how offshore banking units work
there are several steps for a client to get involved in depositing and transacting with an offshore banking unit broadly speaking the offshore banking unit process starts based on an investor s specific needs investors choose an offshore jurisdiction based on factors such as its legal framework tax advantages political stability and banking regulations after selecting an offshore jurisdiction investors can open an account with an offshore banking unit which can be in various forms such as personal corporate investment or trust accounts they must complete necessary documentation and undergo a due diligence process including identification documents proof of address and the source of funds similar to a domestic bank the investor must decide on the range of services needed as well offshore banking units offer a wide range of banking services including deposit accounts international wire transfers foreign currency exchange investment products loans credit cards and wealth management services in addition to banking services offshore banking units can assist investors in optimizing their tax liabilities through legal means such as favorable tax regimes they may also offer access to a broader range of investment opportunities including international stocks bonds mutual funds commodities and alternative investments these offshore banking units may also provide legal guidance to ensure compliance with both the offshore jurisdiction s laws and their home country s laws to avoid legal or regulatory issues the federal reserve has prescribed guidance outlining general policies and procedures to be used when examining u s branches of foreign banking organizations 1offshore banking unit regulationoffshore jurisdictions typically have a dedicated regulatory body or financial authority responsible for overseeing the financial sector these regulatory bodies include offshore banking units obus must obtain proper licensing and authorization from the regulatory body meeting specific requirements such as capital adequacy operational infrastructure and adherence to anti money laundering aml and know your customer kyc regulations the regulatory framework aims to maintain the integrity of the financial system protect customers and prevent illicit activities therefore regulatory authorities supervise obus to ensure compliance including ongoing monitoring periodic audits and examinations of operations obus are required to submit periodic reports and financial statements to the regulatory authority offshore jurisdictions also often engage in international cooperation and information exchange agreements to combat financial crimes and ensure regulatory compliance this includes sharing information with foreign regulatory bodies participating in international initiatives against tax evasion and adhering to global standards like the common reporting standard crs and the foreign account tax compliance act fatca offshore banking units vs domestic banking locationsthere are some key distinctions between offshore banking units and normal bank branches the obvious difference is physical location obus are located in offshore financial centers or jurisdictions with specific legal and regulatory frameworks designed to attract international clients while common bank branches are typically located within a country s domestic territory and subject to the regulations of that jurisdiction another major difference is the underlying regulatory regimes obus are known for their favorable tax structures confidentiality laws and business friendly environments meanwhile domestic bank branches operate within the regulatory framework of the country in which they are located and are subject to the laws and regulations applicable to domestic banking institutions in many cases since these laws are prevalent across the country they are less incentivizing for those seeking specific shelter features the clientele base is often very different between the two as well offshore banking units typically serve international clients including individuals and corporations they often cater to clients who want to optimize their tax liabilities protect their assets or access international investment opportunities on the other hand normal bank branches primarily serve local customers and offer standard banking services to individuals small businesses and corporate clients within the country where the branch is located history of offshore banking unitsthe euro market allowed the first application of an offshore banking unit shortly afterward singapore hong kong india and other nations followed suit as the option allowed them to become more viable financial centers while it took australia longer to join given less favorable tax policies in 1990 the nation established more supportive legislation in the united states the international banking facility ibf acts as an in house shell branch its function serves to make loans to foreign customers as with other obus ibf deposits are limited to non u s applicants offshore banking units have been impacted by recent developments in europe the savings tax directive applied in 2005 aimed to combat cross border tax evasion in the eu however it has undergone several updates and revisions since then 2in 2014 the eu revised the directive to close loopholes allowing individuals to avoid paying taxes on their savings the revised directive required all eu member states to automatically exchange information on non residents bank accounts with their country of residence the oecd introduced the common reporting standard crs in 2014 to detect and deter tax evasion by offshore account holders 3a 2013 directive required member states to automatically exchange non residents financial accounts but this was separate from the revised savings tax directive the agreement between switzerland and the eu signed in may 2015 requires swiss banks to automatically exchange information on eu residents accounts with their country of residence 4 the exchange began in 2018 ending the special secrecy that eu resident clients of swiss banks had previously enjoyed 