What Is the Meaning of Offshore Banking?

Offshore banking refers to the deposit of funds by a company or individual in a bank that is located outside their national residence. Although the term implies that these banks are located on islands, many offshore banks are, in fact, found in onshore locations, such as Panama, Luxembourg and Switzerland. The advantage of offshore banking is that, in many cases, funds are tax exempt where the banks are located. Offshore banks also offer the same services as domestic banks, and frequently they offer more anonymity than would otherwise be available in "onshore" banks.

The term "offshore bank" originated with banks that were established on the British Channel Islands, off the coast of northwest France. These institutions were set up as tax havens to attract more investment. Currently, many jurisdictions where offshore banks are located do not tax deposits. Offshore banking is also known as "private banking."

An offshore bank provides the same services as an onshore bank does. It is an institution in which to deposit savings, and it also provides investment services for its clients. Depositors do not need to go in person to open an account. Because offshore banks are found in places that would entail long travel times, they frequently open accounts based on certified documentation of the individual's identity and assets. For large deposits, accounts may be established through onshore intermediaries located in the depositor's country of residence.

Offshore banks are often located in jurisdictions that offer low taxation, or nontaxation, on deposits and gains. They also offer a degree of privacy, which insulates assets from scrutiny or seizure by tax authorities located in the depositor's country of origin. Less regulation is imposed on offshore banks, as they operate either as independent banking institutions or as part of a larger banking entity located onshore in another country. For depositors who live in countries subject to unstable political conditions, offshore banks also offer an advantage in providing a safe and secure location where they can place their assets.

Many offshore banks are located in jurisdictions that either do not tax or have low taxes levied on deposits and gains. However, exceptions do exist, such as Switzerland. Moreover, countries such as the United States and the member nations of the European Union require by law that their citizens declare income or assets located in offshore accounts. Failure to do so is considered tax evasion and is subject to criminal prosecution. While offshore banks offer greater privacy to account holders, they still require proof of identity when setting up an account. This is to prevent criminal activity, such as money laundering.

Offshore banks are found widely dispersed geographically in being located in places such as the Cayman Islands, Bermuda, Luxembourg, the Channel Islands, Macau and Panama. Offshore banks are also located in other places all over the world. Many of them are subsidiaries of larger institutions. Each of these jurisdictions has different laws with regard to account privacy and tax liabilities. They also have different political systems and not all are tax havens.