank secrecy, a principle born with the 1934 Swiss Banking Act)
Low or no taxation (i.e. tax havens)
Easy access to deposits (at least in terms of regulation)
Protection against local political or financial instability.
While the term originates from the Channel Islands being "offshore" from the United
Kingdom, most offshore banks are located in island nations including Swiss banks and those
of other landlocked nations such as Luxembourg and Andorra.
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 Clear stream, based in Luxembour6 , being possible crossroads for major
illegal money flows.

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Defenders of offshore banking have criticized 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 Organization for Economic Co-operation and
Development (OECD) countries are trying to stamp out competition.
Offshore banking is one of the most sought after banking solutions in today's world.
Offshore banking denotes the banking options opted by an individual outside the country of
residence. The term offshore banking has been inspired from the fact that these banks are
mostly located in the island nations - offshore. However, with numerous exceptions to the
fact, like countries like Switzerland, Luxembourg etc, this term is now used in global context
as well.

1.2 FEATURES

The main activity in which the offshore banking centers engage is the Eurocurrency loans,
underwriting of Eurocurrency bonds and over the counter trading in derivatives for risk
management and speculative purposes. They also provide specialized services including
asset management, foreign exchange, and custodian and trustee services. Offshore banking
is blessed with a number of features. The most significant ones are:
Offers higher level of privacy as opposed to the local banks
No taxation
Protection against financial insecurities and instabilities in the local economy
Less restrictive regulations
Easy access deposits
Except for the developed nations that offer for complete financial stability, individuals
from the various undeveloped countries that are surrounded with instability may opt to
resort to offshore banking for better steadiness in assets and resources
Offshore banks offer better rate of interest
Offers features that banks in the domestic realm may not possess like unspecified bank
account etc
Offers investment opportunities far greater and better in variety and quality than the ones
available locally
Exceptionally preferable for international workers.

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 1.3 OFFSHORE BANKING MYTHS
There are lots of offshore banking myths that prevent people from taking advantage of the
benefits that an offshore account can offer. Once you know the truth about using offshore
banks, though, you can make educated decisions that help you protect your assets from law
suits and privacy invasion.
Offshore Accounts Are Illegal
Perhaps the most persistent offshore banking myths are those that question the legality of
using offshore accounts. Most of the time, this misperception comes from movies and
television shows. The truth is that offshore accounts are perfectly legal as long as you use
them properly. For instance, an offshore account can help you pay fewer taxes, but your
country of residence will still require you to pay some taxes.
Offshore Accounts Arent Safe
Other offshore banking myths question whether offshore accounts are safe. There are some
cautionary tales about people losing all of their money because their offshore accounts
suddenly disappeared. This, however, only happens in countries with poor legal systems.
When you choose offshore accounts in stable countries like Panama, you dont have to
worry about the safety of your assets. In fact, you might find that the Republic of Panama
has a system that is more stable than your own countries.
Offshore Accounts Are Only for Wealthy People
Offshore accounts are useful for lots of people, not just those who are wealthy. You
wouldnt want to spend the time and money establishing an offshore account for just a
couple thousand dollars, but many people find that they can benefit from opening an
offshore account that protects their assets from lawsuits and invasions of privacy.

Offshore banks are located in remote regions thus making it difficult to manage the
account

While many offshore jurisdictions are indeed small islands in the ocean, in the age of rapid
technological progress physical location of the bank doesnt much matter. Its never a

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problem to deposit, transact and investing funds using well-thought, reliable and secure
internet-banking software supported by offshore banks. And italso easy and widespread to
have a debit card to access your funds in cash at any ATM point worldwide.

Offshore banking is tax-free

In most cases its free of local taxation of the banks jurisdiction. But remember that many
high tax countries tax worldwide income of their citizens. It is always safe to check and
comply with tax legislation of the countries where you are considered a resident for tax
purposes.

Its not safe to have account with an offshore subsidiary of a bank having global
presence

A subsidiary banking institution in offshore is a separate legal entity subject to another

jurisdiction banking law, keeping confidentiality of its depositors and not passing any
information to the parent bank. Violations are punishable by prison terms. It is mostly taken
in a wrong way because it can give out information on the clients to the parent bank located
for example in the customers home country.

1.4 THE HISTORY OF OFFSHORE BANKING

For those of you who can remember the 1970s, youll probably remember 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
persuaded their clients that any deposits placed into offshore banks would be anonymous,

12
free from the scrutiny plaguing the mainland and the UK, and would be liable for minimal
taxation. As word spread across Europe and indeed throughout the world, 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; thus becoming offshore banking jurisdictions and offshore financial centers.
This became particularly popular in the small island nations of the Caribbean, which many
tend to associate with offshore banking jurisdictions. Investors and depositors seeking
politically and economically stable jurisdictions found their way to these offshore financial
centers and this practice continues today. Rightly or wrongly, offshore banking has become
synonymous with "tax haven", jurisdictions characterized by low - or zero - taxation on
interest, dividends, royalties and foreign derived income, as well as having some degree of
banking confidentiality.
Over the time this term has evolved to include other popular banking jurisdictions such as
Switzerland, Austria, Lichtenstein, Luxembourg and more recently the United Arab Emirates
(UAE), Singapore and Hong Kong. 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, low taxation and security. Unlike other
banks at home, the Offshore banks were not regularly subjected to political turmoil or
economic strife, and were most welcome for the stability and asset protection benefits.
In the years since they have come into greater use and thus more visible, offshore
banking accounts have been unfairly portrayed by the media and by the larger jurisdictions
as the stomping grounds of the criminal underground-a veritable haven for their illicitly-
obtained assets and funds, or the locales for their money-laundering schemes. Investors
know that offshore banks can be remarkably effective havens for assets and funds in need
of safe, secure, confidential keeping. They know that these banks can safeguard their funds
from the perils of civil, economic, or political strife in their home countries. Today, offshore
banks continue to keep their end of the bargain and continue to provide a safe, confidential
haven for those seeking to safeguard their assets and funds from the perils of undue
regulation and taxation.
Although an abridged and streamlined version of history, these are, fundamentally, the
roots of the modern offshore banking industry.

1.5 OFFSHORE BANKING - DEVELOPMENT, APPEARANCE

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Many economists argued that offshore banking sector represented the new beginning of
the international capitalism. They traced the evolution of the offshore banking sector to the
development of transnational corporations. In this context the evolution of the
international banking came as a response to the modern phenomenon of capital which
obviously goes beyond national borders. At the same time the rapid growth and boom of
the technology sector gave a great incentive and facilitated the creation of the international
offshore banking area. This permitted global access of world market information and
subsequently its management and control. Under the traditional national and international
sectors there were several constraints which gave the possibility for offshore activity to
grow.
These are: the extension of national tax bases; intermittent fiscal and monetary instabilities;
the existence of foreign exchange controls and fluctuations; limiting cross-border controls;
conservative banking laws and regulations with regard to foreign and domestic industrial
entry, systems of supervision and liquidity requirements, constraints on the issue of foreign
and domestic bonds, the admission of securities to capital markets, stock exchange,
insurance regulations ; company laws which restricted business.
Also it has to be mentioned from the international perspective there was a lack of coherent
set of international fiscal principles and laws in which transnational company could operate
across border.
The evolution of the offshore banking center is described from the perspective of its tax and
banking functions. More recently, however, other constraints onshore have served as an
incentive element which pushed for offshore investment and have emphasized the
importance of that investment. These include: the need to provide for what is seen as the
vulnerability of professionals and investors to creditors; the desire to avoid onshore laws
and regulations which mandate the reservation of assets to spouses and heirs; the need for
savings and investment vehicle for ordinary persons.
Offshore banking center came with innovative solutions to all these constraints that were
mentioned above. Let us refer for example to taxation. There are 3 models of offshore
banking centers from the perspective of taxation: with zero-tax (here even residents do not
pay taxes); with low-tax; tax at normal rates but exemption or other preferential treatment
is granted to non-resident investors or investment for certain categories of income.
Notwithstanding the fact that the above categories refers only to tax aspects of offshore
banking activity, it clearly shows the scope of such centers.

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 1.6 ADVANTAGES IMPORTANCES AND BENEFITS OF
OFFSHORE BANKING
1. ADVANTAGES OF OFFSHORE BANKING
Access to politically and economically stable nations:
Offshore banks can sometimes provide access to politically and economically stable
jurisdictions. This will be an advantage for residents in areas where there is risk of political
turmoil, who fear their assets may be frozen, seized or disappear (the corralito for example,
during the 2001 Argentine economic crisis). However it is often argued that developed
countries with regulated banking systems offer the same advantages in terms of stability.
Lower cost base with high returns:
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.
Growth of developing countries:
Offshore finance is one of the few industries, along with tourism, in which geographically
remote island nations can competitively engage. 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.
Tax free income:
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 income.
Financially engineered banking services:
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.
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 Other advantages:
Offshore banking is often linked to other structures, such as offshore companies, trusts or
foundations, which may have specific tax advantages for some individuals.
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 off shoring of capital.

2. IMPORTANCE OF OFFSHORE BANKING

Offshore banking has now become an important segment of the international financial
system. Offshore banking is simply a practice of working with an offshore bank. An offshore
bank refers to a bank located outside the country where the depositor lives.
Usually, these banks may be located in such a jurisdiction with substantial financial as well
as legal advantages. Offshore banks provide a continuum of services in connection with
financial management, such as, deposit taking, money transmissions, creation of provision
of foreign exchange, trade finance, credit facilities, investment and fund management,
corporate administration, and trustee service.
Creation of a bank account with an offshore bank is great alternative particularly for those
who have to travel frequently or someone whose career changes a lot. People prefer
offshore banking for a myriad of other purposes such as expansion of your business, tax-
free investment, and anonymity with regard to financial matters, asset protection, and
estate planning.
A specialty of offshore banking is that an account can be opened with an offshore bank
simply as a saving account. Account can also be opened to carry out main business
functions. Apart from these, through an offshore bank, you can even make investments and
take loans.
This type of banking has now been legally used by many individuals and corporations
worldwide. Offshore banking is usually preferred by people falling under three categories,
such as, high net worth individuals, expatriates, and business owners. High net worth
individuals are usually people with a non-refundable income in excess of one million US
dollars. Included in the expatriates are people residing oversees away from their country for
employment purposes or any other reasons.

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Business owners are usually those people who own business and whose shares are owned
by family members or any other close people. Nowadays, many of the corporate clients
including multinational corporations, large industrial as well as trading companies, shipping
companies, and banking corporations, are also getting attracted to the benefits offered by
offshore banking.
One of the prime benefits of offshore banking is that it provides access to economically as
well as politically stable jurisdictions. This proves to be advantageous to such people whose
residing area has risks of political disorders. There are certain offshore banks that function
with low cost base, which in turn can offer higher interest rates to the depositors when
compared to their home country.
Another great benefit is that it is a great way for developing countries to enhance their
economic growth, since offshore banking allows redistributing finance from the developed
economies to the developing economies. Perhaps the most prominent of the offshore
banking is tax benefits, i.e., most of the offshore banks makes payment of interest without
deducting the tax.
This is highly beneficial to individuals who do not make tax payment on worldwide income
or who do not make payment until the tax return is agreed. Further, many of the services
rendered by the offered by offshore banks many not be available from banks located in
home country.
Offshore banking is usually associated with formations including offshore trusts, offshore
foundations, and offshore companies, which in turn may provide some kind of benefits in
the form of tax as well as asset protection. As a healthy competition is seen in the industry
of offshore banking regarding tax benefits, it enables to choose the most appropriate facility
offering tax advantages. In addition, offshore banking allows you to easily move your assets,
if you want to join an employment or spend long periods outside your home country.

3. BENEFITS OF OFFSHORE BANKING

Offshore banking has been around for many years. It is synonymous with illegal activities
like tax evasion and money laundering. The growth of offshore financial havens like
Bermuda, Seychelles, Isle of Man and the Dominican Republic was fuelled by illegal
transactions.
However the offshore banking industry has started to change because companies have
realized the potential of legal offshore banking services. The growth of reputable financial
hubs like Hong Kong, Singapore and New Zealand as offshore banking centers have
contributed to cleaning the reputation of the service. The banking industry itself is credited
17
with tightening rules and regulations on what is acceptable behavior for banks dealing in
offshore banking services. Besides that account opening procedures are now more
transparent and it is difficult to hide illegal activities from the surveillance of international
regulators.
Companies are now beginning to appreciate offshore banking services because it offers
numerous advantages such as:
There are multiple currencies allowed in offshore accounts making it more efficient for
companies dealing with on a multinational basis.
Offshore banking pays out higher interest rates as the interest is exempted from tax.
International banking has become a legitimate and secure way for individuals and
companies to make tax efficient financial transactions internationally.
Companies can spread out their financial transactions so that they can diversify their tax
rates. A lot of companies are using multiple subsidiaries to lower their tax obligations in one
country.
Offshore banking provides opportunities for good investments especially during economic
downturns as offshore regulations may make it a more stable economic situation compared
to the companys main country of residence.
Opening an offshore bank account for corporations is not a difficult process and there are
many local companies and legal services in these havens to make the process even easier.
With an offshore bank account, there can be efficiency in the transfer of funds for
companies with multinational branches and dealings. It is essential to find a good offshore
banking provider as this make the whole process even more efficient. Many international
banking groups have subsidiaries in reputable offshore financial havens so the companies
do not even have to change bankers when engaging in such opportunities.
If you have a company and is still undecided about offshore banking services, then you
might want to research more about the matter or seek professional advice. There is plenty
of information available on the subject in the internet while consulting a lawyer well versed
in international financial operations would be the best in terms of professional advice.
Other significant benefits of offshore banking are:
Since it provides a broad range of features, offshore banking can provide you absolute
safety and security
- As offshore banks are mostly located in a jurisdiction with sound economic and political
condition, it provides stability
- Many of the offshore banking facilities assure privacy and confidentiality

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- Above all, offshore banking system provides flexibility, ie, it provides flexible structure to
business owners and expatriates requiring global access to their fund
In order to acquire the full benefits above mentioned, it is recommended to review or
examine your decision of opening an account with an offshore bank. Primarily, it must be
checked whether the offshore bank you have chosen is located in such a jurisdiction that
can meet your requirements. The next to be considered is that whether the chosen offshore
bank renders all the services it mentions.
Despite any challenge, setting up an offshore bank account is considered a wise decision.

1.7 DISADVANTAGES OF OFFSHORE BANKING

Financial security:
Offshore bank accounts are less financially secure. In banking crisis which swept the world
in 2008 the only savers who lost money were those who had deposited their funds in
offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who
had deposited with the same banks onshore received all of their money back. In 2009 The
Isle of Man authorities were keen to point out that 90% of the claimants were paid,
although this only referred to the number of people who had received money from their
depositor compensation scheme and not the amount of money refunded. In reality only
40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December
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 and
point out that potential depositors should be aware that any deposits over that amount are
at risk. However only offshore centers such as the Isle of Man have refused to compensate
depositors 100% of their funds following Bank collapse. 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.
Associated with underground economy:
Offshore banking has been associated in the past 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

19
Organized crime gangs, terrorist groups, and other state or non-state actors. However,
offshore banking is a legitimate financial exercise undertaken by many expatriate and
international workers.

The jurisdictions are at remote places:

Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and
access to information can be difficult. Yet in a world with global telecommunications this is
rarely a problem for customers. Accounts can be set up online, by phone or by mail.
Accessible mostly to higher income group:
Offshore private banking is usually more accessible to those on higher incomes, because of
the costs of establishing and maintaining offshore accounts. However, simple savings
accounts can be opened by anyone and maintained with scale fees equivalent to their
onshore counterparts. 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. The Laffer curve demonstrates this tendency.
Offshore bank accounts are sometimes touted as the solution to every legal, financial and
asset protection strategy but this is often much more exaggerated than the reality.
European Savings Tax Directive 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 taxes 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.

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 OFFSHORE FINANCIAL CENTRE
2.1 DEFINITION:
An offshore financial centre (or OFC), although not precisely defined, is usually a low-tax,
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.
"The use of this term makes the important point that a jurisdiction may provide specific
facilities for offshore financial centers without being in any general sense a tax haven."
2.2 INTRODUCTION:
In todays highly integrated global network, international offshore financial centers
(OFCs) have come to play a vital role in facilitating investment worldwide. An offshore
centre exists by usage. It is recognized by an amalgam of features which, taken together,
offer particular advantages for investment by non-residents. OFCs are jurisdictions where
offshore banks are exempt from a wide range of regulations, which are normally imposed
on onshore institutions. Specifically, deposits are not subject to reserve requirements, bank
transactions are mostly tax exempt from regulatory scrutiny with respect to liquidity or
capital adequacy. Information disclosure is also low.
Offshore financial centers provide financial management services to foreign users in
exchange for foreign exchange earnings. There are many channels through which offshore
financial services can be provided. These include the following:
Offshore banks, which can handle foreign exchange operations for corporations or banks.
These operations are not subject to capital, corporate, capital gains, dividend, or interest
taxes or to exchange controls;

21
 International business corporations (IBCs) , which are often tax-exempt, limited-liability
companies used to operate businesses or raise capital through issuing shares, bonds, or
other instruments;
Offshore insurance companies, which are established to minimize taxes and manage risk.
Onshore insurance companies establish offshore companies to reinsure certain risks and
reduce their reserve and capital requirements;
Asset management and protection allows individuals and corporations in countries with
fragile banking systems or unstable political regimes to keep assets offshore to protect
against the collapse of domestic currencies and banks. Individuals who face unlimited
liability at home may use offshore centers to protect assets from domestic lawsuits. Many
leading offshore financial centers are located in small tropical Caribbean countries.

2.3 CHARACTERISTICS OF AN OFFSHORE FINANCIAL

CENTRE:
Jurisdictions that have relatively large numbers of financial institutions engaged primarily
in business with non-residents;
Financial systems with external assets and liabilities out of proportion to domestic
financial intermediation designed to finance domestic economies
Centers which provide some or all of the following services: low or zero taxation;
moderate or light financial regulation; banking secrecy and anonymity.

o Taxation

Although most offshore financial centers originally rose to prominence by facilitating

structures which helped to minimise exposure to tax, tax avoidance has played a decreasing
role in the success of offshore financial centers in recent years. Although most offshore
financial centers still charge little or no tax, 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 centers argue that a lack of transparency in offshore financial
centers means that they are vulnerable to being used in illegal tax evasion schemes. A
number of international organizations also suggest that offshore financial centers engage in
"unfair tax competition" by having no, or very low tax burdens, and have argued that such

22
jurisdictions should be forced to tax both economic activity and their own citizens at a
higher level

o Regulation

Most offshore financial centers now promote themselves on the basis of "light but
effective" regulation, and generally only seek to regulate high-risk financial business, such as
banking, insurance and mutual funds.
Critics of offshore financial centers suggest that they are not effectively regulated in all
areas, and in particular that they are vulnerable to being used by organised crime for money
laundering. However, partly in response to international initiatives and partly in a defensive
move to protect their reputations, most offshore financial centers now apply fairly rigorous
anti-money laundering regulations to offshore business. Some even argue that offshore
jurisdictions are in many cases better regulated than many onshore financial centers. For
example, in most offshore jurisdictions, a person needs a licence to act as a trustee,
whereas (for example) in the United Kingdom and the United States, there are no
restrictions or regulations as to who may serve in a fiduciary capacity.

o Confidentiality

Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions, particularly

in relation to the beneficial ownership of offshore companies, and in relation to offshore
bank accounts. The criticisms are slightly difficult to assess. 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.
However, there are certainly well documented cases of parties using offshore structure to
facilitate wrongdoing, and the strong confidentiality laws in offshore jurisdictions have
clearly played a part in the selection of an offshore vehicle for those purposes.

2.4 OFFSHORE BANKING CENTERS:

The development of the concept of offshore banking center is one of the most important
legal, social and economic phenomena. This has occurred thanks to a lot of modern factors
such as development in technology and communication, the spectacular growth in
transnational companies and of course the development of transnational banking. Actually,

23
nowadays the offshore banking activity is seen as the most dynamic sectors of financial
activity.
However, the well known concept offshore banking brings some negative connotation as
well and an image of unethical, illegal or even criminal activity. This is a very narrow view in
relation to what offshore banking activity represents in its entirety because it transcends
such illegal activities as tax evasion or money laundering. In contrast, many offshore
banking centers ensure compliance with international norms and practices. The creation of
offshore banking sector is the result of the laws and represents a legitimate phenomenon in
itself.
The demand for offshore banking services is determined by several factors. Offshore
banking centers aim to supply the demand of increase revenue. They take advantage of
what in modern times it is called financial sector which goes beyond criminality, illegality
and financial abuse or fraud. Today offshore banking centers aim at facilitating taxation for
investors, use of modern and sophisticated banking, dynamic investment and mutual funds.
Moreover, offshore banking centers view the principle of confidentiality in banking issues as
an essential and crucial element which deserves to be protected and guaranteed. At the
same time let us not forget that in many parts of the world the offshore banking sector is
the main contributor to economic development and growth in the jurisdiction were it exists.
The offshore banking sector developed step by step. The basic structure of tax havens
elevated to such sophisticated entity as offshore financial center with multiple financial
services, including offshore banking. The movement of banking institutions offshore
resulted in a huge scale offshore bank deposits. This resulted in the creation of a big
network of onshore external financial centers and onshore-related offshore finance centers.
The development of such a big network was primarily possible due to rapid development of
telecommunications and air travel.
Thus, the offshore banking sector is rightly seen as one of the most dynamic sector. This
sector is using heavily in its activity the rapid development of modern technologies and at
the same advances it.
In terms of offshore banking centers, in terms of total deposits, 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. 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.
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Offshore banking centers offer the following benefits:
Exemption from minimum reserve requirements.
Freedom from control on interest rates.
Low or non-existent taxes and levies.
The bedrock of most offshore financial centers is the formation of offshore structures.
Offshore structures are characteristically involving the formation of an:
Offshore company
Offshore partnership
Offshore trust
Private foundation offshore structures are formed for a variety of reasons.

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 CHAPTER 3: OFFSHORE BANKING-RECENT TREND

3.1 NEED FOR OFFSHORE BANKING

Quite simply, Offshore Accounts facilitate greater financial privacy. Residents of the UK and
EU can now enjoy the same financial benefits as offshore companies and affluent individuals
have done for many years. It is an affordable and secure solution, providing anonymous
offshore banking and offshore asset protection for everyone. Shielding finances and assets
from creditors, legal action and the divorce courts, for example, are some of the major
reasons to bank offshore. Overseas Bank Accounts can be opened in the name of offshore
companies in order to provide the maximum possible anonymity, privacy and offshore asset
protection.
In the past, Offshore Bank Accounts were perceived as just for the wealthy. This is no longer
the case. There is a distinct rise in the number of Europeans who are investing or depositing
their money into anonymous bank accounts. In doing so, they achieve complete offshore
protection.
Most offshore jurisdictions have fiercely strict privacy and confidentiality regulations
established which help to ensure that the identities and transactions of individuals and,
indeed, companies are carefully shielded and protected. Whilst this confidentiality is almost
legendary, it is not possible to guarantee absolute privacy and anonymity. All offshore
financial centers, just like onshore financial institutions, throughout the world have an
implicit legal obligation to comply with investigations into suspected serious criminal
activity such as money-laundering and, more recently, the funding of terrorism. This is the
only time that OFCs will impart information to a third party.
In the vast majority of offshore bank accounts and companies, where there is no compelling
criminal or terrorism accusation, personal information including the details of the owner of
26
the offshore account and transactional information are completely shielded. These OFCs
are designed to provide complete confidentiality and serve to totally protect and safeguard
individual and company information. This, the highest level of confidentiality available
anywhere in the world, is especially worthy of note as it relates to protecting assets from
legal action within the home jurisdiction and civil matters such as divorce or inheritance
matters. The only time that an offshore bank will divulge even the slightest amount of
information will be when they are compelled to by a foreign government IF certain rigorous
standards and tests have been met by the governmental body. This would be in the case of
substantial evidence in a money laundering or terrorism case. The overseas banks do
everything in their power to protect the identity and information surrounding the accounts
they hold as their primary concern is safeguarding their investors. It is in the interest of
these offshore financial centers to ensure that no leaks or breaks in confidentiality occur as
it would completely shatter the confidence of other offshore account holders and investors.
Along with losing face, they would stand to lose millions of pounds worth of business.
Other offshore vehicles and entities provide an even deeper and tighter level of anonymity
and confidentiality. These include the International Business Company (the IBC) or Offshore
trusts, although these are more complicated to set up and run than simply opening an
offshore bank account.
Although anyone can open an offshore bank account, the objective should be to address the
need of, and to strike the appropriate balance between, effective asset protection, reduced
taxation, complete anonymity, security of transactions and accessibility.

3.2 OFFSHORE BANKING SERVICES

I. Acceptance of Deposits
Checking accounts:
A deposit account held at a bank or other financial institution, for the purpose of securely
and quickly providing frequent access to funds on demand, through a variety of different
channels. Because money is available on demand these accounts are also referred to as
demand accounts or demand deposit accounts.
Savings accounts:

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 Accounts maintained by retail banks that pay interest but cannot be used directly as money
(for example, by writing a cheque). Although not as convenient to use as checking accounts,
these accounts let customers keep liquid assets while still earning a monetary return.
Money market account:
A deposit account with a relatively high rate of interest, and short notice (or no notice)
required for withdrawals. In the United States, it is a style of instant access deposit subject
to federal savings account regulations, such as a monthly transaction limit.
Time deposit:
A money deposit at a banking institution that cannot be withdrawn for a preset fixed 'term'
or period of time. When the term is over it can be withdrawn or it can be rolled over for
another term. Generally speaking, the longer the term the better the yield on the money.

II. Credit
Credit is the trust which allows one party to provide resources to another party where that
second party does not reimburse the first party immediately (thereby generating a debt),
but instead arranges either to repay or return those resources (or other materials of equal
value) at a later date. The resources provided may be financial (e.g. granting a loan), or they
may consist of goods or services (e.g. consumer credit). Credit encompasses any form of
deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, also
known as a borrower.
Credit does not necessarily require money. The credit concept can be applied in barter
economies as well, based on the direct exchange of goods and services. However, in
modern societies credit is usually denominated by a unit of account. Unlike money, credit
itself cannot act as a unit of account.
Movements of financial capital are normally dependent on either credit or equity transfers.
Credit is in turn dependent on the reputation or creditworthiness of the entity which takes
responsibility for the funds. Credit is also traded in financial markets. The purest form is the
credit default swap market, which is essentially a traded market in credit insurance. 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, commonly denoted in
basis points (one basis point is 1/100 of a percent) of the notional amount to be referenced,
while the protection "buyer" pays this premium and in the case of default of the underlying
(a loan, bond or other receivable), delivers this receivable to the protection seller and
receives from the seller the par amount (that is, is made whole).

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III. Wire and Electronic Funds Transfers
Electronic money (also known as e-currency, e-money, electronic cash, electronic currency,
digital money, digital cash, digital currency, cyber currency) refers to money or scrip which
is only exchanged electronically. Typically, this involves the use of computer networks, the
internet and digital stored value systems. Electronic Funds Transfer (EFT), direct deposit,
digital gold currency and virtual currency are all examples of electronic money. Also, it is a
collective term for financial cryptography and technologies enabling it.
While electronic money has been an interesting problem for cryptography (see for example
the work of David Chaum and Markus Jakobsson), to date, the use of e-money has been
relatively low-scale. One rare success has been Hong Kong's Octopus card system, which
started as a transit payment system and has grown into a widely used electronic money
system. London Transport's Oyster card system remains essentially a contactless pre-paid
travel card. Two other cities have implemented functioning electronic money systems. Very
similar to Hong Kong's Octopus card, Singapore has an electronic money program for its
public transportation system (commuter trains, bus, etc.), based on the same type of
(FeliCa) system. The Netherlands has also implemented a nationwide electronic money
system known as Chipknip for general purpose, as well as OV-Chipkaart for transit fare
collection. In Belgium, a payment service company, Proton, owned by 60 Belgian banks
issuing stored value cards, was developed in 1995.
A number of electronic money systems use contactless payment transfer in order to
facilitate easy payment and give the payee more confidence in not letting go of their
electronic wallet during the transaction.

IV. Foreign Exchange

The foreign exchange market (forex, FX, or currency market) is a global, worldwide
decentralized over-the-counter financial market for trading currencies. Financial centers
around the world function as anchors of trading between a wide range of different types of
buyers and sellers around the clock, with the exception of weekends. The foreign exchange
market determines the relative values of different currencies.
The primary purpose of the foreign exchange is to assist international trade and investment,
by allowing businesses to convert one currency to another currency. For example, it permits
a US business to import British goods and pay Pound Sterling, even though the business's
income is in US dollars. It also supports speculation, and facilitates the carry trade, in which
29
investors borrow low-yielding currencies and lend (invest in) high-yielding currencies, and
which (it has been claimed) may lead to loss of competitiveness in some countries.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by
paying a quantity of another currency. The modern foreign exchange market began forming
during the 1970s when countries gradually switched to floating exchange rates from the
previous exchange rate regime, which remained fixed as per the Bretton Woods system.

V. Letters of Credit and Trade Finance

A standard, commercial letter of credit (LC) is a document issued mostly by a financial
institution, used primarily in trade finance, which usually provides an irrevocable payment
undertaking.
The letter of credit can also be payment for a transaction, meaning that redeeming the
letter of credit pays an exporter. Letters of credit are used primarily in international trade
transactions of significant value, for deals between a supplier in one country and a customer
in another. In such cases, the International Chamber of Commerce Uniform Customs and
Practice for Documentary Credits applies (UCP 600 being the latest version).[2] They are
also used in the land development process to ensure that approved public facilities (streets,
sidewalks, storm water ponds, etc.) will be built. The parties to a letter of credit are usually
a beneficiary who is to receive the money, the issuing bank of whom the applicant is a
client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit
are irrevocable, i.e., cannot be amended or canceled without prior agreement of the
beneficiary, the issuing bank and the confirming bank, if any. In executing a transaction,
letters of credit incorporate functions common to giros and Traveler's cheques. Typically,
the documents a beneficiary has to present in order to receive payment include a
commercial invoice, bill of lading, and documents proving the shipment were insured
against loss or damage in transit.
Investment management and Investment custody
Investment management is the professional management of various securities (shares,
bonds and other securities) and assets (e.g., real estate) in order to meet specified
investment goals for the benefit of the investors. Investors may be institutions (insurance
companies, pension funds, corporations, charities, educational establishments etc.) or
private investors (both directly via investment contracts and more commonly via collective
investment schemes e.g. mutual funds or exchange-traded funds).

30
The term asset management is often used to refer to the investment management of
collective investments, (not necessarily) while the more generic fund management may
refer to all forms of institutional investment as well as investment management for private
investors. 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".
The provision of 'investment management services' includes elements of financial
statement analysis, asset selection, stock selection, plan implementation and ongoing
monitoring of investments. Investment management is a large and important global
industry in its own right responsible for caretaking of trillions of yuan, dollars, euro, pounds
and yen. 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.

VI. Trustee services

A board of directors is a body of elected or appointed members who jointly oversee the
activities of a company or organization. The body sometimes has a different name, such as
board of governors, board of managers, board of regents, board of trustees, board of
visitors, or executive board. It is often simply referred to as "the board."
A board's activities are determined by the powers, duties, and responsibilities delegated to
it or conferred on it by an authority outside itself. These matters are typically detailed in the
organization's bylaws. The bylaws commonly also specify the number of members of the
board, how they are to be chosen, and when they are to meet.
In an organization with voting members, e.g., a professional society, the board acts on
behalf of, and is subordinate to, the organization's full assembly, which usually chooses the
members of the board. In a stock corporation, the board is elected by the stockholders and
is the highest authority in the management of the corporation. In a non-stock corporation
with no general voting membership, e.g., a university, the board is the supreme governing
body of the institution; its members are sometimes chosen by the board itself.
General duties of trustees
Trustees have certain duties (some of which are fiduciary). These include the duty to carry
out the express terms of the trust instrument, the duty to defend the trust, the duty to
prudently invest trust assets, the duty of impartiality among the beneficiaries, the duty to
account for their actions and to keep them informed about the trust, the duty of loyalty, the
31
duty not to delegate, the duty not to profit, the duty not to be in a conflict of interest
position and the duty to administer the trust in the best interest of the beneficiaries. These
duties may be expanded or narrowed by the terms of the instrument creating the trust, but
in most instances cannot be eliminated completely. Corporate trustees, typically trust
departments at large banks, often have very narrow duties, limited to those explicitly
defined in the trust indenture.
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, prospective
beneficiaries, or third parties. In the event that a trustee incurs a liability (for example, in
litigation, or for taxes, or under the terms of a lease) in excess of the trust property they
hold, they may find themselves personally liable for the excess.
Trustees are generally held to a "prudent person" standard in regard to meeting their
fiduciary responsibilities, though investment, legal, and other professionals can be held to a
higher standard commensurate with their higher expertise. Trustees can be paid for their
time and trouble in performing their duties only if the trust specifically provides for
payment. 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.

VII. Corporate Administration

Management in all business and organizational activities is the act of getting people
together to accomplish desired goals and objectives using available resources efficiently and
effectively. Management comprises planning, organizing, staffing, leading or directing, and
controlling an organization (a group of one or more people or entities) or effort for the
purpose of accomplishing a goal. Resourcing encompasses the deployment and
manipulation of human resources, financial resources, technological resources, and natural
resources.
Because organizations can be viewed as systems, management can also be defined as
human action, including design, to facilitate the production of useful outcomes from a
system. This view opens the opportunity to 'manage' oneself, a pre-requisite to attempting
to manage others.
Not every bank provides each service. Banks tend to polarize between retail services and
private banking services. Retail services tend to be low cost and undifferentiated, whereas
private banking services tend to bring a personalized suite of services to the client.

32
 Not every bank provides each of these services. Banks tend to polarize between retail
service and private banking services. Retail service tends to be low cost and
undifferentiated; whereas private banking services tend to bring a personalized suit of
services to the client.
Offshore banking is an important part of international financial system. Experts believe that
as much as half the words capital flows through offshore centers. Tax havens have 1.2 per
cent of the world population and hold 26 per cent of the worlds wealth, including 31 per
cent of the net profits of the United States multinationals.
The international monitory fund (IMF) has said that between $600 billion and $1.5 trillion of
illicit money is laundered annually, equal to 2 to 5 per cent of global economic output.
Today, offshore where most of the words drug money is allegedly laundered, estimated at
up to $500bilion a year, more than the total income of the worlds poorest 20 per cent.

3.3 ONLINE OFFSHORE BANKING

Online offshore banking or in other words ibank represents an internet bank system
through which a holder of an offshore corporate or personal bank account, with both
offshore credit card and debit card, can manage and monitor his/her account(s) via internet
from all over the world.

Advantages of online offshore banking

As already mentioned above, a holder of an offshore corporate or personal bank account
may access his/her account via ibank from all over the world. The only thing that you need
is a computer and internet connection. In addition, the offshore bank account can be
accessed 24 hours /7 days.
But this is not the last advantage, do not forget that via online offshore banking you have at
your disposal except the possibility to manage and monitor your account also the possibility
to use different banking services which may differ from bank to bank but generally enhance
such services as: transfer of money, exchange of currencies, making deposits and many
other transactions.
Any of these transactions can be made immediately or booked for a certain date. In
addition, what is the most important is that they are secured.
Moreover, if you have any questions or you encounter problems or difficulties during the
use of the online offshore banking services the majority of banks provide 24 hour
33
assistance. All you need is to call them. The personnel of the offshore banks usually speak in
several languages.

How to use online offshore banking?

Usually, online offshore banking can be used on different operating systems such as
Microsoft Windows or Mac and many other systems. You can even access your private or
corporate offshore bank account from a smart phone. In addition, all largely used browsers
such as Internet Explorer and Mozilla Firefox, and others support the service. At the end of
the day all you actually need is internet connection.
It is important to mention that online offshore banking is a secured system so getting access
to it presupposes several steps. Usually, you will have to use a username and a password to
login into the system. Also each electronic transaction that you make through online
offshore banking has to be confirmed by a personal security code. This reduces the risks of
frauds or any other troubles that might occur if someone else gets access to your offshore
bank account via online offshore banking.

3.4 OFFSHORE BANK ACCOUNTS

In the current economic climate, many persons are turning to offshore banking as an
alternative method of saving and investing their hard earned money.

1. Why setup an offshore bank account?

The main reason people setup offshore bank account is to save on taxes. Another reason is
to keep money away from creditors reach. While it is not illegal in most countries to open
an offshore bank account, if you are doing so for illegal reasons then be prepared not to be
protected from the long arm of the law.
One major advantage of banking in the US is the fact that the government insures the
money. This generally is not the case with an offshore bank account though. So, in the event
of a catastrophe you may wiped out financially in one fell swoop.
The most famous of countries to have an offshore bank account in is Switzerland.

2. Offshore Bank Account Features

True offshore banking

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 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

1. What You Need to Know Before Opening an Account?

Offshore banking, we have all heard about it before. Unfortunately, many are misinformed
when it comes to offshore banking. We have all heard news reports of offshore accounts
being used to front illegal activities or to avoid taxes. In fact, we have also seen it in the
movies, being used a similar way. This has led many individuals to believe that offshore
banking is illegal. Despite what you may believe, offshore banking is legal. However, how
you use it may be considered illegal. Offshore banking is done through a bank that is known
as an offshore bank.
Offshore banks are banks that are located in another country, other than the country that
you reside in. For instance, if you live in the United States an offshore bank would not be
located in the United States. Many popular offshore banks are located in Switzerland. There
are a number of advantages to offshore banking, but there are disadvantages as well.
The biggest advantage of offshore banking is that you are offered privacy and stability.
There are many individuals who place their money in offshore accounts for security
purposes. When your money is in an offshore account, you can access it, but many choose
not to. It is easier to access and spend your money if it is at a local bank. That is why a large
number of individuals use offshore banking to help them increase their savings. 45
Another advantage of offshore banking is that just about anyone can open an account. The
most common users of offshore banking are corporations, the self-employed, or individuals
who wealthy. Offshore banks may have restrictions on the amount of money that is needed
to open an account, but it is not always a large amount. Whether you are a small business
owner, wealthy, or you consider yourself middle class, you should still be able to open up an
offshore bank account.

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 2. How much money do I need to invest offshore?

There is no absolute low limit, but the extra costs of taking advice, opening new bank
accounts, phone communication at a distance, transaction costs mean offshore investment
is unlikely to be worthwhile for those earning less than 25,000 a year. However, because of
the internet, costs are being reduced. Offshore banks will take deposits down to 1,000, but
for a personalised 'private banking' service, you may need to deposit 100,000 or more.
Each offshore bank will have its own requirements, so these are meant as a rough guide.

3. Additional Information about Offshore Banking Accounts

There are popular offshore financial centers throughout the world and based on all
continents. Selecting the right OFC for you is crucial to ensure the correct level and balance
of confidentiality, taxation and offshore asset protection. One of the most effective ways of
asset protection and banking anonymity, as touched on above, is the use of an offshore
company to own the offshore bank account. The offshore location with the greatest privacy
for an offshore company is not necessarily the jurisdiction with the greatest privacy for the
offshore bank account. To provide maximum protection and wealth management, a
combination of OFCs would be of benefit. For example, an offshore company established in
Nevis could own an offshore bank account in Switzerland. The Island of Nevis has terribly
strong offshore company law that offers maximum privacy of ownership. Switzerland,
however, provides the strongest combination of international bank security and financial
privacy. It is crucial to establish the best combination for your specific financial
requirements.

There are several tips that depositor (offshore account owner) should take into
consideration before opening an account:

Depositor should find out whether offshore banking jurisdiction follows bank secrecy
policy. Bank secrecy is in fact one of the main benefits that offshore banking offers
though offshore bank accounts and in practice all tax havens provide such benefits,
however the degree to which anonymity is ensured varies from one jurisdiction to
another, therefore it is worth deepening into the legislation of the country to
determine to what extent bank secrecy is ensured;

36
 Depositor should specify what services does offshore banking center offers. Can
he/she receive a credit card? In what currencies can he/she open an account? What
about foreign exchange operation, offshore investment opportunities, letter of credit
provision, time deposits, checking, online banking and etc? Before actually making a
decision of opening an offshore bank account one should have a clear idea about
advantages and disadvantages of a specific bank and financial sector in general. It
may happen so that a you may start with opening just account and later decide to use
other offshore services as well. It may turn out that other services are not available in
this offshore banking jurisdiction and moving to other jurisdiction may be quite
costly;
Dont forget to check out the taxation policy for the jurisdiction you choose.
Although many offshore banking centers have low or no taxes, there are cases when
this is not the case. In other words not all offshore banking centers are tax havens
and not all tax havens are offshore banking centers;

Although different banks in different offshore banking jurisdictions require different

documents for opening offshore bank accounts, most of them typically ask for the following
documents.

For a Personal Account:

o Filled out bank application form;
o Signature sample;
o Notarized copy of passport with clients original signature or any other acceptable
identification;
o Original bank reference for each signatory of the account;
o Document confirming clients address;

Bank application form varies from bank to bank. Some require it to be signed in front of the
public notary, while some in front of bank officer, some do not have any of these
requirements.

For Corporate Offshore Bank Account:

o Memorandum and Articles of Association (original or certified copy);
o Certificate of Incorporation (original or certified copy);
o Board resolution to open account (original or certified copy);

OFFSHORE CREDIT CARD & ITS WORKING

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Offshore credit cards are comparatively new type of service that offshore banks provide for
their clients. Only couple of years ago typical offshore bank client did not have such a
convenience to access his/her savings so easily through the credit cards that are linked to
the offshore bank account. In the past if a client wanted to access money kept offshore,
he/she had to personally withdraw it from his/her offshore bank account by physically
visiting bank office or transfer it to onshore bank account.

Both ways had serious disadvantages. In case of withdrawing money from the account an
individual faced a risk of getting robbed on the way home and in second case when money
was transferred from offshore to onshore account his/her privacy was seriously challenged,
since it became possible to trace offshore account through this transfer.

This whole process was extremely inconvenient, inflexible and time consuming. Offshore
credit cards made a huge step towards simplification of the ways an individual can access
funds that he/she keeps in the offshore banking center. Offshore bank issued Visa and
MasterCard offshore credit cards made a revolution in offshore banking business.

Offshore credit cards have almost the same features as the domestic ones. They are also
branded under Visa and MasterCard and are accepted at millions of locations for paying in
exchange for goods and services. In addition, they allow getting cash advances through
automated teller machines (ATMs). Offshore credit cards also provide insurance, car rental
benefits, card replacement, offshore banking online services, carrying balances forward and
many other services that are also available to normal credit card owners.

Although offshore credit card and domestic credit card have numerous similarities, there
are some aspects by which they differ. As a rule offshore banks require their clients to
provide certain amount of guarantee a security deposit together with the application for
the credit card. The amount requested by offshore banking institutions varies from case to
case, however normally it is 125-150% of the credit amount requested. For instance, to get
credit card balance of $20,000, a client should provide a security amount of $30,000. There
are cases, when banks require security deposit of 200%.

It is possible to increase offshore credit card balance, but offshore banks require client to
increase security guarantee as well by wiring funds or by any other acceptable method. The
system of security deposits differs from the requirements that domestic banks set for their
customers. In fact offshore credit cards are some kind of hybrid card, where credit that is

38
extended is secured by clients own money, therefore offshore banks often refers to such
cards as offshore cards.

3.5 OFFSHORE BANKING JURISDICTIONS

1. Recommended Offshore Banking Jurisdictions
The most financial advantageous Offshore banking jurisdictions for providing financial
security, privacy, convenience and return upon investment are listed below, in order:
For initial deposits of over 100,000:
Switzerland
Luxembourg
Lichtenstein
Isle of Man
The Offshore Company UK specializes in offering offshore bank account setup in Switzerland
and we have compiled an entire section on Swiss Banking.
For deposits under 100,000, these are the recommended jurisdictions:
Caribbean (many countries, call for details)
Latvia

2. Banking in the European Union Jurisdictions

With the advent of a piece of legislation called the European Union Savings Tax Directive
2005, the financial confidentiality and privacy of EU citizens has been compromised, if they
are subject to it. The reach of this directive extends to certain offshore banking locations if
they are either European Union members or fall under its purview and jurisdiction. Whilst
scrutiny is lower and confidentiality is higher in tax haven jurisdictions, potential European
account holders should note that this EU Tax Directive may adversely affect their financial
privacy. This limits the financial privacy of certain accounts held in certain offshore banking
institutions.
The member states of the European Union are currently: Austria, Belgium, Cyprus, Czech
Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy,
39
Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia,
Spain, Sweden and the United Kingdom.
Offshore Banking within jurisdictions that are part of the commonwealth of, or is governed
by or is a consigner, of these countries and their laws is subject to this European Union
Savings Tax Directive. Other offshore financial centers, such as Switzerland and the United
States of America, may also comply voluntarily.
In essence, the European Union Savings Tax Directive 2005 is an agreement between EU
Member States which allows the exchange of financial or transactional information. This
agreement is known as the automatic exchange of information option and is the hallmark
of the Directive.
European Union citizens must take extra care, therefore, when selecting an offshore
banking institution to ensure their financial privacy. It is essential to choose an offshore
jurisdiction which is not subject to EU law or EU directives and do not participate in this
agreement to guarantee their confidentiality and privacy, thus resulting in increased
offshore bank account security and stronger asset protection.

Other Offshore Bank Account Jurisdictions

All of this being said, there are other offshore financial centers which provide many of the
same offshore benefits that the EU jurisdictions do, but which are not bound by this EU
Directive. These other offshore jurisdictions, not subject to EU Directive reporting, are
where European investors need to look to open an offshore bank account if confidentiality,
less tax and increased financial privacy are important to them. Although an important
consideration, however, it should not be presumed that it would always be advantageous to
bank in a non-EU Directive adhering jurisdiction. A more substantial depositor meeting the
initial deposit amount requirements might still favor Swiss bank accounts and Switzerland as
his offshore banking jurisdiction of choice. Although careful consideration including a fiscal
needs analysis would have to be undertaken to ensure that the location met personal and
financial requirements. If not, there are alternative jurisdictions which are not subject to the
EU Tax Directive that would be very competent in dealing with large sums of money whilst
still maintaining abject privacy. Additionally, these offshore financial centers have much
lower initial deposit requirements than those required to open an account in a Swiss
banking institution, for example. Some OFCs like Panama and Belize only require 250 or
500 to open an account.

40
 OFFSHORE BANKING IN INDIA

4.1 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). The SEZs have
been set up with a view to providing an internationally competitive and hassle free
environment for export production. 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. The OBUs virtually would be foreign
branches of Indian banks located in India. These OBUs, inter alia, would be exempt from
reserve requirements and provide access to SEZ units and SEZ developers to international
finances at international rates. The Reserve Bank of India (RBI) has permitted banks
operating in India, whether Indian, public/private sector or foreign, to set up OBUs in the
SEZs. The OBUs would carry out essentially wholesale banking operations. The OBUs will be
set up as branches of the banks and therefore no separate assigned capital will be required.
All prudential norms applicable to overseas branches of Indian banks would apply to OBUs.
Thus, the necessary risk management practices that are in vogue internationally, would
have to be adopted by the OBUs. The OBUs will be regulated and supervised by RBI. They
will be required to scrupulously follow Know Your Customer and other antimoney
laundering directives of RBI from time to time. Unlike the OFCs in other developing
countries which conduct offshore banking in a significant manner, the OBUs in India have a
limited mandate. In fact, the approach appears to be facilitating the SEZ policy rather than
introducing offshore banking 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. Notwithstanding the
41
limited scope for offshore banking in the light of the relevant regulations, many Indian
banks have set up OBUs in SEZs. Available feedback is encouraging.
Over the years, India has tightened the legal framework to combat money laundering and
other cross border financial crime. These include the Prevention of Money Laundering Act
2002, 50passed keeping in view the FATF deliberations and recommendation and
international initiatives at the United Nations and others. There are other laws such as The
Smugglers and Foreign Exchange Manipulation (Forfeiture of Property) Act of 1976, The
Code of Criminal Procedures 1973, Prevention of Corruption Act, 1988, The Narcotic drugs
and Psychotropic Substances Act of 1985.

4.2 ROLE OF RBI IN OFFSHORE BANKING

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.

1. Reserve bank of India Offshore banking units 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. As per the Government's policy, 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. It was also indicated by the
Union Commerce Minister in his speech announcing the Exim Policy for 2002-07 that for the
first time, Offshore Banking Units (OBUs) would be permitted to be set up in SEZs. These
units would be virtually foreign branches of Indian banks but located in India. These OBUs,
inter alia, would be exempt from CRR, SLR and give access to SEZ units and SEZ developers
to international finances at international rates.

The schemes are as follows

42
o Eligibility Criteria Banks operating in India viz. public sector, private sector and foreign
banks authorized to deal in foreign exchange are eligible to set up OBUs. Such banks
having overseas branches and experience of running OBUs would be given
preference. Each of the eligible banks would be permitted to establish only one OBU
which would essentially carry on wholesale banking operations.
o 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, 1949. Given the
unique nature of business of the OBUs, Reserve Bank would stipulate certain licensing
conditions such as dealing only in foreign currencies, restrictions on dealing with
Indian rupee, access to domestic money market, etc. on the functioning of the OBUs.
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. No separate
authorization with respect to the OBU branch would be issued under FEMA. As
currently in vogue with respect to designating a specific branch for conducting foreign
exchange business, the parent bank may designate the branch in SEZ as an OBU
branch. A separate Notification No. FEMA71/2002RB dated September 7, 2002 issued
by the Exchange Control Department (ECD) of RBI on OBUs is enclosed.
o Capital Since OBUs would be branches of Indian banks, no separate assigned capital
for such branches would be required. However, with a view to enabling them to start
their operations, the parent bank would be required to provide a minimum of US$ 10
million to its OBU.
Reserve Requirements
o RBI would grant exemption from CRR or credit reserve rating requirements to the
parent bank with reference to its OBU branch under Section 42(7) of the RBI Act,
1934.
o SLR Banks are required to maintain SLR under Section 24(1) of the Banking
Regulation Act, 1949 in respect of their OBU branches. However, in case of necessity,
request from individual banks for exemption will be considered for a specified period
under Section 53 of the B.R.Act, 1949.
Resources and deployment the sources for raising foreign currency funds would be
only external. 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. Deployment of funds would be
restricted to lending to units located in the SEZ and SEZ developers. Foreign currency
requirements of corporate in the domestic area can also be met by the OBUs. If funds
43
 are lent to residents in the Domestic Tariff Area (DTA), existing exchange control
regulations would apply to the beneficiaries in DTA.
Permissible Activities of OBUs would be permitted to engage in the form of business
mentioned in Section 6(1) of the BR Act, 1949 as stipulated in the enclosed ECD
Notification no. FEMA71/2002-RB dated September 7, 2002 and subject to the
conditions of the license issued to the OBU branches.
Prudential Regulations All prudential norms applicable to overseas branches of Indian
banks would apply to the OBUs. The OBUs would be required to follow the best
international practice of 90 days' payment delinquency norm for income recognition,
asset classification and provisioning. 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 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 bank's Board would be
required to set comprehensive overnight limits for each currency for these branches,
which would be separate from the open position limit of the parent bank.
Anti-Money Laundering Measures of the OBUs would be required to scrupulously
follow "Know Your Customer (KYC)" and other antimony laundering instructions
issued by RBI from time to time. Further, with a view to ensuring that anti-money
laundering instructions are strictly compiled with by the OBUs, they are prohibited
from undertaking cash transactions, and transactions with individuals.
Regulation and Supervisions of OBUs will be regulated and supervised by RBI through
its Exchange Control Department, Department of Banking Operations and
Development and Department of Banking Supervision.
Reporting requirements OBUs will be required to furnish information relating to their
operations as are prescribed from time to time by RBI. 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. These branches
would be prohibited to participate in domestic call, notice, tem, etc. money market
and payment system. Operations of the OBUs in rupees would be minimal in nature,
and any such operations in the domestic area would be through the Authorized
Dealer (distinct from OBUs) which would be subject to the current exchange control

44
 regulations in force. 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. The Ads dealing with OBUs would be
subject to ECD regulations.
Priority sector lending the loans and advances of OBUs would not be reckoned as net
bank credit for computing priority sector lending obligations.
Deposit insurance Deposits of OBUs will not be covered by deposit insurance.
Choice of SEZ OBUs would be permitted in SEZs approved by Government of India,
where according to Government policy, OBUs can be set up.

4.3 FEMA
The Foreign Exchange Management Act, 1999 (FEMA) is an Act of the Parliament of
India "to consolidate and amend the law relating to foreign exchange with the objective of
facilitating external trade and payments and for promoting the orderly development and
maintenance of foreign exchange market in India". It was passed in the winter session of
Parliament in 1999, replacing the Foreign Exchange Regulation Act (FERA). This act makes
offences related to foreign exchange civil offenses. It extends to the whole
of India. Replacing FERA, which had become incompatible with the pro-liberalization
policies of the Government of India. It enabled a new foreign exchange management regime
consistent with the emerging framework of the World Trade Organization (WTO). It also
paved the way for the introduction of the Prevention of Money Laundering Act, 2002, which
came into effect from 1 July 2005.

1. Acts/rules/guidelines which regulate the flow of foreign contribution to India

The flow of foreign contribution to India is regulated under

Foreign Contribution (Regulation) Act, 2010,
Foreign Contribution (Regulation) Rules, 2011
And other notification / orders etc., issued there under from time to time.
FCRA, 1976 repealed after coming of FCRA, 2010

2. Applicability
As per Section 1(2) of FCRA, 2010, the provisions of the act apply to:
Whole of India
45
 Citizens of India outside India; and
Associate Branches or subsidiaries, outside India, of companies or bodies corporate,
registered or incorporated in India.

4.4 REPUTED OFFSHORE BANKS IN INDIA

India is one if the fastest growing economy of the world which is in fact attracting lot of
foreign countries to come and invest on us. An economically growing country includes a lot
of transaction for which bank is one of the most important place. India has so many local
banks and also national banks but then having international banks is equally important.
Thus India also started allowing foreign banks in India and these are the top ten foreign
banks in India:

1. CITI BANK
2. STANDARD CHATERED BANK
3. HSBC BANK
4. DEUTSCHE BANK
5. ROYAL BANK OF SCOTLAND
6. DBS BANK
7. BARCLAYS BANK
8. BANK OF AMERICA
9. BANK OF BEHRAIN AND KUWAIT
10.DOHA BANK.

4.5 OFFSHORE BANKING CENTRE IN INDIA

Financial experts have been pleading to establish an offshore banking centre in India.
Geographically India provides distinct advantages in attracting offshore banking units,
because it has a stable economic and political performance, a vast market, technical
manpower that could find employment in these centers. Another advantage is that the
Indian market would open a little before the Tokyo market closes, and close before New
York opens, thus providing a vital time link for international money market dealers.

46
 In an era where many Indian corporations are functioning abroad and many corporations
are granted permission to seek overseas finance, 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. The benefits of multi-currency
operations which, to an extent, minimize currency fluctuation risk, will be an added
advantage.
Salaries paid by offshore banks and local expenditure incurred by them contribute to
the economy's welfare. For smaller countries, the benefit would be greater. For a
larger country such as India, however, this may not form a significant portion of the
total income.
India may earn revenue in the form of licence fees, profit taxes imposed on the banks
operating in the area. It may also get the benefit of banks' funds in the form of capital
and liquidity requirements.
The country can gain improved access to the international capital markets.
The domestic financial system may become more efficient through increased
competition and exposure of the domestic banks to the practices of offshore banks.
Offshore banking centers will provide opportunities to train the local staff which will,
in turn, contribute to faster economic growth.
Offshore banking units would help channelize non-resident Indian investments.
Setting up offshore banking centers would trigger enforced development of more
advanced communication facilities a must for their functioning.

4.6 OFFSHORE DEVELOPMENT IN INDIA

Softwares are the ultimate need of the present business. Every business organization needs
softwares to carry out their business processes successfully and efficiently. The
organization always wants a well worthy software in a very optimum price, so they tend to
look for a better option of solutions and off course in a lesser price to maximize the profits.
Due to the high market value of USD, UK-POUND and EURO the development cost of the
software are most likely to be very high in these Developed Nations. Therefore, the business
organizations are looking for a lower cost options and the same quality of work as well. So,
they are Outsourcing their Business Processes to the developing nations like India. India is
considered as the best destination to outsource the IT related work in the last 5 years from
the USA, UK and other European Countries.
India is the leading beneficiary of the IT related outsourcing, because of the following
reasons:

47
 A large pool of Technically Qualified Professionals is available in India with above average
IQ, which makes it a large force in the IT related works.
The most important advantage is the cost factor - 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 quality of services provided
by them is at par the International Standards and they are flexible to work in any time zone
of this world.
The Geographical Distance is not a problem for the Software or IT related services. 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. So, the Geography has now become
History for the modern day technology.

4.7 THE SCOPE FOR OFFSHORE BANKING IN INDIA

The favorable factors for an OFC in India are well known. These include availability of skilled
and quality banking, legal professionals, and vastly improved Tele communication systems
ensuring connectivity, the time zone advantage. The benefit by way of fillip to local
economy is also well understood. However, clearly the regulatory regime governing it would
be critical. Accordingly the proponents of offshore banking would need to address the key
concerns of the regulator. Apart from the apprehension of offshore banking being used for
dubious ends and in financial crime, the regulator would also be concerned about the
systemic risks to the financial system. It would perhaps not be inappropriate to evolve a
regulatory framework with a road map for informed public debate.

Such a framework would need to address issues such as:

First, should only offshore banking be permitted or other activities within the umbrella of
an OFC? Some of the other activities may appear as meeting specific needs such as
insurance, fund management, trusts, etc.
Second, for an OFC being set up should there is a single regulator for all the activities of
the OFC or different regulators mirroring the pattern in the corresponding onshore sub
sectors? Also, should there a single regulator for onshore and offshore banks?
Third, should there licensing of firms in the OFC as it is currently stipulated for OBUs in
SEZs? Or should it be simple incorporation as is the practice in most OFCs? Or should
licensing be restricted to financial intermediaries?
Fourthly, granted that licensing would be required for OBUs, who would be the eligible
parties not just banks operating in India as per current policy, but also foreign banks, their
subsidiaries/ affiliates? What would be the permissible activities? Here again the regulator
would need to strike a balance between the fundamental objective of ensuring financial
48
stability and the business growth compulsions of the OBUs. For instance, if private banking
were to be permitted, the requirements of confidentiality would need to temper the anti-
money laundering safeguard measures. The RBI is today well respected in the international
community as a proactive regulator in the adoption of international standards and the
maintenance of financial stability while at the same time, aiding development and growth. A
slew of policies adopted by RBI in the last few years have been aimed at strengthening the
banking system. These include adoption of prudential norms, consolidated supervision,
connected lending, using technology to upgrade settlement systems, payment systems,
widening and deepening the various segments of the financial markets, the unrelenting
emphasis on up gradation of risk management systems of financial intermediaries.The way
forward appears to involve at the first step, an assessment of the robustness of the existing
legislative and regulatory framework may be done keeping in view the principles of cross
border cooperation, information sharing transparency, ongoing monitoring. Perhaps certain
overseas jurisdictions with whom India can have reciprocal arrangements can be identified,
that will ensure proper due diligence while licensing OBUs and subsequent supervision. In
sum, the question before us may not whether to have an OFC, but how can we set up a well
regulated OFC that will be beneficial to the Indian economy.

4.8 STATISTICS CONCERNING OFFSHORE BANKING

Offshore banking is an important part 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. According to Merrill Lynch and Gemini Consulting's
World Wealth Report for 2000, one third of the wealth of the world's high net-worth
individualsnearly $6 trillion out of $17.5 trillionmay now be held offshore. Some $3
trillion is in deposits in tax haven banks and the rest is in securities held by international
business companies (IBCs) and trusts.
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.[1] 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.

49
Each year, an increasing number of investors around the world are attracted by
international financial centers to establish business in a form of an offshore company,
offshore trust, offshore mutual fund, offshore insurance company, open an offshore bank
account or even start their own offshore bank. It is estimated, that around 60% of the
world's wealth is held on offshore accounts by using offshore companies or offshore trusts
and that around 50% of the world's trade in goods are transacted through various offshore
jurisdictions.
As the years have progressed, so has the application of offshore services along with the
number of offshore jurisdictions offering such benefits. Offshore companies or offshore
trusts are not the illicit hideaways from tax authorities as sometimes presented. When
setup and managed correctly, they can infact provide enormous tax savings and asset
protection in a perfectly legal manner. In simple terms, an international business or offshore
company is usually a normal limited liability company, which is used as a tool by
corporations and individuals throughout the world to legally direct profits out of high tax
countries into offshore jurisdictions or so called international offshore centers, thus taking
advantage of the low or zero taxation and various double tax treaties.

50
 LEGAL ASPECTS

5.1 REGULATION OF OFFSHORE BANKING

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

51
 If the host country determines that any of these three standards is not being met, it could
impose restrictive measures or prohibit the establishment of banking offices.
This was followed by the Report of a Working Group of the Basle Committee which, inter
alia, 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. Subsequently there have been several international and
regional supervisory and regulatory initiatives. These are aimed, inter alia, at curbing
involvement of OFCs in financial crime such as money laundering, tax evasion, lax financial
regulation including inadequate supervision.

5.2 Changing Legislation

The legislation governing offshore banking was forever changed as a consequence of what
happened on the morning of September 11th 2001. The US sought to crack down on
potential terrorists who were using the offshore banking network to move money around
by initiating far reaching banking regulations - applicable to all accounts (worldwide) that
were transacted in US dollars. Following 9/11 the US introduced the USA PATRIOT Act,
which authorizes the US authorities to seize the assets of a bank where it is believed that
the bank holds assets for a suspected criminal. Similar measures have been introduced in
some other countries. This doesnt impact the normal offshore client directly (we assume
your desire to open an offshore bank account is a legitimate one), but part of it is the clause
entitled: Know Your Customer which is the due diligence and bank regulations that
financial institutions must perform to identify their clients and ascertain relevant
information pertinent to doing financial business with them. The international response to
money laundering has been coordinated by the Financial Action Task Force (FATF), also
known by its French name, Groupe d'action financire (GAFI), whose original 40 principles
form the basis of most international responses to money laundering. As well as the
opportunity to curtail terrorist financing activities, the governments of Europe saw an
opportunity to use terrorism as an excuse to clamp down on what really annoyed them
about offshore banking - tax avoidance. The European Union Savings Directive (EUSD),
which came into effect in July 2005, contains the so-called European Union withholding tax,
a tax deducted from interest earned by European Union residents on their investments
made in another member state, by the state in which the investment is held. This directive
makes EU residents with offshore bank accounts choose between one of two options: 1)
Allowing their offshore bank(s) to report savings income directly to local tax authorities. 2)
Pay tax immediately at such time income is provided to the account holder by their offshore
bank. Over time, it is expected an increasing number of offshore banks will be affected by
this decision. In addition, if the account holder chooses the second option mentioned
52
above, then the tax rate used to collect monies due is scheduled to rise in 2011. This
increase in the tax rate is viewed as a way of eventually forcing all account holders in
offshore banks to choose the first option mentioned above - namely allowing those banks to
report directly to their countrys tax collecting agencies.

5.3 Future trends in offshore banking

The future of offshore banking could take many forms. However, what can be said with
confidence is that before this new century gets much older, we will see the creation of a
greatly different financial services industry to the one we have today, both in the
composition of the institutions themselves and in the way they do business.
The recent flurry of mergers in Europe and the UK are indicative of a wider trend that will
see banks, trust companies, accountants and lawyers, both offshore and onshore, become
much larger institutions. This can be attributed to the drive for increased shareholder value.
Financial institutions are likely to seek to build their core business base while developing
other businesses in order to create improved economies of scale.

Prime targets
Trust companies will continue to be prime targets for takeovers by large financial services
groups. Although trust companies have a different customer base to banks, linkages with
trust companies offer obvious benefits. It is probable that by 2025 nearly all trust
companies will either be owned by banks or consolidated with law and accountancy firms.
The business emphasis will probably move further away from private client tax-planning
structures towards corporate structures established offshore for tax neutrality reasons.
The creation of 'bank assurance' groups within the UK and its offshore centers is also likely
to be an increasing trend. Although banks owning insurance providers have long been
recognized as logical in Europe, the UK has only recently begun to see the brokering of such
deals. Lawyers and accountants will one day become prime targets for bank takeovers. This
is increasingly likely if these firms become subject to more stringent regulation and have to
cope with increased compliance costs and the complexity of corporate business.

Corporate cultures
However, it will be interesting to see whether the corporate cultures of these different
organizations can mesh. Instead, we may see independent lawyers and accountants
53
merging together to create 'professional one-stop firms' encompassing law, accountancy
and trust work, with particular leanings to structured finance and related activities.
The composition of the banking sector itself will change, with far greater specialization by
institutions. We will increasingly be able to identify corporate banks, retail banks and banks
which operate exclusively for the offshore market.

E-commerce
The world of e-commerce has lots to offer in terms of the way we do business and use our
time. It is likely to become a primary growth sector for retail banking with an increasing
number of products being offered to potential customers via the web.
Banks in the UK, for example, are likely to increasingly polarise into centers of profit to the
detriment of regional banking. The internet will offer banks from any location, including
offshore, the opportunity to target corporate and personal clients outside these centers.
The corporate sector at the upper end is likely to be less affected by the internet. Corporate
deals are probably too bespoke to homogenise because of their size and complexity. For
corporate deals, technology is much more likely to be used in the management of
information and transactions rather than in structuring products.
Specialised teams
The internet also offers potential dangers for offshore banking. Centers must be careful that
the business they are attracting and supporting has a genuine offshore market.
In the case of internet gambling, for instance, a synthetic offshore market has been created
whereby UK companies with a UK client base are moving offshore for tax purposes. It
remains to be seen how national governments will seek to control this, but undoubtedly the
demand to move cross-border business offshore is growing.
Offshore finance centers will continue, although they will no longer be driven primarily by
personal tax issues. Instead, offshore jurisdictions will be used by the private client mainly
for asset protection rather than for tax planning, with a growing emphasis on tax-neutral
corporate structures.
With a move to asset protection based business, the importance of the trust industry
offshore is likely to grow. There are likely to be much larger corporate trust providers,
supported by the banking or professional groups which own them.
There is a growing market for multinationals to aid offshore treasury management and
client structures. So for offshore corporate clients, the centers will take on the role of being
well-managed, politically stable, tax-neutral environments in which to conduct international
business, demonstrating the overall benefit of offshore centers to global business.
Although Jersey is unlikely to ever join the EU directly, Europe will also become an
increasingly important market.

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DATA ANALYSIS

55