CORPORATE TRANSACTIONS & COMPLIANCE BLOG

Debunking the Myths about Offshore Financial Centers

By: Andy Chen, COGENCY GLOBAL INC. on Mon, Mar 10, 2014

The word “offshore” often brings to theOffshore Financial Center collective consciousness negative connotations of a tropical island or tax-haven, which promotes tax-evasion for the wealthy, money-laundering opportunities for the criminally affiliated and banking secrecy for greedy corporations. However, more often than not, the use of offshore jurisdictions or offshore financial centers (OFCs) is both legitimate and integral to daily international trade and finance, such as the financing of commercial aircraft or reinsurance of a nation’s medical facilities. 

So what is the definition of an OFC? In 1987, the International Monetary Fund (IMF) defined an OFC as a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy[1]. Ironically, the United States of America (New York City) and the United Kingdom (London), by the IMF’s definition, would be the world’s two largest OFCs by volume of financial services provided globally each year. However, the U.S. and the U.K. are generally not considered OFCs in respect of each country’s full membership in both the G20 Nations and the Organisation for Economic Co-Operation and Development (OECD). Today, the most prominent and reputable OFCs are located in four regions around the world; the Caribbean Sea, Channel Islands, Central Europe and Asia.

The Caribbean Sea:
Bermuda, the Bahamas, the British Virgin Islands and the Cayman Islands

U.K. and Channel Islands:
Guernsey, Jersey, Ireland and the Isle of Man

Central Europe:
Belgium, Cyprus, Luxembourg, Malta and the Netherlands

Asia:
Hong Kong, Mauritius and Singapore

There once was a time when OFCs were seen as the perfect locale for money-laundering, terrorist finance or other illicit financial activities. However, after 2009, the words “prominence” and “reputation” are commonly used by the OFCs themselves to describe their ongoing commitment to compliance with the guidelines and recommendations set forth by the OECD, Financial Action Task Force (FATF) and IMF.

Today, after constant reforms and regulatory changes, OFCs are still being actively used as collective investment vehicles, joint venture vehicles, stock market listing vehicles and trade finance vehicles to add value and confidence to the economic activity of global markets and investors. OFCs are continuously enforcing and enhancing anti-money laundering and anti-terrorist financing regulations, maintaining strict regulation on statutory corporate governance and corporate transparency and meeting Know-Your-Client requirements regarding ultimate beneficial ownership in companies. OFCs are also sharing this information in global criminal investigations.

In future posts, we will explore the response of OFCs to the new compliance and regulatory climate set forth by the 2009 guidelines and recommendations of the OECD, FATF and IMF, as well as the new responsibilities placed on directors, shareholders, general partners and limited partners of entities formed in OFCs to maintain financial transparency and proper corporate governance. 


[1] Zoromé, Ahmed. “Concept of Offshore Financial Centers: In Search of an Operational Definition” IMF Working Paper WP/07/87.  IMF. Web. 14 Feb. 2014.

                                               

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: International Corporate Services