Offshore financial structures [KARAN]

The bedrock of most offshore financial centres is the formation of offshore structures -
typically:

• offshore company
• offshore partnership
• offshore trust
• private foundation[26]

Offshore structures are formed for a variety of reasons.

Legitimate reasons include:

• Asset holding vehicles. Many corporate conglomerates employ a large number of

holding companies, and often high-risk assets are parked in separate companies to
prevent legal risk accruing to the main group (ie. where the assets relate to
asbestos, see the English case of Adams v Cape Industries). Similarly, it is quite
common for fleets of ships to be separately owned by separate offshore
companies to try to circumvent laws relating to group liability under certain
environmental legislation.
• Asset protection. Wealthy individuals who live in politically unstable countries
utilise offshore companies to hold family wealth to avoid potential expropriation
or exchange control restrictions in the country in which they live. These structures
work best when the wealth is foreign-earned, or has been expatriated over a
significant period of time (aggregating annual exchange control allowances).[27]
• Avoidance of forced heirship provisions. Many countries from France to Saudi
Arabia (and the U.S. State of Louisiana) continue to employ forced heirship
provisions in their succession law, limiting the testator's freedom to distribute
assets upon death. By placing assets into an offshore company, and then having
probate for the shares in the offshore determined by the laws of the offshore
jurisdiction (usually in accordance with a specific will or codicil sworn for that
purpose), the testator can sometimes avoid such strictures.
• Collective Investment Vehicles. Mutual funds, Hedge funds, Unit Trusts and
SICAVs are formed offshore to facilitate international distribution. By being
domiciled in a low tax jurisdiction investors only have to consider the tax
implications of their own domicile or residency.
• Derivatives trading. Wealthy individuals often form offshore vehicles to engage
in risky investments, such as derivatives trading, which are extremely difficult to
engage in directly due to cumbersome financial markets regulation.
• Exchange control trading vehicles. In countries where there is either exchange
control or is perceived to be increased political risk with the repatriation of funds,
major exporters often form trading vehicles in offshore companies so that the
sales from exports can be "parked" in the offshore vehicle until need for further
investment. Trading vehicles of this nature have been criticised in a number of
shareholder lawsuits which allege that by manipulating the ownership of the
 trading vehicle, majority shareholders can illegally avoid paying minority
shareholders their fair share of trading profits.
• Joint venture vehicles. Offshore jurisdictions are frequently used to set-up joint
venture companies, either as a compromise neutral jurisdiction (see for example,
TNK-BP) and/or because the jurisdiction where the joint venture has its
commercial centre has insufficiently sophisticated corporate and commercial
laws.
• Stock market listing vehicles. Successful companies who are unable to obtain a
stock market listing because of the underdevelopment of the corporate law in their
home country often transfer shares into an offshore vehicle, and list the offshore
vehicle. Offshore vehicles are listed on the NASDAQ, AIM, the Hong Kong
Stock Exchange and the Singapore Stock Exchange. It is estimated that over 90%
of the companies listed on Hong Kong's Hang Seng are incorporated in offshore
jurisdictions. 35% of companies listed on AIM during 2006 were from OFCs.[11]
• Trade finance vehicles. Large corporate groups often form offshore companies,
sometimes under an orphan structure to enable them to obtain financing (either
from bond issues or by way of a syndicated loan) and to treat the financing as
"off-balance-sheet" under applicable accounting procedures. In relation to bond
issues, offshore special purpose vehicles are often used in relation to asset-backed
securities transactions (particularly securitisations).

Illegitimate purposes include:

• Creditor avoidance. Highly indebted persons may seek to escape the effect of
bankruptcy by transferring cash and assets into an anonymous offshore company.
[28]

• Market manipulation. The Enron and Parmalat scandals demonstrated how

companies could form offshore vehicles to manipulate financial results.
• Tax evasion. Although numbers are difficult to ascertain, it is widely believed that
individuals in wealthy nations unlawfully evade tax through not declaring gains
made by offshore vehicles that they own. Multinationals including
GlaxoSmithKline and Sony have been accused of transferring profits from the
higher-tax jurisdictions in which they are made to zero-tax offshore centres [12].

Ship and aircraft registrations

Many offshore financial centres also provide registrations for ships (notably Bahamas
and Panama) or aircraft (notably Aruba, Bermuda and the Cayman Islands).

Aircraft are frequently registered in offshore jurisdictions where they are leased or
purchased by carriers in emerging markets but financed by banks in major onshore
financial centres. The financing institution is reluctant to allow the aircraft to be
registered in the carrier's home country (either because it does not have sufficient
regulation governing civil aviation, or because it feels the courts in that country would
not cooperate fully if it needed to enforce any security interest over the aircraft), and the
carrier is reluctant to have the aircraft registered in the financier's jurisdiction (often the
United States or the United Kingdom) either because of personal or political reasons, or
because they fear spurious lawsuits and potential arrest of the aircraft. For example, in
2003, state carrier Pakistan International Airlines re-registered its entire fleet in the
Cayman Islands as part of the financing of its purchase of eight new Boeing 777s; the
U.S. bank refused to allow the aircraft to remain registered in Pakistan, and the airline
refused to have the aircraft registered in the U.S.

Insurance
See also: Captive insurance

A number of offshore jurisdictions promote the incorporation of captive insurance

companies within the jurisdiction to allow the sponsor to manage risk. In more
sophisticated offshore insurance markets, onshore insurance companies can also establish
an offshore subsidiary in the jurisdiction to reinsure certain risks underwritten by the
onshore parent, and thereby reduce overall reserve and capital requirements. Onshore
reinsurance companies may also incorporate an offshore subsidiary to reinsure
catastrophic risks.

Bermuda's insurance and re-insurance market is now the third largest in the world.[29]
There are also signs the primary insurance market is becoming increasingly focused upon
Bermuda; in September 2006 Hiscox PLC, the FTSE 250 insurance company announced
that it planned to relocate to Bermuda citing tax and regulatory advantages.[13]

Collective investment vehicles

See also: Offshore funds

Many offshore jurisdictions specialise in the formation of collective investment schemes,

or mutual funds. The market leader is the Cayman Islands, estimated to house about 75%
of world’s hedge funds and nearly half the industry's estimated $1.1 trillion of assets
AUM[30]), followed by Bermuda, although a market shift has meant that a number of
hedge funds are now formed in the British Virgin Islands.[31]

But the greater appeal of offshore jurisdictions to form mutual funds is usually in the
regulatory considerations. Offshore jurisdictions tend to impose few if any restrictions on
what investment strategy the mutual funds may pursue and no limitations on the amount
of leverage which mutual funds can employ in their investment strategy. Many offshore
jurisdictions (Bermuda, British Virgin Islands, Cayman Islands and Guernsey) allow
promoters to incorporate segregated portfolio companies (or SPCs) for use as mutual
funds; the unavailability of a similar corporate vehicle onshore has also help fuel the
growth of offshore incorporated funds[citation needed].

Banking
See also: Offshore bank
Traditionally, a number of offshore jurisdictions offered banking licences to institutions
with relatively little scrutiny. International initiatives have largely stopped this practice,
and very few offshore financial centres will now issue licences to offshore banks that do
not already hold a banking licence in a major onshore jurisdiction. The most recent
reliable figures for offshore banks indicates that the Cayman Islands has 285[32] licensed
banks, the Bahamas [33] has 301. By contrast, the British Virgin Islands only has 7
licensed offshore banks.

HEDGE FUND

A hedge fund is an investment fund open to a limited range of investors that undertakes a
wider range of investment and trading activities in addition to traditional long-only
investment funds, and that, in general, pays a performance fee to its investment manager.
As the name implies, hedge funds often seek to hedge some of the risksusing a variety of
methods, most notably short selling and derivatives. However, the term "hedge fund" has
also come to be applied to certain funds that do not hedge their investments, and in
particular to funds using short selling and other "hedging" methods to increase rather than
reduce risk, with the expectation of increasing the return on their investment.
In most jurisdictions hedge funds are open only to a limited range of professional or
wealthy investors who meet certain criteria set by regulators but, in exchange, hedge
funds are exempt from many regulations that govern ordinary investment funds.
History

Sociologist, author, and financial journalist Alfred W. Jones is credited with the creation
of the first hedge fund in 1949.[2] Jones believed that price movements of an individual
asset could be seen as having a component due to the overall market and a component
due to the performance of the asset itself. To neutralize the effect of overall market
movement, he balanced his portfolio by buying assets whose price he expected to be
stronger than the market and selling short assets he expected to be weaker than the
market. He saw that price movements due to the overall market would be cancelled out,
because, if the overall market rose, the loss on shorted assets would be cancelled by the
additional gain on assets bought and vice-versa.

Offshore Financial Centers (OFCs): [PRANAV]

It is suggested that reputable offshore financial centres play a legitimate and integral role
in international finance and trade, and that their zero-tax structure allows financial
planning and risk management and makes possible some of the cross-border vehicles
necessary for global trade, including financing for aircraft and shipping or reinsurance of
medical facilities. Proponents point to the tacit support of offshore centres by the
governments of the United States (which promotes offshore financial centres by the
continuing use of the FSC) and United Kingdom (which actively promotes offshore
finance in Caribbean dependent territories to help them diversify their economies and to
facilitate the British Eurobond market).

A. The Origins and Rationale of OFCs

The OFCs and the Eurocurrency market share a common history, inasmuch as OFCs are
merely the geographical extension of the Eurocurrency market outside Western Europe.
OFCs and Eurocurrency centers are essentially the efficient response of international
banks to the attempt by sovereign governments in many advanced countries in the 1960s
and the 1970s to control capital flows through the imposition of restrictive domestic
regulations.
These restrictions, which in many cases were intended to provide governments with more
control over monetary policy, encouraged a shift of deposits and borrowing to less
regulated institutions, essentially banks in OFCs and Eurobanks, which are exempt from
such restrictions.
In explaining the creation and growth of present-day offshore centers, practitioners and
academics put forward at least four factors:
• the establishment of capital controls with a view to reducing unsustainable
balance of payments deficits21 recorded primarily by the United States in the
late 1950s and also, by many OECD countries in the 1960s;
• the imposition of high taxes, coupled with a tightening of monetary policy,22
in an attempt to curb balance of payment deficits resulting from fiscal
imbalances, particularly in some OECD countries;
• the removal in 1958 of foreign exchange restrictions on the conversion by
nonresidents of current earnings in Western Europe (Johnston, 1982); and
• the fact that U.S. banks’ interest in conducting business transactions in foreign
currencies and to extend their reach to new territories was spurred by the
Glass-Steagall Act of 1933, which barred commercial banks from entering the
investment banking business.
The combined effect of increasingly restrictive regulatory regimes onshore and new
business opportunities abroad engendered by the return to full convertibility of
nonresident assets in Europe provided an impetus to financial institutions and large
multinational corporations to delocalize and increase the volume of their financial
activities offshore. It is this massive delocalization that contributed to broaden and
deepen the scope of markets in international currencies that are now known as the
Eurocurrency market.
21 For the United States, for instance, these measures included the Interest Equalization
Tax (1963), the
Voluntary Foreign Credit Restraint (1965), and the Foreign Direct Investment Program
(1965), all aimed at
limiting the ability of U.S. banks to lend to foreigners.
22 Tight monetary policy was achieved by imposing domestic capital restrictions, such as
reserve requirements
and interest rate ceilings (with the intention of limiting banks’ credit through their
capacity to mobilize
deposits).

Throughout the 1960s and the 1970s, the Eurocurrency market grew at a remarkable
pace. The shift of financial activities to Eurocurrencies gained considerable momentum
after 1966, when U.S. money market rates rose above the interest rate ceilings on dollar
deposits allowed by Regulation Q,23 resulting in a credit crunch that, in turn, forced U.S.
banks to seek funds in the Eurodollar market (Cassard, 1994). During 1966-77, the gross
size of the Euromarket — that is, the sum of all Eurocurrency liabilities, including
interbank deposits—grew 17- fold, from US$18 billion at end-1966 to US$310 billion at
end-1977 (Dufey and Giddy, 1978).
In the early 1970s, the geographical location of the market shifted from being mainly
Western European to worldwide. Banks and, later, securities and insurance firms began
setting up offshore branches in a number of jurisdictions in the Caribbean, Latin America
and Southeast Asia. It is these jurisdictions that have become known today as offshore
financial centers.

B. Significance of OFC Activities in the International Financial System

While incomplete (there are no worldwide statistics for securities and IBCs) and with the
limitations inherent to OFC data collection, the available statistics nevertheless indicate
that offshore banking business remain sizeable.
Calculations based on BIS data suggest that, by end-December 2003, the external
position of offshore banks in terms of assets (in accordance with the BIS list) had reached
US$1.9 trillion, compared with US$16 trillion of total bank assets. By the same date,
external loans (i.e., claims of OFCs on the rest of the world) had reached US$1.5 trillion
or 13 percent of the world cross-border bank claims, as reported to the BIS (US$11.9
trillion). However, because not all banks or OFCs report to the BIS, it is more likely that
these figures are underestimated.
Regarding securities, although OFCs are recognized as significant hubs for the
administration of mutual funds, assets under management in OFCs are estimated at
around US$400 billion, a rather small portion of the assets managed worldwide
(estimated at US$12 trillion) (Dixon, 2001).
In the insurance sector, publicly available worldwide consolidated data are scarce.
Bermuda, the leading OFC and the world’s largest captive insurance center, reported in
2001 some 1,600 insurance and reinsurance companies totaling $172 billion in assets, and
underwriting over $48 billion in annual gross premiums (IMF, 2005). Furthermore, for
the first time, in 2004, Bermuda became the fourth-largest reinsurance market in the
world, after the United Sates, Germany, and Switzerland (in terms of total net written
premiums).

Definitions of OFCs:
“Offshore banking is financial intermediation performed (primarily) for nonresident
borrowers and depositors. The principal attraction of an offshore banking center (for
banks as well as participants) is simply the absence of intrusive and expensive official
regulation, including taxation and controls over the portfolio decisions of the banking
community.” Dufey G., Giddy I. (1978, p.37).

“Offshore centers are defined as cities, areas or countries which have made a conscious
effort to attract offshore banking business, i.e., nonresident foreign currency denominated
business, by allowing relatively free entry and by adopting a flexible attitude where taxes,
levies and regulation are concerned.” McCarthy I. S. (1979, p.3).

“International financial centers are distinguished from their domestic counterparts by

three important characteristics. First, international financial centers deal in external
currencies, which are not the currency of the country where a center is located. […]
Second, offshore centers are generally free of the taxes and exchange controls that are
imposed on domestic financial markets. […] Third, offshore financial centers are
primarily but not exclusively for nonresident clients.” Park Y. S. (1994, p.32).

“An offshore banking centre may be defined as being typically a small territory in which
the conduct of international banking business is facilitated by favorable and/or flexibly
administered tax, exchange control and banking laws, and in which the volume of
banking business is totally unrelated to the size and needs of the domestic market.
Offshore banking activity is essentially entrepôt business with foreign currency funds
being deposited in a given centre from one foreign source and then on-lent to another
foreign borrower.” Johnston R. B. (1982, p. 18).

“An OFC [is] a centre that hosts financial activities that are separated from major
regulating units (states) by geography and/or by legislation. This may be a physical
separation, as in an island territory, or within a city such as London or the New York
International Banking Facilities (IBFs).” p. 4. Hampton M. (1996, p.4).
“OFCs are jurisdictions where offshore banks are exempt from a wide range of
regulations which are normally imposed on onshore institutions.” Errico L., Musalem
A. (1999, p.6).

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,[5] 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. Many leading offshore financial centres are located in
small tropical Caribbean countries. 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.

Weakened Bank Secrecy

Since starting to survey offshore jurisdictions on April 2, 2009, the Organization for
Economic Cooperation and Development ((OECD)) at the forefront of a crackdown on
tax evasion, won't object to governments using stolen bank data to track down tax cheats
in offshore centers. The recent sharing of confidential UBS bank details about 285 clients
suspected of willful tax evasion by the United States Internal Revenue Service was ruled
a violation of both Swiss law and the country’s constitution by a Swiss federal
administrative court. Nevertheless, OECD has removed 18 countries, including
Switzerland, Liechtenstein and Luxembourg, from a so-called "grey list" of nations that
did not offer sufficient tax transparency, and has re-categorized them as “white list”
nations. Countries that do not comply may face sanctions. A notable exception is
Panama, whose canal is currently needed by all Western nations, provides it with a
unique type of immunity to international pressure.

An offshore financial centre (or OFC), although not precisely defined, is usually a
small, low-tax jurisdiction specialising in providing the corporate and commercial
services to non-residents in the form of offshore companies and the investment of
offshore funds.

Scrutiny
Offshore finance has been the subject of increased attention since 2000 and even more so
since the April 2009 G20 meeting, when heads of state resolved to “take action” against
non-cooperative jurisdictions.[11]. Initiatives spearheaded by the OECD, the FATF and the
IMF have had a significant effect on the offshore finance industry.[12] Most of the
principal offshore centres considerably strengthened their internal regulations relating to
money laundering and other key regulated activities. Indeed, Jersey is now rated as the
most compliant jurisdiction internationally, complying with 44 of the "40+9"
recommendations [13].

In 2007 The Economist published a survey of offshore financial centres; although the
magazine had historically been very hostile towards OFCs, the report represented a shift
towards a very much more benign view of the role of offshore finance, concluding:

...although international initiatives aimed at reducing financial crime are welcome, the
broader concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether
nominally on- or offshore, are good for the global financial system.

—The Economist, 23 February 2007,

http://www.economist.com/surveys/displaystory.cfm?story_id=8695139

The Channel Islands hold that funds generated offshore do indeed go through the Bank of
England allowing the UK to benefit from the success of the crown dependancies as
offshore centres.

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. Most
professional practitioners in offshore jurisdictions refer to themselves as "tax neutral"
since, whatever tax burdens the proposed transaction or structure will have in its primary
operating market, having the structure based in an offshore jurisdiction will not create
any additional tax burdens.

A number of pressure groups 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. Another criticism levelled against offshore financial centres is that whilst
sophisticated jurisdictions usually have developed tax codes which prevent tax revenues
leaking from the use of offshore jurisdictions, less developed nations, who can least
afford to lose tax revenue, are unable to keep pace with the rapid development of the use
of offshore financial structures [5] [6].

Regulation
Offshore centres benefit from a low burden of regulation. An extremely high proportion
of hedge funds (which characteristically employ high risk investment strategies) who
register offshore are presumed to be driven by lighter regulatory requirements rather than
perceived tax benefits[14]. Many capital markets bond issues are also structured through a
special purpose vehicle incorporated in an offshore financial centre specifically to
minimise the amount of regulatory red-tape associated with the issue.

Offshore centres have often been seen as venues for laundering the proceeds of illicit
activity [7]. However, following a move towards transparency during the 2000s, some [12]
now argue that offshore jurisdictions are in many cases better regulated than many
onshore financial centres.[15] 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.
[16]

Some commentators have expressed concern that the differing levels of sophistication
between offshore financial centres will lead to regulatory arbitrage,[8] and fuel a race to
the bottom, although evidence from the market seems to indicate the investors prefer to
utilise better regulated offshore jurisdictions rather than more poorly regulated ones[17]. A
study by Australian academic found that shell companies are more easily set up in many
OECD member countries than in offshore jurisdictions[18]. A report by Global Witness,
Undue Diligence, found that kleptocrats used French banks rather than offshore accounts
as destinations for plundered funds.[9]

Confidentiality
See also: 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. However, banks in most jurisdictions 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, as noted in FATF ratings. Most jurisdictions also have
remedies which private citizens can avail themselves of, such as Anton Piller orders, if
they can satisfy the court in that jurisdiction that a bank account has been used as part of
a legal wrong.

Similarly, although most offshore jurisdictions only make a limited amount of

information with respect to companies publicly available, this is also true of most states
in the U.S.A., where it is uncommon for share registers or company accounts to be
available for public inspection. In relation to trusts and unlimited liability partnerships,
there are very few jurisdictions in the world that require these to be registered, let alone
publicly file details of the people involved with those structures.

Statutory banking secrecy is a feature of several financial centres, notably Switzerland

and Singapore[19]. However, many offshore financial centres have no such statutory right.
Jurisdictions including Aruba, the Bahamas, Bermuda, the British Virgin Islands, the
Cayman Islands, Jersey, Guernsey, the Isle of Man and the Netherlands Antilles have
signed tax information exchange agreements based on the OECD model, which commits
them to sharing financial information about foreign residents suspected of evading home-
country tax [10].

Effects on international trade

Offshore centres act as conduits for global trade and ease international capital flows.
International joint ventures are often structured as companies in an offshore jurisdiction
when neither party in the venture party wishes to form the company in the other party's
home jurisdiction for fear of unwanted tax consequences. 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[20].

Recently, several studies have examined the impact of offshore financial centres on the
world economy more broadly, finding the high degree of competition between banks in
such jurisdictions to increase liquidity in nearby onshore markets. Proximity to small
offshore centres has been found to reduce credit spreads and interest rates[21], while a
paper by James Hines concluded, "by every measure credit is more freely available in
countries which have close relationships with offshore centres."[22]

Low-tax financial centres are becoming increasingly important as conduits for investment
into emerging markets. For instance, 44% of foreign direct investment into India came
through Mauritius last year[23], while over two thirds of FDI into Brazil came through
offshore centres[24]. Blanco & Rogers find a positive correlation between proximity to an
offshore centre and investment for LDCs; a $1 increase in FDI to an offshore centre
translates to an average increase of $0.07 in FDI for nearby developing countries[25]

CRITISISM / ILL EFFECTS OF OFF SHORE FINANCE

Tax evasion and money laundering

Numbered bank accounts, used by Swiss banks and other offshore banks located in tax
havens, have been accused by NGOs such as ATTAC of being a major instrument of the
underground economy, facilitating tax evasion and money laundering. After Al Capone's
1931 condemnation for tax evasion, "mobster Meyer Lansky took money from New
Orleans slot machines and shifted it to accounts overseas. The Swiss secrecy law two
years later assured him of G-man-proof-banking. Later, he bought a Swiss bank and for
years deposited his Havana casino take in Miami accounts, then wired the funds to
Switzerland via a network of shell and holding companies and offshore accounts",
according to journalist Lucy Komisar. Joseph Stiglitz, 2001 Nobel laureate for
economics, told Komisar:

Bank secrecy
 (or bank privacy) is a legal principle in some jurisdictions under which banks are not
allowed to provide to authorities personal and account information about their customers
unless certain conditions apply (for example, a criminal complaint has been filed[1]). In
some cases, additional privacy is provided to beneficial owners through the use of
numbered bank accounts or otherwise. Bank secrecy is prevalent in certain countries,
such as Switzerland, Singapore and Luxembourg, as well as offshore banks and other tax
havens under voluntary or statutory privacy provisions.

Created by the Swiss Banking Act of 1934, which led to the famous Swiss bank, the
principle of bank secrecy is sometimes considered one of the main aspects of private
banking. It has also been accused by NGOs and governments of being one of the main
instruments of underground economy and organized crime, in particular following the
class action suit against the Vatican Bank in the 1990s, the Clearstream scandal and the
terrorist attacks of September 11, 2001. Former bank employees from banks in
Switzerland (UBS, Julius Baer) and Liechtenstein (LGT Group) have testified that their
former institutions helped clients evade billions of dollars in taxes by routing money
through offshore havens in the Caribbean and Switzerland. One of these, Rudolf M.
Elmer, wrote, "It is a global problem...Offshore tax evasion is the biggest theft among
societies and neighbor states in this world."[2] The lower house of the Swiss Parliament
voted June 8, 2010 to reject an agreement between UBS and the United States
government to reveal 4,450 American clients of UBS suspected of tax evasion. [3]
However, that rejection is not yet final, since the matter has to be submitted to the upper
house for reconciliation, since the upper house voted in favor of the agreement.[4]

Advances in financial cryptography (e.g. public-key cryptography) could make it possible

to use anonymous electronic money and anonymous digital bearer certificates for
financial privacy and anonymous internet banking, given enabling institutions (e.g.
issuers of such certificates and digital cash) and secure computer systems.

List of main offshore financial centres

See also: List of offshore financial centres

The list of jurisdictions considered by the IMF to be OFCs is published online. [14] Many
offshore financial centres are current or former British colonies or Crown Dependencies,
and often refer to themselves simply as offshore jurisdictions. By some measures, there
are more countries that are offshore financial centres than not but the following
jurisdictions are considered the major destinations for offshore finance:

• Bermuda, which is market leader for captive insurance, and also has a strong
presence in offshore funds and aircraft registration.
• British Virgin Islands, which has the largest number of offshore companies.[34]
• Cayman Islands, which has the largest value of AUM in offshore funds, and is
also the strongest presence in the U.S. securitisation market.
 • Jersey is the most international of the British Crown dependencies, all of which
can be counted as offshore centres. Jersey has particularly strong banking and
funds management sectors and a high concentration of professional advisers
including lawyers and fund managers[35].
• Luxembourg, which is the market leader in Undertakings for Collective
Investments in Transferable Securities (UCITS, pronounced YOU-sits) and is
believed to be the largest offshore Eurobond issuer, although no official statistics
confirm this.
• Singapore has recently risen in stature as a centre for wealth management and
ranked fourth in the world in the 2009 Global Financial Centres Index. The state
is a hub for hedge funds and its private banking industry is growing at a rate of 30
per cent annually [15].

The following formerly prominent offshore centres now specialise in certain niche
markets:

• Bahamas, which has a considerable number of registered vessels. The Bahamas

used to be the dominant force in the offshore financial world, but fell from favour
in 1970s after independence.[36]
• Panama, which is a significant international maritime centre. Although Panama
(with Bermuda) was one of the earliest offshore corporate domiciles, Panama lost
significance in the early 1990s.[37] Panama is now second only to the British
Virgin Islands in volumes of incorporations. [16]

See also the list of Non-Cooperative Countries or Territories (FATF Blacklist)

Offshore bank [NEELAM]

An offshore bank is a bank located outside the country of residence of the depositor,
typically in a low tax jurisdiction (or tax haven) that provides financial and legal
advantages. These advantages typically include:

• greater privacy (see also bank secrecy, a principle born with the 1934 Swiss
Banking Act)
• low or no taxation (i.e. tax havens)
• easy access to deposits (at least in terms of regulation)
• protection against local political or financial instability

While the term 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.
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[1], the personal income
tax of many countries[2] 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 accounts—they 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.

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.

Advantages of offshore banking

• Offshore banks can sometimes provide access to politically and economically
stable jurisdictions. This will be an advantage for residents in areas where there is
risk of political turmoil, who fear their assets may be frozen, seized or disappear
(see the corralito for example, during the 2001 Argentine economic crisis).
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, in which
geographically remote island nations can competitively engage. 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 being 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.

• 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 structures, such as offshore companies,
trusts or foundations, which may have specific tax advantages for some
individuals.

Benefits - it can be included in presentation if necessary

Offshore companies have the following features which may be beneficial:

• Taxation - In most jurisdictions authorities will not seek to tax companies which
they treat as non-resident, save perhaps for a nominal fee -$300 BVI, £320 Isle of
Man etc.

• Simplicity and Reporting - except for regulated businesses, such as banks or

other financial institutions, some jurisdictions make it relatively simple to set up
and maintain companies especially with reference to lesser reporting requirements
than so-called onshore jurisdictions - the level of information required by the
registrar of companies varies from jurisdiction to jurisdiction.

• Legal and asset protection - some jurisdictions have stricter provisions for
allowing a court to pierce the corporate veil, and in many cases corporate
governance rules require the laws of the jurisdiction where the corporation is
chartered - rather than where it is sued - to apply. For example Gibraltar makes it
illegal for the trustee of an Asset Protection Trust to surrender its assets to a
creditor of the settlor and in Switzerland it is illegal to disclose banking
information.

• Fees - some jurisdictions impose much higher fees to incorporate than other
jurisdictions. They may also impose much higher maintenance fees on a
corporation's yearly renewal of its charter. This will vary from service provider to
service provider and will be significantly based on the cost of local
disbursements.

• Anonymity - by carrying out transactions in the name of a private company, the

name of the underlying principal may be kept out of documentation, since the
company is a separate legal entity. Having said that, current anti-money-
laundering regulations often require banks and other professionals to look through
structures. This will always be the case for any reputable bank but it does not
 render ineffective the use of corporate structures, rather it ensures they remain
legally compliant.

• Thin capitalisation - Some offshore jurisdictions tend not to impose "thin

capitalisation" rules on companies (except for regulated entities such as banks and
insurance companies), allowing them to be formed with a purely nominal equity
investment.

• Financial assistance - offshore companies are usually not prohibited from

providing "financial assistance" for the acquisition of their own shares, which
avoids the needs for "whitewash" procedures in certain financial transactions.

• Cost of operation - In many cases, i.e. where a self employed consultant provides
services to a number of jurisdictions and travels frequently, it is a matter of choice
where he chooses to incorporate. In this case the fact that companies in an
offshore financial centre are considerably cheaper than buying or renting
premises, arranging to engage accountants, receptionists, IT providers etc. would
be.

[edit] Typical uses of offshore companies

Offshore companies are beneficial for many purposes including at least some of the
following:

• 1. Consultancy, Professional Services, Agency

Professionals, consultants, artists and many self-employed individuals can gain

substantial advantages by working as employees or as external consultants of offshore
companies, of which they may be the sole shareholders and, if they want to, the sole
directors.

• 2. Employment of Expatriate Staff

Expatriates working overseas can frequently benefit from being employed through an
offshore employment/consultancy company. This can avoid tax being deducted at source.
By not remitting the full salary it can minimise tax and avoid exchange control
difficulties in the country of temporary residence. This arrangement will be particularly
attractive to expatriates working in politically unstable countries.

• 3. Property Owning Companies

There are often significant advantages in using an offshore holding company for the
purpose of holding property. The advantages of such an arrangement include the
avoidance of inheritance tax, capital gains tax and the ease of sale which can be achieved
by transferring the property owned by the company and reduction of property purchase
costs to the onward purchasers.
 • 4. Investment Companies

Funds accumulated through investment companies set up in offshore areas can be

invested or deposited throughout the world and whilst generally returns or interest
payable in respect of these funds will be subject to local taxation, there are a number of
offshore areas in which funds may be placed as bank deposits where the interest and/or
the capital gains are paid and kept gross. To invest in global securities including mutual
funds not available to "local" citizens. Offshore jurisdictions are typically less invasive
allowing for aggressive and unrestrained Free Enterprise.

• 5. Copyrights, Patents and Trademarks

Offshore companies can purchase or be assigned the right to use copyright, patent or
trademark. Royalties can then be accumulated offshore although often royalties may
suffer withholding taxes at source. An interposing holding company in some cases may
allow a reduction in the rate of tax withheld at source.

• 6. Privacy

A high net-worth individual can save professional fees and unwanted publicity by owning
property or other assets through an offshore company. ECI can provide a wide range of
services in the field of privacy protection.

• 7. Protection

To file first position liens against assets and property closing the door to predatory
litigation before it begins. To segregate high-risk investments from other more secure
holdings. To protect retirement funds from possible bankruptcy. To provide for the
transfer of assets for the next generation in an efficient and discreet fashion. Nominee
directors and officers can allow you to conduct business transactions for your benefit
while you remain anonymous. To access your funds with corporate debit or credit cards
thereby maintaining absolute confidentiality.

[edit] Disadvantages
• Offshore companies are usually prohibited from conducting business or retaining
employees in their jurisdiction of incorporation though this very much depends on
the jurisdiction in question and type of company.

• For regulatory reasons, there are often certain restrictions on the type of business
which an offshore company can engage in without the need for a licence. In
practice this is no different from trading 'onshore' since the majority of banks have
offshore operations and the majority of the world's insurance companies are
offshore captive insurance companies.
 • Due diligence in reputable offshore centres tends to be more strict than most
onshore areas. For example, to open a bank account in the name of an offshore
company, to comply with relevant anti-money laundering regulations, the bank
will normally require documents verifying the identity of the signers on the
account to be notarised and may require one or more professional reference letters
from an attorney, accountant and/or banker who has known you.

• Certain countries have "anti-tax haven" legislation which makes it difficult to

conduct business in those countries using an offshore company. For example,
capital markets regulations in France prohibit using offshore companies as bond
issuing vehicles.

• Where a shareholder of an offshore company dies, it is usually necessary to have

the will admitted to probate in the offshore jurisdiction as well (or, if intestate, to
have the letters of administration re-sealed in that jurisdiction), which can add to
cost, delay and inconvenience in administering the deceased's estate.

[edit] Legitimate uses of offshore companies

• International trading, especially where the owner has no fixed residence
• Asset protection
• Captive insurance
• Yacht registration
• Tax avoidance
• Protection of intellectual property
• Succession planning
• Confidentiality (non-criminal)

[edit] Illegitimate uses

Historically the activities of offshore companies have included activities that were or
have become illegal. These include

• The finance of terrorism

• Money laundering
• Tax evasion
• Fraud (including investor fraud)
• Protection from current or future creditors (including taxation authorities and
spouses)
• Irregular trading practices (such as increasing margins on deals by interposing
clandestinely controlled offshore companies as apparent third parties)

The situation has much improved since the 1970s and 1980s largely due to increased
regulation and general changes in commercial practice. However some traces of these
abuses persist today in both offshore and onshore jurisdictions.
 • 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 offshoring of capital.

Disadvantages of offshore banking [NEELAM]

• Offshore bank accounts are less financially secure. In a banking crisis which
swept the world in 2008 the only savers who lost money were those who had
deposited their funds in offshore branches of Icelandic banks such as Kaupthing
Singer & Friedlander. Those who had deposited with the same banks onshore
received all of their money back. In 2009 The Isle of Man authorities were keen to
point out that 90% of the claimants were paid, although this only referred to the
number of people who had received money from their depositor compensation
scheme and not the amount of money refunded. In reality only 40% of depositor
funds had been repaid 24.8% in September 2009 and 15.2% in December 2009.
Both offshore and onshore banking centres often have depositor compensation
schemes. For example The Isle of Man compensation scheme guarantees £50,000
of net deposits per individual depositor or £20,000 for most other categories of
depositor and point out that potential depositors should be aware that any deposits
over that amount are at risk. However only offshore centres such as the Isle of
Man have refused to compensate depositors 100% of their funds following Bank
collapses. Onshore depositors have been refunded in full regardless of what the
compensation limit of that country has stated thus banking offshore is hugely
riskier than banking onshore.

• Offshore banking has been associated in the past with the underground economy
and organized crime, through money laundering.[3] 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.

• Offshore jurisdictions are often remote, and therefore costly to visit, so physical
access and access to information can be difficult. Yet in a world with global
telecommunications this is rarely a problem for customers. Accounts can be set up
online, by phone or by mail.

• Offshore private banking is usually more accessible to those on higher incomes,

because of the costs of establishing and maintaining offshore accounts. However,
simple savings accounts can be opened by anyone and maintained with scale fees
equivalent to their onshore counterparts. 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 [4]. The Laffer curve demonstrates this tendency.

• 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.

Terrorist Finance Tracking Program [LAKHAN]

A series of articles published on June 23, 2006, by The New York Times, The Wall Street
Journal and The Los Angeles Times revealed that the United States government,
specifically the Treasury Department and the CIA, had a program to access the SWIFT
transaction database after the September 11th attacks (see the Terrorist Finance Tracking
Program) rendering offshore banking for privacy severely compromised.

Regulation of offshore banks [LAKHAN]

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. They must report at least quarterly to the regulator on the current state of the
business.

Since the late 1990s, especially following September 11, 2001, there have been a number
of initiatives to increase the transparency of offshore banking, although critics such as the
Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC)
non-governmental organization (NGO) maintain that they have been insufficient. A few
examples of these are:

• The tightening of anti-money laundering regulations in many countries including

most popular offshore banking locations means that bankers are required, by good
faith, to report suspicion of money laundering to the local police authority,
regardless of banking secrecy rules. There is more international co-operation
between police authorities.
• In the US the Internal Revenue Service (IRS) introduced Qualifying Intermediary
requirements, which mean that the names of the recipients of US-source
investment income are passed to the IRS.
• Following 9/11 the US introduced the USA PATRIOT Act, which authorises the
US authorities to seize the assets of a bank, where it is believed that the bank
holds assets for a suspected criminal. Similar measures have been introduced in
some other countries.
• The European Union has introduced sharing of information between certain
jurisdictions, and enforced this in respect of certain controlled centres, such as the
 UK Offshore Islands, so that tax information is able to be shared in respect of
interest.

Joseph Stiglitz, 2001 Nobel laureate for economics and former World Bank Chief
Economist, told to reporter Lucy Komisar, investigating on the Clearstream scandal:

"You ask why, if there's an important role for a regulated banking system, do you allow a
non-regulated banking system to continue? It's in the interest of some of the moneyed
interests to allow this to occur. It's not an accident; it could have been shut down at any
time. If you said the US, the UK, the major G7 banks will not deal with offshore bank
centers that don't comply with G7 banks regulations, these banks could not exist. They
only exist because they engage in transactions with standard banks."[1]

In the 1970s through the 1990s it was possible to own your own personal offshore bank;
mobster Meyer Lansky had done this to launder his casino money. Changes in offshore
banking regulation in the 1990s in the form of "due diligence" (a legal construct) make
offshore bank creation really only possible for medium to large multinational
corporations that may be family owned or run.

Statistics concerning offshore banking [LAKHAN]

Offshore banking is an important part of the international financial system. Experts
believe that as much as half the world's capital flows through offshore centers. Tax
havens have 1.2% of the world's population and hold 26% of the world's wealth,
including 31% of the net profits of United States multinationals. According to Merrill
Lynch and Gemini Consulting's “World Wealth Report” for 2000, one third of the wealth
of the world's “high net-worth individuals”—nearly $6 trillion out of $17.5 trillion—may
now be held offshore. Some $3 trillion is in deposits in tax haven banks and the rest is in
securities held by international business companies (IBCs) and trusts.

The IMF has said that between $600 billion and $1.5 trillion of illicit money is laundered
annually, equal to 2% to 5% of global economic output. Today, offshore is where most of
the world's drug money is allegedly laundered, estimated at up to $500 billion a year,
more than the total income of the world's poorest 20%. Add the proceeds of tax evasion
and the figure skyrockets to $1 trillion. Another few hundred billion come from fraud and
corruption. "These offshore centers awash in money are the hub of a colossal,
underground network of crime, fraud, and corruption" commented Lucy Komisar quoting
these statistics.[1] Among offshore banks, Swiss banks hold an estimated 35% of the
world's private and institutional funds (or 3 trillion Swiss francs), and the Cayman Islands
(1.9 trillion US dollars in deposits) are the fifth largest banking centre globally in terms
of deposits. [4]
Offshore fund [KRUPA]
An offshore fund is a collective investment scheme domiciled in an Offshore Financial
Centre, for example British Virgin Islands, Luxembourg, or the Cayman Islands and
typically sold exclusively to 'foreign' investors (those not of the domestic fund sponsor's
country of origin). Thus, a common example could involve an offshore fund managed or
sponsored by a U.S.-based money manager, organized under the laws of the Cayman
Islands and sold exclusively to non-U.S. investors. For the purposes of the Income and
Corporation Taxes Act 1988 of the UK, an offshore fund is one which is governed by the
Offshore Fund Rules[1] set out in that Act. The vast majority of offshore funds are
organized under the laws of the Cayman Islands, with the British Virgin Islands being the
second most popular domicile.[1]

Advantages
Offshore funds offer eligible investors significant tax benefits compared to many high tax
jurisdictions such as the United States For example, U.S. domestic investment products
such as mutual funds are at a tax-disadvantage to non U.S. investors since dividends from
such a fund are typically subject to high rates of U.S. non-resident alien withholding and
taxes - typically as high as 30% on certain income paid by the U.S. fund (lower by treaty)
[2]
. An offshore fund can be managed similarly however without the high taxes otherwise
involved with a similarly managed U.S. organized fund. Where income is repatriated
(paid or transferred) to high tax jurisdictions, however, such income is usually taxed at
normal rates as foreign sourced or arising income.

Many of these tax-haven locations are considered investor-friendly and are

internationally regarded as financially secure.

Many offshore jurisdictions, notably the British Virgin Islands, offer a zero-tax regime
for investment funds which are domiciled there, which allows the fund to reinvest that
part of its investment portfolio's gains which would otherwise have been lost to tax. In
addition, the regulatory regime in these offshore jurisdictions is deliberately light, with
emphasis placed on the importance of balancing effective regulation for the benefit of the
protection of investors on the one hand, with the establishment of a regime in which the
conduct of investment business is fast and simple. A number of offshore jurisdictions
have recently tightened the regulation of offshore funds.[3]

Regulation
Typically, the regulatory regime will take a two tier approach, making a distinction
between funds which are offered generally to members of the public, which require a
high degree of regulation because of the nature of potential investors, and non-public
funds on the other (for example, in the British Virgin Islands, see the Mutual Funds Act
1996, which applies a three-tier regulatory approach in this manner). Non-public funds
are usually either categorised as private funds or professional funds. Typically, investors
in non-public funds can be assumed to be sophisticated because of the nature of the
offering - there may, for example, be a high minimum initial investment, say
US$100,000, and/or a requirement that investors establish that they are "professional
investors". Or the fund will be designed for a small and select group of investors and the
constitutional documents will limit the number of investors, say to no more than 50.
Although most offshore jurisdictions permit funds to obtain licences to operate as public
funds, the onerous regulatory requirements associated with such licences usually means
that only a small minority of offshore funds are available for subscription by the general
public.[citation needed]

The tax advantages of the funds encourage high tax countries to apply some draconian
laws to limit their distribution. Nonetheless, the vast majority of offshore funds operate
primarily in investor markets in the United Kingdom and the U.S.A., although they are
usually subject to ordinarily taxation in those jurisdictions as they apply to distributions
of income arising from foreign sources.[citation needed]

Most offshore domiciling of funds tends to be regulatory driven rather than tax driven.
The relative absence of regulation relating to leveraging and investment strategies in
offshore jurisdictions encourages higher risk funds, such as hedge funds to form
themselves in those jurisdictions. The vast majority of the world's estimated 9,000 hedge
funds (generally considered the riskiest form of collective investment vehicle) are formed
in Cayman Islands, British Virgin Islands, Luxembourg or Bermuda.[citation needed]

Criticism
Critics, such as ATTAC (an NGO), alleged that they are a main player of the
underground economy, allowing legalized tax evasion, in particular through the usage of
shell corporations practicing transfer pricing.

Banking services [ROHIT] - details

It is possible to obtain the full spectrum of financial services from offshore banks,
including:

• deposit taking
• credit
• wire- and electronic funds transfers
• foreign exchange
• letters of credit and trade finance
• investment management and investment custody
• fund management
• trustee services
• corporate administration
Not every bank provides each service. Banks tend to polarise between retail services and
private banking services. Retail services tend to be low cost and undifferentiated, whereas
private banking services tend to bring a personalised suite of services to the client.

____________________________ END______________________________________

..Extra

Offshore Bonds [ROHIT]

What is an offshore portfolio bond?

An offshore portfolio bond is a tax efficient wrapper that can hold a variety of assets like
stocks and shares or mutual funds. This is a bond that adds the legal and tax shield of a
life insurance policy to an investment portfolio. It is structured to simply combine a life
insurance policy and a portfolio to create a wrapper that investors can buy, manage and
sell their assets through. The British (or onshore) equivalent is called an ‘open ended
investment company’ (OEIC). Although many OEICs are shared, some are private to an
individual and thus a good comparison to Offshore Portfolio Bonds.

What are the benefits of an offshore portfolio bond?

The specific benefits of investing in offshore bonds depend upon your individual
circumstances. The investment funds held within offshore bonds grow free of year-on-
year taxation, unlike comparable OEICs, which are taxed annually on capital growth.
Some of the individual funds within an Offshore Bond may be subject to withholding tax.
Your financial adviser will be able to tell you if it’s worth avoiding these.

You won't be liable for capital gains tax when you sell a profitable fund to purchase
another fund within your offshore portfolio bond. If you made the same switches within
an OEIC, or your equity or unit trust investments outside a portfolio bond, you may be
liable for capital gains tax. This is one way that offshore bonds are often a more tax-
efficient way for you to invest.

Offshore bonds are designed to be flexible, especially with regards to letting you take ad-
hoc withdrawals, or set up an income stream into an offshore bank account with a cheque
book, internet banking and credit card attached.

Another major benefit is the ability to transfer in and consolidate all your existing stocks,
mutual fund and other investments. This gives them the tax efficiency and ease of
administration of the other assets within the portfolio bond.

Tax options in Offshore Bonds

Income payments from OEICs are charged at your standard income tax rate and capital
gains are charged at the standard 18%. Much of the growth in OEICs are contributed
from income payments, not capital gains, so a lot of your growth will be swallowed by
HMRC.

Offshore bonds offer regular withdrawals, that give you access to your capital in the most
tax-efficient way by withdrawing up to five percent of each investment amount every
year as tax-deferred 'income'. This five percent amount can be taken every year for 20
years, or built up over a number of years and withdrawn less frequently without
triggering a 'chargeable event' for tax purposes (a 'chargeable event' occurs, for example,
when you take out more than five percent a year, or you cash in your bond in full,
triggering an income tax charge).

Tax deferral is an important feature of offshore bonds. This lets you choose when to pay
tax, as this will be when you cash in some, or all, of your bond. The tax payable on a
chargeable event will depend on your highest marginal rate at that time. This allows you
to put off such an event until you're either no longer a taxpayer or have moved from
being a higher rate taxpayer to a lower or basic rate taxpayer or have moved to a country
with lower taxes. You should bear in mind that if you do move to a different jurisdiction,
the benefit of tax deferral may be lost. All of these factors will be taken into account by
your financial adviser.

Wrapping your offshore portfolio bond in trust means you can offset or wholly mitigate
taxes due when transferring wealth. If you have any assets above the inheritance tax nil
rate band (the threshold above which inheritance tax applies) that aren't held in trust, they
may be liable for inheritance tax at 40 percent. Also, an offshore bond or trust can be
structured to allow you access to the funds while you are still alive. Please refer to our
full article on How to Pass on Your Wealth.

Since offshore bonds are 'non-income producing assets', there's nothing for you to report
to the HMRC until a chargeable event. You don't have to include any information on
your tax return before this point, compared with the potentially complicated requirements
for reporting income and gains on a portfolio of unit trusts or shares. When you do need
to include information on your tax return under self-assessment, it's also generally much
simpler to report a chargeable event gain from an offshore bond than the income from an
OEIC; your financial adviser will be able to prepare a full tax report for you to submit.

Administration of assets within your bond

Your offshore portfolio bond gives you an easy way to manage all of your investments;
the financial institution will take care of all administration associated with funds, stocks
and fixed income bonds. You will have a clearly defined, easily laid out structure that can
be viewed holistically, simplifying and streamlining your financial life.

However, there are a host of factors your financial adviser will have to consider when
choosing the most appropriate investments:

- The amount you have to invest

- The term of your investment

- The likely rate of inflation during the term

- Your income tax rate, both over the term and on maturity
- Your residence during the investment, and on maturity

- Whether you intend to switch funds, and how often

- Charges and costs

- Ratios of equities to other asset classes within your bond

- The likely growth and income yield on these assets

Due to all of these factors and the complexity involved in properly and objectively
assessing them, specialist advice is necessary.

Risk and Diversification

The essence of risk management is allocating the assets in your portfolio in such a way
that they suit your personal risk tolerance. The simplest way to manage risk is through
diversification.

Diversification is important in almost every portfolio as it decreases risk ‘for free’. In

other words, simply by dividing your assets up between regions and asset classes, the
total risk of the portfolio drops without needing to decrease the risk (and potential return)
of the constituent assets.

Diversification can be very complex if the assets in your portfolio are mainly individual
fixed income bonds and stocks. However, there are some mutual funds or fund of funds
(a fund that invests in other funds) that aim to include enough assets to be wholly
diversified themselves. Hedge funds aim to be non-correlated – this means that they don’t
move with the market at all. They rarely completely achieve this. Many people diversify
their portfolio through hedging, meaning they will purchase an investment that runs
counter to their other primary investments in order to decrease the total risk. This is often
done to offset currency risk but other people buy debt (fixed income bonds) to offset
equity (stocks and shares) risk.

Having said all of this, the Zulu Principle, articulated by Jim Slater, states that focus is
the key to making excellent money in the markets. By just focusing to what you (or your
IFA) actually know well, the choices made can be better informed and stand more chance
of pulling away from the market.

The reality of the situation is that intelligent diversification through hedging is a

necessity, but investing in something just for the sake of diversifying your portfolio is a
mistake. A loss is still a loss and it rarely matters if it helped to diversify your portfolio or
write off a tax loss. However, on the other side of the coin, risk has a value, and lowering
risk is in effect giving you a monetary return.

If this is beginning to sound contradictory and overly intricate, rest assured the
mathematics attached to risk management are some of the most complex around. The
good news is that the ability to invest offshore means your options are dramatically
increased and a good international financial adviser will be able to plan your risk against
this broader backdrop.

Managing Wealth
Managing your wealth fairly well is fairly easy. Maximising your hard earned money
from growth to stability to protection is a difficult, nuanced and highly involved task.

There are a variety of issues you should discuss with your financial adviser. Many people
will have accumulated assets of some sort, usually property or shares. Others will have a
more complex distribution of assets. Protection of the value of these assets is often very
important. Expats may wish to move their money when they leave Britain to avoid
paying capital gains tax, for example.

Managing your investments, both by selecting new ideas and strategies and looking at old
investments with a fresh eye, is also an important yet often overlooked aspect. A fluid
approach to wealth management often works especially well with expatriates. Given the
nature of working overseas, expats can be in and out of different jobs and different
countries quite often. The dynamic nature of overseas work calls for a dynamic approach
to managing your investments. A good financial adviser will discuss various aspects of
your financial life to provide them with a personalised base of information with which to
work.

Managing your wealth goes hand in hand with reducing your tax liability, which is often
highly jurisdiction specific. In order to keep this fully compliant and above board it is
worth finding a financial adviser who is familiar with the country you are moving to, or
have moved to. Wealth management also combines the above aspects with that of
retirement preparation and succession planning.

Given the complexities involved, it’s important you talk to an expert who can guide you
in all the above areas and more. An independent financial adviser should be considered as
they can offer a range of products from various companies rather than having to offer you
products that may not be the most competitive in the marketplace.

Top Investment Themes

When investors decide where to place their money they look at a theme. They then select
an exact ‘vehicle' (a mutual fund or stock for example) to invest in. An investment theme
is a general prediction based on a certain sector of the market. For example, if you
believe that the current build up in crude oil stock-piles (increased supply) won’t drag the
price of oil down as much as the shutdown of oil exploration projects will pull it up
(decreased supply), you may want to invest in oil either directly or indirectly, for example
in the equity markets of an oil dependent country like Russia.

Although we’ll take a look at some of the themes that we especially like, and although a
great financial adviser will have researched his own thematic investment strategies, it’s
useful and interesting to build up the tools to understand how these themes might have
come about.

Oil

Crude Oil is so named because it’s the raw mixture of naphtha (plastics), gasoline,
petroleum gas, diesel, petroleum jelly, and many other parts that, for better or for worse,
fuel the engine of the world economy. Broadly, and with the notable exception of the US,
it’s a commodity that isn’t found where it’s needed and isn’t needed much where it’s
found. This means that it’s a very fiercely traded commodity. Almost without exception
Crude Oil is traded and priced in USD and so carries a currency risk if you save or spend
in anything else. Your financial adviser will help you hedge this risk by investing
elsewhere.

To understand the price of oil, you need to look at several factors. The first is the supply
of oil.
 This is, at least in the
short term, set by the Organization of the Petroleum Exporting Countries (OPEC) quotas.
OPEC is a cartel of oil producers and they collude on the amount they export. The second
factor, oil reserves, refers to the oil held is the US Strategic Petroleum Reserve as well as
other worldwide refineries. A third factor is demand, which is affected by the industrial
activity in various countries, particularly the USA and China. It’s also seasonal – when its
winter in the northern hemisphere, demand increases for heating oil and prices can rise.

Two more external factors affect the price of oil. Poor planning can mean that oil
exploration projects are closed down and mothballed because of poor predictions about
future demand. To find and drill oil in any one place can take the best part of a decade, so
these sorts of guesses about the future market can be murky at best, and difficult to
rectify. The second external factor is political instability. Concerns over tensions in Iran,
Iraq, Israel, Lebanon and in the past Kuwait, have caused massive oil spikes, culminating
in $136 per barrel in 2008. This is because political instability means it’s harder for
suppliers to guarantee delivery at a specific time.

This oil spike of 2008 caused a change in the driving habits of many, especially
Americans, and this coincided with a global economic downturn, suppressing industrial
activity and economic expansion, and thus Crude Oil demand. The oil price dropped
sharply to around $40 per barrel and then, in late 2009, rose to just under $80. As can be
plainly seen there is a great deal of money to be made or lost in oil which is why we don’t
recommend it as a direct investment for any but the most hardened risk-takers.

One indirect investment option is an oil fund. These are usually composed of a variety of
oil stocks; companies who discover, drill for, transport, purify or sell oil, and whose fates
are understandably closely tied to the oil price. Another way to invest in oil that usually
holds a slightly lower risk potential is to invest in the equity markets of countries that
produce oil. The more their exports are skewed towards oil, the closer they’ll track the
price of oil. Russia is a very popular investment for this, with an added positive that it has
many of the advantages of investing in Eastern Europe, although does have negatives
such as transparency and corruption issues.
We believe oil will follow the (albeit rocky) global recovery, and that getting exposure to
its rising price should form some part of any portfolio.

Banks

One of the lynchpins of the 2008-2009 economic downturn was banking. Banks
spearheaded the credit crunch by lending too easily and then packaging the debt so that it
couldn’t be easily or transparently valued.

If you view any industry, asset class or geographical area broadly enough, you can say
“what goes down must come up”. This is true of the banking industry. We believe that
while banks were no doubt largely to blame for the credit crunch, the press they received
outweighed this. In fact they received so much bad press that holding bank stock became
unfashionable and people dropped even good banking stocks at rock bottom prices. This
makes investing in banks (on average) a positive step for a portfolio at the moment.

There are two main ways to directly invest in banks; equity (stocks) and debt (bonds).
The value of each will reflect the fortunes of the underlying bank, and mutual funds can
be easily found comprised of each alone. We believe that there will be downward
pressure on bank earnings (it will be a bit harder for them to earn well) during the market
upturn because of increased capital requirements (they’ll have to keep their books in
better order, to have more money saved, relative to what they lend and trade). However,
increased capital requirements will make their debt safer and so, pound for point, more
valuable. This is why a good financials fund, especially a financial debt/bond/fixed
income fund is critical to make the most of the upturn.

We also believe in ethical investment themes. We understand ethical investments are

becoming more fashionable, companies are becoming ever more aware of their own
social responsibilities and we applaud this. However, ethical investing is as complex an
issue as any other type. We have drawn up a detailed look at ethical investments for more
information.

Remember, knowing when to buy is important, but knowing when to sell is where you
really make your money. Have your portfolio monitored by a financial adviser to make
the most of your gains without giving them back to the next downturn.

CONCLUSION

In recent years, there has been increased recognition of the need to improve
understanding of the activities of offshore financial centers. Some OFCs have captured a
significant part of global financial flows, and their linkages with other financial centers
create the potential for their activities to affect financial stability in many countries. In
July 2000, the IMF's Executive Board asked staff to extend financial sector work to
include OFCs through a voluntary program of assessments and technical assistance. The
aim is to help strengthen financial supervision of OFCs, so that international rules and
arrangements apply to OFCs to promote greater cooperation among supervisors. To this
end, IMF staff undertake detailed assessments of the extent to which OFCs meet the
standards advocated by the international standard-setters, and of any further action
required to meet these standards.

"You ask why, if there's an important role for a regulated banking system, do you
allow a non-regulated banking system to continue? It's in the interest of some of the
moneyed interests to allow this to occur. It's not an accident; it could have been shut
down at any time. If you said the US, the UK, the major G7 banks will not deal with
offshore bank centers that don't comply with G7 banks regulations, these banks could not
exist. They only exist because they engage in transactions with standard banks." [5]

In 1999, a class action suit against the Vatican Bank criticized the role of Switzerland
during World War II. Governments of developing countries accused Swiss banks of
detaining most of the money stolen by corrupt dictators, which Oxfam International
estimate to about $50 billion a year deposited in offshore tax havens, nearly the size of
the $57 billion annual global aid budget.

Also in 1999, according to Lucy Komisar, banks "orchestrated a successful e-mail

campaign to Congress" to "sink a 'know your customer' regulation proposed by the
Federal Deposit Insurance Corporation".[5]

In 2001, the United States learned that the Swiss had protected the bank that handled
finances for Osama Bin Laden. One of them, the Bahrain International Bank, had funds
transiting through non-published accounts of Clearstream, which has been qualified as a
"bank of banks" and was involved in one of Luxembourg's major financial scandals.
Recent developments
EU withholding tax
See also: European Union withholding tax

The European Union has recently made a large number of offshore financial centres
(Barbados and Bermuda being the notable exceptions) sign up to the European Union
withholding tax and exchange of information directive. Under those regulations, brought
into force by local law, banks in those jurisdictions which hold accounts for EU resident
nationals must either deduct a 15% withholding tax (which is split between the offshore
jurisdiction and the country of the account holder's residence), or permit full exchange of
information with the country of the national's residence.

A number of larger jurisdictions, notably Hong Kong and Singapore refused to sign up to
the directive. On implementation, the directive recoupled far less money than
anticipated[38], although it is disputed whether this is because the regulations lacked
effectiveness, or because the predicted amount of funds in offshore bank accounts
transpired to have been greatly exaggerated[citation needed]. Similarly, the widely predicted
capital flight to Hong Kong and Singapore appears not to have materialised[citation needed].

A ruling by the Special Commissioners in the United Kingdom in May 2006 permitted
Revenue authorities to compel UK based banks to release information on offshore bank
deposits where illegality is suspected, even where the customer had elected to pay a
withholding tax rather than to exchange information.

OECD List

In its 2000 report Towards Global Tax Competition, the Organisation for Economic
Cooperation and Development (OECD) identified 47 jurisdictions as tax havens based on
the existence of preferential tax regimes for financial services and the absence of
procedures for exchange of tax information. Between 2000 and April 2002, 31
jurisdictions made formal commitments to implement the OECD’s standards of
transparency and exchange of information and were removed from the list of tax havens.

Andorra, Liechtenstein, Liberia, Monaco, the Marshall Islands, Nauru and Vanuatu did
not make commitments to transparency and exchange of information at that time and
were identified in April 2002 by the OECD’s Committee on Fiscal Affairs as
"uncooperative tax havens". All of these jurisdictions subsequently reversed this position
and were no longer deemed tax havens.

After G20 leaders agreed to crack down on tax havens on during 2009 G20 London
Summit in April 2009, the OECD published a list of countries that still needed to
implement internationally agreed tax standards.
In May 2009, the OECD's Committee on Fiscal Affairs decided to remove all three
remaining jurisdictions - Andorra, Liechtenstein and Monaco - from the list of
uncooperative tax havens in the light of their commitments to implement the OECD
standards of transparency and effective exchange of information and the timetable they
set for the implementation. As a result, no jurisdiction is currently listed as an
uncooperative tax haven by the Committee on Fiscal Affairs.