Offshore banking - why? what and where?

It was during the 1960s and 1970s that offshore financial centres were first set up. Operating outside the depositors' country of residence, these facilities offered offshore banking and new interbank markets with significant financial and legal advantages. In addition to low or no taxation, offshore banks in these centres met the demand for client banking privacy, anonymity and easy access to deposits.

The term 'offshore' refers to a situation where all banking and financial transactions are conducted in a foreign currency and are carried out by non-residents. Offshore banks operate in low tax jurisdictions — centres or countries where taxes have been kept low in order to encourage non-resident businesses to locate there. The structure of offshore banks often differs from that of onshore banks. They may be a related legal entity, or a branch of an onshore bank with a limited physical presence, such as 'shell' branches of an onshore bank.

Offshore banks may offer any or all of the onshore banking services. They may also offer other services such as over-the-counter trading (for example, in derivatives), which is trading in shares not listed on the main or official stock exchange. Because they operate with a lower cost base than onshore banks, some have been able to offer higher interest rates. Asset protection is another motivation for banking offshore. It can also be a safer option for individuals residing in locations where there is political and/or economic instability and corruption.

Questions which need to be considered by offshore banks in relation to potential clients include their identity, their financial standing, the nature of their business, and the source of their funds.

In theory, an offshore banking facility can be established by any individual or group that can pay the setup, licensing and administration fees. But the reality in the 21^st century is that it is mainly multinational corporations and onshore banks that create offshore banking facilities.

by M. Clark on September 12, 2009

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