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

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

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

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

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

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

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)

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.

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.

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.

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

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

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.

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

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.

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.

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

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

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

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

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.

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

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

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

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

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

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

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

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.

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.

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

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

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

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

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

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

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.

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.

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.