1. COURSE CODE AND TITLE CODE: PBBF304 TITLE: OFFSHORE PRACTICE AND ADMINSTRATION

2. DEFINITION OF OFFSHORE SERVICE There is no consensus among scholars and practitioners on what constitutes an Offshore Financial Centre, even though various attempts have been made to define OFCs, since they started to have an impact on international financial markets in the early 1970s.

3. DEFINITION OF OFF SHORE FINANCIAL CENTERS Many different terms have been used to imply the same concepts. They include International Financial Centre (IFC), International Banking Centre (IBC), International Banking Facilities (IBFs), and Offshore Banking Centre. All these terms broadly refer to the same concept of Offshore Financial Centre.

4. An International Monetary Fund (IMF) background paper on offshore financial centres, prepared in June 2000, explains that offshore centres are usually jurisdictions that: have relatively large numbers of financial institutions engaged primarily in business with non-residents, and have factors such as low or zero taxation, moderate or light regulation, banking secrecy or anonymity.

5. DEFINITION OF OFF SHORE FINANCIAL CENTERS International financial centres (IFCs) are countries and territories with low tax rates and other features that make them attractive investment locations.(The Society of Trust and Estate Practitioners, 2009) They are also considered as localities that provides financial services (usually in currencies other than that used domestically) primarily to non-residents, for whom it offers a favourable tax regime.

6. DEFINITION OF OFF SHORE FINANCIAL CENTERS They offer an environment which isolates the financial service providers from the constraints that might arise in "onshore" financial centres. Onshore centres may have rules that are considered by service providers and their customers as too demanding, tax policies that are too restrictive, disclosure requirements that are too extensive, or overall costs that are simply too high. Successful OFCs will generally have legal, regulatory and tax structures that avoid these "problems",

7. DEFINITION OF OFF SHORE FINANCIAL CENTERS Initially they are perceived as small island states with low population and high per capita income and has legislation that creates highly favourable environment for the development of a financial service sector, which far exceeds what would have evolved naturally to meet domestic needs.

8. DEFINITION OF OFF SHORE FINANCIAL CENTERS Currently OFCs also include those financial markets that have developed naturally on the back of their long standing quality services, for example, of the provision of goods and services for foreign trade and related activities or due to their strategic location Example are the City of London, Labuan Offshore Financial Centre in Malaysia, the Dubai International Financial Centre in the United Arab Emirates, Singapore and others

9. DEFINITION OF OFF SHORE FINANCIAL CENTERS In short the term is applied to business transactions mostly carried out from a jurisdiction outside the residence of the clients who initiated the transaction and that jurisdictions chosen usually have low tax rate and use different currencies.

10. categories of offshore financial centres They have been largely put into two. Namely: The operational centres and booking centres. The operational centres are also subdivided into two:primary financial centres and secondary financial centres (or regional financial centres)

11. categories of offshore financial centres Operational centre: They are the well developed and most experienced financial centres where actual financial businesses are conducted. They have well developed infrastructures and strict regulatory guidelines for the protection of all parties. E.g. London, New York, Japan, Singapore and Bahamas. It is further divided into two: Primary and secondary( regional) centres

12. categories of offshore financial centres The Primary centres: They are operational centres which are intermediary for the exchange of world capital. They are the most developed offshore centres where though uses and sources of funds are located worldwide, but their major suppliers and users are the developed countries and international bodies like IMF and World bank They offer wide range of financial services. E.g. London, New York and Japan.

13. categories of offshore financial centres The secondary centres: Secondary financial centers, like primary centers are also operational centres, have developed financial markets and infrastructure. However, unlike primary centers, they have relatively small domestic economies and their main role is to intermediate funds in and out of its own geographical area. secondary centers can be subdivided into two groups: funding centers and collection centers.

14. categories of offshore financial centres The funding centers: Funding centers are centers in which offshore banks import capital and are the primary source of funds in the local economy. They therefore channel funds from the outside the local market areas. In Panama for example most local projects are financed by the offshore banks located there. E.g. Singapore and Panama

15. categories of offshore financial centres The collection centres: Collection centers are countries such as Bahrain that generate excess savings for export. The excess of savings is the result of low absorptive capacity and accumulated gain from the collections

16. categories of offshore financial centres B. The booking Centres: They are centres which do not engaged in actual financial transactions but the sources and uses of funds of the international companies are primarily conducted in other jurisdictions but are recorded locally for accounting purposes by the booking centres. In addition, international companies are typically not allowed to conduct business with residents or local companies. They are largely developing countries that derived their roles mainly from their geographical proximity to the economies of with huge financial resources or sizable financial demands.

17. categories of offshore financial centres They may also be tax haven that levies no or low taxes on profits from foreign activity and offers special tax privileges to all foreigners and foreign businesses. In addition to the tax benefits received, international companies incorporate in booking centers to benefit from the light regulatory standards of these jurisdictions. E.g. Panama and Cayman Island

18. Countries, Territories, and Jurisdictions with Offshore Financial Centres AFRICA: Djibouti, Liberia (J) Mauritius (OG) (FSF) Seychelles (FSF) Tangier ASIA AND PACIFIC Cook Islands, Guam, Hong Kong, Japan1 Labuan, Malaysia, Macao, Marianas Marshall Islands, Micronesia Nauru, Niue, Philippines, Singapore, Tahiti, Thailand, Vanuatu, Western Samoa

19. EUROPE: Andorra, Campione, Cyprus, Dublin, Ireland, Gibraltar. Liechtenstein London, U.K. Luxembourg (FSF) Madeira Malta (OG) (FSF) Guernsey (OG) (FSF) Isle of Man (OG) (FSF) Jersey (OG) (FSF) Monaco (FSF) Netherlands Switzerland (FSF)

20. MIDDLE EAST: Bahrain (J) (OG) (FSF) Israel Lebanon (J) (OG) (FSF) WESTERN HEMISPHERE Anguilla (FSF) Antigua (FSF) Aruba (J) (OG) (FSF) Bahamas (J) (OG) (FSF) Barbados (J) (OG) (FSF) Belize (FSF), Bermuda (J) (OG) (FSF), British Virgin Islands (FSF) Cayman Islands (J) (OG) (FSF)

21. United States4, Uruguay, West Indies (UK) (J)5 Costa Rica (FSF) Dominica Grenada Montserrat Netherlands Antilles (J)(OG) (FSF) Panama (J) (OG) (FSF) Puerto Rico St. Kitts and Nevis (FSF)St. Lucia (FSF) St. Vincent and Grenadines (FSF) Turks and Caicos

22. Source: IMF Working Paper WP/99/5. 2 Legend: (J) = Joint BIS-IMF-OECD-World Bank Statistics on External Debt (OG) = Offshore Group of Banking Supervisors (FSF) = Financial Stability Forum’s Working Group on Offshore Financial Centres 1. Japanese Offshore Market (JOM) 2. Asian Currency Units (ACUs) 3. Bangkok International Banking Facilities (BIBF) 4. US international Banking Facilities (IBF) 5. Includes Virgin Islands, Anguilla, and Monserat

23. CHARACTERISTICS OF OFCS (i) Their primary orientation of business is toward non-residents; (ii) They have favourable regulatory environment (low supervisory requirements and minimal information disclosure/secrecy or anonymity in financial dealings.); (iii) They have low-or zero-taxation schemes. iv) They benefit from good governance v) They have reasonable political and economic stability

24. CHARACTERISTICS OF OFCS (vi) They deal in multiple currencies that are not the currency of the country where the centre is located.

25. CRITERIA FOR CHOOSING OFFSHORE FINANCIAL CENTERS A more convenient fiscal regime with lower explicit taxation and increased net profit margins. Convenient regulatory frameworks that reduce implicit taxation. Cost: Minimum formalities for incorporation and provision of financial service. Adequate legal frameworks that safeguard the integrity of principal-agent relations ( reputation of the centre/ confidentiality) Proximity to major financial centres Must have different experts like Layers, Chartered accountants etc. that offer qualified and efficient varied services. Complete freedom from exchange controls- cash or other assets can be transfer from the OFC legal

26. CRITERIA FOR CHOOSING OFFSHORE FINANCIAL CENTERS Language- advisable for the client or advisor to use the common language as the OSFC Same time zone Favourable climate Clear and precise laws governing both domestics and international issues.

27. Financial services provided by offshore financial centres Banking services; trustee services; company incorporation and management; Investment management; pension funds; ship registration and ship management; investment vehicles

28. Advantages of offshore financial centers/ 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. Offer higher returns on investments: Some offshore banks may operate with a lower cost base and can provide higher interest rate than the legal rate in the home country due to lower overheads and a lack of government intervention as 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.

29. Offer special services: Some offshore banks offer financial 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.

30. They may be formed as a subsidiary of a domestic or international bank to accept deposits outside the controlled environment, particularly foreign currency deposits. This because such Offshore Banks are created by corporate groups to handle external borrowing or to consolidate inter-group finance or banking transactions. Some corporations involved in international trade also use Offshore Banks as foreign or multi-currency management centres They may also be set up to undertake booking transactions which do not fall within the domestic jurisdiction such as large internationally syndicated loans particularly where the participating banks are located in various jurisdictions.

31. They also offer flexible loans, which have low interest payments to their clients. They offer greater protection for assets due to the flexible regulation in such business environments.

32. THE ROLE OF OFCs IN DEVELOPMENT OF INTERNATIONAL FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT improving the potential profitability of business operations: IFCs contribute to economic activity by improving the potential profitability of business operations elsewhere. As a result, for a typical American firm, a 1 percent greater likelihood of establishing an IFC affiliate is associated with a 0.5-0.7 percent greater sales and investment growth in the same region in countries other than IFCs.

33. Promotes domestic investments: Furthermore, foreign investment stimulated by IFCs also appears to encourage greater domestic investment: the American evidence is that 10 percent greater foreign capital investment triggers 2.6 percent additional domestic capital investment, and that 10 percent greater foreign

34. Strengthens the financial markets in the regions in which they are located: Other evidence indicates that the financial services offered in IFCs contribute to the competitiveness of financial markets in the regions in which they are located. Commercial banks in countries with nearby IFCs have lower interest rate spreads than do other countries, and their banking sectors are less concentrated, as reflected in lower market shares for the five largest banks.

35. Ready funds for domestic industries. By every measure credit is more freely available in countries proximate to IFCs, reflecting the degree of banking competition and the resulting stability of their financial architectures. The low tax rates available in IFCs contribute to a form of tax competition that is likely to contribute to the efficiency of tax policies. By fostering this type of competition, IFCs are very likely to enhance the ability of other countries to operate their tax systems efficiently

36. Improves the human resource base of countries: OFCs contribute to the development of knowledge and skills as in the case Mauritius where there has been significant rise in the business of accountants, lawyers, chartered secretaries among others. This may be due to direct interaction between the offshore and onshore centres or the need to improve their skills to meet the competition from the offshore centres Diversify the economy create employment

37. Limitations /Disadvantages of offshore banking 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.

38. Offshore banking has been associated in the past with the underground economy and organize crime, through money laundering. 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.

39. An important issue that is usually raised is the likelihood that the lower cost of financial services is achieved through sub-standard regulation and supervision rather than positive competition and innovation. Increased exposures to liquidity, foreign exchange and credit risks, and had systemic effects on the financial systems of the countries concerned. This is because in countries where there is weak onshore supervisions of the OFCs permits the exploitation of regulatory arbitrage offered if not properly controlled can increased exposures to liquidity, foreign exchange and credit risks.

40. Also, some OFCs through the transfer of assets and liabilities between offshore establishment and parent banks onshore. In Asia e.g., regulatory and fiscal advantages as well as lower borrowing costs, offered in some OFCs induced many Asian banks and corporations to tap international capital markets through offshore establishments. The Large, undetected, and poorly accounted for offshore funds contributed to credit expansion in the region which led to increased exposures to liquidity, foreign exchange and credit risks, and had systemic effects on the financial systems of the countries concerned.

41. OFCS erode tax collections, divert economic activity, and otherwise burden nearby high- tax countries. The developing world is denied the capital resources it needs to establish stable, self supporting democracies. Though 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 exploit the tax benefit due the developing ones.

42. WEEK 3 :OFFSHORE BANKING SERVICES OVERVIEW OF OFFSHORE BANKING Offshore banking centre is an international market where foreign currencies are deposited and lent but are not subject to normal regulations. It is an attempt to bypass domestic regulation controls and take advantages of more liberal banking supervisory regimes. It emerged as a result of the anomalies that exist from the regulations of domestic markets.

43. What is offshore banking? There is no standard definition for offshore banking, but is often used to mean having a banking transactions in a location outside the country one is residing in. This location is usually a low tax jurisdiction - and a place where ones money will be secured. An offshore bank is therefore 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.

44. What makes offshore banking centres attractive to clients They guarantee greater privacy or bank secrecy, a principle born with the 1934 Swiss Banking Act. They are tax heavens -places that create legislation designed to assist persons – real or legal – to avoid the regulatory obligations imposed upon them in the place where they undertake the substance of their economic transactions.

45. What makes offshore banking centres attractive to clients They offer easy access to deposits (at least in terms of regulation there exist less stringent regulations) They offer guarantee of protection against local, political, or financial instability They offer low cost services – low interest on loans Offer higher returns on capital

46. Types of offshore banking services Nature of serviceproducts 1. Deposit and payment services cheque book a/cs; Savings a/c; investments a/c; term deposit a/cs Standing orders Direct debit/ credit

47. Types of offshore banking services 2. Customer Loans Home mortgages Personal loans Personal overdraft

48. Types of offshore banking services 3. Commercial loans : i overdraft; Term loans; ii) Project financing iii) Leasing- operating lease or financial lease; (iv)Factoring- factor organization managing the debt of a client for a fee. It consist of three activities : (a) Administration of clients invoicing, sales a/c and debt collections (b) Credit protection involving the purchase of the company’s debt (c) Factor finance( provision of monetary support for a short period

49. Types of offshore banking services 4.Merchant banking: ( i) security underwriting (ii) Private placement (iii)Broking/ marking of securities (iv) Mergers and acquisitions 5. International trade service : (i)Foreign exchange and fund transfer (ii) risk management services- swaps, forwards etc.

50. Offshore banking in Ghana Overview: The Government of Ghana introduced the concept of offshore banking as a strategy to develop its financial sector, with a view to making Ghana a gateway to financial services in West Africa and linking the Ghanaian economy to global markets.

51. Overview of offshore banking in Ghana In view of this, the Parliament of Ghana in 2007 passed an amendment to the banking Act, 2004 (Act 673) paving the way for the establishment of offshore banking in Ghana Before then, Barclays Bank Ghana Limited (BBG) in 2005, signed a Memorandum of Understanding (MoU) with the Government of Ghana to set up the International Financial Services Centre of Ghana In 2006, BBG and government agreed to set up Offshore Banking sector in Ghana.

52. The suppose purpose The purpose is to provide banking services in Ghana to nonresident customers, create a portfolio of investment products in an environment of low or no taxation, high confidentiality and security. To attract direct foreign investments

53. The suppose purpose To generate both interest and fee income from non-resident customers. To attract investments from the Diaspora and the African sub-region. To attract funding for the domestic market from offshore clients.

54. Prospects and Benefits of offshore banking to the Ghanaian economy The attraction of foreign deposits in foreign currencies. This will help to provide more lending solutions to Ghana’s private sector so as to help generate employment and create wealth. The sector will contribute to the development of knowledge and skills as in the case Mauritius where there has been significant rise in the business of accountants, lawyers, chartered secretaries among others.

55. It will also promote tourism as more international visitors are likely to come to the country. It will also support enormous financial activities and impact positively on other sectors and challenge institutions within the economy. Institutions such as the tax authorities, the Registrar of Companies, the Insurance Commission, and the Securities Exchange Commission among others stand to benefit enormously from the operations of offshore banks.

56. It will also strengthen the financial system. Competition will lead to more realistic interest charges, improved service delivery, improve technology, consumer tailored products.

57. Channel of influence between offshore banks and onshore banking institutions upgrade of human skills through former employees of the offshore banks taking appointments in the inshore banks: Through the interaction of offshore bank units with domestic banks, the management capability of the latter can be influenced effectively, hence, a more effective transfer of banking technology. Sometimes this is accomplished because the former employees of the offshore units through their careers find new jobs in the traditional domestic banks.

58. Channel of influence between offshore banks and onshore banking institutions Competition: Sometimes the domestic banks will look towards the managerial pools already trained in the offshore and foreign branch banks in order to improve their own competitive edge. In this sense, the foreign banks will provide substantial side benefits to the economy through their training of domestic bankers.

59. Channel of influence between offshore banks and onshore banking institutions Through direct dealing: The offshore banks may have to deal directly with local financial institutions by making available some onshore loans for the foreign exchange requirements of the latter’s clientele. In the case of Ghana, this activity is restricted to banks with general banking license. They may also do so directly to service the foreign currency needs of domestic enterprises.

60. Supervision and Regulation of offshore banking operations WHY REGULATION? Any financial system that is not effectively regulated runs the risk of creating weak financial institutions. To promote effective risk management systems in banks. To promote good corporate governance practices. To prevent crimes like money laundering and other related crimes e.g Following September 11, 2001 attack, there have been many calls for more regulation on international finance.

61. Who regulates? The local regulatory body in the offshore financial centres. In the 21st century, regulation of offshore banking has been on the increase, 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).

62. NATURE OF REGULATION They must report at least quarterly to the regulator on the current state of the business. Banks are generally required to maintain capital adequacy in accordance with international standards. Must be licenced and the type of licence determines the type of offshore banking service to offer. The licence is subject to review.

63. TYPES OF OFFSHORE BANKING LICENCE Domestic unrestricted licences: These are usually issued to branches of internationally recognised banks which allows them to undertake any type of banking business. There is no restriction on the type of service to offer. In Ghana the Banking Amendment Act 2007 (Act 738) of the Banking Act of 2004 have it as Class I banking licence which allows the holder to conduct banking business currently classified as universal banking.

64. Domestic restricted licence: It allows the holder to deal in banking business only with clients who are non – residence. In Ghana it is known as Class II banking licence allows the holder to conduct banking business or investment banking business with non-residents and other class II bank licence holders in currencies other than the Ghanaian currency except to the extent permitted by the Bank of Ghana for trading on the foreign exchange market of Ghana and investment in money market instruments.

65. NATURE OF REGULATION cont’d Offshore managed bank licence: It is usually issued to manage banks who has restricted activities in the offshore centre and are under the management of an approved bank which will usually have to be an unrestricted domestic licence holder. Such banks are not allowed to employ staff but have to operate from the premises of the approved manager.

66. NATURE OF REGULATION cont’d Bankers are required to report any suspicious crime: 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.

67. NATURE OF REGULATION cont’d 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.