Business & Industry

May 1, 2016


Lately, there have been a lot of talks about financial "offshores", but most of the statements are confusing and scarcely reliable, mixing concepts and presuming the answers that seem to be useful for certain lobbies. As everything in life, there are good and bad judgements, depending on the criteria of each one. Your VIP Partner went to learn how they appeared, what they are, where they are, and what characterizes an "offshore", so that you can make a fair and objective appraisal.


The Appearance of Offshores

The financial system created after World War II (1939-1945) was conceived and structured after the Bretton Woods Conference in 1945, in the United States of America (USA), where the International Monetary Fund (IMF) and the institutions of the World Bank were created. The first great priority of the United States, that understandably took the world financial lead, was the reconstruction of Europe, namely Germany, and Japan, both destroyed by the war, being well known the large financial supports that originated from the Marshall Plan, and from the extensive write off of debts of Germany and Japan.

During the Nineteen-Sixties and -Seventies, the priority gradually turned to the mobilization of funds to fight the underdevelopment in the Third World, the so called "Rest of the World", of which a substantial part achieved sovereignty and independence after centuries of colonial dominance. The World Bank, and large American and European banks, rapidly started financing development programs and large scale projects in certain countries, mainly in Latin America and Asia, with the purpose of accelerating the development of allied countries.

However, with the sudden and drastic oil price increases in 1972 and 1979, the first period of large recessions with global impact occurred, strongly affecting some countries with more fragile and dependent economies, such as Argentina, Brazil and Mexico, in Latin America; Poland and Democratic Germany in East Europe; and Thailand and Malaysia in Asia, where the first "growth and payment crisis" with world repercussion occurred.

The risk of eminent foreign debt defaults from Latin American countries to western banks, caused great alarm, and put in danger many US and European banks that had very high exposure to those countries. If a default of such giant debts had been materialized, the consequences in the international financial system would have been devastating, when speaking in terms of bankruptcy of several American and European banks.

The risks of breakdown of the international financial system in the 1980s, due to payment crisis originated in several developing countries, affecting the whole world financial system, opened the way to a lot of innovation in terms of new institutions and financial instruments, guided by the United States of America. However, it is important to emphasize that financial innovations that occurred in the USA and other countries had two common features: in first place, the protection of savings, mainly coming from countries in crisis, where local financial institutions had lost capacity to induce trust to depositors and, in second place, the creation of new mechanisms to drive those savings to finance reliable and profitable development projects, mainly in countries that were underdeveloped, but with emerging markets. 

The main concern was creating secure jurisdictions that could protect private savings escaping from countries facing severe risk of financial breakdown, following crisis of different nature and origins, many times with a non-financial origin. One of the main innovations introduced by the Federal Reserve in 1981 was the creation of the "International Banking Facilities" (IBF's), allowing US banks to open accounts to non-US residents, and these accounts were to be kept separated, within the same bank or into a separated subsidiary, offering deposits and loans services both to individual and corporate clients, under privileged terms and conditions, including in taxation. Technically, this could be done in a separate institution, or not, but with segregated accounting.

Several States within the United States, were more aggressive in attracting IBF's, such as New York, Florida and Delaware. The intention was to attract and provide safety to capital flows from countries with payment crisis, thus, US banks have always competed directly with financial offshore centres, that meanwhile had been created in several small countries in the Caribe, but with juridical subordination or inspiration in the United States and the United Kingdom, such as Panama, Bermuda, British Virgin Islands and Cayman Islands.  

Financial Offshores

Just as the United States created IBF's, some island countries created "offshores". In a simple way, an offshore began to designate the jurisdictions that had specific laws for the incorporation of companies and the opening of safe banking accounts to non-residents, to whom was given a more favourable fiscal treatment than other countries, mainly more populated countries that have the possibility of collecting taxes. The expression "tax haven" started to be used because of the lower taxation, when compared to other countries, where the tax administration went on increasing taxes on companies and taxpayers. The expression "offshore" became popular, given that a large number of these jurisdictions were in small island countries spread throughout the Oceans, such as Jersey, Guernsey, Bermuda, British Virgin Islands, Turks and Caicos, Cayman, Marshall, Mauritius, Seychelles, among others.

Consequently, but notwithstanding that the creation of IBF's and offshores had initially the purpose of creating safe structures to protect savings at risk, regardless of the applicable tax regime, the concept of financial offshore, applicable to corporations and bank accoutns, has gradually been associated to the concept of "tax haven". It became an essential feature, the use of a legislation based on tax reduction with the purpose of attracting savings from other countries, assuring total legal protection through the principle of banking secrecy. However, when using the expression "offshore", one cannot forget that many continental countries, such as the United States, United Kingdom, Switzerland, Luxembourg, China (in denominated special administrative zones, as Hong Kong and Macau) and others have created special taxation regimes based on tax reductions, precisely with the same purpose: to attract savings from residents in other countries, using an active factor of fiscal distortion.

The difficulty of going against the natural movement of attracting savings through the creation of fiscal distortions is well clear in the actions of the European Union, which has been able to create a common market, a common currency – the Euro – and a Banking Union, among many other unified legal systems. However, the European Union has failed in the harmonization of tax systems among Member States, what explains that capital and corporations of more fragile countries in the EU legally escape towards countries as Holland and Luxembourg, where they legally pay less taxes.

Some European offshores

Not all offshores are in remote islands in the Caribe or in the Indian or Pacific Oceans. Also in Europe, for instance, when the Governments of Spain and Portugal initiated negotiations for the adhesion to the European Economic Community (CEE), finalized in 1985, both countries included in the Treaties that the CEE has approved, the creation of special taxations to attract investments and capital in Madeira (Portugal) and in Canary Islands (Spain), under the principle of protecting ultra-remote regions. After 1986, the Government of Portugal have created the Free Trade Zone of Madeira, including an Industrial Processing Zone, an International Ship Registration, and a Business International Centre, where non- Portugal residents can incorporate companies, holdings and open bank accounts under a special tax regime approved by the European Authorities.

In the European Union countries such as Cyprus, Malta, Ireland, Holland, Luxembourg, Portugal, Spain, the United Kingdom, and many others, have created tax regimes that promote the establishment of corporations and holdings and the attraction of funds under conditions of assured guarantee and lower taxes, inclusively leading to the transfer of head offices of corporations and holdings from one country to another, so they can benefit of more favourable tax regimes.

The Wrong in Financial Offshores

However, over the last few years, and especially after the attack to the Twin Towers in New York, the benevolent perception of the world press towards almost all financial offshores has changed, especially when it comes to those that are located in small islands without any other resources. In fact, and because of a much stricter control over the transparency of the origin of the funds deposited in several accounts created in some offshores, accounts which are protected by bank secrecy, it has been observed that some of those offshores have been especially lax in the legal obligations that any bank must fulfil, for example, identifying and knowing any costumer - "Know Your Costumer" -, and execute a proper compliance of any and all transactions, including those that can raise suspicion. So, it is true that several cases of money laundering from illegal, and even criminal, sources went through certain offshores, and, because of this behaviour, these were included in negative lists, until having implemented the proper control systems.      

In this matter, it is consensual that it is necessary to impose a very strict control of any abuse or illegal doing, even for safeguarding the good name of those who fulfil the rules and refuse to give coverage to criminal situations. Going through the published lists one can see that there are few and exceptional cases of financial offshores that are still in the black or grey lists and the majority has adhered to sharing information agreements that will prevent irregular situations from occurring in the future.

Being undisputable the necessity to prevent any banking institution located in any offshore centre or in a theoretical financial centre above any doubt, such as New York, London or Frankfurt, from being used to cover any transactions or situations of criminal nature, it is difficult to recognize the validity of radical and generalized opinions that disregard the advantages – and look only at some cases that are the roots for the disadvantages – and wish to eliminate all financial offshore centres. In fact, being absolutely right to impose the adoption of existing rules applicable to all banks in any part of the world and the stricter supervision of their functioning, it is important to remember that most of those island micro-countries need fiscal income, job creation and to attract funds for reaching some economic development, besides touristic activities and hotels that are a traditional feature of such natural heavens that have specialized in being tax havens.

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