offshore financial centres

Offshore Financial Centers

Chapter 7

Hughes and MacDonald Text

Key Questions You need to Be able to answer

What is an offshore financial center? List some common offshore financial centers by region of the world: What are some common reasons why countries seek to develop

themselves as offshore financial centers Arguments Against offshore financial centers What reasons do clients have to become associated with an offshore

financial center? Are bank secrecy laws absolute? What two major issues have forced offshore financial centers to

moderate their strict bank secrecy laws? How do offshore financial centers maintain secrecy but take action to

reduce or eliminate money laundering and the unsavory business elements?

Key Chapter Concepts

What is an offshore financial center?


Offshore financial centers exist for the benefit of foreign customers

Governments of offshore financial centers have decided strategically, that this is an industry that they want to attract and build within their borders…partly for the industry employment, but also because of the economic spin-offs, in particular, the tourist expenditures that can be attracted (especially in warm weather countries).

What is an offshore financial center?


List some common offshore financial centers by region of the world


Europe/ Middle East Bahrain Cyprus Gibraltar Guernsey Ireland (Dublin) Isle of Man Jersey Liechtenstein Luxembourg Monaco Switzerland

List some common offshore financial centers by region of the world

North America Anguilla Aruba Bahamas Barbados Bermuda British Virgin Islands Cayman Islands Grenada Montserrat Netherlands Antilles Asia/Pacific

Asia Pacific Cook Islands Hong Kong Lubuan Island Palau Nieu Singapore Vanuato


What are some common reasons why countries seek to develop themselves as offshore financial centers?


The country may have little land base and few opportunities to develop other types of economic activity because of:

Limited energy supplies at high cost Limited raw materials and other natural resources Long distance from raw material and energy sources so secondary manufacturing

options are few

The country may possess natural characteristics that make it an ideal offshore financial center:

Political stability Close geographical proximity to wealthy countries Well educated workforce Some natural amenities that make to possible to develop its potential as a tourist

attraction A political willingness to pass bank secrecy laws and at the same time be prepared to

invest in policing and security infrastructure to assure personal safety and to address the potential to attract unsavory elements.

What are some common reasons why countries seek to develop themselves as offshore financial centers?

Key Elements Shared By Offshore Financial Centers

Low or no taxes Services are provided mainly, but not exclusively, for

nonresident clients There are no or few foreign exchange controls Geographical proximity to a major economy and good

communications infrastructure A legal regime that upholds bank secrecy A high degree of political stability is also important – no

one wants to put their money into a country that cannot guarantee personal safety or the ability to extract one’s funds.


What are the arguments often cited against offshore financial centers?


What are the arguments often cited against offshore financial centers?

They attract unsavory business elements including money launderers and terrorists and dictators and expatriates who have funneled ill-gotten gains to the offshore financial center for their own purposes

They help people evade taxes in their own country which means that a disproportionate tax burden is shouldered by the middle-income tax payer – effectively undermining sovereignty and tax fairness.


What reasons do clients want to become associated with an offshore financial center?


What reasons do clients want to become associated with an offshore financial center? What factors do they consider when choosing an offshore financial center?

Do some research:

• Anguilla as an offshore center.


What reasons do clients have to become associated with an offshore financial center?

Legitimate Reasons:

• Privacy for personal, family, business or political reasons (purposes)

• Try to keep funds separate in case of inheritance battles, divorce or personal bankruptcy

• Keep funds in a secure bank in a secure country

Illegitimate/Illegal Reasons:

• Launder money from criminal activities

• Evade Taxes


Are bank secrecy laws absolute?


Are bank secrecy laws absolute?

In practice no…under the laws in most offshore financial centers, they can be lifted to pursue and investigate criminal activities.


What two major issues have forced offshore financial centers to moderate their strict bank secrecy laws?


What two major issues have forced offshore financial centers to moderate their strict bank secrecy laws?

• Disclosure that wealth that was taken from Jews by the Germans during WW II was stored in banks in Switzerland

• After September 11, 2001, the U.S. realized that offshore financial centers may be involved in providing the secrecy necessary for terrorists to finance their plots world wide.

Key Chapter ConceptsHow do offshore financial centers maintain secrecy but take action to reduce or eliminate money laundering and the unsavory business elements?

Do some searching of offshore financial centers• Switzerland• Isle of Man – Supervision Commission


Each offshore financial center has its own set of laws …and based on the countries culture, history and traditions, may hold different views of what is legal and what is illegal.

• For example, Switzerland does not view tax evasion as illegal and will not cooperate with foreign governments in those cases…strangely enough, the Swiss will cooperate in the case of Tax Fraud

• Bank secrecy is lifted in the case of serious crime like money laundering – hence bank secrecy laws are not an impediment to controlling criminal activity…however, the standards of proof a judge will require are high.

• Bank secrecy, in practice, is NOT lifted in private matters such as inheritance and divorce.


Common controls in most jurisdictions focus on due diligence rules over bank personnel including:

• Know your client rules (verifying the contracting partner, verifying the beneficial owner, clarification of the economic background of a transaction and retaining documents attesting to the verifications made.)

• Reporting of suspicious transactions – obligation to inform

• Serious sanctions against bank personnel if they violate the rules

In addition, the lifting of bank secrecy can be ordered by the country’s judges if there is proof that the account is a criminal matter.


Under the OECD, The Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body that was set up in 1989 at the G7 economic summit in Paris and is open to most members of the OECD. Its purpose is to develop and promote strategies to combat laundering of the proceeds of criminal activities.

In 1990 it implemented 40 recommendations that all countries are encouraged to adopt.

Question 1

What are the key elements that all offshore financial centers share?

Question 1

Key Elements Shared By Offshore Financial Centers Low or no taxes Services are provided mainly, but not exclusively, for nonresident

clients There are no or few foreign exchange controls Geographical proximity to a major economy and good

communications infrastructure A legal regime that upholds bank secrecy A high degree of political stability is also important – no one

wants to put their money into a country that cannot guarantee personal safety or the ability to extract one’s funds.

Question 2

What are the advantages and disadvantages of going to an offshore financial center?

Question 3

What factors contributed to the emergence of Switzerland and Luxembourg as important offshore financial centers?

Question 4

Hong Kong and Singapore are major offshore financial centers in Asia. Compare and contrast the development of each city as important offshore financial center

Question 5

What is an International Banking Facility?

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