An offshore center is a country that offers to the residents of other countries the ability to establish companies and to use its financial services for activities outside this center, offering in most of the cases some advantages such as low taxation rates. In other words the aim of the users of the offshore centers is to take advantage of the lower tax rates offered by the offshores center which is not synonymous to tax evasion as is the general perception. Certain jurisdictions establish themselves as offshore financial centers in order to attract funds, provide jobs and facilitate economic development.
In recent years, there has been an increasing recognition of the need to improve the understanding of the activities of offshore financial centers (OFCs) because these centers have captured a significant proportion of global financial flows.
2.1.1 Offshore problem:
Why do criminals go offshore? Offshore does not automatically denote illegal or criminal activity, numerous International organizations and national governments have pointed out the risk that facilities provided by financial centers and organized crime groups may exploit offshore jurisdictions. The offshore problem is indeed an important item on their political agendas. Criminal organizations are making wide use of the opportunities offered by financial havens and offshore centers to launder criminal assets, thereby creating roadblocks to criminal investigations. Financial havens offer an extensive array of facilities to foreign investors who are unwilling to disclose the origin of their assets. The difficulties for law enforcement agencies are amplified by the fact that, in many cases, financial havens enforce every strict financial secrecy, effectively shielding foreign investors from investigations and prosecutions from their home countries. Criminals prefer financial centers and offshore jurisdictions because the anonymity guaranteed by their banking, tax and company regulations provide an effective shield against requests for information by law enforcement agencies. Anonymity, in fact, is an essential requisite for the laundering of criminal proceeds and their reinvestment in the legitimate economy without incurring the law enforcement risk. It is possible to argue that the lesser this risk, the greater the probability that organized crime groups will use financial centers and offshore jurisdictions to launder the proceeds of their criminal activities.
2.1.2 Proponents and critics:
There are two viewpoints on offshore financial centers. Proponents argue that OFCs have an important role in the international economy, offering advantages for corporations and individuals, and allowing legitimate financial planning and risk management. Opponents criticize the insufficient legislation, opportunities for money laundering, tax evasion, and avoidance of legal risk.
2.2 Labuan IBFC:
Labuan IBFC was created as an offshore financial hub on October 1990 and was operating under the name of Labuan International Offshore Financial Centre (IOFC). At the time it was established to strengthen the contribution of financial services to the Gross National Products Malaysia as well as to develop the island and its surrounding vicinity.
Labuan IBFC is Malaysia's only offshore center, strategically located Labuan island off the north west coast of Sabah which is itself part of the Borneo land mass. Since its inception, the jurisdiction has developed by leaps and bounds such that today, it is home to more than 6,500 offshore companies and more than 300 licensed financial institutions including world-leading bank. Supported by a well-developed infrastructure that includes modern amenities as well as a full range of service providers for the business community, Labuan IBFC is embarking on an aggressive growth strategy to become the premier international business and financial center in the Asia pacific region.
There are five core areas that Labuan IBFC intends to focus on, leveraging on its key strengths. These five are offshore holding companies, captive insurance, Shariah-compliant Islamic Finance structures, public and private funds and wealth management. Given the burgeoning interest around the world in Islamic finance, Labuan IBFC is well placed to enhance its lead as an Islamic financial hub. Labuan IBFC's position is further enhanced by the formation of the Malaysian International Islamic Finance Centre initiative that was launched in August 2006.
2.2.1 Labuan function:
To administer, enforce, review and give effect to the provisions stated in the Labuan Offshore Acts and any other law relating to offshore financial services in Labuan. Ensure offshore financial transactions are conducted according to the laws provided and in line with established norms of good and honorable conduct as well as preserve and maintain the good repute of Labuan International Offshore Financial Centre (IOFC). Also Labuan can suggest or advise the Minister of Finance generally on matters relating to offshore financial services in Labuan.
2.3 Labuan transforming business
2.3.1 Labuan Islamic Financial Services and Securities Act
Since Labuan took on the mantle of 'first mover' in Islamic finance starting with the establishment of the first Islamic bank in 1998, it has been steadily enhancing its reputation in this specialist and fast growing area. This decade has seen it issue a stream of financing, from the first global sukuk in 2002 to one of the largest aircraft financing transactions using an Ijara leasing structure and the latest USD1.5 billion Islamic bonds by Petroliam National (PETRONAS), Malaysia's national petroleum company.
The groundbreaking Labuan Islamic Financial Securities and Services Act 2009 (LIFSSA) is probably the first of its kind in the world, andomnibus' piece of legislation that clarifies and streamlines all the rules and guidelines issued over the years on Islamic finance. In addition, LIFSSA addresses Shariah compliance in trusts and foundations as well as the establishment of the Shariah Supervisory Council. Labuan has been at the forefront in the drive towards internationally recognized and accepted Shariah standards, setting the example with its own Shariah Supervisory Council that comprises globally acclaimed Islamic scholars.
2.3.2 Labuan Trusts Act and Labuan Foundations Act
Amendments to the Labuan Trusts Act 1996 (LTA) and the introduction of the Foundations Act 2010 (LFA) are expected to give Labuan IBFC an edge as a modern offshore center for wealth planning. This is fortuitous as industry experts forecast that Asia's share of the rich community is poised to grow annually by 12 to 15 per cent until 2013, making the region the largest source of high net worth investors, after the U.S.A.
The Foundations Act will be an added incentive for the wealthy to set up in Labuan IBFC as these foundations will operate in a similar way to trusts and should appeal to individuals or families from Civil Law countries like Indonesia, Thailand, the Philippines and the Middle East. In addition, making a Trust or a Foundation into an Islamic form is easily done as long as the structure is formed according to Shariah principles.
2.3.3 Other legislative high points
Under the new Labuan legislative framework, one amalgamates the previous individual Acts on banking, insurance, securities, trust companies etc. and is known as the Labuan Financial Services and Securities Act 2010 (LFSSA). This Act introduced new entities such as limited liability partnerships and protected cell companies while managed trust companies are also provided for. Another new Act is the Limited Partnerships and Limited Liability Partnerships Act 2010 (LLPLLPA), which identify the types, roles and duties of partners including the permission for an LP to convert to an LLP. The introduction in Labuan of these commonly used partnerships by professionals enhances the jurisdiction's appeal. One new product that should prove exciting is the inclusion of shipping operations as a Labuan business activity under the revised Labuan Business Activity Tax Act 1990 (LBATA) provided such operations are carried out in Labuan and outside of Malaysia. There is also provision for advance tax rulings that will be a boon for potential investors who seek certainty and clarity in their tax obligations.
2.4 (OFCs) offshore financial centers (myth vs. reality)
For too long, offshore financial centers like the Cayman Islands have been stereotyped as refuges for the wealthy to stash their fortunes. Like most stereotypes that grow more out of myth than reality, the role of today's offshore financial centers is quite different from what many perceive. Successful offshore financial centers uphold global transparency and cooperation standards and enable market efficiency and competition. It's time to dispel the stereotypes that have long driven global efforts to stem the vital role of financial services centers. The realities of what offshore financial centers are and their contributions to global financial markets are explained below, alongside four of the most commonly held myths.
Myth: Offshore financial centers only benefit the rich and powerful.
Reality: The Cayman Islands and other offshore financial centers compete aggressively with each other every day to offer the most cost-efficient environment for international capital flow. This competitive market allows companies to rise financing and package financial risk more economically. These efficiencies benefit businesses, consumers of goods and services sold by these companies around the world and shareholders, which include such venerable clientele as non-profit endowments and public sector pension funds.
Myth: Offshore financial centers prey upon other countries' tax codes, fostering illegal tax shelters.
Reality: Investors and/or their advisers choose the Cayman Islands for tax neutrality. This simply means that investors and their specific corporate activities which can often involve two or more countries--are not subject to additional layers of taxation over and above those of their home country, which is where capital flows ultimately end up and are then taxed. In a similar context, numerous U.S. companies have left states where they were founded or have substantial business operations and established registered offices in Delaware, Nevada, Colorado and Texas so they can take advantage of the tax savings and efficiencies of having a registered office there. This is not seen as being shady or unduly evasive in the least.
2.5 Issues on offshore banking and finance
2.5.1 OFCs and corruption:
Corruption is closely related to money laundering, since at a certain stage the proceeds of corruption need to be laundered through the financial system and enter the real economy so as to appear legitimate. The proceeds of corruption may be laundered in jurisdictions that have not enacted strict anti money laundering measures as well as in countries that uphold very strict bank secretary laws or regulations.
2.5.2 Prime venture (Labuan) limited guaranteed by GENTING BERHAD:
Labuan was the issuer of the notes of US$250,000,000 1% guaranteed exchangeable notes as ordinary shares of RM0.50 each in the capital of Resorts World by the offering that, the notes and the shares are being offered by the manager outside United States in accordance with regulation, the notes may only be offered of subscription or sale outside Malaysia to non-residents of Malaysia. Accordingly, the notes may not be offered for subscription or sale in Malaysia and resident of Malaysia are disqualified from subscribing for or purchasing the notes.
2.5.3 Anti-money laundering:
The major money laundering cases coming to light in recent years share a common feature: criminal organizations are making wide use of the opportunities offered by financial havens and offshore centers to launder criminal assets, thereby creating roadblocks to criminal investigations. Financial havens offer an extensive array of facilities to the foreign investor unwilling to disclose the origin of his assets, from the registration of International Business Corporations (IBCs) or shell companies, to the services of a number of "offshore banks" which are not subject to control by regulatory authorities. The difficulties for law enforcement agents are amplified by the fact that, in many cases, financial havens enforce very strict financial secrecy, effectively shielding foreign investors from investigations and prosecutions from their home country. While bank secrecy and financial havens are distinct issues, they have in common both a legitimate purpose and a commercial justification. At the same time, they can offer unlimited protection to criminals when they are abused for the purpose of "doing business at any cost.
2.5.4 Offshore hedge funds (taxation):
Offshore hedge funds are corporations that redeem shares at their net asset value. These entities are passive foreign investment companies. Profits are "credited" net of all expenses that would otherwise be caught by the 2% and 3% limitations are deductible against any earnings, thereby reducing taxable income and creating a tax liability only on net profits realized. Taxpayers should consider a number of factors when deciding whether to invest in a domestic onshore entity or an offshore vehicle that is classified as a corporation. Federal income tax purposes, most managers set up both a domestic and an offshore fund, with the conventional. Taxable investors invest in the domestic fund while tax-exempts and foreigners invest in the foreign one. However, investors may want to think twice about this.
2.5.5 1997 crisis and how offshore worked with it:
Malaysia had so free a capital account regime leading up to the 1997 crisis, that there was even an offshore market in ringgit, perhaps the only case of an offshore market in an emerging market currency. The offshore ringgit market developed in response to non-residents' demand for hedging instruments when import and export settlements were still ringgit-denominated to exempt Malaysian based importers and exporters from the need to hedge. This offshore ringgit market then facilitated exchange rate turbulence in 1997-98, recognizing this, the September 1998 measures sought to eliminate the offshore market to insulate domestic monetary policy from the foreign exchange market during the crisis, in order to lower interest rates. Although several factors contributed to the rise in ringgit interest rates from the second half of 1997, the offshore ringgit market facilitated speculative offshore borrowing of ringgit to finance dollar purchases in anticipation of a crash in the ringgit's value. High interest rates had devastating consequences for the real economy and its banking institutions, already overexposed to share and property lending.
