Offshore Banking Services

Question 1

Outline banking services offshore

Answer 1

Similar across all jurisdictions, although each offshore centre has own specific legislation

Offshore banking = bank account outside country of residence

Banks play key role in development of offshore centres / common banks locally incorp subsidiaries or branches of large onshore banks providing offshore facilities

Banks offshore are valuable suppliers of funding to mainland banks

Range of services provided is diverse;

• retail services essential to local community
• target affluent / wealthy people attracting wealth deposits
• private banking / wealth management of HNWIs financial needs

Banks support FSB operating offshore; foreign exchange, services to investments, trusts, fund admin & insurance

European banks specialise in providing services to corporate market

Question 2

Outline benefits of offshore bank accounts

Answer 2

• gross interest tax paid
• tax benefits in country of residence if income not remitted back to country
• statutory secrecy & confidentiality provisions / enhances common law principle applies to customer & banker relationship
• less stringent regulation / supervision (reduce costs & offer higher interest rates)
• foreign exchange
• infrastructure (centralised)

Question 3

Why would a bank offer services offshore

Answer 3

Tax liability Lower

Less stringent regulation

Costs of staff & premises lower (maybe)

Provide offshore products for client base

Question 4

Considerations when choosing an offshore banks

Answer 4

Quality of service provided

Regulatory requirements & effectiveness of oversight

Absence of bank failures

Availability of depositor compensation schemes (main disadvantages as some don’t offer)

Question 5

Outline depositor compensation schemes

Answer 5

Reports of banking failures during global financial crisis caused offshore centres to introduce schemes to give comfort to investors

JSY introduced 2009 protecting deposits £50,000 in even of jersey banking failure

GSY & Isle of Man = £50,000
Malta = €100000

Benefit of schemes available for private individuals & Charities only / provide protection for deposits up to certain amount

Scheme doesn’t extend to all corporations, trusts or partnerships

Isle of Man protects non individuals up to £20,000

Costs of scheme borne by banking industry

Question 6

Outline banking services provided offshore

Answer 6

• current accounts
• debit cards, credit cards, cheque books
• deposit & savings accounts
• foreign exchange
• forward exchange rates contracts
• mortgage facilities
• lending facilities
• overdraft faculties
• payment facilities (internet & telephone)

Services T&Cs will vary between banks

Question 7

Outline foreign exchange services

Answer 7

Offered by banks both onshore & offshore

Banks buy & self foreign currency to customer on foreign exchange market

Foreign Exchange Market = decentralised global marketplace = FOREX of CURRENCY MARKET

Banks facilitate currency exchange & advise clients with known foreign invoices to pay & cost of settling

Banks impose transaction limit of require notice of large exchange transactions or those with particular currency - terms vary

Commission changed makes banks profit (difference in buying & selling rate)

Question 8

Outline types of risks involved in transactions

Answer 8

Foreign exchange risk is variation in cash flows & profits caused by fluctuating exchange rates

Transaction risk = risk of rate changing between transactions and settling date

Exchange rate = market price for currency expressed in terms of another

Spot rate = FER transaction quoted / settled in 2 days/ two quotes given (bid/ offer) with difference providing profit margin on transaction

Question 9

Outline Forward Exchange Contracts

Answer 9

Binding contract which oblige customer to buy or sell given quantity of foreign currency at future date / rates booked in advance

Customer pays exchange rate on spot rate on day of deal / exchange rate guaranteed to enable business to determine costs / income in advance

Used by customers who wish to use funds in future for transaction on named date

Terms of contract vary / flexibility or fixed on settlement dates

FECs offer protection against adverse exchange rates movements / assist business to budget future sales

• risks if exchange rates move against customer still legally bound to settle at specified rate
• remove uncertainty - protect against unfavourable movements but also preclude benefits of favourable movements