Offshore banking provides financial advantages for the depositor as the system allows one to open a bank account outside the country of their residence. This gives the person low tax jurisdiction and gives him or her security as well.
The system also gives the depositor many legal compensations such as greater privacy, a trouble-free access to deposit account, a less restraining legal regulation, and protection against government plans to seize or freeze the account holder’s financial assets.
Meanwhile, offshore banking has been linked to many subversive activities such as organized crime, underground economy, money laundering, and tax evasion. Many corrupt government officials have been said to stock their money to offshore banks to prevent their ill-gotten wealth from being discovered by their constituents.
This kind of banking system requires depositors to pay for personal income tax on interest. But in some cases, the bank does not subject the person from this, for example, when the personal income tax of many countries has no difference between interest earned in local banks and those from abroad.
Tax authorities do not have legal jurisdiction over offshore banks as the latter is protected by the bank secrecy, a principle born with the 1934 Swiss Banking Act. This means that offshore banks do not have legal obligation to report income tax to authorities. This is where some of the disadvantages of this system are rooted, as this may be used for funding terrorist groups, crime-syndicates, and other subversive activities. But still, this system is a legitimate financial exercise that protects the assets of expatriates and international workers.
Most people from developing nations seek offshore banking as this provides protection against political and economic turmoil experienced in their countries. For people who fear that their assets may be seized and frozen by their local government, offshore banking gives security to their accounts and also provides them a financial haven. Meanwhile, developed nations with secured and regulated banking systems offer the same stability as offshore banking provides.
Offshore finance also helps developing countries as it provides great source of money to fund economic programs and government projects. Another great advantage of this banking system is that it can help redistribute world finance from developed counties to developing nations.
Economic pundits believe that offshore banking contributes to as much as half of the world’s capital flows, making this one of the most important components of the international financial system.
The two most popular offshore banking havens are Switzerland and Cayman Islands, although there are many rising banking centers that are fast becoming well-known such as Guernsey, Jersey, and Isle of Man. These three are reputed for having one of the most outstanding and well regulated banking systems.
Due to the increase of terrorist attacks and other subversive undertakings, there have been initiatives to increase transparency to offshore banking system. Examples of these are the enforcement of a tighter money-laundering law and the treaty between two jurisdictions where sharing of information is made legal.
