International and Offshore Banking: Masters Short Programme
INTERNATIONAL OFFSHORE BANKING
MASTERS PROGRAMME
(NQF Level 9)
The Institute of Advanced Studies (Pty) Ltd
in association with
The Da Vinci Institute
for Technology Management(Pty) Ltd
offera
Masters Programmeon
International and Offshore
Banking
International and Offshore Banking: Masters Short Programme
INTERNATIONAL AND OFFSHORE BANKING PROGRAMME SYNOPSIS
Offshore Banking
A considerable volume of international banking takes place offshore, and many of the world’s major banks have banking and trust company operations in one or more IOFCs.
Most IOFC jurisdictions have enacted legislative provisions and set up administrative authorities whose function is to control banking and trust company activities.
Banking services offered in the tax havens are of different types:
-The commercial banks offer full commercial and retail facilities to both residents and non-residents of the jurisdictions where they are located. These banks usually provide an extremely wide range of services through their network of branches, their ability to move funds swiftly, and their expertise in handling international transactions.
-Representative offices in IOFC jurisdictions offer a more limited range of services than do the commercial banks; however, they do normally handle currency transactions, deposits, and the issue of letters of credit. Representative offices of banks located elsewhere are usually licensed as non-resident banks.
-Non-resident banks are licensed to serve only those clients who reside outside the tax haven jurisdiction or to transact business ofa non-local character. The precise terminology and the limitations may vary according to the jurisdiction in question.
Switzerland is the unquestioned leader of the world’s offshore private banking industry. London, Switzerland’s nearest competitor, manages less than half as much as the combined totals of Zurich, Geneva, and Lugano, Switzerland’s three main private banking centres. Switzerland’s share of the world private banking market is estimated to be in the range of 30-40%. Approximately two-thirds of this amount belongs to private clients, the majority of whom reside outside Switzerland.
Private banking, unlike global investment banking, is one area where Swiss banks have always been market leaders. Now, predictably, private banking activities have become a focus not only of Swiss banks themselves but also of many foreign banks carrying on activities in Switzerland. Private Banks are concentrating more on investment advice and portfolio management, and less on trading and investment banking, due to the low risks and high returns that can be generated. Private bankers are entrepreneurs in a privately owned sector, who carry out their business using their own assets, assuming unlimited liability with their entire commercial and private fortunes, and exercising independent powers of decision. The core activity of private bankers traditionally has been and still is asset management for private clients.
Private banking is not only performed by private bankers. Many former private bankers have converted their partnerships into private or publicly traded corporations in order to have limited liability and to be able to benefit from financing opportunities on the capital markets. In the past few years, the activities of many private banks have been extended to the management of assets for national and international institutional investors. This new class of client is very attractive for the banks because of the accumulated savings and potential market they represent.
Institutional clients are, in general, very demanding in respect to the performance of their portfolios, and they benchmark performance on a regular basis. Due to the high volume of business they represent, institutional investors are putting substantial pressure on private banks’ fee structures and forcing them to enhance their technical expertise. Private Banks are also becoming active on the stock exchanges and many of them are also involved in underwriting and placement. In addition to catering to institutional investors, private banks are now establishing investment funds. The investment fund business has attracted new clients to private banks who either wish to invest in very specialised funds or whose assets are not substantial enough to justify the structuring of individualised portfolios.
Captive Banks
The term captive bank is sometimes used to refer to a banking subsidiary set up in an IOFC tax haven or financial centre that operates principally for the benefit of the members of a multinational group and their customers and suppliers. Such captive banks may also operate as merchant banks and offer commercial banking as well as financing services.
Banking Secrecy
In most countries, one of the terms of the relationship between banker and customer is that the banker will keep the customer’s affairs secret. Staff members are normally required to sign a declaration of secrecy concerning the business of the banks. If numbered accounts are used, their purpose is to limit the number of persons who know the identity of the client.
In certain countries, specific legislation makes breaches of bank secrecy subject to criminal law sanctions. However, in all legal systems (including Switzerland), there are specific cases in which the duty of secrecy of a banker is discharged. Furthermore, the current attacks being waged worldwide against money laundering have resulted in significant restrictions and controls on bank secrecy. The level of secrecy in the Swiss banking industry is now not much different than most developed countries. In fact, it is arguable that Swiss “know-your-customer” rules are much stricter than elsewhere.
The Swiss banks have become more responsive to foreign requests to block questionable funds in Swiss banks. Furthermore, the negative publicity that has resulted from the past Swiss tradition of banking secrecy is now turning from an asset into a liability. The exchange of information clause contained in most tax treaties may enable the tax administration of one treaty country to obtain information concerning bank accounts that its residents have in the other country.
In a major new development, the worldwide attack on money laundering is creating very considerable pressure towards more open access to banking information.
Back-to-Back Loans
Back-to-back loans are matching deposit arrangements. They may be used to solve a financing or exchange control problem. However, in the case of certain IOFCs, the function of back-to-back loans is to reduce the taxable base subject to withholding taxes on interest payments, by interposing an intermediary subsidiary company between the source of the income and the recipient. For example, an intermediary company located in the Netherlands or the Netherlands Antilles may be interposed to take advantage of a favourable tax treaty. In such cases, the authorities usually require a certain spread or “turn” on the rates to create a small profit that is subject to tax locally.
This type of transaction involves the prospective lender placing funds or securities on deposit with a bank operating in the lender’s own country or elsewhere, while an associate of that bank (or the same bank) operating locally or in that other country lends an equivalent amount to an associate of the lender in another country. It is an arrangement for the avoidance of withholding tax on interest paid to a foreign country and of exchange controls on the remittance of funds outside the borrower’s country.
The advantage of using an IOFC as a location for the initial deposit is that the interest received on the bank deposit will be paid free of tax. In the country of the back-to-back loan, the loan interest should be designed to be an allowable tax deduction. This structure may be utilised in financing structures for the purchase of property in high tax jurisdictions. It is also used to route money from IOFC jurisdictions to high tax countries, without the use of conduit vehicles using tax treaty structures.
Eurocurrencies and Eurobonds
Eurocurrencies are currencies other than the domestic currency of the country in which the bank taking the deposit or lending the funds is located. Originally, the U.S. dollar was deposited and lent by West European banks, hence the term Eurodollars, which may be defined as an entry denominated in U.S. dollars on the books of a non-U.S. bank. All major currencies are now dealt in Eurocurrencies, so the prefix Euro is now a misnomer because the term applies outside Europe. The market is not subject to exchange controls or like restrictions, although investors and borrowers may be subject to them in their own countries.
Eurobonds are long-term loans issued in terms of U.S. dollars or other currencies or in terms of composite units of account. They may take the forms of loans, debentures, or convertible debentures. When the Eurobond market started in 1963, the borrowers were mainly governments, nationalised industries, and public utilities. These were soon joined by large companies, particularly as a result of the restrictions imposed during the 1960s on U.S. enterprises with regard to their investments abroad. The market has since enjoyed considerable growth. Eurobonds are usually issued in countries where interest payments are not subject to withholding tax. Major issues are normally handled by international underwriting syndicates, including major world banking and financial institutions.
International Tax Planning Services by Offshore Banks
A high percentage of clients and customers of offshore financial institutions require tax advice that may involve international tax planning, double taxation agreements and withholding taxes, offshore financial centres, international taxation of trusts, estates inheritances and gifts, and international anti-avoidance.
It is both lawful and sensible for an offshore bank to arrange customers’ business and personal affairs in such a way as to attract the lowest possible incidence of tax. The widening scope of tax laws, the complexity of their provisions, and high tax rates make it more necessary than ever for business enterprises and individuals alike to plan their taxable events with considerable care.
For an offshorebank’s customer which is a commercial or industrial enterprise, an unnecessarily increased tax burden represents a business waste that not only reduces its distributable profits but may well make it uncompetitive.
In the case of an individual client of an offshore bank, the net return from personal endeavour and the investment of capital is in most countries so severely reduced by the Revenue that the failure to take advantage of potential tax minimisation benefits may have a considerable effect on his spending power and accumulated wealth. The omission to anticipate death duties and inheritance taxes will frequently cut an unnecessarily deep wedge into his estate.
Offshore tax planning is tax planning in which factors involving more than one country are included in the original database and an offshore element is introduced as an extension of domestic tax planning.The different ways in which two or more systems may be linked offer considerable scope for tax minimisation or deferral, particularly where at least one of the countries is offshore, since offshore does, by its very nature, generally refer to a better tax deal in a foreign country.On the other hand, where a project crosses frontiers, there are far more tax and non-tax factors to be taken into account than in a purely domestic case. It follows that offshore tax planning may often be exceedingly complex.
Trust Services by Offshore Banks
International and offshore banks perform a major role in the setting up and administration of trusts.
The word “trust” refers to the duty or aggregate accumulation of obligations that rest upon a person described as a trustee. The responsibilities are in relation to property held by it or under its control. The trustee is obliged to administer the trust property in the manner lawfully prescribed by the trust instrument (trust deed or settlement), or in the absence of specific provision, in accordance with equitable principles or statute law. The administration will thus be in such a manner that the consequential benefits and advantages accrue, not to the trustee, but to the beneficiaries.
The English trust is merely a bundle of rights and obligations in equity and is thus not strictly speaking a legal entity. Though the law of trusts varies from system to system, those patterned on the English law of trusts resemble one another closely, differences usually being of statutory origin. In the case of civil law systems where the trust is to be found it is invariably a creature of statute.
The trustees stand in a fiduciary relation and must hold the property or exercise the rights in a fiduciary capacity.
The courts have over the centuries greatly elaborated principles laying down the rights, powers, and duties of trustees. In particular, high standards have always been demanded of trustees in respect of care for the trust estate, careful investment, strict accounting, fair apportionment between income and capital, duty to pay the right beneficiaries, and absence of personal profit or self-interest and trustees have frequently been held liable to repay to the trust losses caused by lack of care or other breach of trust. Trust property can be recovered from a third party who has obtained it unless he obtained a legal title, for valuable consideration, and without notice that his acquisition was in breach of trust.
A trustee must accept or disclaim office, and persons may be authorized to appoint new trustees, or the court may do so. A trustee may retire but remains liable for things done while he was a trustee, or may be removed by the court. A trustee must not make use of trust property for his private advantage and must account for profit made out of his trust. As a general rule, in the absence of a provision relating to remuneration, a trustee is not entitled to any remuneration. Also, in many cases, the trustee would not be empowered to acquire trust property, and dealings with beneficiaries may be voidable.
The trustees’ duties are:
-to take possession of and preserve the trust property;
-to be diligent and prudent in administering the trust property;
-to act personally;
-to be impartial as between beneficiaries;
-to keep accounts;
-to give information to the beneficiaries as required; and
-to invest the trust funds in the manner permitted by statute.
If in doubt, trustees are entitled to obtain the opinion of the court as to the right course of action, and they may have specific questions determined by the court. The courts now have wide powers to approve arrangements varying or revoking the trusts or enlarging the powers of the trustees.
A breach of trust is any act in contravention or excess of the duties imposed on the trustees by the trust, including neglects, omissions, and dishonesty, and trustees are liable in so far as loss has resulted to the trust estate. They may be relieved from liability by provision in the trust deed, or by the court under statutory power. Beneficiaries can obtain no relief against trustees if they concurred or acquiesced in the breach of trust.
There is no generally accepted definition of the word “settlement” but it may be defined as any disposition of property, of whatever nature, by any instrument or number of instruments, whereby trusts are constituted for the purpose of regulating the enjoyment of the settled property successively among the persons or classes of persons nominated by the settlor. However, for certain tax purposes the word “settlement” is given a much wider meaning.
The trust services of offshore banks include also the setting up and administration of certain alternative vehicles to the offshore trust.
The demand for offshore and onshore structures to provide legal mechanisms for the defense of family property is colossal. In the past decades, the preferred vehicle has been the so-called asset protection trust. The massive increase in the use of offshore trusts over the past 50 years, often in jurisdictions with either no, or inadequate, trust law, has led to a corresponding explosion in litigation. In recent years there has been a succession of decisions which have raised large question marks over the future use of offshore trusts as assumptions that have been made for years have been overturned.
In the result, serious difficulties are now being encountered in the use of offshore trusts.
In the first instance, the trust has, at its heart, a number of essential fundamentals that clients frequently refuse to accept as part of the trust relationship. For example, there is a fundamental requirement that the trustee should take full legal ownership and control of the assets. Many a client seeking an asset protection vehicle is horrified to find that he loses control of his hard-earned assets to some foreigner in a remote jurisdiction, who could, in strict law, take decisions entirely independently of him.
Then, devices such as letters of wishes (letters of intent), trustees’ file notes, and special functions of the protector, are coming increasingly under attack as being nothing more than an extension of settlor control. Reporting requirements for settlors of offshore has made life very much more difficult for overseas trustees.
The duties and responsibilities of trustees have always been onerous. In the last few years, a number of important court decisions have considerably increased their exposure. Combining this with the fact that, by definition, the asset protection trust is operating in an area where litigants are trigger happy, overseas trustees are now very concerned at the potential risks, and finding it almost impossible to obtain insurance cover. Where the settlor (or grantor) retains control over the “trust” (whether directly or through a protector) the product is not a trust as the law of equity understands it. It is in legal terms an agency arrangement, or perhaps a bailment, and entirely different legal rules apply.
There has arisen a need for new forms of vehicles which will be safer and more efficient in their application than the offshore trust, and cheaper to administer than the offshore trust.