Offshore Financial Centers
An offshore financial centre (or OFC), although not precisely defined, is 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.
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.
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 often been seen as venues for laundering the proceeds of illicit activity. However, following a move towards transparency during the 2000s, some now argue that offshore jurisdictions 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, 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.
Some commentators have expressed concern that the differing levels of sophistication between offshore financial centres will lead to regulatory arbitrage, 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, Undue Diligence, found that kleptocrats used French banks rather than offshore accounts as destinations for plundered funds.
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. 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.