Offshore Banking: Why Go Offshore?

Nobody quite seems to agree on where the word “offshore” first came from – but it most likely developed in the UK. The Channel Islands (Jersey and Guernsey) went into the finance business soon after the end of the Second World War. Their unusual constitutional status gave them independence in all domestic affairs, including taxation and banking regulation. It didn’t take them long to realise that they could offer a safe, tax-free haven for moderately wealthy, middle class Brits who were being persecuted by successive Labour governments, desperate to pay off the debts of the Second World War.

During the 1970s, Labour governments in the United Kingdom raised taxes as high as 95% and restricted export of currency. Whilst the super rich had always looked to Switzerland, the Channel Islands provided a convenient, close, English-speaking alternative for overtaxed Brits looking to move more modest wealth “offshore.” During the 1980s and the 1990s, dozens of Caribbean island nations renounced their status as colonies and broke away from Britain (and to a lesser extent France). On becoming independent sovereign nation states, they, too, saw financial services as a way to quick profits. Within easy reach of North America, they focused more on the US and Canadian markets, offering “no questions asked” banking services for those wishing to hide cash. We’ve all seen the movies about so called “Samsonite banking.”

Although leftist or populist politicians sometimes still try to tar the image of offshore islands with the brush of money-laundering, organized crime and tax evasion, the fact is that these economies today are generally prosperous and well regulated international financial centres that contribute in a meaningful and beneficial way to oiling the works of global commerce. Today most offshore centres prefer to be known as international financial centres, avoiding the “offshore” or “tax haven” appellations which they believe have negative connotations. While that may be true, the word “offshore” lives on. Around here we don’t want to give in to political correctness and we happen to like the word “offshore.” It’s become part of the English language and we see no reason to change it. Most people know what we mean when we say “offshore banking” and people understand something specific... unlike “international finance” which could mean almost anything!

Anyway, getting back to our theme, although the word “offshore” was originally coined because of the small island nations involved in the business, today it has become generally accepted as meaning any place outside your home country. For example, to Brits the USA is offshore, and vice versa. Landlocked Switzerland, Liechtenstein and Andorra don’t have any sea shore at all, but they very much fit into our modern definition of offshore banking. Tax avoidance or Tax Evasion? An important difference to understand According to a formulation by the OECD (Organisation for Economic Co-operation and Development), an offshore tax haven is a jurisdiction which actively makes itself available for the avoidance of taxes which would otherwise be paid in a higher tax jurisdiction.

The keyword here is “tax avoidance”. There is another one: “tax evasion”. Tax avoidance is legal, while tax evasion is a crime. Basically, tax avoidance is structuring ones’ business affairs in such a way that minimum possible amount of tax is payable, without breaking the law.

An offshore jurisdiction is one that offers attractive instruments or opportunities for tax avoidance, and for personal financial privacy, and for asset protection.The keyword here is “tax avoidance”. There is another one: “tax evasion”. Tax avoidance is legal, while tax evasion is a crime. Basically, tax avoidance is structuring ones’ business affairs in such a way that minimum possible amount of tax is payable, without breaking the law.

An offshore jurisdiction is one that offers attractive instruments or opportunities for tax avoidance, and for personal financial privacy, and for asset protection.

Every client has a slightly different motivation for going offshore. Sometimes, asset protection may not even have a tax motive, although frequently both are related. It’s just safer to be offshore!

Strict banking secrecy regulations, supported by stiff criminal penalties for those who might breach them, blanket confidentiality provisions for trust and company management firms, and minimum information on public files such as credit bureaux are only some of the reasons why your assets might be better protected offshore than onshore. Credit bureaux, in particular, have become a scourge on society. While they certainly serve a useful role in society by allowing people to qualify for credit if they want to, there is simply no option to opt out of them even if you are not interested in borrowing money. Despite unenforceable laws to the contrary, this means that basically anyone with internet access can check your bank balance at any time. Unless, of course, you only use offshore accounts – which never report to anybody.

The Offshore Safe Haven

A lot of offshore investments used to come from countries where political turmoil and civil strife threatened the wealth of productive people. For example, Miami became a major regionalfinancial centre because it offered the security, safety and stability of the United States of America to businessmen and wealthy families from Latin America at a time when the region was characterised by devaluations, thefts and ruthless military dictatorships. Today, however, the tables are turned and we see many Americans (besides those same wealthy Latin Americans) seeking a safe haven for their money and gold bullion coins outside the US, as they see the economy imploding and the dollar fast losing its value. Think Panama...

Smart money doesn’t want to depend on the economy of just one country or indeed one currency, and small offshore havens – neutral countries with very conservative economies – offer the necessary safety and security. No Swiss bank has collapsed in centuries, whereas this year we have seen bank collapses in the USA, not to mention the Savings and Loan crisis which is still fresh in many minds. We’re not saying that you will lose money in major western banks today either, but not-so-subtle hints like the sub-prime crisis, the Northern Rock problems in the UK, and the Societe Generale scandal in France, do suggest that we should be looking to invest at least part of our portfolios in small, neutral places which don’t have such a high level of exposure to risky practices.

Offshore Expertise

In a global economy, you need global expertise. Where do you find it? In countries that rely on international business for their livelihoods. Would you prefer to buy a watch made in Australia, the US or Switzerland? You would probably go for the Swiss because of their worldwide reputation for “superlative” quality (to coin a phrase from Rolex). Well, banking services are the same. Switzerland and London are much more international in their outlook than New York or Paris. The service is simply better and more sophisticated. Most offshore banks focus their non-resident services in just one or two offices where their best people are put to work as a team. This is in contrast to retail or onshore banks who try to serve clients through hundreds or thousands of branches, and call centres in India or the Philippines. Of course they will give you advice (in return for commissions) but you cannot expect anything like the same level of expertise.

Can you imagine a banker in Philadelphia who is qualified to advise you on how you can gear your returns by taking a loan in Japanese Yen then investing the loan proceeds in Mexican Peso bonds for a higher return? There might be a few, but don’t hold your breath. But this kind of expertise is routinely found in offshore private banks.

Offshore Access

You may not have realised this, but if you live in a country like the USA or UK many of the most attractive investments in the world are off-limits to you because of regulatory requirements. We’re not talking about dodgy “high yield prime bank off balance sheet trading schemes” here. We are talking about mutual funds run by the investment banking divisions of big American or British banks, or smaller niche funds that allow smaller investors to participate in hugely successful investments such as Warren Buffet’s Berkshire Hathaway. Complicated regulatory approval procedures and complying with legislation such as Sarbanes- Oxley make it unattractive for many foreign businesses to do business with Americans and Brits. Foreign banks dealing with Americans must either sign up for “qualified intermediary” status with the US authorities (which means co-operating on information exchange) – or their clients must suffer punitive withholding taxes. There is plenty of smart money already floating around offshore, and it’s easier for many banks simply to reserve their best investments for sophisticated offshore clients, while preparing other funds for their domestic markets.

The UK is another case in point. The “Money Laundering Regulations 2007” have driven a lot of expat and non-resident trust business offshore. London used to be a major international financial centre for the offshore world, a safe haven where wealthy foreigners knew they could rely on English common law to protect the confidentiality of their business transactions. Under the 2007 rules, however, businesses such as company formation agents, trust providers and even accommodation addresses (maildrops) are required to keep confidential information on their clients available for inspection any time – no need for warrant or even just cause – by inspectors of Her Majesty’s Revenue and Customs. Due process has become a thing of the past.

The good news is that even today, it is quite simple to change the country of origin of your funds. How? By using an offshore company or trust. This makes your funds let’s say Panamanian, then any international bank will be able accept your funds without regulatory problems.

Aren’t all offshore havens used by crooks and money-launderers?

Well, aren’t London, New York or Miami banks used by them, too? Offshore tax havens have for decades been the target of blackmail and slander campaigns by the governments of the powerful high-tax jurisdictions. Your government would most assuredly like you to believe that offshore tax havens are only used by fraudsters and criminals – but that’s completely unjustified.

While there will be a rotten apple in any basket (especially if the basket is big enough), 99% of all business transacted through offshore companies is completely legitimate. In fact, due to the inherent need to keep their reputations squeaky clean, most of the leading tax haven countries nowadays have much better systems to detect and prevent financial crime and money-laundering than the big, powerful nations who criticise them.