Confidentiality

Critics of offshore jurisdictions point to excessive secrecy in those jurisdictions, particularly in relation to the beneficial ownership of offshore companies, and in relation to offshore bank accounts.

The criticisms are slightly difficult to assess. In most jurisdictions banks will preserve the confidentiality of their customers, and all of the major offshore jurisdictions have appropriate procedures for either law enforcement agencies to obtain information regarding suspicious bank accounts. Most jurisdictions also have remedies which private citizens can avail themselves of, such as Anton Piller orders, if they can satisfy the court in that jurisdiction that a bank account has been used as part of a legal wrong.

Similarly, although most offshore jurisdictions only make a limited amount of information with respect to companies publicly available, this is also true of most states in the U.S.A., where it is uncommon for share registers or company accounts to be available for public inspection.

In relation to trusts and unlimited liability partnerships, there are very few jurisdictions in the world that require these to be registered, let alone publicly file details of the people involved with those structures.

However, there are certainly well documented cases of parties using offshore structure to facilitate wrongdoing, and the strong confidentiality laws in offshore jurisdictions have clearly played a part in the selection of an offshore vehicle for those purposes.

Regulation

Most offshore financial centres now promote themselves on the basis of "light but effective" regulation, and generally only seek to regulate high-risk financial business, such as banking, insurance and mutual funds.

Many capital markets bond issues are structured through a special purpose vehicle incorporated in an offshore financial centre specifically to minimize the amount of regulatory red-tape associated with the issue. Some offshore jurisdictions have sought to replicate this success with equity issues by forming local stock exchanges, but these have not been a notable success to date.

A number of internet-based businesses have recently set up business in offshore financial centres which, whilst lawful in the offshore financial centre, would not be lawful in its target market. These businesses often relate to pornography or gambling.

Critics of offshore financial centres suggest that they are not effectively regulated in all areas, and in particular that they are vulnerable to being used by organised crime for money laundering. However, partly in response to international initiatives and partly in a defensive move to protect their reputations, most offshore financial centres now apply fairly rigorous anti-money laundering regulations to offshore business. Some even argue that offshore jurisdictions are in many cases better regulated than many onshore financial centres. For example, in most offshore jurisdictions, a person needs a licence to act as a trustee, whereas (for example) in the United Kingdom and the United States, there are no restrictions or regulations as to who may serve in a fiduciary capacity.

Some commentators have expressed concern that the differing levels of sophistication between offshore financial centres will lead to "regulatory arbitrage", and fuel a race to the bottom, although evidence from the market seems to indicate the investors prefer to utilise better regulated offshore jurisdictions rather than more poorly regulated ones.

Taxation

Although most offshore financial centres originally rose to prominence by facilitating structures which helped to minimize tax, tax avoidance has played an increasingly smaller role in the success of offshore financial centres in recent years.

Although most offshore financial centres still charge little or no tax, the increasing sophistication of onshore tax codes has meant that there usually is little tax benefit to moving a transaction structure offshore.

Most professional practitioners in offshore jurisdictions refer to themselves as being "tax neutral", referring to the fact that, whatever tax burdens the proposed transaction or structure will have in its primary operating jurisdiction or market, having the structure based in an offshore jurisdiction will not create any additional tax burdens.

For example, international joint ventures are often structured as companies in an offshore jurisdiction when neither joint venture party wishes to form the company in the other party's home jurisdiction, but both parties wish to ensure that the company's jurisdiction of incorporation will not attract unwanted tax consequences.

Many offshore financial centres used to "ring fence" offshore companies formed in those jurisdictions (International Business Companies formed in the British Virgin Islands are a good example).

However, recent international pressure has brought an end to ring-fencing in most jurisdictions, and most offshore financial centres simply restructured their tax codes so that the activity of the offshore companies, whilst technically subject to tax in the jurisdiction, was never likely to result in tax being assessed.

Critics of offshore financial centres argue that a lack of transparency in offshore financial centres means that they are vulnerable to being used in illegal tax evasion schemes. A number of international organizations also suggest that offshore financial centres engage in "unfair tax competition" by having no, or very low tax burdens, and have argued that such jurisdictions should be forced to tax both economic activity and their own citizens at a higher level.

Another criticism leveled against offshore financial centres is that whilst sophisticated jurisdictions usually have developed tax codes which prevent tax revenues leaking from the use of offshore jurisdictions, less developed nations, who can least afford to lose tax revenue, are unable to keep pace with the rapid development of the use of offshore financial structures.

Offshore financial service

An offshore financial centre (or OFC), although not precisely defined, is usually a low-tax, lightly regulated jurisdiction which specializes in providing the corporate and commercial infrastructure to facilitate the use of that jurisdiction for the formation of offshore companies and for the investment of offshore funds.

Offshore financial centres are often (but not always) current or former British Colonies or Crown Dependencies, and often refer to themselves as offshore jurisdictions.

In Tolley's International Initiatives Affecting Financial Havens (2001), Tim Bennett, ISBN 0-406-94264-1, the author in the Glossary of Terms defines an "offshore financial centre" in forthright terms as "a politically correct term for what used to be called a tax haven."

However, he then qualifies this by adding "The use of this term makes the important point that a jurisdiction may provide specific facilities for offshore financial centres without being in any general sense a tax haven."

The term is fluid to a certain extent, and it has been remarked more than once that whether a financial centre is characterized as "offshore" is really a question of degreeconsiders the following to be characteristics of an offshore financial centre:

• Jurisdictions that have relatively large numbers of financial institutions engaged primarily in business with non-residents;
• Financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies; and
• Centres which provide some or all of the following services: low or zero taxation; moderate or light financial regulation; banking secrecy and anonymity.

Views of offshore financial centres tend to be polarized. Proponents suggest that reputable offshore financial centres play a legitimate and integral role in international finance and trade, offering huge advantages in certain situations for both corporations and individuals, allowing legitimate risk management and financial planning.

Critics argue that they drain tax from wealthy (and not so wealthy) nations, are insufficiently regulated, and facilitate illegal activities such as tax evasion and money laundering while avoiding legal risk under corporate veil.

Proponents point to the tacit support of offshore centres by the governments of the United States (who promote offshore financial centres by the continuing use of the FSC) and United Kingdom (who actively promote offshore finance in Caribbean dependent territories to help them diversify their economies and to facilitate the British Eurobond market).

OPIC, a U.S. government agency, when lending into countries with underdeveloped corporate law, often requires the borrower to form an offshore vehicle to facilitate the loan financing. One could argue that US external aid statutorily cannot even take place without the formation of offshore entities.

What is certainly true of offshore financial centres is that recently they have attracted a great deal more attention than in the past, and international initiatives spearheaded by the OECD, the FATF and the IMF have had a significant effect on the offshore finance industry. number of smaller, less regulated jurisdictions figuratively went to the wall, and closed up shop. Most of the principle offshore centres that remained considerably strengthened their internal regulations relating to money laundering and other key regulated activities. On 23 February 2007 The Economist published a survey of offshore financial centres; although the magazine had historically been very hostile towards OFCs, the report represented a shift towards a very much more benign view of the role of offshore finance, concluding: "...although international initiatives aimed at reducing financial crime are welcome, the broader concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether nominally on- or offshore, are good for the global financial system."