Offshore Banking History

Tax havens are often located in beautiful parts of the world.

All that offshore banking really means is that the bank is located outside of the country of residence of the depositor. Throughout history, especially the last century, a few reasons for depositing offshore have made this style of banking popular. Relatively low taxes or no taxes at all on the deposits and extreme privacy (think Switzerland) are the main reason for offshore banking's success.

First Offshore Banks

Although taxation has existed since the time of the Ancient Greeks, the British put into place a particularly strenuous tax code in the beginning of the 20th century. The first offshore banks cropped up on the Channel Islands, between France and Britain. These offered places to keep your money without it being taxed.

History of the Term

The first offshore banks were so named after the Channel Islands banks. Later it became a tradition for many places that offered offshore banking to be islands, in accordance with the name. Places like the Bahamas, Cayman Islands and Cyprus are all examples of this. There are some counterexamples of landlocked countries like Switzerland, an offshore banking haven made famous by its secrecy laws.

Offshore Banking and World War II

Offshore banking became especially historically important during World War II. German officials routed a lot of money, gained from looting rich Jewish homes, through Swiss banks. Swiss banks had a history of secret banking dating back to the Middle Ages but it was codified into law in 1934, just in time for the outbreak of the war. A lot of this lost property was, controversially, never returned to Jewish families because the practices of offshore banking made it almost impossible to trace.

Offshore Banking and Crime

Because of relatively low taxes and high secrecy, many criminals and organized crime groups use offshore banks to store or launder money. The International Monetary Fund says that between $600 and $1.5 trillion is laundered each year. This is up to 5 percent of global GDP. Much of this money is laundered by drug cartels, who want their funds to be difficult to trace. Historically the connection between drug money and offshore banks started in the '70s, with the explosion of drug proceeds in Colombia and the Americas.

Crisis in Offshore Banking

Following the financial crisis of 2008, various powerful countries like the U.S. and Britain have made an effort to crack down on offshore banking. This is because rich countries are suffering from high deficits that could be cured with greater tax revenue. Countries from Anguilla to Andorra to the Cayman Islands have been forced to comply with new international rules on transparency.

References

• CK Magazine: History of Tax Havens
• Sterling Offshore: Banking Facts
• World Net Daily: Offshore Banks

Resources

• The Economist: A Survey of Offshore Finance