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Offshore Finance

Offshore finance refers to financial transactions that take place in jurisdictions that are either literally or jurisdictionally separated from the major economies of the onshore world, such as the United States, Britain, Japan, or Germany. Offshore financial services are transacted from offshore financial centers (OFCs) found in dispersed locations throughout the planet. Although no firm consensus exists in the academic or business worlds as to the number of OFCs, most offshore jurisdictions are small independent or semi-independent island nations with spatial clusters found in the Caribbean basin and in Western Europe and in isolated locations in Asia and the Pacific region. This topic is of importance to geographers because the offshore world is often at the spatial margins of economic activity where many of the problems of the modern global economy are found: extremely unequal tax practices, money laundering, and terrorist financing. This entry addresses reasons for the creation of an offshore financial sector, the current distribution of OFCs, and reaction to the growth in offshore finance by the onshore world.

Development of Offshore Finance

Offshore financial transactions and OFCs became more relevant and visible as the global circuity of capital grew in size and intensity in the second half of the 20th century. The global financial system evolved and grew in sophistication and complexity because of several developments, including the dissolution in the 1960s of the post-World War II Bretton Woods system of fixed exchange rates pegged to the U.S. dollar; the subsequent creation of the Eurodollar market (“Eurodollars” are U.S. currency held in banks located outside the United States, and “Eurocurrency” is any major currency held in banks outside the country of issuance); the growth in Middle East petrodollar recycling in the 1970s; and technological improvements in the latter part of the 20th century in electronic telecommunications and data exchange. Current estimates show that as much as half of the world's stock of money either resides in or flows through these places.

Spatial Distribution of OFCs

No consensus exists as to the number of OFCs transacting financial services in the global economy. Supranational regulatory and supervisory bodies such as the Organisation for Economic Co-operation and Development (OECD), the European Union (EU), the Financial Action Task Force (FATF), or the Basel Committee Offshore Group of Banking Supervisor (OGBS) vary in the number of OFCs defined and listed. In addition, trade bodies such as the Lowtax Network identify more. Table 1 shows a current list of low-tax jurisdictions as defined by http://Lowtax.net, with those members of the OGBS so identified. These places—many of which are small island economies—number at least 40 and are scattered throughout the planet. The factor they have in common is the use of accommodating (often described by critics as minimal) legislative, regulatory, and supervisory infrastructures to attract capital by marketing tax minimization, secrecy, and confidentiality of service and product.

Offshore-Onshore Tensions

The first serious reaction from the onshore world toward regulating the financial activities of the offshore world came with the 1998 initiative by the OECD addressing harmful tax competition as an emerging global issue. The OECD's concern over existing inequities led to specific guidelines published in the form of a so-called blacklist of most jurisdictions labeled as tax havens, and OFCs were then charged with establishing guidelines for increased transparency when reporting financial transactions.

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