An offshore bank is a bank located outside the country of residence
of the depositor, typically in a low tax jurisdiction that provides
financial and legal advantages. These advantages typically include
some or all of
. strong privacy (see also anonymous banking)
. less restrictive legal regulation
l. low or no taxation
. 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 "offshore" from
Britain, 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 (Switzerland and Andorra in particular
One common misconception is that offshore banking can legally
prevent assets from being subject to personal income tax on interest.
Except for certain persons who meet fairly complex requirements,
this is incorrect as the personal income tax of most countries
makes no distinction between interest earned in local banks and
those earned abroad. Persons subject to US income tax, for example,
are required to declare on penalty of perjury, any offshore bank
accounts they may have. Although offshore banks sometimes do
not report income to other tax authorities this does not make
the non-declaration of the income or the evasion of the tax on
that income legal in most jurisdictions.
1 Advantages of Offshore Banking
2 Disadvantages of Offshore Banking
3 Banking Services
4 Regulation of Offshore Banks
5 Offshore Finance Centres
6 External Links
7 See also
Advantages of Offshore Banking
Offshore banks provide access to politically and economically
stable jurisdictions. This may be an advantage for those resident
in areas where there is a risk of expropriation or where there
is corruption within the banking system, or bank officers may
become liable to the influence of or pressure from criminal gangs.
Some offshore banks may operate with a lower cost base and can
provide higher interest rates than the home country.
Offshore finance is one of the few industries that geographically
remote island nations can competitively engage in.
Interest is generally paid by offshore banks without the deduction
of tax. This is an advantage to individuals who do not pay tax
on worldwide income, or who do not pay tax until the tax return
is agreed, or who feel that they can illegally evade tax by hiding
the interest income.
Some offshore banks offer banking services that may not be available
in one's country of residence. One such example is paperless
Offshore banks in some countries participate in mandated bank
account deposit protection insurance systems.
Disadvantages of Offshore Banking
Few offshore jurisdictions have depositor compensation schemes,
to bail out depositors in the event that a bank becomes
Offshore banking has been associated with money laundering
and organized crime. There is a risk of reputation being
tarnished by association.
In addition, the advantages of offshore banking may come
at a high cost as the returns on some offshore banking
be substantially below those of normal bank accounts.
The fees and minimum deposits required to open and operate
accounts at some offshore banks can make them inaccessible
to the general
Offshore jurisdictions are often remote so physical access
and access to information can be difficult.
It is possible to obtain the full spectrum of financial
services from offshore banks, including:
Letters of credit and trade finance
Not every bank provides each service. Banks tend to polarise
between retail services and private banking services. Retail
services tend to be low cost and undifferentiated, whereas private
banking services tend to bring a personalised suite of services
to the client.
Regulation of Offshore Banks
In the 21st century, the majority of offshore banks operate
within highly regulated environments. The quality of the regulation
in monitored by supra-national bodies such as the 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.
Whilst offshore banking has a historic association with organised
crime, it is an important part of the international financial
system. For example, the Cayman Islands is the fifth largest
banking centre globally, in terms of deposits.
Since the late 1990s there has been a number of initiatives
to increase the transparency of offshore banking. 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 to report suspicion of money laundering
to the local police authority, regardless of banking secrecy
rules. There is more international co-operation between police
Source : wikipedia
In the USA the IRS introduced Qualifying Intermediary requirements
which mean that the names of the recipients of US source investment
income are passed to the IRS.
Following 9/11 the USA introduced the USA PATRIOT Act, which
authorises 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