An offshore bank is typically a bank that's outside your country of residence. They typical impose only a low or in some case's a nil rate or tax, confidentiality for all clients, minimum reporting requirements, political and economic stability. The origins of the offshore banking industry are found in a group of islands off the Northwest coast of France.
Offshore banking is basically the cross border intermediation of funds and the provision of services by banks that reside in OFCs to non residents. Offshore banking seems to be particularly appealing option especially to the heavily regulated and maturing financial markets of emerging economies. Mostly economies that have high growth rates and those that is in need of investment financing. Emerging economies seems to be using offshore as their channel.
There are a number of advantages to offshore banking and finance, such as:
Trouble-free access to accounts,
Increased privacy
Less legal regulations
Protection from government orders to freeze or seize financial assets.
Benefits of Offshore Banks
1) Potential tax efficiency: No tax deducted on interest earned. Interest on our offshore accounts is paid without the deduction of tax†Offshore income may not be subject to tax. Depending where you live, income on an offshore bank account or investments may not be subject to tax in your country of residence, if that money is not remitted into your country of residence, no inheritance tax, capital gains tax or death duties. Jurisdictions such as the Isle of Man and Jersey, Channel Islands have no inheritance, capital gains taxes or death duties (probate may be required in certain circumstances)
2) Convenience: One bank wherever you go. Investing your money offshore allows your finances to remain and grow in one place as you work or travel around the world. Wherever in the world you move, you'll have a bank that understands your needs and can provide financial solutions tailored to meet those needs 24/7. Offshore banks have sophisticated internet banking and multi-lingual call centre services. These allows the investors to have access to their money or anything regarding their money 24/7.
3) A safe haven: Offshore centers protect ones assets. For instances; If one lives in a country that is politically or economically unstable, placing your money offshore offers protection for your assets. In times of economic instability, banking offshore provides a safe home for your money. Offshore accounts are not governed by your country of residence but by the laws of the offshore jurisdiction where they are held.
PART 2: LIRERATURE REVIEWS
REVIEWS ON LABUAN IBFC
In 1990, the island of Labuan was nominated as Malaysia's official offshore financial hub where it operates under the name of Labuan International Offshore Financial Centre until the end of 2007 in which the centre grew up both in reputation and financial standing during that time.
However, in January 2008, the name Labuan International Business and Financial Centre (Labuan IBFC) was introduced to reflect the jurisdictions' growth and rapidly increasing in international status. In addition, the jurisdiction of marketing division of Labuan IBFC Inc. Sdn. Bhd. was incorporated in July 2008 too as the official agency authorized by the Malaysian government. This is in relation to market, promote, and otherwise serve as the world's point of contact for Labuan IBFC. Besides, Labuan IBFC also continues to structure new products, services, and regulatory environment where it is able to play an important and legitimate role in international trade and finance while offering significant advantages for corporations and individuals.
Labuan International Business and Financial Centre (Labuan IBFC) is regulated by the authority of Labuan Financial Services Authority (Labuan FSA) which was previously known as Labuan Offshore Financial Services Authority (LOFSA) after the new legislation came into force on 11th February 2010. Basically, Labuan FSA regulates the legislative and legal framework of Labuan IBFC operation.
Labuan Financial Services Authority (Labuan FSA) was set up on 15th February 1996 as a single regulatory body to lead and coordinate efforts in promoting and developing Labuan as an International Business and Financial Centre (IBFC). Furthermore, the establishment of Labuan FSA is emphasized with the government's commitment in order to make Labuan high in reputation as the most excellent IBFC.
Besides, Labuan Financial Services Authority (Labuan FSA) is also expected to restructure the government mechanism in supervising the International Business and Financial Centre (IBFC) to carry out research and development works in order to draw up plans for further growth and greater efficiency for the Labuan IBFC.
ISSUES ON OFFSHORE BANKING AND FINANCE
Although offshore banking has important implications for the financial systems, there are some issues that are linked to Offshore Banking and Finance.
Limited accessibility
Offshore jurisdictions are located in remote areas thus it can become more costly to those investors who have to physically visit the bank. The advancement of global telecommunications technology may not be a substitute for having access to in-person documents and service yet. This can be quite expensive and impractical for the investors who have to visit an offshore. Besides, offshore banking and finance are also more reachable to those with higher incomes where the costs of having an offshore account are much larger than those from normal banks.
Association with the underground economy
Offshore banking and finance has long been associated with the underground economy where the black market and other organized crimes involving money laundering. After the event of September 11th, 2001 happened, tax havens in offshore banking and finance, and clearinghouses were also indicted the supporting from various terrorist groups, organized crime gangs, and other state or non-state groups. The existence of offshore banking and finance also support tax evasion because offshore banking and finance provide tax evaders with a convenient place to deposit their hidden income and wealth.
Not ideal for developing countries
Developing countries can also suffer the impact of offshore banking and finance due to the speed of funds called "hot money" that being transferred in and out from one country to another. This "hot money" is then supported by offshore accounts and may cause in an increase of problems regarding financial disturbances. Besides, the tax burden in the developed countries tends to fall disproportionately upon the middle income groups. Moreover, avoiding from paying tax will lead to a higher tax proportion paid by high income groups. Nevertheless, many of these groups are able to use offshore banking and easy money transfers out of the country to avoid paying the taxes owed.
Taxation
Originally offshore centre's where prominently known for facilitating structures which helped to minimize exposure to tax. Due to tax avoidance, this has led to a decrease in success of offshore centres, resulting in tax neutrality of some offshore banks. Some issues regarding tax is, accusations from pressure groups suggesting that no tax or very low tax creates unfair tax competition, for example less developed countries benefit from tax revenue, therefore they cannot afford to keep up with developed nations who choose not to tax clients.Traditionally, offshore centers provided services aimed at those wishing to minimise their tax liabilities. Offshore companies incorporated in tax haven jurisdictions would be used for tax-efficient and confidential holding of assets or tax-efficient trading. According to Keneally, K. and Rettig, C. P. (2009), In July 2008, the U.S. Senate Permanent Subcommittee on Investigations reported that the United States is estimated to lose $100 billion annually in tax revenues to offshore abuses.
5.Investors not protected by the law
According to an article written by Lim, J. (2007), the writer mentioned that according to ASIC executive director of consumer protection Greg Tanzer, investors should take extreme care when investing overseas as they might not be protected by the law of the country they reside in, which in this case was Australia. "If you take up an offer of securities from an overseas entity that has not complied with Australian law or deal directly with an overseas broker, you may lose the protections provided by Australian law," he said.
Scrutiny
Non-cooperative jurisdictions are common in offshore banking, these are financial centre's that don't usually meet the international standards because they adhere to the regulations set or do not follow the supervisory bodies.
7. Regulation
Another issue facing offshore centre's is the light regulatory requirements; it brings some benefits to offshore centres but has some disadvantages as well. For this reason of having lighter regulatory requirements, clients are attracted to these centres because it seems less complicated to deal with. Due to light regulatory requirements offshore centres are perceived as being venues for laundering the proceeds of illicit activity.
8. Confidentiality
Among many elements that make offshore centres attractive is that they provide high confidentiality of clients bank accounts. This has become an issue because some of these bank accounts are being used for money laundering purposes. Even though it's the duty of a bank to provide confidentiality about a client's bank account FATF (Financial Action Task Force) has the right to obtain information regarding suspicious banks.
Statutory banking secrecy is a popular feature of several offshore centre's; however, many financial centre's do not have such statutory right, financial information has to shared about foreign residents who are suspected of evading home -country tax by their respective jurisdictions.
The days when jurisdiction sought out illegal monies or terrorist moneys are long gone. Louise Mitchell (2005) mentioned that there has been a huge change in the offshore world where regimes such as that of St Vincent and the Grenadines that once used the slogan of "strictest privacy" have embraced the fight against money laundering and terrorist financing and introduced operational regimes to ensure this.
However there is still confidentiality but it comes in relation to the reason why the customer needs confidentiality. If you need confidentiality to protect the fact that your money is illegal confidentiality will not be granted. In most offshore centers that are serious about being reputable members of the international financial community, there is protection of criminal money. There is in fact in place highly efficient mechanism for the sharing of information in relation to charged or suspected criminal activity. However the playing field is not level even in the sharing of information in relation to criminal activity. The playing field is even less level when it comes to confidentiality that is afforded to civil matter such as information that is relevant to taxation. (Louise Mitchell (2005))
9. Effects on international trade
Offshore centres make it easier to carry out global trade and ease international capital flows. International joint ventures are often structured as companies in an offshore jurisdiction where by neither party in the venture party would like to form the company in the other party's home jurisdiction to avoid unwanted tax consequences. Most offshore financial centre's still impose little or no tax, the increasing sophistication of onshore tax codes has meant that there is often little tax benefit relative to the cost of moving a transaction structure offshore.
Recently, several studies have examined the effects of offshore financial centre's on the world economy, discovering that there exists a high degree of competition between banks in such jurisdictions to increase liquidity in nearby onshore markets countries which have close relationships with offshore centres.
Lack of comprehensive and up-to-date data
This lack of comprehensive and up to date data on OFCs' financial activity impedes effective monitoring and analysis of capital movements. In his journal Andrew Crockett (2000) mentioned that the available banking stock data indicate roughly US$1.4 trillion in deposits by reporting banks vis-à-vis OFCs at end June 1999. Even for banking activity, however, this is likely an underestimate as the available data are incomplete, lack timeliness and do not include off-balance sheet activities, which are believed to be substantial. Discussions that were held with financial market participants suggest that the magnitude of flows through OFCs is significant and increasing. Considerable efforts have been undertaken in recent years by national authorities and international financial agencies to improve statistics on debt and capital flows. Most onshore jurisdictions with significant financial activities provide, on a voluntary basis, relevant and timely data to the BIS for its Locational Statistics. Not all OFCs with significant financial activities report to the BIS, and many that do report with long delays and without the requested breakdown of their claims between debt securities and other claims.
11.Lack of availability of timely information on beneficial ownership of corporate vehicles
The lack of availability of timely information on beneficial ownership of corporate vehicles (companies, trusts, partnerships and other vehicles with limited liability) established in some OFCs could thwart efforts against illegal business activities. There are some international standards concerning the disclosure of information about corporate vehicles (e.g. the FATF Recommendations require financial institutions to know the identity of their customers, including corporate customers, before opening accounts). Andrew Crockett (2000) mentions that however, there is no international standard or standard- setting body for corporate formation. As a result, practice varies widely across jurisdictions, both onshore and offshore, on arrangements whereby authorities can obtain information about the beneficial ownership of corporate vehicles registered in their jurisdiction and the powers to share that information with foreign authorities. In addition, 'flight clauses' which are a permitted feature of trusts in certain jurisdictions, when coupled with excessive secrecy, undercut the efficacy of international supervisory and law enforcement co-operation.
Andrew Crockett (2000) goes on to say that the activities of OFCs are of concern where they attract significant volumes of financial activity, while failing to abide by international standards of supervision and information disclosure. This concern is amplified where the failure relates to an inability or unwillingness to meet international standards of co-operation in cross- border information exchange and enforcement. Problematic OFCs also add complexity and opaqueness to corporate structures and financial transactions, increasing the overall level of risk.
Monetary stability
Dong He and Robert N McCauley (2010) in their journal mention that the development of offshore markets in a given currency poses several challenges to a central bank's responsibility for maintaining monetary stability. An offshore market in a given currency can increase the difficulty of defining and controlling the money supply in that currency. Equally, an offshore market in a given currency can pose a challenge to measuring and controlling bank credit. For example, domestic firms and households, perhaps through the aggregation of some non-bank financial institution (like money market funds), can substitute offshore deposits in the domestic currency for onshore ones. If these in turn are lent back into the economy (so-called round-tripping), hard-to-measure and hard-to-control offshore deposits and credit can substitute for their domestic counterparts. If monetary policy is based to some extent on the control of money or credit, then the effect of offshore use of the currency on money or credit should be factored in when setting monetary or credit targets or monitoring ranges.
They continue to say that offshore activity in the currency might also affect the shape of the yield curve or the exchange rate. If the central bank sets the overnight (or some other short-term) rate with a view to targeting inflation and growth, then policymakers would have to factor these effects into their inflation forecasts and set the short-term interest rate appropriately. (Dong He and Robert N McCauley (2010))
implications of offshore activities for the exchange rate ultimately depend on how the long and short positions of the currency in offshore markets balance out. Capital controls may at present place restrictions on the ability of offshore market participants to take either long or short positions. In this context, offshore non-deliverable exchange markets already permit speculative bets on the currency that may increase pressure on the exchange rate given prevailing macroeconomic conditions. Greater integration of the onshore and offshore foreign exchange market would make these pressures more immediate. In the longer term, and under more liberalized capital account regimes, the influence on the exchange rate depends largely on the level of domestic interest rates relative to global levels. Relatively low interest rates would tend to make the currency a borrower's currency and its offshore use a net source of downward pressure on its exchange rate. Conversely, relatively high interest rates would tend to make the currency an investor's currency and its offshore use a net source of upward pressure on its exchange rate. (Dong He and Robert N McCauley (2010))
PART 3: ANALYSIS AND FINDINGS
3.1 THE LABUAN IBFC
3.2 THE ISSUES ON OFFSHORE BANKING AND FINANCE
First and foremost offshore banking has a impediment on the issue of frictions that are associated with tax regimes, the overly stringent regulatory frameworks, the restrictions on Capital flows. In offshore Banking, there are dubious activities involved that in a way continue to make offshore a pervasive activity especially in terms of the number of OFCs and the volume of transactions carried out in different centers. To solve this issues there could be further harmonization of tax regimes and better prudent frameworks, coupling increasingly universal implementation would definitely regulate questionable activities been carried out in offshore centers. It is clear that offshore Banking has a problem of clients.It is difficult as a client to gauge the financial health and the stability of an offshore bank.It is also very difficult to gauge the political and economic stability of the country in which an offshore centre is located.This is beause most of the centres are usually smaller countries and islands.This problem can be solved by opening offshore centres in major developing and emerging economically and politically known countires that would attract more clients.
Also this issue of clients can be solved by clients making sure that the offshore centre they are dealing with has some affliates with some known bank.Another issue would be offshore centers been highly leveraged.This could be because of operational leeway.Leeway is basically a shift or drift in operation.This could be as a resul of poor management and internal controls.It coul also be as a result of an internal explotation of less stringent regulations in place that remains as an open question.This issue can be solved by offshore excutives choosing the right expetise and the right skilled management to take care of the internal management of transations and the whole operations of an offshore center.The regulatpry advantages that permit significant number of offshore banks to be more profitable than onshore banks may allow them to be more leveraged when there is an accounting risk.This is because they have a greater liberty of managing their balace sheets.It is possible that offshpre banks may allocate a higher proprtion of assest to higher risk, higher retun activities.Basically the ration of capital to risk weighted assets of offshore declines than that of onshore banks.So this problem can be solved by offshore banks paying more attention to their leeway operations as it may result in them been more leveraged then onshore banks especially when accounting for the risk of rsk compositon of portfolios.
There are also allegations of money laundering that involves the passing of funds through the offshore centers banking accounts. This is one of the dubious activities that people associate with offshore banking that has been a challenge in its operation. Most of the time there aspects associated with money laundering. First and foremost, the allegations of the sources of funds raise issues. This aspect is basically aimed at illegal drug business for example'
PART 4: COMMENTS AND RECOMMENDATIONS
The Labuan IBFC links in to the global economy along three dimensions
Regulation
Location
Function
SOLUTIONS TO THE ISSUES OF OFFSHORE BANKING AND FINANCE
Tax avoidance
Keneally, K. and Rettig, C. P. (2009) quoted IRS framework for citizens that tries to avoid taxation. They mentioned that according to the IRS failure to file tax return a penalty may be imposed in certain circumstances, amounting to five percent of the net tax amount required to be shown on the tax return for each month or fraction thereof, to a cap of 25 percent, with an increase to 15 percent and a cap of 75 percent if fraud is established. While in cases of failure to pay taxes, the memorandum noted that a late payment penalty may be imposed equal to 0.5 percent of the late payment monthly with a cap of 25 percent.
Bank Secrecy
In a research done by Keneally, K. and Rettig, C. P. (2009) the IRS has a series of documents providing for managerial oversight of offshore cases and setting out a penalty framework to be applied in those cases in which the taxpayer makes a voluntary disclosure of offshore issues. The memorandum summarized that U.S. citizens, residents, and certain other persons are required to report interests in or signature or similar authority over financial accounts outside the United States that exceed $10,000 in the aggregate in a given year
Investors not protected by the law
In such cases the government should try to implement some law that protects their citizens incase something malicious happens to the offshore accounts. There is no way country residents or citizens will stop investing in offshore centers more especially when they feel offshores offer their investment a safe haven
Effects on international trade
Many of the countries consider or actively use the offshoring strategy as an instrument to decrease the labor costs, to achieve new technologies and to try to stay competitive worldwide Juma'h (2007) . Offshoring serve production chain of low costs regions and guarantees that through the Foreign Direct Investment there is transference of technologies from foreign countries to local countries.
PART 5: CONCLUSION
As a conclusion, offshore banking and finance is a huge field and a significant part of the international financial system. Offshore banking and finance activities have always been viewed as possibly having some illegal component. In fact, it is a simply valid and legal activity that has been reviewed by knowledgeable attorneys and accountants.
