Offshore Financial Services: Are They Legal or Illegal?

            

Having an offshore bank account is not illegal in and of itself. The fact that the motivations for doing so are unlawful is beside the point.

The revelations in the Panama Papers created a media frenzy in President Obama's final days in office when he made a television appearance. There was outrage all over the world at the revelations in these papers, and many of the people named were swiftly branded as criminals and tax cheats.

The murky reputation of offshore banking is largely due to the fact that it is conducted in private. Offshore banks are complicit in tax evasion and money laundering if they are aware that their customers are concealing their income and wealth in offshore accounts for these reasons.

Unfortunately, some offshore financial services providers don't take this issue seriously enough to put in place the necessary safeguards. This is sometimes intentional and more often the result of a lack of regulation relative to what, say, a bank in the United Kingdom is required to have in place. However, British taxpayers must still disclose information to HM Revenue and Customs about any taxable funds held offshore.

There are a number of reasons why banks choose to operate offshore.

Simply put, an offshore bank is one that is physically located in a country other than the account holder's home country. Financial institutions that are based in low-tax jurisdictions are the most common providers of offshore financial services. Compared to conventional banking systems at home, these institutions typically provide more favorable financial and legal terms.

Having an offshore account can be beneficial in many situations. The ability to access one's funds from anywhere in the world is a significant convenience for anyone planning to live or work abroad. Offshore accounts also commonly support multiple currencies, which can be useful for those who regularly convert their funds.

Customers who do business in more than one country may save time and money by doing business with a single bank rather than a number of local branches. To maximize tax efficiency, it makes sense to have this all in one place. Companies that do this without maintaining a physical presence in their tax domicile country have received significant backlash. Although technically not illegal, this practice could be considered unethical.

Many people who do not live in the United Kingdom may be concerned about the safety of their money in a domestic account because of political or economic instability in their home country. It's easier to relax with the help of an offshore banking option.

When compared to domestic arrangements, the convenience, speed, and low cost of accessing one's money or international financing through an international banking facility is typically superior.

There are, of course, drawbacks, such as the fact that accounts typically demand a minimum balance and that account balances (up to £85,000 in the UK) are not protected in the same way that accounts are protected (via schemes like the UK's Financial Services Compensation Scheme).

Effects on tax evasion and money laundering

If offshore banking is perfectly legal, then why is there so much fuss about how to stop it?

There are two sides to the issue. Income is the primary consideration. For their economies to function, governments rely on tax revenue and are therefore motivated to crack down on tax evasion and encourage citizens to pay "their fair share." 

Governments are working hard to make tax avoidance unethical, as this is simpler than enacting complex legislation across borders since tax avoidance is not illegal but there will always be loopholes.

Second, the secrecy that is inherent to many offshore financial services makes them appealing to criminals who seek to launder money or evade taxes. This is a blatantly illegal activity that must be addressed, but the government isn't trying to prevent law-abiding citizens from paying their fair share of taxes by any means.

What this means is that anyone who requests to open an offshore account should be considered a higher-risk client and subjected to appropriate enhanced due diligence in regards to ultimate beneficial ownership and the reasons for opening an offshore account.

Therefore, it is essential that offshore financial services providers implement sufficient controls and provide extensive training to their staff in order to identify and report suspicious activity.