Offshore Financial Centres:
to recent International Initiatives
2002 Dr Jean-Philippe Chetcuti. All Rights Reserved.
Used interchangeably with ‘tax havens’, “offshore financial
centres” are very difficult to define. Not only countries which we usually call
‘tax havens’ engage in the provision of offshore financial services. While
London, New York, Frankfurt and Tokyo are among the largest offshore financial
centres, none of these deserves the nomenclature of ‘tax haven’. The difficulty
of definition is evident from the recent discrepancies present in the various
rankings or black lists issued by the OECD, FATF and the FSF.
In an attempt to narrow the scope of the definition, many
have sought to define an OFC as one where the larger part of the financial
service activity carried on is in respect of non-residents. Nonetheless, in
absolute terms more offshore business can be expected to be undertaken through
London or New York than the OFCs so more narrowly defined. Then we have problem
of categorising centres such as Luxembourg and Switzerland who disliked the
“offshore” label given them by the G7 FSF. There are also substantial
differences between well established centres such as Hong Kong, Singapore,
Jersey, Guernsey and the Isle of Man, which can be compared with Luxembourg and
Switzerland in the range and level of financial services provided, and islands
in the Pacific which engage in providing financial services to non-residents on
a much more limited scale and with a much narrower range.
Nonetheless, one can reasonably think of “offshore”
jurisdictions as jurisdictions enjoying a competitive edge
based on fiscal or regulatory advantages that differ significantly from
those in the major economies.
Irrespective of definition, the trend internationally is to distinguish “not
between onshore and offshore centres, but between centres which comply with
international standards and those which do not.”
Nowadays, offshore financial centres (OFCs) fulfil a
multitude of diverse needs, including tax planning, international estate
planning, global investing and banking, protection of privacy, facilitation of
international business transactions, relief from regulatory burdens,
reinsurance, shipping, expatriation planning, and asset protection planning.
Investors who “go offshore” are motivated by any of the following factors:
OFCs offer countless profit opportunities which make domestic investment
Backed by civil and criminal penalties,strict offshore confidentiality laws ensure financial privacy and
secrecy: banking and other financial records are shielded from the national tax
authorities, creditors, competitors, ex-spouses and others interested in the
Tax benefits: while it is illegal to conceal any portion of one’s assets
from the government, it is not illegal for one to locate funds beyond the
jurisdictional reach of one’s national tax authority. Zero tax, no tax
opportunities as well as tax deferment constitute effective incentives for
Family patrimonies embedded in asset protection trusts can be protected
from litigious attacks by predator plaintiffs, national tax authorities and
other creditors, especially in jurisdictions that do not recognise the judgments
emanating from the home state.
Traditionally, an investor looking beyond his shores based
his OFC choice on the centre’s political stability, the predictability and
sophistication of its legislative infrastructure, the repute of its judiciary,
the reliability of its service providers and professionals, and finally, the
soundness of its transport and communications infrastructure. Aggressive
competitive strategies have seen most major OFCs making an effort at satisfying
most or all of these investment criteria. Now, most OFCs boast a level of
sophistication in particular areas which is often unrivalled even by some of the
principal onshore financial centres.
However, common features which distinguish OFCs from their onshore counterparts
are scarce supervision, substandard policy in the combat
against money laundering, deficient tax regime, lack of transparency or
deficiencies in international collaboration.
To chisel out a greater competitive advantage, offshore
centres allure offshore investment to their shores by developing low-tax or
no-tax policies as well as strict secrecy rules. In times of falling
commodities prices and a highly competitive tourist markets, these baptised
“tax-havens” proved very capable in economic diversification.
As a result, OFCs flourished and their economies became heavily dependent on
their financial services sector.
The use of a financial institution in a tax-free
environment which is essentially free of fiscal and exchange controls is a major
incentive for offshore banking.
An individual or entity can carry on banking and financial activities in foreign
jurisdiction using an established offshore bank. Alternatively, an individual
or entity can form its own offshore bank.
Amongst the advantages enjoyed by offshore banks over
traditional domestic banks we find:
the unrestricted scope of private offshore banks’ activities
(restricted only by their legality) means that they can carry out any imaginable
activity: insurance, underwriting, manufacturing, the sale of securities.
the high level of confidentiality, often supported by civil and
criminal sanctions, (subject only to OFCs various “informal” ways of
disseminating proprietary information)
Some OFCs have also developed a niche in the field of
investment management. Offshore funds are being used more frequently even by
institutional investors seeking to invest on a collective basis but discouraged
by the heavy burdens of home state regulation (e.g. US regulation). In this
arena, OFCs also provide a more tax efficient platform for investors worldwide.
Offshore funds may also be used in connection with structured financial products
as well as offshore variable insurance products.
Offshore fund jurisdictions
vary as to:
the degree of local regulation;
the minimal contacts necessary with the jurisdiction (e.g.
the requirement to maintain local fund administration;
minimum capital requirements; and
their status and reputation in the financial community.
Regarding the necessity of minimal local contacts with the
jurisdiction, “legitimate” jurisdictions such as Dublin or Luxembourg tend to
require the presence of significant local administration and to be stricter in
enforcing compliance with international money laundering treaty obligations.
OECD’s Business Investment and Advisory
Financial Action Task Force
Financial Stability Forum
“Group of Seven”, Canada, France, Germany, UK,
Italy, Japan, US.
International Business Company
International Monetary Fund
Organisation for Economic Co-operation and
Offshore Financial Centre
2. A changing scenario – international upheaval