History of Offshore Banking. Does It Really Have A Future?

By Santana Nyekano

Offshore banking, is a segment of the finance industry whose birth can be traced back to Vienna, Austria.

Offshore banking was born when the neutrality of Switzerland was established during the Vienna Congress in 1815.

Some accounts, however, claim that offshore banking originated in the Channel Islands of France.

Despite the contradictions, one thing is clear: that offshore banking was born out of the need for individuals to find a haven for their wealth.

During the post-Napoleon Europe, wealthy families and merchants saw the need to find a safe place to keep their growing assets. This was an era in Europe defined by constant economic turmoil and political strife.

The ruling elite sought ways to finance their wars and lead lives of luxury, and with the increasing numbers of affluent families, taxation had grown to become the easiest and most rewarding way to get more money.

During this time, European kingdoms, empires, and territories imposed higher taxes without providing equivalent services such as security. Prevalent insecurity due to societal imbalances and exorbitant taxation forced the wealthy to safeguard their dwindling fortunes abroad.


In the mid-1800s, bankers in the Northwestern Islands of France cashed in on frustrations faced by the Europe’s super-rich by inviting them to deposit their wealth in their banks to enjoy strong asset protection, lower taxation, and get banking confidence.

Before long, offshore banking was open to the rich and opening accounts with these banks spread among the royals, industrialists, and the European elite families.

Since the foundation of the first offshore banks in Vienna and Chanel Islands, offshore financial institutions have maintained an impressive resume of safeguarding the wealth of foreign investors from unreasonable financial regulations and scrutiny, socioeconomic turmoil, and punitive taxation by regimes among other threats.

The 'snowball’ effect that resulted led to smaller “offshore jurisdictions” rushing to tap the revenue flowing freely into the small islands that were being revamped as tax havens.

The Coining of “Offshore banking” and elite banking

According to historyandpolicy.org, the demand for secure banking practices and sound financial regulation dramatically augmented the increase in the number of banking institutions offering such financial services.

By the late 19th century, the evolution of the rules of offshore banking boosted the confidence that wealthy individuals had on offshore jurisdictions and the amount of monies they attracted rolled into billions.

It was during this time that the term “offshore banking” was coined to describe the small offshore financial centers and tax havens that offered strong, safe, and anonymous banking backed by sound financial and regulatory practices.

Elite offshore banking is believed to have spread from Europe to the rest of the world at the beginning of the 20th century.

As investors and wealthy families flocked from around the world to take advantage of the offshore tax havens, more institutions were established in economically sound and politically stable locations.

This form of banking grew very popular in the trade circles as the banks were willing to customize their fiscal policies to offer depositors great advantages and potential investors a wonderful haven to save their money.

While this was a beneficial approach, a more compact structure was required to ensure sustenance and feasibility in the long-term.

The Turning Point: 1889 Business Incorporation Laws of Delaware

Offshore banking was further nurtured by the relaxation of business incorporation laws passed in 1889 in Delaware and the rapid weakening of the British Empire in the late 19th century.

Since then, offshore banking has evolved from a new tool that merchants used to facilitate the flow of investment capital into a matter of contention for the media, governments, and the general public.

By the turn of the 20th century, there were hundreds of established offshore banks operated in low and no-tax jurisdictions all over Europe.

These banks offered unmatched advantages and benefits over domestic accounts, and as competition among themselves intensified, the services became more accessible to more people, and requirements further relaxed.

It is indisputable that the very first offshore banks were established in island locations. However, it is not accurate to depict all offshore banks as located only in islands as the media tends to portray.

As a matter of fact, the largest and most powerful offshore jurisdictions today are found in the UK and the US according to AdvisoryHQ.

The liberation of Switzerland that is seen as the seed that led to the growth of offshore banking in early 19th century meant that no country could use it as a military base of operation or invade it.

Over a century later, Switzerland played another crucial role in the history of offshore banking with the introduction of the Swiss Banking Act in 1934.

This law made it illegal for banks to provide account and personal information about their customers to authorities unless the request met certain conditions.

In 1925, the United Kingdom passed legislation that made it easier for its citizens to access financial trust services and to keep their financial dealings under wraps.

Just four years later in 1929, a landmark ruling by the London courts completely changed the world’s perception of offshore banking.

The court ruled that Egyptian Delta Land and Investment, a company registered in London with its headquarters in Cairo, did not have to pay tax to the UK government owing to it using offshore banking services in the country.

This ruling is viewed as the one major event that set a precedent for tax avoidance and the explosion of offshore banking in the country and around the world.

Following the ruling, the City of London established itself as the top provider of offshore financial services and advice.

However, the influx of foreign companies and individuals operating in the UK without paying taxes led to the devaluation of the British Pound.

As a result, the British government was forced to prohibit local banks from lending to foreign companies and individuals.


Caribbean Offshore Goldmine

While the British government realized that offshore banking and tax havens were viable goldmines in the 1960s, it was the country’s small formal policy development approach that contributed to the thriving of offshore banking.

For instance, when the London financial community underwent a transformation that made it a preferable banking location in the late 19th century, states in the US including New Jersey quickly followed suit.

In 1889, New Jersey became the first state to liberalize incorporation laws as a way to entice companies and corporations from out of the state to register there and enjoy greater tax limits.

Caribbean-based offshore banking took off after the First World War in the 1920s largely because of the islands’ proximity to the United States.

In the years after the war, wealthy plantation owners, industrialists, and stock traders were attracted to the emerging secure banking services offering more convenient services compared to established offshore jurisdictions in Europe.

At this time, independent jurisdictions in the Caribbean liberated from British rule discovered a simple yet powerful way to take advantage of the booming commerce in the US.

These banking institutions excelled because as the world began the healing process post-WWI, the rich embarked on looking for ways to insulate themselves from catastrophes such as the world war.

Interestingly, these islands became a magnet for established banks in Europe, with many renowned foreign banks opening up branches to market their services to the America’s new millionaires.

Towards and during the World War II, a momentous shift in the global population combined with frequent transfers of funds in response to instability and conflicts led to the enactment of tougher and stricter banking laws. Countries such as Britain, in its move to get a hold of the runaway banking sector, drove business to offshore center.

Creation of the Euromarket

After the Second World War, the ensuing peace and advancement of transportation, financial, and trading technologies helped the global economy and trade to thrive.

In 1957, the Bank of England entered an agreement with British banks to create a temporary and informal allowance for banks in the UK to conduct unregulated deals with non-British clients provided they dealt in foreign currency.

The creation of Euromarket gave birth to a new industry that made many of the former British colonies—particularly those in the Caribbean—prominent overnight.

The ties that banks in these jurisdictions had with the UK banks meant that the institutions could legally, easily, and covertly make any financial transactions.

The Euromarket was established at a time when the UK economy and the value of the sterling pound was still under pressure, and UK banks, being constrained from growing by money exchange controls, found the loophole to carry out business on behalf of the unregulated offshore market.

With the Bank of England turning a blind eye to the dealings of local British banks, offshore banks really took off around the world.

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Inter-State Double Taxation Avoidance Treaties

The prominence and success of offshore banking were further reinforced by trade treaties that countries entered post the World War II.

For instance, the treaty between Luxembourg and Italy in 1980 put a cap on the tax rates that the citizens of both countries were required to pay.

Another example is the treaty signed by Cyprus and Russia, which capped taxes on dividends from Russia at a fixed five percent.

Another major milestone in offshore banking is the transformation of the City of London elite banking center into a nexus of global finance.

This center played a major role in orchestrating the transfer and parking of almost half of all international banking assets and liabilities using offshore banks according to Ronen Palan, a professor of international political economy at City University London.

European Union governments agreed to introduce the Savings Tax Directive in July 2005 to stamp out cross-border interest payments, a move that would have major implications for offshore banking.

This agreement meant that residents of EU who deposit money in countries other than the one they reside in would be forced to choose between allowing offshore banks to notify tax authorizes in their country or forfeit tax where they are making a payment.

Essentially, this meant that cross-border tax interest paid to an individual would come to the knowledge of his/her resident country.

The prominence of offshore banking began to take a hit with the near bankruptcy of Cyprus, a popular tax haven, in 2012.

The industry came under the spotlight when over $31 billion in Russian deposits was almost lost.

Later that year, in April, a leak originating from two trust companies that operated offshore banking services in Singapore and British Virgin Islands exposed account information for over 120,000 companies and individuals.

However, significant policy changes that would have the greatest impact on offshore banking came in 2013.

This was when the EU Economic and Financial Affairs Council passed a new directive that requires bankers in the EU member states to share their clients’ transaction records and identities automatically.

This meant the banks operating offshore banks within the EU were obligated to conform to authority requests—it was a shattering of the industry’s top strengths. Shortly after, this directive won the support of major global economies outside the EU including the United States and Australia.

Offshore Banking Today

The Bloomberg Billionaire Index shows that 30 percent of the 200 richest people in the world put their wealth in or through an offshore entity.

Although Switzerland remains the most popular haven for investment, there are many independent jurisdictions around the world that provide as much secrecy and favorable wealth safekeeping environment like it. 

In May 2015, the European Union signed a protocol with Switzerland making amendments to the countrys existing savings laws to transform it into an automatic exchange of financial information agreement based on a global standard.

The newly revised agreement means that residents of EU will no longer enjoy the anonymous and privacy banking benefits the country has offered to foreign depositors since the 19th century.

While this move is seen as a significant step in the fight against tax evasion and fraud, it could as well be the most significant step in the death of offshore banking as we know it.

Today, people working away from home are heavily involved in expat banking, adopting measures in order to send money home and receive incentives.

The future of this industry is surely a bright one, with traditional barriers being brought down and newer, more inclusive and flexible approaches being adopted across the board.

• http://www.advisoryhq.com/articles/brief-overview-and-history-of-offshore-bank-accounts/

• http://www.historyandpolicy.org/policy-papers/papers/history-of-tax-havens

• http://www.offshorecompany.co.uk/banking/history.htm

• http://www.bloomberg.com/news/articles/2013-05-03/offshore-tax-havens-in-spotlight-after-200-year-history

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