OFFSHORE

BANKING

Group Members
Sunita Singh 48

Diana D’souza 07

Aarati Haria 14

Divya Nair 26

Shweta Shetty 43

Niriksha Sompura 49
OFFSHORE BANKING

Offshore simply means anything outside of a country’s

jurisdiction. So if I’m in the US which is considered onshore,
any other country outside US jurisdiction is referred to as
offshore.The term Offshore banking originates from the
Channel Islands being "offshore" from the United Kingdom, 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, including Swiss banks and those of other landlocked
nations such as Luxembourg and Andorra. Offshore bank is
simply a bank located outside your country of residence,
usually in a low tax jurisdiction and legal advantages. Thus
Offshore bank and banking account are similar in the sense
that these are bank accounts opened at a country other than
your own.

The appeal of offshore banking is that it offers

greater privacy or bank secrecy ( a principle born with the

1934 Swiss Banking Act) : offshore banks may decide not to
report income to other tax authorities

• low or no taxation (i.e. tax havens): No tax deducted on

interest earned. Interest on our offshore accounts is paid
without the deduction of tax†

• Offshore income may not be subject to tax. Depending

where you live, income on an offshore bank account or
investments may not be subject to tax in your country of
residence, if that money is not remitted into your country
of residence

• No inheritance tax, capital gains tax or death duties.

Jurisdictions such as the Isle of Man and Jersey, Channel
Islands have no inheritance, capital gains taxes or death
duties (probate may be required in certain circumstances)

• easy access to deposits (at least in terms of regulation)

 • protection against local political or financial instability

• Convenience: easy, international access

• A safe haven for your money

The quality of the regulation is monitored by supra-national

bodies such as the International Monetary Fund (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. In the 21st century, regulation of offshore banking is
allegedly improving, although critics maintain it remains largely
insufficient.

India is one of the new entrants in the area of offshore banking.

It was only recently that the Reserve Bank of India (RBI)
allowed the Indian banks to maintain an offshore banking unit.
The special economic zones are where the offshore banking in
India takes place.

ROLE OF RESERVE BANK OF INDIA IN OFFSHORE

BANKING

The role of Reserve Bank of India has been very critical in

initiating the process of offshore banking in India. For plenty of
years, the various Indian banks had been trying to convince the
Reserve Bank of India to introduce offshore banking in the
country. Eventually, the Reserve Bank of India understanding
the needs and prospects of offshore banking in India, allowed
the setting up of offshore units in the special economic zones.
Many of the Indian banks made use of that provision to set up
offshore banks in India.

REPUTED OFFSHORE BANKS IN INDIA

With the introduction of offshore banking numerous banks

made a beeline for setting up an offshore banking unit at the
special economic zones. One of the banks which took to
offshore banking in India is the Bank of Baroda. It set up an
offshore unit in the city of Mumbai. Punjab National Bank is
another banks which boasts of an offshore banking unit at
Santacruz Electronics Export Promotion Zone or SEEPZ in
Mumbai. The State Bank of India is also one of the banks with
an offshore unit at SEEPZ.

OFFSHORE BANKING IN INDIA

Reserve bank of India

Offshore banking unit’s guidelines

Scheme For Setting Up Of Offshore Banking Units

(Obus) In Special Economic Zones (Sezs)

The Government of India has introduced the Special

Economic Zone (SEZ) scheme with a view to providing an
internationally competitive and a hassle free
environment for export production. As per the
Government's policy, SEZs will be a specially delineated
duty free enclave and deemed to be a foreign territory
for the purpose of trade operations and duties / tariffs so
as to usher in export-led growth of the economy.
It was also indicated by the Union Commerce Minister in
his speech announcing the Exim Policy for 2002-07 that
for the first time, Offshore Banking Units (OBUs) would
be permitted to be set up in SEZs. These units would be
virtually foreign branches of Indian banks but located in
India. These OBUs, inter alia, would be exempt from CRR,
SLR and give access to SEZ units and SEZ developers to
international finances at international rates.

2. The Scheme

2.1 Eligibility Criteria

Banks operating in India viz. public sector, private sector
and foreign banks authorised to deal in foreign exchange
are eligible to set up OBUs. Such banks having overseas
branches and experience of running OBUs would be
given preference. Each of the eligible banks would be
permitted to establish only one OBU which would
essentially carry on wholesale banking operations.

2.2 Licensing
Banks would be required to obtain prior permission of the
RBI for opening an OBU in a SEZ under Section 23(1)(a)
of the Banking regulation Act, 1949. Given the unique
nature of business of the OBUs, Reserve Bank would
stipulate certain licensing conditions such as dealing only
in foreign currencies, restrictions on dealing with Indian
rupee, access to domestic money market, etc. on the
functioning of the OBUs. The parent bank's application
for branch licence should itself state that it proposes to
conduct business at the OBU branch in foreign currency
only.
No separate authorisation with respect to the OBU
branch would be issued under FEMA. As currently in
vogue with respect to designating a specific branch for
conducting foreign exchange business, the parent bank
may designate the branch in SEZ as an OBU branch. A
separate Notification No. FEMA71/2002-RB dated
September 7, 2002 issued by the Exchange Control
Department (ECD) of RBI on OBUs is enclosed.

2.3 Capital
Since OBUs would be branches of Indian banks, no
separate assigned capital for such branches would be
required. However, with a view to enabling them to start
their operations, the parent bank would be required to
provide a minimum of US$ 10 million to its OBU.

2.4 Reserve Requirements

2.4.1 CRR
RBI would grant exemption from CRR requirements to
the parent bank with reference to its OBU branch under
Section 42(7) of the RBI Act, 1934.

2.4.2 SLR
Banks are required to maintain SLR under Section 24(1)
of the Banking Regulation Act, 1949 in respect of their
OBU branches. However, in case of necessity, request
from individual banks for exemption will be considered
for a specified period under Section 53 of the B.R.Act,
1949.

2.5 Resources and deployment

The sources for raising foreign currency funds would be
only external. Funds can also be raised from those
resident sources to the extent such residents are
permitted under the existing exchange control
regulations to invest/maintain foreign currency accounts
abroad. Deployment of funds would be restricted to
lending to units located in the SEZ and SEZ developers.
Foreign currency requirements of corporates in the
domestic area can also be met by the OBUs. If funds are
lent to residents in the Domestic Tariff Area (DTA),
existing exchange control regulations would apply to the
beneficiaries in DTA.

2.6 Permissible Activities of OBUs

OBUs would be permitted to engage in the form of
business mentioned in Section 6(1) of the BR Act, 1949
as stipulated in the enclosed ECD Notification no.
FEMA71/2002-RB dated September 7, 2002 and subject
to the conditions of the licence issued to the OBU
branches.

2.7 Prudential Regulations

All prudential norms applicable to overseas branches of
Indian banks would apply to the OBUs. The OBUs would
be required to follow the best international practice of 90
days' payment delinquency norm for income recognition,
asset classification and provisioning. The OBUs may
follow the credit risk management policy and exposure
limits set out by their parent banks duly approved by
their Boards.
The OBUs would be required to adopt liquidity and
interest rate risk management policies prescribed by RBI
in respect of overseas branches of Indian banks as well
as within the overall risk management and ALM
framework of the bank subject to monitoring by the
Board at prescribed intervals.
The bank's Board would be required to set
comprehensive overnight limits for each currency for
these branches, which would be separate from the open
position limit of the parent bank.

2.8 Anti-Money Laundering Measures

The OBUs would be required to scrupulously follow
"Know Your Customer (KYC)" and other anti-money
laundering instructions issued by RBI from time to time.
Further, with a view to ensuring that anti-money
laundering instructions are strictly compiled with by the
OBUs, they are prohibited from undertaking cash
transactions, and transactions with individuals.

2.9 Regulation and Supervision

OBUs will be regulated and supervised by RBI through its
Exchange Control Department, Department of Banking
Operations and Development and Department of Banking
Supervision.

2.10 Reporting requirements

OBUs will be required to furnish information relating to
their operations as are prescribed from time to time by
RBI.

2.11 Ring fencing the activities of OBUs

The OBUs would operate and maintain balance sheet
only in foreign currency and would not be allowed to deal
in Indian Rupees except for having a special Rupee
account out of convertible fund to meet their day to day
expenses. These branches would be prohibited to
participate in domestic call, notice, tem, etc. money
market and payment system. Operations of the OBUs in
rupees would be minimal in nature, and any such
operations in the domestic area would be through the
Authorised Dealer (distinct from OBUs) which would be
subject to the current exchange control regulations in
force.
The OBUs would be required to maintain separate nostro
accounts with correspondent banks which would be
distinct from nostro accounts maintained by other
branches of the same bank. The Ads dealing with OBUs
would be subject to ECD regulations.

2.12 Priority sector lending

The loans and advances of OBUs would not be reckoned
as net bank credit for computing priority sector lending
obligations.

2.13 Deposit insurance

Deposits of OBUs will not be covered by deposit
insurance.

2.14 Choice of SEZ

OBUs would be permitted in SEZs approved by
Government of India, where according to Government
policy, OBUs can be set up.

TRENDS IN REGULATION OF OFFSHORE

BANKING

Since offshore banking emerged and grew in response to

restrictive
regulatory regimes, there are certain inherent risks that
can potentially
affect international financial stability. Three can be
readily identified.
First, the contagion effect with the increasing integration
of financial
markets worldwide and the explosive growth in cross-
border capital flows, problems in a bank in a OFC can be
transferred rapidly to other market jeopardising the
stability of those markets. Second, the lack of reliable
data on activities in OFCs may hinder effective
supervision. Third, competitive liberalisation may lead to
lowering regulatory standards in OFCs in order to attract
a higher share of global business.
Internationally regulators have been addressing the
systemic issues posed by offshore banking. The `Basle
Concordat’ of 1975 was implemented on best efforts
basis for almost two decades. The bankruptcy of Bank of
Credit and Commerce International (BCCI) in 1992
hastened the adoption of international supervisory
standards. BCCI was a landmark in the sense that
thereafter, it has become difficult for a bank incorporated
in a jurisdiction with limited domestic market to carry on
business in other countries. The standards adopted by
the Basle Committee for Banking Supervision are as
follows:

• All international banks should be supervised by a home

country
authority that capably performs consolidated
supervision;

• The creation of cross-border banking establishments

should receive the prior consent of both the host country
and home country authority;

• Home country authorities should possess the right to

gather
information from their cross-border banking
establishments;

• If the host country determines that any of these three

standards is not being met, it could impose restrictive
measures or prohibit the
establishment of banking offices.

This was followed by the Report of a Working Group of

the Basle
Committee which, inter alia, aims at improving access of
home and host regulators to data necessary for effective
consolidated supervision and ensuring all cross border
banking operations are subject to home and host
supervision. Subsequently there have been several
international and regional supervisory and regulatory
initiatives. These are aimed, inter alia, at curbing
involvement of OFCs in financial crime such as money
laundering, tax evasion, lax financial regulation including
inadequate supervision.
OFFSHORE BANKING IN THE INDIAN
CONTEXT

India has made a cautious beginning in offshore banking

by permitting for the first time Offshore Banking Units
(OBUs) to be set up in Special
Economic Zones (SEZs). The SEZs have been set up with
a view to
providing an internationally competitive and hassle free
environment for export production. SEZs will be specially
delineated duty free enclave and deemed to be a foreign
territory for the purpose of trade operations and duties /
tariffs so as to usher in export-led growth of the
economy. The OBUs virtually would be foreign branches
of Indian banks located in India. These OBUs, inter alia,
would be exempt from reserve requirements and provide
access to SEZ units and SEZ developers to international
finances at international rates. The Reserve Bank of India
(RBI) has permitted banks operating in India, whether
Indian, public/private sector or foreign, to set up OBUs in
the SEZs. The OBUs would carry out essentially
wholesale banking operations. The OBUs will be set up as
branches of the banks and therefore no separate
assigned capital will be required. All prudential norms
applicable to overseas branches of Indian banks would
apply to OBUs. Thus, the necessary risk management
practices that are in vogue internationally, would have to
be adopted by the OBUs. The OBUs will be regulated and
supervised by RBI. They will be required to scrupulously
follow “Know Your Customer” and other antimoney
laundering directives of RBI from time to time.
Unlike the OFCs in other developing countries which
conduct offshore
banking in a significant manner, the OBUs in India have a
limited
mandate. In fact, the approach appears to be facilitating
the SEZ policy
 rather than introducing offshore banking in India. This is
in line with the cautious policy stance adopted by the
regulators in regard to the opening up of the financial
sector. Notwithstanding the limited scope for offshore
banking in the light of the relevant regulations, many
Indian banks have set up OBUs in SEZs. Available
feedback is encouraging.

Over the years, India has tightened the legal framework

to combat money laundering and other cross border
financial crime. These include the Prevention of Money
Laundering Act 2002, passed keeping in view the FATF
deliberations and recommendation and international
initiatives at the United Nations and others. There are
other laws such as The Smugglers and Foreign Exchange
Manipulation (Forfeiture of Property) Act of 1976, The
Code of Criminal Procedures 1973, Prevention of
Corruption Act, 1988, The Narcotic drugs and
Psychotropic Substances Act of 1985.

BANKING SERVICES PROVIDED BY OFFSHORE

BANKS

1) Deposit account
A deposit account is a current account, savings account, or
other type of bank account, at a banking institution that allows
money to be deposited and withdrawn by the account holder.
These transactions are recorded on the bank's books, and the
resulting balance is recorded as a liability for the bank, and
represent the amount owed by the bank to the customer. Some
banks charge a fee for this service, while others may pay the
customer interest on the funds deposited.

Major types

• Checking accounts: A deposit account held at a bank or

other financial institution, for the purpose of securely and
quickly providing frequent access to funds on demand,
through a variety of different channels. Because money is
 available on demand these accounts are also referred to
as demand accounts or demand deposit accounts.

• Savings accounts: Accounts maintained by retail banks

that pay interest but can not be used directly as money
(for example, by writing a cheque). Although not as
convenient to use as checking accounts, these accounts
let customers keep liquid assets while still earning a
monetary return.

• Money market deposit account: A deposit account with a

relatively high rate of interest, and short notice (or no
notice) required for withdrawals. In the United States, it is
a style of instant access deposit subject to federal savings
account regulations, such as a monthly transaction limit.

• Time deposit: A money deposit at a banking institution

that cannot be withdrawn for a preset fixed 'term' or
period of time. When the term is over it can be withdrawn
or it can be rolled over for another term. Generally
speaking, the longer the term the better the yield on the
money.

2) Credit (finance)

• Credit is the provision of resources (such as granting a

loan) by one party to another party where that second
party does not reimburse the first party immediately,
thereby generating a debt, and instead arranges either to
repay or return those resources (or material(s) of equal
value) at a later date. It is any form of deferred payment.
[1]
The first party is called a creditor, also known as a
lender, while the second party is called a debtor, also
known as a borrower.

• Movements of financial capital are normally dependent on

either credit or equity transfers. Credit is in turn
dependent on the reputation or creditworthiness of the
entity which takes responsibility for the funds.

• Credit need not necessarily be based on formal monetary

systems. The credit concept can be applied in barter
 economies based on the direct exchange of goods and
services, and some would go so far as to suggest that the
true nature of money is best described as a
representation of the credit-debt relationships that exist
in society.

• Credit is denominated by a unit of account. Unlike money

(by a strict definition), credit itself cannot act as a unit of
account. However, many forms of credit can readily act
as a medium of exchange. As such, various forms of
credit are frequently referred to as money and are
included in estimates of the money supply.

• Credit is also traded in the market. The purest form is the

credit default swap market, which is essentially a traded
market in credit insurance. A credit default swap
represents the price at which two parties exchange this
risk – the protection "seller" takes the risk of default of
the credit in return for a payment, commonly denoted in
basis points of the notional amount to be referenced,
while the protection "buyer" pays this premium and in the
case of default of the underlying (a loan, bond or other
receivable), delivers this receivable to the protection
seller and receives from the seller the par amount (that
is, is made whole).

3) Electronic money

Electronic money (also known as e-money, electronic cash,

electronic currency, digital money, digital cash or digital
currency) refers to money or scrip which is exchanged only
electronically. Typically, this involves use of computer
networks, the internet and digital stored value systems.
Electronic Funds Transfer (EFT) and direct deposit are examples
of electronic money. Also, it is a collective term for financial
cryptography and technologies enabling it.

Wire Transfer
Wire transfer or credit transfer is a method of transferring
money from one person or institution (entity) to another. A wire
transfer can be made from one bank account to another bank
account or through a transfer of cash at a cash office.

Bank wire transfers are often the most expedient method for
transferring funds between bank accounts. A bank wire transfer
is effected as follows:

• The person wishing to do a transfer (or someone who they

have appointed and empowered financially to act on their
behalf) goes to the bank and gives the bank the order to
transfer a certain amount of money. IBAN and BIC code
are given as well so the bank knows where the money
needs to be sent to.

• The sending bank transmits a message, via a secure

system (such as SWIFT or Fedwire), to the receiving bank,
requesting that it effect payment according to the
instructions given.

• The message also includes settlement instructions. The

actual transfer is not instantaneous: funds may take
several hours or even days to move from the sender's
account to the receiver's account.

• Either the banks involved must hold a reciprocal account

with each other, or the payment must be sent to a bank
with such an account.

4) Foreign exchange market

The foreign exchange market (currency, forex, or FX) trades

currencies. It lets banks and other institutions easily buy and
sell currencies. [1]

The purpose of the foreign exchange market is to help

international trade and investment. A foreign exchange market
helps businesses convert one currency to another. For
example, it permits a U.S. business to import European goods
and pay Euros, even though the business's income is in U.S.
dollars.
In a typical foreign exchange transaction a party purchases a
quantity of one currency by paying a quantity of another
currency. The modern foreign exchange market started forming
during the 1970s when countries gradually switched to floating
exchange rates from the previous exchange rate regime.
The foreign exchange market is unique because of
• its trading volumes,
• the extreme liquidity of the market,
• its geographical dispersion,
• its long trading hours: 24 hours a day except on weekends
• the variety of factors that affect exchange rates.
• the low margins of profit compared with other markets of
fixed income (but profits can be high due to very large
trading volumes)
• the use of leverage

5) Letter of credit

• A standard, commercial letter of credit is a document

issued mostly by a financial institution, used primarily in
trade finance, which usually provides an irrevocable
payment undertaking.

• The LC can also be the source of payment for a

transaction, meaning that redeeming the letter of credit
will pay an exporter. Letters of credit are used primarily in
international trade transactions of significant value, for
deals between a supplier in one country and a customer in
another. They are also used in the land development
process to ensure that approved public facilities (streets,
sidewalks, stormwater ponds, etc.) will be built. The
parties to a letter of credit are usually a beneficiary who is
to receive the money, the issuing bank of whom the
applicant is a client, and the advising bank of whom the
beneficiary is a client. Almost all letters of credit are
irrevocable, i.e., cannot be amended or canceled without
prior agreement of the beneficiary, the issuing bank and
the confirming bank, if any. In executing a transaction,
letters of credit incorporate functions common to
Traveler's cheques. Typically, the documents a beneficiary
has to present in order to receive payment include a
commercial invoice, bill of lading, and documents proving
 the shipment was insured against loss or damage in
transit. However, the list and form of documents is open to
imagination and negotiation and might contain
requirements to present documents issued by a neutral
third party evidencing the quality of the goods shipped, or
their place of origin.

6) Investment management

• Investment management is the professional management

of various securities (shares, bonds etc.) and assets (e.g.,
real estate), to meet specified investment goals for the
benefit of the investors. Investors may be institutions
(insurance companies, pension funds, corporations etc.) or
private investors (both directly via investment contracts
and more commonly via collective investment schemes
e.g. mutual funds or Exchange Traded Funds) .

• The term asset management is often used to refer to the

investment management of collective investments, (not
necessarily) whilst the more generic fund management
may refer to all forms of institutional investment as well as
investment management for private investors. Investment
managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private
investors may often refer to their services as wealth
management or portfolio management often within the
context of so-called "private banking".

• The provision of 'investment management services'

includes elements of financial analysis, asset selection,
stock selection, plan implementation and ongoing
monitoring of investments. Investment management is a
large and important global industry in its own right
responsible for caretaking of trillions of dollars, euro,
pounds and yen. Coming under the remit of financial
services many of the world's largest companies are at
least in part investment managers and employ millions of
staff and create billions in revenue.
 • Fund manager (or investment adviser in the U.S.) refers to
both a firm that provides investment management
services and an individual who directs fund management
decisions.

7) Trustee

Trustee is a legal term that refers to a holder of property on

behalf of a beneficiary. A trust can be set up either to benefit
particular persons, or for any charitable purposes (but not
generally for non-charitable purposes): typical examples are a
will trust for the testator's children and family, a pension trust
(to confer benefits on employees and their families), and a
charitable trust. In all cases, the trustee may be a person or
company, whether or not they are a prospective beneficiary.

General duties of trustees

• Trustees have certain duties (some of which are fiduciary).
These include the duty to carry out the express terms of
the trust instrument, the duty to defend the trust, the duty
to prudently invest trust assets, the duty of impartiality
among the beneficiaries, the duty to account for their
actions and to keep them informed about the trust, the
duty of loyalty, the duty not to delegate, the duty not to
profit, the duty not to be in a conflict of interest position
and the duty to administer the trust in the best interest of
the beneficiaries. These duties may be expanded or
narrowed by the terms of the instrument creating the
trust, but in most instances cannot be eliminated
completely. Corporate trustees, typically trust
departments at large banks, often have very narrow
duties, limited to those explicitly defined in the trust
indenture.

• A trustee carries the fiduciary responsibility and liability to

use the trust assets according to the provisions of the
trust instrument (and often regardless of their own or the
beneficiaries' wishes). The trustee may find himself liable
to claimants, prospective beneficiaries, or third parties. In
the event that a trustee incurs a liability (for example, in
litigation, or for taxes, or under the terms of a lease) in
 excess of the trust property they hold, they may find
themselves personally liable for the excess.

• Trustees are generally held to a "prudent person"

standard in regard to meeting their fiduciary
responsibilities, though investment, legal, and other
professionals can be held to a higher standard
commensurate with their higher expertise. Trustees can
be paid for their time and trouble in performing their
duties only if the trust specifically provides for payment. It
is common for lawyers to draft will trusts so as to permit
such payment, and to take office accordingly: this may be
an unnecessary expense for small estates.

OFFSHORE DEVELOPMENT - A FAVOURITE

DESTINATION INDIA
Softwares are the ultimate need of the present business. Every
business organization needs softwares to carry out their
business processes successfully and efficiently. The
organization always wants a well worthy software in a very
optimum price, so they tend to look for a better option of
solutions and off course in a lesser price to maximize the
profits.

Due to the high market value of USD,UK-POUND and EURO the

development cost of the software are most likely to be very
high in these Developed Nations. Therefore, the business
organizations are looking for a lower cost options and the same
same quality of work as well. So, they are Outsourcing their
Business Processes to the developing nations like India. India is
considered as the best destination to outsource the IT related
work in the last 5 years from the USA, UK and other European
Countries. India is the leading beneficiary of the IT related
outsourcing, because of the following reasons -

• A large pool of Technically Qualified Professionals are

available in India with above average IQ, which makes it a
large force in the IT related works.

• The most important advantage is the cost factor - in India

a Professional Software Engineer or IT Professional is
 available to work for a monthly salary of less than USD500
equivalent which is not likely to be happened in US/UK
etc. The quality of services provided by them is at par the
International Standards and they are flexible to work in
any time zone of this world.

• The Geographical Distance is not a problem for the

Software or IT related services. It is possible to implement
the developed software online from any place connected
to Internet unless it is a very complex application and the
support needed for the maintenance can be provided from
any place in the world via Internet. So, the Geography has
now become History for the modern day technology.

THE FUTURE OF THE OFFSHORE INDUSTRY

Since the 911 incident, the international crackdown on money
laundering has created a divide in the offshore industry,
primarily between jurisdictions eager to comply with
international standards of anti-laundering regulation and those
that are less co-operative. The driving force behind those
initiatives, have been influential organizations such as the
Financial Action Task Force (FATF). The FATF was established
by the G-7 countries in 1989 and is an inter-governmental body
whose purpose is the development and promotion of policies,
both at national and international levels, to combat money
laundering and terrorist financing. As the FATF seek to apply
more international pressure, it will become increasingly difficult
for the less well-regulated regimes to do business.

Another major issue is the exchange of information, the profile

of which has been raised in the current climate. The recently
agreed EU Savings Tax Directive will change the face of the
offshore industry, although to what extent is somewhat harder
to predict. Previously no information was exchanged
automatically in Europe unless there were concerns about
illegal activities on a bank account. However, with the
introduction of the EU Tax Directive, customers living within the
EU are likely to be forced to engage with these issues, either by
having to pay a withholding tax or agreeing to exchange
information. The new directive will affect not only the EU
Member States but "all territories under their control",
Switzerland and the USA. The UK has recently announced that if
the Cayman Islands fail to voluntarily to comply with these new
rules, the United Kingdom will legislate on its behalf.

To this effect, Hong Kong will soon become a much more

important jurisdiction for tax planning as it is one of the only
respectable and well-regulated "offshore" banking centres
which will not be subject to the new EU directive on automatic
exchange of information and withholding tax.
Hong Kong should also be seriously considered for clients
wishing to register an offshore company, as it is one of the few
respectable locations in the world that tax on a “Territorial
Basis”. Consequently, this means that corporation tax is ONLY
charged on profits derived from a trade, profession or business
carried on in territory of Hong Kong. Income sourced elsewhere,
even if remitted to Hong Kong, is treated as tax free.

In general, the regulatory regime in respect of offshore banking

may be
expected to move forward on the basis of following four broad
principles:
• First, consolidated supervision of banking operations through
greater
co-operation between home country and host country
regulators;
• Second, higher transparency with reference to supervisory
systems and
programmes including dissemination of guidelines, publications
of
data of OFCs;
• Third, technical assistance to upgrade regulatory systems,
supervisory
policies and procedures through adoption of `best in class’
processes
and policies.
• Fourth, setting up systems for independent monitoring of
activities of
OFCs and complying with supervisory standards.

THE SCOPE FOR OFFSHORE BANKING IN INDIA

The favourable factors for an OFC in India are well known.
These include availability of skilled and quality banking, legal
professionals, vastly improved
telecommunication systems ensuring connectivity, the time
zone advantage. The benefit by way of fillip to local economy is
also well understood. However, clearly the regulatory regime
governing it would be critical. Accordingly the proponents of
offshore banking would need to address the key concerns of
the regulator. Apart from the apprehension of offshore banking
being used for dubious ends and in financial crime, the
regulator would also be concerned about the systemic risks to
the financial system. It would perhaps not be inappropriate to
evolve a regulatory framework with a road map for informed
public debate. Such a framework would need to address issues
such as

• First, should only offshore banking be permitted or other

activities within the umbrella of an OFC? Some of the other
activities may appear as meeting specific needs such as
insurance, fund management, trusts, etc.

• Second, for an OFC being set up should there be a single

regulator for
all the activities of the OFC or different regulators mirroring the
pattern in the corresponding onshore sub sectors? Also, should
there a single regulator for onshore and offshore banks?

• Third, should there licensing of firms in the OFC as it is

currently stipulated for OBUs in SEZs? Or should it be simple
incorporation as is the practice in most OFCs? Or should
licensing be restricted to financial intermediaries?

• Fourthly, granted that licensing would be required for OBUs,

who would be the eligible parties – not just banks operating in
India as per current policy, but also foreign banks, their
subsidiaries/ affiliates? What would be the permissible
activities? Here again the regulator would need to strike a
balance between the fundamental objective of ensuring
financial stability and the business growth compulsions of the
OBUs. For instance, if private banking were to be permitted, the
requirements of confidentiality would need to temper the anti-
money laundering safeguard measures. The RBI is today well
respected in the international community as a proactive
regulator in the adoption of international standards and the
maintenance of financial stability while at the same time, aiding
development and growth. A slew of policies adopted by RBI in
the last few years have been aimed at strengthening the
banking system. These include adoption of prudential norms,
consolidated supervision, connected lending, using technology
to upgrade settlement systems, payment systems, widening
and deepening the various segments of the financial markets,
the unrelenting emphasis on upgradation of risk management
systems of financial intermediaries. The gradualist approach to
financial liberalisation has paid rich dividend. The way forward
appears to involve at the first step, an assessment of the
robustness of the existing legislative and regulatory framework
may be done keeping in view the principles of cross border
cooperation, information sharing transparency, ongoing
monitoring. Perhaps certain overseas jurisdictions with whom
India can have reciprocal arrangements can be identified, that
will ensure proper due diligence while licensing OBUs and
subsequent supervision. In sum, the
question before us may not whether to have an OFC, but how
can we set
up a well regulated OFC that will be beneficial to the Indian
economy.

OFFSHORE INVESTING

Investing beyond the borders of your jurisdiction, which is also

referred to as offshore investing, has quite some advantages.
We will name a few here, together with some of the
disadvantages of investing abroad.
Offshore investing makes up more than half of the world’s
financial investments and is therefore quite significant.
Offshore investing has the following advantages:

• Confidentiality. Many wealthy persons investing in

stocks and companies are not happy with publicity with
regard to their moves. Other people might take advantage
of their exposed knowledge, thus making it less
interesting for the person in question to make a certain
investment. Confidentiality is not just important for
 unethical business, money laundering or drug trafficking.
It is simply an important aspect of life to many people.

• Asset protection. Offshore investment centres are

popular places to redistribute income. Assets can be
transferred to funds and family, without having to pay
extra taxes or follwing complicated legal rules in the home
country.

• Tax reduction. Many of the popular jurisdictions to invest

in offer significant tax reductions to foreign investors.
However, the US as well as the EU jurisdictions are well
aware of the tax reductions that are applicable to their
richer citizens, and are therefore trying their best to
prevent citizens from investing offshore, accusing them of
tax evasion and considering tax evasion illegal.

• Diversification of Investment. Offshore investment

centers in general offer much more than the national
banks and financial institutions. An offshore bank or
investment centre has access to the world market and
givs you the opportunity to trade in whichever currency
you prefer. Any stockmarket is open for yur investments.

There are some disadvantages to offshore investing:

• Cost. Investing offshore is pretty costly. Most banks

require a minimum investment of between $100.000 and
$1 million. In addition, there are rules in certain offshore
centres that require proof of residence in the jurisdiction,
which means that you would have to invest in property as
well. In other cases, setting up an offshore corporation
might be compulsory, leading to high investment fees for
just the initial stages of investing your money.

• Tightening Tax Laws. Many jurisdictions are now trying

to prevent their citizens from offshore investing. The main
reason is that they are losing on income, as taxes did not
apply to foreign investments. The Internal Revenue Code
(2004) has also made it much more difficult to profit from
tax reductions in offshore centers.
 • Safety. Like in any business, offshore investing carries a
certain risk. Be sure to do some research and to invest in
a reliable and well-recognized company. Hire a
professional to give you advice, but count on steep prices
for these people. Also include the costs of travelling for
you and your money and advisors, commission fees and
professional fees.

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 political turmoil who fear their assets may be frozen,
seized or disappear. However, developed countries with
regulated banking systems offer the same advantages in
terms of stability.

• Some offshore banks may operate with a lower cost base

and can provide higher interest rates than the legal rate in
the home country due to lower overheads and a lack of
government intervention. Advocates of offshore banking
often characterise government regulation as a form of tax
on domestic banks, reducing interest rates on deposits.

• Offshore finance is one of the few industries, along with

tourism, that geographically remote island nations can
competitively engage in. It can help developing countries
source investment and create growth in their economies,
and can help redistribute world finance from the
developed to the developing world.

• Interest is generally paid by offshore banks without tax

deducted. 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 from domestic banks such as anonymous
 bank accounts, higher or lower rate loans based on risk
and investment opportunities not available elsewhere.

• Offshore banking is often linked to other services, such as

offshore companies, trusts or foundations, which may
have specific tax advantages for some individuals.

• Many advocates of offshore banking also assert that the

creation of tax and banking competition is an advantage
of the industry, arguing with Charles Tiebout that tax
competition allows people to choose an appropriate
balance of services and taxes. Critics of the industry,
however, claim this competition as a disadvantage,
arguing that it encourages a “race to the bottom” in which
governments in developed countries are pressured to
deregulate their own banking systems in an attempt to
prevent the off shoring of capital.

DISADVANTAGES OF OFFSHORE BANKING

• The existence of offshore banking encourages tax

evasion, by providing tax evaders with an attractive place
to deposit their hidden income.

• Offshore jurisdictions are often remote, so physical access

and access to information can be difficult. Yet in a world
with global telecommunications this is rarely a problem.
Accounts can be set up online, by phone or by mail.

• Developing countries can suffer due to the speed at which

money can be transferred in and out of their economy as
"hot money". This "Hot money" is aided by offshore
accounts, and can increase problems in financial
disturbance.

• Offshore banking is usually more accessible to those on

higher incomes, because of the costs of establishing and
maintaining offshore accounts. The tax burden in
developed countries thus falls disproportionately on
middle-income groups. Historically, tax cuts have tended
 to result in a higher proportion of the tax take being paid
by high-income groups, as previously sheltered income is
brought back into the mainstream economy. The Laffer
curve demonstrates this tendency.

• Offshore bank accounts are less financially secure. In a

banking crisis which swept the world in 2008 the only
savers who lost money were those who had depositied
their funds in an offshore banking centre (the Isle of Man).

• Offshore banking has been associated in the past with the

underground economy and organized crime, through
money laundering. Following September 11, 2001,
offshore banks and tax havens, along with clearing
houses, have been accused of helping various organized
crime gangs, terrorist groups, and other state or non-state
actors. However, offshore banking is a legitimate financial
exercise undertaken by many expatriate and international
workers.

• Offshore bank accounts are sometimes touted as the

solution to every legal, financial and asset protection
strategy but this is often much more exaggerated than the
reality.

OFFSHORE FINANCIAL CENTRE

Many leading offshore financial centres are located in small

tropical Caribbean countries.

An offshore financial centre (or OFC), although not precisely

defined, is usually a low-tax, lightly regulated jurisdiction which
specializes in providing the corporate and commercial
infrastructure to facilitate the use of that jurisdiction for the
formation of offshore companies and for the investment of
offshore funds.
"The use of this term makes the important point that a
jurisdiction may provide specific facilities for offshore financial
centres without being in any general sense a tax haven."

Characteristics of an offshore financial centre:

• Jurisdictions that have relatively large numbers of financial

institutions engaged primarily in business with non-
residents;

• Financial systems with external assets and liabilities out of

proportion to domestic financial intermediation designed
to finance domestic economies

• Centers which provide some or all of the following

services: low or zero taxation; moderate or light financial
regulation; banking secrecy and anonymity.

Taxation

Although most offshore financial centres originally rose to

prominence by facilitating structures which helped to minimise
exposure to tax, tax avoidance has played a decreasing role in
the success of offshore financial centres in recent years.
Although most offshore financial centres still charge little or no
tax, the increasing sophistication of onshore tax codes has
meant that there is often little tax benefit relative to the cost of
moving a transaction structure offshore.

Critics of offshore financial centres argue that a lack of

transparency in offshore financial centres means that they are
vulnerable to being used in illegal tax evasion schemes. A
number of international organizations also suggest that
offshore financial centres 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.

Regulation

Most offshore financial centres now promote themselves on the

basis of "light but effective" regulation, and generally only seek
to regulate high-risk financial business, such as banking,
insurance and mutual funds.

Critics of offshore financial centres suggest that they are not

effectively regulated in all areas, and in particular that they are
vulnerable to being used by organised crime for money
laundering. However, partly in response to international
initiatives and partly in a defensive move to protect their
reputations, most offshore financial centres now apply fairly
rigorous anti-money laundering regulations to offshore
business. Some even argue that offshore jurisdictions are in
many cases better regulated than many onshore financial
centres. 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.

Confidentiality
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.

The criticisms are slightly difficult to assess. In most

jurisdictions banks 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.

However, there are certainly well documented cases of parties

using offshore structure to facilitate wrongdoing, and the strong
confidentiality laws in offshore jurisdictions have clearly played
a part in the selection of an offshore vehicle for those purposes.

Offshore structures

The bedrock of most offshore financial centres is the formation

of offshore structures. Offshore structures are characteristically
involve the formation of an:
• offshore company
• offshore partnership
 • offshore trust
• private foundation
Offshore structures are formed for a variety of reasons.

IS SETTING UP OFFSHORE ILLEGAL?

No, setting up offshore is not illegal. However, withholding
information about your offshore investments is illegal in some
countries. An offshore jurisdiction should be perceived as just
another foreign country, but with certain advantages. These
can take the form of banking secrecy laws, advantages in
forming companies for international trade through tax treaties,
no interest tax, no inheritance taxes, no capital gains tax, no
individual tax, and many others.

Depending on your personal needs or preferences, there will

normally be one or more offshore jurisdictions offering the
services you are looking for.

This is one of the most frequently asked questions concerning

the legality of offshore banking, and in short, Yes, offshore
banking is legal. Offshore banking is a benefit to all of society
and is indispensible.
Using offshore banking for tax evasion purposes is what is not
legal, and that is usually what is associated with offshore
banking in general and is the cause of the misconception.

Offshore banking is also associated with criminal activities such

as money laundering. Let's clarify the distinction of legal and
legal and examine why offshore banking will remain legal

While Offshore banking has often been associated with the

underground economy and organized crime, via tax evasion
and money laundering; however, legally, offshore banking does
not prevent assets from being subject to personal income tax
on interest. Except for certain persons who meet fairly complex
requirements, the personal income tax of many 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—which may or may not be numbered
bank accounts—they may have. Although, and have no legal
obligation to do so as they are protected by bank secrecy, this
does not make the non-declaration of the income by the tax-
payer or the evasion of the tax on that income legal. Following
September 11, 2001, there have been many calls for more
regulation on international finance, in particular concerning
offshore banks, tax havens, and clearing houses such as
Clearstream, based in Luxembourg, being possible crossroads
for major illegal money flows.

Defenders of offshore banking have criticized these attempts at

regulation. They claim the process is prompted, not by security
and financial concerns, but by the desire of domestic banks and
tax agencies to access the money held in offshore accounts.
They cite the fact that offshore banking offers a competitive
threat to the banking and taxation systems in developed
countries, suggesting that Organization for Economic Co-
operation and Development (OECD) countries are trying to
stamp out competition.

Is it legal to set up an offshore bank account so that a

court order cannot take money from your accounts?

It is illegal to "conceal" assets offshore form the IRS, and/or to

deny the possession of such assets in a written or oral
statement when there is pending action or a judgment in place
for creditor debt, alimony, restitution for personal injury suit
and so forth. The reliability of offshore asset depositories are
dicey at best and may become a nightmare rather than a
haven for the depositer. If the action is in anyway connected
with bankruptcy or any federal litigation such as the IRS, it is
considered a federal felony and carries a mandatory prison
sentence of 5-years for each count of which the person is found
guilty.

As previously mentioned, offshore banking is often associated

with illegal activities. One of these illegal activities is tax
evasion. If you set up an offshore bank account, you will still
need to report your savings. Not reporting all of your money in
an offshore account can lead to you be brought up on tax
evasion charges. It is important to note that you have the
ability to prevent this from happening. As long as you choose to
use your offshore bank account legally, there shouldn’t be any
disadvantages to having one If you are planning on using your
offshore account to avoid a lawsuit or to evade taxes, you may
want to reexamine your decision. As previously mentioned,
there are serious consequences for doing this. As long as you
plan on using your offshore account in a legal way, you can
benefit immensely from offshore banking.

Offshore Bank Accounts

In the current economic climate, many persons are turning to

offshore banking as an alternative method of saving and
investing their hard earned money.

Why setup an offshore bank account?

The main reason people setup offshore bank account is to save

on taxes. Another reason is to keep money away from creditors
reach.
While it is not illegal in most countries to open an offshore bank
account, if you are doing so for illegal reasons then be prepared
not to be protected from the long arm of the law.

One major advantage of banking in the US is the fact that the

government insures the money. This generally is not the case
with an offshore bank account though. So, in the event of a
catastrophe you may wiped out financially in one fell swoop!

The most famous of countries to have an offshore bank account

in is: Switzerland.

Offshore Bank Account Features

• True offshore banking
• No bank references for the account signatory
• No reporting requirements
• No taxation
• 24-hour online internet banking from any PC
• Multi-currency accounts
• Low monthly account management charges
• International ATM debit and credit card facilities
• ATM anonymous cash card (aka debit card)
• Gold and business credit cards

Offshore Banking: What You Need to Know Before

Opening an Account

Offshore banking, we have all heard about it before.

Unfortunately, many are misinformed when it comes to
offshore banking. We have all heard news reports of offshore
accounts being used to front illegal activities or to avoid taxes.
In fact, we have also seen it in the movies, being used a similar
way. This has led many individuals to believe that offshore
banking is illegal. Despite what you may believe, offshore
banking is legal. However, how you use it may be considered
illegal.Offshore banking is done through a bank that is known
as an offshore bank.

Offshore banks are banks that are located in another country,

other than the country that you reside in. For instance, if you
live in the Untied States an offshore bank would not be located
in the United States. Many popular offshore banks are located
in Switzerland. There are a number of advantages to offshore
banking, but there are disadvantages as well.

The biggest advantage of offshore banking is that you are

offered privacy and stability. There are many individuals who
place their money in offshore accounts for security purposes.
When your money is in an offshore account, you can access it,
but many choose not to. It is easier to access and spend your
money if it is at a local bank. That is why a large number of
individuals use offshore banking to help them increase their
savings.

Another advantage of offshore banking is that just about

anyone can open an account. The most common users of
offshore banking are corporations, the self-employed, or
individuals who wealthy. Offshore banks may have restrictions
on the amount of money that is needed to open an account,
but it is not always a large amount. Whether you are a small
business owner, wealthy, or you consider yourself middle class,
you should still be able to open up an offshore bank account.

STATISTICS CONCERNING OFFSHORE BANKING

Offshore banking is an important part of the international

financial system. Experts believe that as much as half the
world's capital flows through offshore centers. Tax havens have
1.2% of the world's population and hold 26% of the world's
wealth, including 31% of the net profits of United States
multinationals. According to Merrill Lynch and Gemini
Consulting's “World Wealth Report” for 2000, one third of the
wealth of the world's “high net-worth individuals”—nearly $6
trillion out of $17.5 trillion—may now be held offshore. Some $3
trillion is in deposits in tax haven banks and the rest is in
securities held by international business companies (IBCs) and
trusts.

The IMF has said that between $600 billion and $1.5 trillion of
illicit money is laundered annually, equal to 2% to 5% of global
economic output. Today, offshore is where most of the world's
drug money is allegedly laundered, estimated at up to $500
billion a year, more than the total income of the world's poorest
20%. Add the proceeds of tax evasion and the figure skyrockets
to $1 trillion. Another few hundred billion come from fraud and
corruption. "These offshore centers awash in money are the
hub of a colossal, underground network of crime, fraud, and
corruption" commented Lucy Komisar quoting these statistics.[1]
Among offshore banks, Swiss banks hold an estimated 35% of
the world's private and institutional funds (or 3 trillion Swiss
francs), and the Cayman Islands (1.9 trillion US dollars in
deposits) are the fifth largest banking centre globally in terms
of deposits.

Each year, an increasing number of investors around the world

are attracted by international financial centers to establish
business in a form of an offshore company, offshore trust,
offshore mutual fund, offshore insurance company, open an
offshore bank account or even start their own offshore bank. It
is estimated, that around 60% of the world's wealth is held on
offshore accounts by using offshore companies or offshore
trusts and that around 50% of the world's trade in goods are
transacted through various offshore jurisdictions.

As the years have progressed, so has the application of

offshore services along with the number of offshore
jurisdictions offering such benefits. Offshore companies or
offshore trusts are not the illicit hideaways from tax authorities
as sometimes presented. When setup and managed correctly,
they can in fact provide enormous tax savings and asset
protection in a perfectly legal manner. In simple terms, an
international business or offshore company is usually a normal
limited liability company, which is used as a tool by
corporations and individuals throughout the world to legally
direct profits out of high tax countries into offshore jurisdictions
or so called international offshore centers, thus taking
advantage of the low or zero taxation and various double tax
treaties.

CONCLUSION

Opening an offshore bank account could be the best thing you

ever do. However, many people find

• the process daunting - not least because they need to

overcome the irrational fear that somehow

• their money won't be as safe as banking at home.

Of course the truth turns out to be the opposite. If you bank

with a reputable offshore bank, then yourmoney is much safer
than before!

I trust the information in this report has given you something to

think about, and to help you make a good decision regarding
opening your own offshore bank account. Certainly that is my
intention.

Once you step into offshore waters you'll find there is plenty
more to whet your appetite - including
• access to previously off-limits investment opportunities,
more flexible business banking

• arrangements, more tax-efficient ways of conducting your

financial affairs, and lots more.