Offshore financial centre - AbsoluteAstronomy.com

An offshore financial centre (OFC), though not precisely defined, is usually a small, low-tax jurisdiction

Jurisdiction

Jurisdiction is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility...

specializing in providing corporate and commercial services to non-resident offshore companies

Offshore company

The term offshore company is ambiguous. It may refer to either:# A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre i.e...

, and for the investment

Investment

Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

of offshore funds.

Definition

The term is a relatively modern neologism, first coined in the 1980s. Academics Rose & Spiegel, Société Générale and the International Monetary Fund

International Monetary Fund

The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...

(IMF) consider offshore centres to include all economies with financial sectors disproportionate to their resident population:
It has been remarked more than once that whether a financial centre is characterized as "offshore" is really a question of degree. Indeed, the IMF Working Paper cited above notes that its definition of an offshore centre would include the United Kingdom and the United States, which are ordinarily counted as "onshore" because of their large populations and inclusion in international organisations such as the G20 and OECD.

The more nebulous term “tax haven

Tax haven

A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....

” is often applied to offshore centres, leading to confusion between the two concepts. In Tolley's International Initiatives Affecting Financial Havens the author in the Glossary of Terms defines an “offshore financial centre” in forthright terms as “a politically correct term for what used to be called a tax haven.” However, he then qualifies this by adding, “The use of this term makes the important point that a jurisdiction may provide specific facilities for offshore financial centres without being in any general sense a tax haven." A 1981 report by the IRS concludes, “a country is a tax haven if it looks like one and if it is considered to be one by those who care.”

With its connotations of financial secrecy and tax avoidance

Tax avoidance

Tax avoidance is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. The term tax mitigation is a synonym for tax avoidance. Its original use was by tax advisors as an alternative to the pejorative term tax...

, “tax haven” is not always an appropriate term for offshore financial centres, many of which have no statutory banking secrecy, and most of which have adopted tax information exchange protocols to allow foreign countries to investigate suspected tax evasion.

Views of offshore financial centres tend to be polarised. Proponents suggest 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 Foreign Sales Corporation

Foreign Sales Corporation

Foreign Sales Corporations was a means formerly provided by United States taxation law for US companies to receive a reduction in US federal income taxes for profits derived from exports, through the use of an offshore subsidiary .The European Union launched proceedings against these provisions...

(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

Eurobond

A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. It can be categorised according to the currency in which it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be traded throughout the world - for...

market).

Overseas Private Investment Corporation

Overseas Private Investment Corporation

The Overseas Private Investment Corporation is an independent agency of the United States Government that mobilizes U.S. private sector investment in new and emerging markets overseas in order to support both the sustainable economic development of those markets and the creation of American jobs...

(OPIC), a U.S. government agency, when lending into countries with underdeveloped corporate law

Corporate law

Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...

, often requires the borrower to form an offshore vehicle to facilitate the loan financing. One could argue that US external aid statutorily cannot even take place without the formation of offshore entities.

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. Initiatives spearheaded by the Organisation for Economic Cooperation and Development (OECD), the Financial Action Task Force on Money Laundering

Financial Action Task Force on Money Laundering

The Financial Action Task Force , also known by its French name, Groupe d'action financière , is an intergovernmental organization founded in 1989 on the initiative of the G7. The purpose of the FATF is to develop policies to combat money laundering and terrorist financing...

(FATF) and the International Monetary Fund

International Monetary Fund

have had a significant effect on the offshore finance industry. 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.

In 2007 The Economist
The Economist
The Economist is an English-language weekly news and international affairs publication owned by The Economist Newspaper Ltd. and edited in offices in the City of Westminster, London, England. Continuous publication began under founder James Wilson in September 1843...

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:
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 dependencies as offshore centres.

Taxation

Although most offshore financial centres originally rose to prominence by facilitating structures which helped to minimise exposure to tax

Tax

To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...

, tax avoidance

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

Tax competition

Tax competition, a form of regulatory competition, exists when governments are encouraged to lower fiscal burdens to either encourage the inflow of productive resources or discourage the exodus of those resources...

" 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.

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. 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 historically been seen as venues for laundering the proceeds of illicit activity. However, following a move towards transparency during the 2000s and the introduction of strict AML regulations, some now argue that offshore are in many cases better regulated than many onshore financial centres. For example, in most offshore jurisdictions, a person needs a licence to act as a trustee

Trustee

Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...

, 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. The leading offshore financial centres are more compliant with the Financial Action Task Force on Money Laundering

Financial Action Task Force on Money Laundering

's '40+9' recommendations than many OECD countries.

Some commentators have expressed concern that the differing levels of sophistication between offshore financial centres will lead to regulatory arbitrage

Arbitrage

In economics and finance, arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices...

, 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. A study by Australian academic found that shell companies are more easily set up in many OECD member countries than in offshore jurisdictions. A report by Global Witness

Global Witness

Global Witness is an international NGO established in 1993 that works to break the links between natural resource exploitation, conflict, poverty, corruption, and human rights abuses worldwide. The organisation has offices in London and Washington, D.C.. Global Witness states that it does not have...

, Undue Diligence, found that kleptocrats used French banks rather than offshore accounts as destinations for plundered funds.

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 order

Anton Piller order

In English and English-derived legal systems, an Anton Piller order is a court order that provides the right to search premises and seize evidence without prior warning...

s, 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. 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.

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.

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, while a paper by James Hines concluded, "by every measure credit is more freely available in countries which have close relationships with offshore centres."

Low-tax financial centres are becoming increasingly important as conduits for investment into emerging markets. For instance, 44% of foreign direct investment

Foreign direct investment

Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lasting management interest in an enterprise operating in an economy other than that of the investor.. It is the sum of equity capital,other long-term capital, and short-term capital as shown in...

(FDI) into India came through Mauritius

Mauritius

Mauritius , officially the Republic of Mauritius is an island nation off the southeast coast of the African continent in the southwest Indian Ocean, about east of Madagascar...

last year, while over two thirds of FDI into Brazil came through offshore centres. Blanco & Rogers find a positive correlation between proximity to an offshore centre and investment for least developed countries

Least Developed Countries

Least developed country is the name given to a country which, according to the United Nations, exhibits the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world...

(LDCs); a $1 increase in FDI to an offshore centre translates to an average increase of $0.07 in FDI for nearby developing countries.

Offshore financial structures

The bedrock of most offshore financial centre is the formation of offshore structures – typically:

offshore company
Offshore company
The term offshore company is ambiguous. It may refer to either:# A company which is incorporated outside the jurisdiction of its primary operations regardless of whether that jurisdiction is an offshore financial centre i.e...
offshore partnership
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
offshore trust
Offshore trust
An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction.Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring assets on the trustees to manage for the benefit of a person or...
private foundation
Private foundation
A private foundation is a legal entity set up by an individual, a family or a group of individuals, for a purpose such as philanthropy. The Bill & Melinda Gates Foundation is the largest private foundation in the U.S. with over $38 billion in assets...

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 (i.e. where the assets relate to asbestos
Asbestos
Asbestos is a set of six naturally occurring silicate minerals used commercially for their desirable physical properties. They all have in common their eponymous, asbestiform habit: long, thin fibrous crystals...

, 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
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...

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).
Avoidance of forced heirship provisions. Many countries from France to Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...

(and the U.S. State of Louisiana
Louisiana
Louisiana is a state located in the southern region of the United States of America. Its capital is Baton Rouge and largest city is New Orleans. Louisiana is the only state in the U.S. with political subdivisions termed parishes, which are local governments equivalent to counties...

) continue to employ forced heirship
Forced heirship
Forced heirship is a form of partible inheritance whereby a deceased's estate is separated into an indefeasible portion, the forced estate, passing to those the deceased is survived by, and a discretionary portion, or free estate, to be freely disposed of by will...

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
Will (law)
A will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his/her estate and provides for the transfer of his/her property at death...

or codicil
Codicil (will)
A codicil is a document that amends, rather than replaces, a previously executed will. Amendments made by a codicil may add or revoke small provisions , or may completely change the majority, or all, of the gifts under the will...

sworn for that purpose), the testator can sometimes avoid such strictures.
Collective Investment Vehicles. Mutual funds, Hedge funds, Unit Trusts and SICAV
SICAV
A SICAV is an open-ended collective investment scheme common in Western Europe, especially Luxembourg, Switzerland, Italy, Spain, Belgium and France...

s 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
Derivative (finance)
A derivative instrument is a contract between two parties that specifies conditions—in particular, dates and the resulting values of the underlying variables—under which payments, or payoffs, are to be made between the parties.Under U.S...

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 needed 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
Joint venture
A joint venture is a business agreement in which parties agree to develop, for a finite time, a new entity and new assets by contributing equity. They exercise control over the enterprise and consequently share revenues, expenses and assets...

companies, either as a compromise neutral jurisdiction (see for example, TNK-BP
TNK-BP
TNK-BP is a major vertically integrated Russian oil company. It is Russia's third largest oil producer and among the ten largest private oil companies in the world. TNK-BP is Russia's third largest oil company in terms of reserves and crude oil production...

) 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
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

listing because of the underdevelopment of the corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...

in their home country often transfer shares into an offshore vehicle, and list the offshore vehicle. Offshore vehicles are listed on the NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...

, Alternative Investment Market
Alternative Investment Market
AIM is a sub-market of the London Stock Exchange, allowing smaller companies to float shares with a more flexible regulatory system than is applicable to the main market....

, the Hong Kong Stock Exchange
Hong Kong Stock Exchange
The Hong Kong Stock Exchange is a stock exchange located in Hong Kong. It is Asia's third largest stock exchange in terms of market capitalization behind the Tokyo Stock Exchange and the Shanghai Stock Exchange and fifth largest in the world...

and the Singapore Stock Exchange
Singapore Exchange
Singapore Exchange Limited is an investment holding company located in Singapore and providing different services related to securities and derivatives trading and others. SGX is a member of the World Federation of Exchanges and the Asian and Oceanian Stock Exchanges FederationSingapore 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.
Trade finance vehicles. Large corporate groups often form offshore companies, sometimes under an orphan structure
Orphan structure
An orphan structure is a financing term referring to a company whose shares are held by a trustee on a charitable purpose trust. The company is said to be an "orphan" as it is not beneficially owned by anyone....

to enable them to obtain financing (either from bond issues
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...

or by way of a syndicated loan
Syndicated loan
A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as arrangers....

) and to treat the financing as "off-balance-sheet
Off-balance-sheet
Off-balance sheet usually means an asset or debt or financing activity not on the company's balance sheet.Some companies may have significant amounts of off-balance sheet assets and liabilities. For example, financial institutions often offer asset management or brokerage services to their clients...

" under applicable accounting procedures. In relation to bond issues, offshore special purpose vehicles are often used in relation to asset-backed securities
Asset-backed security
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets. The pool of assets is typically a group of small and illiquid assets that are unable to be sold individually...

transactions (particularly securitisations
Securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation , to...

).

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.
Market manipulation. The Enron
Enron scandal
The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron Corporation, an American energy company based in Houston, Texas, and the dissolution of Arthur Andersen, which was one of the five largest audit and accountancy partnerships in the world...

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
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...

through not declaring gains made by offshore vehicles that they own. Multinationals including GlaxoSmithKline
GlaxoSmithKline
GlaxoSmithKline plc is a global pharmaceutical, biologics, vaccines and consumer healthcare company headquartered in London, United Kingdom...

and Sony
Sony
, commonly referred to as Sony, is a Japanese multinational conglomerate corporation headquartered in Minato, Tokyo, Japan and the world's fifth largest media conglomerate measured by revenues....

have been accused of transferring profits from the higher-tax jurisdictions in which they are made to zero-tax offshore centres.

Ship and aircraft registrations

Many offshore financial centres also provide registrations for ships (notably Bahamas and Panama

Panama

Panama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...

) or aircraft (notably Aruba

Aruba

Aruba is a 33 km-long island of the Lesser Antilles in the southern Caribbean Sea, located 27 km north of the coast of Venezuela and 130 km east of Guajira Peninsula...

, Bermuda

Bermuda

Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...

and the Cayman Islands

Cayman Islands

The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...

).

Aircraft are frequently registered in offshore jurisdictions where they are leased or purchased by carriers in emerging markets

Emerging markets

Emerging markets are nations with social or business activity in the process of rapid growth and industrialization. Based on data from 2006, there are around 28 emerging markets in the world . The economies of China and India are considered to be the largest...

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

Civil aviation

Civil aviation is one of two major categories of flying, representing all non-military aviation, both private and commercial. Most of the countries in the world are members of the International Civil Aviation Organization and work together to establish common standards and recommended practices...

, or because it feels the courts in that country would not cooperate fully if it needed to enforce any security interest

Security interest

A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...

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

Pakistan International Airlines

Pakistan International Airlines Corporation commonly known as PIA, is the flag carrier airline of Pakistan. The airline has its head office on the grounds of Jinnah International Airport in Karachi. and operates scheduled services to 24 domestic destinations and 38 international destinations in 27...

re-registered its entire fleet in the Cayman Islands as part of the financing of its purchase of eight new Boeing 777

Boeing 777

The Boeing 777 is a long-range, wide-body twin-engine jet airliner manufactured by Boeing Commercial Airplanes. It is the world's largest twinjet and is commonly referred to as the "Triple Seven". The aircraft has seating for over 300 passengers and has a range from , depending on model...

s; 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

A number of offshore jurisdictions promote the incorporation of captive insurance

Captive insurance

Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups, but they sometimes also insure risks of the group's customers as well...

companies within the jurisdiction to allow the sponsor to manage risk. In more sophisticated offshore insurance markets, onshore insurance

Insurance

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...

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

Reinsurance

Reinsurance is insurance that is purchased by an insurance company from another insurance company as a means of risk management...

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. There are also signs the primary insurance market is becoming increasingly focused upon Bermuda; in September 2006 Hiscox PLC

Hiscox

Hiscox Ltd. is a Bermuda-incorporated insurance provider, listed on the London Stock Exchange. An underwriter at Lloyd's of London, the company largely specialises in niche areas of the market, offering property and casualty insurance aimed at companies and high net worth individuals, as well as...

, the FTSE 250 insurance company announced that it planned to relocate to Bermuda citing tax and regulatory advantages.

Collective investment vehicles

Many offshore jurisdictions specialise in the formation of collective investment scheme

Collective investment scheme

A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...

s, or mutual funds

Collective investment scheme

A collective investment scheme is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group...

. The market leader is the Cayman Islands

Cayman Islands

, estimated to house about 75% of world’s hedge funds and nearly half the industry's estimated $1.1 trillion of assets under management

Assets under management

Assets under management is a financial term used denote the market value of funds being managed by a financial instutition on behalf of its clients, investors, depositors, etc. This metric is a sign of size and success against competition...

), followed by Bermuda

Bermuda

, although a market shift has meant that a number of hedge fund

Hedge fund

A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university...

s are now formed in the British Virgin Islands

British Virgin Islands

The Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...

. As at year end 2005, there were 7,106 hedge funds registered in the Cayman Islands, 2,372 hedge funds in the British Virgin Islands and 1,182 in Bermuda. These figures do not include other collective investment vehicles. See also the recent survey by Deloitte in Hedgeweek.

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

Leverage (finance)

In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...

which mutual funds can employ in their investment strategy. Many offshore jurisdictions (Bermuda

Bermuda

, British Virgin Islands

British Virgin Islands

, Cayman Islands

Cayman Islands

and Guernsey

Guernsey

Guernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet...

) allow promoters to incorporate segregated portfolio companies
Segregated portfolio company
A segregated portfolio company , sometimes referred to as a protected cell company, is a company which segregates the assets and liabilities of different classes of shares from each other and from the general assets of the SPC.Segregated portfolio assets comprise assets representing share capital,...

(or SPCs) for use as mutual funds; the unavailability of a similar corporate vehicle onshore has also helped fuel the growth of offshore incorporated funds.

Banking

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 bank

Offshore bank

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

s 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 licensed banks, the Bahamas has 301. By contrast, the British Virgin Islands

British Virgin Islands

only has seven licensed offshore banks.

List of main offshore financial centres

The list of jurisdictions considered by the IMF to be OFCs is published online. Many offshore financial centres are current or former British colonies

Colony

In politics and history, a colony is a territory under the immediate political control of a state. For colonies in antiquity, city-states would often found their own colonies. Some colonies were historically countries, while others were territories without definite statehood from their inception....

or Crown Dependencies

Crown dependency

The Crown Dependencies are British possessions of the Crown, as opposed to overseas territories of the United Kingdom. They comprise the Channel Island Bailiwicks of Jersey and Guernsey in the English Channel, and the Isle of Man in the Irish Sea....

, 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
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...

, which is market leader for captive insurance
Captive insurance
Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups, but they sometimes also insure risks of the group's customers as well...

, and also has a strong presence in offshore funds and aircraft registration.
British Virgin Islands
British Virgin Islands
The Virgin Islands, often called the British Virgin Islands , is a British overseas territory and overseas territory of the European Union, located in the Caribbean to the east of Puerto Rico. The islands make up part of the Virgin Islands archipelago, the remaining islands constituting the U.S...

, which has the largest number of offshore companies.
Cayman Islands
Cayman Islands
The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...

, which has the largest value of Assets under management
Assets under management
Assets under management is a financial term used denote the market value of funds being managed by a financial instutition on behalf of its clients, investors, depositors, etc. This metric is a sign of size and success against competition...

in offshore funds, and is also the strongest presence in the U.S. securitisation market.
Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...

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.
Luxembourg
Luxembourg
Luxembourg , officially the Grand Duchy of Luxembourg , is a landlocked country in western Europe, bordered by Belgium, France, and Germany. It has two principal regions: the Oesling in the North as part of the Ardennes massif, and the Gutland in the south...

, which is the market leader in Undertakings for Collective Investments in Transferable Securities
Undertakings for Collective Investments in Transferable Securities
The Undertakings for Collective Investment in Transferable Securities Directives and are a set of European Union Directives that aim to allow collective investment schemes to operate freely throughout the EU on the basis of a single authorisation from one member state...

(UCITS, pronounced YOU-sits) and is believed to be the largest offshore Eurobond
Eurobond
A Eurobond is an international bond that is denominated in a currency not native to the country where it is issued. It can be categorised according to the currency in which it is issued. London is one of the centers of the Eurobond market, but Eurobonds may be traded throughout the world - for...

issuer, although no official statistics confirm this.
Singapore
Singapore
Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

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.

The following 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.
Panama
Panama
Panama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...

, 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. Panama is now second only to the British Virgin Islands in volumes of incorporations.

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

Global Financial Centres Index

Reputation and standards of regulation vary across the range of offshore centres. The 2010 Global Financial Centres Index

Global Financial Centres Index

The Global Financial Centres Index is a ranking of the competitiveness of financial centres based on 26,629 financial centre assessments from an online questionnaire together with over 60 indices...

(GFCI) gathers data on all International Financial Centres and lists the following (all British

United Kingdom

The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

sovereign territories), in order, as the world's five leading offshore finance centres:

Jersey
Jersey
Jersey, officially the Bailiwick of Jersey is a British Crown Dependency off the coast of Normandy, France. As well as the island of Jersey itself, the bailiwick includes two groups of small islands that are no longer permanently inhabited, the Minquiers and Écréhous, and the Pierres de Lecq and...
Guernsey
Guernsey
Guernsey, officially the Bailiwick of Guernsey is a British Crown dependency in the English Channel off the coast of Normandy.The Bailiwick, as a governing entity, embraces not only all 10 parishes on the Island of Guernsey, but also the islands of Herm, Jethou, Burhou, and Lihou and their islet...
Isle of Man
Isle of Man
The Isle of Man , otherwise known simply as Mann , is a self-governing British Crown Dependency, located in the Irish Sea between the islands of Great Britain and Ireland, within the British Isles. The head of state is Queen Elizabeth II, who holds the title of Lord of Mann. The Lord of Mann is...
Bermuda
Bermuda
Bermuda is a British overseas territory in the North Atlantic Ocean. Located off the east coast of the United States, its nearest landmass is Cape Hatteras, North Carolina, about to the west-northwest. It is about south of Halifax, Nova Scotia, Canada, and northeast of Miami, Florida...
Cayman Islands
Cayman Islands
The Cayman Islands is a British Overseas Territory and overseas territory of the European Union located in the western Caribbean Sea. The territory comprises the three islands of Grand Cayman, Cayman Brac, and Little Cayman, located south of Cuba and northwest of Jamaica...

In December 2009 a group of professional services firms and businesses with offices in the GFCI's leading offshore financial centres, established the International Financial Centres Forum (IFC Forum). According to its website, the IFC Forum aims to provide authoritative and balanced information about the role of the small international financial centres in the global economy.

EU withholding tax

The European Union

European Union

The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

has recently made a large number of offshore financial centres (Barbados

Barbados

Barbados is an island country in the Lesser Antilles. It is in length and as much as in width, amounting to . It is situated in the western area of the North Atlantic and 100 kilometres east of the Windward Islands and the Caribbean Sea; therein, it is about east of the islands of Saint...

and Bermuda

Bermuda

being the notable exceptions) sign up to the European Union withholding tax

European Union withholding tax

The so-called European Union withholding tax is a withholding tax which is deducted from interest earned by European Union residents on their investments made in another member state, by the state in which the investment is held....

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

Withholding tax

Withholding tax, also called retention tax, is a government requirement for the payer of an item of income to withhold or deduct tax from the payment, and pay that tax to the government. In most jurisdictions, withholding tax applies to employment income. Many jurisdictions also require...

(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

Singapore

Singapore , officially the Republic of Singapore, is a Southeast Asian city-state off the southern tip of the Malay Peninsula, north of the equator. An island country made up of 63 islands, it is separated from Malaysia by the Straits of Johor to its north and from Indonesia's Riau Islands by the...

refused to sign up to the directive. On implementation, the directive recouped far less money than anticipated, although it is disputed whether this is because the regulations lacked effectiveness, or because the predicted amount of funds in offshore bank accounts

Offshore bank

transpired to have been greatly exaggerated. Similarly, the widely predicted capital flight to Hong Kong and Singapore appears not to have materialised.

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 haven

Tax haven

A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and a low corruption rate....

s 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

2009 G-20 London summit

The 2009 G-20 London Summit is the second meeting of the G-20 heads of state in discussion of financial markets and the world economy, which was held in London on 2 April 2009 at the ExCeL Exhibition Centre. It followed the first G-20 Leaders Summit on Financial Markets and the World Economy, which...

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.

External links

International Financial Centres Forum (IFC Forum)
The Economist survey on offshore financial centres
IMF's 2000 report on OFCs
Lax Little Islands by David Cay Johnston, The Nation, May 13, 2009

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