Offshore banking is associated with a bank that is located in some other country than that of depositor, generally in country with low taxes or even in a tax haven and provides full set of advantages for its customers. What is special with offshore banking is that it provides offshore banking accounts that enjoy bank secrecy and anonymity. Offshore banking accounts typically offer following advantages:
- Higher privacy and bank secrecy that originated from the 1934 Swiss Banking Act;
- Lighter legal regulation;
- Low taxes or absence of taxation on interest earned on offshore banking accounts;
- Simple procedures for accessing deposits;
- High degrees of protection from local political or market instabilities;
The term “offshore banking” comes from Channel Islands that are offshore for United Kingdom. Although most of the centers providing such service are located on island-states, this term is used to denote such banking practices regardless of the country they operate in. For instance, Swiss banks operate in the landlocked country; however they are also referred so.
Offshore banking provides certain advantages for its users:
- It often provides politically and financially stable place to keep cash. This is a huge advantage for
residents of those countries that are prone to political turmoil and there is a sound risk that financial assets can be frozen, confiscated or may simply disappear. It should be noted here that in terms of stability banking sectors of developed countries can be considered as a serious competitors for the offshore banking; - It may offer higher interest rates and therefore higher incentives to the potential customers, since they operate under lower costs due to lower taxes and little government regulation;
- It is a powerful tool by which island-states create growth for their economies. Along with tourist offshore banking is one of few sectors, where poor countries can effectively compete with developed countries and win their piece in the redistribution of world assets;
- Interest rate income is generally paid without deduction of taxes. This is very attractive for the residents of those countries that do not pay taxes on the income generated outside the country of residence or for those individuals, who can risk evading taxes.
- It may offer such services and banking products that are not available in the country, where the individual resides. This can be anonymous offshore banking accounts, higher and lower rate loans based on risk and investment, etc.
- It is often related to offshore companies, trusts, foundations that provide tax advantages for some individuals.
- It is believed that offshore banking provides strong competition to the normal commercial banking that leads to better service and facilitates appearance of new products and services. However critics of offshore banking state that this competition forces developed countries to deregulate their financial sectors to prevent outflow of capital to offshore banking centers.
Offshore banking provides certain disadvantages for its users:
- It has been associated with underground economy and money laundering. Furthermore, after 9/11
offshore banking centers were accused in assisting organized crime and terrorist organizations. However offshore banking is legal business that employs many expatriate and international workers; - Although offshore banking centers are often remote jurisdictions, accessing information is not a problem anyway. With the today’s telecommunications technology information access became convenient for customers.
- Generally offshore banking services is available for those with high incomes, but those with low incomes can still afford maintaining simple savings account that has the same cost as similar onshore account.
Offshore banking includes full set of financial services:
- Deposit taking;
- Credit;
- wire- and electronic funds transfers;
- Foreign exchange;
- Letters of credit and trade finance;
- Investment management and investment custody;
- Fund management;
- Trustee services;
- Corporate administration;
