8. Offshore banking services

Question 1

What is Offshore banking?

Answer 1

When residents open bank accounts outside of their jurisdiction. It is common for banks in offshore centres to be locally incorporate subsidiaries of large onshore banking groups that wish to provide offshore services to existing clients.
Typically complementary to other financial services in the jurisdictions, i.e. trust and fiduciary sector, the collective investment scheme sector and insurance sector.

Question 2

Advantages of customer using an offshore bank account?

Answer 2

• Unlikely to be tax deducted at source on interest earned
• Income may not be subject to tax
• Lighter regulations/ supervision (could mean enhanced interest paid)
• Bank secrecy provisions, i.e. more bank/customer confidentiality

Question 3

Advantages of banks offering offshore bank accounts?

Answer 3

• Lower taxes on profits
• Lighter regulation and supervision
• Premises / staff may be cheaper
• Meet requirements of existing client base/ offer complementary services

Question 4

Considerations when choosing an offshore bank?

Answer 4

• Track record i.e. absence of bank failures
• Regulatory system
• Depositor protection
• Quality of banks operating

Question 5

What scheme used to provide customers w/ comfort?

Answer 5

Depositor compensation schemes have been implemented since the global financial crisis of 2007.
In 2009 Jersey introduced a scheme that would protect ash deposits of up to £50,000 per person in the event that a bank failed.

Question 6

What offshore banking services are provided?

Answer 6

• Credit and Debit cards
• Mortgage facilities
• Overdraft facilities
• Payment facilities
• Lending facilities
• Deposit/ Savings accounts
• Current accounts
• Foreign exchange
• Forward exchange contracts

Question 7

What is are the 2 types of foreign exchange transactions?

Answer 7

• Spot transaction

- Forward Exchange Contracts (FEC)

Question 8

What is a forward exchange contract?

Answer 8

Exchange rate is set on the day the exchange is initiated and settled at a predetermined point in the future.
These are used if a business requires currency at a point in the future and protects against the risk of exchange rate movements and allows the business to budget more accurately.

Question 9

What is a spot transaction?

Answer 9

An agreement to buy one currency against selling another currency at an agreed price for settlement on or around the spot date

Question 10

What is the group that consists of banking regulators from offshore centres?

Answer 10

The Group of International Finance Centre Supervisors (GIFCS). This introduced procedures for licensing and supervising banking business.

Question 11

Who are the BCBS and what do they do?

Answer 11

The Basel Committee on Banking Supervision was established in 1974 by the central bank governors of a number of countries.
The BSBC formulates supervisory standards, guidelines and recommends statements of best practice, which their member countries are expected to implement. They are however not a legal authority.
Best known for its international standards on capital adequacy as the Basel Capital Accord.

Question 12

What are BCBS’s main functions?

Answer 12

• Global standard setter for prudential regulation of banks
• Provision of a forum for regulator co-operation on banking supervision matters
• Straighten the regulation, supervision and practices of banks worldwide
• Enhancing banking stability

Question 13

What are the types of banking license in offshore centres?

Answer 13

Some will have one all-encompassing category of banking license, whilst others have various levels of licensing where some banking business may be restricted.

Question 14

What may the fit and proper assessment for a banking license entail?

Answer 14

• Track record of applicant
• Ownership and control of bank
• Organisation systems and controls
• Financial resources of applicant
• Important of bank in home jurisdiction
• Competence and experience of principal persons

Question 15

What on-going supervision of banking would occur?

Answer 15

• On-site examinations conducted at the bank’s premises, and hold regular meetings with the bank
• Off-site supervision which may include a desk-base analysis or regulatory and statistical returns and other information
• The bank to submit annual audited financial statements
• The principal and key persons to be in receipt of approval by the regulator
• Notifying the regulator of any significant events or changes within the business

Question 16

What might be the standard codes of practice that must be followed by those w/ a banking license?

Answer 16

• Must be conducted w/ integrity
• Must have due regard for the interests of its customers
• Must organise and control its affairs effectively for the proper performance of its business activities and be able to demonstrate the existence of adequate risk management systems.
• Must be transparent in its business arrangements
• Must maintain and be able to demonstrate the existence of adequate capital resources.
• Must deal with authorities in an open and cooperative manner (must note make statements that are misleading, false or deceptive)

Question 17

What is a managed bank?

Answer 17

Banks that may not meet the criteria to undertake banking business may be established as managed banks. It would be represented/managed by another registered deposit taker (the manager) within the offshore centre.
The manager would provide all necessary resources, such as staff, premises and information systems and operates those resources of behalf of the managed bank.

Question 18

What are the advantages of managed bank?

Answer 18

• Management oversight allows the bank to operate whilst adhering to the codes of practice, and therefore, protects the public.
• Costs should be reduced
• Benefits from administrative efficiencies (e.g. avoids the need to recruit additional staff)
• Learning curve can be flatter as experienced staff take the strain
• Systems controls and expertise are already in place
• Can eventually apply to become a standalone bank in due course.

Question 19

What are the 4 stages from managed

Answer 19

• Starts as a bank fully managed by another bank
• Appoints management within the managing bank
• Sets up own front office, but managed bank still operates the back office.
• Operates as a stand-alone bank