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Offshore banking services (Offshore banking services (Current accounts,…
Offshore banking services
Offshore banking is simply having a bank account outside of your country of residence
It is very common for banks in offshore centres to be locally incorporated subsidies of large onshore banking groups that wish to provide the offshore banking facility to existing clients. Others are branches of mainland banks
The banking industry in offshore centres is complementary to other parts of the international finance sector. It supports the trust and fiduciary sector by providing a range of services, including the taking of deposits, to the structures established within the offshore centre. The banking industry also supports the collective investment fund sector by providing overdraft and liquidity facilities to fund.
This enables them to finance the timing differences between the purchase and sale of securities and the follows of subscriptions and redemptions by investors and by taking deposits from the invested balances of fund administration companies.
Insurance sectors may be supported by the provision of standby letters of credit to captive insurance companies
Banks accept deposits from customers, often on a short term basis and lend to other customers, sometimes for longer periods eg as would be required with a mortgage
Offshore centres are sometimes in the position where the level of deposits they receive outweighs the borrowing needs of local customers.The banks therefore lend the majority of their deposits to parent banks or group companies. Banks in offshore centres are therefore valuable suppliers of funding and liquidity to mainland banks
Reasons for using an offshore bank account
Interest is usually paid gross (ie it is unlikely that any tax will be deducted at source on interest earned
Depending on where the client is resident, offshore income may not be subject to tax in their country of residence is the income is not remitted back to that country
Offshore centres often benefit from statutory secrecy or confidentiality provisions that enhance the normal common law principles that apply to the customer / banker relationship
In some offshore centres, less stringent regulation and supervision could reduce the bank's costs and enable a higher rate of interest to be paid to customer
A bank may wish to offer services from an offshore location
The tax liability of profits arising may be low
There is less stringent regulation and supervision
Costs for premisses and staff may be lower
It wishes to complement the services that it can provide to its client base (ie to provide offshore products and services)
Considerations when choosing to use a bank located in an offshore centre
The quality of the banks operating within the offshore centre
The regulatory requirements and the effectiveness of regulatory oversight
The absence of bank failures
The availability of a depositor compensation scheme
Depositor compensation schemes
It has been uncommon for offshore centres to have depositor compensation schemes
Reports of bank failures in some jurisdictions during the global financial crisis has caused offshore centres to introduce depositor compensation schemes to give comfort to offshore investors
Jersey introduced a depositor compensation scheme in November 2009 protecting deposits up to £50,000
Guernsey introduced its depositor compensation scheme in November 2008 protecting deposits up to £50,000
Malta has a scheme that will protect up to €100,000
It is common for the benefits of such schemes to be available to private individuals and charities only
Isle of man protects non-individuals up to £20,00
The majority of the cost of the compensation schemes is usually borne by the banking industry
Offshore banking services
Current accounts
Debit cards, credit cards and cheque books
Deposit and savings accounts
Foreign exchange
Forward exchange contracts
Lending facilities
Mortgage facilities
Overdraft facilities
Payment facilities including online and telephone banking
Foreign exchange markets
Foreign exchange is a service often offered by banks both onshore and offshore
Banks buy currency from and sell foreign currency to customers on the foreign exchange market
Sometimes referred to as the forex market, FX marker or currency market
A decentralised global marketplace
Some banks offer foreign exchange services by telephone or online banking. The bank may impose transaction limited or require notice of larger foreign exchange transactions or for transactions involving certain currencies
Foreign exchange services offered by banks range from simply information a customer who has a foreign currency invoice to pay what the cost will be in the local currency to more complex transactions such as forward exchange contract or putting in place a portfolio of hedges to manage the foreign currency risk that a business may face
Banks make a profit by charging a commission on each FX deal. There is also a spread between the buying rate (the rate at which the bank will buy the currency from the customer) and the selling rate (the rate at which the bank will sell the customer the foreign currency)
A sport transaction is a foreign exchange transaction that usually settles within two days
Forward exchange contracts
An FEC is a binding contract to buy or sell a given quantity of foreign currency at a future date at a rate of exchange determined when the FEC is made
Customers may wish to enter into an FEC with a view to using the funds in the future to fulfil a business transaction on a named date
The exact terms of the contract may differ between banks (eg some may offer flexibility and allow a period of time between two dates to be specified for settlement or the contract
With an FEC, the customer pays a foreign exchange rate based on the spot rate on the day of the deal. The rate of exchange is guaranteed enabling a business to determine in advance what its cost will be (or how much income will be received)
FECs offer protection against adverse exchange rate movements in an easy and low cost way
FECs also assist a business to budget and manage future sales and invoicing
The risk with an FEC is that if the exchange rate moves against the customer, they are still legally bound to settle at the exchange rate specified in the contract
Collapse of Landsbanki Guernsey Limited 2008