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EXECUTIVE SUMMARY
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 accountsthey may have.
Although offshore banks may decide not to report income to other tax
authorities, 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.
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.
OFFSHORE BANKING
OFFSHORE BANKING
Offshore simply means anything outside of a countrys jurisdiction. 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.
For a depositor offshore banking is associated with the services of a bank
from the country other than his country of residence. If you have invested
or deposited funds to a bank outside the country (referred as Offshore
Bank), where you live, you are engaged in offshore banking. On the other
hand, any bank in your country of residence is often referred as a domestic
bank.
There are two main myths about offshore banking. First of all, the public
mistakenly links offshore banking to criminal activities, terrorism-financing
and money laundering. Secondly, people think that offshore banking
services are only for high-income class, since ordinary people cannot afford
them.
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
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required to declare on penalty of perjury, any offshore bank accounts
which may or may not be numbered bank accountsthey may have.
Although offshore banks may decide not to report income to other tax
authorities, 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 Clear stream, based in Luxembourg , being
possible crossroads for major illegal money flows.Defenders of offshore
banking have criticised 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 Organisation for Economic Co-operation and
Development (OECD) countries are trying to stamp out competition.
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.
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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
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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.
Before the EU introduced the European Savings Directive (ESD) in July
2005, an offshore bank was simply a bank located outside your country of
residence, usually in a low tax jurisdiction. The appeal of offshore banking
is that it offers the potential for tax efficiency, the convenience of easy
international access and a safe haven for your money.
The History of Offshore Banking
In 1970s the UK and Europe levied the highest, most punitive taxes
in the developed world, with high earners in the UK having their earnings
taxed at a rate of 85 per cent, giving rise to the phrase tax exile, where
the likes of the Rolling Stones, Michael Caine, Pink Floyd, Sean Connery
moved abroad for years at a time to avoid paying high rates of income tax.
And then the government and financial institutions in the Channel
Islands predominantly Jersey and Guernsey realized that, rather than a
person leave the UK to save tax, their assets could be moved offshore to
Channel Island banks and tax could be saved that way. The Channel
Islands fall into two separate self-governing bailiwicks Jersey and
Guernsey, both of whom are British Crown Dependencies, but neither is
part of the United Kingdom. The Channel Islands assisted dejected
investors with two key offerings: confidentiality and lower taxation. The
offshore banking industry was born. The Channel Islands bankers
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persuaded their clients that any deposits placed into offshore banks would
be anonymous, free from the scrutiny plaguing the mainland and the UK,
and would be liable for minimal taxation.
As word spread across Europe and indeed throughout the world,
other small island nations and jurisdictions seized upon the opportunity and
began strengthening regulations regarding banking practices and client
confidentiality in the hopes of attracting foreign depositors; thus becoming
offshore banking jurisdictions and offshore financial centers.
This became particularly popular in the small island nations of the
Caribbean, which many tend to associate with offshore banking
jurisdictions. Investors and depositors seeking politically and economically
stable jurisdictions found their way to these offshore financial centers and
this practice continues today.
Rightly or wrongly, offshore banking has become synonymous with
"tax haven", jurisdictions characterized by low - or zero - taxation on
interest, dividends, royalties and foreign derived income, as well as having
some degree of banking confidentiality. Over time this term has evolved to
include other popular banking jurisdictions such as Switzerland, Austria,
Lichtenstein, Luxembourg and more recently the United Arab Emirates
(UAE), Singapore and Hong Kong.
These gained popularity for the same reasons the small island
offshore financial centers did: they implemented sound banking practices
codified in law and regulations guaranteeing confidentiality, low taxation
and security. Although an abridged and streamlined version of history,
these are, fundamentally, the roots of the modern offshore banking
industry.
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ADVANTAGES OF OFFSHORE BANKING
Offshore banks provide access to politically and economically stable
jurisdictions. This may be an advantage for those residents 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.
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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.
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telecommunications this is rarely a problem. Accounts can be set up
online, by phone or by mail.
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Bahamas
Barbados
Belize
Bermuda
British Virgin Islands
Cayman Islands
Channel Islands (Jersey and Guernsey)
Cook Islands
Cyprus
Dominica
Gibraltar is no more an offshore centre since 30th June 2006. No new
Exempt Company certificates are being issued from that date.
o Ghana
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o
o
o
o
o
o
o
o
o
o
o
o
o
o
Hong Kong
Isle of Man
Labuan, Malaysia
Liechtenstein
Luxembourg
Malta
Macau
Montserrat
Nauru
Panama
Saint Kitts and Nevis
Seychelles
Switzerland
Turks and Caicos Islands
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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
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offshore trust
private foundation
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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
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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.
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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.
2.4.2 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.
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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.
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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.
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
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the banks with an offshore unit at SEEPZ.
Offshore banking: A lucrative proposition
ONE of the significant features of the Exim Policy is the proposal to permit
offshore banking units (or overseas banking units) in Special Economic Zones
(SEZs). Offshore banking refers to the international banking business involving
non-resident foreign currency-denominated assets and liabilities. It refers to the
banking operations that cover only non-residents, and does not include
domestic banking. An offshore banking centre is a place where deliberate
attempt is made to attract international banking by offering many concessions
in the form of taxes and levies imposed at lower rates.
A more important relaxation is the exemption of the offshore banks from
restrictions on operations. Offshore banking units in these centres can carry on
their activities with international enterprises or investors without conflicting with
the domestic fiscal and monetary policy.
Offshore banking centres offer the following benefits:
Exemption from minimum reserve requirements.
Freedom from control on interest rates.
Low or non-existent taxes and levies: Entry is relatively easy, especially
for large international banks, in contrast to the situation in neighbouring
countries that may strictly limit or prohibit the entry of foreign banks.
Licence fees are generally low: Close proximity to the important loan
outlets or deposit sources; for instance, Bahrain is an offshore base for
petro-dollars.
Offshore banking is an extension of the euro-currency concept to the
East, which provides a link between euro-currency markets and the final
borrowers. They provide essential time zone links that are truly worldwide, and ensure that the market operates 24 hours a day. While
offshore banking is an integral part of the euro-market, what
distinguishes it from the mainstream euro market is that it was specially
set up by host countries to promote international banking.
Offshore banking units are branches of international banks or other
subsidiaries or affiliates. They do not carry retail business, but generally
provide wholesale banking services project financing, syndicated loans,
issue of short-term and medium term instruments, such as negotiable
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certificates of deposits and capital notes as well as merchant banking
activities in foreign currency denominated bonds and equity shares.
The deals are mostly between banks or with large borrowers or multinational
corporations. MNCs prefer transacting in offshore financial centres because of
certain apparent advantages: Avoidance of high tax incidence; freedom from
exchange control; maintenance of secrecy of deals due to non-interference
from government and regulatory authorities; and deferring tax by floating
subsidiary units in such centres and delaying their remittance of profits to the
parent company, when it would be taxed.
Participation of the Indian banks
Few Indian banks, such as State Bank of India, Indian Overseas Bank, Bank of
India and Bank of Baroda, have set up offshore banking units for deposit taking
and final lending at Bahrain, Hong Kong, Colombo, Cayman Islands, and so
on. Indian Bank, Bank of Baroda and Union Bank of India jointly floated a
deposit taking company, IBU International Finance, in Hong Kong for both
offshore and onshore banking.
The benefits for the Indian banks from these ventures are:
Sizeable profits as these ventures involve relatively low operating
costs.
With multi-currency deposit bases, the banks would be able to serve
better the needs of their customers who have set up joint ventures
abroad in the form of foreign currency finance.
The banks would strengthen the country's balance of payments through
repatriation of profits from the venture.
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providing a vital time link for international money market dealers.
In an era where many Indian corporations are functioning abroad, and many
corporations are granted permission to seek overseas finance, establishing an
offshore unit will help tap the resources:
Exporters would benefit in terms of finer margins on loans and better foreign
exchange rates available via an offshore banking unit.
The benefits of multi-currency operations which, to an extent, minimise
currency fluctuation risk, will be an added advantage.
Salaries paid by offshore banks and local expenditure incurred by them
contribute to the economy's welfare. For smaller countries, the benefit would
be greater. For a larger country such as India, however, this may not form a
significant portion of the total income.
India may earn revenue in the form of licence fees, profit taxes imposed on
the banks operating in the area. It may also get the benefit of banks' funds in
the form of capital and liquidity requirements.
The country can gain improved access to the international capital markets.
he domestic financial system may become more efficient through increased
competition and exposure of the domestic banks to the practices of offshore
banks.
The offshore banking centres will provide opportunities to train the local staff
which will, in turn, contribute to faster economic growth.
The offshore banking units would help channelize non-resident Indian
investments.
Setting up offshore banking centres would trigger enforced development of
more advanced communication facilities a must for their functioning.
But establishing offshore centres also comes with a price:
The supervision and regulation of offshore banks may involve substantial
costs.
Encouraging offshore banking may result in the diminution in autonomy of
domestic monetary policy, since it is difficult to draw a line always between the
offshore and onshore operations, particularly in the absence of exchange
control.
banking provides scope for tax evasion by residents. For instance,
in Hong Kong, it was found that residents place deposits with offshore banks
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and take loans of the same amount. The interest on loan would be a deductible
expenditure for taxation, while the income from interest on deposits is not
taxed.
Offshore banks may prove to be harmful competitors to the local banks and
may inhibit their growth.
For long, Mumbai was considered suitable for establishing offshore banking
here. The city has all the requirements goods infrastructure in the form of
telecommunications and services, abundant and well-trained manpower and
presence of many international banks, both Indian and foreign, already
engaged in international banking.
The Sodhani Committee on Foreign Exchange Reforms (1996) has
recommended allowing Indian banks and financial As against the general
recommendation of permitting offshore banking units only at Mumbai, the
present proposal is to permit them at Special Economic Zones. This is a wise
move since both offshore banking centres and SEZs have many things in
common as regards administration and purpose. The establishment of offshore
centres in India was foreseen when the Foreign Exchange Regulation Act
(FERA) was replaced by the Foreign Exchange Management Act, 1999
(FEMA). Article 10 of FEMA included offshore banking units as one of the
authorities to whom the RBI could delegate powers for dealing in foreign
exchange. The question is: Will these offshore banking units fulfil Mr Maran's
cherished goals? The RBI is expected to bring out regulations regarding setting
up these units in India. A lot depends on how far these regulations are liberal
and pragmatic.
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TRENDS IN REGULATION OF OFFSHORE BANKING
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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.
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
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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 antimony 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
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Criminal Procedures 1973, Prevention of Corruption Act, 1988, The Narcotic
drugs and Psychotropic Substances Act of 1985.
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
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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.
2) Credit (finance)
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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 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
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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:
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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.
The foreign exchange market (currency, forex, or FX) trades currencies. It lets
banks and other institutions easily buy and sell currencies.
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
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(but profits can be high due to very large trading volumes)
The use of leverage
5) Letter of credit
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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
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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
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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.
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OFFSHORE DEVELOPMENT - A FAVOURITE DESTINATION INDIA
Soft wares 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 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 -
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this world.
Since the 9/11 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 intergovernmental 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
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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 cooperation between home country and host country regulators;
Second, higher transparency with reference to supervisory systems and
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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.
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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 centres.
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Recommendations of the Expert Group on Foreign Exchange Markets in
India (1995) in Regard to Setting Up of Offshore Banking Units (OBUs)
Before concluding we may note the recommendations of the Expert Group in
regard to the setting up of offshore banking units. The group has
recommended that Offshore Banking Units (OBUs) may be allowed to be set
up by scheduled commercial banks operating in India as part of and within the
existing bank titled domestic OBUs. Foreign banks not operating in India
would not be permitted to operate only as domestic OBU. OBU is expected to
maintain its own separate accounting which will be audited separately and
strictly.
Sources of Funds
The Group recommended that OBUs may obtain fund from: (i) acceptance of
deposits or borrowings in foreign currency from non-residents including foreign
entities and other foreign branches of Indian banks and issuance of foreign
currency certificates of deposits, the Reserve Bank of India (RBI) would lay
down account opening criteria; (ii) acceptance of funds as deposits/borrowings
from only those residents who are eligible to hold foreign currency accounts
(although these funds cannot strictly be deemed as offshore funds, the
objective of permitting this to be held in offshore books, is to increase the
source of foreign currency funds which are free of reserve requirements so that
liquidity and pricing of these is more in line with international rates), which will
greatly benefit exporters; and (iii) taking deposits from other domestic OBU in
India.
Development of Funds
The Group has suggested that OBUs may deploy funds by way of:
(i)
(ii)
(iii)
(iv)
Loans
to
domestic
entities
in
foreign
currency for
project/
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infrastructure finance under the RBIs general or specific permissions.
Other Business
According to the Group domestic OBUs should also be permitted to: (i)
undertake foreign exchange dealings with non-residents, other domestic
OBUs and authorised dealers not involving local currency; (ii) issue
guarantees and do other business not involving domestic currency/local
exposure; (iii) loan syndication and management in advising, negotiating
and confirming LCs in foreign currencies where both the parties are nonresidents; and (v) financial advisory services.
Capital Adequacy and Supervision
The Group has suggested that the OBU will be subject to strict regulation by
RBI including capital adequacy, exposure norms, accounting standards and
gap limits. Besides prescribing eligibility criteria for allowing setting up of such
units, the RBI may also, according to the Expert Group, specify a limit on the
total assets/liabilities. The limit would be subject to review from time to time.
OFFSHORE BANKING
justify exemption from CRR/SLR requirements.
Offshore banking and offshore banks are often misunderstood and intentionally
maligned by governments of high taxing jurisdictions. It is important to note that
just like an offshore company, an offshore bank is merely a bank domiciled in a
country other than that of the persons country of residence, domicile or
citizenship. Hollywood has also done a good job of associating offshore
banking with cigarette boats, private jets and criminals of all kinds. In reality,
these offshore jurisdictions and offshore banks are very different than what
typically conjures in the mind. Let us look at some myths and facts about
offshore banking with an unbiased and historical perspective.
Myth #1
Offshore banks are only used to evade taxes.
Fact: Popular offshore banking jurisdictions often provide a number of benefits
over onshore banks including lower administration costs, higher interest rates,
the ability to deposit and transact in multiple currencies, increased privacy,
access to otherwise unavailable international investments, sophisticated
private banking, the ability to facilitate international business transactions, etc.
Additionally, offshore banking provides increased asset protection from
potential extraneous lawsuits, unstable governments, unstable economic
conditions, unlawful seizure, etc.
Myth #2
Offshore banking is only conducted by money launderers, drug dealers,
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weapons smugglers and terrorists.
Fact: There is no question that offshore banks are abused by some of these
unwanted elements. Let us maintain a proper perspective on this however.
These same elements have been offshore banking in the US and UK for
many years due to the lax restrictions on foreign deposits in these two
countries. Conservative estimates put the total amount of money held in US
banks from proceeds of money laundering at $300 billion. In fact, many
offshore banking jurisdictions have better laws and regulations than either of
these two countries. All jurisdictions offered by Sterling Offshore have
implemented the 40 recommendations of the OECD (Organization for
Economic Co-operation and Development) FATF (Financial Action Task
Force). In 2006 the FATF commenced a review of all of the major financial
jurisdictions and found only the USA to be non-compliant due to, amongst
other things, insufficient information exchange concerning US depositors.
Myth #3
Offshore banks are less secure than onshore banks.
Fact: Many of these banking jurisdictions offer banking histories and current
conditions far superior to their international counterparts. Switzerland is
estimated to hold over 35% of the worlds banking deposits and our premier
banking partner there has been in business for over 300 years. Cayman
Islands is the 5th largest banking jurisdiction in the world. Panama has over
130 major banks including many of the largest international banks in the world.
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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.
While Offshore banking has often been associated with the underground
economy and organized crime, via tax evasion and money laundering;
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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 accountswhich may or may not be
numbered bank accountsthey 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.
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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 depositor. If the
action is in any way 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.
In the current economic climate, many persons are turning to offshore banking
as an alternative method of saving and investing their hard earned money.
The main reason people setup offshore bank account is to save on taxes.
Another reason is to keep money away from creditors reach.
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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 wipe out financially
in one fell swoop!
No reporting requirements
No taxation
Multi-currency accounts
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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
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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.
There is no absolute low limit, but the extra costs of taking advice, opening
new bank accounts, phone communication at a distance, transaction costs
mean offshore investment is unlikely to be worthwhile for those earning less
than 25,000 a year. However, because of the internet, costs are being
reduced. Offshore banks will take deposits down to 1,000, but for a
personalized 'private banking' service, you may need to deposit 100,000 or
more. Each offshore bank will have its own requirements, so these are meant
as a rough guide.
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
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irrational fear that somehow
Of course the truth turns out to be the opposite. If you bank with a reputable
offshore bank, then your money 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
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BIBLIOGRAPHY
WEBSITES:
www.rbi.org.in.
www.banknetindia.com/banking/cintro.htm.
www.ehow.com
www.theconvention.org
www.moneycontrol.com
www.bis.com
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