Offshore Banking in the US
by Jeff Corbett
The world economy is a very competitive market where businesses vie for profit and governments compete for investment capital on a daily basis. Nations often engage in activities to gain rewards which are far more aggressive than the largest corporations could ever contemplate. States of government naturally have strategic advantages over anything a corporation could employ with their access to an extensive economic arsenal which can be utilized against opponents. From tariffs on manufactured goods to restrictions on currency, the nations of the world compete for assets.
A strong banking system which is perceived by the public as safe and provides capital for business expansion is the cornerstone to a sturdy economy and an expanding financial system. Both of these elements are critical for Governments to be able to increase their tax base and provide domestic stability. Just as is the case with entrepreneurship, any government worth its salt must face into the abyss of the old adage, you either grow or you die. This is especially true when governments are attempting to deal with outrageous deficits.
With this as a backdrop, banking is an essential dual edged tool. Since it is the business of moving money for profit, banking provides both the depository to attract assets as well as the facility to move wealth away. Therefore, banking is frequently seen as a zero-sum game in which one side wins and another looses. It understandably follows that politics are interwoven into the very fabric of this industry. Politicians and bureaucrats rally to the bully pulpit seemly quicker on the subject of international banking than most any other topic. We find the political rhetoric and hypocrisy surrounding the financial industry amusing and certainly worth a mention in this format even though any discussion is necessarily restricted by space.
Are you aware that foreigners investing in the United States earn tax free interest on bank CDs? In addition, any effort to share this information with other governments for their own tax purposes is illegal. It is true and by definition that fact makes the United States an offshore tax and banking haven. Foreign investors now hold more than 55% of the publicly-held and-traded U.S. Treasury securities. These assets come to the U.S. for security, tax-free investment and privacy. Overseas wealth inflow now plays a critical role in the U.S. economy by bridging the gap between domestic supplies of capital and demand for it.
The U.S. not only acts as a tax haven for fixed income depositors but licenses two banking entities that are virtually identical to the classic definition of an offshore bank. Edge Corporations and International Banking Facilities are shell banking units that present ownership with the benefits of being a bank with reduced regulation and lower reserve requirements. To those who would own an offshore banking entity, these facilities provide entrée into the U.S. and the prestige that comes with it.
Definitions:
Offshore Bank – A bank located outside the country of residence of either the depositor or owner.
Edge Act Corporation – A federally-chartered U.S. corporation that is only allowed to engage in international banking or other financial transactions related to international business. Authority established by the Edge Act in 1919.International Banking Act of 1978 allows foreign banks to own Edge Act corporations.
International Banking Facilities (IBFs) – Institutions in the United States that allow depository (banks) to offer services to foreign residents and institutions free of some Federal Reserve requirements and some state and local income taxes
Conclusion
Virtually every nation in the world competes in the offshore market place for foreign capital. Economic realities make this a necessity for continued national growth and it is unlikely to change. Nations, however, cannot exist in a fiscal vacuum. They need other governments to be trading partners. So even mighty nations, those that may attempt to have their cake and eat it too, must walk this economic tightrope. A global economy, consequently, forces most governments to be reasonable citizens of the world. Isolationism is not an option for nations wishing to compete on an international basis and gain wealth. Globalization, the rapid growth communications plus the internet have all been major contributing factors to leveling the playing field of international banking.
We would offer that the offshore world and international banking is frequently painted as being evil by those who have something to gain from restricting free enterprise. In general however, this market is neither good nor bad but a result of free societies conducting trade.
Posted in: Miscellaneous, Uncategorized on February 8, 2013
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