OFFSHORE BANKING

T. Y. B & I

Chapter I
Introduction

59

OFFSHORE BANKING

T. Y. B & I

Bank

bank is a

industry, and government restrictions on financial activities by banks have varied over time and location. The current sets of global standards are called Basel II. The most recent trend has been the advance of universal banks, which attempt to offer their customers the full spectrum of financial services under the one roof. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472.
59

financial intermediary

that accepts deposits and channels those deposits into lending activities. Banks are a fundamental component of the financial system, and are also active players in financial markets. The essential role of a bank is to connect those who have capital (such as investors or depositors), with those who seek capital (such as individuals wanting a loan, or businesses wanting to grow). Banking is generally a highly regulated

OFFSHORE BANKING

T. Y. B & I

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Jewish Florentine bankers, who used to make their transactions above a desk

covered by a green tablecloth. However, there are traces of banking activity even in times ancient, which indicates that the word 'bank' might not necessarily come from the word 'banco'.

Definition
The definition of a bank varies from country to country. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:

collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act that codifies the law in relation to negotiable instruments, including cheques, and this Act contains a statutory definition of the term banker: banker includes a body of

conducting current accounts for his customers paying cheques drawn on him, and

59

OFFSHORE BANKING

T. Y. B & I

persons, whether incorporated or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition seems circular, it is actually

functional, because it ensures that the legal basis for bank transactions such as cheques does not depend on how the bank is organised or regulated.

Banking in India

Structure of the organized banking sector in India. Number of banks are in brackets.

59

OFFSHORE BANKING

T. Y. B & I

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969

the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 49,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of
59

OFFSHORE BANKING

T. Y. B & I

total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all

three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

The Bank of Bengal, which later became the State Bank of India.

59

OFFSHORE BANKING

T. Y. B & I

From World War I to Independence

The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to warrelated economic activities. At least 94 banks in India failed between 1913 and 1918.

Postindependence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy

59

OFFSHORE BANKING

T. Y. B & I

including banking and finance. The major steps to regulate banking included:

new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors. However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July 1969.

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no

Nationalization
By the 1960s, the Indian banking industry had become an important tool to facilitate the
59

OFFSHORE BANKING

T. Y. B & I

development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969.

Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of
59

OFFSHORE BANKING

T. Y. B & I

the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalized banks were credited by some, including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009.

Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India,

59

OFFSHORE BANKING

T. Y. B & I

which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. Currently (2010), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in

its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales.

59

OFFSHORE BANKING

T. Y. B & I

CHAPTER II OFFSHORE BANKING

59

OFFSHORE BANKING

T. Y. B & I

Offshore bank
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:

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, 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

greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens)

59

OFFSHORE BANKING

T. Y. B & I

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. Although offshore banks may decide not to report income to other tax

authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the taxpayer or the evasion of the tax on that income legal. Following 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 Luxembourg, being possible crossroads for major illegal money flows. Defenders of offshore banking have criticized these attempts at regulation. They claim the

59

OFFSHORE BANKING

T. Y. B & I

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.

politically and economically stable jurisdictions. This may be an advantage for those residents in areas where there is a risk of political turmoil who fear their assets may be frozen, seized or disappear. However, developed countries with regulated banking systems offer the same advantages in terms of stability. 2. 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 Advantages of Offshore

Banking

rates on deposits.

3. Offshore finance is one of the

1. Offshore banks provide access few industries, along with tourism, to

59

OFFSHORE BANKING

T. Y. B & I

that geographically remote islandnot available elsewhere. nations can competitively engage 6. Offshore banking is often linked in. It can help developing countries to other services, such as offshore source investment and create companies, trusts or foundations, growth in their economies, and can which may have specific tax help redistribute world finance from advantages for some individuals. the developed to the developing world. 4. Interest is generally paid by offshore banks without tax 7. Many advocates of offshore banking also assert that the creation of tax and banking competition is

an advantage of the industry, deducted. This is an advantage to arguing with Charles Tiebout that individuals who do not pay tax on tax competition allows people to worldwide income, or who do not choose an appropriate balance of pay tax until the tax return is services and taxes. Critics of the agreed, or who feel that they can industry, however, claim this illegally evade tax by hiding the competition as a disadvantage, interest income. arguing that it encourages a race to 5. Some offshore banks offer the bottom in which governments banking services that may not be in developed countries are available from domestic banks such pressured to deregulate their own as anonymous bank accounts, banking systems in an attempt to higher or lower rate loans based on prevent the offshoring of capital. risk and investment opportunities

59

OFFSHORE BANKING

T. Y. B & I

Disadvantages of Offshore Banking

A. Offshore banking has been

telecommunications this is rarely a problem. Accounts can be set up online, by phone or by mail. D. Developing countries can suffer

associated with the underground due to the speed at which money economy and organized crime, can be transferred in and out of their through money laundering. economy as hot money. This Following September 11, 2001, Hot money is aided by offshore offshore banks and tax havens, accounts, and can increase problems along with clearing houses, have in financial disturbance. been accused of helping various organized crime gangs, terrorist E. Offshore banking is usually more

accessible to those on higher groups, and other state or non-state incomes, because of the costs of actors. establishing and maintaining B. The existence of offshore providing tax evaders with an hidden income. offshore accounts. The tax burden disproportionately on middlecuts have tended to result in a banking encourages tax evasion, by developed countries thus falls in attractive place to deposit their income groups. Historically, tax higher proportion of the tax take C. Offshore jurisdictions are often being paid by high-income groups, remote, so physical access and as previously sheltered income is access to information can be brought back into the mainstream difficult. Yet in a world with global
59

OFFSHORE BANKING

T. Y. B & I

economy.

A significant proportion of Eurobonds floated in international capital markets is also issued in OFCs, although the marketing and selling of such instruments would markets. Recently, the use of

ACTIVITIES OF

normally be done in major financial OFFSHORE BANKS: Offshore banks engage in a special purpose vehicles registered wide variety of transactions: foreignOFCs has led to a growing in currency loans (including volume of structured finance deals, syndicated loans) and the taking of which again mainly for tax reasons deposits, the issue of securities, are domiciled in OFCs. over-the counter (OTC) trading in derivatives for risk-management The use of OTC derivative

instruments blossomed over the last and speculative purposes, and the decade, but was mainly management of customers' financial concentrated in a few centers. As assets. derivatives entail substantive Foreign currency lending and counterparty, settlement, liquidity its associated funding is normallyand legal risks they require the an asset driven business, sometimes infrastructure of developed financial originated in the OFC, but often centers, where their use is more originated elsewhere and booked prevalent. and funded in the OFC, normally for tax reasons. Deposit taking from individual customers is an activity specialized

59

OFFSHORE BANKING

T. Y. B & I

measure, it forced EU in by a number of OFCs. Normally, resident savers depositing the banks involved in this business money in any country are major international banks with a other high reputation (deposit insurance is than the one they are normally not available). The resident in to choose between forfeiting tax at attraction is normally related to tax, the both income and capital taxes. The point of payment, or allowing notification by proceeds of this type of business are normally invested in high quality the offshore banks to tax authorities in their country marketable assets in major financial centers. 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
59

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

OFFSHORE BANKING

T. Y. B & I

which were not then disclosed.

Chapter III OFFSHORE BANKING SERVICES

59

OFFSHORE BANKING

T. Y. B & I

Offshore Banking services

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

letters of credit and trade finance investment management and investment custody fund management trustee services

deposit taking credit wire- and electronic funds transfers foreign exchange

Deposit account

59

OFFSHORE BANKING

T. Y. B & I

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 bank, and represent the amount owed by the bank to the customer. Some banks charge a fee for this service, while others may pay the customer interest on the funds deposited.

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: Accounts maintained by retail banks that pay interest but can not be used directly as

Major types

Checking accounts:

59

OFFSHORE BANKING

T. Y. B & I

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.

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.

Money market deposit 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

Credit (finance)

59

OFFSHORE BANKING

T. Y. B & I

Credit is the provision of resources (such as granting a loan) by one party to another party where that second party does not reimburse the first party immediately, thereby generating a debt, and instead arranges either to repay or return those resources (or material(s) of equal value) at a later date. It is any form of deferred payment. The first party is called a creditor, also known as a lender, while the second party is called a debtor, also known as a borrower. Credit need not necessarily be based on formal monetary systems. The credit concept can be

applied in barter economies based on the direct exchange of goods and services, and some would go so far as to suggest that the true nature of money is best described as a representation of the credit-debt relationships that exist in society. Credit is denominated by a unit of account. Unlike money (by a strict definition), credit itself cannot act as a unit of account. However, many forms of credit can readily act as a medium of exchange. As such, various forms of credit are frequently referred to as money and are included in estimates of the money supply.

59

OFFSHORE BANKING

T. Y. B & I

Credit is also traded in the market. 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).

Electronic money
Electronic money (also known as ecurrency, e-money, electronic cash, electronic currency, digital money, digital cash or digital currency) refers to money or scrip which is exchanged only electronically. Typically, this involves the use of computer networks, the internet and digital stored value systems. Electronic Funds Transfer (EFT) and direct deposit are all examples of electronic money. Also, it is a collective term for

59

OFFSHORE BANKING

T. Y. B & I

financial cryptography and technologies enabling it. While electronical money has been an interesting problem for cryptography (see for example the work of David Chaum and Markus Jakobsson), to date, use of digital cash 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 cash system. Singapore also has an electronic money implementation for its public transportation system (commuter trains, bus, etc), which is very similar to Hong Kong's

Octopus card and based on the same type of card (FeliCa). There is also another implementation based upon the same system in the Netherlands, known as Chipknip.

Foreign exchange market

The foreign exchange market (forex, FX, or currency market) is a worldwide decentralized over-thecounter financial market for the trading of currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around

59

OFFSHORE BANKING

T. Y. B & I

the clock, with the exception of weekends. The purpose of the foreign exchange market 'Forex' is to assist international trade and investment. The foreign exchange market allows businesses to convert one currency to another foreign currency. For example, it permits a U.S. business to import European goods and pay Euros, even though the business's income is in U.S. dollars. Some experts, however, believe that the unchecked speculative movement of currencies by large financial institutions such as hedge funds impedes the markets from

correcting global current account imbalances. This carry trade may also 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 started 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. The foreign exchange market is unique because of

59

OFFSHORE BANKING

T. Y. B & I

trading volume results in market liquidity geographical dispersion continuous operation: 24 hours a day except weekends, i.e. trading from 20:15 UTC on Sunday until 22:00 UTC Friday the variety of factors that affect exchange rates the low margins of relative profit compared with other markets of fixed income the use of leverage to enhance profit margins with respect to account size Main foreign exchange market turnover, 1988 2007, measured in billions of USD. The foreign exchange market is the largest and most liquid

Market size and liquidity

59

OFFSHORE BANKING

T. Y. B & I

financial market in the world. Traders include large banks, central banks, currency speculators, corporations, governments, and other financial institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euro money's annual FX Poll, volumes grew a further 41% between 2007 and 2008.

Letter of credit

After a contract is concluded between buyer and seller, buyer's bank supplies a letter of credit to seller.

Seller consigns the goods to a carrier in exchange for a bill of lading.

59

OFFSHORE BANKING

T. Y. B & I

Seller provides bill of lading to bank in exchange for payment. Seller's bank exchanges bill of lading for payment from buyer's bank. Buyer's bank exchanges bill of lading for payment from the buyer. Buyer provides bill of lading to carrier and takes delivery of goods. 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.

59

OFFSHORE BANKING

T. Y. B & I

The LC can also be source of payment for a transaction, meaning that redeeming the letter of credit will pay 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. 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 cancelled 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.

Parties Involved in Letter of Credit:

59

OFFSHORE BANKING

T. Y. B & I

1.

Beneficiary:

He is usually an exporter. Beneficiary is entitled to payment as long as he can provide the documentary evidence required by the letter of credit. Upon requesting demand for payment the beneficiary warrants that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the confirming bank must pay him.

2.

Issuing Bank: Usually Importer's bank. The issuing banks obligation to the buyer is to examine all documents to insure that they meet all the terms and conditions of the credit. The issuing bank is not liable for performance of the underlying contract between the customer and beneficiary.

3.

Advising Bank i.e. Confirming Bank:

59

OFFSHORE BANKING

T. Y. B & I

It is usually a foreign correspondent bank of the issuing bank. The advising bank would be responsible for sending the documents to the issuing bank. The advising bank has no other obligation under the letter of credit. If the issuing bank does not pay the beneficiary, the advising bank is not obligated to pay. If confirming bank is different from advising bank then confirming bank is correspondent bank of the issuing bank. Correspondent in
4.

such case obligates itself to insure payment under the letter of credit.

Applicant (Importer): He is the one who originates the process of L/C. It is on his behalf that the issuing bank issues L/C.

Investment management
Investment management is the professional management of various securities (shares, bonds and other

59

OFFSHORE BANKING

T. Y. B & I

securities) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investors (both directly via investment contracts and more commonly via collective investment schemes e.g. mutual funds or exchangetraded funds) . The term asset management is often used to refer to the investment management of collective investments, (not necessarily) whilst 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

59

OFFSHORE BANKING

T. Y. B & I

important global industry in its own right responsible for caretaking of trillions of 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. Fund manager (or investment adviser in the United States) refers to both a firm that provides investment management services and an individual who directs fund management decisions.

Trustee is a legal term for a holder of property on behalf of a beneficiary. A trust can be set up either to benefit particular persons, or for any charitable purposes (but not generally for noncharitable purposes): typical examples are a will trust for the testator's children and family, a pension trust (to confer benefits on employees and their families), and a charitable trust. In all cases, the trustee may be a person or company, whether or not they are a prospective beneficiary. Not every bank provides each service. Banks tend to polarize between retail services and

Trustee

59

OFFSHORE BANKING

T. Y. B & I

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.

banking, usually via dedicated bank advisers. It should not be confused with a private bank, which is simply a nonincorporated banking institution. Historically private banking has been viewed as very exclusive, only catering for high net worth individuals with liquidity over $2 million, although it is now possible to open some private bank accounts with as little as $250,000 for private investors. An institution's private banking division will provide various services such as wealth management, savings, inheritance and tax planning for their clients. A high-level form of
59

Private Banking
Private banking is a term for 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

OFFSHORE BANKING

T. Y. B & I

private banking (for the especially affluent) is often referred to as wealth management. For private banking services clients pay either based on the number of transactions, the annual portfolio performance or a "flatfee", usually calculated as a yearly percentage of the total investment amount. The word "private" also alludes to bank secrecy and minimizing taxes through careful allocation of assets or by hiding assets from the taxing authorities. Swiss and certain offshore banks have been criticized for such cooperation with individuals practicing tax evasion. Although tax fraud is a criminal offense

in Switzerland, tax evasion is only a civil offence, not requiring banks to notify taxing authorities.

Wealth management
Wealth management is an investment advisory discipline that incorporates financial planning, investment portfolio management and a number of aggregated financial services. High Net Worth Individuals (HNWIs), small business owners and families who desire the assistance of a credentialed financial advisory specialist call

59

OFFSHORE BANKING

T. Y. B & I

upon wealth managers to coordinate retail banking, estate planning, legal resources, tax professionals and investment management. Wealth managers can be an independent CERTIFIED FINANCIAL PLANNER, MBAs, CFA Charterholders or any credentialed professional money manager who works to enhance the income, growth and tax favored treatment of long-term investors. One must already have accumulated a significant amount of wealth for wealth management strategies to be effective and is also one of the key areas that are

growing at a tremendous rate. Wealth management can be provided by large corporate entities, independent financial advisers or multi-licensed portfolio managers whose services are designed to focus on high-net worth customers. Large banks and large brokerage houses create segmentation marketingstrategies to sell both proprietary and nonproprietary products and services to investors designated as potential high net-worth customers. Independent wealth managers use their experience in estate planning, risk management,and their
59

OFFSHORE BANKING

T. Y. B & I

affiliations with tax and legal specialists, to manage the diverse holdings of high net worth clients. Banks and brokerage firms use advisory talent pools to aggregate these same services. The events of 2008 in the financial markets caused investors to address concerns within their portfolios. "The past 18 months have challenged traditional thinking about investing and asset allocation, diversification, and correlation. For individual investors, risk tolerances have been tested, investment assumptions have been overturned, and fundamental truisms have

been questioned." For this reason wealth managers must be prepared to respond to a greater need by clients to understand, access, and communicate with advisers regarding their current relationship as well as the products and services that may satisfy future needs. Moreover, advisors must have sufficient information, from objective sources, regarding all products and services owned by their clients to answer inquiries regarding performance and degree of risk-at the client, portfolio and individual security levels. "This state of affairs poses a dilemma for wealth managers, who, for a generation, have adhered to the core

59

OFFSHORE BANKING

T. Y. B & I

principles of asset allocation and earned their keep by preaching the mantras of 'buy and hold', 'invest for the long term', and when things get tough, 'stay the course'. Today wealth management advisors must have access to an objective content repository. This repository must contain a current and readily available profile of the clients holdings.

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 networth individuals nearly $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

Statistics concerning offshore banking

Offshore banking is an important part of the international financial

59

OFFSHORE BANKING

T. Y. B & I

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.

59

OFFSHORE BANKING

T. Y. B & I

This unit will be permitted to set up in special economic zones (SEZ). These banks would be virtually foreign branches of these banks but located in India. 1. These overseas banking units (OBCs) would be exempted from credit rating ratio (CRR), (SLR) would give access to SEZ

Characteristics/ Features of Offshore Banking Centers

units and SEZ developers finance at international rates. 2. The OBUs would operate and maintain balance sheet only in foreign

59

OFFSHORE BANKING

T. Y. B & I

currency and would not be allowed to deal in INR expect for having a special rupee account out of convertible fund to meet their day expenses. 3. Operation of the OBUs in rupees would minimal in nature and any such operations in the domestics area would be subject to the current exchange control regulations in force.

4. 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 bank. The ads dealing with OBUs would be subject to ECD regulations. 5. These accounts can be opened by nonresident individuals corporate, trusts or offshore

59

OFFSHORE BANKING

T. Y. B & I

companies. Indian residents/corpor ate are eligible to open foreign current A/cs under FEMA. 6. Given the unique nature of business of the OBUs, reserve bank would stipulate certain

licensing conditions such as dealing only in foreign currencies, retractions on the dealing with Indian rupee, access to domestic money market. etc on the functioning of the OBUs.

59

OFFSHORE BANKING

T. Y. B & I

CHAPTER IV

59

OFFSHORE BANKING

T. Y. B & I

Regulation of Offshore banks

Regulation of offshore banks

In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient. The quality of the regulation is monitored by supranational bodies such as the International Monetary

59

OFFSHORE BANKING

T. Y. B & I

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) nongovernmental organization (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 police authority, regardless of banking secrecy rules. There is more international cooperation between police authorities. In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary

59

OFFSHORE BANKING

T. Y. B & I

requirements, which mean that the names of the recipients of US-source investment income are passed to the IRS.

certain jurisdictions, and enforced this in respect of certain controlled centers, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest.

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. The European Union has introduced sharing of information between

Main Function of offshore Banking

1. Multi currency deposits accepted 2. Maturities ranging from 15 to 5 years. Deposits for 15 days up to 1month are accepted subject to minimum

59

OFFSHORE BANKING

T. Y. B & I

deposit amount of US$ 100,000/GPB 60,000/& Euro 100,000/3. Attractive rates of interest on deposits 4. Multi currencies burrowing option 5. Rates of interest linked to LIBOR of corresponding period. 6. Full reparability of maturity valve of deposits.

7. Loans against deposits both in foreign currency. Higher rates of interest via FCNR deposits subject to minimum deposits subject to minimum deposits of US$ 5000/- or its equivalent.

Example of offshore banking.

The worlds local bank, HSBC is a leading force in the offshore banking industry by offering a wide range of services for expatriates and people looking to bank and invest abroad. They can live up to their
59

OFFSHORE BANKING

T. Y. B & I

boast of being the worlds local bank by forming and keeping strong ties and connections with banks throughout the world, allowing them to maintain a global presence. Offshore banking usually refers to using the services of banks and financial services located outside the account holders country of residence. Such banking institutions are usually located in jurisdictions considered as tax havens. Oftentimes investors and those who chose to expatriate are able to grow investments to maturity tax free. Other benefits of offshore banking include added confidentiality and privacy. Some offer

anonymously numbered accounts and reside in countries that impose strong secrecy enforcement laws. Now with the advances in technology and the globalization of business worldwide, the need to conduct business abroad is more prevalent than ever. More and more individuals and businesses have the need for offshore banking services such as HSBC and other major international financial centers. Not only do we have a greater need for international bank accounts, we also require instant access to account information and customer support, either through the phone or the internet.
59

OFFSHORE BANKING

T. Y. B & I

HSBC and other major offshore banking services have caught on to this and have focused on being geared towards meeting clients needs. HSBC excels in providing top of the line quality products and services that anticipate customer needs and improve the offshore banking experience. HSBC offshore banking service is the division of HSBC that handles international accounts. They offer everything from aiding in providing temporary housing to establishing local and multi-currency bank accounts. Health insurance services are also provided.

Online offshore banking services have become a must and HSBC offers instant access to financial information and customer support on the internet or over the phone. The new innovations and advances in software have also enabled HSBC and other online financial service providers to upgrade their security systems. Thats part of the reason offshore banking services are known for privacy. Asset protection is also a major issue among individuals and corporations alike. Holding assets overseas offers an extra layer of protection from lawsuits and malicious litigations.

59

OFFSHORE BANKING

T. Y. B & I

A frequently asked question is whether offshore banking is legal or not. This is due to the fact that offshore banks have usually been associated with the wealthy and famous, and have been surrounded by illegal activities, such as money laundering and drug money. The fact is offshore bank accounts are legal and will remain that way for the simple fact that holding an offshore account just means transferring assets to another country. The international economy depends on the ability to move funds in and out of countries, even governments have this

need. Offshore bank accounts are legal and will remain that way. Not only that, they are now beneficial to the common person. Its no longer the way it was when offshore accounts were reserved for the seven figure group. Now you and I can take advantage of these banks and we can have access to it all instantly on the internet. HSBC offers some of the most exciting and dynamic financial vehicles in the offshore banking industry. Its definitely worth checking to see if you can benefit from a HSBC offshore account.

59

OFFSHORE BANKING

T. Y. B & I

59

OFFSHORE BANKING

T. Y. B & I

CHAPTER V
Procedure for offshore bank A/c

Procedure for offshore bank A/c

59

OFFSHORE BANKING

T. Y. B & I

Offshore Bank Account Setup

Setting up your offshore banking account is as easy as talking with our representatives. You can call to discuss the information needed for popular jurisdictions and we can assist you with opening a new bank account. Most offshore banks will require an eligible introducer. This is someone who already has a relationship with the bank. OffshoreCompany.com is an eligible introducer for many financial institutions throughout the world. Common items that may be necessary when setting up offshore bank accounts:

Valid passport copy or driver's license Banking references Corporate legal documents

Offshore banks have different requirements. Once the offshore bank account has been processed, the confirmation is sent typically via email. At that time the bank will wait for a wire transfer of initial deposit in order to activate your new account. Some expenses include opening fee, additional banking cards (if applicable), courier and other expenses. Again, these will vary between the offshore banking account providers.

Application forms with original signatures

59

OFFSHORE BANKING

T. Y. B & I

Once the bank account is active, you typically receive online access to create your user account and password. You may also receive items such as an easy-to-use

digital signature device, test key table and other enabling tools to access your account balance and perform transactions quickly, easily, privately and securely.

Offshore Bank Account Costs

Offshore banking accounts are generally opened under the name of offshore companies or corporations. This increases privacy; all banking transactions are traced under the name of a company, not the client. Opening an offshore bank account in this facet could cost anywhere between $350 to $550 and the cost of the company. An offshore company typically runs between $1495 and $2,495. So, the total is usually $1845 for both. Offshore banking accounts need to be opened with an initial deposit to activate your account. Though some provider's proprietary account types, fees, interest rates, etc. vary, most offshore financial institutions have competitive costs. The interest rates tend to be higher than domestic institutions. The process of establishing the offshore bank account will incur processing fees, courier charges and some small miscellaneous costs, for things such as notary

59

OFFSHORE BANKING

T. Y. B & I

charges, etc. OffshoreCompany.com has helped thousands of Americans open private financial accounts, companies and corporations and can assist in your needs today.

Finding out what jurisdictions and bank is right for you is easy. Simply call our representatives and explain your needs or fill out the inquire now form and we will call you.

Offshore Bank Accounts and Security

Banking privacy and security is a major concern. It is a priority that you and your money are safe. OffshoreCompany.com regularly recommends banking institutions that participate in a central banking system. The system is highly regulated and implements stringent accounting practices, which
59

OFFSHORE BANKING

T. Y. B & I

provides a stronger infrastructure and independent oversight for local offshore banks. Many institutions provide secure and private offshore banking accounts to American and foreign corporations and local government officials. The institutions provide employment and support the local economy. Because of the economy's dependence on the financial services sector, the privacy and financial safety laws are a longstanding and stable. It is critical that all prospective clients make the right choice of jurisdiction. We perform extensive research on many of the top offshore bank account providers and are glad to provide helpful information to help you make the proper choice.

Offshore banks in some countries participate in mandated financial protection insurance systems. Security and privacy is taken very seriously. Offshore banking security and privacy is statutorily enforced, meaning, it's the law, limiting any information whatsoever to be shared with a third party, including foreign governments. Naturally, laws permit offshore bank account providers to share information in cases of severe criminal acts or terrorism. Banking privacy is not taken lightly. In Switzerland, for example, any employee violating a customer's privacy is punished severely by law including stiff fines and jail time.
59

OFFSHORE BANKING

T. Y. B & I

CHAPTER VI Questionnaires & Company Case Study

59

OFFSHORE BANKING

T. Y. B & I

Questionnaires
1.

What is offshore banking?

Offshore banking can be defined as using the services of a bank located in a different jurisdiction or country than the depositor resides in. Offshore banks are usually located in places considered as tax havens and also provide additional confidentiality and security for the depositor. The term offshore was originated from the British Channel Islands, tax havens located literally offshore from the United Kingdom. These were the original tax havens and they started the usage of the term offshore for describing the industry. Those islands became major international banking centers because of those tax benefits and regulations. They were optimal places to hold assets abroad or save and invest. Offshore bank accounts are often less regulated than domestic banks due to fewer restrictions from their

59

OFFSHORE BANKING

T. Y. B & I

governments. This allows for more types of offshore banking accounts and ways in which they can be manipulated.
2.

What Are The Offshore Banking Secrets To Make Huge Amounts Of Money?

In investigating offshore banking secrets to make huge amounts of money, I ran across several articles that warned the information may be inaccurate. I am reporting to you what I have gleaned from this information. It will be up to you to check out the accuracy of this information before you make any major decisions about your money and how to invest or bank it. There are two types of high yield investment programs available. The first has to do with offshore banking, secret international financial rules approved by the US Federal Bank, or Treasury department. The second involves small investments and trading in gold, currency, or futures. If you are contacted about participation in the first program, it will usually involve an offshore bank or investment house. The person who is trying to get you to buy in will claim there is a legal loophole in income taxes or international lending. You will be solicited to buy into this program, being told you will make huge profits within 30 to 90 days. When the 90 days passes and you have seen no money, the person who got you involved will tell you to be patient that the money is coming.

59

OFFSHORE BANKING

T. Y. B & I

This person will also ask you to sign up other people, claiming the more people you can bring into the deal will help him to pay you what you are owed. You need to realize there is no loophole in income tax rules, nor are there any secret rules involving international lending. This is fraud plain and simple, and if you participate in this scheme you may be charged with attempted fraud. You need to steer clear of this scheme and notify the authorities immediately. The second investment program is about smaller amounts of money. These programs say they will pay out 1-10% a day. Even up to 100% per month. It is important to know that while great deals of these programs are scams, some of them may be legal. This usually involves day trading in the stock market, on futures, gold, and currency. You could put in as little as $20 in the program and earn a percent or so every business day. You will be allowed to withdraw the funds at any time, although by leaving the money in, your earnings would grow and give larger payoffs. Experienced day traders actually do make anywhere from 120% each day. This average is more like 2% a day. The money you pay into the program would be put together with the money of other participants and invested by the day trader using 50% margins; the trader could pay 1% daily to the investors and still make money on the deal. If the trader is good at what he does, he could be right about 80% of the time and never lose more than 3% of the investment on bad trades. This program is

59

OFFSHORE BANKING

T. Y. B & I

workable and is not a scam; unless the day trader does not plan on giving back any of the proceeds. You will have no way of knowing which is true. Another type of high yield investment program involves the selling of ebooks and software. Invested money is put together and spent on advertising for the sale of ebooks and other software that can be downloaded. It is run on the principle that for every $100 spent in advertising, a return of $300 in revenue will be realized. A payout of 50% a month can be realized for the investors. This program can work, but there is a limit to how long it will last. The market for the product will soon be saturated and the sales will decline. The profits would wane and the program would have to be shut down. Those who got in at the beginning will be the winners here. These are a few of the many offshore banking secrets to make huge amounts of money. Others can be found on the internet. Use caution when something sounds too good to be true, as it probably is.
3.

What Is Offshore Banking And Bank Account?

If you want to invest in property, save some money tax-free, or form a corporation, protecting your assets with an offshore bank account is a great idea. You have a choice of which offshore bank you want to open an account with. Your offshore

59

OFFSHORE BANKING

T. Y. B & I

banking and bank account should include an account package that is tailored for your business needs. When looking for an offshore bank, you want to find one that offers you more than one jurisdiction and a wide range of multicurrency bank accounts. Some clients prefer an anonymous ATM card that does not have their name printed on it. They are able to withdraw money anonymously anytime they feel the need. An offshore bank, bank account is usually in a low tax jurisdiction that provides legal and financial advantage over other banks. The advantages of having an offshore bank, bank account are: Strong privacy and secrecy, easy access to deposits, less restrictive legal regulation, protection against local financial instability, and low or no taxation. Interest is usually paid by offshore banks without tax deduction. This is an advantage to individuals who do not pay tax on worldwide income. Some offshore banks offer different services than domestic banks. Higher interest rates and anonymous bank accounts are a couple of the services offered by offshore banks.
4.

What do you mean by Free Offshore Banking?

Offshore banking means transferring money and assets overseas to be managed by banking institutions in jurisdictions

59

OFFSHORE BANKING

T. Y. B & I

outside of your country of residence. The term offshore refers to the British Channel Islands just located physically offshore from the main land. Those islands were tax havens, thus becoming very attractive places to establish investments that can grow tax free. Banking institutions flocked to the opportunity to take advantage of those islands. Other countries that offer those same benefits began following suit and the practice became widespread. Now the term has been expanded to mean just having assets anywhere outside of your own country of residence. Usually those jurisdictions have laws in place that favor the offshore banking industry. Those laws usually enforce privacy and confidentiality as a requirement from banking institutions. They also have less strict restrictions and regulations allowing for more flexible offshore accounts that are easier to manipulate in various ways. Also, its not free to establish an offshore banking account. They usually require a sizable sum of money in most offshore banking accounts. This ranges from around two thousand dollars to ten thousand dollars, depending on the account type and period of holding. Some range from no money to a very small deposit such as one dollar. The documentation requirements in some jurisdictions banks are very few and often only one document is required. Offshore banking has become a large industry that circulates trillions of dollars on a daily basis. The competitions has become fierce and banks are willing to offer more for less or

59

OFFSHORE BANKING

T. Y. B & I

free to attract new customers and to inform people that could benefit the most from their services.
5.

Is Offshore Banking Legal?

This is one of the frequently asked questions about offshore banking, and in short, YES, offshore banking is legal. Offshore banking is so legal that, its always going to remain legal. Offshore banking is a benefit to all of society and is indispensible. Using offshore banking for tax evasion purposes is what is not legal, and that is usually what is associated with offshore banking in general and is the cause of the misconception. Offshore banking is also associated with criminal activities such as money laundering. This article will clarify the distinction and examine why offshore banking will remain legal. The term offshore was originated from the British Channel Islands, tax havens located literally offshore from the United Kingdom. Now the term is used to refer to all tax havens whether islands or not. Technically, just moving your money from an account in your country of residence to another jurisdiction is considered offshore banking, even if its not a tax haven. This is the main reason why offshore banking will always be legal. The thing that is NOT legal is banking offshore for tax evasion. Depending on which country you resides in, it is usually illegal to take money out of the country or making
59

OFFSHORE BANKING

T. Y. B & I

money overseas and never submitting it to your country of residence or declaring it. Saving on taxes is not the only advantage of using offshore banking accounts. There are many other benefits, including but not limited to: -Optimized account Privacy -Protection from aggressive litigations -More competitive account structures ad interest rates -global access to your money -Ability to bank in multiple currencies -Access to global business opportunities And not to forget that those who reside in countries with corrupt or unstable economic systems have the opportunity to bank in an economically and politically stable jurisdiction.

6. What services are available?

Just like with your regular domestic banks, you can obtain a full spectrum of services can be obtained from your offshore banking center. These services include personal and corporate checking and savings accounts. These offshore financial centers also offer secure internet banking facilities that allow for wire and electronic funds transfers, debit and ATM cards which are accepted worldwide, credit cards, Loans and mortgages. Some

59

OFFSHORE BANKING

T. Y. B & I

even go so far as offer Anonymous numbered accounts to provide for extra confidentiality. Investment management and custody is also provided by some banks. They also have Corporate Administration services, trustee services, fund management and foreign exchange. Banks tend to specialize between retail and private banking, so all the listed services might not be available at every bank. Retail banks tend to be more economical and offer standard services. Private banking services, while more costly than their retail counterparts, tend to offer more personalized services for their clients. Privacy is the first to come to mind, considering that offshore entities have no obligation to release any of your personal or business information. Unless evidence can be shown proving your involvement in criminal activity, your information will not be given to any governing body or tax authority. Pretty much, they cant sue for or seize things which they dont know exist. Because of offshore banking centers usually being located in Tax havens, your assets can grow almost free from any form of taxation. Thus, tax efficiency is another important benefit of holding assets overseas. This does not mean that you can avoid taxes altogether. Asset Protection is another one of the main benefits offered by offshore banking services. Holding offshore accounts gives

59

OFFSHORE BANKING

T. Y. B & I

you protection from Invasive bureaucracy, lawsuits, and it also protects your assets from seizures.
7.

What do you mean by Offshore Investment Banking?

Governments

and

onshore

financial

institutions

are

constantly trying to misinform us about the legitimate nature of offshore investment banking. A lot of people are now taking to time to research and are finding out the many benefits of the offshore world. Of course its worth mention before I get ahead of myself that offshore banking is not for everyone and experienced financial advisers should be consulted before actually investing offshore. Like any other financial decision due diligence should be performed before any cash is spent. Its usually believed that just the famous and the rich can benefit from investing offshore, but that is changing now. Regular everyday people like you and I can start enjoying offshore profits too, and best of all, its not even that hard to do. With the internet and innovative offshore investment banking services, an individual can remotely manage funds without ever needing to travel to the jurisdiction or having to meet face to face with representatives of the investment company managing the funds. The confidentiality and asset protection of assets in offshore investments is effortless due to the majority of jurisdictions imposing strong anti-disclosure regulations on the

59

OFFSHORE BANKING

T. Y. B & I

financial institutions operation within their borders. You dont have to do much to keep your investments under wraps. International business is the new trend and large financial institutions that need to expand their clientele base focus on making it easier for international customers to access their services. This is a good thing, because a lot of these offshore investment banking services offer highly competitive investment vehicles and a lot of times generate greater returns on investments than domestic investments. Another added bonus is the tax havens that the offshore investments banks are located in allow for tax free growth of the investment until maturity. These institutions also make it easier on the remote investor. Investment banking abroad has proved to be profitable if approached properly. The higher interest rates and looser regulations and restrictions on what one can do with an account allow for greater opportunities for success. One other benefit of investing online is that newer business opportunities that you wouldnt usually come across in your country become within your grasp because the international markets have many more participants and players. The chance to come across interesting investments that could realize unusual profits also keep investing and banking offshore interesting.
8.

What are the Offshore Banking Interest Rates?

59

OFFSHORE BANKING

T. Y. B & I

Theres a wide misconception that on current accounts, offshore accounts yield higher interest rates than their onshore counterparts. Sadly, this is not usually true and both onshore and offshore banks offer the same low interest rates on current accounts. There are usually fees associated with constantly accessing funds except on checkings or current accounts, which have poor interest rates most of the time, just like any other bank. Offshore Banking Was usually considered as being for the rich and famous, but International banking institutions are competitive and need to reach more customers. This resulted in offshore banking services putting together more attractive packages and reducing fees while increasing interest rates to draw in more business. They can remain flexible while offering advantages just because of the laws in the countries they are located. There are interest rate benefits though, just in a different account type. Savings interest rates are a whole other topic. Offshore banks usually do offer higher rates for savings accounts than their onshore competitors. This interest rate also gets better the larger the lump sum or frequency of contribution the client can commit. Longer amounts of time also increase the potential for higher interest rates. It is suggested to use a combination of offshore banking accounts for the optimal returns and flexibility. Truly high interest rate offshore bank accounts are not too easy to come by, and they dont offer the flexibility of

59

OFFSHORE BANKING

T. Y. B & I

lower interest current accounts. A combination of high interest savings accounts, for long term returns, and a low interest rate current account for, accessibility to your money is probably one of the best investment package strategies for maximized profit from offshore accounts.

COMPANY CASES STUDIES

1) Intermediate Group Holding Company
Telco Ltd., a company incorporated and managed in South Africa and engaged in telecommunication services, is going to invest in China. Its Chinese operations will be both manufacturing and providing services. Telco intends to penetrate the Chinese market for telecommunication, and according to some market research carried out before, the operations will be highly profitable within a couple of years. How to structure Telco's investment in a tax effective manner? Suggested solution: Dividends paid by the Chinese subsidiary to the South African parent will not trigger Chinese withholding tax if the South African investor qualifies as a "foreign investment enterprise" under Chinese law. This is the case, among others, if the Chinese company is wholly foreignowned. Upon receipt of the dividends by the parent in South Africa, additional

59

OFFSHORE BANKING

T. Y. B & I

South African corporate tax may be due. The channeling of the dividends to a group holding company, and subsequently to the South African investor in such a way that South African tax due on the dividend received, could be an interesting solution. This could be achieved by structuring the investment through a Seychelles group holding company established as a CSL (special license company) under Seychelles law. The dividends received 2) Albert Smith is

by this company are only subject to 1.5% tax in the Seychelles. Due to special provision in the treaty between the Seychelles and South Africa, no further tax is payable in South Africa upon redistribution of the dividends to the parent, if any. Therefore, the maximum tax burden is limited to 1.5%. If this would be preferred, the dividends Personal service company.

Luxembourg as an independent IT Luxembourg taxes (rates up to 38%). Mr. Smith is going to conclude a new service contract to work in Italy for
59

currently working in consultant through a Luxembourg management company. Therefore, he is currently paying

OFFSHORE BANKING

T. Y. B & I

a US-company. The US Company has a European office in the UK. It is contract work and the US Company is using Albert's services by sub-contracting him out to one of its clients in Italy. Mr. Smith wonders whether he can reduce his Italian income tax exposure (rates up to 45%), for example, by using an offshore company which is directly or indirectly controlled by him. Suggested solution: Mr. Smith could set up a new personal service company in country which has a good tax treaty with Italy, thus ensuring - with some proper structuring that any fees paid for Albert's work in Italy are

taxed in the country of residence of the service company. The company makes Albert available for working in Italy. The personal service company is fully owned by a personal service company set up by Albert in an offshore jurisdiction. Thus, it is necessary that the service company is established in a country which does not levy a withholding tax on dividends paid abroad. A country meeting these conditions is Malta. Although the Italian-source fees received by the Maltese company are subject to tax at a rate of 35%, two-thirds of the Maltese tax will be refunded upon the distribution of the dividends offshore, thus reducing the

59

OFFSHORE BANKING

T. Y. B & I

tax burden in Malta to 11.67%. Malta does not levy

a withholding tax on dividends.

59

OFFSHORE BANKING

T. Y. B & I

CHAPTER Conclusion
59

OFFSHORE BANKING

T. Y. B & I

Conclusion

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
59

OFFSHORE BANKING

T. Y. B & I

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

59

OFFSHORE BANKING

T. Y. B & I

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 nonresident 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.

59

OFFSHORE BANKING

T. Y. B & I

Bibliography
From the International Banking & Insurance textbook of T.Y. B&I. INTERNATIONAL BANKING K VISWANATHAN INTERNATIONAL BANKING DEEPAK ABHYANKAR

Webilography
www. Wikipedia.com www.ANSWERS.COM www.HSBC.com www.google com

59