Tax Havens, Offshore Jurisdictions

by Elliot Clark on February 10, 2009

In international banking network international and regional offshore banking centers (OBC) play important role in encouraging investment. Offshore banking centers offer special advantages and aim to attract investment by the non-resident individuals. OBCs are countries and jurisdictions where international financial institutions are exempted from various regulations that are applied to the domestic banking, such as deposits are exempted from reserve requirement obligations and banking transactions are tax-free. For instance, in Singapore offshore banking sector that is primarily represented by Asian Currency Units (ACU) is exempted from wide range of regulations, requirement and controls, such as minimum reserve requirements imposed by Monetary Authority of Singapore and investment controls that restrict Offshore Banking CentersSingapore banks to invest in single project or piece of asset excessively. In addition at OBCs banks are subject to weak information disclosure requirements.

There are tree main types of offshore banking centers based on sources and uses of funds, liquidity of markets and nature of transactions they conduct:

Primary OBCs – major global banking centers with highly liquid regional markets and with available sources and uses of funds. OBCs of such caliber are Japanese Offshore Market (JOM), London and US International Banking Facilities.

Secondary OBCs – unlike primary OBCs they only conduct intermediation of funds in the region they operate. Such OBCs are Hong Kong, Singapore, Bahrain, Lebanon, Panama, etc.

Booking OBCs – such offshore banking centers do not conduct intermediation of funds, but they serve as registries for those transactions that were conducted in other OBCs. Under this category can be classified Caribbean OBCs.

Offshore banking institutions most maintain business relations with other financial institutions and conduct wholesale banking/financial business in any currency other that the one of the country, where OBC is located. Offshore banking is conduct primarily through special establishments often referred as offshore banking units (OBU) that typically are integral part of a bank and have separate balance sheet, is exempted from certain requirements and can conduct business only with non-residents. OBUs accumulate funds from regions with excess liquidity and intermediate to the regions with deficient liquidity as parent company dictates. For instance, Singapore (regional OBC) ACUs are established to engage in Asian Dollar Market. What ACUs do is the following: they accumulate funds (deposits) from sources other than Singapore and intermediate them to the borrowers from the countries of the region. On the other hand, Domestic Banking Units (DBU) of Singapore is kept separate from these transactions. Moreover, although both this units are parts of one commercial bank, they have separate balance sheets.

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