Offshore Banking: Busted!

Reading a John Grisham novel was the first time that I came across Offshore banking. Needless to say, my first encounter with this style of banking involved a shady businessman, four black suitcases of money, and of course, an assassin. As I made my way through more thrillers (movies & books), I was amazed by the number of fraudulent plots that revolved around a bank account in the Caymans or the Swiss Bank. This triggered my make-the-world-a-better-place attitude. As a typical teenager, I planned on questioning the authorities: If it paves way for so many wrong-doings, why hasn’t offshore banking been put to an end? 

Much like all the other times that I have ever asked questions based on a thriller, I had based my assumptions off something that we have always been warned against, half knowledge. What I didn’t know at that time (But I do now, hence the article) was that Offshore banking is absolutely legal. Not only is it legal, given today’s situation, it is a smart move if you have a lot of money lying around. Offshore banking refers to any bank account that one owns which is outside the jurisdiction of their home country. For example, if you are an Indian citizen and open an account in the UK, that can be considered an offshore bank account. Dating back to the 1860s, Offshore banking was a way to safeguard one’s growing assets against the economic, political and social turmoil that prevailed in the post-Napoleon-Europe. Almost two centuries later, people opt for offshore banking for essentially the same reasons. With the passing years, it has become a tool to legally diversify political risk by putting liquid savings in sound, well-capitalized institutions where they are treated best. Speaking of political risks, popular opinion of finance enthusiast says that the biggest risk to one’s savings is not the market risk, but the government. Offshore banking not only dilutes this government risk but also provides access to sounder banking systems across the countries. Offshore banking earns brownie points from their customers given the high level of confidentiality that they maintain. The Bloomberg Billionaire Index shows that 30 percent of the 200 richest people in the world put their wealth in or through an offshore entity which is, primarily, because of the level of secrecy they maintain. Additionally, they also provide protection from over zealous government agencies that have the power to freeze one’s assets. Besides this, people opting for offshore banking statistically enjoy higher interest rates than what are offered in their home countries. So why don’t the majority of people own an offshore bank account? 

Fundamentally, offshore banking caters to needs of people from the high-income strata. Not only this, but taking into account the endless numbers of frauds that are involved, the risk of money laundering and illegal tax evasions can not be ruled out. The operations of the bank taking place outside the jurisdiction of one’s country can give rise to inconveniency in accessing information. 

Categorising on the basis of privacy orientation, low deposit and reputation, leading countries in the offshore banking sectors are Switzerland (No surprise there), Belize, Singapore and Hong Kong. Historically speaking, the frauds and scams that offshore banks have aided have crossed all boundaries (Pun intended!). In order to tackle this, In May 2015, the European Union signed a protocol with Switzerland making amendments to the country’s existing savings laws to transform it into an automatic exchange of financial information agreement based on a global standard. The newly revised agreement means that residents of EU will no longer enjoy the anonymous and privacy banking benefits the country has offered to foreign depositors since the 19th century. While this move is seen as a significant move in the fight against tax evasion and fraud, it could as well be the most significant one in the death of offshore banking as we know it. But the questions still prevail, does offshore banking really need regulation? And if it does, won’t the regulations violate the fundamentals of offshore banking? If left unaltered, will it not just increase the number of frauds that go about? And if it used as a haven for so many frauds, does it belong in the 21st century? The fate of offshore banking is yet to be decided. Meanwhile, I am just out here hoping no Swiss Bank official contacts me after this article. 

Purva Dafle

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