Activities led within the offshore centers

The financial activities undergone offshore are numerous. They offer banking services, insurance operations, stocks and shares, shares control. They can also achieve such non-financial transactions such as the marine or car book, airlines or home.

International Business Companies (IBC), located in CFO, are screen companies with duty free limited responsibility, interceding to fulfilling activities at the capital level via shares, stocks and deed tools issuing.

The main customers of the offshore centers are private multinational companies for their own fortunes.

The offshore centers offer the customers a reduced or zero tax a convenient legal system, a high quality banking system and experienced auxiliary force. Finally, the offshore centers adopt, in order to attract customers, a larger notion of the bank secrecy.

The most frequent activity types are the banking services offered through the international bank branches located in the offshore centers. The number of the financial institutions which offer services in the offshore centers and the number of local institutions is given in Appendix 1.

The banks don’t exist in centers, or they are in minority. For instance, in Labuan-Malaysia there are only 49 offshore banks, Vanuatu has 34 offshore banks and 4 home banks, in Bahamas there are also 212 banks, from which 203 are offshore. Another example of offshore institution domination is Barbados with 199 insurance companies, from which 180 are offshore.

If we analyze the international business companies, they are plenty. For example, in the British Virgin Islands there are 350.000 international business companies, 47.000 in Bahamas and 35.500 in the Mau Islands.

The organization of offshore centers offers advantages and costs for the receiving countries. The advantages are (2):

· function expenses through the offshore institutions (banks, insurances);

· salary payments to institution public servants can be a major advantage;

· taxes on benefits and license rights are a revenue source for the receiving countries;

¹ From a list of 44 contacted jurisdictions, 41 were assessed offshore.

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· easier access to the international financial markets;

· increase of the local staff experience;

The costs for an offshore center for the host countries are:

· activating an expensive communication service;

· control making to follow minimum regulations, which induce the costs;

· losing the local currency independence;

· increased competition in local finance through international banks;

The offshore typology analysis shows three types:

(1) the New York type, where there is a special agreement of founding the offshore center such as N. York, Tokyo and Singapore;

The international activity accounts are different from the national accounts. The international accounts benefit from the reinforcement of some national activities mandatory restrictions (for example the mandatory reserves);

(2) the London type which is characterized by transaction liberalization for both residents and non-residents;

(3) the “high installment” (fiscal paradises) where there are no duties for non-resident transactions.

The offshore centers are used both as transaction counting centers and operation centers (3). London is a typical transaction operation center at large. Cayman is an example of transaction counting which takes place outside the center.

The fiscal paradises are used to:

· diminish the person’s duties;

· reduce taxes on civilians.

The fiscal paradises are one of the CFO forms concerned with diminishing taxation. In order to obtain such advantages, individuals can receive citizenship of CFO (actors, athletes). Company tax reduction is possible only for companies registered within the fiscal paradises.

2. Risks caused by CFO

In the beginning, the activities and financial inset weakness in the offshore centers didn’t imply surveillance and assessment through international institutions due to the reduced deregulation risk for the international financial system.

Risks have increased once with the growth of the CFO activity and world financial market growth integration.

The CFO more important risks are:

· international financial destabilization;

· run away from taxation;

· bank crises;

· capital laundry and terrorism finance.

International financial destabilization

If we consider the financial stability from the country’s point of view and not from the CFO’s, the aspect of the financial activity from the offshore center it’s not so important because it can regard tax evasion and diminish of the budget expenses.

But in host countries the offshore center, especially in small countries where there is a great inequality between the number of local and offshore institutions, the offshore activity can destabilize

the economy of the host country. This can lose its political currency independence and there can occur the possibility of a financial crisis.

From an international perspective, it is emphasized that today the centers wind hundreds billion dollars; the effective amount of the financial activities is large and it concerns many people from the world.

The IMF experts calculations which are based on data given by the BRI, suggests that the CFO cross-border assets were almost 4.6 trillion USA dollars (an average of the total cross-border assets), from which 0.9 trillion USA dollars in Caribbean and a trillion USA dollars in Asia. Most of it (2.7 trillion), is CFO assets from London, J’IBF (International Banking Facilities) from New York and JOM (Japanese Offshore Market)²⁾.

Unfortunately, the smaller ones, the offshore financial centers are today about 20% from the cross-border banking outset.

Every year, about 60 thousand companies are registered in offshore centers. The deposit value in centers exceeds 1300 billion USA dollars. Their role is to transfer capital and manage growing assets. About 60% from the world assets are underwritten through offshore centers.

These aspects of the activities from the centers risk compromising the international financial stability. The abilities of the centers to attract global financial operations, imply an important surveillance factor against competition on the international market.

The competition and the benefit brought when it corresponds to the innovation tools and the financial products reduce the cost of the financial services all over.

But it is concerning when cost reduction comes from not obeying the regulations and control

laws.

A jurisdiction that doesn’t obey the minimal norms can be subjected to financial instability.

The absence of the reduced data regarding the operations from the centers still represents an obstacle in risk assessment for the international finance stability.

Run away from taxation

Run away from taxation can be a movement of the activity in a fiscal paradise where taxation can be reduced in comparison to the native country. Moreover, registering an offshore company makes it not to pay taxes. The revenue level in the world hit taxation. The loss of budget revenues by the countries are estimated at 3% (Finland) and 23% (France).

The company Euron is an example of tax reduction due to the registration of 900 branches in the offshore centers. Euron created 692 branches in Caimans, 119 branches in the Turkish islands and

Caicos, 43 in the Maurice Islands and 8 in the Bermuda. For three years, Euron didn’t pay taxes and in the same time received VAT refund. In total, the bursary of the USA lost about 382 billion USA dollars. The recent obligations in branches, the creative compatibility and the audit considered distorted led to the fall of the Euron stock course, after the relevant information and eventually the Euron bankruptcy and destabilization of the capital market.

Banking crises

The most important risk on the bank market is the bankruptcy of the offshore banks. For example, the famous case of bankruptcy of the Credit and International Trade Bank in 1991 and of the Meridian International Bank in 1995.

The operations of the offshore banks play an important role in the financial crisis from Latin America and Asia and now in the 2007 global crisis. The absence of the real regulations at the consolidated banks allowed arbitration operations to take place by frequent transfer between the offshore establishments and the offshore related banks.

² Offshore Financial Centers – IMF Background Paper, June 23, 2000, p. 9.

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More offshore banks from Asia are used for operation on the capital markets. They don’t know the contribution of the offshore funds to the credits in the region. This is the cause of a liquidity risk on the exchange market and on the financial system of those countries.

Another risk is represented by the greater offshore banks in comparison with the onshore banks. The assets concentration in offshore banks produces a risk for the local banks. The solution doesn’t consist only in a close surveillance of a CFO, but a consolidated surveillance in the origin countries is imposed. This is due to the fact that IMF introduced the financial vulnerability assessment for both: onshore and offshore centers.

Capital laundry and terrorism financing

Nobody knows exactly what the actual level of world capital laundry is. The level is estimated to reach between 2 to 5% from the global GDP (4).

After September 11 2001, capital laundry and terrorism financing have become issues to be discussed globally.

The social and political costs of capital laundry are consistent. “Organized crime can be the core of the financial institutions, which can produce reduction in large economic sectors and can corrupt the political system. Dirty money also destabilizes the financial system of a country and supports a severe crisis.”³⁾ The offshore financial centers offer favorable conditions for such activities, due to the fact that the offshore financial centers assessment program contains FATF norms.

3. Results of the offshore financial centers assessment 3.1. Initiatives of the international institutions

The control authorities and a number of international courts work together on control issues on offshore financial centers activities. The analyzed issues regard less than three aspects: money laundry, fiscality and financial regulations. We should emphasize the role of IMF, GASI, OCDE and FSF among the institutions who deal with CFO.

The financial action group for capital laundry (FATF) deals with the implications of money laundry and terrorism financing at criminal and legal level.

In FATF last report it was signaled that from 12 centers, the anti-money laundry devise shows weak criticism. FATF publishes in his report a list of 15 “non-cooperative jurisdictions”. This list was corrected in the sense that seven jurisdictions in progress were removed from the “non-cooperative” list from the countries territory, but they supported 6 new centers. In 2005 IMF and the World Bank made 48 FATF recommendations regarding the reference their operational activities register.

OCDE focuses on fraud, fiscal competition and fiscal regulation differences. It launched a project on “damaging fiscal practices”, which regards the centers. OCDE published a list with 35 jurisdictions identified as a fiscal paradise (“high installment”). During the Barbados reunion, OCDE and the developing countries (CFO included) created a special group to deal with the regulations acceptable for the operations from the fiscal paradises.

The Financial Stability Forum (FSF) delegated the work group in April 1999 to study the implications of the offshore financial centers in the international financial stability.

The first report⁴⁾ of the group regards the financial surveillance of the CFO, the second (May, 2005) classifies the centers in three categories according to the control quality, cooperation level and priority set for the future assessments.

³ Op. Cit. ⁵⁾.

⁴ The report of the work group was published in April, 5th, 2005, it is available on the Forum site.

In the first group there are included the CFO which have the fiscal paradise status opposite the ones which use the regulations against the fiscal paradises. The second group regards the countries which are not fiscal paradises. And the third contains the countries which are occasionally included in the paradises list.

Other assessments

The results of some of the CFO assessments are published in the following reports:

· “The Edwards Report”, published by the government of Great Britain in 1998, which assesses the centers situated on the territories from Great Britain (Jersey, Guernsey, Sark and the Man Islands);

· “The KPMG Report”, completed in 2000, assesses 6 overseas territories of Great Britain which offer offshore services (Caimans, the British Virgin Islands, Turk Islands and Caicos, Anguilla, Monserrat and Bermuda).

· “The Ad-Hock Group on Non Cooperative Jurisdictions”, created by FATF in 1998⁵⁾, assessed 31 non cooperative jurisdictions, according to 25 criteria from the capital laundry point of view.

· A 15 non cooperative jurisdiction list was published as a result of this activity in 2000.

Date: 2014-12-29; view: 827