Offshore financial centres (OFCs) in the recent years have drawn a lot of attention to themselves. This attention can be regarded as both positive as well as negative. OFCs and in particular offshore banks have been questioned of their operations and their services provided. Offshore banks have been quite attractive for their unregulated features where in transactions take place under minimum interference by the country in which they operate (Palan, 1998). Another element that is closely linked to that of offshore banks is that of tax havens. Many offshore banks have been taken advantage of due to the fact that the country in which operations are carried out is featured as a tax haven. The recent financial crises and the collapse of major offshore banks have questioned these operations trying to justify the opportunities and challenges existing within these offshore banks. In order to carry out research based on these opportunities and challenges, the British Isles OFC's will be studied.
Section 2: Literature Review
Emergence of Offshore Banking
The increasing globalisation of the world financial markets had resulted in a number of banks classified as offshore banks. According to Errico and Musalem (1999), offshore banking is defined as 'the cross-border intermediation of funds and provision of services by banks residing in Offshore Financial Centres to non-residents'. Many OFCs come into being due to attempts made by smaller financial centres to be accepted within the global financial system. This is supported by Cobb's (1998) view stating that as 'the smaller financial centres scattered around the globe strive hard to be accepted within the global system of finance by creating superior reputations as stable, secure, yet confidential places to invest money'. In addition to these characteristics, offshore banking is growing due to its favourable regulatory requirements such as low levels of supervision, information secrecy and its low or zero tax policy.
However, these characteristics have been dismayed by many in the recent years. Hampton and Christensen (2002) have mentioned in their paper that offshore banks have raised alarming concerns as there has been an increase in volume in offshore transactions and increased wealth being held offshore. The authors have also stressed on the increasing number of countries that are engaging in these offshore financial centres and benefiting from the low tax imposed within these economies (Hampton and Christensen, 2002).
The Offshore Banking Mechanism
According to the Errico and Musalem (1999), the process of offshore banking is carried out within offshore branches and subsidiaries; where in transactions are carried out to facilitate the movement of assets and liabilities from parent banks. This publication by Errico and Musalem (1999) for the International Monetary Fund also highlights the three types of transactions carried out within these banks, namely 'Eurocurrency loans and deposits, the underwriting or Eurobonds, and over-the counter trading in derivatives for risk management and speculative purposes'.
The British Isles
The British Isles comprises of the three main islands namely Isle of Man, Jersey and Guernsey. These islands are all characterised as OFCs. According to Morris (2010), the recent financial crisis which saw the downfall of a number of Icelandic Banking groups and huge losses faced by depositors was a result of the turmoil being spread over to the offshore jurisdictions of Guernsey and Isle of Man. The British Isles have been able to market itself as OFCs through its key attribute of a Tax Haven. The islands tax system permits low and tax rates, no capital gains tax or capital transfer tax (Cobb, 1998). In addition, to the low tax requirements, these OFC's also benefit from lax regulatory framework which resulted in a series of business failures in the 1980's (Cobb, 1998). However, the recent financial crisis has increased the pressure on the OFC's to maintain levels of supervision and insurance on deposits. This was clearly noted in the case of Guernsey, where in the financial turmoil resulted in the implementation of the 'Guernsey Banking Deposit Compensation Scheme' which as was aimed at protecting the depositors from losses (Morris, 2010).
Section 3: Research Aim and Objectives
Having conducted a literature review on the topic to be research, the aim and the objectives that are intended to be achieved are as follows:
Overall Aim of the Study
The overall aim of this study is to attain a clear justification of the growing importance of offshore banks taking into consideration the opportunities and challenges faced.
Objectives of the Study
The key objectives of the research carried out are as follows:
To recognize the opportunities and challenges of offshore banking.
To address the issues of tax haven and money laundering and its implications.
To identify the key elements that contributes to a successful offshore bank.
Section 4: Methodology
The following section states the methodology that will be implemented keeping in mind the timeframe allotted for the research to be carried out in order to achieve the stated aim and objectives with clear justification of the approach used.
Research approach
The research is based on a fairly theoretical aspect highlighting the key characteristics of offshore banks. The most fitting approach would be a systematic study of secondary data, where in a number of journal articles previously published with close emphasis on the topic will be investigated. These papers will help bring about a background of the subject as well as will provide an understanding of the approaches used by published authors. A critical and unbiased analysis will be adopted while extracting knowledge with regard to offshore banking.
Data acquisition method
As the research is based on secondary data, all information that will be used in order to draw a conclusion to the research question will be attained from academic online journals through the university's provided ABI/INFORM, Science Direct, Bloomberg and DataStream. In addition, in order to gather information with regard to the British Isles which is essential for the research being carried out, market reports will be obtained.
Analytical Approach
Having carried out most of the research based on secondary data attained in the form of academic journals, a qualitative approach will be carried out while analyzing this information. Qualitative research, according to Bratton, Callinan, Forshaw and Sawchuk (2007) can be defined as 'a research strategy that emphasizes on non-numerical data, entails inductive theorizing, rejects positivism, is oriented towards case studies, and embodies a view of social reality as a product of individual thought'. In order to amplify the results, a case study methodology will be adopted. This case study methodology will comprise of cases based on the British Isles, namely Isle of Man, Jersey and Guernsey.
5. Resource and planning
This research is to be carried out within a limited timeframe of approximately 12 weeks which is a shorter period in comparison to that required to carry out an in-depth and detailed analysis. Following mentioned is an approximation of the time allotted for each task to be completed.
Task carried out
Time Allotted
Research and Literature Review
3 Weeks
Data Collection
2 Weeks
Data Analysis
4 Weeks
Report Writing
3 Weeks
12 Weeks
Section 5: Bibliography
Bratton, J., Callinan, M., Forshaw, C. and Sawchuk, P. (2007) 'Work and Organizational Behaviour' New York: Palgrave Macmillan.
Cobb, S.C. (1998), 'Global Finance and the Growth of Offshore Financial Centres: The Manx Experience' Geoforum, 29 (1), pp.7-21
Errico, L. and Musalem, A. (1999), 'Offshore Banking: An Analysis of Micro- and Marco- Prudential Issues', International Monetary Fund. Available at: http://www.imf.org/external/index.htm (Accessed on: 21st March 2011)
Hampton, M.P. and Christensen, J. (2002), 'Offshore Pariahs? Small Island Economies, Tax Havens, and the Re-configuration of Global Finance' World Development, 30 (9), pp.1657-1673
Morris, P.E. (2010), 'Bank failure and deposit protection in offshore Britain: the case of Guernsey', Journal of Financial Regulation and Compliance, 18 (3), pp.272-292
Palan, R. (1998) 'The Emergence of an Offshore Economy', Futures, 30 (1), pp.63-73
