Banking offshores: how does it work? Case study of Luxembourg

Nowadays, the internationalization and globalization of economic relations are characterized by significant movement of the capital. One of the characteristic features of the modern world economy is the financial resources accumulation in offshore areas worldwide. A special place should be given banking offshore centers, which account for about 20 % of all bank transactions by some estimates.

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Offshore centers are generally characterized by the following features: tax incentive regimes, financial secrecy, exchange control, communications, easy access to foreign banking system. The most important features of the offshore banking centers characteristics are a high level of financial privacy and easy access to the foreign banking system. Let’s focus on that more.

The main characteristics of offshore banking centers are:

1) tax benefits or tax exemption for non-resident activity in the offshore banking center;

2 ) the movement of the capital is virtually not regulated ;

3) agreements made ​​in these centers have an international basis and remain outside the influence of the economic and financial policy of the country;

4) offshore centers have effective local and international communications and transport infrastructure;

5) offshore centers exist in terms of domestic political stability and ensure secrecy agreements;

6) a well-functioning banking system and stable central banks are necessary;

7) the main language in these areas is English ;

8) offshore centers are easily accessible, they are located in a time zone where the major financial and commodity markets in the world are;

9) centers have highly skilled labor ;

10) offshore centers should have a good relationship with the financial authorities in industrialized countries [2].

The main motives of establishing an offshore company in the financial jurisdictions include: the loyalty of government regulation, high banking and commercial secrecy and anonymity of beneficial owners of the companies, easy access to the foreign financial system.

Some level of secrecy is typical for many countries, for offshore jurisdictions, as well as for others. However, most countries do not protect the banking and commercial data, information about the real owners from the investigation by law enforcement authorities of a foreign country, especially when the investigation is carried out in accordance with the international agreements. The peculiarity of the offshore jurisdictions is the availability of excessively stringent rules protecting the banking and commercial secrecy. They may not break their barriers of secrecy, even when there are serious violations of the laws of another country. From this perspective, there are two categories of the offshore jurisdictions:

- countries that refuse to weaken its secrecy, despite the use of secrecy for criminal purposes;

- countries that allow legal investigation as appropriate.

The degree of secrecy and the scope of these restrictions are different in different countries. For example, Bermuda distinguish between tax evasion and other criminal acts. They help law enforcement agencies in the investigation of non-crimes, but refuse to cooperate in cases of tax evasion. In many countries, particularly in the Bahamas and the Cayman Islands, the degree of guaranteed privacy is directly related to the type of statute purchased or licensed corporation.

Privacy is ensured especially in countries that have been or are still British colonies. Many jurisdictions have confirmed and strengthened criminal sanctions for violation of privacy. For example, in 1976, the Cayman Islands, which already had a system of strict banking secrecy laws have tightened their adding significant sanctions against those who expose a lot of banking and commercial information [5].

The use of offshore entities makes it possible to place the capital in hard currency, in the reliable banks in the country with stable economic and political situation. Offshore company may open foreign currency bank account in a foreign bank. Such funds may be used for non-cash payments, other transactions (letters of credit, bank guarantees) or informal accumulation of funds [5].

Regarding the establishment of banks in offshore areas, the main motive is to open and maintain bank accounts for investors from countries with high taxes and strict currency controls and transactions in Eurocurrency market. That’s why many of these financial and credit institutions are registered in the main centers of Eurocurrency market – especially in Luxembourg, Switzerland and Liechtenstein, and – in Singapore, Bahrain, Cyprus, the Cayman and the Bahamas. A lot of offshore banks are registered for specific projects and financial schemes [4].

One of the world’s major offshore banking centers is Luxembourg, because it accounts for 6-8% of the world’s offshore capital. The country attracted large capital investment funds, and the amount of net assets under management, Luxembourg is considered to be one of the three world leaders.

There are all main European and international financial institutions In Luxembourg. Notably, at 30. 10. 2013, only 5 are Luxembourg origin among 147 commercial banks registered in Luxembourg. There is more detailed information on the country of origin of commercial banks registered in Luxembourg in the Table 1.

Table 1.

The number of banks registered in Luxembourg, by main countries of origin

Country of origin Number of banks Country of origin Number of banks
Germany 37 Belgium 7
France 14 China 6
Switzerland 11 U.S. 6
Italy 9 Japan 5
UK 9 Luxembourg 5
Sweden 8 Brazil 4

 Based on [6 ].

Creation branches of European banks is encouraged by the elimination of all kinds of coercion in relation to cash flow, such as No minimum reserves, excluding any regulation with respect to interest rates or capital movements and the unconditional observance of banking secrecy, combined with a flexible and rigorous bank control and under the same favorable tax rate of all customers .

A citizen of any country has no problem with opening an account in one of the 147 banks in Luxembourg. However, there is an increased requirement in such procedures for the citizens of CIS. Moreover, each bank can present its own specific conditions of unexplained causes. For example, the Belgian-Luxembourg Bank Generale differs by red tape and showing increased demands of customers. A number of banks that are subsidiaries, send a potential customer to the central residence in the country where it is located [3].

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In general, the needs of companies of Luxembourg are solved by local banks, while international banks provide a wide range of cross-border services: multi-currency loans and loan syndication, issuance and listing of securities, including Eurobonds, custody services, trust services, international finance vehicles, issuance and sale of securities, foreign currency exchange and trade financing.

Private banking is particularly in demand in Luxembourg due to lack of withholding tax on interest payments and strict banking secrecy, as well as a very broad range of financial products that are available. In Luxembourg, as in Switzerland, the law firms are entitled to open bank accounts, while keeping secret the name of the actual owner of the funds (beneficiary owner). According to the Criminal Code of the Grand Duchy of Luxembourg, the violation of banking secrecy, except in clearly defined and very limited circumstances, is a crime recognized by bank employees. Luxembourg courts may authorize disclosure only when there is a clear evidence of tax fraud or money laundering  [3].

The greatest common Luxembourg-Belgian bank DEXIA attracts depositors of the former Soviet Union. First of all, the bank does not impose any increased requirements and there is a special sector, serving customers in Eastern Europe. To open an account with the bank, you must do the following conditions: the amount of the initial deposit must be not less than 75 thousand euros, to produce documentary evidence of the origin of the money (invoice for the sale of shares, property, etc., for which client received an amount contributes to the account). Documentation confirming the legal activities of the company, such status, is also necessary.

Conditions for opening bank accounts in Luxembourg  are different, but there are some trends that need attention. For example, if a customer wants to open a deposit account, the deposit amount must be usually at least 50-60 thousand dollars, the sum of the current account must  be at least 100 thousand dollars. Banks pay 4-6,5 % per annum, and the bank gives each client the individual rates on deposits and a maximum rate of 10 % [1].

Other commercial banks located in Luxembourg, which services are offered by one of the brokerage firm, offers the following services: private investment, multi-currency accounts, internet banking, investment accounts, credit cards, Visa and MasterCard.

To open an account you must provide the following documents: a description of the company, a statement of the source of the income, a certificate from any bank account of at least two years (reference).

Accounts are opened mainly for investment and savings purposes, but their use for business purposes is also possible, if only 1/ 5 of the annual turnover of funds were on deposit or invested through the bank [1].

Minimum deposit amount (or the amount that the client should save or invest for the first 6 months) is $400 000  or € 300 000 or £ 200 000 or the equivalent in another currency. The Bank considers necessary meetings with the client within six months after opening an account. The client can independently visit the nearest branch of the bank. If it is painful for the client, it is possible to visit a representative of the bank to the customer or the organization of the meeting in a third country. This bank has many branches around the world and meetings are often held in a convenient place for a client. It is possible to open an account in the name of the company (IBC or LLC) or Foundation. The services of intermediary firms that open an account are about $ 500 [1].

Conclusions. Offshore banking centers are characterized by a loyalty of government regulation, high banking and commercial secrecy, anonymity of beneficial owners of companies and the ease of access to foreign financial system. The main motives of establishing offshore bank is opening and maintaining bank accounts for investors from countries with high taxes and strict currency controls and transactions in Eurocurrency market. Luxembourg is a typical offshore banking center – it accounts for about 6-8 % of the world’s offshore capital. There are all main European and international financial institutions in Luxembourg, due to the high level of secrecy of financial information and the elimination of all kinds of coercion in relation to the cash flows of banks.

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  1. Banki Lyuksemburha. Otkrytie scheta v Lyuksemburhe ICG. – Retrieved from http://www.icg-offshore.com/ru/bank-offshore/eu-banks/149-offshoresbanks-account-luxembourg.html
  2. Lyuksemburh — nekohda metropoliya stali, nyne evropeyskiy bankovskiy tsentr / Pandia.ru. Entsyklopedyya znanyy. – Retrieved from http://www.pandia.ru/364640/
  3. Lyuksemburh: Offshornye bankovskie podrazdeleniya / Yurydycheskiy tsentr. Offshory, akkreditatsiya inostrannykh predstavytel’stv, rehistratsiya kompaniy s inostrannymy investytsyyamy. – Retrieved from http://www.formationcompany.ru/article/lux_banking
  4. Offshornye zony. Printsypy deystviya predpriyatiy v offshornykh zonakh / Nicholas Sakharov. The economist – Retrieved from http://www.sakharov.ru/meo/meo2/77.htm
  5. Tenevaya ekonomika i ekonomicheskaya prestupnost': / Veb-laboratoriya Omskoho hosudarstvennoho universiteta. – Retrieved from http://newasp.omskreg.ru/bekryash/ch5p1.htm
  6. Number of banks per country of origin / Commission de Surveillance du Secteur Financier (CSSF) Luxembourg. – Retrieved from http://www.cssf.lu/en/statistics/banks/monthly-stats/number/

Мар'яна Щегельська

Mariana Shchehelska (Kucheruk)

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