OFFSHORE BANKING

EXECUTIVE SUMMARY
Offshore banking has often been associated with the underground
economy and organized crime, via tax evasion and money laundering;
however, legally, offshore banking does not prevent assets from being
subject to personal income tax on interest. Except for certain persons who
meet fairly complex requirements, the personal income tax of many
countries makes no distinction between interest earned in local banks and
those earned abroad. Persons subject to US income tax, for example, are
required to declare on penalty of perjury, any offshore bank accounts
which may or may not be numbered bank accountsthey may have.
Although offshore banks may decide not to report income to other tax
authorities, and have no legal obligation to do so as they are protected
by bank secrecy, this does not make the non-declaration of the income by
the tax-payer or the evasion of the tax on that income legal.
Following September 11, 2001, there have been many calls for more
regulation on international finance, in particular concerning offshore banks,
tax havens, and clearing houses such as Clearstream, based in
Luxembourg, being possible crossroads for major illegal money flows.
The role of Reserve Bank of India has been very critical in initiating the
process of offshore banking in India. For plenty of years, the various Indian
banks had been trying to convince the Reserve Bank of India to introduce
offshore banking in the country. Eventually, the Reserve Bank of India
understanding the needs and prospects of offshore banking in India,
allowed the setting up of offshore units in the special economic zones.
Many of the Indian banks made use of that provision to set up offshore
banks In India.

OFFSHORE BANKING

OFFSHORE BANKING
Offshore simply means anything outside of a countrys jurisdiction. The
term Offshore banking originates from the Channel Islands being "offshore"
from the United Kingdom, and most offshore banks are located in island
nations to this day, the term is used figuratively to refer to such banks
regardless of location, including Swiss banks and those of other landlocked
nations such as Luxembourg and Andorra.
For a depositor offshore banking is associated with the services of a bank
from the country other than his country of residence. If you have invested
or deposited funds to a bank outside the country (referred as Offshore
Bank), where you live, you are engaged in offshore banking. On the other
hand, any bank in your country of residence is often referred as a domestic
bank.
There are two main myths about offshore banking. First of all, the public
mistakenly links offshore banking to criminal activities, terrorism-financing
and money laundering. Secondly, people think that offshore banking
services are only for high-income class, since ordinary people cannot afford
them.
Offshore banking has often been associated with the underground
economy and organized crime, via tax evasion and money laundering;
however, legally, offshore banking does not prevent assets from being
subject to personal income tax on interest. Except for certain persons who
meet fairly complex requirements, the personal income tax of many
countries makes no distinction between interest earned in local banks and
those earned abroad. Persons subject to US income tax, for example, are
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OFFSHORE BANKING
required to declare on penalty of perjury, any offshore bank accounts
which may or may not be numbered bank accountsthey may have.
Although offshore banks may decide not to report income to other tax
authorities, and have no legal obligation to do so as they are protected by
bank secrecy, this does not make the non-declaration of the income by the
tax-payer or the evasion of the tax on that income legal. Following
September 11, 2001, there have been many calls for more regulation on
international finance, in particular concerning offshore banks, tax havens,
and clearing houses such as Clear stream, based in Luxembourg , being
possible crossroads for major illegal money flows.Defenders of offshore
banking have criticised these attempts at regulation. They claim the
process is prompted, not by security and financial concerns, but by the
desire of domestic banks and tax agencies to access the money held in
offshore accounts. They cite the fact that offshore banking offers a
competitive threat to the banking and taxation systems in developed
countries, suggesting that Organisation for Economic Co-operation and
Development (OECD) countries are trying to stamp out competition.
Offshore bank is simply a bank located outside your country of residence,
usually in a low tax jurisdiction and legal advantages. Thus Offshore bank
and banking account are similar in the sense that these are bank accounts
opened at a country other than your own.

The appeal of offshore banking is that it offers greater privacy or bank

secrecy (a principle born with the 1934 Swiss Banking Act): offshore banks
may decide not to report income to other tax authorities

OFFSHORE BANKING
Low or no taxation (i.e. tax havens): 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)

easy access to deposits (at least in terms of regulation)

protection against local political or financial instability

Convenience: easy, international access

A safe haven for your money

The quality of the regulation is monitored by supra-national bodies such as

the 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
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OFFSHORE BANKING
business. In the 21st century, regulation of offshore banking is allegedly
improving, although critics maintain it remains largely insufficient.

India is one of the new entrants in the area of offshore banking. It was only
recently that the Reserve Bank of India (RBI) allowed the Indian banks to
maintain an offshore banking unit. The special economic zones are where
the offshore banking in India takes place.
Before the EU introduced the European Savings Directive (ESD) in July
2005, an offshore bank was simply a bank located outside your country of
residence, usually in a low tax jurisdiction. The appeal of offshore banking
is that it offers the potential for tax efficiency, the convenience of easy
international access and a safe haven for your money.
The History of Offshore Banking
In 1970s the UK and Europe levied the highest, most punitive taxes
in the developed world, with high earners in the UK having their earnings
taxed at a rate of 85 per cent, giving rise to the phrase tax exile, where
the likes of the Rolling Stones, Michael Caine, Pink Floyd, Sean Connery
moved abroad for years at a time to avoid paying high rates of income tax.
And then the government and financial institutions in the Channel
Islands predominantly Jersey and Guernsey realized that, rather than a
person leave the UK to save tax, their assets could be moved offshore to
Channel Island banks and tax could be saved that way. The Channel
Islands fall into two separate self-governing bailiwicks Jersey and
Guernsey, both of whom are British Crown Dependencies, but neither is
part of the United Kingdom. The Channel Islands assisted dejected
investors with two key offerings: confidentiality and lower taxation. The
offshore banking industry was born. The Channel Islands bankers
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OFFSHORE BANKING
persuaded their clients that any deposits placed into offshore banks would
be anonymous, free from the scrutiny plaguing the mainland and the UK,
and would be liable for minimal taxation.
As word spread across Europe and indeed throughout the world,
other small island nations and jurisdictions seized upon the opportunity and
began strengthening regulations regarding banking practices and client
confidentiality in the hopes of attracting foreign depositors; thus becoming
offshore banking jurisdictions and offshore financial centers.
This became particularly popular in the small island nations of the
Caribbean, which many tend to associate with offshore banking
jurisdictions. Investors and depositors seeking politically and economically
stable jurisdictions found their way to these offshore financial centers and
this practice continues today.
Rightly or wrongly, offshore banking has become synonymous with
"tax haven", jurisdictions characterized by low - or zero - taxation on
interest, dividends, royalties and foreign derived income, as well as having
some degree of banking confidentiality. Over time this term has evolved to
include other popular banking jurisdictions such as Switzerland, Austria,
Lichtenstein, Luxembourg and more recently the United Arab Emirates
(UAE), Singapore and Hong Kong.
These gained popularity for the same reasons the small island
offshore financial centers did: they implemented sound banking practices
codified in law and regulations guaranteeing confidentiality, low taxation
and security. Although an abridged and streamlined version of history,
these are, fundamentally, the roots of the modern offshore banking
industry.

OFFSHORE BANKING
ADVANTAGES OF OFFSHORE BANKING
Offshore banks provide access to politically and economically stable
jurisdictions. This may be an advantage for those residents in areas
where there is a risk of political turmoil who fear their assets may be
frozen, seized or disappear. However, developed countries with
regulated banking systems offer the same advantages in terms of
stability.

Some offshore banks may operate with a lower cost base and can
provide higher interest rates than the legal rate in the home country
due to lower overheads and a lack of government intervention.
Advocates of offshore banking often characterise government
regulation as a form of tax on domestic banks, reducing interest rates
on deposits.

Offshore finance is one of the few industries, along with tourism, that
geographically remote island nations can competitively engage in. It
can help developing countries source investment and create growth
in their economies, and can help redistribute world finance from the
developed to the developing world.

Interest is generally paid by offshore banks without tax 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, or who
feel that they can illegally evade tax by hiding the interest income.

OFFSHORE BANKING
Some offshore banks offer banking services that may not be
available from domestic banks such as anonymous bank accounts,
higher or lower rate loans based on risk and investment opportunities
not available elsewhere.

Offshore banking is often linked to other services, such as offshore

companies, trusts or foundations, which may have specific tax
advantages for some individuals.

Many advocates of offshore banking also assert that the creation of

tax and banking competition is an advantage of the industry, arguing
with Charles Tiebout that tax competition allows people to choose an
appropriate balance of services and taxes. Critics of the industry,
however, claim this competition as a disadvantage, arguing that it
encourages a race to the bottom in which governments in
developed countries are pressured to deregulate their own banking
systems in an attempt to prevent the off shoring of capital.

DISADVANTAGES OF OFFSHORE BANKING

The existence of offshore banking encourages tax evasion, by

providing tax evaders with an attractive place to deposit their hidden
income.

Offshore jurisdictions are often remote, so physical access and

access to information can be difficult. Yet in a world with global
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OFFSHORE BANKING
telecommunications this is rarely a problem. Accounts can be set up
online, by phone or by mail.

Developing countries can suffer due to the speed at which money

can be transferred in and out of their economy as "hot money". This
"Hot money" is aided by offshore accounts, and can increase
problems in financial disturbance.

Offshore banking is usually more accessible to those on higher

incomes, because of the costs of establishing and maintaining
offshore accounts. The tax burden in developed countries thus falls
disproportionately on middle-income groups. Historically, tax cuts
have tended to result in a higher proportion of the tax take being paid
by high-income groups, as previously sheltered income is brought
back into the mainstream economy.

Offshore bank accounts are less financially secure. In banking crisis

which swept the world in 2008 the only savers who lost money were
those who had deposited their funds in an offshore banking centre
(the Isle of Man). Offshore banking has been associated in the past
with the underground economy and organized crime, through money
laundering. Following September 11, 2001, offshore banks and tax
havens, along with clearing houses, have been accused of helping
various organized crime gangs, terrorist groups, and other state or
non-state actors. However, offshore banking is a legitimate financial
exercise undertaken by many expatriate and international workers.
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OFFSHORE BANKING

Offshore bank accounts are sometimes touted as the solution to

every legal, financial and asset protection strategy but this is often
much more exaggerated than the reality.

Offshore financial centres

In terms of offshore banking centres, in terms of total deposits, the global

market is dominated by two key jurisdictions: Switzerland and the Cayman
Islands, although numerous other offshore jurisdictions also provide
offshore banking to a greater or lesser degree. In particular, Jersey,
Guernsey and the Isle of Man are known for their well regulated banking
infrastructure. Some offshore jurisdictions have steered their financial
sectors away from offshore banking, as difficult to properly regulate and
liable to give rise to financial scandal.
List of offshore financial centres
Offshore financial centres include:
o
o
o
o
o
o
o
o
o
o
o

Bahamas
Barbados
Belize
Bermuda
British Virgin Islands
Cayman Islands
Channel Islands (Jersey and Guernsey)
Cook Islands
Cyprus
Dominica
Gibraltar is no more an offshore centre since 30th June 2006. No new
Exempt Company certificates are being issued from that date.
o Ghana
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OFFSHORE BANKING
o
o
o
o
o
o
o
o
o
o
o
o
o
o

Hong Kong
Isle of Man
Labuan, Malaysia
Liechtenstein
Luxembourg
Malta
Macau
Montserrat
Nauru
Panama
Saint Kitts and Nevis
Seychelles
Switzerland
Turks and Caicos Islands

OFFSHORE FINANCIAL CENTRE

Many leading offshore financial centres are located in small tropical
Caribbean countries.
An offshore financial centre (or OFC), although not precisely defined,
is usually a low-tax, lightly regulated jurisdiction which specializes in
providing the corporate and commercial infrastructure to facilitate the
use of that jurisdiction for the formation of offshore companies and for
the investment of offshore funds.
"The use of this term makes the important point that a jurisdiction
may provide specific facilities for offshore financial centres without
being in any general sense a tax haven."
Characteristics of an offshore financial centre:

Jurisdictions that have relatively large numbers of financial

institutions engaged primarily in business with non-residents;
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Financial systems with external assets and liabilities out of

proportion to domestic financial intermediation designed to finance
domestic economies

Centres which provide some or all of the following services: low

or zero taxation; moderate or light financial regulation; banking
secrecy and anonymity.
Taxation
Although most offshore financial centres originally rose to prominence
by facilitating structures which helped to minimise exposure to tax,
tax avoidance has played a decreasing role in the success of offshore
financial centres in recent years. Although most offshore financial
centres still charge 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.
Critics of offshore financial centres argue that a lack of transparency
in offshore financial centres means that they are vulnerable to being
used in illegal tax evasion schemes. A number of international
organizations also suggest that offshore financial centres engage in
"unfair tax competition" by having no, or very low tax burdens, and
have argued that such jurisdictions should be forced to tax both
economic activity and their own citizens at a higher level.
Regulation
Most offshore financial centres now promote themselves on the basis
of "light but effective" regulation, and generally only seek to regulate
high-risk financial business, such as banking, insurance and mutual
funds.

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Critics of offshore financial centres suggest that they are not
effectively regulated in all areas, and in particular that they are
vulnerable to being used by organised crime for money laundering.
However, partly in response to international initiatives and partly in a
defensive move to protect their reputations, most offshore financial
centres now apply fairly rigorous anti-money laundering regulations to
offshore business. Some even argue that offshore jurisdictions are in
many cases better regulated than many onshore financial centres.
For example, in most offshore jurisdictions, a person needs a licence
to act as a trustee, whereas (for example) in the United Kingdom and
the United States, there are no restrictions or regulations as to who
may serve in a fiduciary capacity.
Confidentiality
Critics of offshore jurisdictions point to excessive secrecy in those
jurisdictions, particularly in relation to the beneficial ownership of
offshore companies, and in relation to offshore bank accounts.
The criticisms are slightly difficult to assess. In most jurisdictions
banks will preserve the confidentiality of their customers, and all of
the major offshore jurisdictions have appropriate procedures for law
enforcement agencies to obtain information regarding suspicious
bank accounts.
However, there are certainly well documented cases of parties using
offshore structure to facilitate wrongdoing, and the strong
confidentiality laws in offshore jurisdictions have clearly played a part
in the selection of an offshore vehicle for those purposes
Offshore structures
The bedrock of most offshore financial centres is the formation of
offshore structures. Offshore structures are characteristically involve
the formation of an:
offshore company
offshore partnership
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offshore trust
private foundation

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ROLE OF RESERVE BANK OF INDIA IN OFFSHORE BANKING

The role of Reserve Bank of India has been very critical in initiating the
process of offshore banking in India. For plenty of years, the various Indian
banks had been trying to convince the Reserve Bank of India to introduce
offshore banking in the country. Eventually, the Reserve Bank of India
understanding the needs and prospects of offshore banking in India,
allowed the setting up of offshore units in the special economic zones.
Many of the Indian banks made use of that provision to setup offshore
banks in India.

Reserve bank of India

Offshore banking units guidelines

Scheme For Setting Up Of Offshore Banking Units (Obus) In Special

Economic Zones (Sezs)

The Government of India has introduced the Special Economic Zone (SEZ)
scheme with a view to providing an internationally competitive and a hassle
free environment for export production. As per the Government's policy, SEZs
will be a specially delineated duty free enclave and deemed to be a foreign
territory for the purpose of trade operations and duties / tariffs so as to usher in
export-led growth of the economy.
It was also indicated by the Union Commerce Minister in his speech
announcing the Exim Policy for 2002-07 that for the first time, Offshore

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Banking Units (OBUs) would be permitted to be set up in SEZs. These units
would be virtually foreign branches of Indian banks but located in India. These
OBUs, inter alia, would be exempt from CRR, SLR and give access to SEZ
units and SEZ developers to international finances at international rates.

2. The Scheme
2.1 Eligibility Criteria
Banks operating in India viz. public sector, private sector and foreign banks
authorised to deal in foreign exchange are eligible to set up OBUs. Such banks
having overseas branches and experience of running OBUs would be given
preference. Each of the eligible banks would be permitted to establish only one
OBU which would essentially carry on wholesale banking operations.

2.2 Licensing
Banks would be required to obtain prior permission of the RBI for opening an
OBU in a SEZ under Section 23(1) (a) of the Banking regulation Act, 1949.
Given the unique nature of business of the OBUs, Reserve Bank would
stipulate certain licensing conditions such as dealing only in foreign currencies,
restrictions on dealing with Indian rupee, access to domestic money market,
etc. on the functioning of the OBUs. The parent bank's application for branch
licence should itself state that it proposes to conduct business at the OBU
branch in foreign currency only.
No separate authorisation with respect to the OBU branch would be issued
under FEMA. As currently in vogue with respect to designating a specific
branch for conducting foreign exchange business, the parent bank may
designate the branch in SEZ as an OBU branch. A separate Notification No.

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FEMA71/2002-RB dated September 7, 2002 issued by the Exchange Control
Department (ECD) of RBI on OBUs is enclosed.

2.3 Capital
Since OBUs would be branches of Indian banks, no separate assigned capital
for such branches would be required. However, with a view to enabling them to
start their operations, the parent bank would be required to provide a minimum
of US$ 10 million to its OBU.

2.4 Reserve Requirements

2.4.1 CRR
RBI would grant exemption from CRR requirements to the parent bank with
reference to its OBU branch under Section 42(7) of the RBI Act, 1934.

2.4.2 SLR
Banks are required to maintain SLR under Section 24(1) of the Banking
Regulation Act, 1949 in respect of their OBU branches. However, in case of
necessity, request from individual banks for exemption will be considered for a
specified period under Section 53 of the B.R.Act, 1949.

2.5 Resources and deployment

The sources for raising foreign currency funds would be only external. Funds
can also be raised from those resident sources to the extent such residents are
permitted under the existing exchange control regulations to invest/maintain
foreign currency accounts abroad. Deployment of funds would be restricted to

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lending to units located in the SEZ and SEZ developers. Foreign currency
requirements of corporates in the domestic area can also be met by the OBUs.
If funds are lent to residents in the Domestic Tariff Area (DTA), existing
exchange control regulations would apply to the beneficiaries in DTA.

2.6 Permissible Activities of OBUs

OBUs would be permitted to engage in the form of business mentioned in
Section 6(1) of the BR Act, 1949 as stipulated in the enclosed ECD Notification
no. FEMA71/2002-RB dated September 7, 2002 and subject to the conditions
of the licence issued to the OBU branches.

2.7 Prudential Regulations

All prudential norms applicable to overseas branches of Indian banks would
apply to the OBUs. The OBUs would be required to follow the best
international practice of 90 days' payment delinquency norm for income
recognition, asset classification and provisioning. The OBUs may follow the
credit risk management policy and exposure limits set out by their parent banks
duly approved by their Boards.
The OBUs would be required to adopt liquidity and interest rate risk
management policies prescribed by RBI in respect of overseas branches of
Indian banks as well as within the overall risk management and ALM
framework of the bank subject to monitoring by the Board at prescribed
intervals.
The bank's Board would be required to set comprehensive overnight limits for
each currency for these branches, which would be separate from the open
position limit of the parent bank.

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2.8 Anti-Money Laundering Measures

The OBUs would be required to scrupulously follow "Know Your Customer
(KYC)" and other anti-money laundering instructions issued by RBI from time
to time. Further, with a view to ensuring that anti-money laundering instructions
are strictly compiled with by the OBUs, they are prohibited from undertaking
cash transactions, and transactions with individuals.

2.9 Regulation and Supervision

OBUs will be regulated and supervised by RBI through its Exchange Control
Department, Department of Banking Operations and Development and
Department of Banking Supervision.

2.10 Reporting requirements

OBUs will be required to furnish information relating to their operations as are
prescribed from time to time by RBI.

2.11 Ring fencing the activities of OBUs

The OBUs would operate and maintain balance sheet only in foreign currency
and would not be allowed to deal in Indian Rupees except for having a special
Rupee account out of convertible fund to meet their day to day expenses.
These branches would be prohibited to participate in domestic call, notice, tem,
etc. money market and payment system. Operations of the OBUs in rupees
would be minimal in nature, and any such operations in the domestic area
would be through the Authorised Dealer (distinct from OBUs) which would be

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subject to the current exchange control regulations in force.
The OBUs would be required to maintain separate nostro accounts with
correspondent banks which would be distinct from nostro accounts maintained
by other branches of the same bank. The Ads dealing with OBUs would be
subject to ECD regulations.

2.12 Priority sector lending

The loans and advances of OBUs would not be reckoned as net bank credit for
computing priority sector lending obligations.

2.13 Deposit insurance

Deposits of OBUs will not be covered by deposit insurance.

2.14 Choice of SEZ

OBUs would be permitted in SEZs approved by Government of India, where
according to Government policy, OBUs can be set up.

REPUTED OFFSHORE BANKS IN INDIA

With the introduction of offshore banking numerous banks made a beeline for
setting up an offshore banking unit at the special economic zones. One of the
banks which took to offshore banking in India is the Bank of Baroda. It set up
an offshore unit in the city of Mumbai. Punjab National Bank is another banks
which boasts of an offshore banking unit at Santacruz Electronics Export
Promotion Zone or SEEPZ in Mumbai. The State Bank of India is also one of

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the banks with an offshore unit at SEEPZ.
Offshore banking: A lucrative proposition
ONE of the significant features of the Exim Policy is the proposal to permit
offshore banking units (or overseas banking units) in Special Economic Zones
(SEZs). Offshore banking refers to the international banking business involving
non-resident foreign currency-denominated assets and liabilities. It refers to the
banking operations that cover only non-residents, and does not include
domestic banking. An offshore banking centre is a place where deliberate
attempt is made to attract international banking by offering many concessions
in the form of taxes and levies imposed at lower rates.
A more important relaxation is the exemption of the offshore banks from
restrictions on operations. Offshore banking units in these centres can carry on
their activities with international enterprises or investors without conflicting with
the domestic fiscal and monetary policy.
Offshore banking centres offer the following benefits:
Exemption from minimum reserve requirements.
Freedom from control on interest rates.
Low or non-existent taxes and levies: Entry is relatively easy, especially
for large international banks, in contrast to the situation in neighbouring
countries that may strictly limit or prohibit the entry of foreign banks.
Licence fees are generally low: Close proximity to the important loan
outlets or deposit sources; for instance, Bahrain is an offshore base for
petro-dollars.
Offshore banking is an extension of the euro-currency concept to the
East, which provides a link between euro-currency markets and the final
borrowers. They provide essential time zone links that are truly worldwide, and ensure that the market operates 24 hours a day. While
offshore banking is an integral part of the euro-market, what
distinguishes it from the mainstream euro market is that it was specially
set up by host countries to promote international banking.
Offshore banking units are branches of international banks or other
subsidiaries or affiliates. They do not carry retail business, but generally
provide wholesale banking services project financing, syndicated loans,
issue of short-term and medium term instruments, such as negotiable
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certificates of deposits and capital notes as well as merchant banking
activities in foreign currency denominated bonds and equity shares.
The deals are mostly between banks or with large borrowers or multinational
corporations. MNCs prefer transacting in offshore financial centres because of
certain apparent advantages: Avoidance of high tax incidence; freedom from
exchange control; maintenance of secrecy of deals due to non-interference
from government and regulatory authorities; and deferring tax by floating
subsidiary units in such centres and delaying their remittance of profits to the
parent company, when it would be taxed.
Participation of the Indian banks
Few Indian banks, such as State Bank of India, Indian Overseas Bank, Bank of
India and Bank of Baroda, have set up offshore banking units for deposit taking
and final lending at Bahrain, Hong Kong, Colombo, Cayman Islands, and so
on. Indian Bank, Bank of Baroda and Union Bank of India jointly floated a
deposit taking company, IBU International Finance, in Hong Kong for both
offshore and onshore banking.
The benefits for the Indian banks from these ventures are:
Sizeable profits as these ventures involve relatively low operating
costs.
With multi-currency deposit bases, the banks would be able to serve
better the needs of their customers who have set up joint ventures
abroad in the form of foreign currency finance.
The banks would strengthen the country's balance of payments through
repatriation of profits from the venture.

Offshore banking centre in India

Financial experts have been pleading to establish an offshore banking centre
in India. Geographically, India provides distinct advantages in attracting
offshore banking units, because it has a stable economic and political
performance, a vast market, technical manpower that could find employment in
these centres. Another advantage is that the Indian market would open a little
before the Tokyo market closes, and close before New York opens, thus
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providing a vital time link for international money market dealers.
In an era where many Indian corporations are functioning abroad, and many
corporations are granted permission to seek overseas finance, establishing an
offshore unit will help tap the resources:
Exporters would benefit in terms of finer margins on loans and better foreign
exchange rates available via an offshore banking unit.
The benefits of multi-currency operations which, to an extent, minimise
currency fluctuation risk, will be an added advantage.
Salaries paid by offshore banks and local expenditure incurred by them
contribute to the economy's welfare. For smaller countries, the benefit would
be greater. For a larger country such as India, however, this may not form a
significant portion of the total income.
India may earn revenue in the form of licence fees, profit taxes imposed on
the banks operating in the area. It may also get the benefit of banks' funds in
the form of capital and liquidity requirements.
The country can gain improved access to the international capital markets.
he domestic financial system may become more efficient through increased
competition and exposure of the domestic banks to the practices of offshore
banks.
The offshore banking centres will provide opportunities to train the local staff
which will, in turn, contribute to faster economic growth.
The offshore banking units would help channelize non-resident Indian
investments.
Setting up offshore banking centres would trigger enforced development of
more advanced communication facilities a must for their functioning.
But establishing offshore centres also comes with a price:
The supervision and regulation of offshore banks may involve substantial
costs.
Encouraging offshore banking may result in the diminution in autonomy of
domestic monetary policy, since it is difficult to draw a line always between the
offshore and onshore operations, particularly in the absence of exchange
control.
banking provides scope for tax evasion by residents. For instance,
in Hong Kong, it was found that residents place deposits with offshore banks
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and take loans of the same amount. The interest on loan would be a deductible
expenditure for taxation, while the income from interest on deposits is not
taxed.
Offshore banks may prove to be harmful competitors to the local banks and
may inhibit their growth.
For long, Mumbai was considered suitable for establishing offshore banking
here. The city has all the requirements goods infrastructure in the form of
telecommunications and services, abundant and well-trained manpower and
presence of many international banks, both Indian and foreign, already
engaged in international banking.
The Sodhani Committee on Foreign Exchange Reforms (1996) has
recommended allowing Indian banks and financial As against the general
recommendation of permitting offshore banking units only at Mumbai, the
present proposal is to permit them at Special Economic Zones. This is a wise
move since both offshore banking centres and SEZs have many things in
common as regards administration and purpose. The establishment of offshore
centres in India was foreseen when the Foreign Exchange Regulation Act
(FERA) was replaced by the Foreign Exchange Management Act, 1999
(FEMA). Article 10 of FEMA included offshore banking units as one of the
authorities to whom the RBI could delegate powers for dealing in foreign
exchange. The question is: Will these offshore banking units fulfil Mr Maran's
cherished goals? The RBI is expected to bring out regulations regarding setting
up these units in India. A lot depends on how far these regulations are liberal
and pragmatic.

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OFFSHORE BANKING
TRENDS IN REGULATION OF OFFSHORE BANKING

Since offshore banking emerged and grew in response to restrictive regulatory

regimes, there are certain inherent risks that can potentially affect international
financial stability. Three can be readily identified. First, the contagion effect
with the increasing integration of financial markets worldwide and the explosive
growth in cross-border capital flows, problems in a bank in a OFC can be
transferred rapidly to other market jeopardising the stability of those markets.
Second, the lack of reliable data on activities in OFCs may hinder effective
supervision. Third, competitive liberalisation may lead to lowering regulatory
standards in OFCs in order to attract a higher share of global business.
Internationally regulators have been addressing the systemic issues posed by
offshore banking. The `Basle Concordat of 1975 was implemented on best
efforts basis for almost two decades. The bankruptcy of Bank of Credit and
Commerce International (BCCI) in 1992 hastened the adoption of international
supervisory standards. BCCI was a landmark in the sense that thereafter, it
has become difficult for a bank incorporated in a jurisdiction with limited
domestic market to carry on business in other countries. The standards
adopted by the Basle Committee for Banking Supervision are as follows:
All international banks should be supervised by a home country
authority that capably performs consolidated supervision;
The creation of cross-border banking establishments should receive the prior
consent of both the host country and home country authority;

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OFFSHORE BANKING
Home country authorities should possess the right to gather information from
their cross-border banking establishments;
If the host country determines that any of these three standards is not being
met, it could impose restrictive measures or prohibit the establishment of
banking offices.

This was followed by the Report of a Working Group of the Basle Committee
which, inter alia, aims at improving access of home and host regulators to data
necessary for effective consolidated supervision and ensuring all cross border
banking operations are subject to home and host supervision. Subsequently
there have been several international and regional supervisory and regulatory
initiatives. These are aimed, inter alia, at curbing involvement of OFCs in
financial crime such as money laundering, tax evasion, lax financial regulation
including inadequate supervision.

OFFSHORE BANKING IN THE INDIAN CONTEXT

India has made a cautious beginning in offshore banking by permitting for the
first time Offshore Banking Units (OBUs) to be set up in Special Economic
Zones (SEZs). The SEZs have been set up with a view to providing an
internationally competitive and hassle free environment for export production.
SEZs will be specially delineated duty free enclave and deemed to be a foreign
territory for the purpose of trade operations and duties / tariffs so as to usher in
export-led growth of the economy. The OBUs virtually would be foreign
branches of Indian banks located in India. These OBUs, inter alia, would be

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OFFSHORE BANKING
exempt from reserve requirements and provide access to SEZ units and SEZ
developers to international finances at international rates. The Reserve Bank of
India (RBI) has permitted banks operating in India, whether Indian,
public/private sector or foreign, to set up OBUs in the SEZs. The OBUs would
carry out essentially wholesale banking operations. The OBUs will be set up as
branches of the banks and therefore no separate assigned capital will be
required. All prudential norms applicable to overseas branches of Indian banks
would apply to OBUs. Thus, the necessary risk management practices that are
in vogue internationally, would have to be adopted by the OBUs. The OBUs
will be regulated and supervised by RBI. They will be required to scrupulously
follow Know Your Customer and other antimony laundering directives of RBI
from time to time. Unlike the OFCs in other developing countries which conduct
offshore banking in a significant manner, the OBUs in India have a limited
mandate. In fact, the approach appears to be facilitating the SEZ policy rather
than introducing offshore banking in India. This is in line with the cautious
policy stance adopted by the regulators in regard to the opening up of the
financial sector. Notwithstanding the limited scope for offshore banking in the
light of the relevant regulations, many Indian banks have set up OBUs in SEZs.
Available feedback is encouraging.

Over the years, India has tightened the legal framework to combat money
laundering and other cross border financial crime. These include the
Prevention of Money Laundering Act 2002, passed keeping in view the FATF
deliberations and recommendation and international initiatives at the United
Nations and others. There are other laws such as The Smugglers and Foreign
Exchange Manipulation (Forfeiture of Property) Act of 1976, The Code of

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OFFSHORE BANKING
Criminal Procedures 1973, Prevention of Corruption Act, 1988, The Narcotic
drugs and Psychotropic Substances Act of 1985.

BANKING SERVICES PROVIDED BY OFFSHORE BANKS

1) Deposit account
A deposit account is a current account, savings account, or other type of bank
account, at a banking institution that allows money to be deposited and
withdrawn by the account holder. These transactions are recorded on the
bank's books, and the resulting balance is recorded as a liability for the bank
and represent the amount owed by the bank to the customer. Some banks
charge a fee for this service, while others may pay the customer interest on the
funds deposited.
Major types

Checking accounts: A deposit account held at a bank or other financial

institution, for the purpose of securely and quickly providing frequent
access to funds on demand, through a variety of different channels.
Because money is available on demand these accounts are also referred
to as demand accounts or demand deposit accounts.

Savings accounts: Accounts maintained by retail banks that pay interest

but cannot be used directly as money (for example, by writing a cheque).
Although not as convenient to use as checking accounts, these accounts
let customers keep liquid assets while still earning a monetary return.

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OFFSHORE BANKING
Money market deposit account: A deposit account with a relatively high
rate of interest, and short notice (or no notice) required for withdrawals.
In the United States, it is a style of instant access deposit subject to
federal savings account regulations, such as a monthly transaction limit.

Time deposit: A money deposit at a banking institution that cannot be

withdrawn for a preset fixed 'term' or period of time. When the term is
over it can be withdrawn or it can be rolled over for another term.
Generally speaking, the longer the term the better the yield on the
money.

2) Credit (finance)

Credit is the provision of resources (such as granting a loan) by one

party to another party where that second party does not reimburse the
first party immediately, thereby generating a debt, and instead arranges
either to repay or return those resources (or material(s) of equal value)
at a later date. It is any form of deferred payment. The first party is
called a creditor, also known as a lender, while the second party is
called a debtor, also known as a borrower.

Movements of financial capital are normally dependent on either credit

or equity transfers. Credit is in turn dependent on the reputation or
creditworthiness of the entity which takes responsibility for the funds.

Credit need not necessarily be based on formal monetary systems. The

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OFFSHORE BANKING
credit concept can be applied in barter economies based on the direct
exchange of goods and services, and some would go so far as to
suggest that the true nature of money is best described as a
representation of the credit-debt relationships that exist in society.

Credit is denominated by a unit of account. Unlike money (by a strict

definition), credit itself cannot act as a unit of account. However, many
forms of credit can readily act as a medium of exchange. As such,
various forms of credit are frequently referred to as money and are
included in estimates of the money supply.

Credit is also traded in the market. The purest form is the credit default
swap market, which is essentially a traded market in credit insurance. A
credit default swap represents the price at which two parties exchange
this risk the protection "seller" takes the risk of default of the credit in
return for a payment, commonly denoted in basis points of the notional
amount to be referenced, while the protection "buyer" pays this premium
and in the case of default of the underlying (a loan, bond or other
receivable), delivers this receivable to the protection seller and receives
from the seller the par amount (that is, is made whole).

3) Electronic money

Electronic money (also known as e-money, electronic cash, electronic

currency, digital money, digital cash or digital currency) refers to money or

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OFFSHORE BANKING
scrip which is exchanged only electronically. Typically, this involves use of
computer networks, the internet and digital stored value systems. Electronic
Funds Transfer (EFT) and direct deposit are examples of electronic money.
Also, it is a collective term for financial cryptography and technologies enabling
it.

Wire Transfer
Wire transfer or credit transfer is a method of transferring money from one
person or institution (entity) to another. A wire transfer can be made from one
bank account to another bank account or through a transfer of cash at a cash
office.

Bank wire transfers are often the most expedient method for transferring funds
between bank accounts. A bank wire transfer is effected as follows:

The person wishing to do a transfer (or someone who they have

appointed and empowered financially to act on their behalf) goes to the
bank and gives the bank the order to transfer a certain amount of money.
IBAN and BIC code are given as well so the bank knows where the
money needs to be sent to.

The sending bank transmits a message, via a secure system (such as

SWIFT or Fedwire), to the receiving bank, requesting that it effect
payment according to the instructions given.

The message also includes settlement instructions. The actual transfer is

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OFFSHORE BANKING
not instantaneous: funds may take several hours or even days to move
from the sender's account to the receiver's account.

Either the banks involved must hold a reciprocal account with each other,
or the payment must be sent to a bank with such an account.

4) Foreign exchange market

The foreign exchange market (currency, forex, or FX) trades currencies. It lets
banks and other institutions easily buy and sell currencies.

The purpose of the foreign exchange market is to help international trade and
investment. A foreign exchange market helps businesses convert one currency
to another. For example, it permits a U.S. business to import European goods
and pay Euros, even though the business's income is in U.S. dollars.
In a typical foreign exchange transaction a party purchases a quantity of one
currency by paying a quantity of another currency. The modern foreign
exchange market started forming during the 1970s when countries gradually
switched to floating exchange rates from the previous exchange rate regime.
The foreign exchange market is unique because of
Its trading volumes,
The extreme liquidity of the market,
Its geographical dispersion,
Its long trading hours: 24 hours a day except on weekends
The variety of factors that affect exchange rates.
The low margins of profit compared with other markets of fixed income
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OFFSHORE BANKING
(but profits can be high due to very large trading volumes)
The use of leverage

5) Letter of credit

A standard, commercial letter of credit is a document issued mostly by a

financial institution, used primarily in trade finance, which usually
provides an irrevocable payment undertaking.

The LC can also be the source of payment for a transaction, meaning

that redeeming the letter of credit will pay an exporter. Letters of credit
are used primarily in international trade transactions of significant value,
for deals between a supplier in one country and a customer in another.
They are also used in the land development process to ensure that
approved public facilities (streets, sidewalks, storm water ponds, etc.) will
be built. The parties to a letter of credit are usually a beneficiary who is to
receive the money, the issuing bank of whom the applicant is a client,
and the advising bank of whom the beneficiary is a client. Almost all
letters of credit are irrevocable, i.e., cannot be amended or cancelled
without prior agreement of the beneficiary, the issuing bank and the
confirming bank, if any. In executing a transaction, letters of credit
incorporate functions common to Travellers cheques. Typically, the
documents a beneficiary has to present in order to receive payment
include a commercial invoice, bill of lading, and documents proving the
shipment was insured against loss or damage in transit. However, the list
and form of documents is open to imagination and negotiation and might

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OFFSHORE BANKING
contain requirements to present documents issued by a neutral third
party evidencing the quality of the goods shipped, or their place of origin.

6) Investment management

Investment management is the professional management of various

securities (shares, bonds etc.) and assets (e.g., real estate), to meet
specified investment goals for the benefit of the investors. Investors may
be institutions (insurance companies, pension funds, corporations etc.) or
private investors (both directly via investment contracts and more
commonly via collective investment schemes e.g. mutual funds or
Exchange Traded Funds) .

The term asset management is often used to refer to the investment

management of collective investments, (not necessarily) whilst the more
generic fund management may refer to all forms of institutional
investment as well as investment management for private investors.
Investment managers who specialize in advisory or discretionary
management on behalf of (normally wealthy) private investors may often
refer to their services as wealth management or portfolio management
often within the context of so-called "private banking".

The provision of 'investment management services' includes elements of

financial analysis, asset selection, stock selection, plan implementation
and ongoing monitoring of investments. Investment management is a
large and important global industry in its own right responsible for

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OFFSHORE BANKING
caretaking of trillions of dollars, euro, pounds and yen. Coming under the
remit of financial services many of the world's largest companies are at
least in part investment managers and employ millions of staff and create
billions in revenue.

Fund manager (or investment adviser in the U.S.) refers to both a firm
that provides investment management services and an individual who
directs fund management decisions.

7) Trustee

Trustee is a legal term that refers to a holder of property on behalf of a

beneficiary. A trust can be set up either to benefit particular persons, or for any
charitable purposes (but not generally for non-charitable purposes): typical
examples are a will trust for the testator's children and family, a pension trust
(to confer benefits on employees and their families), and a charitable trust. In
all cases, the trustee may be a person or company, whether or not they are a
prospective beneficiary.
General duties of trustees
Trustees have certain duties (some of which are fiduciary). These include
the duty to carry out the express terms of the trust instrument, the duty to
defend the trust, the duty to prudently invest trust assets, the duty of
impartiality among the beneficiaries, the duty to account for their actions
and to keep them informed about the trust, the duty of loyalty, the duty
not to delegate, the duty not to profit, the duty not to be in a conflict of
interest position and the duty to administer the trust in the best interest of

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OFFSHORE BANKING
the beneficiaries. These duties may be expanded or narrowed by the
terms of the instrument creating the trust, but in most instances cannot
be eliminated completely. Corporate trustees, typically trust departments
at large banks, often have very narrow duties, limited to those explicitly
defined in the trust indenture.

A trustee carries the fiduciary responsibility and liability to use the trust
assets according to the provisions of the trust instrument (and often
regardless of their own or the beneficiaries' wishes). The trustee may find
himself liable to claimants, prospective beneficiaries, or third parties. In
the event that a trustee incurs a liability (for example, in litigation, or for
taxes, or under the terms of a lease) in excess of the trust property they
hold, they may find themselves personally liable for the excess.

Trustees are generally held to a "prudent person" standard in regard to

meeting their fiduciary responsibilities, though investment, legal, and
other professionals can be held to a higher standard commensurate with
their higher expertise. Trustees can be paid for their time and trouble in
performing their duties only if the trust specifically provides for payment.
It is common for lawyers to draft will trusts so as to permit such payment,
and to take office accordingly: this may be an unnecessary expense for
small estates.

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OFFSHORE DEVELOPMENT - A FAVOURITE DESTINATION INDIA
Soft wares are the ultimate need of the present business. Every business
organization needs softwares to carry out their business processes
successfully and efficiently. The organization always wants a well worthy
software in a very optimum price, so they tend to look for a better option of
solutions and off course in a lesser price to maximize the profits.

Due to the high market value of USD, UK-POUND and EURO the development
cost of the software are most likely to be very high in these Developed Nations.
Therefore, the business organizations are looking for a lower cost options and
the same quality of work as well. So, they are Outsourcing their Business
Processes to the developing nations like India. India is considered as the best
destination to outsource the IT related work in the last 5 years from the USA,
UK and other European Countries. India is the leading beneficiary of the IT
related outsourcing, because of the following reasons -

A large pool of Technically Qualified Professionals is available in India

with above average IQ, which makes it a large force in the IT related
works.

The most important advantage is the cost factor - in India a Professional

Software Engineer or IT Professional is available to work for a monthly
salary of less than USD500 equivalent which is not likely to be happened
in US/UK etc. The quality of services provided by them is at par the
International Standards and they are flexible to work in any time zone of

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this world.

The Geographical Distance is not a problem for the Software or IT

related services. It is possible to implement the developed software
online from any place connected to Internet unless it is a very complex
application and the support needed for the maintenance can be provided
from any place in the world via Internet. So, the Geography has now
become History for the modern day technology.

THE FUTURE OF THE OFFSHORE INDUSTRY

Since the 9/11 incident, the international crackdown on money laundering has
created a divide in the offshore industry, primarily between jurisdictions eager
to comply with international standards of anti-laundering regulation and those
that are less co-operative. The driving force behind those initiatives, have been
influential organizations such as the Financial Action Task Force (FATF). The
FATF was established by the G-7 countries in 1989 and is an intergovernmental body whose purpose is the development and promotion of
policies, both at national and international levels, to combat money laundering
and terrorist financing. As the FATF seek to apply more international pressure,
it will become increasingly difficult for the less well-regulated regimes to do
business.

Another major issue is the exchange of information, the profile of which has
been raised in the current climate. The recently agreed EU Savings Tax

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OFFSHORE BANKING
Directive will change the face of the offshore industry, although to what extent
is somewhat harder to predict. Previously no information was exchanged
automatically in Europe unless there were concerns about illegal activities on a
bank account. However, with the introduction of the EU Tax Directive,
customers living within the EU are likely to be forced to engage with these
issues, either by having to pay a withholding tax or agreeing to exchange
information. The new directive will affect not only the EU Member States but
"all territories under their control", Switzerland and the USA. The UK has
recently announced that if the Cayman Islands fail to voluntarily to comply with
these new rules, the United Kingdom will legislate on its behalf.

To this effect, Hong Kong will soon become a much more important jurisdiction
for tax planning as it is one of the only respectable and well-regulated
"offshore" banking centres which will not be subject to the new EU directive on
automatic exchange of information and withholding tax.
Hong Kong should also be seriously considered for clients wishing to register
an offshore company, as it is one of the few respectable locations in the world
that tax on a Territorial Basis. Consequently, this means that corporation tax
is ONLY charged on profits derived from a trade, profession or business
carried on in territory of Hong Kong. Income sourced elsewhere, even if
remitted to Hong Kong, is treated as tax free.
In general, the regulatory regime in respect of offshore banking may be
expected to move forward on the basis of following four broad principles:
First, consolidated supervision of banking operations through greater cooperation between home country and host country regulators;
Second, higher transparency with reference to supervisory systems and

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OFFSHORE BANKING
programmes including dissemination of guidelines, publications of data of
OFCs;
Third, technical assistance to upgrade regulatory systems, supervisory
policies and procedures through adoption of `best in class processes and
policies.
Fourth, setting up systems for independent monitoring of activities of OFCs
and complying with supervisory standards.

OFFSHORE INVESTING

Investing beyond the borders of your jurisdiction, which is also referred to as

offshore investing, has quite some advantages. We will name a few here,
together with some of the disadvantages of investing abroad. Offshore
investing makes up more than half of the worlds financial investments and is
therefore quite significant.

Offshore investing has the following advantages:

Confidentiality. Many wealthy persons investing in stocks and

companies are not happy with publicity with regard to their moves. Other
people might take advantage of their exposed knowledge, thus making it
less interesting for the person in question to make a certain investment.
Confidentiality is not just important for unethical business, money
laundering or drug trafficking. It is simply an important aspect of life to
many people.

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OFFSHORE BANKING

Asset protection. Offshore investment centres are popular places to

redistribute income. Assets can be transferred to funds and family,
without having to pay extra taxes or following complicated legal rules in
the home country.

Tax reduction. Many of the popular jurisdictions to invest in offer

significant tax reductions to foreign investors. However, the US as well
as the EU jurisdictions are well aware of the tax reductions that are
applicable to their richer citizens, and are therefore trying their best to
prevent citizens from investing offshore, accusing them of tax evasion
and considering tax evasion illegal.

Diversification of Investment. Offshore investment centers in general

offer much more than the national banks and financial institutions. An
offshore bank or investment centre has access to the world market and
gives you the opportunity to trade in whichever currency you prefer. Any
stock market is open for your investments.

There are some disadvantages to offshore investing:

Cost. Investing offshore is pretty costly. Most banks require a minimum

investment of between $100.000 and $1 million. In addition, there are
rules in certain offshore centres that require proof of residence in the
jurisdiction, which means that you would have to invest in property as
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OFFSHORE BANKING
well. In other cases, setting up an offshore corporation might be
compulsory, leading to high investment fees for just the initial stages of
investing your money.

Tightening Tax Laws. Many jurisdictions are now trying to prevent their
citizens from offshore investing. The main reason is that they are losing
on income, as taxes did not apply to foreign investments. The Internal
Revenue Code (2004) has also made it much more difficult to profit from
tax reductions in offshore centres.

Safety. Like in any business, offshore investing carries a certain risk. Be

sure to do some research and to invest in a reliable and well-recognized
company. Hire a professional to give you advice, but count on steep
prices for these people. Also include the costs of travelling for you and
your money and advisors, commission fees and professional fees.

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Recommendations of the Expert Group on Foreign Exchange Markets in
India (1995) in Regard to Setting Up of Offshore Banking Units (OBUs)
Before concluding we may note the recommendations of the Expert Group in
regard to the setting up of offshore banking units. The group has
recommended that Offshore Banking Units (OBUs) may be allowed to be set
up by scheduled commercial banks operating in India as part of and within the
existing bank titled domestic OBUs. Foreign banks not operating in India
would not be permitted to operate only as domestic OBU. OBU is expected to
maintain its own separate accounting which will be audited separately and
strictly.
Sources of Funds
The Group recommended that OBUs may obtain fund from: (i) acceptance of
deposits or borrowings in foreign currency from non-residents including foreign
entities and other foreign branches of Indian banks and issuance of foreign
currency certificates of deposits, the Reserve Bank of India (RBI) would lay
down account opening criteria; (ii) acceptance of funds as deposits/borrowings
from only those residents who are eligible to hold foreign currency accounts
(although these funds cannot strictly be deemed as offshore funds, the
objective of permitting this to be held in offshore books, is to increase the
source of foreign currency funds which are free of reserve requirements so that
liquidity and pricing of these is more in line with international rates), which will
greatly benefit exporters; and (iii) taking deposits from other domestic OBU in
India.
Development of Funds
The Group has suggested that OBUs may deploy funds by way of:
(i)

Lending to any non-resident;

(ii)

Specific category of investments permitted by RBI;

(iii)

Loans to other domestic OBUs

(iv)

Loans

to

domestic

entities

in

foreign

currency for

project/

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OFFSHORE BANKING
infrastructure finance under the RBIs general or specific permissions.

Other Business
According to the Group domestic OBUs should also be permitted to: (i)
undertake foreign exchange dealings with non-residents, other domestic
OBUs and authorised dealers not involving local currency; (ii) issue
guarantees and do other business not involving domestic currency/local
exposure; (iii) loan syndication and management in advising, negotiating
and confirming LCs in foreign currencies where both the parties are nonresidents; and (v) financial advisory services.
Capital Adequacy and Supervision
The Group has suggested that the OBU will be subject to strict regulation by
RBI including capital adequacy, exposure norms, accounting standards and
gap limits. Besides prescribing eligibility criteria for allowing setting up of such
units, the RBI may also, according to the Expert Group, specify a limit on the
total assets/liabilities. The limit would be subject to review from time to time.

Incentives for OBUs

According to the recommendations of the Group, (a) the liabilities of the OBU
will have to be exempt from CRR/SLR requirements, (the RBI, may, however,
prescribe minimum liquid assets requirements for prudential reasons if felt
necessary); (b) the rates of income tax should be low, not exceeding 10 per
cent; (c) there should not be withholding tax on deposits raised from nonresidents; and (d) transactions of OBUs should be exempt from stamp duty.
The Expert Group felt that these conditions would enable OBUs to be
competitive with other such regional centres abroad so as to attract nonresident business for its growth. The clear identification/separation of funds
flow in the domestic OBUs and the parent bank will ensure that foreign
currency flow do not impact domestic monetary aggregates. This itself would
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justify exemption from CRR/SLR requirements.

Offshore Banking Facts

Offshore banking and offshore banks are often misunderstood and intentionally
maligned by governments of high taxing jurisdictions. It is important to note that
just like an offshore company, an offshore bank is merely a bank domiciled in a
country other than that of the persons country of residence, domicile or
citizenship. Hollywood has also done a good job of associating offshore
banking with cigarette boats, private jets and criminals of all kinds. In reality,
these offshore jurisdictions and offshore banks are very different than what
typically conjures in the mind. Let us look at some myths and facts about
offshore banking with an unbiased and historical perspective.

Myth #1
Offshore banks are only used to evade taxes.
Fact: Popular offshore banking jurisdictions often provide a number of benefits
over onshore banks including lower administration costs, higher interest rates,
the ability to deposit and transact in multiple currencies, increased privacy,
access to otherwise unavailable international investments, sophisticated
private banking, the ability to facilitate international business transactions, etc.
Additionally, offshore banking provides increased asset protection from
potential extraneous lawsuits, unstable governments, unstable economic
conditions, unlawful seizure, etc.

Myth #2
Offshore banking is only conducted by money launderers, drug dealers,
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OFFSHORE BANKING
weapons smugglers and terrorists.
Fact: There is no question that offshore banks are abused by some of these
unwanted elements. Let us maintain a proper perspective on this however.
These same elements have been offshore banking in the US and UK for
many years due to the lax restrictions on foreign deposits in these two
countries. Conservative estimates put the total amount of money held in US
banks from proceeds of money laundering at $300 billion. In fact, many

offshore banking jurisdictions have better laws and regulations than either of
these two countries. All jurisdictions offered by Sterling Offshore have
implemented the 40 recommendations of the OECD (Organization for
Economic Co-operation and Development) FATF (Financial Action Task
Force). In 2006 the FATF commenced a review of all of the major financial
jurisdictions and found only the USA to be non-compliant due to, amongst
other things, insufficient information exchange concerning US depositors.

Myth #3
Offshore banks are less secure than onshore banks.
Fact: Many of these banking jurisdictions offer banking histories and current
conditions far superior to their international counterparts. Switzerland is
estimated to hold over 35% of the worlds banking deposits and our premier
banking partner there has been in business for over 300 years. Cayman
Islands is the 5th largest banking jurisdiction in the world. Panama has over
130 major banks including many of the largest international banks in the world.

Depositors need to consider all factors when choosing a banking jurisdiction.

Many of these offshore banks and banking jurisdictions have histories far
superior to that of banks in their own country. Many have lending practices that
are much stricter than that of the banking institutions in their own countries.
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IS SETTING UP OFFSHORE ILLEGAL?

No, setting up offshore is not illegal. However, withholding information about

your offshore investments is illegal in some countries. An offshore jurisdiction
should be perceived as just another foreign country, but with certain
advantages. These can take the form of banking secrecy laws, advantages in
forming companies for international trade through tax treaties, no interest tax,
no inheritance taxes, no capital gains tax, no individual tax, and many others.

Depending on your personal needs or preferences, there will normally be one

or more offshore jurisdictions offering the services you are looking for.

This is one of the most frequently asked questions concerning the legality of
offshore banking, and in short, Yes, offshore banking is legal. Offshore banking
is a benefit to all of society and is indispensible.
Using offshore banking for tax evasion purposes is what is not legal, and that is
usually what is associated with offshore banking in general and is the cause of
the misconception.

Offshore banking is also associated with criminal activities such as money

laundering. Let's clarify the distinction of legal and legal and examine why
offshore banking will remain legal

While Offshore banking has often been associated with the underground
economy and organized crime, via tax evasion and money laundering;

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however, legally, offshore banking does not prevent assets from being subject
to personal income tax on interest. Except for certain persons who meet fairly
complex requirements, the personal income tax of many countries makes no
distinction between interest earned in local banks and those earned abroad.
Persons subject to US income tax, for example, are required to declare on
penalty of perjury, any offshore bank accountswhich may or may not be
numbered bank accountsthey may have. Although, and have no legal
obligation to do so as they are protected by bank secrecy, this does not make
the non-declaration of the income by the tax-payer or the evasion of the tax on
that income legal. Following September 11, 2001, there have been many calls
for more regulation on international finance, in particular concerning offshore
banks, tax havens, and clearing houses such as Clearstream, based in
Luxembourg, being possible crossroads for major illegal money flows.

Defenders of offshore banking have criticized these attempts at regulation.

They claim the process is prompted, not by security and financial concerns, but
by the desire of domestic banks and tax agencies to access the money held in
offshore accounts. They cite the fact that offshore banking offers a competitive
threat to the banking and taxation systems in developed countries, suggesting
that Organization for Economic Co-operation and Development (OECD)
countries are trying to stamp out competition.
Is it legal to set up an offshore bank account so that a court order cannot
take money from your accounts?
It is illegal to "conceal" assets offshore form the IRS, and/or to deny the
possession of such assets in a written or oral statement when there is pending
action or a judgment in place for creditor debt, alimony, restitution for personal

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injury suit and so forth. The reliability of offshore asset depositories are dicey at
best and may become a nightmare rather than a haven for the depositor. If the
action is in any way connected with bankruptcy or any federal litigation such as
the IRS, it is considered a federal felony and carries a mandatory prison
sentence of 5-years for each count of which the person is found guilty.

As previously mentioned, offshore banking is often associated with illegal

activities. One of these illegal activities is tax evasion. If you set up an offshore
bank account, you will still need to report your savings. Not reporting all of your
money in an offshore account can lead to you be brought up on tax evasion
charges. It is important to note that you have the ability to prevent this from
happening. As long as you choose to use your offshore bank account legally,
there shouldnt be any disadvantages to having one If you are planning on
using your offshore account to avoid a lawsuit or to evade taxes, you may want
to re-examine your decision. As previously mentioned, there are serious
consequences for doing this. As long as you plan on using your offshore
account in a legal way, you can benefit immensely from offshore banking.
Offshore Bank Accounts

In the current economic climate, many persons are turning to offshore banking
as an alternative method of saving and investing their hard earned money.

Why setup an offshore bank account?

The main reason people setup offshore bank account is to save on taxes.
Another reason is to keep money away from creditors reach.

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While it is not illegal in most countries to open an offshore bank account, if you
are doing so for illegal reasons then be prepared not to be protected from the
long arm of the law.

One major advantage of banking in the US is the fact that the government

insures the money. This generally is not the case with an offshore bank
account though. So, in the event of a catastrophe you may wipe out financially
in one fell swoop!

The most famous of countries to have an offshore bank account in is:

Switzerland.

Offshore Bank Account Features

True offshore banking

No bank references for the account signatory

No reporting requirements

No taxation

24-hour online internet banking from any PC

Multi-currency accounts

Low monthly account management charges

International ATM debit and credit card facilities

ATM anonymous cash card (aka debit card)

Gold and business credit cards

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What You Need to Know Before Opening an Account

Offshore banking, we have all heard about it before. Unfortunately, many are
misinformed when it comes to offshore banking. We have all heard news
reports of offshore accounts being used to front illegal activities or to avoid
taxes. In fact, we have also seen it in the movies, being used a similar way.

This has led many individuals to believe that offshore banking is illegal. Despite
what you may believe, offshore banking is legal. However, how you use it may
be considered illegal.Offshore banking is done through a bank that is known as
an offshore bank.

Offshore banks are banks that are located in another country, other than the
country that you reside in. For instance, if you live in the Untied States an
offshore bank would not be located in the United States. Many popular offshore
banks are located in Switzerland. There are a number of advantages to
offshore banking, but there are disadvantages as well.

The biggest advantage of offshore banking is that you are offered privacy and
stability. There are many individuals who place their money in offshore
accounts for security purposes. When your money is in an offshore account,
you can access it, but many choose not to. It is easier to access and spend
your money if it is at a local bank. That is why a large number of individuals
use offshore banking to help them increase their savings.

Another advantage of offshore banking is that just about anyone can open an

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account. The most common users of offshore banking are corporations, the
self-employed, or individuals who wealthy. Offshore banks may have
restrictions on the amount of money that is needed to open an account, but it is
not always a large amount. Whether you are a small business owner, wealthy,
or you consider yourself middle class, you should still be able to open up an
offshore bank account.

How much money do I need to invest offshore?

There is no absolute low limit, but the extra costs of taking advice, opening
new bank accounts, phone communication at a distance, transaction costs
mean offshore investment is unlikely to be worthwhile for those earning less
than 25,000 a year. However, because of the internet, costs are being
reduced. Offshore banks will take deposits down to 1,000, but for a
personalized 'private banking' service, you may need to deposit 100,000 or
more. Each offshore bank will have its own requirements, so these are meant
as a rough guide.

CONCLUSION

Opening an offshore bank account could be the best thing you ever do.
However, many people find

The process daunting - not least because they need to overcome the

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irrational fear that somehow

Their money won't be as safe as banking at home.

Of course the truth turns out to be the opposite. If you bank with a reputable
offshore bank, then your money is much safer than before!

I trust the information in this report has given you something to think about, and
to help you make a good decision regarding opening your own offshore bank
account. Certainly that is my intention.

Once you step into offshore waters you'll find there is plenty more to whet your
appetite - including

Access to previously off-limits investment opportunities, more flexible

business banking

Arrangements, more tax-efficient ways of conducting your financial

affairs, and lots more.

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BIBLIOGRAPHY

WEBSITES:

www.rbi.org.in.
www.banknetindia.com/banking/cintro.htm.
www.ehow.com
www.theconvention.org
www.moneycontrol.com
www.bis.com

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