Offshore bank
Encyclopedia
An offshore bank is a bank
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:
While the term originates from the Channel Islands
being "offshore" from the United Kingdom
, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, 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 Clearstream
, based in Luxembourg, being possible crossroads for major illegal money flows.
Defenders of offshore banking have criticised 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 Organisation for Economic Co-operation and Development
(OECD) countries are trying to stamp out competition.
in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU.
Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.
from offshore banks, including:
Not every bank provides each service. Banks tend to polarise between retail services
and private banking
services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.
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 individuals”—nearly $6 trillion out of $17.5 trillion—may 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. Among offshore banks, Swiss banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands
(1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits. However, recent data by the Swiss National Bank
show that the assets held by foreign persons in Swiss bank accounts declined by 28.1% between January 2008 and November 2009.
, The Wall Street Journal
and The Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the CIA, had a program to access the SWIFT
transaction database after the September 11th attacks (see the Terrorist Finance Tracking Program
) rendering offshore banking for privacy severely compromised.
(IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business.
Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency
of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization
(NGO) maintain that they have been insufficient. A few examples of these are:
Joseph Stiglitz, 2001 Nobel
laureate for economics and former World Bank Chief Economist
, told to reporter Lucy Komisar, investigating on the Clearstream
scandal:
In the 1970s through the 1990s it was possible to own your own personal offshore bank; mobster Meyer Lansky
had done this to launder his casino
money. Changes in offshore banking regulation in the 1990s in the form of "due diligence
" (a legal construct
) make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run.
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.
Weakened Bank Secrecy
Since starting to survey offshore jurisdictions on April 2, 2009, the Organization for Economic Cooperation and Development ((OECD)) at the forefront of a crackdown on tax evasion, won't object to governments using stolen bank data to track down tax cheats in offshore centers.
The recent sharing of confidential UBS bank details about 285 clients suspected of willful tax evasion by the United States Internal Revenue Service was ruled a violation of both Swiss law and the country’s constitution by a Swiss federal administrative court.
Nevertheless, OECD has removed 18 countries, including Switzerland, Liechtenstein and Luxembourg, from a so-called "grey list" of nations that did not offer sufficient tax transparency, and has re-categorized them as “white list” nations. Countries that do not comply may face sanctions.
A notable exception is Panama, whose canal is currently needed by all Western nations, provides it with a unique type of immunity to international pressure. Given the enlargement of the canal to accommodate larger shipping, it is unlikely in the foreseeable future that Panama would likely succumb to international pressure toward transparency.
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven
Tax haven
A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
) that provides financial
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
and legal advantages. These advantages typically include:
- greater privacyPrivacyPrivacy is the ability of an individual or group to seclude themselves or information about themselves and thereby reveal themselves selectively...
(see also bank secrecyBank secrecyBank secrecy is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply...
, a principle born with the 1934 Swiss Banking Act) - low or no taxation (i.e. tax havenTax havenA tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....
s) - 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
Channel Islands
The Channel Islands are an archipelago of British Crown Dependencies in the English Channel, off the French coast of Normandy. They include two separate bailiwicks: the Bailiwick of Guernsey and the Bailiwick of Jersey...
being "offshore" from the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
and Andorra
Andorra
Andorra , officially the Principality of Andorra , also called the Principality of the Valleys of Andorra, , is a small landlocked country in southwestern Europe, located in the eastern Pyrenees mountains and bordered by Spain and France. It is the sixth smallest nation in Europe having an area of...
.
Offshore banking has often been associated with the underground economy
Underground economy
A black market or underground economy is a market in goods or services which operates outside the formal one supported by established state power. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and...
and organized crime
Organized crime
Organized crime or criminal organizations are transnational, national, or local groupings of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for monetary profit. Some criminal organizations, such as terrorist organizations, are...
, via tax evasion
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
and money laundering
Money laundering
Money laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
; however, legally, offshore banking does not prevent assets from being subject to personal income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
on interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
. 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
Taxation in the United States
The United States is a federal republic with autonomous state and local governments. Taxes are imposed in the United States at each of these levels. These include taxes on income, property, sales, imports, payroll, estates and gifts, as well as various fees.Taxes are imposed on net income of...
, for example, are required to declare on penalty of perjury
Perjury
Perjury, also known as forswearing, is the willful act of swearing a false oath or affirmation to tell the truth, whether spoken or in writing, concerning matters material to a judicial proceeding. That is, the witness falsely promises to tell the truth about matters which affect the outcome of the...
, any offshore bank accounts
Deposit account
A deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
—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
Bank secrecy
Bank secrecy is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply...
, this does not make the non-declaration of the income by the tax-payer or the evasion
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
of the tax on that income legal. Following September 11, 2001
September 11, 2001 attacks
The September 11 attacks The September 11 attacks The September 11 attacks (also referred to as September 11, September 11th or 9/119/11 is pronounced "nine eleven". The slash is not part of the pronunciation...
, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses
Clearing (finance)
In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. Clearing is necessary because the speed of trades is much faster than the cycle time for completing the underlying transaction....
such as Clearstream
Clearstream
Clearstream Banking S.A. is the clearing and settlement division of Deutsche Börse, based in Luxembourg and Frankfurt. Clearstream was created in January 2000 through the merger of Cedel International and Deutsche Börse Clearing...
, based in Luxembourg, being possible crossroads for major illegal money flows.
Defenders of offshore banking have criticised 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 Organisation for Economic Co-operation and Development
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...
(OECD) countries are trying to stamp out competition.
Advantages of offshore banking
- 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 (see the corralitoCorralitoCorralito was the informal name for the economic measures taken in Argentina at the end of 2001 by Minister of Economy Domingo Cavallo in order to stop a bank run, and which were fully in force for one year. The corralito almost completely froze bank accounts and forbade withdrawals from U.S...
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.
- Some offshore banks may operate with a lower cost base and can provide higher interest rateInterest rateAn interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
s than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.
- Offshore finance is one of the few industries, along with tourismTourismTourism is travel for recreational, leisure or business purposes. The World Tourism Organization defines tourists as people "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes".Tourism has become a...
, 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.
- 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.
- Some offshore banks offer banking servicesCustomer serviceCustomer service is the provision of service to customers before, during and after a purchase.According to Turban et al. , “Customer service is a series of activities designed to enhance the level of customer satisfaction – that is, the feeling that a product or service has met the customer...
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.
- Offshore banking is often linked to other structures, such as offshore companiesOffshore companyThe term offshore company is ambiguous. It may refer to either:# A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre i.e...
, trustsOffshore trustAn offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction.Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring assets on the trustees to manage for the benefit of a person or...
or foundationsPrivate foundationA private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets...
, 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 TieboutTiebout modelThe Tiebout model, also known as Tiebout sorting, Tiebout migration, or Tiebout hypothesis, is a positive political theory model first described by economist Charles Tiebout in his article "A Pure Theory of Local Expenditures"...
that tax competitionTax competitionTax competition, a form of regulatory competition, exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources...
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 bottomRace to the bottomA race to the bottom is a socio-economic concept that is argued to occur between countries as an outcome of regulatory competition, progressive taxation policies and social welfare spending...
" in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.
Disadvantages of offshore banking
- Offshore bank accounts are less financially secure. In a 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 centres such as the Isle of Man have refused to compensate depositors 100% of their funds following Bank collapses. Onshore depositors have been refunded in full regardless of what the compensation limit of that country has stated thus banking offshore is historically riskier than banking onshore.
- Offshore banking has been associated in the past with the underground economyUnderground economyA black market or underground economy is a market in goods or services which operates outside the formal one supported by established state power. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and...
and organized crimeOrganized crimeOrganized crime or criminal organizations are transnational, national, or local groupings of highly centralized enterprises run by criminals for the purpose of engaging in illegal activity, most commonly for monetary profit. Some criminal organizations, such as terrorist organizations, are...
, through money launderingMoney launderingMoney laundering is the process of disguising illegal sources of money so that it looks like it came from legal sources. The methods by which money may be laundered are varied and can range in sophistication. Many regulatory and governmental authorities quote estimates each year for the amount...
. Following September 11, 2001September 11, 2001 attacksThe September 11 attacks The September 11 attacks The September 11 attacks (also referred to as September 11, September 11th or 9/119/11 is pronounced "nine eleven". The slash is not part of the pronunciation...
, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terroristTerrorismTerrorism is the systematic use of terror, especially as a means of coercion. In the international community, however, terrorism has no universally agreed, legally binding, criminal law definition...
groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.
- 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.
- 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 http://www.adamsmith.org/pdf/flattax.pdf. The Laffer curveLaffer curveIn economics, the Laffer curve is a theoretical representation of the relationship between government revenue raised by taxation and all possible rates of taxation. It is used to illustrate the concept of taxable income elasticity . The curve is constructed by thought experiment...
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 exaggeration.
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 taxEuropean Union withholding tax
The so-called European Union withholding tax is a withholding tax which is 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....
in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU.
Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.
Banking services
It is possible to obtain the full spectrum of financial servicesFinancial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
from offshore banks, including:
- deposit takingDeposit accountA deposit account is a current account, savings account, or other type of bank account, at a banking institution that allows money to be deposited and withdrawn by the account holder. These transactions are recorded on the bank's books, and the resulting balance is recorded as a liability for the...
- creditCredit (finance)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 , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
- wire-Wire transferWire transfer or credit transfer is a method of electronic funds transfer from one person or institution to another. A wire transfer can be made from one bank account to another bank account or through a transfer of cash at a cash office...
and electronic funds transfersElectronic moneyElectronic money is money or scrip that is only exchanged electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems... - foreign exchangeForeign exchange marketThe foreign exchange market is a global, worldwide decentralized 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...
- letters of credit and trade financeLetter of creditA standard, commercial letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking....
- investment management and investment custodyInvestment managementInvestment management is the professional management of various securities and assets in order to meet specified investment goals for the benefit of the investors...
- fund management
- trustee servicesTrusteeTrustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
- corporate administrationManagementManagement 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...
Not every bank provides each service. Banks tend to polarise between retail services
Retail
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
and private banking
Private banking
Private banking is banking, investment and other financial services provided by banks to private individuals investing sizable assets. The term "private" refers to the customer service being rendered on a more personal basis than in mass-market retail banking, usually via dedicated bank advisers...
services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.
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 StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
multinationals
Multinational corporation
A multi national corporation or enterprise , is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation...
. According to Merrill Lynch
Merrill Lynch
Merrill Lynch is the wealth management division of Bank of America. With over 15,000 financial advisors and $2.2 trillion in client assets it is the world's largest brokerage. Formerly known as Merrill Lynch & Co., Inc., prior to 2009 the firm was publicly owned and traded on the New York...
and Gemini Consulting
Capgemini
Capgemini is a French global IT services company, one of the world's largest management consulting, outsourcing and professional services companies with a staff of 114,274 operating in 40 countries. It is headquartered in Paris and was founded in 1967 by Serge Kampf, the current chairman, in...
's “World Wealth Report” for 2000, one third of the wealth of the world's “high net-worth individuals”—nearly $6 trillion out of $17.5 trillion—may now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies
International business company
An international business company or international business corporation is an offshore company formed under the laws of some jurisdictions as untaxed company which is not permitted to engage in business within the jurisdiction in which it is incorporated...
(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
Illegal drug trade
The illegal drug trade is a global black market, dedicated to cultivation, manufacture, distribution and sale of those substances which are subject to drug prohibition laws. Most jurisdictions prohibit trade, except under license, of many types of drugs by drug prohibition laws.A UN report said the...
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
Lucy Komisar
Lucy Komisar is a New York City-based investigative journalist. She writes about offshore banking, corporate secrecy, international money laundering, and how they relate to corporate fraud; international corruption; the looting by dictators; financing of terrorism; international crime including...
quoting these statistics. 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
Cayman Islands
The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...
(1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits. However, recent data by the Swiss National Bank
Swiss National Bank
The Swiss National Bank is the central bank of Switzerland. It is responsible for Swiss monetary policy and for issuing Swiss franc banknotes.The names of the institution in the four official languages of the country are: ; ; ; ....
show that the assets held by foreign persons in Swiss bank accounts declined by 28.1% between January 2008 and November 2009.
Terrorist Finance Tracking Program
A series of articles published on June 23, 2006, by The New York TimesThe New York Times
The New York Times is an American daily newspaper founded and continuously published in New York City since 1851. The New York Times has won 106 Pulitzer Prizes, the most of any news organization...
, The Wall Street Journal
The Wall Street Journal
The Wall Street Journal is an American English-language international daily newspaper. It is published in New York City by Dow Jones & Company, a division of News Corporation, along with the Asian and European editions of the Journal....
and The Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the CIA, had a program to access the SWIFT
Swift
The swifts are a family, Apodidae, of highly aerial birds. They are superficially similar to swallows, but are actually not closely related to passerine species at all; swifts are in the separate order Apodiformes, which they share with hummingbirds...
transaction database after the September 11th attacks (see the Terrorist Finance Tracking Program
Terrorist Finance Tracking Program
The Terrorist Finance Tracking Program is a United States government program to access the SWIFT transaction database revealed by The New York Times, The Wall Street Journal and The Los Angeles Times in June 2006. It is part of the Bush administration's "Global War on Terrorism"...
) rendering offshore banking for privacy severely compromised.
Regulation of offshore banks
In the 21st century, regulation of offshore banking is allegedly increasing, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as the International Monetary FundInternational Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
(IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business.
Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency
Transparency (humanities)
Transparency, as used in science, engineering, business, the humanities and in a social context more generally, implies openness, communication, and accountability. Transparency is operating in such a way that it is easy for others to see what actions are performed...
of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization
Non-governmental organization
A non-governmental organization is a legally constituted organization created by natural or legal persons that operates independently from any government. The term originated from the United Nations , and is normally used to refer to organizations that do not form part of the government and are...
(NGO) maintain that they have been insufficient. A few examples of these are:
- The tightening of anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local policePoliceThe police is a personification of the state designated to put in practice the enforced law, protect property and reduce civil disorder in civilian matters. Their powers include the legitimized use of force...
authority, regardless of banking secrecy rules. There is more international co-operation between police authorities. - In the US the Internal Revenue ServiceInternal Revenue ServiceThe Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...
(IRS) introduced Qualifying Intermediary requirements, which mean that the names of the recipients of US-source investment income are passed to the IRS. - Following 9/11 the US introduced the USA PATRIOT ActUSA PATRIOT ActThe USA PATRIOT Act is an Act of the U.S. Congress that was signed into law by President George W. Bush on October 26, 2001...
, which authorises 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. - The European UnionEuropean UnionThe European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
has introduced sharing of information between certain jurisdictions, and enforced this in respect of certain controlled centres, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest.
Joseph Stiglitz, 2001 Nobel
Nobel Prize
The Nobel Prizes are annual international awards bestowed by Scandinavian committees in recognition of cultural and scientific advances. The will of the Swedish chemist Alfred Nobel, the inventor of dynamite, established the prizes in 1895...
laureate for economics and former World Bank Chief Economist
World Bank Chief Economist
The World Bank Chief Economist provides intellectual leadership and direction to the Bank’s overall development strategy and economic research agenda, at global, regional and country levels...
, told to reporter Lucy Komisar, investigating on the Clearstream
Clearstream
Clearstream Banking S.A. is the clearing and settlement division of Deutsche Börse, based in Luxembourg and Frankfurt. Clearstream was created in January 2000 through the merger of Cedel International and Deutsche Börse Clearing...
scandal:
"You ask why, if there's an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It's in the interest of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time. If you said the US, the UK, the major G7 banks will not deal with offshore bank centers that don't comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks."
In the 1970s through the 1990s it was possible to own your own personal offshore bank; mobster Meyer Lansky
Meyer Lansky
Meyer Lansky , known as the "Mob's Accountant", was a Polish-born American organized crime figure who, along with his associate Charles "Lucky" Luciano, was instrumental in the development of the "National Crime Syndicate" in the United States...
had done this to launder his casino
Casino
In modern English, a casino is a facility which houses and accommodates certain types of gambling activities. Casinos are most commonly built near or combined with hotels, restaurants, retail shopping, cruise ships or other tourist attractions...
money. Changes in offshore banking regulation in the 1990s in the form of "due diligence
Due diligence
"Due diligence" is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations...
" (a legal construct
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
) make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run.
Offshore financial centres
In terms of offshore banking centres, in terms of total deposits, the global market is dominated by two key jurisdictions: SwitzerlandSwitzerland
Switzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
and the Cayman Islands
Cayman Islands
The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...
, although numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
, Guernsey
Guernsey
Guernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet...
and the Isle of Man
Isle of Man
The Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
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.
Weakened Bank Secrecy
Since starting to survey offshore jurisdictions on April 2, 2009, the Organization for Economic Cooperation and Development ((OECD)) at the forefront of a crackdown on tax evasion, won't object to governments using stolen bank data to track down tax cheats in offshore centers.
The recent sharing of confidential UBS bank details about 285 clients suspected of willful tax evasion by the United States Internal Revenue Service was ruled a violation of both Swiss law and the country’s constitution by a Swiss federal administrative court.
Nevertheless, OECD has removed 18 countries, including Switzerland, Liechtenstein and Luxembourg, from a so-called "grey list" of nations that did not offer sufficient tax transparency, and has re-categorized them as “white list” nations. Countries that do not comply may face sanctions.
A notable exception is Panama, whose canal is currently needed by all Western nations, provides it with a unique type of immunity to international pressure. Given the enlargement of the canal to accommodate larger shipping, it is unlikely in the foreseeable future that Panama would likely succumb to international pressure toward transparency.
List of offshore financial centres
Offshore financial centres include:- Antigua and BarbudaAntigua and BarbudaAntigua and Barbuda is a twin-island nation lying between the Caribbean Sea and the Atlantic Ocean. It consists of two major inhabited islands, Antigua and Barbuda, and a number of smaller islands...
- Bahamas
- BarbadosBarbadosBarbados is an island country in the Lesser Antilles. It is in length and as much as in width, amounting to . It is situated in the western area of the North Atlantic and 100 kilometres east of the Windward Islands and the Caribbean Sea; therein, it is about east of the islands of Saint...
- BelizeBelizeBelize is a constitutional monarchy and the northernmost country in Central America. Belize has a diverse society, comprising many cultures and languages. Even though Kriol and Spanish are spoken among the population, Belize is the only country in Central America where English is the official...
- BermudaBermudaBermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
- British Virgin IslandsBritish Virgin IslandsThe Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...
- Cayman IslandsCayman IslandsThe Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...
- Channel IslandsChannel IslandsThe Channel Islands are an archipelago of British Crown Dependencies in the English Channel, off the French coast of Normandy. They include two separate bailiwicks: the Bailiwick of Guernsey and the Bailiwick of Jersey...
(JerseyJerseyJersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
, GuernseyGuernseyGuernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet...
, AlderneyAlderneyAlderney is the most northerly of the Channel Islands. It is part of the Bailiwick of Guernsey, a British Crown dependency. It is long and wide. The area is , making it the third-largest island of the Channel Islands, and the second largest in the Bailiwick...
, SarkSarkSark is a small island in the Channel Islands in southwestern English Channel, off the French coast of Normandy. It is a royal fief, geographically located in the Channel Islands in the Bailiwick of Guernsey, with its own set of laws based on Norman law and its own parliament. It has a population...
and HermHermHerm is the smallest of the Channel Islands that is open to the public and is part of the Bailiwick of Guernsey. Cars are banned from the small island just like its Channel Island neighbour, Sark. Unlike Sark, bicycles are also banned...
) - Cook IslandsCook IslandsThe Cook Islands is a self-governing parliamentary democracy in the South Pacific Ocean in free association with New Zealand...
- CyprusCyprusCyprus , officially the Republic of Cyprus , is a Eurasian island country, member of the European Union, in the Eastern Mediterranean, east of Greece, south of Turkey, west of Syria and north of Egypt. It is the third largest island in the Mediterranean Sea.The earliest known human activity on the...
- DominicaDominicaDominica , officially the Commonwealth of Dominica, is an island nation in the Lesser Antilles region of the Caribbean Sea, south-southeast of Guadeloupe and northwest of Martinique. Its size is and the highest point in the country is Morne Diablotins, which has an elevation of . The Commonwealth...
- GibraltarGibraltarGibraltar is a British overseas territory located on the southern end of the Iberian Peninsula at the entrance of the Mediterranean. A peninsula with an area of , it has a northern border with Andalusia, Spain. The Rock of Gibraltar is the major landmark of the region...
is no longer an offshore centre since 30 June 2006. No new Exempt Company certificates are being issued from that date. - GhanaGhanaGhana , officially the Republic of Ghana, is a country located in West Africa. It is bordered by Côte d'Ivoire to the west, Burkina Faso to the north, Togo to the east, and the Gulf of Guinea to the south...
- Hong KongHong KongHong Kong is one of two Special Administrative Regions of the People's Republic of China , the other being Macau. A city-state situated on China's south coast and enclosed by the Pearl River Delta and South China Sea, it is renowned for its expansive skyline and deep natural harbour...
- Isle of ManIsle of ManThe Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
- LabuanLabuanLabuan is a federal territory in East Malaysia. It is an island off the coast of the state of Sabah. Labuan's capital is Victoria and is best known as an offshore financial centre offering international financial and business services via Labuan IBFC since 1990 as well as being an offshore support...
, Malaysia - LiechtensteinLiechtensteinThe Principality of Liechtenstein is a doubly landlocked alpine country in Central Europe, bordered by Switzerland to the west and south and by Austria to the east. Its area is just over , and it has an estimated population of 35,000. Its capital is Vaduz. The biggest town is Schaan...
- LuxembourgLuxembourgLuxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...
- MaltaMaltaMalta , officially known as the Republic of Malta , is a Southern European country consisting of an archipelago situated in the centre of the Mediterranean, south of Sicily, east of Tunisia and north of Libya, with Gibraltar to the west and Alexandria to the east.Malta covers just over in...
- MacauMacauMacau , also spelled Macao , is, along with Hong Kong, one of the two special administrative regions of the People's Republic of China...
- MauritiusMauritiusMauritius , officially the Republic of Mauritius is an island nation off the southeast coast of the African continent in the southwest Indian Ocean, about east of Madagascar...
- MonacoMonacoMonaco , officially the Principality of Monaco , is a sovereign city state on the French Riviera. It is bordered on three sides by its neighbour, France, and its centre is about from Italy. Its area is with a population of 35,986 as of 2011 and is the most densely populated country in the...
- MontserratMontserratMontserrat is a British overseas territory located in the Leeward Islands, part of the chain of islands called the Lesser Antilles in the West Indies. This island measures approximately long and wide, giving of coastline...
- NauruNauruNauru , officially the Republic of Nauru and formerly known as Pleasant Island, is an island country in Micronesia in the South Pacific. Its nearest neighbour is Banaba Island in Kiribati, to the east. Nauru is the world's smallest republic, covering just...
- New ZealandNew ZealandNew Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
- PanamaPanamaPanama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...
- Saint Kitts and NevisSaint Kitts and NevisThe Federation of Saint Kitts and Nevis , located in the Leeward Islands, is a federal two-island nation in the West Indies. It is the smallest sovereign state in the Americas, in both area and population....
- SeychellesSeychellesSeychelles , officially the Republic of Seychelles , is an island country spanning an archipelago of 115 islands in the Indian Ocean, some east of mainland Africa, northeast of the island of Madagascar....
- SingaporeSingaporeSingapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...
- SwitzerlandSwitzerlandSwitzerland name of one of the Swiss cantons. ; ; ; or ), in its full name the Swiss Confederation , is a federal republic consisting of 26 cantons, with Bern as the seat of the federal authorities. The country is situated in Western Europe,Or Central Europe depending on the definition....
- Turks and Caicos IslandsTurks and Caicos IslandsThe Turks and Caicos Islands are a British Overseas Territory and overseas territory of the European Union consisting of two groups of tropical islands in the Caribbean, the larger Caicos Islands and the smaller Turks Islands, known for tourism and as an offshore financial centre.The Turks and...
See also
- Bank secrecyBank secrecyBank secrecy is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply...
- Corporate havenCorporate havenA corporate haven is a jurisdiction with laws friendly to corporationsthereby encouraging them to choose that jurisdiction as a legal domicile.- History :...
- List of finance topics
- Private bankPrivate bankPrivate banks are banks that are not incorporated. A private bank is owned by either an individual or a general partner with limited partner...
- Banking in SwitzerlandBanking in SwitzerlandAll banks in Switzerland are regulated by Swiss Financial Market Supervisory Authority , which derives its authority from a series of federal statutes...
- Banking in SingaporeBanking in SingaporeBanking in Singapore is a service industry that has grown significantly in recent years. Total banking assets under management in Singapore rose from about $92 billion in 1998 to about $350 billion in 2004....
- Tax havenTax havenA tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....