Are Offshore Financial Services Legal or Illegal?

Posted by

Jan Hagen

on 03 Jan 2020

It is important to realise that there is nothing illegal about opening and operating an offshore bank account. The reasons behind it may be illegal, but that is a different matter altogether.

Are Offshore Financial Services Legal or Illegal?

In his final days in office, President Obama appeared on TV amidst the hype caused by the revelations in the Panama Papers. These papers caused global outrage, and many people identified were immediately labelled as tax evaders and criminals.

Offshore banking’s debatable reputation is largely driven by its secrecy. There are undoubtedly individuals that hide their income and wealth in offshore accounts in order to avoid or even evade paying taxes or to launder money, and offshore banks would be facilitating this if they were aware that this was going on.

More recently, Jeremy Corbyn and Clive Lewis have been targeting ‘the elite’, proposing much more stringent taxes for inheritances over £125,000. They have also targeted wealthy entrepreneurs who are managing their tax exposures as being greedy and bad, even though there is no suggestion that any illegality has taken place. This article looks at the reasons that drive politicians to target offshore activity.

Yes, there are offshore service providers that do not have adequate controls in place to stop this. Sometimes by design, but mostly because there is no legal requirement to have the same level of controls that, for example, a bank within the UK has to have in place. British taxpayers, however, still have a duty to report details of money held offshore that is liable to tax to HM Revenue and Customs.

An example of offshore services used for criminal purposes was the investigation into HSBC in 2012. HSBC was investigated by HMRC in relation to offshore accounts in Jersey for criminals living in the UK. The investigation was based on information provided by a whistleblower, who gave the tax authority a list of names, addresses and account balances. These were accounts in the names of drug dealers, cybercriminals and bankers facing fraud charges. Three years later, HSBC closed scores of accounts in Jersey.

Reasons for offshore banking

Essentially, an offshore bank is nothing more than a bank located outside the account holder’s country of residence. Offshore banking services are typically offered by banks with a presence in a low-tax jurisdiction. These banks tend to offer financial and legal advantages over domestic banking arrangements.

There are plenty of legitimate reasons for having an offshore account. When living or working abroad, holding an international bank account can make it easier to manage finances when outside the country. Also, offshore accounts are often available in multiple currencies, which can be more convenient for someone making or receiving payments in different currencies.

Clients with operations in several countries may find it more convenient and more economical to direct all of their business through one bank rather than dealing with separate institutions in a range of countries. It obviously makes sense to centralise this in a jurisdiction that is the most tax efficient. A lot of criticism has been vented towards companies that do this without actually having a physical presence in the country where they are tax domiciled. This is not illegal, but arguably it is unethical.

There are also many people who live in countries that are less politically or financially stable than the UK, and they may be worried about the security of funds held in a domestic account. An offshore banking facility offers peace of mind.

International banking facilities usually offer more flexibility so that those who need access to their money or to international financing can do so more cheaply, quickly and easily than would be possible with domestic arrangements.

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

Money laundering and tax evasion implications

So, if there is nothing illegal about offshore banking, why all the hype about how to tackle the offshore problem?

The problem is two-fold. Firstly, it’s all about income. Governments need tax income to run their respective economies, and so they are keen to stop tax evasion and persuade taxpayers to pay ‘their fair share’. Tax avoidance is not illegal, but there will always be loopholes, so governments are working hard to make it ethically unacceptable, which is easier than creating complex legislation across borders.

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Secondly, offshore services often provide degrees of anonymity which makes them very attractive for money launderers and tax evaders. Obviously, this is pure criminal behaviour that has to be addressed, but it is important not to confuse this with the government’s desire to stop honest people from managing their tax obligations.

What it does mean is that an offshore account offers benefits for criminals, such as tax evaders and money launderers, so anyone wishing to open an account like this should be treated as a higher-risk client, and appropriate enhanced due diligence in relation to ultimate beneficial ownership and reasons for opening an offshore account should be thoroughly looked at.

It is, therefore, crucial that offshore services providers have adequate controls in place and that their employees are trained to a high degree in respect of recognising potential suspicious activity.

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