International Offshore Banking
by
the Lowtax Network Editorial Team, February,
2007
Disclaimer:
The Lowtax Network has taken reasonable care in
assembling this report but accepts no liability
for any actions taken or not taken as a result.
In particular, this report does not constitute
investment advice. Anyone contemplating an investment,
or a change to a current investment, needs to
take appropriate professional advice.
There
is a staggering amount of money in the world,
and more and more of it is in offshore jurisdictions.
According
to a study by consulting firm McKinsey and Company
published in January, 2007, the value of total
global financial assets, including equities, government
and corporate debt securities, and bank deposits,
expanded to $140 trillion in the 12 months to
the end of 2005, an increase of $7 trillion from
a year earlier. That is a growth rate of 5.3%.
There
are no consolidated figures for the growth in
offshore assets - many jurisdictions simply don't
release figures. But for those that do, it is
clear that the rate of increase in banking, trust
and fund assets dramatically outpaces McKinsey's
global figure. In Jersey, for instance, banking
assets were GBP159bn in December, 2004; by September,
2006, they stood at GBP188bn. That is an annual
growth rate of 10.2%, roughly double the global
rate; and Jersey banking is by no means untypical
of offshore performance. Indeed some other jurisdictions
have shown higher growth rates; and fund assets
have grown faster even than banking ones.
With
'onshore' high-taxing countries chopping finer
and finer in order to remove tax loopholes, and
imposing ever more stringent anti-money-laundering
rules, it is no surprise that more and more people
move their assets offshore, if they are able to.
The
purpose of this special feature is to describe
the history of offshore banking, and to contrast
the offshore banking sector with its onshore rival.
A Very Potted History of Offshore Banking
If
the words 'offshore banking' conjure up for
you a shadowy figure wearing a Panama hat and
crumpled white suit, smoking a cigar, and probably
sipping cocktails from a hollowed out coconut,
then you've clearly been reading too much John
Grisham. Stop it. It isn't good for you. In
an increasingly globalised world, in which more
and more of the population are becoming internationally
mobile, and need financial services which reflect
their circumstances, offshore and international
banking has moved on. The growing need for international
banking on both a personal and corporate level
has led to an increase in the number and quality
of financial centres, both offshore and on,
and the diversity of financial services offered.
As
a result, there is a huge spectrum of different
offshore banking services available to expats,
international investors, globetrotters, international
consultants and corporations, offering varying
degrees of return, protection, and privacy.
Before we look into the different sorts of offshore
bank account available, however, a brief rundown
of the background of this ever-growing industry
is necessary, in order to understand the present
situation.
As
more and more financial institutions became
keen to establish themselves on an international
level, regulators perceived a need for greater
banking regulation, and introduced a set of
minimum standards and safeguards, known as the
Basle Accord (introduced 1988). The Accord outlined
the requirements necessary for banks to obtain
licenses, which included two minimum types of
bank capitalisation- core capital and supplementary
capital. Core (Tier 1) capital is basically
a mixture of shareholder equity and disclosed
reserves, and supplementary capital is a mixture
of debt and equity instruments. (Wake up there,
you at the back! There is a reason why we're
telling you this
).
The
Basle Accord set the minimum capital adequacy
level for each type of bank capital at 4%, meaning
that many banks operating in countries under
this accord were forced to increase their capital
reserves and to invest in 'safer' investments.
Recently introduced modifications to the original
Basle Accord (originally enough, called Basle
2, and running to 541 pages) seek to align capital
requirements with the underlying risks of loans
made, and will further affect the amount of
capital which each bank is required to hold.
This may mean that banks in countries which
are operating under the Basle Accord are forced
to be more cautious about the instruments in
which they invest, resulting in potentially
less attractive returns. However, in non-Accord
countries (which includes many offshore jurisdictions),
regulation of this kind is usually down to the
regulatory authorities of the jurisdiction,
and the required capital adequacy levels can
vary.
Other
legislative issues have also had an effect on
the offshore banking world. Initiatives by the
OECD/FATF/G7 countries to combat money laundering
have, in the process, severely damaged the banking
secrecy laws of many offshore jurisdictions.
'Know your Customer' legislation has meant that
privacy in high tax and certain low tax jurisdictions
has been jettisoned in return for international
acceptance. In addition, US rules have introduced
'Qualified Intermediary' status which also imposes
more stringent controls on any institution wanting
to avoid having to tax US-source income regardless
of the nationality or tax status of the recipient.
For all these reasons, opening an offshore account
can now often require a small rainforest's worth
of paperwork.
The
OECD's first shot across the bows of banking
secrecy was fired in earnest with the release
of a report in 2000 into improving access to
bank information for tax purposes, endorsed
by all 29 members of the organisation. Although
the report was more a statement of intent rather
than a detailed plan, it set the template upon
which national tax authorities could obtain
information about specific individuals or companies
whom they have reason to suppose are engaged
in tax evasion or criminal activity.
Although
many offshore jurisdictions have responded to
the pressure brought about as a result of their
blacklisting by the OECD and the FATF by strengthening
legislation against money-laundering and introducing
better controls over financial institutions,
the high tax countries have failed to really
galvanise a move towards any comprehensive dilution
of banking secrecy, and the international framework
of mutual assistance treaties remains largely
as it was.
Indeed,
the high-tax countries themselves are gradually
being forced by peer pressure and international
regulations to tighten up their own regimes.
In
January, 2007, for instance the UK took the
latest in a series of EU-inspired measures when
Economic
Secretary to the UK Treasury, Ed Balls, published
draft money laundering regulations for consultation.
The
regulations are designed to implement the EU's
Third Money Laundering Directive, and have already
caused controversy.
The
proposed regulations include:
- Extended
supervision so that all businesses in the
regulated sector comply with money laundering
requirements, including estate agents, trust
and company service providers and unsecured
lenders;
- Strict
tests to ensure people running money services
businesses and those who help set up trusts
and companies are fit and proper;
- Extra
checks on customers that firms identify
as posing a high risk of money laundering;
- A
requirement to establish the source of wealth
for those in high risk situations, for example
those involving deals with high ranking
public officials overseas; and
- A
strengthened and risk-based regime in casinos,
in line with, but stricter than, international
standards.
Mr
Balls announced that: 'These Regulations will
strengthen further the UK's defences against
money laundering and terrorist finance. By taking
tough and targeted new measures where the risks
are greatest we will crackdown further on illegal
activity and help force criminals and would-be
terrorists out of the shadows. At the same time
our Regulations will ensure that businesses
and consumers in low risk situations face fewer
burdens than previously.'
The
Directive includes criminal penalties for advisers
ranging from stockbrokers to lawyers and estate
agents to bankers if they do not carry out multiple
checks.
However,
the UK's Law Society warned that the new money
laundering regulations could put solicitors
at risk of inadvertently committing criminal
offences because they are "impossible to interpret"
in practice. It also warned that the new rules
will increase the cost to clients of solicitor’s
work in dealing with trusts.
According
to the Law Society, a number of the terms in
the new EU Directive are unclear, and unless
the Government clarifies them, solicitors will
have to make extensive enquiries – at clients’
expense – in order to avoid inadvertently committing
a criminal offence.
Offshore
Versus Onshore in 2007
It
is unlikely that the relative advantages of
offshore will be undermined in the short term
at least. The OECD's rather uneventful Global
Forum on Taxation in Berlin in June 2004 encouraged
participants to continue to strive towards effective
exchange of information and transparency by
2006, although it was also recognised that flexibility
is required since many participants have not
yet initiated negotiations towards the required
signing of bilateral agreements.
The
OECD claims however that substantial progress
has been made. A report from the Global Forum
secretariat in 2006 stated that countries continue
to improve their international cooperation to
combat tax abuse by putting in place mechanisms
which enhance transparency and exchange of information
for tax purposes. Many of the economies reviewed
have enhanced transparency by introducing rules
on customer due diligence, information gathering
powers and the immobilisation of bearer shares.
Most have entered into double taxation conventions
and/or tax information exchange agreements,
and many are engaged in negotiations for such
agreements.
The
OECD also noted that none of its member countries,
and very few non-members, now make domestic
tax interests a condition for responding to
a treaty partner’s request for information on
a specific taxpayer. However,
the Organisation argues that more progress can
be made to improve global tax transparency,
and stated that some countries still place constraints
on international co-operation to counter criminal
tax matters and a number continue to impose
strict limits on access to bank information
in civil tax matters.
"The
direction of change is clear," Paolo Ciocca,
Chair of the OECD’s Committee of Fiscal Affairs
and Co-Chair of the Global Forum stated. "Onshore
and offshore financial centres are prepared
to work towards the implementation of mutually
agreed standards. I look forward to the day
when the centres that have met these standards
are joined by other jurisdictions that have
not yet achieved them," he added.
Leasi
P. T. Scanlan, Governor of the Central Bank
of Samoa and also a Co-Chair of the Global Forum,
said the report demonstrated the ability of
OECD and non-OECD countries to co-operate in
order to prevent their financial centres being
misused for illegal tax avoidance and evasion.
"This
has been a huge undertaking but we now have
a clear idea of where we stand. It is an important
step in helping countries to work towards a
level playing field so that these abuses do
not simply shift from one financial centre to
another," he observed.
It
must be made clear that although in most countries,
having an offshore account is not illegal in
itself, the illegality comes when the client
doesn't declare the account, or the income from
it. Banks in jurisdictions with strong banking
secrecy legislation tend to place the onus for
this reporting on the client themselves (which
is not to suggest for a moment that they recommend
not reporting the income, merely that they do
not volunteer the information to other countries,
and will usually reject requests for the client's
personal details unless there is evidence of
criminal activity).
Despite
the efforts of the OECD countries to restrain
the offshore banking sector, the reality is
that in most offshore centres, deposit totals
have shot up in recent years, and seemed to
be having a particularly good year in 2006,
with double digit percentage increases in many
cases.
Why Do I Need An Offshore Bank Account?
Whether
you are a professional expatriate, globetrotter,
international investor, or consultant, an offshore
bank account could prove invaluable. Relocation,
whether on a regular or one-off basis can have
serious taxation implications for your assets,
but if they are safely anchored in an offshore
jurisdiction, barring unforeseen events they
can remain there for the duration of your expatriation
(and beyond), usually attracting favourable
taxation and higher returns. However, it is
probably advisable to open an account in your
country of secondment for day to day transactions
as well.
If
you are employed in a profession which has a
greater than average chance of attracting litigation
(for example the medical profession), or are
concerned about future attacks on your assets
from family members, offshore bank accounts
can also prove effective as asset protection
vehicles. If you have waited until your assets
are under threat, and would now like to transfer
them offshore and out of danger, however, we
have four words for you - Stable Door. Horse.
Bolted.
As
previously mentioned, initiatives by the OECD
and EU have dealt the concept of offshore privacy
a bit of a blow, and in several jurisdictions
it has been severely compromised. Some individuals
choose to address this by interposing an International
Business Company (or IBC) or trust between themselves
and the offshore account, as it can be the case
that the beneficial owner of an IBC or a trust
does not have to be disclosed. Some providers
also come to arrangements with banks in jurisdictions
with strong secrecy laws, whereby reporting
requirements (to the bank at least) are minimised.
However, this is a complicated area, and professional
advice needs to be taken in order to ensure
that you are in compliance with the rules of
both countries.
The
Bush administration's actions regarding the
ongoing OECD crackdown campaign may be a silver
lining in the tax havens' cloud; the administration
appears to have backed away from the organisation's
campaign, and has withdrawn US support for essential
elements of the project. This climb-down appears
to only be partial at the moment, and ex-Treasury
Secretary Paul O'Neill stated that although
America no longer wants to participate in efforts
towards world tax harmonisation, there is still
room for international co-operation on issues
such as tax avoidance. However, the issue looks
set to run and run, so watch this space
What Services do Offshore Banks Offer?
This
depends upon the organisation you choose to
bank with, and the jurisdiction in which it
is located. Nearly all international and offshore
banks offer checking, savings and current accounts,
many offer credit and debit cards, and some
offer foreign currency services and investment
accounts. Larger organisations, usually in the
more regulated jurisdictions, also sometimes
provide mortgages and other financial products.
Other institutions offer IBC registration and
maintenance. Increasingly, banks and financial
service providers are recognising the need for
online facilities (especially if they are hoping
to attract an expatriate audience), and many
now offer 24 hour online account access, and
allow you to conduct much of your banking by
e-mail or telephone.
However,
bear in mind that in a lot of cases, these services
(with the exception of online banking) are not
offered for free, and the charges can vary significantly
between jurisdictions and institutions. Therefore
it is probably best to decide what you need
from your offshore bank account before you start
looking, and if you decide that you do need
extra facilities, use them wisely, otherwise
the charges can start to mount up.
Which Offshore Jurisdiction Should I Choose?
Choosing
a jurisdiction in which to locate your international
bank account is tricky at the best of times,
and made more so by the constant uncertainty
foisted on the offshore community by the OECD,
FATF et al. However, if circumstances dictate
that you need an offshore bank account, then
choose you must, so what should you look out
for?
There
are several key criteria which any offshore
jurisdiction should fulfil before you consider
banking there. These include (although are not
limited to) the following:
-
Political and economic stability. Fairly
self explanatory, really
-
Strict secrecy legislation. Anti-money laundering
initiatives have nibbled away at the privacy
legislation of many offshore jurisdictions,
and especially over the forthcoming months,
you will need to keep your ear very firmly
to the ground. Some smaller countries have
signed exchange of information treaties
with larger, more powerful nations in exchange
for aid, so you will need to be aware of
these if they exist between your country
of residence and your preferred jurisdiction/s.
Another factor for consideration is that
some offshore jurisdictions are in fact
the official territories of larger countries,
which can sometimes bring pressure to bear
on them, with unfortunate results. It is
therefore advisable not to bank in a jurisdiction
with strong ties to your country of residence,
or with an offshore branch of your onshore
bank.
-
Strong infrastructure. A modern and reliable
business infrastructure is usually a fairly
good indicator of the stability of a jurisdiction,
and is essential for a number of reasons.
Although it may sometimes be tempting to
look to newer and smaller jurisdictions
which may have slipped under the radar of
the high tax countries, it is worth bearing
in mind that their communications and business
infrastructures may not be fully developed,
which could make it difficult to contact
your provider or access your assets. You
should also ensure that your chosen jurisdiction
has a full array of financial service providers
(i.e. law firms, accountants, other banking
institutions) in addition to the one you
are looking at.
-
Convenient location. Although expatriation,
by definition, may mean that this differs
as you move from country to country, it
is still important to consider the geographical
location of the country in which you intend
to bank. Getting up in the middle of the
night to talk to your bank manager sort
of cancels out the convenience aspect of
offshore banking, so try and make sure the
country is at least in a convenient time
zone for you!
-
Investor/customer protection. As previously
mentioned, some jurisdictions are more stringently
regulated than others, and as such the chances
of there being some kind of investor protection
measures in place vary. However, in countries
where the legislation is geared towards
minimising risk, there may be other restrictions
in place which limit the returns that it
is possible to achieve. Whether investor
protection is a major issue with you or
not, it is worth being aware that standards
can vary tremendously from jurisdiction
to jurisdiction, and sometimes between institutions.
What Due Diligence Should I Do Before Opening
an Offshore Account?
First
and foremost, you should enlist the services
of a finance professional. They should be
aware of the risks and ongoing issues in the
jurisdiction in which you choose to locate,
and should also be aware of any suspect institutions.
However, initially, it is worth doing a little
research for yourself, and there are several
things that you can do:
-
First of all, look at the established institutions
in your jurisdiction of choice. In this way,
you can gauge the standards of the industry
there, and in so doing, give yourself a frame
of reference.
-
Although longevity is an important plus point
for an offshore bank in due diligence terms,
it is not the only factor to be considered.
Keep an eye out for any negative publicity
in the media (this is where the internet comes
in especially handy!)
-
Don't do business with a 'brass plate' bank.
Although there has been a drive towards eradicating
this type of institution, you need to make
sure that the bank that you intend to entrust
your hard earned cash to is the real deal
(i.e. has an office, staff, a license, money,
etc. Little things like that!) If you have
come across the institution via its website,
make sure that it is possible to make contact
by other means than e-mail. Although the presence
of a physical mailing address, and telephone
and fax details do not in themselves indicate
that a bank is legitimate, their absence may
be a red flag.
-
Be wary of banks or providers offering interest
rates that seem unusually high. Although there
is certainly scope for good returns in the
offshore arena, things that seem too good
to be true usually are. When dealing with
your future happiness and financial well being,
it is a good idea to leave your faith in human
nature at home!
So,
how do I go about opening an offshore bank account
then?
Due
diligence is not just a one way process, and
the amount that banks are required to conduct
on potential customers increased greatly with
the advent of 'Know your Customer' legislation
in the last few years. If you are applying to
open a bank account through an intermediary,
or with an institution that has agreed to implement
KYC, you will need to provide at least the following:
It
is difficult to discern whether 'Know Your Customer'
legislation came about as a result of the efforts
of the FATF (Financial Action Task Force), as
a result of the efforts of the IRS, or as a
combination of the two. In some people's minds,
however, it is inextricably linked with the
latter, and with the introduction of 'Qualified
Intermediaries' and 'Qualified Jurisdictions'
in 2001. Qualified intermediaries are primarily
concerned with US citizens, and those with US
source income, and are required by the IRS to
implement KYC in return for simplified reporting,
and withholding tax procedures.
However, it all gets a bit complicated from
here on in, because it is possible to find a
qualified institution in a qualified jurisdiction,
a non-qualified institution in a qualified jurisdiction,
and sometimes a qualified institution in a non-qualified
jurisdiction (although this is only permitted
if the institution is a branch of a company
resident in a qualified country). Got all that?
All that this really means is that unfortunately
US citizens have got the short end of the stick
again, in that some banks may choose not to
take them on as a result of the extra reporting
requirements. However, once again this is a
complicated matter, and best discussed with
a qualified professional.
The EU's Savings Tax Directive
Meanwhile
in Europe, the EU introduced the Savings Tax
Directive, which means that as from July, 2005,
all EU member states and a number of their offshore
dependent territories are either placing a 15%
withholding tax on the returns on savings paid
to citizens of EU member states, or are passing
information about the payment to the citizens'
home countries. The EU put pressure on Switzerland,
where tax avoidance is not a criminal activity
(and which is not actually an EU member), to
agree to exchange of information on the identities
of depositors and savers, but the Swiss, who
have always been fiercely protective of their
banking secrecy laws, put forward a compromise
whereby their existing withholding tax system
would be extended and strengthened, which was
reluctantly accepted by the EU.
After
the first year of operation of the Savings Tax
Directive, however, it became clear that most
savers and investors have easily escaped the
Directive, when statistics showed far lower
levels of reported or taxed interest had been
expected.
In
Switzerland, for instance, in the first six
months of the operation of the legislation,
Swiss institutions withheld and passed on to
the tax authority about EUR100 million (US$128
million) from the savings of individuals resident
in EU member states.
On the surface it seems implausible that Switzerland,
the world's largest private banking centre with
more than 500 major banking institutions and
home to an estimated 35% of the world's private
wealth, could collect such a relatively small
amount; but given the relative ease with which
the directive can be circumvented, the figures
are not really surprising.
The
most obvious route is for investors to place
their assets in jurisdictions not covered by
the directive; anecdotal evidence suggests that
Dubai, Hong Kong and Singapore have been major
beneficiaries. However, there are a number of
investment instruments that have, for whatever
reason, not been included within the scope of
the directive.
Other
major banking centres have also reported lowly
withholding tax revenues: Luxembourg EUR48 million,
Jersey EUR13 million, Belgium EUR9.7 million,
Guernsey EUR4.5 million and Liechtenstein EUR2.5
million.
In Conclusion
Although
no-one would deny that there is uncertainty
in the world of offshore banking and investing
at the moment, with the proper planning, international
banking can still offer the chance to achieve
enhanced returns and greater privacy to both
international investors and expatriates. Achieving
tax efficiency may be becoming more complicated,
but this does not mean that it is impossible,
and there are an increasing number of qualified
individuals.
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