Offshore finance which includes offshore banking is a collective term that means financial transaction conducted in a in a low tax or tax haven jurisdiction whose location is somewhere other than the mainland (onshore) this includes investment schemes (funds), trusts and others (Wikipedia 2010). Some of the countries choose to develop offshore business and become OFC for a number of reasons. There is because they can generate income and improve their employment rate through offshore business in their countries. For instance, Cayman Islands and the Channel Islands are one of the successful OFC that rely on offshore business. OFC can be used for legitimate reasons and dubious reasons. For example, OFCs are often associated with underground economy and organised crime via tax that is avoidance of tax and money laundry because of the great privacy they provide.
History of Offshore Banking and Finance
Although the Caribbean is often thought of as the centre the first offshore centre developed in Europe with Monaco being the first to become a tax haven when it is stopped all personal taxation in 1868(Pala 159). Ever since then Monaco has grown but it is one of the few countries on the Organisation for Economic Cooperation and Development's list of uncooperative tax havens. Switzerland also was one of the first to lead the way in the development of offshore financial centres. It created the notion of banking secrecy and invented anonymous numbered banking accounts, for which it is still known. It was not until 1936 when OFCs started to exist in the Western Hemisphere. They soon spread around the world to places like Bahamas, Caribbeans, and the Cayman Islands
Regulation of offshore banking and finance
Offshore Financial Centres are monitored and controlled by 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. Some of the ways in which offshore financial activities are monitored
Reinforcing anti-money laundering regulations in many countries including most popular offshore banking locations means that bankers are required, to report suspicion of money laundering to the local police authority, regardless of banking secrecy rules.
In some countries e.g. US, 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 for checking.
Authorities are allowed to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal.
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.
Benefits of Offshore banking and finance
Offshore banks can sometimes help provide access to politically and economically stable jurisdictions. So people who fear their assets may be frozen, seized or disappear can always place it in offshore centres.
Offshore is good for tourism because it can competitively engage. It can help developing countries attract investment and create growth in their economies, and can help spread world finance from the developed to the developing world.
Another benefit is that interest is paid by offshore banks without tax being 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.
Some offshore centres may offer financial services that may not be available from domestic financial institutions such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere.
Disadvantages of offshore banking and finance
Money or assets kept in offshore centres are less financially secure. For example, in a banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander.
Offshore banking is prone to illegal financial transactions. For instance, underground economy and organised crime where by money or assets are acquired through illegal means such as gambling, prostitutions. This is made easy because of the privacy and secrecy they provide to customers.
Offshore jurisdictions are often far away from the mainland making them very difficult to visit, even information not easily attainable as with onshore financial institutions.
PART 2: Reviews on LABUAN IBFC
Literature review
According to Article Alley (2009), Malaysia had develops the island of Labuan as official offshore financial centre in 1990 and its name is Labuan International Offshore Financial Centre (IOFC). Labuan IBFC's is located in a strategic location that enables for it to prosper more easily. It is located between two growing economies of China and India and several other regional financial centres. So, the Labuan IBFC can take advantage of investment opportunities since it is located in a better position. Labuan IBFC offers a wide range of financial products and services to customers around the world especially those in the Asia Pacific. It includes Labuan banking (including investment and Islamic banking), Insurance and insurance-related services, Fund management, Labuan trusts, Leasing, Factoring, Investment Holdings, Limited Partnership, Management Company, Islamic financial products and services.
Besides that, The Organisation for Economic Co-operation and Development (OECD) had listed Malaysia in the "White List" (Press Release, 2010). Malaysia white listed by OECD is due to the Labuan International Business and Financial Centre (LIBFC) that have substantially implemented OECD standards for transparency and exchange of information between countries. This is an advantage to Labuan IBFC because white listed by OECD will attract more investors.
Since January 2008, the author stated that some changes were made to the way Labuan was run (Article by Labuan IBFC Inc. Sdn. Bhd, 2010). For instance, it restructured and renamed its self to Labuan International Business and Financial Centre (IBFC) to expand the growth and international status and in keeping with its goal to be the premier IBFC in the Asia Pacific region. In order to achieve the goal, Labuan came up with five key areas of improvement which are holding companies, Islamic finance, insurance including captive insurance, private wealth management and fund management. These are the areas that Labuan will focus its attention on to heighten the success of the offshore centre.
In addition, Labuan also came up with legislative changes (Article by Labuan IBFC Inc. Sdn. Bhd, 2010). The laws in force comprise the new Labuan Islamic Financial Services and Securities Act 2010, Labuan Financial Services and Securities Act 2010, Labuan Foundations Act 2010, Labuan Limited Partnerships and Limited Liability Partnerships Act 2010 while the four amended Acts are the Labuan Companies Act 1990, Labuan Business Activity Tax Act 1990, Labuan Financial Services Authority Act 1996 and Labuan Trusts Act 1996 (Article by Labuan IBFC Inc. Sdn. Bhd, 2010).
According to New Straits Times (2010), Labuan IBFC Inc chief executive officer David Kinloc said that Malaysian need required specific approval for using of Labuan IBFC's products and services before the new legislations implemented. But, nowadays Malaysian with foreign assets or foreigners with Malaysian assets are able to invest in Labuan IBFC by structure their investments. The new legislation also introduced new trust and estate management products to attract more investors.
In the Daily Mail Article, Labuan IBFC reported positive growth in all key business sectors in 2009 during the economic downturn. The growth is said to be attributed to strategic initiatives carried by Labuan FSA in 2009 including strengthening of the legislative framework and improving efficiency in important business processes. All ideas were carried out in accordance with the goal of repositioning as the premier international business and financial centre in the Asia Pacific region. The legislation investigation and analysis was undertaken in effort to help improve Labuan's legal framework which is still a need for both international best practices and competitiveness.
From the The Star (2010), I found that Labuan IBFC Inc Sdn Bhd is the marketing agency for Labuan IBFC. According to Labuan IBFC Inc Sdn Bhd chief executive officer David Kinloch, they had spent a great deal of time to promote the Labuan name as the international business and financial centre for South East Asia. For instance, they got the approval to open a representative office in Hong Kong on 1 September 2010. They are also looking at China, India, Indonesia, the Philippines, Vietnam and other emerging economies to expand their offshore business. Since 2009, Labuan holding companies had been permitted to set up a regional headquarters or management office in Kuala Lumpur to bring convenient to those want to use Labuan IBFC's products and services. However, Labuan banks could set up one or more offices anywhere in the country but no retail banking activities is allowed. Besides that, Labuan IBFC is also upgrading the level of professional services by recruiting specialists in banking, trusts and Islamic finance.
By promote Labuan name in Asian countries, Labuan IBFC also focus on Indian investors. According to Free Press Release (2008), Crawford is confident of positive response by Indian investors. There is because Labuan IBFC is located in a strategic place and time zone that bring convenient to the Indian Investors. Besides that, Labuan IBFC can provide a low cost environment to facilitate business operations, a wide range of Islamic financial and conventional products and a complete spectrum of service providers to Indian Investors.
According to Chief executive officer Martin Crawford, Labuan IBFC can be safe harbour during the current economic uncertainties (Btimes, 2010). There is because Labuan IBFC's captives are registered under the Offshore Insurance Act which can offers greater flexibility to investors. Other than great flexibility provided by captives, he also said that the well facilities, infrastructure, legal and tax framework in the Labuan IBFC will attract investors to take part in the global captive insurance sector. In this article, a new innovation in offshore captives which are the protected cell company (PCC) concept was introduced by Crawford. PCCs mean that a company's assets and liabilities can be separated among different cells of itself. Therefore, creditors can only have access to the assets of a designated cell and not the others when there is the event of excessive claims or insolvency exists.
Borneo Post Online (2010) stated that Labuan is located in a strategic location with access to developing economies such as China and India. Therefore, setting up a company nearby Labuan will be a quick and simple process with the approvals coming from the Labuan Offshore Financial Services Authority (LOFSA). Besides that, the company can access to expertise and world class infrastructure in Labuan. By leasing ships through Labuan, shipping business can enjoy significant tax benefits instead of spending more than they really need to spend. Besides that, Labuan has provided tax-regime and regulatory environment that has helped both local and foreign companies to reduce their operating costs through innovative leasing structures.
According to Baba and Amin (2009), Labuan IBFC develops an Islamic banking and takaful business in order to maintain the competitive edge of the Labuan IBFC. By developing an Islamic banking and takaful business in Labuan IBFC, the authors need to determine the offshore bankers' knowledge and perceptions of Islamic banking. However, the results of this survey show that Labuan offshore bankers do not have a clear understanding of Islamic banking principles and practices but the offshore bankers are willing to train their officers in Islamic banking. The findings also show that Labuan doesn't have competitive advantages over Bahrain and London and they are currently the leading Islamic finance centres in the world. There is because Labuan IBFC has two major disadvantages which are poor physical infrastructure and Labuan's inherent location disadvantage.
PART 3: ISSUES ON OFFSHORE BANKING AND FINANCE
Issue 1: Money laundering
Literature review
Money laundering is the financial transaction are involved with the large amount of the money are come from the illegally activities and given of the viewing is coming from a legitimate source. We also consider as money laundering is the illegal fund transfer to the legal fund. The criminal are laundering or hide their ill gotten profit from Internal Revenue Service by using offshore center (Bhum, Levi, Naylor, Williams, 1999). There have many sort of criminal, from "stock fraudsters to corporate embezzlers to commodity snuggles" (Bhum, Levi, Naylor, Williams, 1999). The offshore centers are offer "freedoms and services and opportunities" (Bhum, Levi, Naylor, Williams, 1999). Clients get freedom from exchange controls, taxes, reserve assets ratio requirements, and disclosure of information. The examples of illegally activities are such as terrorist activity, drug activity, illegal arms trade and other illegally sources.
When the principles of bank for provide and protect the information of bank are having in the 1934 Swiss Banking Act been created, the money laundering having be started become popular in the offshore banking accounts. Criminal organisations are making wide use of the opportunities offered by financial havens and offshore centres to launder criminal assets, thereby creating roadblocks to criminal investigations (Blum, Levi, Naylor and Williams, 1998). In this situation, we noted that the law are provided in the offshore centre can be making the criminal become visible and let them having the shield for become more easy for them to transfer their fund for the illegal activity.
In the research of the Joint Research Centre on Transnational Centre in June 2006, has been also prove that the lesser of the law enforcement risk has been become the greater the probability that the criminal can be using the offshore centre to launder the process of the illegal activities. The criminal also trying for let the illegal money disappears in offshore centre, which will become difficult for the government to taking that action to them (Shelley, 2001). Offshore financial centre creates barriers that make it difficult for authorities to prosecute money laundering and other financial illegal activities. Even when authorities begin investigations, only about one half of those investigations ever result in sentencing. Money is harder to trace offshore than domestically due to laxer banking secrecy laws (Davis, 2008).
Panama is an offshore financial centre that includes offshore banks and various forms of shell companies that have been used by a wide range of criminal group globally for money laundering. The majority of money laundering activities in Panama is narcotics-related or the result of transhipment or smuggled, pirated and counterfeit goods through Panama's major free trade zone, the Colon Free zone (CFZ). The funds that generated from those illegal activities are susceptible to being laundered through a wide variety of methods which including the Panamanian banking system, Panamanian casinos, bulk cash shipments, pre-paid telephone cards, insurance companies and so on.
Analysis
Money laundering is also known as "black money". All the money involved in money laundering is come from the illegal activities such as drug trafficking, human trafficking and so on. They take offshore centre as the middle platform to let the "black money" turn to "clean money", which means that they are transfer the illegal money in order to let the money to be use in the public. The rules and law for offshore centre to let them are having the chance for the money laundering activities. From the literature review that we had done, we knew about Swiss is the one of the famous place to run money laundering. First of the reason is the created of the Swiss Banking Act. In the 1934 Swiss Banking Act, the information for the customer for the offshore banking will be protected and will not simply leak out to anyone. The criminal will not worry about the investigation from their local government. The government will hard to taking action on their criminal because of the lack of enough information. In the research, we also finding that many of the investigation are having on the offshore banking for the money laundering. But half of them are did not having any result and output for the investigation. Because of the rule in offshore centre, the investigation will become harder to track the coming of the money with the onshore centre. The law of the offshore banking can offer the advantages and benefit to the public. But most of the criminal are use the law to do something illegal.
Issue 2: Tax evasion
Literature review
Offshore tax evasion refers to the practice of hiding assets in offshore accounts for the purposes of avoiding paying taxes on the money. It can occur multiple ways, which including putting funds into an account that the internal revenue department cannot find, or setting up a shell corporation that is created for the sole purpose of shielding the business from tax liability. In general, tax evasion is mean by the individual or organization using the illegal way to avoid to paying the tax for their responsibility. These of the action are considering as the illegal activities, the individual or organization will get the criminal charges and substantial penalties. That is having the difference of the tax evasion and tax avoidance. The tax avoidance is using the legal way for reduce the heavy tax rate, and the fund are not become for the money laundering. These gray areas provide a great opportunity for people to save on taxes or secretly transfer money into other accounts. Unfortunately, when people try to push the envelope in offshore finance, the legal line is often crossed (Davis's, 2008).
An offshore centre is a country which offers to the residents of other countries the ability to establish companies and to use its financial services for activities outside this centre, by offering low taxation rates. The aim of the clients is to make use of the lower tax rates offered by the offshore centre which is not identical to tax evasion (Rossidou-Papakyriacou, 1999). Offshore tax evasion is become a high risk to the public finances. According the case in United Kingdom for year 2007, the HMRC has been required to five banks for supply the information on offshore accounts held by UK residents. After the analysis of the data, that are show about 25 percent of individuals declared income from their offshore accounts, this been showing the risk of the tax evasion has been happened in the offshore banking and finance. The tax evasion is not only happen for individual, is also been happen in cooperate. In India, on December 12th, 2010 the Finance Ministry of India has been state out has started having investigations for around 100 companies about the tax evasion with operations in offshore tax havens.
For example, Caribbean is considered a tax haven for many companies and money launders. The area endorses itself as an offshore center, requires little or no tax burden, has very strict bank secrecy laws that provide customer confidentiality, has a large financial and banking center, offer low incorporation fees, offers free movement of currency into and out of country and has few laws that criminalize money laundering and other financial crimes.
According to the US State Department, Panama had over 350,000 foreign-registered companies, for example subsidiaries of foreign multinationals, all of which face low to no taxes and regulations. This high rate of foreign incorporation- the country is reportedly second only to Hong Kong and it makes this country a magnet for tax evasion.
Analysis
Tax evasion is one of the other common issue for the off shore centre. Many people are using the offshore advantages to avoid pay tax in the country. If the individual or organisation using this illegal way to avoid paying the tax in their country, this can be consider as a tax evasion. Some of the cases of money laundering do correlated with tax evasion. The funds of tax evasion become the fund of the money laundering. The one of main purpose of the offshore centre is provide finance facility to other resident to having finance activity with the low rate of the tax.
Although the offshore offering low interest rate, the offshore banking is not having the target to the person are wanted to having tax evasion. In our research is stated of that, in year 2007 the HMRC having been analysis the information provided by the 5 bank for the offshore banking account holder and find out that 25 percent of the holders has committed tax evasion. We can know that the tax evasions in offshore centre are getting known by many of the individual now. This will be decrease the income for the most of the country. If more and more of the people using this type of method to avoid pay tax, the finances of the country will become down seriously.
This practice had been broadly used by many individuals and also businesses. The main challenge for the internal revenue department in offshore tax evasion schemes is that it is very difficult to detect and prosecute offshore structures when the internal revenue department has no jurisdiction to require the foreign countries to turn over account information. As such, offshore tax evasion remains prevalent in the world wide.
Now of that day, we not only needed the concern about individual for the tax evasion. Besides, large numbers of companies are involved too. For example, that is around 100 numbers of companies in India having the investigation about the tax evasion. Most of the countries are trying to take more action and punishment to the individual or company are involved in the tax evasion in offshore centre.
As what US department of Justice Documents explained, tax evasion and financial secrecy are linked closely to drug trafficking, money laundering and terrorism which may destroy lives and livelihoods.
Issue 3: Security
Literature review
"The distance and different laws and government philosophies can create more risk," said Rich Mogull, research director for information security and risk at Gartner Inc. in Stamford, Conn. In the market-oriented economies, "withholding financial information from competitors, suppliers, creditors and customers" is a precise that business people assume from the beginning (Bhum, Levi, Naylor, Williams, 1999). Indeed, most countries have wide range of laws for the purpose to protect the information. Clients are concern about the potential security when access to confidential and private data. The information privacy is highly correlated with the advances of communication (Bhum, Levi, Naylor, Williams, 1999).
There are several steps to make light of risk and secure Offshore Operations. First, clients need to know their security and privacy requirements before they start. Second, clients need to do a detailed security assessment before signing any agreements that include regulatory compliance. Last, they need to do a periodic assessments, audits and tests. (Banerjee, Sudhir , Thakur, 2008; Willoughby, 2003)
In the research we can notices that, the data storage for the offshore centre is can hold by many of the person. First of that, the customer maybe provide the privacy information to the offshore banking centre for the finance propose in one of the country. Besides, the information on customer can be store in a computer server in another country. In addition, the computer server is moderator by a person come from another third country and the moderator is currently located in a fourth country. For this situation, we can know the all this four country have the opportunity to giving protection of this information. In this way, which country having to the right to protect the information to show out in public. Consider one of the cases, one of the people in different country who have hacked into the computer server for offshore banking to getting privacy information about the customer in other country. And then they sell out the information to the third country. That is difficult to take action to them and fulfil the privacy rule for offshore centre (Bhum, Levi, Naylor, Williams, 1999)
Analysis
The different of the countries may have the different of the rules and law in offshore centre. This is risky to offshore customer. From the literature review we noticed that the financial information from competitors, suppliers, creditors and customers is the most of the important part for the business. Nowadays, the customer will more concern about how the offshore centre to protect their information. All of the offshore centres having different law to protect their customer's information.
Issue 4: Drug Trafficking
Literature review
Generally, drug trafficking refers to the sale and distribution of illegal drugs, for example, Heroin, Cocaine and so on. In terms of drug trafficking, the Caribbean generally acts as a transshipment zone from the originating country to the consuming country. South America, a major producer of illicit drugs and the United States, a major consumer of illicit drug, are both close to the Caribbean islands. Transnational organized crime groups employ several common criminal methods throughout the region. The drugs are then retrieved by traffickers, who use high-speed boats if the shipment lands in water. Traffickers also use legal and illegal airstrips, which are mad on road or in remote fields (Frank Shanty, Patit Paban Mishra).
Many items such as car interiors, suitcase, live and dead animal and people have been used to smuggle drugs. Many of the islands are also used as staging area for different drug trafficking operations. Because of the geography of the islands, all of countries use maritime vessels, particularly high-speed boats, to smuggle drugs into the area.
From the press and articles, Cocaine and Marijuana are the major illicit drugs smuggled into and out of the Caribbean. The US State Department 2004 International Narcotics Control Strategy Report identified the Bahamas, Jamaica and the Dominican Republic as major transit points for the shipment of South American narcotics to the United States and other markets. Cocaine is by far the most profitable drug trafficked in the Caribbean. The primary route for Cocaine trafficking is through Jamaica and Haiti, followed by routes through Puerto Rico, the Bahamas and the Cominican Republic. Columbia has recently become a major competitor in the marijuana trade. The Caribbean provides an alternate route for synthetic drugs, or club drugs such as MDMA (ecstasy) into the United States from Europe.
Proceeds from drug trafficking are routinely laundered through many Caribbean countries. Some of the countries in Caribbean have free-zone areas in which goods can be held and then shipped without an additional import or duty tax. The technology revolution has greatly increased the offshore financial activities especially in the areas of communications and telecommunications. However this also makes those illegal activities happen easily.
An arm trafficking is growing rapidly in the region and is both interregional and intraregional, with many of the firearms coming from South America. The arms are usually traded for drugs as payment and are kept in the country or region. Most of the arms involved are AK-47s, and gun running is directly involved with the drug trade. Of all the countries in the Caribbean, Haiti is the most heavily involved in the arms trade.
Analysis
From the literature review, we knew that the drug trafficking had been getting seriously in recently. The main reason for the increasing of this issue is because of the number of drug consumers keep increasing. Those drug traffickers can make a huge profit from the drug smuggling. However they have to bear the high risk as well.
In order to smuggling those illegal drugs, traffickers would use high-speed boats if the shipment lands in water or use legal and illegal airstrips, which are mad on road or in remote fields. They will also use many of the islands as the staging area for different drug trafficking operations. In general, items such as car interiors, suitcase and dead animal were used to smuggle illegal drugs.
From the press, majority of the drug consumers are from US, meanwhile the drug suppliers are from Mexico and Caribbean.
PART 4: COMMENTS AND RECOMMENDATION
Regulation
Comments
Labuan Financial Services Authority (Labuan FSA) is the regulatory authority of Labuan International Business and Financial Centre. Since its establishment, it takes on a larger and broader role and was looking at areas such as marketing, tax structure, legal framework and structure promotion to make Labuan visible. Besides that, its establishment further underscores the government's commitment to make Labuan a premier IBFC of high repute.
Labuan FSA is doing its job greatly by enacted 8 new Acts to bring with its positive changes in the way the jurisdiction operates while greatly enhancing its product and services offering. The enactment of these new Acts will further secure the regulation in Labuan IBSC and attracts more foreign companies to invest their business. Furthermore, Labuan IBFC is having a highly flexible tax framework with the remains of Labuan Business Activity Tax Act of 1990 (LBATA). It is one of the most business-friendly and flexible framework in the world. This is because Labuan companies operating from Labuan opt to be taxed under the Malaysian Income Tax Act of 1967 as an alternative to LBATA. This has been mandated to allow such companies to further benefit from Malaysia's extensive double tax agreements with more than 70 countries globally.
In the concerned of legislation, Labuan FSA has reviewed the existing legislations in order to make the required changes as well as to propose new activities to expand and deepen the financial services industry. It is also taking measure to propose new activities in order to expand and deepen the financial service industry.
Recommendations
There are several recommendations for the Labuan FSA. First of all, Labuan FSA should target on large companies from China, India and Middle East. With Malaysia's extensive tax treaty network over 63 countries and the introduction of a more flexible tax framework, it will definitely support this initiative. Besides that, revision of pricing structure pertaining to incorporation and maintenance fee charges would further enhance Labuan IBFC's competitiveness. Lastly, efforts should also be taken to develop Labuan's captive insurance business, which has enjoyed commendable growth over the years.
Location
Comments
Labuan IBFC is Malaysia's only offshore centre and has a strategic position. It is strategically located between the two growing economies of China and India. Besides that, through Labuan's proximity to other regional financial centres, it puts Labuan IBFC in a unique position for tapping many investment opportunities in the South East Asia. Furthermore, with its strategic location, it is currently home to more than 6,500 offshore companies and more than 300 licensed financial institutions including world leading banks. Labuan IBFC is using their strategic location well by embarking on an aggressive growth strategy to become the premier international business and financial centre in the Asia Pacific region.
In other words, Labuan IBFC's strategic location is the key strength of itself. Therefore, Labuan IBFC did well by focusing on five core areas, which are offshore holding companies, captive insurance, Shariah-compliant Islamic Finance structures, public and private funds and wealth management. Besides, Labuan IBFC is well placed to enhance its lead as an Islamic financial hub with burgeoning interest around the world in Islamic finance. The formation of the Malaysian International Islamic Finance Centre has further enhanced Labuan IBFC's position in international stage.
Recommendation
With Labuan IBFC's strategic location, traders and investors from China, India and Middle East will definitely gathered and invest in here. Therefore, Labuan IBFC shall set the currency rate at a reasonable level to attract more foreign investment and hence boost up our country's economy. Furthermore, Labuan IBFC shall build some entertainment and accommodation facilities so that it is convenience for foreign investor to invest at Labuan in long-term.
Function
Comments
Labuan IBFC is one of the original participating members on the working group of the Malaysia International Islamic Financial Centre (MIFC). Therefore, Labuan IBFC is the benchmark that will make Labuan even more attractive for Islamic banks, takaful and re-takaful companies and fund managers. Other than that, it is also responsible for setting national objectives, policies and priorities for the orderly development and administration of Labuan.
Compared with other sector, the business activities of Labuan IBFC are specifically in banking, insurance and insurance related business, trust and fund management, incorporating companies and etc. Besides that, in line with the country's stated goal to be an International Islamic Financial Centre, Labuan IBFC had also deep focus on Shariah-compliant products. And, Labuan IBFC is also growing a reputation for Islamic wealth management, attracting Muslim investors and family offices to establish trusts, foundations and investment holding companies in the jurisdiction.
Recommendations
With the status of the Malaysia's only offshore centre, Labuan IBFC should continue benchmark itself against other international business and financial centres all around the world by further enhance its delivery systems. Besides, Labuan IBFC should further improve their electronic lodgement system used by authorised trust companies, so that it can boost up the efficiency and response time for the submission of documents and payments. Furthermore, it should also leverage on the Malaysian Islamic Financial Centre strategy by promoting syariah-compliant trusts and foundation, which will complement Islamic financial products and services that already available in Kuala Lumpur.
Solution to the issues
Money laundering
The primary purpose of organized crime is to make profits. Like any business, the purposes of profits are to enjoy it and re-invest it in future activity. However, for the organized criminal, profits are close to the source of the crime represents a particular vulnerability and unless the criminal can effectively distance himself or herself from the crime which is the source of the profit they remain susceptible to detection and prosecution. Hence, there is a need to launder their illicit profits to make them appear legitimate. This process is well known as money laundering.
Anti money laundering is the term used by banks and other financial institutions such as offshore centres to describe the variety of measures they have to combat this illegal activity and to prevent criminals from using the financial system in general as the conduit for their Proceeds of Crime.
The best way to solve money laundering issues is to know their customers. Offshore centers should actively screen all new customers prior to approving any new accounts. Besides that, offshore centers can also monitor the behavior of existing customers to see how they use the services provided by offshore centers. Proper monitoring can help offshore centers to find potential money launderers within the system.
In order to solve money laundering problems, offshore centres should request all of their customers provide supporting documentation for proof of identity and the origin of their funds before conducting any transactions. They should place great emphasis on verifying the identity of their customers and determining that their funds are derived from a legal origin before any transactions.
Furthermore, there are various software programs developed to help offshore centres to screen and detect potential money launderers. These programs will give access to government watch lists and financial records so fraudulent customers will be revealed. Some programs will also provide background checks so offshore centre can make sure whether those applicants are providing truthful information on their financial applications or not.
Tax evasion
Offshore tax evasion refers to the practice of hiding assets in offshore accounts for the purposes of avoiding paying taxes on the money. Offshore tax evasion can occur multiple ways, which including putting funds into an account that the internal revenue department cannot find, or setting up a shell corporation that is created for the sole purpose of shielding the business from tax liability. This practice had been broadly used by many individuals and also businesses. The main challenge for the internal revenue department in offshore tax evasion schemes is that it is very difficult to detect and prosecute offshore structures when the internal revenue department has no jurisdiction to require the foreign countries to turn over account information. As such, offshore tax evasion remains prevalent in the world wide.
In order to solve the tax evasion problems, relevant authorities should implement in order to strengthen its legislation for foreign investors. Many high tax jurisdictions have enacted legislation to counter the tax sheltering potential of tax evasion. Following are the general legislation which tends to operate in order to solve tax evasion problems in offshore centres.
Individuals or businesses have to attribute their income and gains of the companies or trusts in the tax haven to a taxpayer in the high-tax jurisdiction on an arising basis. Example: Controlled Foreign Corporation legislation
Offshore centres focused more on restrictions on deductibility, of imposition of a withholding tax when payments are made to offshore recipients.
Exit charges are needed, for taxation of unrealised capital gains when an individual, trust or company emigrates.
However, many jurisdictions employ blunter rules. For example, in France securities regulations are such that it is not possible to have a public bond issue through a company incorporated in a tax haven.
By blaming offshore financial centres for everything from the banking crisis to taxation shortfalls, the G-20 (a group of finance ministers and central bank governors from 20 economies: 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank) and OECD member-nations now seek to eliminate offshore financial centres and plunder protected offshore wealth under the guise of transparency and preventing "unfair tax competition." They are actually trying to eliminate offshore centres in worldwide in order to solve the tax evasion problems arise from transactions of offshore centres.
The myth perpetuated by the OECD and G-20 nations is that offshore financial centres encourage tax evasion. However, in reality, excessive tax burdens in welfare states encourage tax evasion, leading to capital flight to OFCs. Logic dictates that if politicians wish to eliminate capital flight, they should lower their country's oppressive taxes. Unfortunately, world leaders may instead be heading, towards a global "tax truce" where all nations are taxed at the same high rate. For this reason, people of the nation will facing high tax problem and it reduce their cost of living and cause economic downturn.
As a solution, government of the nation should focus more on the tax system in their nation. By lower their taxes, it can help to increase their nation's GDP because people have more money to spend. In another words, if the nation charge higher tax to public, the country might not able to well-manage their economy. And it may lead the people of the nation toward offshore system in order to evade the higher tax charged by their nation.
Security
One of the most sensitive issues in the offshore centres and leased staff industry today, is the security of information between vendor and client. Most of the offshore bank accounts can be considered less secure financially. From the jurisdiction and legislation implemented by the offshore centres, clients can get to know how secure the transaction with the institutions is.
Offshore centres and its client should look into their own capabilities to keep the traffic of information smooth and safe. The big picture shows that while offshore service providers have a grip on internal security practices, information may leak out when clients don't do their job well. Besides that, there are also many cases involving intellectual property right infringement happened before. These issues may not pose great risks to the outsourcing offshore centres, but the lines between institutions and client must be clearly defined to prevent conflict happened.
For example, during year 2008, with the world banking crisis, the only savers who lost money were the ones using offshore banking system in the Isle of Man. They did not receive a full refund even after 11 months, by mid November 2009 though 90% of the depositors were paid. To make sure the same thing doesn't happen to clients, they should always weigh all the terms of the bank, especially the jurisdiction.
The following are the suggested solutions to help clients to avoid any security issues that may arise when having the transactions with offshore centres:
Clients should check on the vendor's track record, which clients can have a clear understanding on the vendor's credential and industry record. Particularly, the investigation should cover the vendor's IP assets, security policies, business relationship with other vendors. This can help to build a strong and reliable image between the vendor and clients; therefore it may avoid many unnecessary conflicts or problems.
While vendor and client's security software may be in place, their personnel may not be aware of it. Somewhere along the way a personnel may unknowingly leak important data. This will exposes the company to unpredictable damage. So before any deal with offshore partner, vendors have to gauge their client's security infrastructure, for example, pay particular attention to location, office buildings, Internet service provider, power supply, IT personnel, among others.
There are certain limits to shared business information, therefore vendors don't have to share everything with their clients, and same goes to the clients. The data control system in offshore allow sharing of only the needed date so that can avoid any unauthorized use of vital business information happen.
Drug Trafficking
Drug trafficking, is one of the major issues that would arise from the transactions in offshore centres. In general, drug trafficking can be refers to the sale and distribution of illegal drugs. In many countries, drug trafficking carries a severe penalty which include death penalty, prison sentence. For example, in year 2010, two people were sentence to death in Malaysia for trafficking 1 kilogram of cannabis into the country. Although drug trafficking might bring a serious penalty to the trafficker, however because it can bring a huge profit to the trafficker, so they are willing to take this high risk in return for the benefits.
Drug trafficking is such a problem that can be solved to a certain extent by having a systematic outlook. We, as a human being, can combat drug trafficking in some ways or the other. Firstly, we should create awareness among the youth. By education the people, especially the youth, it can help them to recognize the consequences and the bad of consuming illicit drugs.
Countries should work in together with the United Nations to reduce the demand for drugs by utilizing effective practices in treatment, law enforcement and prevention. Research should also be funded and continued to discover the best ways of communicating a drug free message and a positive attitude toward healthy lifestyle choices. Our world leaders must be educated about the vast societal costs of drug use and become a part of each country's prevention strategy. Policymakers should be aware of the United Nations' guidelines against drug use as well as their own countries' acceptance of those signed treaties against illegal drugs and drug trafficking.
Some countries derive a large portion of their Gross National Product from the sale and distribution of illicit drugs. As a suggestion from Pauline Go, the revenue streams should be replaced or stopped in order to join hands together to combat drug trafficking. And this can be done if the US government publicly recognizes its "partner countries" and offers them assistance to improve their economies. From the article, we knew that US government played an important role in order to solve drug trafficking issues in worldwide.
From the press which released on 11 May 2010, US President Barack Obama announced a National Drug Control Strategy which developed by Office of National Drug Control Policy (ONDCP). This establishment is to reduce drug use and its consequences through a balanced policy of prevention, treatment, enforcement and international cooperation. Besides that, this strategy also focuses on making recovery possible for those American whom addicted to drugs through an expansion of community addition centres and the development of new medications and evidence-based treatments for addiction. Continued support for law enforcement, the criminal justice system, disrupting domestic drug traffic and production, working with partners to reduce global drug trade, and innovative community-based programs, such as drug courts, play a critical role in reducing American drug use and its effects.
According to Pauline Go, a professional legal writer for many legal website, since the drug traffickers can make a huge profit by supplying drugs, the best way to stop the traffickers to make profit is legalization of drug in which it would undoubtedly remove the motivation for trafficking. Abolishing the laws that make it possible to earn profit from drug trafficking is one of the best way to stop it. However, it may not be a perfect way for all nations.
