Introduction to OFF-SHORE Banking ( part one)

Abstract

For over 20 years we have been providing a range of publications on how to establish and administer offshore and international bank accounts. A significant percentage of our readers establish accounts with international and offshore banks rather than domestic banks because

often their characteristics include:

Familiarity with offshore and international business.

Worldwide investment and business perspective.

Tax-efficiency.

Confidentiality.

Lack of foreign exchange controls.

Access to special investment opportunities.

The objective  is to advise potential clients of the “basics” and to provide answers to the more common questions relating to offshore banks and establishing and administering an offshore bank account.

1. Basic Information’s about OFF-SHORE Banking

Offshore centers benefit from a low burden of regulation. An extremely high proportion of hedge funds (which characteristically employ high risk investment strategies) who register offshore are presumed to be driven by lighter regulatory requirements rather than perceived tax benefits. Many capital markets bond issues are also structured through a special purpose vehicle incorporated in an offshore financial center specifically to minimize the amount of regulatory red-tape associate with the issue.

Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions, particularly in relation to the beneficial ownership of offshore companies, and in relation to offshore bank accounts. However, banks in most jurisdictions will preserve the confidentiality of their customers, and all of the major offshore jurisdictions have appropriate procedures for law enforcement agencies to obtain information regarding suspicious bank accounts, as noted in FATF ratings. Most jurisdictions also have remedies which private citizens can avail themselves of, such as Anton Piller orders, if they can satisfy the court in that jurisdiction that a bank account has been used as part of a legal wrong.

Similarly, although most offshore jurisdictions only make a limited amount of information with respect to companies publicly available, this is also true of most states in the U.S.A., where it is uncommon for share registers or company accounts to be available for public inspection. In relation to trusts and unlimited liability partnerships, there are very few jurisdictions in the world that require these to be registered, let alone publicly file details of the people involved with those structures. Statutory banking secrecy is a feature of several financial centers, notably Switzerland and Singapore. However, many offshore financial centres have no such statutory right. Jurisdictions including Aruba, the Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, Jersey, Guernsey, the Isle of Man and the Netherlands Antilles have signed tax information exchange agreements based on the OECD model, which commits them to sharing financial information about foreign residents suspected of evading home-country tax.Offshore centers have often been seen as venues for laundering the proceeds of illicit activity. However, following a move towards transparency during the 2000s, some now argue that offshore jurisdictions are in many cases better regulated than many onshore financial centers. For example, in most offshore jurisdictions, a person needs a licence to act as a trustee, whereas (for example) in the United Kingdom and the United States, there are no restrictions or regulations as to who may serve in a fiduciary capacity. Some commentators have expressed concern that the differing levels of sophistication between offshore financial centers will lead to regulatory arbitrage, and fuel a race to the bottom, although evidence from the market seems to indicate the investors prefer to utilise better regulated offshore jurisdictions rather than more poorly regulated ones. A study by Australian academic found that shell companies are more easily set up in many OECD member countries than in offshore jurisdictions. A report by Global Witness, Undue Diligence, found that kleptocrats used French banks rather than offshore accounts as destinations for plundered funds. Although most offshore financial centres originally rose to prominence by facilitating structures which helped to minimize exposure to tax, tax avoidance has played a decreasing role in the success of offshore financial centres in recent years. Most professional practitioners in offshore jurisdictions refer to themselves as “tax neutral” since, whatever tax burdens the proposed transaction or structure will have in its primary operating market, having the structure based in an offshore jurisdiction will not create any additional tax burdens.

A number of pressure groups suggest that offshore financial centers engage in “unfair tax competition” by having no, or very low tax burdens, and have argued that such jurisdictions should be forced to tax both economic activity and their own citizens at a higher level. Another criticism leveled against offshore financial centers is that whilst sophisticated jurisdictions usually have developed tax codes which prevent tax revenues leaking from the use of offshore jurisdictions, less developed nations, who can least afford to lose tax revenue, are unable to keep pace with the rapid development of the use of offshore financial structures.

2. Benefits

Offshore companies have the following features which may be beneficial:

Taxation – In most jurisdictions authorities will not seek to tax companies which they treat as non-resident, save perhaps for a nominal fee -$300 BVI, £320 Isle of Man etc.

Simplicity and Reporting – except for regulated businesses, such as banks or other financial institutions, some jurisdictions make it relatively simple to set up and maintain companies especially with reference to lesser reporting requirements than so-called onshore jurisdictions – the level of information required by the registrar of companies varies from jurisdiction to jurisdiction.

 Legal and asset protection – some jurisdictions have stricter provisions for allowing a court to pierce the corporate veil, and in many cases corporate governance rules require the laws of the jurisdiction where the corporation is chartered – rather than where it is sued – to apply. For example Gibraltar makes it illegal for the trustee of an Asset Protection Trust to surrender its assets to a creditor of the settler and in Switzerland it is illegal to disclose banking information.

Fees – some jurisdictions impose much higher fees to incorporate than other jurisdictions. They may also impose much higher maintenance fees on a corporation’s yearly renewal of its charter. This will vary from service provider to service provider and will be significantly based on the cost of local disbursements.

Anonymity – by carrying out transactions in the name of a private company, the name of the underlying principal may be kept out of documentation, since the company is a separate legal entity. Having said that, current anti-money-laundering regulations often require banks and other professionals to look through structures. This will always be the case for any reputable bank but it does not render ineffective the use of corporate structures, rather it ensures

they remain legally compliant.

Thin capitalization – Some offshore jurisdictions tend not to impose “thin capitalization” rules on companies (except for regulated entities such as banks and insurance companies), allowing them to be formed with a purely nominal equity investment.

Financial assistance – offshore companies are usually not prohibited from providing “financial assistance” for the acquisition of their own shares, which avoids the needs for “whitewash” procedures in certain financial transactions.

Cost of operation – In many cases, i.e. where a self employed consultant provides services to a number of jurisdictions and travels frequently, it is a matter of choice where he chooses to incorporate. In this case the fact that companies in an offshore financial center are considerably cheaper than buying or renting premises, arranging to engage accountants, receptionists,T providers etc. would be.

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