Offshore banking Banking disadvantages. An offshore bank is a bank regulated under international banking license (often called offshore license), which usually prohibits the bank from establishing any business activities in the jurisdiction of establishment. Due to less regulation and transparency, accounts with offshore banks were often used to hide undeclared income. Since the 1980s, jurisdictions that provide financial services to nonresidents on a big scale can be referred to as offshore financial centres. OFCs often also levy little or no corporation tax and/or personal income and high direct taxes such as duty, making the cost of living high.
With worldwide increasing measures on CFT (combatting the financing of terrorism) and AML (anti-money laundering) compliance, the offshore banking sector in most jurisdictions was subject to changing regulations. Since 2002 the Financial Action Task Force issues the so-called FATF blacklist of “Non-Cooperative Countries or Territories” (NCCTs), which it perceived to be non-cooperative in the global fight against money laundering and terrorist financing.
An account held in a foreign offshore bank is often described as an offshore account. Typically, an individual or company will maintain an offshore account for the financial and legal advantages it provides, including but not limited to:
- Strong privacy, including bank secrecy.
- Little or no corporate taxation via tax havens.
- Protection against local, political, or financial instability.
While the term originates from the Channel Islands being “offshore” from the United Kingdom, and while most offshore banks are located in island nations to this day, the term is used figuratively to refer to any bank used for these advantages, regardless of location. Thus, some banks in landlocked Andorra, Luxembourg, and Switzerland may be described as “offshore banks”.
Offshore banking has previously been associated with the underground economy and organized crime, tax evasion[3] and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain people who meet fairly complex requirements (such as perpetual travelers), the personal income tax laws of many countries (e.g., France, and the United States)[5] make no distinction between interest earned in local banks and that earned abroad. Persons subject to US income tax, for example, are required to declare, on penalty of perjury, any foreign bank accounts—which may or may not be numbered bank accounts—they may have. Offshore banks are now required to report income to many other tax authorities, although Switzerland and certain other jurisdictions retain bank secrecy regimes that can be more difficult to deal with. This does not make the non-declaration of the income by the taxpayer or the evasion of the tax on that income legal and many OFCs have recently been important colleagues to onshore tax authorities and law enforcement against wrongdoers. Following the 9/11 attacks, there have been many calls to increase regulation on international finance, in particular concerning offshore banks, OFCs, crypto currency and clearing houses such as Clearstream, based in Luxembourg, which are possible crossroads for major illegal money flows. Most criminality involving the banking system has happened because of the regulations and controls being circumvented.
Banking disadvantages
- Offshore bank accounts are sometimes less financially secure than domestic ones in recent times. For example, in the banking crisis which swept the world in 2008, some savers lost funds that were not insured by the country in which they were deposited. 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. In reality. Switzerland, Luxembourg and other offshore jurisdictions now often have some form of compensation scheme.
Both offshore and onshore banking centres often have depositor compensation schemes. For example: The Isle of Man compensation scheme[15] guarantees £50,000 of net deposits per individual depositor, or £20,000 for most other categories of depositor. Potential depositors should be aware that any deposits over the guaranteed 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 economy and organized crime, thanks to movies such as the Firm through money laundering. Following September 11, 2001, offshore banks, onshore banks along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial service used by many expatriate and international workers.
- Offshore jurisdictions can be remote, and therefore costly to visit, so physical access can be difficult. This problem has been alleviated to a considerable extent with the advent and realization of online banking as a practical system.
- Offshore private banking is usually more accessible to those with 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 in doubles from time to time, as previously sheltered income is brought back into the mainstream economy. The Laffer curve demonstrates this tendency.
- The US Bank Secrecy Act requires U.S. Taxpayers to file a Department of the Treasury Form 90–22.1 Report of Foreign Bank and Financial Accounts (FBAR: Each person or entity (including a bank) subject to the jurisdiction of the United States having an interest in, signature, or other authority over one or more bank, securities, or other financial accounts in a foreign country must file an FBAR if the aggregate value of such accounts at any point in a calendar year exceeds $10,000. (31 CFR 103.24). A recent District Court case in the 10th Circuit may have significantly expanded the definition of “interest in” and “other Authority”.
- Offshore bank accounts are sometimes touted as the solution to every legal, financial, and asset protection strategy, but the benefits are often exaggerated as in the more prominent jurisdictions, the level of Know Your Customer evidence required underplayed.
