Offshore bank

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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,[1] the personal income tax of many countries[2] 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.

Advantages of offshore banking[edit source | edit]

Disadvantages of offshore banking[edit source | edit]

European Savings Tax Directive[edit source | edit]

In their efforts to stamp down on cross border interest payments EU governments agreed to the introduction of the Savings Tax Directive in the form of the European Union withholding tax in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU.

Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.

Banking services[edit source | edit]

It is possible to obtain the full spectrum of financial services from offshore banks, including:

Not every bank provides each service. Banks tend to polarise between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.

Scope of offshore banking[edit source | edit]

Offshore banking constitutes a sizable portion of the international financial system. Experts believe that as much as half the world's capital flows through offshore centers. Tax havens have 1.2% of the world's population and hold 26% of the world's wealth, including 31% of the net profits of United States multinationals. An estimated £13-20 trillion is hoarded away in offshore accounts.[10]

Some $3 trillion is in deposits in tax haven banks and the rest is in securities held by international business companies (IBCs) and trusts. Among offshore banks, Swiss banks hold an estimated 35% of the world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands (1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms of deposits.[11] 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.[12]

Scale of potential tax revenue[edit source | edit]

Assuming even just the lower estimate of £13 trillion on deposit in offshore accounts, if these assets earned an average 3% a year in income for their owners taxable at 30%, then the offshore funds would generate £121 billion in tax revenues.[10] However, keep in mind, these statistics assume that ZERO tax is paid (i.e. NO ONE pays any tax on their holdings), and that 100% of those deposits is notionally liable to tax which is not being paid, each of which seems a highly unlikely scenario.

Ownership[edit source | edit]

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. A large portion, £6.3tn, of offshore assets, is owned by only a tiny sliver, 0.001% (around 92,000 super wealthy individuals) of the world's population. In simple terms, this reflects the inconvenience associated with establishing these accounts, not that these accounts are only for the wealthy. Most all individuals can take advantage of these accounts.

Money laundering[edit source | edit]

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]

Terrorist Finance Tracking Program[edit source | edit]

A series of articles published on June 23, 2006, by The New York Times, The Wall Street Journal and The Los Angeles Times revealed that the United States government, specifically the US Treasury Department and the CIA, had a program to access the SWIFT transaction database after the September 11th attacks (see the Terrorist Finance Tracking Program) rendering offshore banking for privacy severely compromised.

Regulation of offshore banks[edit source | edit]

In the 21st century, regulation of offshore banking is allegedly increasing, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supra-national bodies such as the International Monetary Fund (IMF). Banks are generally required to maintain capital adequacy in accordance with international standards. They must report at least quarterly to the regulator on the current state of the business.

Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that they have been insufficient. A few examples of these are:

Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief Economist, told to reporter Lucy Komisar, investigating on the Clearstream 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."[1]

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.[citation needed]

Offshore financial centres[edit source | edit]

In terms of offshore banking centres, in terms of total deposits, the global market is dominated by two key jurisdictions: Switzerland and the Cayman Islands. A letter by the District Attorney of New York, Robert M. Morgenthau, published by the New York Times, states that the Cayman Islands has 1.9 trillion United States dollars on deposit in 281 banks, including 40 of the world’s top 50 banks.[14] although numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree.[citation needed] In particular, Jersey, Guernsey and the Isle of Man are known for their well regulated banking infrastructure.[citation needed] 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.[15][citation needed]

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, such as in the 2008 Liechtenstein tax affair.[citation needed] 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.[citation needed] Countries that do not comply may face sanctions.[citation needed]

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.[citation needed] 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.[citation needed]

List of offshore financial centres[edit source | edit]

Offshore financial centres include:

See also[edit source | edit]

References[edit source | edit]

  1. ^ Such as perpetual travelers
  2. ^ For example, the United States, France and Malaysia. In other countries it makes no difference so long as you are resident and domiciled there (for example, the United Kingdom)
  3. ^ "Isle of Man Depositors' Compensation Scheme". Dcs.im. Retrieved 2012-02-20. 
  4. ^ "Kaupthing Singer & Friedlander (Isle of Man) Limited (In Liquidation)". Kaupthingsingers.co.im. Retrieved 2012-02-20. 
  5. ^ "FSC - Depositors' Compensation Scheme - Financial Supervision Commission". Gov.im. Retrieved 2012-02-20. 
  6. ^ "Business | Icelandic bank savers bailed out". BBC News. 2008-10-08. Retrieved 2012-02-20. 
  7. ^ Joseph Stiglitz (2008-10-22). "A crisis of confidence - Letting financial markets run wild was risky business indeed. Transparency, oversight and fair competition are needed now". The Guardian. Retrieved 2008-11-24. 
  8. ^ [1][dead link]
  9. ^ Anthony E. Parent. "The Hidden Side to the McBride FBAR Judgment". Retrieved 2012-12-11. 
  10. ^ a b The Guardian (UK), 21 July 2012, "£13tn: Hoard Hidden from Taxman by Global Elite," http://www.guardian.co.uk/business/2012/jul/21/global-elite-tax-offshore-economy
  11. ^ "Open a bank account in Switzerland". BankIntroductions.com. Retrieved 2012-02-20. 
  12. ^ "Are Private Foreign Assets Fleeing From Switzerland?". MyPrivateBanking.com. Retrieved 2012-02-20. 
  13. ^ http://www.irsmedic.com/2012/07/24/what-is-fbar-form/
  14. ^ "Havens for Tax Evasion - New York Times". Liechtenstein: Nytimes.com. 2008-03-11. Retrieved 2012-02-20. 
  15. ^ For example, despite being the largest offshore jurisdiction by some distance in terms of number of incorporated offshore vehicles, the British Virgin Islands has only ever licensed 7 offshore banks. This compares against hundreds in Switzerland, the Cayman Islands and (3rd in number of total banking licences) the Bahamas.
  16. ^ President Launches Ghana's Landmark Offshore Banking[dead link]
  17. ^ "Ghana's offshore dreams". Thestatesmanonline.com. 2007-04-25. Retrieved 2012-02-20. 

External links[edit source | edit]