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Offshore Banking in Labuan

In: Business and Management

Submitted By meera
Words 4453
Pages 18
Offshore bank is a bank that located outside the country of residence of the depositor. Offshore banking has often been related with the underground economy and organized crime, via tax evasion and money laundering; though legally offshore banking does not prevent assets from being subject to personal income tax on interest. Even though, offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal.
September 11, 2011 onwards there were many calls for more regulations on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clear stream, based in Luxembourg, being possible crossroads for major illegal money flows. These attempts have been criticized at regulation by defenders of offshore banking. They claim the process is provoked not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They mention the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that Organization for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.
There are many advantages as well as disadvantages of offshore banking. Offshore banks provide access to politically and economically steady jurisdictions. The banks also may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. It also can help developing countries source investment and create growth in their economies, and can help reallocate world finance from the developed to the developing world. Interest is normally paid by offshore banks without tax deducted. Some offshore banks offer services that not available from domestic banks. It also has specific tax advantages for some individuals.
Beyond the advantages there are disadvantages. It’s an underground economy and organized crime through money laundering. The existence of offshore banking encourages tax evasion. Offshore jurisdictions are often remote, so physical access and access to information can be hard. Developing countries can endure due to the speed at which money can be transferred in and out of their economy as "hot money". This "Hot money" is aided by offshore accounts, and can raise problems in financial disturbance. Moreover, the tax burden in developed countries thus falls disproportionately on middle-income groups.

Early 1990’s offshore banking regulation begins as a response to the highly rigid and restrictive nature of domestic banking systems that were force. There was rising demand on the liberal and free environment, where restrictions posed by domestic regulatory authorities were not present. Offshore banking regulation present filled this niche at tax haven that emerged in 1960’s. Offshore banking centers provided a competitive option to cartelized oligopolistic banking structures that were in place during that period. Regulations of offshore banking are allegedly improving, although critics maintain it remains largely insufficient in the 21st century. Supra-national bodies such as the International Monetary Fund (IMF) monitored the quality of the regulation. Banks are generally required to maintain capital adequacy. This is accordance with international standards. They must report at least quarterly to the regulator on the current state of the business.
Since the late 1990’s, particularly on September 11, 2001 onwards, there have been a number of initiatives to boost up the transparency of offshore banking, although critics such as the Association for the Taxation of Financial Transactions for the Aid of Citizens (ATTAC) non-governmental organization (NGO) sustain that they have been inadequate. There are few examples of these are as followed. The tightening of anti-money laundering regulations in many countries as well as most popular offshore banking locations means that bankers are required, by good faith, to report suspicion of money laundering to the local police authority, despite of banking secrecy rules. There is more international co-operation among police authorities.
Secondly, Qualifying Intermediary requirements were introduced by Internal Revenue Service (IRS) in the US which means that the names of the recipients of US-source investment income are passes to the IRS. Following the September 11, the US introduced the USA PATRIOT Act, which authorizes the US authorities to seize the assets of a bank, where it is believed that the bank holds assets for a suspected criminal. Similar measures have been introduced in some other countries. The European Union has introduced sharing of information between certain jurisdictions. They also enforced this in respect of certain controlled centers, such as the UK Offshore Islands, so that tax information is able to be shared in respect of interest. Changes in offshore banking regulation in the 1990s make offshore bank creation really only possible for medium to large multinational corporations that may be family owned or run in the form of "due diligence” which also known as a legal contract.
The regulations of offshore banking operations can be divided into three segments:
 General Cross Border Regulation
In the light of the Basle Committee findings following the BCCI collapse cross border regulation have increased making it possible and easier for information to be passed between regulators in different centers. This has helped the authorities to have a better understanding of the activities of institutions, which are operating, from more than one location. There is a restriction on the type of information. Any information, which is released to outside regulators must remain confidential and can be used only for regulatory purposes.
 Offshore Cross Border Regulation and Supervision
The Offshore Group of Banking Supervisors was created in 1980 with its principal aim being to improving the supervisory systems and general exchange of information, which occurs offshore. This group has 19 members and includes centers such as the Bahamas, Bermuda, the Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, the Isle of Man, Jersey, and Singapore. Through discussions and mutual agreement it has helped it members to identify and clarify such matters as:
a. What information should be exchanged with onshore authorities?
b. How to prevent money laundering and the use of offshore banks for criminal purposes generally?
c. The importance of the role of external auditors in assisting with supervision.
d. The criteria to be applied to assess a bank’s financial position.

 Offshore Depositor Protection
The UK has legislation in place, which is designed to provide depositors with a level protection should the bank, or building society where they have deposited their funds become insolvent. However, this protection will not necessarily extend to offshore branches or subsidiaries of UK banks or building societies. Depositor protection is essentially a matter for the regulatory authorities in offshore jurisdictions and generally there is no cover available. However, an exception to this is the Isle of Man, which has its own compensation scheme. There are a number of possible reasons why a center might decide not to provide a compensation scheme to investors but usually the main reason is the objections which the service providers themselves may have. After all, they will be expected to contribute to the scheme to cover possible claims, if the industry were properly regulated, there would be no need for scheme to be implemented, as investors would be protected under the licensing requirements. 3.0 REGULATIONS AFFECT AND CONTROL OFFSHORE BANKS ACTIVITIES
These regulations affect and control the offshore banks activities. The regulations imposed restriction on the type of information, which can be divulged and usually his would be restricted to information, which would enables the regulator to do his job and prevent possible problems occurring. Regulations ensure that any information to outside regulators must remain confidential and can be used only for regulatory purposes. These regulations prevent money laundering and the use of offshore banks for criminal purposes generally as offshore bank is high risk bank.
These offshore banks are common in tax and banking havens. They have restricted licenses barring them from transacting banking activities with citizens in their own licensing authority. Sometimes they are also forbidden use or deal in the local currency of the licensing jurisdiction.Restricted offshore banks are high risk for a selection of reasons. The licensing country has little encouragement to monitor banks not allowed to do business with local citizens or in the local currency. All they want is the annual license fee. It resides doesn’t allow it to do any business locally. The exception to this rule would be where such a restricted offshore bank is fully and unreservedly guaranteed by a respectable, first class parent bank. For example, in Belize, the three largest offshore banks are all owned by large, world-class banks. In the event of any problems, the parent company will step in and make good on any depositor losses.

These banks are subject to special attention. If peoples carry out any transactions with such banks, they deal might come under the loupe. They are much better off hiding your secret funds in major local banks. Use banks that don’t advertise in the international expat magazines. Avoid banks who give seminars actively targeting the offshore market. Instead, seek private referrals from people you trust. The best place to hide a rough diamond is in the sand.

The final high-risk group of banks is those in ‘blacklisted’ countries. Once again, transfers to and from banks in these countries are automatically flagged for special attention. There are a range of blacklists. There is the money-laundering blacklist maintained by the Financial Action Task Force (FATF). Then there is the OECD’s tax blacklist. The OECD is a Paris-based bureaucracy whose employees all enjoy total exemption from taxes. They maintain a richly-stocked, tax-free wine cellar, too, – all at taxpayers’ expense, of course. The mission of these hypocrites is to make sure that everyone else pays taxes. Other blacklists are maintained by the European Union, the USA and many national tax departments. The blacklists are constantly changing. As one jurisdiction rolls over and plays ball, another will be targeted. These can be preventing by the control of the offshore regulations.

If the offshore banks activities do not regulated there are problems will arise. The bank transforms profit earned from criminal activity into legal profits. These increases the criminal activities such as drug trafficking, arms smuggling, trafficking in stolen arts, body parts, nuclear secrets and weapons.

Labuan Island is a part of Malaysia country, so the system in Labuan is subject to administration under the authority of the Prime Minister. For the offshore industry in Labuan, some special laws have been enacted and will only be used in Labuan only. In this offshore activity Arbitration is allowed, while the dispute heard in camera and is subject to final appeal to the Supreme Court. Labuan is a free port, which no tax is imposed on the activities carried out on the island. Among the taxes are not subject to sales tax, surtax, excise or import and export duties. Economic conditions in Labuan is very strong, there is proven by more than the world's top 50 banks have branches in Labuan. Currency used in Labuan is Malaysian Ringgit currency. Most offshore companies in Labuan are encouraged to do business in foreign currencies, especially.
Labuan was declared by Malaysia government as an International Offshore Financial Centre on November 6, 1989. The principal corporate legislation next Offshore Companies Act was enacted on October 1, 1990. There are also several other laws have been enacted such as the Labuan Trust Companies Act 1990, the Offshore Banking Act 1990, Offshore Insurants Act 1990, Labuan Offshore Business Activity Tax Act 1990, and so on. Also Labuan Offshore Financial Services Authority (LOFSA) has been set up as the sole regulator body for these statuses. LOFSA is to administer the duties of the main offshore operations in banking, insurance, securities, trust and fund management, and establishment or registration of companies.
Under the Labuan Offshore Financial Services Authority Act 1996 [Act 545], section 3 have defined the meaning ‘banks’ that is the Board of the Labuan Offshore Financial Services. In Offshore Banking Act 1990 offshore banking business was defines as the business of receiving deposits on current account, deposit account, savings account or any other account as may be specified by the Bank. Other that, offshore banking also can known as an offshore investment banking business that is subject to such terms and conditions as the Bank may specify, an Islamic banking business or such other business as the Bank, with the approval of the Minister, may specify.

Law to offshore banks in Labuan Malaysia is subject to act 443 offshore banking act 1990. This act has incorporating all amendments up to 1 January 2006. Under the Offshore Banking Act 1990 has provided the regulatory framework covering the operations of offshore banks in Labuan.

For the business offshore banking, it must have a license to operation that. To apply for this license, in licensing of offshore banks section 5 (1) the application is writing must be made by or on behalf of the applicant to the Minister by submitting application to the Bank. Accordance with the Offshore Banking Act 1990, criteria for the minimum requirements necessary to apply for a banking license is first must hold sound track proof, must be supervised by a capable regulatory authority, must be accorded a good credit rating by good enough rating agencies, must be a bank or financial institution, and last is must conform to generally received standards of international banking practices or BIS. Not forgetting the applicant is required to submit an application in a prescribed Form L. Accordance with this act, if one wishes to establish a branch or subsidiaries, he is allowed to apply for an offshore banking license. For this application he needs to complete the documents as the balance sheet audited statement of the particulars of the proposed establishment and the details of directors and shareholders, and the guarantee and or entrepreneurship. Offshore banking act under this part for ‘Offices and Subsidiaries' without written permission from the bank, a licensed offshore bank is a foreign offshore company cannot open any office other than the principal place of business in Federal Territory of Labuan.

Apart from that there are several requirements under the law which must be satisfied by offshore banking upon issuance of the licence, that is; first statutory requests under the OBA, second keep up a physical existence in Labuan, third comply with prudential and reporting requirements issued by LOFSA, fourth carry on business in any currency other than the Malaysian currency except as legitimate by the related authorities, and lastly any other requirement issued by LOFSA from time to time.

All business activities in the offshore bank is a secret, which was pointed out that confidentiality is a symbol of an offshore financial center. So it is the primary responsibility for offshore banks to maintain strict secrecy of client affairs. In the Offshore Banking Act 1990 specifies that an officer or director of an offshore bank is prohibited from giving, reproduce or disclose any information or documents relating to the affairs or account the customer to any person, unless authorized in writing by the client or personal representative. There are also specific restrictions on the inquiry into the affairs of particular the customer. In the offshore banking act was enacted that 'no anything in this Act empowers the Minister to direct Bank, or to authorize the Bank to inquire specifically about identities, accounts and affairs of any particular customer of any licensed offshore banks. This means that the confidentiality of customer information is secure. In addition, no person who has any information or document that the child knowledge has been disclosed in contravention of subsection (1) in any way whatever shall disclose the same to any other person people. While the business relation with customers, cash deposits and opening accounts for customers whose identity is unknown is strictly prohibited to be accepted by an offshore bank. Offshore banks are expected to comply with regulatory codes of conduct that places a strong emphasis on "know your customer".

In arena of introducing Labuan is the heart of super express evolving South Eastern Asian region and close to number of foremost cities and economic focal point like Singapore, Kuala Lumpur, Hong Kong, Brunei and etc. Labuan was declared as an International Offshore Financial Centre (IOFC) in October 1990 and at present in 2011 it is marked for its 13th anniversary. It is not to denied that this legend city has developed rapidly fast and furious from the day it was launch to be the IOFC which benefits from a bountiful income tax system, a fit regulated financial administration, a deep water port and a glowing developed supporting infrastructure including internet communications as well mainly in business and financial firms. The city of Labuan, as per today known as the centre of income contributing as it is famous for the oil and gas exploration owned by PETRONAS Malaysia itself, financial services in hold of about 61 approved banks overall, 56 were in operation (comprising 13 subsidiaries, 6 branches of Malaysia owned banks, 9 subsidiaries and 28 branches of foreign owned banks) described in Labuan Financial Service Centre Annual Report by the Chairman of honour, Governor Dr. Zeti Akhtar Aziz and also in the sector of tourism. The island surround by a vast ocean is a strategic geographical location that constructs Labuan as an extraordinary one. There should be a lot of recommendation the city has followed for the development since it was found to achieve the target of how Labuan is today.
 Create the liberal environment.
Now, driving the sense to further develop Labuan International Business and Financial Centre (IBFC), the first requirement to be fulfilled is to create the liberal environment. This statement is conducive to be applied especially in the entry criteria for business, banking and finance procedure. The reason why it is favourable is because it will encourage the development of Labuan as one of the offshore centre. To further explain, this recommendation refers to tolerant financial and government policy that were categorized by elastic banking act and financial system, near to the ground exchange restriction and low or non-existent domestic taxes. This means is to provide the foreigners a relaxed entry for them to enter Labuan for their employment. As to what the Investor offshore Editorial Team (2011) mentioned in their article, entry procedures in Malaysia is much hard-hitting than any other country. Plus, Malaysia do only permits foreigner, which only grants short-term visas to tourists, students and foreign national attending business conferences. So, in order for them, foreigners to enter the border of Malaysia, they have to apply to the Department of Immigration, which will usually issue a visa for a period of two to three years and thence to renewable for a comparable extent. According to the latest act on Foreign Employment law in Malaysia stated that a foreigner only able to be issued or renew their visas for within five years. Drawing to the main issue, all those barriers should be consider at first to create a limited requirement for them to enter the Labuan Offshore city to reach the fixed target to develop Labuan as an International Business as well a Financial Centre.

 Maintain constant political environment and secure economic performance.
Next, is to maintain constant political environment and secure economic performance. By maintaining a stable political environment helps Labuan to develop and maintain a successful offshore centre. This is because as a normal human being we ourselves will make an assurance to keep our treasury in a safe position. So, the same goes to those investors outside there as they invest in multi millions in order to develop and to keep operating their company located here in Labuan. To further explain the political environment case, Hong Kong’s political stability remains in doubt until the intensions of the People’s Republic are revealed. As foremost, this uncertainty has slow down the growth of offshore banking activities. Another closely related case is regarding Beirut and Shanghai in 1920’s respectively is example where the lack of political stability has lead to the downfall of financial centre. To compress on the noted point, Malaysia government should be extra vigilant dealing in political issues to preserve a peaceful administration to rule the country. Similar to political stability, a vibrant economic performance too would help Labuan to excel in gaining the investors, customers, stakeholder and organization trust in initial business corporation and financial intermediaries. According to Labuan Offshore Financial Service Authority, also known as LOFSA in their annual report (1996 & 2003) mentioned that Labuan offshore banking business, and banking assets have gradually declined since 1997.The reason to preserve the economic performance is to create thought to the investors that Labuan Offshore Centre able to guarantee their fund management in order for them to build enormous turnover in particular invested field. In line, Singapore is one of the best examples to be illustrated as a financial centre of its ability to fabricate due to the stability of its domestic economy.
 Developing the international Islamic financial market.
Developing the International Islamic Financial Market (IIFM) is a way to promote Labuan IBFC to further develop in the future. The reason why IFMM is in the list of suggestion is because; today Islamic Finance and Banking in terms of Shariah principles based product and services are in a part of customer interest that are being talked and practiced as in ‘infancy’ level. The lack of exposure in Islamic Financial System could resist by a proper workout to introduce them globally. In conjunction to this matter, this mission would most probably attract global investors to Labuan IBFC by diversifying the structure offered in the IBFC. The Labuan Foundation Act 2010 (LFA) is line to the above benefit. This mentioned act enable investors from civil law centers to take pleasure in profit offered in Labuan IBFC by using the viable alternative to trusts. This particular sector has the potential to draw massive turnover in the process of developing Labuan Offshore Centre. The development could generate a strong base to assemble a gigantic and liquidize Islamic financial market as this allocate the issuers, investors and intermediaries access to the equal benefits of liquidity and price finding that are available to conventional players in the market. Furthermore, the intended upgrading in this area could play an essential role in improving the elasticity and risk management requirements of domestic Islamic financing. For instance, Labuan IBFC could make amendment on the road to recovery or establish the already dwell categorize services like Islamic Banking, Islamic Private Funds, Islamic Capital Markets, Islamic Takaful and Retakaful and finally the Islamic Foundation itself.
 Maintain and promote the tourism sector and develop educations accessibility.
Last but not least, the great importance in develop, maintain and promote the tourism sector as this will automatically raise the name on the world stage. As foreigners going in and out of Labuan, will discover the function of this offshore city and immediately helps to spread the news. Besides, most of the other offshore centers evolved from a successful tourism industry. Reading an article, magazine or browsing through internet is not the only possible way to expose the fact of the Labuan as the IBFC but it is also well working through this approach. Together with this specialty Labuan could also promote the existing sources for example through education system. So, in such cases Labuan could promote the courses offered to the neighborhoods countries like China, Japan, Turkey, India, Bangladesh and etc to further develop in the future. Through this like-kind of publicity people around the world is easily access to view and get closer to Labuan as an offshore centre. The reason why our group recommends this particular approach is to make use of the facilities available to as tourism in one of the criteria that able to contribute to the economic development. Another supplementary approach to develop this city is through education accessibility. Labuan owns a pleasurable surrounding which comes with expert mass of technology development facilities which enables the process of learning to exist through. The government of Malaysia should persuade and encourage the Labuan administration to promote more learning institution to be set up in this island to increase the options for those local and foreign students to further their studies here in the course related to international business and financial services. Studies based on this professional allow them to see, forecast and analyze the real life process of business and financial service. University Malaysia Sabah Kampus Antarabangsa Labuan and Labuan Matriculation College is the example of the already exist learning centers.

Overall, to further develop Labuan as the International Business and Financial Centre is a long-term process taking into account the recommendation that balanced the law and regulation that govern the Offshore Banks operation. So, in hoping the above mentioned laws and regulations as well the recommendation would be practice as a long-term solution to reach the patronize target of achievement. Besides, the government jointly with the Labuan Development Centre should put the arm together to balance the support needed for this process. As to rational logic, government will always be there to continuously supportive and reactive in order to adopt the recommendation to expand the International Offshore Business and Financial Centre. In here, we our group would like to take a chance to discover the possibilities via Labuan as our prospect business venture. We are also looking forward to experience ourselves by linking in the International Business and Financial Centre in City of Labuan.


(2011). Investor Offshore Editorial Team: An Overview of Labuan as IBFC .
Act 443 OFFSHORE BANKING ACT 1990. (2006). LAWS OF MALAYSIA , 1-37.
(2001). Annual Report: Labuan Fianacial Services Authority.
Bell, C. (2011). Labuan: Law of Offshore. Retrieved november 30, 2011, from LOWTAX global tax & business portal:
CE. (n.d.). LABUAN. Retrieved december 30, 2011, from campany express:
D.A.A.Rahman. (2009). Key Building Blocks of a Vibrant Financial Center: A Case of Labuan Interbnational Business and Financial Center .
R.Baba. (2005). Offshore Banking. Labuan: Pearson Prentice Hall.…...

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