Offshore Banking Centers and Offshore Finance

The rise of the global economy has increased international transactions and enabled money to be moved very quickly. Offshore financial centers are thought to be safe havens for financial assets acquired illegally, but they may also offer some legal financial advantages for multinational companies and wealthy individuals. Most of these financial centers are located in small jurisdictions or microstates particularly in small island countries. This article addresses some specific questions regarding offshore banking; for instance, Do I have to declare income I generate from interest in my offshore bank account?, Are there any government regulations to keep a check on offshore financial transactions?, What is the meaning of the term "the Laffer curve" and what relation does it have with offshore banking?, What does the automatic exchange of information option mean?, and Which countries are affected by The EU Savings Tax Directive 2005?
An offshore bank is a bank located outside the country of residence of a depositor, typically in a low tax jurisdiction or a tax haven that provides financial and legal advantages. These advantages usually include strong privacy laws, less restrictive regulation, easy access to deposits and protection against local political or financial instability. Some offshore banks may operate with a lower cost base. Lower overhead and lack of government intervention enable them to provide higher interest rates than those available in the taxpayer’s home country.

Offshore banking is often associated with the underground economy, organized crime, tax evasion and money laundering. However, offshore banking does not always involve illegal activity and most of the time, banking offshore does not remove assets from the coverage of holder’s domestic income tax laws. For tax purposes, many countries now make no distinction between interest earned in local banks and those earned abroad. Additionally, while most offshore jurisdictions offer high levels of confidentiality, they cannot guarantee absolute secrecy, as financial institutions worldwide are obliged to report suspicions of serious criminal conduct, including, terrorism. In the 21st century, regulation of offshore banking is allegedly improving, although critics maintain it remains largely insufficient. 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, and must report at least quarterly to the regulator on the current state of their businesses.

Persons subject to U.S. income tax, for example, are required to declare any offshore bank accounts, including numbered bank accounts. Offshore banks may not be required to report bank account’s income to other tax authorities and may have no legal obligation to do so, as they are protected by their jurisdiction’s bank secrecy laws. Nevertheless, the taxpayer is required to report such income.

In addition to voluntary report of offshore bank accounts, international financial co-operation is increasing. Recently, there have been many calls for more regulation of international finance, in particular, of offshore banks, tax havens, and clearing houses. For example, ClearStream, based in Luxembourg, has been accused of being a crossroads for major illegal money flows.

In an effort to clamp down on tax evasion, in July, 2005, members of the European Union governments agreed to the introduction of a withholding tax, the Savings Tax Directive. A complex measure, it forced EU resident savers depositing money in offshore banks to choose between paying taxes before depositing in offshore banks or allowing notification by the offshore banks to tax authorities in their country of residence. The EU intends to reach offshore banks in an increasing number of jurisdictions. The rate of tax deducted at the source will rise in 2008 and again in 2011, making disclosure increasingly attractive. Savers' choice of action is complex; tax authorities are not prevented from enquiring into accounts previously held by savers which were not then disclosed.



Do I have to declare income I generate from interest in my offshore bank account?
Certain countries in the world require their residents to declare their worldwide income. Tax is then payable on that offshore income as well. The U.K. and the U.S. are two such countries. Most countries have no restrictions on where your business interests, investments or bank accounts are located; it is simply your responsibility to report any income you earn to the appropriate tax authority.

Are there any government regulations to keep a check on offshore financial transactions?
The U.S. introduced the USA PATRIOT Act, which authorizes the U.S. authorities to seize the assets of bank accounts deemed to hold assets from a suspected criminal. Similar measures have been introduced in some other countries. The European Union has introduced sharing of tax information between certain jurisdictions, and enforcement measures regarding certain controlled-centers, such as the UK Offshore Islands.

What is the meaning of the term "the Laffer curve" and what relation does it have with offshore banking?
The Laffer curve is used to illustrate the concept of taxable income elasticity, the idea that government can maximize tax revenue by setting tax rates at an optimum point. The curve, popularized by Arthur Laffer though widely known among economists, is primarily used by advocates who want government to reduce tax rates. For example, consider that offshore banking is usually more accessible to those with 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 taken being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.

What does the automatic exchange of information option mean?
The EU Savings Tax Directive 2005 is an agreement between the EU Member States to automatically exchange information about any customers who earn savings income in one EU State but who reside in another EU State. This is known as the ‘automatic exchange of information option’ and it is the ultimate objective of the Directive.

Which countries are affected by The EU Savings Tax Directive 2005?
The countries affected by The EU Savings Tax Directive 2005 are; Andorra, Anguilla, Aruba, Austria, Belgium, British Virgin Islands, Cayman Islands, Channel Islands, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Isle of Man, Italy, Latvia, Lichtenstein, Lithuania, Luxembourg, Malta, Monaco, Montserrat, Netherlands, Netherlands Antilles, Poland, Portugal, San Marino, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turks & Caicos and U.K.

Tricks of the Offshore Trade - tracking the path of dirty money

Financial planners will know by now that the new anti-money laundering (AML) regime takes a risk-based approach, requiring designated service providers to implement their own risk framework for identifying and treating AML risks.



Money laundering tools

Money laundering techniques evolve to avoid detection. Any example that you read about will, self-evidently, be examples of money laundering techniques that have not avoided detection. The most successful techniques are those that have. If I could suggest what they were I am sure that I would be more lucratively engaged at this moment than writing this article – hopefully on the right side of the law.

Some money laundering techniques will be favoured over others by different criminal sectors.

The net result of criminal activity for the criminal is, most usually, money. It follows that if you trace the money trail back you will find the criminal – simple in theory.

Organised criminals therefore go to extraordinary lengths to disconnect the money from the source of the activity.

Their task is made easier by banks in some countries that sell ‘secrecy’.

The Swiss banking system has been most well known for this over the years, but the Caribbean Islands, the Channel Islands, Nauru and other places also offer ‘safe havens’ for the depositor if you don’t want anyone to know whose account it is.

Many of these banks have correspondent relationships with banks in Western countries, like Australia.

Another tool that is commonly used is that of the shell company.

The company may, or may not, have a real function. Whatever its apparent function, its true purpose is as a separate legal entity that can receive proceeds from illegal activity and pay it out, disguised as the proceeds of a legitimate business. The names of the actual criminals will not appear as shareholders or officers. Shareholders may be other companies, friends or associates. Ultimately, however, the controller is organised crime.

Not all countries have the same compliance, accounting and financial reporting requirements that Australia does.

The amount of criminal money in the world economy is enormous and has been estimated by the United Nations at over $500 billion each year.

If we were talking in terms of a country’s gross domestic product and the amount of money from illegal drug activity alone, it would be the world’s third largest economy.

There is, therefore, a lot of money to be made by banks that offer secrecy and for countries that offer lax AML and company financial reporting laws.

Thus, money obtained from criminal activity is deposited into different branches of banks, or through other financial intermediaries, usually in different denominations and by businesses apparently unconnected with the criminal activity.

The money itself may have been physically transported great distances away from the crime before it is divvied up and placed into the financial system.

Once in the system it will typically be transferred to other accounts. It may well end up in an account owned by a shell company with a secret account in an offshore jurisdiction. From there, it could be transferred anywhere else in the world and used to benefit the criminal masterminds behind it – now virtually untraceable.

Verifying the identity of the client and obtaining some basic information about the business structure, or corporate structure, and the transaction are basic steps that can be taken to cut through the anonymity and structures that are such useful tools to the money launderer.

However, this needs to be carried out on a wide scale internationally.

Hence, the Financial Action Task Force’s recommendations and Australia’s response.

As you may know, the key obligations for reporting entities will be:

> verification of client identity (Part 2);

> ongoing risk-based customer due diligence (Part 10, Division 6);

> reporting suspicious matters and specified high value transactions (Part 3);

> ensuring appropriate originator information is provided with domestic and international funds transfer instructions (Part 4);

> keeping records of dealing with clients (Part 10); and

> developing, maintaining and complying with AML/ counter-terrorism financing programs (Part 7).

The reasons for these obligations are evident from the above description of money laundering tools and techniques.

Confidentiality versus secrecy

Of course, there is a legitimate place for confidentiality in lawful personal and commercial activity.

Confidentiality is important and should be protected.

But ultimate secrecy to facilitate criminal activity is another matter altogether. The two should not be confused.

As professionals in the financial services industry our relationships with our clients are based on trust and we must take our obligations of confidentiality seriously.

There is, however, nothing necessarily inconsistent with these obligations and some intelligent prodding can help make an assessment about whether particular transactions or arrangements could suggest criminal activity.



A money laundering example

Drugs are sold on the street for cash. Millions of dollars in cash are collected. First, the money is placed into the financial system by being deposited into bank accounts. There will be several individual deposits made to different branches of different banks.

The amounts deposited would be less than any reportable cash transaction amounts (for example, $10,000 in Australia). If the money can be deposited into banks with lax reporting and identification requirements then so much the better for the criminal.

Second, the funds are layered by transferring the monies, over a period of time, into a number of other accounts held at different banks and in different countries.

Once again, if the transfer is to countries with lax identification and reporting requirements, the chances of being detected are much less.

These accounts may be in the names of fictitious individuals or company shells.

Third, the funds are integrated into the legitimate economy. They are transferred into the accounts of companies that apparently conduct legitimate businesses, just more profitably than most.

In the Jurado case, where Franklin Jurado laundered $50 million for a Colombian drug cartel, these ‘legitimate’ businesses in Europe were restaurants, construction companies, real estate companies and pharmaceutical enterprises.

There was no reason for bankers, lawyers or financial advisers in Europe to query the accounts of those businesses.

There was no apparent connection with the Cali drug cartel or with Colombia.



Examples of suspicious transactions

> Transactions that don’t make economic sense. For example, a customer may have a large number of accounts with the same bank and may have frequent transfers between different accounts. Why?

> Transactions that you wouldn’t expect having regard to the customer’s usual business activity, for example, moving money between countries, where the customer’s usual business is a local business supplying locally manufactured products.

> An account sits dormant for a long period of time and then has large amounts deposited and/or withdrawn without apparent connection to the customer’s other affairs such as, for example, the sale of a house.

> A client of modest means seeks advice on an investment strategy for a large amount of money from an unknown source.

> Buying securities or other investment products with large amounts of cash.

> Payments being made to, or being received from, numbered accounts.

> A customer who normally uses bank cheques to purchase securities or investment products.

Perhaps one of the most helpful things financial intermediaries can do in preparation for designing their risk management system for AML is to think about their client profiles and to obtain an understanding of money laundering risk for their business.

A visit to the AUSTRAC website and reading as many examples of suspicious transactions and money laundering activities as you can will help you in thinking about what type of activities to look for in your business.

Books that you might like to read if you have an interest in the area include: The Laundry men and The Sink by Jeffrey Robinson (Editor, Constable & Robinson) London.



Grant Holley is partner at Holley Nethercote Commercial Lawyers .

Western tax havens slated as corrupt

Duncan Campbell in London

September 5, 2006

BRITAIN, the United States and Switzerland are among the world's most
corrupt countries, a tax expert says.

The failure of these and other developed countries to clamp down on offshore
tax havens is responsible for more hardship than any corrupt acts by Third
World leaders, John Christensen, formerly an adviser to the government of
the Channel island of Jersey and now director of the Tax Justice Network,
told the Economic Geography Research Group conference on Sunday.

"I would place the United Kingdom high on the list of most corrupt
countries," he said, citing its role as a tax haven and a defender of the
tax haven role of its overseas territories and dependencies, as well as its
"dismal role in undermining the effectiveness" of the European Union's
attempts to close tax loopholes.

Mr Christensen said there had been too much emphasis on corruption in the
Third World and not enough on the abuse of offshore tax havens by the
wealthiest nations.

Transparency International, a pressure group campaigning against corruption,
reinforced stereotypes by depicting African nations as the most corrupt, he
said.

By contrast, Mr Christensen said, many of the countries the group identified
as least corrupt were offshore tax havens, including important centres such
as Singapore, Switzerland, Britain, Luxembourg, Hong Kong, the US, and
Belgium.

Tax Havens list Britain as corrupt

Tax havens 'put Britain high on list of corrupt countries'
By Charles Clover

(Filed: 02/09/2006)

Britain is high on a list of the world's most corrupt countries, along
with the United States and Switzerland, because of the refuge it offers to
dirty money in tax havens such as the Channel Isles and the Isle of Man,
researchers said yesterday.

Britain deserves inclusion high on any list of corrupt countries
because of its "pinstripe infrastructure" of financial advisers squirrelling
away money offshore and because of its reluctance to close down its tax
havens, the Royal Geographical Society's annual conference was told.

John Christensen, of the Tax Justice Network, whose research is funded
by the Joseph Rowntree Foundation, criticised the ranking of the world's
most corrupt nations compiled annually by Transparency International, a
not-for-profit organisation, in which African countries come out as the most
corrupt.

He said the index used a too-narrow definition of corruption, mostly
bribery.

He said Britain, Switzerland, America and other countries that provide
tax havens would float to the top if the definition of corruption was
broadened to include other forms of criminal cash transfers and illicit
transactions.

While the amount of corruption in developing countries was reliably
estimated at $20 billion a year, the inclusion of corrupt transactions
across borders lifted that to $539 billion.

Mr Christensen accused Gordon Brown, the Chancellor, of failing to
carry out his promise to go after large scale corporate tax avoiders,
because of a reluctance to alter Britain's perception as a "low tax" nation.

Instead of going after the corrupt super-rich, the Chancellor had
placed the burden of taxation on people of middle and lower incomes.

Mr Christensen said that this had wider consequences than just
starving the Treasury of tax revenue because money from corruption, or
flight capital as it is sometimes known, helped to inflate property prices
and did not lead to genuinely productive economic activity.

Calling for the abolition of tax havens he said: "You cannot move
money in the quantity that has been moved out of Russia without using the
western banking network and they are all deeply implicated in the process."

Prem Sikka, a professor of accounting at Essex University, accused Mr
Brown of losing an estimated

£97-150 billion a year to organised tax avoidance by large
corporations because he was reluctant to tackle the trans-frontier transfer
of money, at preferential rates, between large corporations.

© Copyright of Telegraph Group Limited 2006.
http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2006/09/02/ntax02.xml

Isle Of Man Leads As Centre Of Offshore E-Commerce

The Isle of Man has both maintained and improved its competitiveness and
currently stands as one of the world’s leading jurisdictions for e-business,
according to a recently published report.

The findings of the report by Charteris, the IT consulting firm, were announced
by the Isle of Man government last week, and according to the company, the Isle
of Man has been "very successful in maintaining a strong and steady marketing
position on e-business compared with its jurisdictional competitors".

“Amongst those who are aware of the Isle of Man’s positioning, it is seen as a
good example of how to get things right, and the standard to be achieved – a
number of official publications by competitor jurisdictions explicitly say so,"
the report observed.

Charteris noted that the decision to introduce a 0% corporate tax regime,
coupled with a cap on personal income tax at a maximum level of £100,000 per
annum, have been key in transforming the Island into a leader on the e-commerce
front.

Other factors crucial to the growth of e-commerce in the jurisdiction include
increased off-Island competition as a result of the licensing of Cable &
Wireless, which has led to lower bandwidth costs; provision of new world-class
hosting facilities in the form of Manx Telecom’s new Douglas North facility;
evidence of clustering in the online gambling sector and the beginnings of
“stickiness” of operators in the sector; a number of “excellent sales wins”,
including NETeller, Microgaming, Poker Stars and Inca Gold; and clear signs of
significant improvement in collaboration between business and Government on
e-business and economic development issues.

Tim Craine, Isle of Man Government Director of E-Business and Space Commerce,
commented that the Charteris report was a "clear endorsement of the e-business
strategy pursued by Government over the last 5 years".

"The report itself highlights how we have developed the Island’s proposition,
increased our lead over our competitors and placed ourselves in an ideal
position to take our share of new and emerging opportunities in the area of
converging technologies," Mr Craine noted.

"However, we are not complacent and the report also highlights how and where we
can make further improvements," he added.