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Chapter 4: Offshore Financial Centres (Location are considered major as…
Chapter 4: Offshore Financial Centres
Types of Institutions
International Investment Bank :red_flag:
:fire: Deposits not be subjected to reserve requirements
:fire: Free of interest and exchange controls
:fire: Bank transactions treated under a favourable fiscal regime
Offshore Banks :red_flag:
:fire: A lesser form of regulatory scrutiny, and information disclosure requirements may not be rigorously applied
Offshore Corporations / International Business Corporation (IBCs) :red_flag:
:fire: IBCs are limited liability vehicles registered in a OFC
:fire: May be used to own and operate businesses
:fire: Can be used to create complex financial structures
:fire: May be set up with one director only
:fire: IBCs are popular vehicle for managing investment funds
Insurance Companies :red_flag:
:fire: Was established to manage risk and minimize taxes
:fire: To retain certain risks underwritten by the parent and reduce overall reserve and capital requirements
:fire:Onshore reinsurance company incorporates a subsidiary in an OFC to reinsure catastrophic risks
Introduction :red_flag:
:star: OFCs (Zorome,2007) defined, OFCs are jurisdictions that provide financial services to non-residents on a scale that is excessive compared to the size and the financing of their domestic economies
:star: Also called as International Financial Centre (IFC)
:star: Can be defined as any finacial centre where offshore activity takes place
:star: More practical definition - a centre where the bulk of financial sector activity is offshore on both sides of the balance sheet
:star: OFCs - services offered are mainly for non-resident clients
:star: Not all services offered such as fund management, insurance, brokering and others can be found in onshore banking
:star: All of OFCs have a number of key consideration including:
:check: Services are mainly for non-resident clients
:check: There are no or limited FOREX controls
:check: Low or no taxes
:check: Geographical proximity to a major economy
:check: There are good communications and connectivity/networking
:check: A set of practice/procedure that supports bank secrecy
:check: A high degree of political stability/personal safety
:star: OFCs offer significant tax and regulatory advantages as well as providing clients from other countries with international banking srvices
:star: The reasons someone associates with OFCs:
:check: Illegitimate purposes:
:forbidden: Launder money from criminal activities
:forbidden: evade taxes
:check: Legitimate purposes:
:check: : Privacy for personal/family business or political reasons
:check: Keep funds in a secure bank in a secure country
:check: To keep fund separate from daily use in case of bankruptcy or divorce
:star: Common reasons countries seek to develop themselves as OFCs:
:check: May possess natural features that make it an ideal OFCs:
:!: political stability
:!: well educated manpower
:!: close geographical proximity to wealth countries
:!: some natural amenities that could attract a tourist attraction
:!: a political willingness to pass bank secrecy laws and prepare to invest in policing and security infrastructure
:check: May have little land base and few opportunities to develop othe type economic activities because of:
:!: limited energy supplies at high cost
:!: far from resources including raw material and energy sources
:!: limited raw materials and other natural resources
Function of Offshore Financial Centres
:explode: Plays a key role in the international banking and financial system
:explode: Improve the availability of credit and encouraging competition in domestic banking and financial system
:explode: Help to boost the investment in the major economies, which in turn supports job creation, inflation reduction and economic growth
:explode: OFCs are functioned as:
:check: Jurisdictions provider that has large numbers of financial institutions engaged primarily in business with non-residents
:check: Entities to manage financial systems with external assets and liabilities
:check: International centres which provide some or all of the following services i.e. low or zero taxation, moderate or light financial regulation, banking secrecy and anonymity
:check: Maintain extensive legislation, and to take measure to reduce criminally related activities
:check: Must have / maintain the necessary structure for providing the varied services required by a global clientele that ranges from different backgrounds
Facilities Offered by Offshore
A. OFFSHORE SAVING ACCOUNT
:star: It requires millions to open a saving account at offshore banking.
:star: For making a withdrawal, for example, fee can be high as USD25 a time, so depositing a small balance in an offshore savings account may not make financial sense.
:star: It is a common misconception
C. FOREX SERVICES
:lock: Converting money for a property.
Ex: House purchase in a foreign currency.
:lock: Making regular payments in a foreign currency .
Ex: paying monthly school fees in a different currency to which a person receives his/her income
:lock: Moving to a foreign country with the need to exchange money.
:lock: Making a foreign currency payment at specisic time in the future.
:lock: Managing the client's overall foreign currency exposure.
:lock: Forward contracts and spot transactions.
:lock: Managing currency risk, Ex: liquidity, fluctuation, etc.
D. OFFSHORE INVESTMENTS
:black_flag: Attractions of the OFCs' investment services:
:no_entry: no capital tax
:no_entry: no withholding tax on dividends or interest
:no_entry: no tax transfers
:no_entry: no corporation tax
:no_entry: no capital gains tax
:no_entry: no exchange controls
:no_entry: light regulations and supervisions
B. OFFSHORE CURRENT ACCOUNT
:fire: eg: who are travelling to the UK can open their current account in Sterling before arrival, can get their salary paid in, pay UK bills, set up standing orders and make payments.
:fire: Ease of movement between accounts ( can protect their money against currency fluctuation
:fire: Depositors can use debit card to withdraw money in either Dollar, Euro & Sterling currencies for free
:fire: This offshore current account currency offered are normally in foreign/ major currencies
Location are considered major as the destination in OFCs
bermuda
• it is a market leader for captive insurance
• it also has a strong presence in offshore funds and aircraft registration
1.bahamas
• The Bahamas used to be the leading force in the offshore financial world
• It remains as one of the top ten OFCs in the world due to many reasons such as:
tradition of confidentiality
privacy
anonymity
no direct taxation
excellent communication text
British Virgin Islands
• it has the largest number of offshore companies in the world
Cayman Islands
• it has largest value in term of assets
• it also the strongest presence in the US security market
5.Jersey
• it is the most international of the British Crown dependencies
• it has strong banking & fund management sectors
• has high concentration of professional advisers such as lawyer and fund managers
Luxembourg
• also, a leading OFC and strategically located between Germany, France and Belgium
• it is the market leader in Undertaking for Collective Investment in Transferable Securities (UCITS)
• the largest offshore Eurobond issuer
• considering Luxembourg for offshore banking are:
political stability
sound national
environment
competitive fiscal
framework
7.Singapore
• is known as a centre for wealth management
• ranked fourth in the world in the 2009 Global Financial Centres Index (GFCI)
• it also a hub for hedge funds & its private banking industry is growing at a rate of 30% annually
• the country is located in a time zone that allows it to enjoy overlapping business hour
• it has attracted many MNCs to do business because of their reputation for law & order, cleanliness and efficiency
Hong Kong
• have advantages such as extensive international links, political stability, state of art communication and English-speaking labor pools and well-developed service infrasstruture
• It evolved as a major hub for the arrangement, syndication and management of euro credits to Asia-Pacific’s borrowers.
Mauritius
• It is used for both inward and outward investment platform for developing and developed countries
• It has the effective commercial and legal infrastructure required to support the development of a global network
• The island nation has a number of double taxation agreement and is listed on the OECD list of location that have implemented internationally agreed tax and transparency standards
Panama
• It is a significant international maritime centre
• Panama is the second only to the British Virgin Islands in term of the number of offshore companies located
New Zealand
• It is considered as the most remote jurisdiction
• it is well positioned for the Asian market, but retains close ties to European countries
Switzerland
• it remains one of the world’s most respected OFCs
• it provides a highly sophisticated range of services for its selected clientele
• it considered as a tax haven location due to its general low rate of taxation