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OBJECTIVES
The term ‘offshore’ financial centers and their rationale
Types of offshore financial centers
Benefits of these centers
Reasons for their growth and ingredients of their success
Main financial centers
Problems of regulation
INTRODUCTION
The term ‘offshore’ conjures before the mind’s eye the image of sun, salty, seas,
sand, sea shells and ships. However the expression has acquired its own special
meaning in the world of finance. People who moved their residence or their
business affairs from some political land mass to a nearby tax efficient base were
usually moving to the nearest convenient ‘haven’ with reach. It was literally
offshore – the British to the channel island, the Americans to the Bahamas, the
Chinese to Hong Kong and the Australians to the New Hebrides. In time, however
the term acquired a wider significant and was used to apply to any centers where
international business may be done in favorable, congenial, hospitable tax and
regulatory climate. This may be an onshore independent state within a state, e.g.
Liberia, panama, but it may also be a state within a state- usually a situation where
a country allows international business to be conducted free from the burden of its
own official regulation taxation and controls over the portfolio decision of banking
units. For example, non- resident companies may operate in jersey free from
jersey’s own income tax, and in number of countries it is possible for overseas
nationals to conduct business in a way which is reasonably free from local fiscal
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legislation. Indeed, it is argued that the UK is one of the best ‘offshore centers’ the
world because there is more international business conducted there, untrammeled
by British taxation or other restrictions.
RATIONALE
Offshore financial centers exist primarily to facilitate international transfer
of funds in a business environment supportive of that goal. The tend to enjoy the
funds in a business environment supportive of that goal. They tend to enjoy the
following advantage over other banking centers, a regulatory climate in the
following advantage over other banking centers, a regulatory climate in which
controls are lax enough to permit the unrestrained transfer of capital among non-
resident, minimal taxation and relatively small reserve requirements. Historically
those offshore centers that have been most successful have benefited from the
political stability of host countries and from flexible regulatory policies that permit
easy adaptation to new circumstances. They are most frequently and most
productively used for funding syndication, booking and administering loans. They
are also employed to a lesser extent, for the management of non-resident tax
sheltered trusts. Though some host governments have allowed hybrids cases of
permitting unrestricted banking activity, in most instances, offshore centers are
limited to international transactions and are barred from participating in the host
country’s economy. The distinctive characteristics of offshore centers is that it
provides an intermediate service for foreign borrowers and lenders takes place
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outside the centre’s own financial market, the service provided is one of external
financial intermediation.
CHARACTERISTICS
The offshore financial centers include markets where one or more of the foll
characteristics prevail:
I. There is large foreign currency market for deposits and loans (e.g. London)
II. The market is a large supplier of funds to the world markets (e.g.
Switzerland)
III. The market is an intermediary or pass through for international loan funds
(e.g. Bahamas, Cayman islands)
IV. The market may offer tax-breaks
In the past financial centers grew in countries whose stage of development
permitted them to be net supplier of capital, viz., net capital exporters. In
contrast international financial centers offer their financial institution and
expertise to the international community to both import and export of capital,
that is, they act as entrepot financial centers. such a centre can be a net capital
exporter or a net capital importer – the important feature is that the instructions
and regulations enable and encourage foreign investors and borrowers to
participate in their financial markets.
TYPES OF OFFSHORE FINANCIL CENTRES
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There are broadly two types of offshore financial centers: functional centers;
and paper centers.
1. Functional centers
Functional centers are those where actual deals are stuck with
customers in respect of the obtaining of deposit and negotiations of loans.
Markets exist for bank to borrow and lend deposits to other banks and to
issue certificates of deposits. Among the functional or fully operational
centers a distinction exists between international and regional financial
centers. International centers cater to regions extending far beyond the
boundaries of the country or areas in which the centers is located and
they cater to the financial needs of customer world wide. On the other
hand, regional financial centers derive their role primarily from a
combination of geographical proximity to countries in which customers
operate and the safety and ease of operations of subsidiaries, branches
and agencies of foreign banks whose head offices lie in international
financial centre’s, In other words they are hosts of foreign financial
institutions that find it convenient to locate offices there than becoming
magnets of financial power in their own right, attracting foreign
enterprises to establish subsidiaries in order to obtain a piece of action.
Although the distinction is now far less, clear-cut, London, New York
and Paris are truly international financial centers and magnets, whereas
Singapore and Hong Kong began as regional financial centre.
2. Paper centers
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Paper centers- also know as ’booking’, ’shell’, ‘routing’ centers are
locations where transactions are legally booked but they are really a set
of ledgers maintained an agent, the intermediation occurs elsewhere. A
booking financial centre serves as a location of record keeping and there
is no or very little actual banking activity. Branches of US banks in
Caribbean and Bahamas are prominent example. For many US banks
without full-service branches in London and other financial centers, such
locations offer low cost access to Eurocurrency system.
Difference between functional centers and tax heavens
Functional centers Tax heavens
a. Physical presence
b. Less sensitive to local taxes
c. One centre is not a substitute for
another
d. Operations cannot come to
sudden end if incentives
withdrawn
e. Segmentation of country
necessary
Name plates
Highly sensitive
All centers substitutes for one
another
Operations would come to
sudden end
Segmentation not necessary
since no distinction
AN ALTERNATIVE TAXANOMY – THREE CATEGORIES
OF OFFCENTRE CENTRES
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Offshore banking
Because of the ability of offshore centers to attract huge resources and
to provide huge credit internationally, offshore banking has acquired a
special meaning in international finance. Offshore banking today
encompasses the following activities
1) Borrowing funds from major Eurocurrency markets and investing
the same in other countries.
2) Providing the whole sale banking like syndicated loans, project
loans and such other large loans to multinational corporations and
banks
3) Providing merchant banking activities for arranging external funds
by issuing foreign currency bonds and equities
As these activities provide good opportunities for income and many
countries are developing centers for offshore banking activities and these places
are called offshore banking centers.
An offshore banking centers can be defined as a place where the government
of the country makes deliberate attempt to develop international banking centres by
giving a number of concessions. Such concessions’ which attracts international
banks to open offshore banking branches in those places are generally the
following
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a) The deposits accepted are made free from CRR/SLR requirement
though the domestic banking is subjected to the same.
b) Interest on these deposits are exempted from income Tax and
withholding tax.
c) The profit made by banks out of their offshore banking activity I
exempted from income tax or charged at a very low rate
d) The interest rate on deposits and advances are completely deregulated
and left to discretion of banks
e) The licensing of policy for opening such branches are made liberal
and the licensing fee is stipulated at a very low level
f) Communication and information technology of international standard
is provided to reach any where in fraction of seconds
g) In some cases providing complete secrecy and confidentiality of
transactions and non-interference of government and other regulatory
authorities
h) Providing very liberal exchange control regulations
i) Providing a fair and efficient legal system as is essential for any trade
j) Providing and encouraging skilled and good English speaking staff
An offshore bank is 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. These advantages typically include :
greater privacy (see also bank secrecy, a principle born with the 1934 Swiss
Banking Act)
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low or no taxation (i.e. tax havens)
easy access to deposits (at least in terms of regulation)
protection against local political or financial instability
Offshore banking has often been associated with the underground economy and
organized crime, via tax evasion and money laundering; however, legally, offshore
banking does not prevent assets from being subject to personal income tax on
interest. Except for certain persons who meet fairly complex requirements[1], the
personal income tax of many countriesmakes no distinction between interest
earned in local banks and those earned abroad. Persons subject to US income tax,
for example, are required to declare on penalty of perjury, any offshore bank
accounts—which may or may not be numbered bank accounts—they may have.
Although offshore banks may decide not to report income to other tax authorities,
and have no legal obligation to do so as they are protected by bank secrecy, this
does not make the non-declaration of the income by the tax-payer or the evasion of
the tax on that income legal. Following September 11, 2001, there have been many
calls for more regulation on international finance, in particular concerning offshore
banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg,
being possible crossroads for major illegal money flows.
Defenders of offshore banking have criticised these attempts at regulation. They
claim the process is prompted, not by security and financial concerns, but by the
desire of domestic banks and tax agencies to access the money held in offshore
accounts. They cite the fact that offshore banking offers a competitive threat to the
banking and taxation systems in developed countries, suggesting that Organisation
for Economic Co-operation and Development (OECD) countries are trying to
stamp out competition.
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Advantages of offshore 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 (see the corralito for example, during the 2001
Argentine economic crisis). However, developed countries with regulated
banking systems offer the same advantages in terms of stability.
Some offshore banks may operate with a lower cost base and can provide
higher interest rates than the legal rate in the home country due to lower
overheads and a lack of government intervention. Advocates of offshore
banking often characterise government regulation as a form of tax on
domestic banks, reducing interest rates on deposits.
Offshore finance is one of the few industries, along with tourism, in which
geographically remote island nations can competitively engage. It can help
developing countries source investment and create growth in their
economies, and can help redistribute world finance from the developed to
the developing world.
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.
Some offshore banks offer banking 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.
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Offshore banking is often linked to other structures, such as offshore
companies, trusts or foundations, which may have specific tax advantages
for some individuals.
Many advocates of offshore banking also assert that the creation of tax and
banking competition is an advantage of the industry, arguing with Charles
Tiebout that 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 are pressured to
deregulate their own banking systems in an attempt to prevent the offshoring
of capital.
Disadvantages of offshore banking
Offshore banking has been associated in the past with the underground
economy and organized crime, through money laundering.[3] 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, 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.
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Offshore private banking is usually more accessible to those on higher
incomes, because of the costs of establishing and maintaining offshore
accounts. However, simple savings accounts can be opened by anyone and
maintained with scale fees equivalent to their onshore counterparts. The tax
burden in developed countries thus falls disproportionately on middle-
income groups. Historically, tax cuts have tended to result in a higher
proportion of the tax take being paid by high-income groups, as previously
sheltered income is brought back into the mainstream economy [4]. The
Laffer curve demonstrates this tendency.
Offshore bank accounts are sometimes touted as the solution to every legal,
financial and asset protection strategy but this is often much more exaggerated than
the reality.
Banking services
It is possible to obtain the full spectrum of financial services from offshore banks,
including:
deposit taking
credit
wire- and electronic funds transfers
foreign exchange
letters of credit and trade finance
investment management and investment custody
fund management
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trustee services
corporate administration
Not every bank provides each service. Banks tend to polarise between retail
services and private banking services. Retail services tend to be low cost and
undifferentiated, whereas private banking services tend to bring a personalised
suite of services to the client.
Statistics concerning offshore banking
Offshore banking is an important part of the international financial system. Experts
believe that as much as half the world's capital flows through offshore centers. Tax
havens have 1.2% of the world's population and hold 26% of the world's wealth,
including 31% of the net profits of United States multinationals. According to
Merrill Lynch and Gemini Consulting's “World Wealth Report” for 2000, one third
of the wealth of the world's “high net-worth individuals”—nearly $6 trillion out of
$17.5 trillion—may now be held offshore. Some $3 trillion is in deposits in tax
haven banks and the rest is in securities held by international business companies
(IBCs) and trusts.
The IMF has said that between $600 billion and $1.5 trillion of illicit money is
laundered annually, equal to 2% to 5% of global economic output. Today, offshore
is where most of the world's drug money is allegedly laundered, estimated at up to
$500 billion a year, more than the total income of the world's poorest 20%. Add the
proceeds of tax evasion and the figure skyrockets to $1 trillion. Another few
hundred billion come from fraud and corruption. "These offshore centers awash in
money are the hub of a colossal, underground network of crime, fraud, and
corruption" commented Lucy Komisar quoting these statistics.[1] Among offshore
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banks, Swiss banks hold an estimated 35% of the world's private and institutional
funds (or 3 trillion Swiss francs), and the Cayman Islands (1.9 trillion US dollars in
deposits) are the fifth largest banking centre globally in terms of deposits.
Regulation of offshore banks
In the 21st century, regulation of offshore banking is allegedly improving, 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). Banks are generally required to maintain capital adequacy in accordance
with international standards. They must report at least quarterly to the regulator on
the current state of the business.
Since the late 1990s, especially following September 11, 2001, there have been a
number of initiatives to increase the transparency of offshore banking, although
critics such as the Association for the Taxation of Financial Transactions for the
Aid of Citizens (ATTAC) non-governmental organization (NGO) maintain that
they have been insufficient. A few examples of these are:
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.
In the US the Internal Revenue Service (IRS) introduced Qualifying
Intermediary requirements, which mean that the names of the recipients of
US-source investment income are passed to the IRS.
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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.
The European Union has introduced sharing of information between certain
jurisdictions, and enforced this in respect of certain controlled centres, such
as the UK Offshore Islands, so that tax information is able to be shared in
respect of interest.
Examples of offshore banking centers.
Some of the well known offshore banking centers are:- London, New
York, Singapore, Hong Kong, Tokyo, Colombo, Bahamas, Nassau,
Cayman Islands Etc.
These centers can be broadly classified into functional centers and paper
centers
The paper centers are locations where transactions are booked legally but
the actual business takes place elsewhere. Examples of such centers are
Bahamas, Nassau, Cayman Islands Etc. These centers are also called
“Shell”, “Brass Plate” Or “Broking Centers”
The Shell Bank
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The correspondent bank should also ensure that the respondent bank is able to
provide, on request, customer profile and transaction data, immediately banks
should refuse to enter into a correspondent relationship with a ‘shell bank’
Shell banks are not permitted to operate in India. Banks should also guard
against establishing relationship with foreign institution that may permit their
accounts to be used by Shell banks. Banks should be extremely cautious while
establishing continuing relationship with respondent banks located in countries
with poor KYC standards and countries identified as ‘non-co-operative’ in the fight
against money laundering and terrorist financing.
Tax heavens vs Offshore banking centers:
A place is called a tax heaven if concession of tax is available to all i.e. both
domestic and international banks but in an offshore banking centre tax concessions
are deliberately given to international banks for promoting offshore banking while
domestic banking is kept under a separate tax net.
Tax heavensThere were number of instances where our scrupulous politicians, business man,
officials and underworld don’s invested their looted, tax evaded, hefty
commissions, from the under invoicing ---over invoicing of exports or imports;
commission in large projects or defence deals and from other various mega deals…
Mostly it is the dishonest industrialists, scandalous politicians and corrupted IAS,
IRS, IPS officers who might have deposited in foreign banks in their illegal
personal accounts a sum of about $ 1500 billion, which have been misappropriated
by them. This amount is about 13 times larger than the country’s foreign debt.
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With this amount 45 crore poor people can get Rs 1,00,000 each. This huge
amount has been appropriated from the people of India by exploiting and betraying
them…
If one search Wikipedia the figures confirms it as $5.7 trillion (Rs 285 lakh crore)
in 2007…
One has to wonder how....This money being deposited in safe tax heavens.
There are presumably more than 70 tax havens in the world. Notable ones are
Swiss banks, Liechtenstein/Luxemburg/ Channel Islands, St Kitts, Antigua,
Bahamas, Isle of Man and Liechtenstein ….
If we take the 2006 report from Swiss banks deposits level India tops the table with
$1456 billion or $1.4 trillion in Swiss banks alone than rest of the world
combined. Actual sum involved none can confirm unless the tax hevens reveal
under pressure from World authorities...
Tip of the iceberg is when our IT cracked a single case Pune’s Hasan Ali Khan a
hawala operator whom the income tax department had found having unaccounted
wealth worth Rs 35,000 crore including in accounts abroad. Of course this sum has
to be proved in the court of Law as it is under investigations.
Where this money came from?
If these funds can be brought back to India by willing honest politicians & through
legislations we can pay off our entire debts as well as provide annual budget for
years without adding tax burdens on common citizens.
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Crackdown on tax havens and cross-border tax evasion will help developing
countries to raise more revenues to pay for much-needed schools, roads and
hospitals.
Many in the mainstream media have kept quiet, with hardly an editorial or
analysis. TV channels, particularly the business ones, are silent when ever this
serious issue arises from the concerned public.
It is a pity that in spite of several opposition leaders appeals India has not been
successful in quantifying the amount of black money sloshing around in the black
hole of a parallel economy within the country. It is time the revenue department
modernised itself if only to ferret out wealth from tax evaders in the country.
The role of tax havens in siphoning off tax revenues from developing countries has
come under the scanner amid efforts to crack down on cross-border tax evasion.
Every year billions of dollars are made over from developing countries to foreign
tax havens. If only more of that money stayed at home, it could finance bigger
development budgets and help relieve endemic poverty and under-development.
It is time that our tax administrations act through concentrated attack on tax havens
or sources of black money which is a long-felt need for ensuring even development
of the country.
In the last few months, global newspapers, particularly the business publications
such as Financial Times, Wall street Journal and The Economist, have been full of
articles and analyses about tax havens and the determination of the USA and other
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Organisation for economic Cooperation and Development (OECD) countries to
tear off the veil of secrecy over these tax havens, particularly Switzerland.
World attention was drawn to this issue after Germany stole data from LGT bank
of Lichtenstein and got a long list of tax evaders including that of the head of
German Post.
Then followed severe action from the US government against UBS, the largest
Swiss bank, after which the latter agreed to part with details of tax evaders and to
pay a fine. The OECD has published a list of these tax havens and categorized
them according to the level of non-cooperation. The Obama administration is
working on a legislation to deal a severe blow to these tax havens.
In the past 5 years alone the share of Swiss banks in dirty money from India is at
least a third due to historical and geographical reasons. Some $45 billion out of the
$136.5 billion stashed away from India would have been hoarded in these five
years in Swiss banks.
Notably, this figure is only for five years. More money was stashed away during
the Nehruvian socialist regime. So, the loot for 55 years preceding 2002 would be
several times the about money. In fact, in those days, the Indian rupee commanded
a better value per dollar. So, fewer rupees could get more dollars. Hence the
estimation that the Indian money stashed away may be of the order of $500 billion
to $1.5 trillion.
Not only that. 'The International Narcotics Control Strategy Report - Money
Laundering and Financial Crimes - March 2009' by the US department of state
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suggests that 30-40% of the inflows may be by Hawala market --- not accounted.
During 2007-2008, according to that report, formal inflows into India were $42.6
billion and so 40% of this, namely $1.8 billion, could be reflected as illegal "flows"
not captured by the law. This sum could be paid for in rupees domestically but
stored in tax havens abroad.
Apart from it one can imagine the total including under-invoicing/ over-invoicing
of exports and imports and getting the balance stored abroad and kickbacks from
major defence/ civilian contracts. Then there are funds earned by artists/
entertainment/ sports people, which are not brought in but stashed abroad.
Switzerland is specifically mentioned among tax havens as it is the largest and the
oldest and also the most uncooperative.
Another interesting thing which is taking place is the result of the crackdown in
Germany. An April 8 report by Reuters says, "A crackdown on tax havens that
prompted Switzerland to loosen its banking secrecy is encouraging more and more
Germans to come clean about foreign accounts they use to evade taxes. Berlin has
waged a very public campaign to stamp out tax evasion since Klaus Zumwinkel,
then chief executive of Deutsche Post and one of Germany's top businessmen, was
arrested in a major tax probe last February.
We must not forget the LGT affair where India has been reluctant to grab the
names of Indians in the list with the Germans.
Choice is ours, India to decide…. can we play our necessary role in the global
forums and are a facilitator to get back our money, or become a laughing stock
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when the who's who of India list is published in some American or European news
portal.
Once this huge amount of black money and property comes back to India, the
entire foreign debt can be repaid in 24 hours. After paying the entire foreign debt,
we will have surplus amount, almost 12 times larger than the foreign debt. If this
surplus amount is invested in earning interest, the amount of interest will be more
than the annual budget of the Central government. So even if all the taxes are
abolished, then also the Central government will be able to maintain the country
very comfortably.
India must try and get the names of these economic offenders now. One should not
forget that we in India generate at least 50% of our GDP as black money…
Any way the cat will be out of the bag some day…but when?
Even God also don’t know.
Subbu
Throughout the Nehruvian socialistic period, under-invoicing of exports and over-
invoicing of imports was very common. Along with that, substantial portion of
external earnings were siphoned off to these tax heavens. In a socialistic way, all
leaders, be they from business, politics, film, sports or bureaucracy, participated in
creating what we may call secular wealth cutting across caste and creed. Also,
good portion of the defence commissions were settled abroad. Plus some of our
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bureaucrats and entertainers and artists have also accumulated wealth abroad. This
lobby is well-entrenched and one of the main losers in the appreciation of the
rupee.
Worst part of the story is the loss of these deposits to Swiss banks themselves up
on the death of some of these depositors who have not passed on the relevant
account information to their progeny.
The Swiss banks appropriate such sums after some years (seven to ten) after the
death of the beneficiary if there are no claimants.
These are operated using codes but most of them require passport and its number
as a proof. That is the reason one finds some persons travelling to Switzerland with
all expired passports. Zurich is the only European town which has Hindi slogans
written on the side of its trams. Of course it is supposedly linked to Bollywood, but
the India traffic to Zurich has to be seen to be believed.
It is estimated that between $500 billion and $1,400 billion is hoarded in Swiss
banks and add with that the money stashed in territories like Virgin islands and
Bahamas and other assorted tax havens. We need to take steps to bring it back to
India. The mechanics can be worked out in terms of amnesty and Swiss bonds
issued against these dollars. It can tremendously boost our foreign exchange
reserves and facilitate infrastructure investment.
To start with, we can add one column in our election affidavits regarding wealth
accumulated abroad. Of course, the politicians are not going to declare the ill-
gotten wealth. But, it may be useful for future regarding provision of false
affidavits. The entire tax efforts of countries like India are subverted by these
deposits.
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The second and most important issue pertains to financing of terrorism. These
secretive and non-transparent tax heavens can be a serious threat to India since the
sources and uses of funds are not clear. The lesser the transparency, the greater the
threat for civil societies. From that point also, it is imperative for us to get these
vaults open.
The third point is that this should become a major issue in World trade and
financial negotiations since what belongs to us cannot be denied to us for long. The
entire issue of global financial flows and cross-country free flows become
meaningless due to the presence of these tax heavens. Indian lead will shake the
world and help large number of African and Latino countries.
Already, the Polit Bureau of CPI [M] has asked for government action in the light
of the UBS developments.
Baba Ramdev, too, has demanded that politicians take steps to bring back the
money.
It may be difficult to expect the major parties to take it up since the hands of many
of its leaders are stained with rust and dust of Swiss bank vaults.
In the case of Bofors, it was the government of the day versus the opposition
parties, and now it has to be a mass movement against all these tainted leaders. The
citizens of India should fight to uphold the values of our republic which is not just
a market or museum piece but a living civilisation wounded by colonialists and
looted by current thanedars ruling the roost in the corridors of power. If the leaders
keep quiet on this burning issue, we can conclude the elite of the country has failed
us. Of course, the DDM (Desi Dork Media) - both electronic and print - will be
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campaigning to "fill up pubs' in the name of freedom- rather than any serious issue.
Our media has become just entertainers and not interested in any important issue.
Let us remember that past history suggests that the elite of India failed India and
not the ordinary farmers or workers. The elite helped in the plunder and
devastation caused to this country.
The thunderous silence of our elite in politics/ media/ business/ bureaucracy and
arts speaks volumes about our collective guilt.
"No criminals" in politics is a good campaign. But can we have leaders with funds
stashed abroad? The black money abroad is the Gangotri of all crimes. It shows our
distrust about our mother land and contempt for Dharma. Let us deal with that first.
Three categories of f-centre
I. New York, Singapore, Tokyo, Bahrain Offshore markets are all of a kind.
Under their rules, special accounts are established separately from domestic
ones and can be exempted from restrictions that apply in the domestic
financial market. Regulatory and tax-related concessions are available only to
transactions between non-resident.
II. The sort of offshore markets structure is only necessary in countries where
the domestic financial system is highly regulated. In the second category
offshore centers , e.g. London, Hong Kong and other places where
transactions are liberalized for both resident and non-residents the ‘offshore’
markets simply refers to the onshore transactions between non-residents.
III. The third category of offshore market is tax heaven. Because of the tax
breaks these markets offer they are used most almost exclusively for
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transactions between non-residents. Cayman islands, the Bahamas, isle of
man and jersey fall into this category.
Mumbai as a proposed centre for Offshore banking:
Mumabi can be considered as a suitable centre for establishing offshore banking in
india.it provides good infrastructure facility in form of telecommunication,
skilled,english speaking manpower, ideal location in the eastern zone.
BENEFITS
Offshore banking is lucrative business. Offshore business generates foreign
change, license fee income, tax revenues, employment, travelling facilities,
Infrastructural development as well as indirect benefits like development of
regional capital market and image building. It offers a change of economic
versification and is far more profitable than tourism once the necessary
infrastructure is in place requiring less manpower and foreign exchange
spending.
REASONS FOR GROWTH
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Since world war II the demand for offshore financial services has grown
rapidly as a result of high taxation and proliferating regulations in the
industrialized countries combined with political instability elsewhere. The rise of
multi-national companies whose primary allegiance is to shareholders rather than
to any particular country, the expansion of the world trade and cross-border
investment and the increase in personal and corporate wealth helped to stimulate
this growth. It has been made possible by revolutionary advances in
communication technology erasing the barriers of time and space for even the most
remote locations.
The low tax investment has attracted hedge funds to set-up their
offices.Furthermore, there have been attempts to utilize these offshore financial
centers for the purpose of tax evasions, money laundering, etc. thought the holding
companies. The absence of any exchange control regulations have also assisted in
these types of activities.
INGREDENTS THAT MAKE OFFSHORE CENTRE SUCCESSFUL
They are:
1) The territory should levy no direct taxes.
2) There should be no restrictions on the use of foreign exchange or the free
movement of funds in and out of the territory.
3) There should be guarantees of clients confidentiality, preferably enshrined in
legislation and enforced by local courts.
4) The governments should welcome and encourage offshore business by
making it relatively easy for intermediaries to function and providing
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flexible regulations, minimal constraints and formalities in simple speedy
processing of official documentations.
5) There should be a professional staff to look after the business including
lawyers, accountant and bankers together with some well-known
international-institutions, and the major labor force should be well educated.
6) There should be an adequate physical infrastructure including good
telecommunications, back up facilities, skilled help to maintain and repair
equipment and adequate office space.
7) The legal system should be sound, reliable and impartial elevated
regulations should be clear and unambiguous, minimizing uncertainty and
arbitrary administrative rulings.
8) The territory should be conveniently located and easily accessible by plane
from major cities with suitable hotels and meeting facilities.
9) The jurisdiction should enjoy political and social stability in order to inspire
confidence among investors and their agents.
Over and above these basics other factors may come into play, such as the
use of the dollar as the local currency, the territory’s cost structure and
whether or not it has proven track record and offers a variety of services.
TAX HEAVENS
Until recently offshore financial centers were commonly described as
tax heavens, a term that many offshore players dislike. Tax heavens is
slightly emotive term suggesting an eliminating of escape, bolt hole or at
least refugee, and understandably enough, many of the tax havens prefer to
be called financial centers. This latter description is no doubt reasonable in
relation to the principal offshore centers around the world but is a little
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euphemistic when referring to some of the wind-swept isle which claim to
be ‘low tax areas’. The term accurately reflects the genesis of the business
and remains a condition of its continues existence. No offshore centre could
hope to survive if it imposed normal levels of taxation.
Tax avoidance is mainly a high bracket game based on diligent study
and familiarity with the rules. The opportunities for minimizing taxes come
alive when taxpayer’s financial asset are substantial and his affairs are
complicated. An increasing number of the more traditionally wealthy are
becoming inclined to take an extra-territorial view of things in one of the
world’s many tax heavens from Liechtenstein to Bahamas and Monaco to
jersey. But many offshore activities could more accurately be described as
tax planning, using legal mechanism to reduce or eliminate taxes on income,
wealth, profits and inheritance or to accumulate tax-free income offshore
pending repatriation to a taxable juridiction.
Such arrangements are often used when the income or asset in
question are international in nature. For example, an author or inventor who
receives royalties from many countries may have them paid to an offshore
account until the funds are needed. International traders may operate through
offshore vehicles to increase trading profits and owners of foreign capital
assets may incorporate offshore to avoid capital gains tax when the assets
are sold. In some cases, tax burden or permit repatriation at the most
beneficial use.
Most compels considerations arise for residents of countries which
levy tax on world wide income, regardless of whether or not it is repatriated.
But here too there are legal possibilities available offshore.
For e.g. US banks pay US taxes on the profits of their branches
worldwide. They can claim credit for taxes paid to other countries to reduce
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their US tax liability but the amount of credit allowed is limited. To avoid
accumulating excess credit in high-tax countries and to lower their foreign
tax rate in general they book some loans in tax free offshore centers. As a
bonus, the income on such loans is often exempt from state and local taxes
in the united states because the business is entirely international.
FREEDOM FROM REGULATIONS
Tax efficiency is not the only reason for using offshore centers.
Freedom from regulation is another major attraction as individuals and
business seek to escape what they regard as onerous, unreasonable or
capricious restrictions imposed by governments. Offshore centre provide
legal mechanism, through which business such as banking, insurance and
ship registration can avoid costly and time consuming regulation in certain
circumstances.
More generally, offshore centers are often used to void foreign
exchange and capital controls restrictions on foreign investments and other
domestic.
FACTORS BEHIND THE OVERSEAS BRANCH EXPANSION
Overseas branch expansion program of Indian banks is primarily
based on the factors like earning of foreign exchange, furtherance of Indian
trade with other countries and assistance of Indian entrepreneurs in setting
up joint ventures abroad. Preference was accorded by the Indian banks to
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open offices in countries having the potential for absorption of Indian
exports and technical know-how and in international financial centers having
regard to their capacity to serve as a reservoir of funds for branches. The
scope available at the overseas centers to act as reservoirs for non-resident
investment and deposit also, to a large extent, governs the overseas branch
expansion policy of Indian banks because the branches at these centers act as
conduits for the expatriates remittance to India. In the past overseas branches
of Indian banks largely conducted retail banking and catered primarily to the
business needs of the Indian population at the particular center or provided
credit to the business firms of ethnic people. Later on the bigger among the
public sector banks started operating in the euro-currency markets and are
engaged in whole sale banking. Their functions include :
I. Raising of funds on Eurocurrency inter-bank markets
II. Issue of floating rate certificate of deposit/notes
III. Syndication of loans as lead or co-lead managers or as participant.
Indian banks have also operations in offshore financial centers like
Bahamas, Cayman islands, Bahrain etc.
Although the overseas branches have in the past decade made a sizeable
contribution to the bottom – line of individual banks balance sheets, the share of
these branches in international banking transactions is minuscule. In fact, the
earlier inflows of profits from overseas operations have been supplanted by
outflows from india by way of head office funds for provisioning requirements and
write-offs of loans gone sour, thus castiing doubts about the profitability of
international banking.
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OBJECTIVES OF INDIAN BANKS BRANCHES ABROAD
Foll basic objective can be identified and emphasized for fulfillment by
foreign branches of Indian banks:
I. Enhancement of banks overall business and profitability
II. Financing India’s external trade
III. Active association with the raising of commercial borrowing of
Indian enterprises in having access to international trade, capital and
money markets.
IV. Acting correspondent banks for domestic branches;
V. Channelizing remittance to india from Indian expatriate workers and
tourist, etc.
VI. Playing a catalytic and counseling role in attracting investments in
equity bonds and NRE deposits and assisting NRIs in setting up
business venture in India.
VII. Projecting banks image as international banks capable of catering not
only to Indian ethnic or India- based enterprise but also to enterprise
of different national origins;
VIII. Acting as an exchange bureau for providing two-way information
relating to the latest market technologies and product innovations in
the Indian as well as the foreign corporate trade and financial sectors’
IX. Contributing to the well being of the society of the host country.
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CONSTRAINTS OF INDIAN BANKS
Before turning to the constraints faced by Indian banks, let us enumerate
some of the universally accepted time-based characteristics of an internationally
competitive bank:
I. Capital adequacy
II. Geographical spread
III. Wide customer base
IV. Diversified product range
V. Committed and well qualified personnel
VI. Aggressive marketing culture
VII. Adequate internal checks and controls
The operation of Indian banks abroad need to be evaluated in the
light of each of the above issues
GEOGRAPHICAL SPREAD
A bank with a balanced geographical spread can more easily weather
regional storms. Within india the spread of branches is fairly even.
As regards the spread of foreign branches of Indian banks, there is a high
concentration of branches in certain pockets like the United States, UK, Fiji
islands, Hong Kong and Singapore. Historically Indian banks have ventured
overseas in the footsteps of Indian emigrants. This is also mirrored in the
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composition of the customer base abroad which is mainly ethnic Indian in
character, a very narrow subset of the customer universe indeed.
However the scope of international banking extends beyond catering to the
needs of ethnic Indians. A cursory glance at India’s major trading partners would
provide better pointers to better future potential areas for expansion. With trade
relations between India and china improving the Indian banks have established
representative offices as well as branch pressure in china. Some of the upcoming
industrial free trade zones adjacent to Hong - Kong are also ideal for operating of
new branches there. The rejoining of south Africa into the main stream of the
world economy has opened up another opportunity for the global expansion of
Indian banks and state bank of India and bank of Baroda have been quick to grasp
this opportunity by opening branches at Johannesburg and Durban, respectively.
The sizeable number of people of Indian origin of south Africa would provide a
starting base for operation of Indian banks there. Mauritius which is fast
developing as an offshore centre also holds out considerable scope for expansion
and the state bank of India has its presence there.
CUSTOMER BASE
The soundness of a bank is directly based upon a wise and prosperous clientele.
The available potential market t at our overseas centers can broadly segmented as
under:
1) Ethnic Indian business
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2) Local ethnic business
ETHNIC INDIAN BUSINESS
Almost the entire business handled by Indian banks abroad emanates from
ethnic Indians. However the entire business emanating from ethnic Indians is not
handled by Indian banks. A concerted effort to tap this familiar loyal market could
augment Indian banks existing business.
LOCAL ETHNIC BUSINESS
Local ethnic business offers the highest potential and remains the least
exploited market segment. At the overseas centers of indian banks till date. At the
same time this is the most difficult segment to be weaned over.
PRODUCT RANGE
While the customer base of Indian banks is narrowly confined to the ethnic
Indian one, product range is closely clustered around trade finance of a retail
nature. This narrow product range served well in the environment of booming
world trade till the 1960s. However failure to keep pace with the proliferation of
innovative products -derivatives-introduced by competition in the wake of
phenomenal growth in the euro-currency market and offshore banking activities
from the 1970s onwards has adversely affected development of business.
In such a highly competitive market, one has to tread warily. Developing
such products call for a team of well-trained, dedicated personal to advise and
handle these instruments. T present there is a paucity of these skills, Indian banks
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need to develop the necessary infrastructure and manpower to make forays into
this territory. This would also necessitate dev elopement of sophisticated checks
and control system to avert any losses.
PERSONNEL
The motive spirit of bank is provided by its committed and well-qualified
personnel. A well qualified ans committed staff is the sine-qua-non of any
successful enterprise
The intricacies of international banking demands specialistsin exchange
dealing, money market, country risk analysis and international trade. These are
vital subjects necedditating updating on a countinous basis. Indian banks are yet to
develop suchspecialist teams comparable to international standards. For the long-
term development of international competitiveness there is a need to build up such
expertise.
An effective way of grooming indian personnel in these specialised skill is
to depute the expatriate staff for intensive training in institutes of international
repute, seminars conducted by euromoney, institutional investors and the like and
also to expose them for an on-the job training in some of the leading internationa
banks in respective centres. Some of the indian banks are already benefiting from
such exposure of their personnel to the competitive culture of the leading banks in
centres like london, paris, singapore, etc.
There is anohter aspect that needs to be given due weithage in tonung up of
indian managerial skills in the arena of international banking. The operating
environment being highly competitive, professional and fast changing,there is a
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need to develop specialist. The general principal of staff rotation for tdevelopment
of skills would not be applicable in the international domain. Staff identified fro
specialists skills should be given longer terms to work in these areas and should
receive periodic training to keep themselves abreast of their specialised fields.
MARKETING CULTURE
Branches of indian banks should abroad do not always possess the requisite
communication and marketing expertise to tap the potential outside ethnic base.
There is also a disturbing trend in rapport with ethnic indians. The original
emigrants had an emotional bondage – a strong umblicial cord – with indain banks.
They needed a native banker on the foreign shores and hence pledged their loyalty
to the latter. After five decade of settling down the second and third generations of
ethnic indians no more feel the strong bondage their elders had with indian banks
aborad. As a result branches of indian banks now receive only a portion of ethnic
indian business.
The mainstay of foreign branches all along has been trade finance. Foreign
branches of indian banks should act as catalyst in bringing the buyers, sellers, and
the products together in respect of indian exports in addition to providing the
necessaryfinancial support.
INTERNAL CHECKS AND CONTROL
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International banking is highly risk prone. As such an effective system of
internal checksand control assumes paramount importance. Though presently
internal checks and controls such as surprise checks of sensitive departments by
officials not connected with that department, concurrent audits, statutory audits are
in place they do not appear to have yielded the desired results. The present
regulstory framework does not appaer to have yielded the desired results. The
present regulatory framework does not welcome frequent visits of HO officials to
the distant centres for an on-the-spot assessment. This needs to be remedied.
The job of checks and controls in respect of foreign branches is rendered
difficult in view of the geographical distances between the branches and the
controlling offices. In addition, the nuances of checks and control vary from one
centre to another depending on the reqiurements of the regulatory authorities at
each centres. In view of the importance attached to the internal checks and controls
by various regulatory authorities indian banks need to give due attention to this
aspect.
OTHER CONSTRAINTS
Besides the above constraints branches of indian banks abroad have also
suffered on account of foll factors:
a) Lack of prudent provisioning policy
Indian banks which were making handsome profits abroad till the
early 1980s did not follow the prudent policy of retaining porfits at the
foreign centres for augementation of capital. As a result the could not build
up reserves to provide a cushion for lean periods to any significant extent.
b) Dependence on inter-bank markets
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Inter-bank market is a ‘fair weather friend’. Any deterioration in
credit rating in india, political instability, economic problems, adverse press
publicity, etc., immidiately prompts inter-bank markets to prune down the
credit lines sanctioned by them for taking the exposure on india. Indian
fuctioning abroad did encounter some difficulties in raising funds in inter-
bank markets in 191. It is therefore, necessary to build a stable deposit base.
FULL – OUT FROM SOVEREIGN LOANS
Indian banks tested the waters of syndicated loans to sovereign/quasi-
sovereign entities, during 1979-81, subscription like many others o the belief that
sovereign countries do not go bankrupt. However, many less developed countries
in Latin America and Africa were severely buffeted by successive exogenous
shocks like oil-shocks, slump in commodity prices, rise in inflation and escalating
debt-service cost, etc. as a result, many Indian banks were saddled with non-
performing sovereign debts against which they had to make heavy provisions and
their head offices had to remit funds from India to cover them.
PROSPECTS FOR EXPANTION
While the necessity and desirability of Indian banks expanding abroad are
well recognised, the need to temper this enthusiasm, keeping in view the high
costs, risks and pitfalls operating in a highly aggressive competitive market can
hardly be overemhasised. Besides account has also to be taken of the reciprocal
concessions/facilities that may have to be conceded to the banks from the
concerned countries in regard to their entry/expansion/operation in India.
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International money and capital markets have become highly competitive and
volatile. It is therefore, of paramount importance that banks opening branches
abroad should have the capacity – financial as well as management – to handle
intricate international transaction and command the confidence of the authorities in
the host countries. Banking abroad offers scope for a variety of specialized
activities which require a high degree of expertise and operational skills. Indian
banks abroad have therefore to be fully equipped to take up new types of business.
This requires specialized staff, ability to mobilize resources and flexibility to
operate in political, economic and social environment of different countries, Indian
banks should, therefore, clearly demonstrate such capabilities before seeking
expansion of their outreach abroad.
TASKS AHEAD
The way Indian banks have expanded and managed their operation abroad
exhibit inherent weaknesses in policy formulations with regard to the various
aspects of their business. Despite their long presence overseas, especially at the
prime financial centers of the world, they have not been able to make a dent by
creating a healthy image. They remained contented with their traditional business
and could hardly think of the changing times in a dynamic world banking scenario.
Business abroad is highly competitive. Indian banks virtually overlooked the fact
they were required to compete with the international giants. They became victims
of their 1960s and 1970s when banking all over the world was a flourishing
activity.
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The future poses many challenges, stiffening regulatory attitude vis-à-vis
income recognition and provisioning requirements.
To build a quality asset portfolio, the asset expansion should be developed
along the following lines:
Higher rated customers
Participation loans
Niche banking – concentration on areas of strength
Identifying areas of India related business which is growing
MANAGEMENT OF BALANCE OF PAYMENTS (BOP)
The country’s currency comprises domestic and international activities.
Accordingly, its BOP accounts represent detailed account of all transactions in a
given period between residents of that country and non-residents.
BOP components are broadly divided into three categories; current account
capital account and reserves.
Current accounts include the value of the visible and invisible trade. Visible
trade again includes imports and exports of merchandise and commodities.
Invisible trades are services, including travel, transportation, remittances, etc.
Capital account represents short-term or long-term (over 12 months) direct
investment, trade credits and payments, grant, etc.
Reserves may be considered as a sub-division of current account which is
available for free use.
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