Offshore banking has always been surrounded with an aura of mysticism with rich and often criminal people hiding their assets on a far away island where no taxes are being paid. The media is full of stories where
offshore banking and criminality are tightly associated and in the movies it is always the bad guys who are using offshore accounts. For a bad cause of course. Personally, I cannot remember one single movie where the good guys where the ones using an
offshore company or an offshore bank account.
But is this a correct description of offshore banking? Is offshore banking really that bad?
The definition of offshore banking and an offshore bank
The term 'offshore banking’ originates from Europe and the Channel Islands; a couple of islands that are situated in the English Channel between England and France. The Channel Islands were by definition ‘offshore’ from England and the rest of the United Kingdom. In the beginning the term offshore had nothing to do with taxes, it was simply a description of something that geographically was not situated on the main land of UK and an offshore bank was a bank being situated ‘offshore’ on the Channel Islands.
An offshore bank can simply be defined as a bank located outside the country and jurisdiction of residence of the depositor. By definition a Spanish citizen living in Spain but having his or her saving on an account in Portugal is managing his or her savings offshore.
However, this definition cannot be said to be the common one. The common definition does include other requisites as well. Even though there are several definitions of offshore banking the following should probably be accepted by most people working in the offshore banking industry.
An offshore bank can generally be defined as a bank that:
- is located in a jurisdiction outside the jurisdiction of residence of the depositor,
- the jurisdiction where the bank is located is a low tax jurisdiction, and
- the jurisdiction where the bank is located does have strong secrecy laws.
Is offshore banking really that bad?
By definition there is nothing illegal or bad with offshore banking or an offshore bank. As stated above an offshore bank is simply a bank that is located in a low tax jurisdiction with strong secrecy laws outside the jurisdiction of residence of the depositor.
Taking measures in order to avoiding paying taxes is not a crime as long as it is done in accordance with the applicable tax laws. Often the term offshore tax avoidance is used for describing dispositions that are within the limits of the law in order to diminish or completely avoid paying taxes while the term tax evasion is used to describe dispositions that are outside of the law and regarded as a criminal offence.
The fact that there are bank in jurisdictions with no taxes and strong secrecy laws will of course lead to that there are people using these jurisdictions in order to illegally avoid paying taxes but also in order to commit money laundering.
But even though that offshore banks are used in illegal activities it must be remembered that of all the bank transactions taking place offshore it is only a very, very small fraction that can be considered being associated with criminal activities. The vast majority of transactions is completely legal and plays an important role in the global economy.
When watching Hollywood movies and even reading the newspapers it is easy to believe that offshore bank accounts are being held only by drug barons, terrorists, tax evaders and other criminals. Nothing could be further from the truth; offshore banking and offshore bank accounts are being used by anyone from most of the companies on the Fortune 500 list to small business owners and expats that have moved abroad in order to enjoy their retirement.
Thus, offshore banking cannot be considered as something 'bad'. It has existed for a long time and plays an important role in the global economy and the global growth. Offshore banking facilitates international business and money transactions and is also giving good and necessary competition to the 'non-offshore' banking systems that definitely needs more competition, not less.
When discussing offshore banking and criminal activities the focus should be on the criminal activities and not on offshore banking in general. Offshore banking and offshore banks are here to stay and will continue to play an important and vital role in the global economy.
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The author Robert Pavlik has been working as a business lawyer since the mid 80s. He is specialized in offshore solutions with focus on
offshore banking and
offshore company formations. He continuously writes legal articles for different magazines and other publications around the world.
