OFFSHORE BANKING INTRODUCTION WHAT IS AN OFFSHORE BANK An offshore bank is a bank located outside the country of residence of the

depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include some or all of * strong privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) * less restrictive legal regulation * low or no taxation (i.e. tax havens) * easy access to deposits (at least in terms of regulation) * protection against local political or financial instability While the term originates from the Channel Islands "offshore" from Britain, 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 (Switzerland, Luxembourg and Andorra in particular are landlocked). 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[1], the personal income tax of many countries[2] 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 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 accused of being a 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 argue that offshore banking offers a competitive threat to the banking and taxation

systems in developed countries, and that OECD countries are trying to stamp out competition. Offshore banking unit A financial institution carrying out offshore trades. offshore banking has been regarded as an alternative to opening up a local market to foreign banks. In effect, offshore banking enables an institution to engage in banking and foreign-exchange activities free of the regulations of the host country, and many offshore banking centres offer tax concessions to foreign companies operating within their borders as a way of attracting lucrative foreign-exchange business. The first offshore banking unit was the euromarket; others include Singapore, Hong Kong, Luxembourg, Bahrain, the Cayman Islands, the Channel Islands and the Netherlands Antilles. Australia's taxation regime has been historically unfavourable to the operation of offshore banking business. In the early 1990s, the commonwealth and state governments (particularly New South Wales) relaxed some tax provisions in an attempt to make Australia more competitive as an international financial centre.

Nature of Offshore Banking Offshore banking denotes carrying on banking activity which is insulated from the monetary regulations of the host country. Very often, such banking centres are set up deliberately to attract international banking business of dealing in non-resident foreign currency denominated assets and liabilities by exempting, reducing or eliminating restrictions upon banking operations as well as lowering tax and/ or other levies. International banks may also choose to set up branches or offices at centres abroad including offshore centres with a view to avoid conformity to stringent domestic monetary policy regulations. The basic characteristic of offshore banking is its segregation from the banking system of the host country. In a sense, the banking centres remain offshore and uncontrolled. Traditionally, offshore banking denoted carrying on banking activity at offshore financial centres in a physically neutral way. These centres are also known sometimes as tax havens and the bank offices brass plate or shell branches. Bahamas for example is tax haven.

Several of the US international banks set up branches at an offshore centre such as Bahamas to get away from the restrictions of the US federal government on domestic banking in USA or set up a shell or brass plate branch to take advantage of low or complete absence of taxes.

ADVANTAGES AND DISADVANTAGES OF OFFSHORE BANKING

Advantages of Offshore Banking 1 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.

2 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 governement intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

3 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.

4 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.

5 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.

6 Offshore banking is often linked to other services, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.

7 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 offshoring of capital.

8 Many people are unaware of this factor and its appears to be a foreign concept to many. Most western countries do not offer any protection as to the details of your banking. The protection factors makes offshore banking one of the most popular banking solutions. Unlike many bank accounts, it is impossible to get account details, including the account balance, of an account in an offshore jurisdiction.

9 In offshore banks, privacy laws are very stringent, as opposed to laws in the United States. People are jailed and made to pay heavy fines if they disclose any information regarding bank accounts in offshore banks. Offshore banking allows you to conduct business in the country in which you have your bank account with the local currency. It will help you to increase your profits, provided you are aware of all the details involved in investing and depositing your money.

Disadvantages of Offshore Banking

A Offshore banking has been associated 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.

B The existence of offshore banking encourages tax evasion, by providing tax evaders with an attractive place to deposit their hidden income.

C 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.

D 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.

E 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.

European Savings Tax Directive In their efforts to stamp down on cross border interest payments EU governments agreed to the introduction of the Savings Tax Directive in the form of the European Union withholding tax in July 2005. A complex measure, it forced EU resident savers depositing money in any country other than the one they are resident in to choose between forfeiting tax at the point of payment, or allowing notification by the offshore banks to tax authorities in their country of residence. This tax affects any cross border interest payment to an individual resident in the EU. Furthermore the rate of tax deducted at source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed. Banking services It is possible to obtain the full spectrum of financial services from offshore banks, including: deposit taking credit

wire- and electronic funds transfers foreign exchange letters of credit and trade finance investment management and investment custody fund management trustee services corporate administration Not every bank provides each service. Banks tend to polarise between retail services and private banking services. Retail services tend to be low cost and undifferentiated, whereas private banking services tend to bring a personalised suite of services to the client.

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 individualsnearly $6 trillion out of $17.5 trillionmay 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 are the fifth largest banking centre globally in terms of deposits. Terrorist Finance Tracking Program A series of articles published on June 23, 2006, by The New York Times, The Wall Street Journal and The Los Angeles Times revealed that the United States government, specifically the Treasury Department and the CIA, had a program to access the SWIFT transaction database after the September 11th attacks (see the Terrorist Finance Tracking Program) rendering offshore banking for privacy severely compromised.

Regulation of offshore banks In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient. 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. Since the late 1990s, especially following September 11, 2001, there have been a number of initiatives to increase the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that they have been insufficient. A few examples of these are: * The tightening of anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local police authority, regardless of banking secrecy rules. There is more international co-operation between police authorities. * In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary requirements, which mean that the names of the recipients of US-source investment income are passed to the IRS. * Following 9/11 the US introduced the USA PATRIOT Act, which authorises the US authorities to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal. Similar measures have been introduced in some other countries.

* The European Union has introduced sharing of information between certain jurisdictions, and enforced this in respect of certain controlled centres, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest.

Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal: "You ask why, if there's an important role for a regulated banking system, do you allow a non-regulated banking system to continue? It's in the interest of some of the moneyed interests to allow this to occur. It's not an accident; it could have been shut down at any time. If you said the US, the UK, the

major G7 banks will not deal with offshore bank centers that don't comply with G7 banks regulations, these banks could not exist. They only exist because they engage in transactions with standard banks."[1] In the 1970s through the 1990s it was possible to own your own personal offshore bank; mobster Meyer Lansky had done this to launder his casino money. Changes in offshore banking regulation in the 1990s in the form of "due diligence" (a legal construct) make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run.

Other Requirements for Offshore Banking Centre One common feature of successful offshore centre is the presence of good telecommunication network, domestic as well as international. Actually financial centres are now a part of global information highway or cyber space. This is one aspect that has to be taken care of if a decision is taken to set up an offshore facility in India. A banker should be able to reach his constituent or counterpart when he wants to irrespective of location.

The freedom of movement of expatriate personnel of international banks is another aspect that has to be ensured. International travel has to be much easier. It is not frequency of air services but relative ease with which you walk through customs and immigration that are important. At most of the airports of the financial centres in Europe, USA and Asia it hardly takes 30 seconds to go through customs and immigration. The obtaining of visa has also to be made much more easier and free than what is today. Visas and travel documents are to be looked upon as matter of form since information is necessary from the view point of traffic control as well as security but nothing beyond that. An international financial service status may be created which is at par with diplomatic service for grant of travel facilities and clearance at the airports. Other infrastructure facility that have mattered in the decision to set up an offshore banking centre are good office accommodation, housing for expatriates working at the branches of the international banks located at the offshore centre, schools, medicals and recreational facilities. Provision of these facilities does not really pose any problem but they have to be met if an offshore centre is to be floated . Another factor that has influenced the successful functioning of an offshore centre is the location of the centre time zone-wise. India is definitely at an advantage as it is between London and Singapore. We are five-and-a-half hours in advance of London and two hours behind Singapore. We can transact on the same day with London and Singapore. Bahrain is the only centre which enjoys such a favourable location time zone-wise. Any proposed offshore banking facility in India would really be a bridge between the Asian and Euro-dollar market. Mumbai with its tradition of banking and trade would be an ideal choice for locating the proposed OBC.

Bank secrecy Bank secrecy (or bank privacy) is a legal principle under which banks are allowed to protect personal information about their customers, through the use of numbered bank accounts or otherwise. Effective bank secrecy is better achieved in certain countries, such as Switzerland or in tax havens, where offshore banks adhere to voluntary or statutory levels of privacy. Created by the Swiss Banking Act of 1934, which led to the famous Swiss bank, the principle of bank secrecy is sometimes considered one of the main aspects of private banking. It has also been accused by NGOs and governments of being one of the main instrument of underground economy and organized crime, in particular following the Class action suit against the Vatican Bank in the 1990s, the Clearstream scandal and September 11, 2001. Advances in financial cryptography (e.g. public-key cryptography) make it possible to use anonymous electronic money and anonymous digital bearer certificates to achieve financial privacy and anonymous internet banking

Offshore financial centres In terms of offshore banking centres, in terms of total deposits, the global market is dominated by two key jurisdictions: Switzerland and the Cayman Islands,[4] although numerous other offshore jurisdictions also provide offshore banking to a greater or lesser degree. In particular, Jersey, Guernsey and the Isle of Man are known for their well regulated banking infrastructure. Some offshore jurisdictions have steered their financial sectors away from offshore banking, as difficult to properly regulate and liable to give rise to financial scandal.

List of offshore financial centres Offshore financial centres include: 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. [6] [7] Ghana [8][9] Hong Kong Isle of Man Labuan, Malaysia Liechtenstein Luxembourg Malta Macau

Montserrat Nauru Panama Saint Kitts and Nevis Seychelles Switzerland Turks and Caicos Islands Selected Offshore Centres Bahamas Bahamas an archipelago of 700 islands stands with Nassau as capital. Nassau is favorably located time zone-wise especially in relation to customers located in Western hemisphere. Bahamas was an offshore tax haven in mid sixties with a few branches of foreign banks. It has grown since, to the top ten banking centres in the world with the asset base of the banking centre at $120 billion. There is large physical presence of banks. Of the 415 licensed, 166 have a physical presence. Banks in Bahamas have a sound capital base with capital asset ratio around 11 per cent. A license fee $25,000 is payable by a bank. Large and prestigious banks from 36 countries operate. Offshore banks are not subject to any liquidity requirements and regulations are minimal. Banks have however to adhere to certain norms. There is a self regulatory code of conduct to deter the use of banks for criminal activities. The offshore centre is supervised by the central bank which ensures the maintenance of professional integrity. There are no taxes. Political stability and proximity to United States have rendered Bahamas an attractive offshore centre. The islands have developed business infrastructure and transport and communication.

Bahrain The offshore centre at Bahrain was founded in 1975 to encourage offshore banking units (OBUS). It neatly bridges the gap between Singapore and London. The centre has now 65

licensed OBUs. Bahrain has a very favourable time-zone and is located in the proximity of the worlds major oil producing countries. OBUS are allowed to deal in offshore advances and deposits without restrictions and regulations that apply to commercial banks. OBUS are not allowed to deal with residents of Bahrain, other than government and fully licensed banks. OBUS have to have physical presence and fully staffed. OBUS are not required to maintain any reserves and there are no formal solvency requirements. OBUS are however required to provide Bahrain monetary agency with monthly statistical information and a copy of their annual audited financial statements. Bahrain has no corporate tax or personal taxes. There are no restrictions on repatriation of capital, profit or income. Cayman Islands Cayman Islands are self governing British dependent territory South of Florida and West of Jamaica. It is the fifth largest financial centre in terms of assets held after London, Tokyo, New York and Hong Kong and holds largest consolidated international claims among offshore centres. There are 550 banks and trust companies licensed by the government. Businesses transacted in Cayman Islands include Eurocurrency borrowing and lending, deposit placing and taking, issue of bonds and floating rate notes, consortium lending and international fiduciary and corporate services. Cayman Islands have no controls on international banking and trust activities and have flexible regulations for liquidity ratios and capital requirements. The Islands have access to Eurocurrency markets and there are no restrictions on Euro-dollar transactions. Profits may be retained or repatriated. There is no deduction of tax at source on interest.

Applications for licenses are scrutinized and approved. Regular returns and compliance with government requirements is insisted upon. There are two kinds of bank licenses. Category A license could entitle a bank to engage in both local and offshore banking business. There are 85 banks in A category. Category B license entitles the bank to engage in business originating outside the islands. About 400 B licenses have been issued. Minimum capitalization is stipulated for the two types of banks. Hong Kong

Hong Kong is one of the freest money markets in the world and there is no distinction between resident and non-resident accounts. Hong Kong does not belong to the tax haven category. It has no exchange control and residents may place funds in the Euro-dollar market free of any regulation. Profits, dividends and interest can be fully repatriated. Panama Among the non-reporting centres Panama is quiet large in terms of asset and liabilities. Favourable tax environment, absence of controls on capital and incentives offered to foreign banks are the major factors that contributed to the growth of Panama as an offshore centre. In addition Panama has excellent communication facilities, internationally trained legal experts and international auditing firms. Banks can maintain numbered or coded accounts to offer secrecy and protection to depositors. Panama has encouraged offshore business mainly with a view to mobilize resources for development of Panama. The National Banking Commission set up in 1970 issues bank licenses. It regulates the credit system by setting the statutory reserve and liquidity requirements. Paid-up capital is defined in relation to productive assets or as a per cent of local loans. Banks are required to submit monthly statement of assets and liabilities and quarterly analysis of credit facilities and other assets in Panama. There are three kinds of licenses. The general license which enables the bank to function both in Panama and abroad; the international license which is exclusively for offshore operation and representative license for banks which keep their representative in Panama. Different amounts of paid-up capital are prescribed for general license and international license. There are no taxes affecting offshore business. Interest and dividends received from foreign sources and interests on time deposits placed with local banks in Panama are not subject to tax. There is no withholding tax payable on the distribution of such income. Singapore

Among the offshore centre Singapore has emerged as an important Asian based market in Euro-dollars. The Asian dollar market was created in 1968 at the initiative of the Singapore Branch of Bank of America. The Singapore market deals not only in US dollars but in other convertible currencies such as Deutsche mark, the Netherlands guilder, the Swiss franc and the yen. Some of the factors that are responsible for the establishment of a market in Singapore are the existence of a well-developed financial system, near absence of inhibiting controls on domestic and international financial transactions, stability of the government and the social system and favourable

geographical location. The convertible foreign currency deposit accounts Unit (ACUs) transactions are kept separate from the banks other transactions.

Offshore Banking Strategies

We generally leave the offshore banking business and questions about potential uses to our offshore partner banks; however, we often field questions regarding these issues and find it necessary to explain a few simple strategies often utilised. None of the information in this section and indeed in this website should be construed as tax advice in your home country. These strategies may or may not be legal in your home country. We can only advise on legal uses in the countries where we establish corporations and bank accounts on behalf of our clients.

For clients looking to repatriate funds from an offshore account without having to cash out, a back to back loan may be an option. We work with several banks that are able to provide this service.

Back to Back Loan

Back to back loans are generally intended to hedge against changes in currency valuations. The concept is relatively simple. You deposit funds with the bank in one currency and the bank issues a loan in another currency using your deposit as collateral. With the continuously deteriorating US Dollar, this has been a great tool for many people in recent years. In practice, these loans have several uses which have contributed to their popularity.

Scenario #1 (Business Loan)

You have an offshore company and bank account with funds you have been accumulating over time. A situation arises and you find your onshore

business is in need of a cash infusion. You may be able to structure a back to back loan with your offshore bank. It is generally a simple concept. You deposit funds at the bank and using your deposit as security they draft a loan agreement at an interest rate and term decided by you. The bank loans the funds to you solving your cash flow problem and allowing you to show the cash as a liability on your books. This may be an instance when you actually prefer to pay a higher rate of interest. Your interest payments may be tax deductible expenses allowing you to save taxes in future years.

Scenario #2 (Property Mortgage)

You are building a new house or buying a piece of property and need cash. Your offshore bank can draft a back to back loan as a mortgage at an interest rate and term of your choosing (usually at a fairly high rate) allowing you to purchase the property and maintain a lien on the property by filing the mortgage. Many high net worth individuals prefer not to own property and investments in their own names and seek arrangements which make their assets more difficult to locate for potential adversaries. This is a popular strategy in these cases. Any searches for assets would turn up a fully mortgaged home rather than one owned free and clear. These loans may be kept topped up to 100% of the value of the home as well. As with the business loan, interest payments are often tax deductible providing future income tax savings which may come in handy, especially if you have the good fortune of being in the highest tax brackets.

Private Annuity Contract Private annuities can be used for a variety of purposes in estate planning. Although commonly used as a tool in transferring ownership of appreciated assets to family members, private annuities can also serve estate planners as a device for transferring cash from cash-rich estates. Additionally, these

contracts can be used to guarantee income and to minimize estate tax liabilities.

A private annuity is an annuity contract issued by an individual rather than a commercial insurance company. In the past, it was used most often to transfer appreciated property to family members. There is every reason to suggest it may be as effective for transferring cash from a cash rich estate, to assure income and for saving on estate taxes.

As a contract, a private annuity is quite simple. The issuer of the contract agrees to pay the annuitant a periodic payment for the annuitant's life in exchange for a payment of cash or for the transfer of property. The annuitant cannot be in imminent danger of death, nor can the annuity contract be collateralized or otherwise secured. If it is known on the valuation date that the annuitant will die from an illness in a very short time, the value of the annuity is based on that fact.

Offshore Banking Jurisdictions The list of offshore banking jurisdictions and offshore financial centers continues to expand as tax competition and globalization continue to fuel demand for international low tax banking solutions. Here is a brief look at the recommended banking jurisdictions by Sterling Offshore. Isle of Man Banking Jersey and Guernsey Banking UK Banking Luxembourg Banking Austrian Banking

Swiss Banking Liechtenstein Banking "Offshore" Financial Centres Asian Banking EU Banking Over the last few years, EU banks have benefited from measures aimed at liberalizing trade and business practices such as the Single Passport System. Other measures crafted to create tax and information sharing hegemony amongst all of the member states such as the EU Savings Directive 2005 were not as welcomed by some of the traditionally

popular banking jurisdictions. The EU Savings Directive 2005 is explained in more detail in another section, but let us briefly discuss the positive impact of the Single Passport System. Single Passport System The single passport system essentially allows banks from one member EU country to open branches in other EU countries whilst maintaining their internal policies and regulations and adhering to the banking laws of the home country of the bank. Banks in popular jurisdictions such as Isle of Man, Switzerland, Lichtenstein, Luxembourg, and Austria have been taking advantage of this and opening branches in other EU countries. Isle of Man Banking Isle of Man began to lose some of its appeal as a tax haven following the EU Savings Directive and other international agreements it had signed for the exchange of information; however, in 2006 the Government made a move that has catapulted Isle of Man near the top of the banking world. They reduced the corporate tax rate from 10% to 0% for both resident and non-resident companies rendering much of the information exchange provisions meaningless. Its tax haven status along with the jurisdictions AAA rating, excellent communications infrastructure and highly skilled employment base

makes Isle of Man one of the top tax havens and overall premier banking jurisdictions in the world.

Isle of Man is a well established offshore banking jurisdiction with most of the largest international banks having a presence or even their main operations based there. Isle of Man offshore banks are often utilized as the regional headquarters to the UK market with many of the large London institutions, such as those operating in the Knightsbridge District, actually operating as branches of the Isle of Man headquarters. This is mainly for privacy and tax advantages afforded to the clients and the banks themselves. Isle of Man banks offer a wide array of services including both private banking and commercial/business services. Many international companies requiring sophisticated credit card processing and other business support services often choose an Isle of Man bank. Several of these Isle of Man banks also offer a variety of investment vehicles and private banking services to international clientele. Sterling Offshore generally recommends our Isle of Man banking partners for business and commercial accounts. We also recommend them for private banking in certain circumstances.

Jersey and Guernsey Banking Jersey and Guernsey banks were amongst the first to market to foreigners in the early stages of what is now the modern offshore banking industry. Both are still utilized for offshore banking; however, many of their banks are actually headquartered in Isle of Man with the Jersey offshore banks and Guernsey offshore banks largely being utilized as branches or representative offices. Many of the processes, services and even communications are actually being routed through Isle of Man so we generally just recommend an opening an offshore Isle of Man bank account if choosing amongst these jurisdictions. UK Banking London is the biggest financial center in the world and obviously the banking options and level of service is amongst the best in the world. While banking secrecy laws in UK may not match those of many other jurisdictions, UK bank accounts for structures set up elsewhere still offer reasonable privacy. Additionally, funds transferred to and from a UK bank account will draw less suspicion than from jurisdictions labelled as "tax havens". Luxembourg Banking Many are surprised to learn that Luxembourg is the second largest banking jurisdiction in Europe (behind the UK) and the largest private banking country in Europe. Although not as rich in history or as well known to laymen as Switzerland, Luxembourg banks have gained enormous popularity over the years; especially since 1980 when it solidified its long history of favorable taxation and banking secrecy into law. Since that time, managed fund assets have grown from $3 billion to $1.85 trillion, 2238 managed funds in all, at the end of 2006. Total assets held by banks amounted to $1.1 trillion of that figure. Luxembourg Banking Laws and Regulations Luxembourg does not use the term offshore in any of its legislation, regulations or anything describing its company forms. The key to typical offshore tax status for Luxembourg business lies in the various forms of holding companies, collective investment vehicles and investment funds outlined in legislation such as the 1929 Holding Company, Milliardaire Holding Company, Financial Holding Company, SOPARFI, Fond Commun de Placement, SICAV, SICAF and SICAR. Going into detail about each would be beyond the scope of this section, but these basically provide several options for favorable tax status for both resident holding and investment companies as well as non-resident companies. Individuals holding accounts with Luxembourg banks and financial institutions are also exempt from local taxation on capital gains, dividends and interest unless they reside in one of the EU member countries.

One potential negative to banking in Luxembourg is their agreement to begin information exchange with the EU by 2009 as a result of the EU Savings Directive 2005; however, for individual clients not residing in any of the countries affected by this Directive and non-resident corporate clients, Luxembourg taxes will likely be non-applicable to you allowing you to bank there with no local tax obligations. As always, it is advisable to seek the counsel of your tax professional to identify your status. Luxembourg Banking Services Most of our discussion of Luxembourg has focused on investing and this is generally the only use for which we recommend Luxembourg to our clients. Luxembourg does offer commercial banking services for non-resident businesses; however, there are more favorable options such as Isle of Man for most of these customers. Luxembourg is suitable for clients seeking private banking and investment services or for large businesses that may have an interest in establishing a physical presence in Luxembourg. Austrian Banking Austrian banks have a rich history dating more than 200 years. Austrian banks offer a variety of services; however, for foreign individuals and non-resident legal entities they are probably best used for private banking or for commercial entities looking to conduct business in the booming Eastern European market. Austrian banks have had a presence in Eastern Europe for over two centuries, but they have been rapidly expanding there as well as in Central and Southeastern Europe since 1990. This was a bit of a gamble at the time, but the gamble has paid off as many of these economies are among the fastest growing in the world. Banking secrecy is enshrined in the Austrian Constitution. This secrecy can only be lifted by an Austrian Court Order for the purpose of investigating a criminal case or one involving criminal tax fraud (forgery of documents). Tax evasion reaches the criminal threshold when the evaded tax amount is 75000 Euro or the foreign currency equivalent. While just slightly less appealing than the Swiss laws, Austrian banking secrecy is still very solid by international standards. Austrian banks are regulated by the Bankwesengesetz (The Banking Act) of 1994. Austrian banks are slightly less expensive and a much lower profile option to Swiss banks. They offer solid private banking services as well as a few specialized products. We generally recommend Austrian banks for commercial entities conducting business in Eastern Europe and private banking clients, but we do have one bank in particular who offers specialized products to US and Canadian clientele. Swiss Banking Swiss Banking History

Swiss banks and Swiss banking secrecy have their roots dating back more than 300 years. Swiss Banks have long been famous for their privacy, security and superior private banking services. Indeed, Swiss banks have proven themselves many times throughout history to be both secure and committed to the privacy of their clients. In fact, it was attacks on Swiss banking secrecy promulgated by Hitler in 1931 as well as French leftists looking to uncover account information regarding French Aristocrats in 1932 that caused the Swiss Parliament to codify the Swiss banking code into the Banking Law of 1934, which still governs today. Swiss Banking Laws and Regulations The Swiss Banking Law of 1934 is a comprehensive piece of legislation which is still the basis for the current legal and regulatory structure governing the Swiss banking industry. One of the most important components of the Banking Law of 1934 was a provision which criminalized violators of banking secrecy. It is important to note that Swiss banking secrecy cannot be lifted by tax authorities or for requests made by treaty partners for information requests relating to possible tax evasion. Tax evasion is only considered an administrative offense in Switzerland. Swiss banking secrecy may only be lifted in cases of serious criminal matters such as crimes relating to tax fraud, money laundering, drug trafficking, weapons smuggling and terrorist financing. In line with internationally adopted practices, Switzerland has adopted mutual legal assistance treaties and cooperates with foreign governments on matters relating to serious crimes such as criminal tax fraud (falsifying or forging documents), money laundering, drug and weapons trafficking and terrorist financing. Although many in the offshore world see this as a potential sign of weakness and a harbinger of things to come, our view is that this is ultimately good for Switzerland and its image. Switzerland is not likely to allow this to be abused by foreign tax authorities. As mentioned earlier, tax evasion is only an administrative offense in Switzerland and thus does not rise to the necessary level of serious crime required to cooperate with foreign governments on these matters. They have also elected to reject the information exchange option of the EU Savings Directive, instead opting for the withholding route and preserving the privacy of their banking clients. Switzerlands storied history of privacy and neutrality is still alive and well today. Privacy and neutrality remain cornerstones of banking laws and regulations. Accordingly, Switzerland has refrained from applying for entry into the EU and it has rejected most attempts by the EU to impose itself and infringe upon Swiss Independence. Swiss Banking Institutions Over 500 licensed bank and securities dealers operate in Switzerland holding approximately 35% of the world banking deposits. These range from major international banks to smaller Swiss private banks. The options vary from small independent Swiss

banks to large international banks, the two largest of which UBS and Credit Suisse hold over 50% of Swiss banking deposits. For a variety of reasons, but mainly due to international pressure placed on these two institutions by the USA and UK (where they have a substantial presence), we do not recommend either of these Swiss banks to our clientele seeking private banking. Swiss Banking Services Swiss banks provide a variety of services but are best known, and indeed probably best utilized, for private banking and wealth management for high net worth clients. Swiss banks offer access to every international market and nearly every type of investment imaginable, all supported by some of the

brightest financial minds in the world. The preferred Swiss banking partners of Sterling Offshore certainly fit this description. Liechtenstein Banking Liechtenstein banks are similar to Swiss banks but on a smaller scale. There are only sixteen Liechtenstein banking institutions and a few of those are actually branches of Swiss banks. Twelve of the banks were granted licenses within the last four years. Other than obviously being smaller and having fewer institutions, Liechtenstein shares many similarities with Switzerland including being an independent state outside of the EU. Liechtenstein Banking Laws and Regulations Liechtenstein banking laws and regulations closely resemble those of Switzerland. For instance, tax evasion is also considered an administrative matter and not a criminal offense. Liechtenstein only has one Mutual Legal Assistant Treaty and that is with the United States. It is important to note that this treaty does not include probes into matters concerning possible tax evasion since this is not considered a criminal matter. After a couple of high profile money laundering cases earlier this decade, Liechtenstein implemented a law which increased internal regulation and auditing while also allowing for a process where foreign governments may request assistance into criminal matters. The foreign government must petition the Liechtenstein Court to have the authorities conduct an investigation. There is an appeal process allowing the accused party to possibly thwart the investigation. These are generally only for tax fraud (falsifying or forgery of documents), money laundering, terrorist financing, weapons smuggling and drug smuggling and other serious criminal offenses. For anyone concerned that this is a harbinger of things to come, the ruler of the Principality, Prince Alois told Bloomberg

News in 2006 that Liechtenstein banking secrecy is very firmly anchored in Liechtenstein. He went on to say that any measure to change this or water down existing Liechtenstein banking secrecy laws would likely be rejected if put to a referendum to the people. Liechtenstein Banking Services Liechtenstein banks are most noted for their private banking facilities and indeed offer sophisticated, individualized services for clients. Access to international markets and a host of investment instruments are available. Investment income on non-resident accounts is not liable to local taxation. Commercial banking is generally not available and/or practical for foreign companies. In addition to those discussed previously, many other tax haven jurisdictions remain popular for banking including the British Virgin Islands (BVI), Cayman Islands, Belize, Panama, Bermuda, etc. For basic banking services, Barclays (Seychelles) is a fine institution and one that we often establish along with a Seychelles IBC. Asian Banking More recently, the Asian banks have made a strong push into the offshore banking realm with both Hong Kong and Singapore gaining in popularity. Both of these require the company to be established in the jurisdiction. Additionally, company incorporation is generally more expensive with more restrictions than other popular jurisdictions. Sterling Offshore continually researches the offshore banking sector in order to advise clients on the best jurisdiction and bank for their particular needs. New agreements between countries are being signed regularly affecting international depositors to the institutions. We monitor these agreements and work closely with our partner banks to provide timely and accurate information concerning the offshore banking world to our clients.

Offshore Asset Protection

There is no better way to protect your affairs and privacy from potential adversaries than through the creation of a well constructed offshore structure. As many countries become increasingly more litigious, governments continue to encroach on civil liberties and privacy and technology continues to make it easier for hungry lawyers to search for assets while making the decision whether or not you are "sue worthy", many would benefit from establishing an offshore presence to protect at least a portion of their assets. Offshore Asset Protection Structures A variety of offshore components may be utilized in an offshore asset protection structure including private foundations, offshore trusts, offshore companies, offshore bank accounts and/or an offshore brokerage account. It may even be possible to maintain assets in their current location while merely transferring ownership of the assets into an offshore asset protection structure as well. Offshore asset protection structures generally involve at least one offshore trust or offshore private foundation perhaps coupled with an underlying offshore company. Utilizing multiple jurisdictions is often desirable making it more difficult to locate and win judgements against any assets. Clients are advised that in order to set up a proper asset proctection structure, the client must be willing to give up "ownership" of the actual assets being placed into it. Not to worry though, as many legal and contractual safeguards are put into place as well as the possibility to appoint protectors or guardians ensuring the assets will always be utilized per the Foundation Charter or Trust Deed and associated documents as set out by the Founder/Settlor. While both offshore trusts and private foundations are useful in setting up asset protection structures, a fair amount of offshore trusts established are invalid and would be labeled "sham" trusts if ever challenged in a court. In fact, a leading international trust expert conducting a very informal poll of the trust practitioners in a popular offshore jurisdiction asked the practitioners how many of the offshore trusts established by them would likely be considered "sham" trusts by the courts if challenged. The answer was shocking: "75-80%..... but that is what the clients wanted" was the general response. Clients establish the trusts but the settlor remains very much in control of the administration of the trust in some cases. Often times, assets are never actually placed into the trust which means they obviously cannot be under the protection of the trust. These are common occurrences which can lead to adverse court decisions. Offshore Foundation Due to the issues above and the fact that courts are able to "interpret" the legality of trusts at all, Sterling Offshore prefers the use of the offshore private foundation for most asset

protection structures. Offshore foundations are much more versatile than the offshore trust, are based in civil law meaning they are not up for "interpretation" by the courts and offer a great deal of protection to the participants in the structure. The fact that the offshore foundation is also legally separate from the Founder and beneficiaries and has no legal "beneficial owner" makes it an invaluable tool in offshore asset protection. The foundation itself is the "owner" of all assets (which may include shares of a company) placed into it. This may be beneficial in countries with strict reporting requirements and tax consequences regarding "controlled foreign corporations" (see your tax advisor as this varies among countries). Offshore Bearer Share Company One of the best privacy tools still available today is the offshore bearer share company. While the availability of jurisdictions offering bearer share companies is decreasing and restrictions are generally increasing, Sterling Offshore still offers services in several jurisdictions that offer allow shares to be issue to "bearer". We offer a Seychelles bearer share company, Panama bearer share company, Belize bearer share company and BVI bearer share company. Panama and Seychelles offer the best terms regarding government fees and restrictions. Opening bank accounts for bearer share companies is generally a bit more difficult; however, Sterling Offshore has several banking options with reputable banks with whom we can open bank accounts for a bearer share company. Perhaps a better alternative to the bearer share company is the issuing of registered shares to a nominee shareholder. We also frequently issue the shares in the name of a private foundation when setting up an asset protection structure or to a trust with the foundation as the beneficiary of the trust. Offshore Bank Account The last but probably most important component of a offshore asset protection structure is the offshore bank account. Unfortunately, this is probably also the weakest point of any structure and the likely target of any queries into your affairs. Especially considering the increasing disregard of legal structures and focus on the "beneficial owner" in some countries, it is critical to both create the right structure and establish the right offshore bank account for your offshore asset protection structure. Sterling Offshore is able to provide introductions for the purpose of establishing an offshore bank account. . The applications and requirements vary depending on the institution.

Offshore Banking Facts 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, 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 noncompliant 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.

Depositors need to consider all factors when choosing a banking jurisdiction. Many of these offshore banks and banking jurisdictions have histories far superior to that of banks in their own country. Many have lending practices that are much stricter than that of the banking institutions in their own countries. How safe are deposits for US depositors who have money held at any of the US banks that have been lending money at alarming rates with alarmingly low reserve requirements with the recent subprime debacle? Can anyone figure our the trillions and trillions of dollars in derivatives (supposedly backed by something) that have been spun out of these institutions? How safe is the US dollar which is no longer backed by anything of substance and only a guarantee by a government that cannot balance a budget? How about depositors in the UK with the debacle of Northern Rock and subsequent nationalization by the government?

International Offshore Banking There is a staggering amount of money in the world, and more and more of it is in offshore jurisdictions.

According to a study by consulting firm McKinsey and Company published in January, 2007, the value of total global financial assets, including equities, government and corporate debt securities, and bank deposits, expanded to $140 trillion in the 12 months to the end of 2005, an increase of $7 trillion from a year earlier. That is a growth rate of 5.3%. There are no consolidated figures for the growth in offshore assets - many jurisdictions simply don't release figures. But for those that do, it is clear that the rate of increase in banking, trust and fund assets dramatically outpaces McKinsey's global figure. In Jersey, for instance, banking assets were GBP159bn in December, 2004; by September, 2006, they stood at GBP188bn. That is an annual growth rate of 10.2%, roughly double the global rate; and Jersey banking is by no means untypical of offshore

performance. Indeed some other jurisdictions have shown higher growth rates; and fund assets have grown faster even than banking ones. With 'onshore' high-taxing countries chopping finer and finer in order to remove tax loopholes, and imposing ever more stringent anti-money-laundering rules, it is no surprise that more and more people move their assets offshore, if they are able to. The purpose of this special feature is to describe the history of offshore banking, and to contrast the offshore banking sector with its onshore rival.

A Very Potted History of Offshore Banking If the words 'offshore banking' conjure up for you a shadowy figure wearing a Panama hat and crumpled white suit, smoking a cigar, and probably sipping cocktails from a hollowed out coconut, then you've clearly been reading too much John Grisham. Stop it. It isn't good for you. In an increasingly globalised world, in which more and more of the population are becoming internationally mobile, and need financial services which reflect their circumstances, offshore and international banking has moved on. The growing need for international banking on both a personal and corporate level has led to an increase in the number and quality of financial centres, both offshore and on, and the diversity of financial services offered. As a result, there is a huge spectrum of different offshore banking services available to expats, international investors, globetrotters, international consultants and corporations, offering varying degrees of return, protection, and privacy. Before we look into the different sorts of offshore bank account available, however, a brief rundown of the

background of this ever-growing industry is necessary, in order to understand the present situation. As more and more financial institutions became keen to establish themselves on an international level, regulators perceived a need for greater banking

regulation, and introduced a set of minimum standards and safeguards, known as the Basle Accord (introduced 1988). The Accord outlined the requirements necessary for banks to obtain licenses, which included two minimum types of bank capitalisation- core capital and supplementary capital. Core (Tier 1) capital is basically a mixture of shareholder equity and disclosed reserves, and supplementary capital is a mixture of debt and equity instruments. (Wake up there, you at the back! There is a reason why we're telling you this). The Basle Accord set the minimum capital adequacy level for each type of bank capital at 4%, meaning that many banks operating in countries under this accord were forced to increase their capital reserves and to invest in 'safer' investments. Recently introduced modifications to the original Basle Accord (originally enough, called Basle 2, and running to 541 pages) seek to align capital requirements with the underlying risks of loans made, and will further affect the amount of capital which each bank is required to hold. This may mean that banks in countries which are operating under the Basle Accord are forced to be more cautious about the instruments in which they invest, resulting in potentially less attractive returns. However, in non-Accord countries (which includes many offshore jurisdictions), regulation of this kind is usually down to the regulatory authorities of the jurisdiction, and the required capital adequacy levels can vary. Other legislative issues have also had an effect on the offshore banking world. Initiatives by the OECD/FATF/G7 countries to combat money laundering have, in the process, severely damaged the banking secrecy laws of many offshore jurisdictions. 'Know your Customer' legislation has meant that privacy in high tax and certain low tax jurisdictions has been jettisoned in return for international acceptance. In addition, US rules have introduced 'Qualified Intermediary' status which also imposes more stringent controls on any institution wanting to avoid having to tax US-source income regardless of the nationality or tax status of the recipient. For all these reasons, opening an offshore account can now often require a small rainforest's worth of paperwork. The OECD's first shot across the bows of banking secrecy was fired in earnest with the release of a report in 2000 into improving access to bank

information for tax purposes, endorsed by all 29 members of the organisation. Although the report was more a statement of intent rather than a detailed plan, it set the template upon which national tax authorities could obtain information about specific individuals or

companies whom they have reason to suppose are engaged in tax evasion or criminal activity. Although many offshore jurisdictions have responded to the pressure brought about as a result of their blacklisting by the OECD and the FATF by strengthening legislation against money-laundering and introducing better controls over financial institutions, the high tax countries have failed to really galvanise a move towards any comprehensive dilution of banking secrecy, and the international framework of mutual assistance treaties remains largely as it was. Indeed, the high-tax countries themselves are gradually being forced by peer pressure and international regulations to tighten up their own regimes. In January, 2007, for instance the UK took the latest in a series of EU-inspired measures when Economic Secretary to the UK Treasury, Ed Balls, published draft money laundering regulations for consultation. The regulations are designed to implement the EU's Third Money Laundering Directive, and have already caused controversy.

Offshore Versus Onshore in 2007 It is unlikely that the relative advantages of offshore will be undermined in the short term at least. The OECD's rather uneventful Global Forum on Taxation in Berlin in June 2004 encouraged participants to continue to strive towards effective exchange of information and transparency by 2006, although it was also recognised that flexibility is required since many

participants have not yet initiated negotiations towards the required signing of bilateral agreements. The OECD claims however that substantial progress has been made. A report from the Global Forum secretariat in 2006 stated that countries continue to improve their international cooperation to combat tax abuse by putting in place mechanisms which enhance transparency and exchange of information for tax purposes. Many of the economies reviewed have enhanced transparency by introducing rules on customer due diligence, information gathering powers and the immobilisation of bearer shares. Most have entered into double taxation conventions and/or tax information exchange agreements, and many are engaged in negotiations for such agreements.

The OECD also noted that none of its member countries, and very few non-members, now make domestic tax interests a condition for responding to a treaty partners request for information on a specific taxpayer. However, the Organisation argues that more progress can be made to improve global tax transparency, and stated that some countries still place constraints on international co-operation to counter criminal tax matters and a number continue to impose strict limits on access to bank information in civil tax matters. "The direction of change is clear," Paolo Ciocca, Chair of the OECDs Committee of Fiscal Affairs and Co-Chair of the Global Forum stated. "Onshore and offshore financial centres are prepared to work towards the implementation of mutually agreed standards. I look forward to the day when the centres that have met these standards are joined by other jurisdictions that have not yet achieved them," he added. Leasi P. T. Scanlan, Governor of the Central Bank of Samoa and also a Co-Chair of the Global Forum, said the report demonstrated the ability of OECD and non-OECD countries to co-operate in order to prevent their financial centres being misused for illegal tax avoidance and evasion. "This has been a huge undertaking but we now have a clear idea of where we stand. It is an important step in helping countries to work towards a level playing field so that these abuses do not simply shift from one financial centre to another," he observed. It must be made clear that although in most countries, having an offshore account is not illegal in itself, the illegality comes when the client doesn't declare the account, or the income from it. Banks in jurisdictions with strong banking secrecy legislation tend to place the onus for this reporting on the client themselves (which is not to suggest for a moment that they recommend not reporting the income, merely that they do not volunteer the information to other countries, and will usually reject requests for the client's personal details unless there is evidence of criminal activity). Despite the efforts of the OECD countries to restrain the offshore banking sector, the reality is that in most offshore centres, deposit totals have shot up in recent years, and seemed to be having a particularly good year in 2006, with double digit percentage increases in many cases.

Is Offshore Banking Legal? This is one of the frequently asked questions about offshore banking, and in short, YES, offshore banking is legal. Offshore banking is so legal that, it's always going to remain 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. This article will clarify the distinction and examine why offshore banking remain legal. The term offshore was originated from the British Channel Islands, tax havens located literally offshore from the United Kingdom. Now the term is used to refer to all tax havens whether islands or not. Technically, just moving your money from an account in your country of residence to another jurisdiction is considered offshore banking, even if it's not a tax haven. This is the main reason why offshore banking will always be legal. How can it be illegal to move money from one country to another? Individuals and businesses, large or small, and even governments all have the need to move money around the world. If moving money from one country to another was illegal, our global economy would have serious problems and i don't see how we could make it. We are constantly ordering items from eBay and some do so from other countries. People use Paypal accounts to transfer funds when ordering online. Governments are involved in import export activity and have to pay for it somehow. So again, no one can stop you from taking your money to another country; it is a legal and everyday process that will remain that way. The thing that is NOT legal is banking offshore for tax evasion. Depending on which country u reside in, it is usually illegal to take money out of the country or making money overseas and never submitting it to your country of residence or declaring it. as stated, this depends on your tax status and country of residence. For instance, in the United States, the federal government requires all citizens to declare all taxable assets regardless of where they are located in the world. Failing to do so is committing a criminal offense. There are ways around this though, such as expatriating for certain amount of time to save on taxes. International companies can also reduce their tax burden through using a slick network of offshore bank accounts and IBCs. And another thing to keep in mind is that a lot of countries don't charge income tax on money earned out of the country and brought in. They also don't tax interest earned on accounts. So, if US citizens and UK and European citizens can't even save tax through offshore banking, how can it be beneficial? Saving on taxes is not the only advantage of using offshore banking accounts. There are many other benefits, including but not limited to: -Optimized account Privacy -Protection from aggressive litigations -More competitive account structures ad interest rates -global access to your money -Ability to bank in multiple currencies -Access to global business opportunities

And not to forget that those who reside in countries with corrupt or unstable economic systems have the opportunity to bank in an economically and politically stable jurisdiction.

Characteristics of Offshore Centres The analysis of the select offshore centres presented reveals that the characteristics of the offshore banking centres are: (a) Local capital requirements are low or non-existent; (b) License fees are low; (c) Entry is relatively easy and (d) Taxes and levies on offshore business are virtually non-existent. ] In none of the offshore centres enumerated above minimum reserve requirements on offshore liabilities are levied or withholding tax on income is deducted. A major feature of offshore centres is their proximity to important loan outlets or deposit sources.

Offshore Centre For India Introduction

Mobilisation of resources to finance domestic economic development through the setting up of an Offshore Banking Facility was attempted earlier by Panama and Philippines. The existence of an offshore center, tax haven or international capital market benefits the host country enormously; through the capital inflows the financial center brings and increases employment and income. Objectives of the Offshore Banking Centre

The raison d etre for setting up of an Offshore Banking Center (OBC) is that it would help foster a regional capital market which enlarges the flow of foreign capital to raise the level of domestic investment. The Expert Group on Foreign Exchange Markets in India (1955) set up by the Reserve Bank of India also suggested the setting up of the offshore centre within India to encourage offshore transactions towards development of a financial centre particularly for countries which have not yet achieved capital account convertibility. According to the Expert Group the setting up domestic Offshore Banking (OBUs) is seen as an interim (but necessary) step towards development/sophistication of the Indian foreign exchange markets Units. Any future plans of full convertibility of the Indian Rupee according to the Group are greatly dependent on narrowing the gap between international financial markets and domestic markets. Domestic OBUs offer the benefit of providing Indian financial institutions global know-how/human skills/technology/infrastructure in a relatively controlled environment prior to opening up the foreign exchange markets to full impact of convertibility. India has a special position in South Asia in terms of productive network, skilled manpower and technology. Financial and banking services in India which are yet to adopt modern technology would be exposed to international finance and business based on electronic data processing and telecommunication networks if we set up an OBC. According to the Expert Group there are a multitude of benefits in setting up a centre such as: (a) increase in skilled employment (both direct and with multiplier effects); (b) imparting of valuable training and exposure to international banking for local financial institutions; (c) increasing depth and scope of services available to exporters/importers/investors; (d) increased investment in world class infrastructure and transfer of latest banking technology, especially treasury skills and products on an ongoing basis. In addition several other indirect benefits like attracting regional (South Asian) foreign exchange business and improved international perceptions of the country with foreign investors/institutions. International banks based at the offshore centre can augment the foreign exchange resources of India. Foreign commercial capital can play a key role in making rapid growth possible. India can absorb billions of Dollars in investment capital and spew everything from hot rolled steel to sewing machines. Since capital is obtained on commercial terms, it can be used to buy the machinery, equipment and raw materials at

the most competitive prices internationally. It also leads internally to the adoption of more rigorous investment criteria whit beneficial impact on resource allocation. The offshore banking centre would also enable the Indian banking system to handle the surpluses and needs of genuine international transactions. Indian banks operating at the OBC apart from borrowing in the interbank market can mobilize resources directly from abroad and attract deposits from persons of Indian origin resident abroad and surpluses from the overseas earnings of Indian companies. Indian banks could use the resources they mobilize to book approved loans to finance projects in India and undertake intermediary business in non-domestic currencies on their own account and on behalf of non-residents. The current trends in international liquidity when banks are fairly liquid and emerging improvement in the credit rating of India combined with a deregulation and administration of whatever controls we have intelligently and flexibly may attract an adequate number of international banks representing the spectrum of international capital market. The flow of foreign capital could help India experience rapid economic growth by investing in infrastructure and by adopting latest technology which would raise productivity and improve the competitive position of Indian manufactures in the world market. It is suggested that an offshore banking centre may be set up in Mumbai. Foreign banks of standing and repute representing different geographical areas across the continents may be invited to participate provided they keep separate books for their transactions at the OBC.

Conditions for the success of the Offshore Centre

The factors that are generally considered essential for the successful working of an offshore centre are the absence of taxes, exchange regulations and bank supervision and control. While they are essential, they are not adequate to make a centre a success. It is the understanding they are not adequate to make a centre a success. It is the understanding and flexibility with which the government and central bank deal with the international banks that is more important. London had more offshore business than domestic business in almost all the 25 years of the exchange risk and inflation risk. Actually, the British financial circles and the financial system when confronted with replacement of sterling as a world liquidity medium by the dollar they just turned to dollar and started accepting dollar deposits and deploying them outside the United States. Similarly, Singapore until 1978 operated with an exchange control system and even today offshore banking is segregated from domestic banking system. Neither London nor Singapore which really were offshore centres par excellence can be called tax havens. The taxes are quite onerous in London; and Singapore has taxes which make it less attractive than other centres. Although, offshore business is subject to various taxes,

banks still book their business in Singapore and London than in some tax haven or brass plate branches in the Caribbean or Pacific. In the case of Bahrain also which has all the features we would consider essential for the success of an offshore centre, such as the absence of taxes, exchange controls and bank supervision still has not made as rapid strides as Singapore. Bahrain has been successful because of its political acceptability to Arab World which has surplus funds.

Fiscal the taxes that are relevant for international banks decision to open a branch at the offshore banking centre are the tax on net profits and the withholding tax on interest. Since international banking is carried out on small margins say a quarter per cent or one eighth per cent a tax on net profits as in the case of India would make it unattractive for the banks to come to India. They may prefer to book the transactions if it lends to Indian constituents at a no tax or lower taxes centre rather than India. The only exception would be the case of a centre like London which has the skills and infrastructure in a degree to outweigh the tax advantage of booking the transaction at a tax haven. In Panama offshore banks transactions with non-residents are exempted from tax while those with residents are subjected to tax. In Singapore and Philippines offshore income is subjected to a lower rate. In regard to Indian banks which set up offices at offshore centre their offshore income may be exempted or treated on par with those of foreign banks. Tax on interest which is withheld at source acts as a much greater deterrent than tax on net profits. Since offshore banking is essentially an interbank transaction banks gave to pay tax on their borrowing, interest plus withholding tax. If there is a withholding tax in the borrowers country, the borrower has to pay the withholding tax himself to enable the lender to realize the return which he can obtain tax free in another country. Withholding taxes on interest are really a tax on solved by segregating offshore transactions and exempting them from any tax on interest paid as Singapore and Hong Kong have done. Exchange Control: It is assumed that the present exchange control will continue. This assumption is reasonable in the context of setting up of an offshore centre, since several countries operated their centres with exchange control such as UK and Singapore. But banks in the offshore banking centre be they international banks or Indian banks should have complete freedom to do intermediary business in nondomestic currencies. Dealing in foreign exchange or buying or selling of currencies on a spot or forward basis is a normal function of a bank in the international capital market which is what the offshore centre would be. A standard foreign exchange activity is the creation of deposits for lending purposes. A US bank will trade dollar for Deutsche marks or a Deutsche mark loan and vice versa. Even if one had dollars to make a dollar loan the

forward exchange rate may be such that it is cheaper to take a deposit in another currency for the appropriate period of time and swap it into dollars on a matched basis.

Banks in the international markets also meet the needs of customers by spot and forward transactions enabling the constituent to match or cover his own currency position. But banks rarely confine themselves to merely matching transactions. Banks normally anticipate constituents requirements or market movement by taking a position for or against a particular currency. Such major exchange positions contribute significantly to profits. Banks do observe internal limits to open positions where they are either long or short in a currency on a spot or forward basis and to forward positions where they have a matched position overall concealing long and short positions within the overall maturity ladder. Banks at the offshore banking center may be allowed to square their position either through interbank loans or purchases or through their Head Offices in their home countries. As long as the squaring does not involve Indian Rupee and the Reserve bank, nothing should come in the way of international banks from pursuing this line of activity.

In case of Indian banks operating at OBC, they may be required to cover their liquidity requirements and shortfalls by maintaining a reserve ratio of say 10 per cent. Exchangecontrolwise Indian Rupee would remain soft. It will not be available for trading and Indian residents would be bound by the existing legislation regarding the purchase and acquisition of foreign currencies. But banks at the offshore centre may be permitted to deal as authorised exchange dealers even in regard to domestic transactions. This could be another source of business which may attract foreign banks.

Why Do I Need An Offshore Bank Account? Whether you are a professional expatriate, globetrotter, international investor, or consultant, an offshore bank account could prove invaluable. Relocation, whether on a regular or one-off basis can have serious taxation implications for your assets, but if they are safely anchored in an offshore jurisdiction, barring unforeseen events they can remain there for the duration of your expatriation (and beyond), usually attracting favourable taxation and higher returns. However, it is probably advisable to open an account in your country of secondment for day to day transactions as well. If you are employed in a profession which has a greater than average chance of attracting litigation (for example the medical profession), or are concerned about future attacks on your assets from family members, offshore bank accounts can also prove effective as asset protection vehicles. If you have waited until your assets are under threat, and would now like to transfer them offshore and out of danger, however, we have four words for you - Stable Door. Horse. Bolted. As previously mentioned, initiatives by the OECD and EU have dealt the concept of offshore privacy a bit of a blow, and in several jurisdictions it has been severely compromised. Some individuals choose to address this by interposing an International Business Company (or IBC) or trust between themselves and the offshore account, as it can be the case that the beneficial owner of an IBC or a trust does not have to be disclosed. Some providers also come to arrangements with banks in jurisdictions with strong secrecy laws, whereby reporting requirements (to the bank at least) are minimised. However, this is a complicated area, and professional advice needs to be taken in order to ensure that you are in compliance with the rules of both countries.

The Bush administration's actions regarding the ongoing OECD crackdown campaign may be a silver lining in the tax havens' cloud; the administration appears to have backed away from the organisation's campaign, and has

withdrawn US support for essential elements of the project. This climb-down appears to only be partial at the moment, and ex-Treasury Secretary

Paul O'Neill stated that although America no longer wants to participate in efforts towards world tax harmonisation, there is still room for international co-operation on issues such as tax avoidance. However, the issue looks set to run and run, so watch this space

What Services do Offshore Banks Offer? This depends upon the organisation you choose to bank with, and the jurisdiction in which it is located. Nearly all international and offshore banks offer checking, savings and current accounts, many offer credit and debit cards, and some offer foreign currency services and investment accounts. Larger organisations, usually in the more regulated jurisdictions, also sometimes provide mortgages and other financial products. Other institutions offer IBC registration and maintenance. Increasingly, banks and financial service providers are recognising the need for online facilities (especially if they are hoping to attract an expatriate audience), and many now offer 24 hour online account access, and allow you to conduct much of your banking by e-mail or telephone. However, bear in mind that in a lot of cases, these services (with the exception of online banking) are not offered for free, and the charges can vary significantly between jurisdictions and institutions. Therefore it is probably best to decide what you need from your offshore bank account before you start looking, and if you decide that you do need extra facilities, use them wisely, otherwise the charges can start to mount up.

Which Offshore Jurisdiction Should I Choose?

Choosing a jurisdiction in which to locate your international bank account is tricky at the best of times, and made more so by the constant uncertainty foisted on the offshore community by the OECD, FATF et al. However, if circumstances dictate that you need an offshore bank account, then choose you must, so what should you look out for?

There are several key criteria which any offshore jurisdiction should fulfil before you consider banking there. These include (although are not limited to) the following:

Political and economic stability. Fairly self explanatory, reallyStrict secrecy legislation. Anti-money laundering initiatives have nibbled away at the privacy legislation of many offshore jurisdictions, and especially over the forthcoming months, you will need to keep your ear very firmly to the ground. Some smaller countries have signed exchange of information treaties with larger, more powerful nations in exchange for aid, so you will need to be aware of these if they exist between your country of residence and your preferred jurisdiction/s. Another factor for consideration is that some offshore jurisdictions are in fact the official territories of larger countries, which can sometimes bring pressure to bear on them, with unfortunate results. It is therefore advisable not to bank in a jurisdiction with strong ties to your country of residence, or with an offshore branch of your onshore bank.

Strong infrastructure. A modern and reliable business infrastructure is usually a fairly good indicator of the stability of a jurisdiction, and is essential for a number of reasons. Although it may sometimes be tempting to look to newer and smaller jurisdictions which may have slipped under the

radar of the high tax countries, it is worth bearing in mind that their communications and business infrastructures may not be fully developed, which could make it difficult to contact your provider or access your assets. You should also ensure that your chosen jurisdiction has a full array of financial service providers (i.e. law firms, accountants, other banking institutions) in addition to the one you are looking at.

Convenient location. Although expatriation, by definition, may mean that this differs as you move from country to country, it is still important to consider the geographical location of the country in which you intend to bank. Getting up in the middle of the night to talk to your bank manager sort of cancels out the convenience aspect of offshore banking, so try and make sure the country is at least in a convenient time zone for you!

Investor/customer protection. As previously mentioned, some jurisdictions are more stringently regulated than others, and as such the chances of there being some kind of investor protection measures in place vary. However, in countries where the legislation is geared towards minimising risk, there may be other restrictions in place which limit the returns that it is possible to achieve. Whether investor protection is a major issue with you or not, it is worth being aware that standards can vary tremendously from jurisdiction to jurisdiction, and sometimes between institutions.

What Due Diligence Should I Do Before Opening an Offshore Account?

First and foremost, you should enlist the services of a finance professional. They should be aware of the risks and ongoing issues in the jurisdiction in which you choose to locate, and should also be aware of any suspect institutions. However, initially, it is worth doing a little research for yourself, and there are several things that you can do:

First of all, look at the established institutions in your jurisdiction of choice. In this way, you can gauge the standards of the industry there, and in so doing, give yourself a frame of reference.

Although longevity is an important plus point for an offshore bank in due diligence terms, it is not the only factor to be considered. Keep an eye out for any negative publicity in the media (this is where the internet comes in especially handy!)

Don't do business with a 'brass plate' bank. Although there has been a drive towards eradicating this type of institution, you need to make sure that the bank that you intend to entrust your hard earned cash to is the real deal (i.e. has an office, staff, a license, money, etc. Little things like that!) If you have come across the institution via its website, make sure that it is possible to make contact by other means than e-mail. Although the presence of a physical mailing address, and telephone and fax details do not in themselves indicate that a bank is legitimate, their absence may be a red flag.

Be wary of banks or providers offering interest rates that seem unusually high. Although there is certainly scope for good returns in the offshore arena, things that seem too good to be true usually are. When dealing with your future happiness and financial well being, it is a good idea to leave your faith in human nature at home!

So, how do I go about opening an offshore bank account then?

Due diligence is not just a one way process, and the amount that banks are required to conduct on potential customers increased greatly with the advent of 'Know your Customer' legislation in the last few years. If you are applying to open a bank account through an intermediary, or with an institution that has agreed to implement KYC, you will need to provide at least the following:

A notarised copy of your passport. If you don't have a passport, then a notarised copy of your birth certificate or driving license should be acceptable.

A recent utility bill (or equivalent document) with details of your permanent address.

A bank reference letter drawn on your domestic banks letterhead (or on the form sometimes provided by the offshore bank), and signed by the bank manager, stating that you are a reliable and suitable customer. The recommendation is that the reference letter is completed by a bank with which you have had a two year banking relationship, but six months is really the bare minimum.

A professional letter of reference from a doctor, lawyer, and accountant in your country of residence.

A letter of intent on source of funds. This is where you must lay out the projected account activity, and also the expected source of any funds deposited. KYC legislation means that if there is any suspicious or unusual account activity (i.e. if the actual amounts deposited or frequency of deposits differ from your projections), the banks must investigate this, and if necessary pass the information on to the relevant authorities.

The required minimum deposit. This will vary from institution to institution. It is difficult to discern whether 'Know Your Customer' legislation came about as a result of the efforts of the FATF (Financial Action Task Force), as a result of the efforts of the IRS, or as a combination of the two. In some people's minds, however, it is inextricably linked with the latter, and with the introduction of 'Qualified Intermediaries' and 'Qualified Jurisdictions' in 2001. Qualified intermediaries are primarily concerned with

US citizens, and those with US source income, and are required by the IRS to implement KYC in return for simplified reporting, and withholding tax procedures.

However, it all gets a bit complicated from here on in, because it is possible to find a qualified institution in a qualified jurisdiction, a non-qualified institution in a qualified jurisdiction, and sometimes a qualified institution in a non-qualified jurisdiction (although this is only permitted if the institution is a branch of a company resident in a qualified country). Got all that? All that this really means is that unfortunately US citizens have got the short end of the stick again, in that some banks may choose not to take them on as a result of the extra reporting requirements. However, once again this is a complicated matter, and best discussed with a qualified professional.

The EU's Savings Tax Directive

Meanwhile in Europe, the EU introduced the Savings Tax Directive, which means that as from July, 2005, all EU member states and a number of their offshore dependent territories are either placing a 15% withholding tax on the returns on savings paid to citizens of EU member states, or are passing information about the payment to the citizens' home countries. The EU put pressure on Switzerland, where tax avoidance is not a criminal activity (and which is not actually an EU member), to agree to exchange of information on the identities of depositors and savers, but the Swiss, who have always been fiercely protective of their banking secrecy laws, put forward a compromise whereby their existing withholding tax system would be extended and strengthened, which was reluctantly accepted by the EU.

After the first year of operation of the Savings Tax Directive, however, it became clear that most savers and investors have easily escaped the Directive, when statistics showed far lower levels of reported or taxed interest had been expected.

In Switzerland, for instance, in the first six months of the operation of the legislation, Swiss institutions withheld and passed on to the tax authority about EUR100 million (US$128 million) from the savings of individuals resident in EU member states.

On the surface it seems implausible that Switzerland, the world's largest private banking centre with more than 500 major banking institutions and home to an estimated 35% of the world's private wealth, could collect such a relatively small amount; but given the relative ease with which the directive can be circumvented, the figures are not really surprising.

The most obvious route is for investors to place their assets in jurisdictions not covered by the directive; anecdotal evidence suggests that Dubai, Hong Kong and Singapore have been major beneficiaries. However, there are a number of investment instruments that have, for whatever reason, not been included within the scope of the directive.

Other major banking centres have also reported lowly withholding tax revenues: Luxembourg EUR48 million, Jersey EUR13 million, Belgium EUR9.7 million, Guernsey EUR4.5 million and Liechtenstein EUR2.5 million.

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) lending to any non-resident; (ii) specific category of investments permitted by RBI; (iii) loans to other domestic OBUs and (iv) loans to domestic

entities in foreign currency for project/ 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 non-residents; 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.

Incentives for OBUs

According to the recommendations of the Group, (a) the liabilities of the OBU will have to be exempt from CRR/SLR requirements, (the RBI, may, however, prescribe minimum liquid assets requirements for prudential

reasons if felt necessary); (b) the rates of income tax should be low, not exceeding 10 per cent; (c) there should not be withholding tax on deposits raised from non-residents; and (d) transactions of OBUs should be exempt from stamp duty. The Expert Group felt that these conditions would enable OBUs to be competitive with other such regional centres abroad so as to attract non-resident business for its growth. The clear identification/separation of funds flow in the domestic OBUs and the parent bank will ensure that foreign currency flow do not impact domestic monetary aggregates. This itself would justify exemption from CRR/SLR requirements.