General Glossary of Typical Offshore Banking Terms

Edited by: Prof. G. S. Mentz, Esq.

As in any industry there are key terms with specific meaning unique to its participants. The following list of terms is not meant to be all-inclusive. It is meant to provide the reader with basic understanding of offshore terminology.

Offshore
This term, when used in this context, and when referring to a country, means a jurisdiction that offers financial secrecy laws in an effort to attract investment from outside its borders. When referring to a financial institution, "offshore" refers to a financial institution that primarily offers its services to persons domiciled outside the jurisdiction of the country in which the financial institution is organized.

Financial Secrecy
This term refers to the confidentiality afforded to financial transactions either by enactment of law or by other means. There are many forms of financial secrecy. Financial secrecy can be a part of an agreement between the institution and the client. Law can impose it with either criminal or civil sanctions. Financial secrecy can be operationally given by the financial institution whereby the institutional practices call for only top management to know who owns the account or no bank official knows who owns the account, such as a numbered account. It can also be obtained by the imposition of an attorney, nominee, or entity between the bank and its client.

Tax Haven
A tax haven is a country, which provides a no-tax or low-tax environment. The U.S. is considered a tax haven by some countries. In some offshore jurisdictions the reduced tax regime is aimed towards entities organized in the country with all operations occurring outside the country. These countries seek to encourage investment and make up revenue losses by charging a variety of fees for the start up of the entity and on an annual basis.

Beneficial Ownership
This term refers to the true owner of an entity, asset, or transaction as opposed to any stated ownership provided in documents or oral representations. The beneficial owner is the one that receives or has the right to receive proceeds or other advantages as a result of the ownership. It is common practice in offshore financial secrecy jurisdictions to interpose entities, individuals, or both as stated owners. The beneficial or true owner is contractually acknowledged in side agreements, statements or by other devises.

Nominee
A nominee is an individual or entity, which acts on behalf of a beneficial owner. Most often the nominee pretends to be the owner of an entity, asset, or transaction to provide a veil of secrecy as to the beneficial owner's involvement. Many offshore entities provide nominee services whereby they will provide a nominee to act as owner of your arrangement but generally will not act unless instructed to by the beneficial owner.

International Business Corporation (IBC)
The term international business corporation or IBC refers to a corporation formed in an offshore financial secrecy jurisdiction which is afforded certain tax advantages and protection as to the disclosure of its beneficial owner. Depending on the offshore financial secrecy jurisdiction, shareholders of the IBC may remain confidential through the use of bearer shares.Just as with U.S. corporations, the same person may act as a shareholder, director, president, agent, or as any other officer within the company. Generally, however, the beneficial owner(s) will appoint resident officers and directors for the IBC. Typically an IBC is authorized to do business anywhere in the world except in its home country where it was incorporated (i.e. an IBC formed in The Bahamas may do business anywhere in the world except The Bahamas). The IBC may purchase real estate, cars, businesses, etc. The beneficial owner may act as an agent of the IBC to purchase assets on its behalf. By this means, assets are held under a corporate name, thereby helping to protect the beneficial owner's privacy. It has been reported that there are over one million IBCs formed in offshore jurisdictions worldwide.

Personal Investment Corporation (PIC)
A PIC is a term used in the banking industry to refer to an IBC. PICs are generally created for the private bank's client in order to hold the client's investment assets. A PIC and an IBC are analogous.

Private Banking
Offshore banking services are most commonly handled by the private banking departments of commercial banks or by private banks that cater solely to private banking clientele. Private banking is a relatively recent term that refers to a higher level of financial services afforded to a bank's wealthiest clients. The private banking department of a commercial bank has been described as functioning as a bank within a bank, maintaining its own separate books and records, and subject to separate operating procedures. Private banking activities are conducted through relationship managers and marketing officers who have access to a team of specialists around the world in order to provide personal money management, financial advice, and investment services to their high net worth clients. Private bankers are in a unique position of having knowledge and understanding of their client's personal and business backgrounds, sources of wealth, and uses of private banking accounts. Our use of this term doesn't imply that private banking is a term usually associated with abusive tax schemes. It is a commonly used term to describe many of the services discussed above.

Offshore Trustee
A trustee has a fiduciary duty to manage and conserve the assets of a trust over which he or she has control. The offshore trustee has an additional duty to maintain the financial privacy of the beneficial owner of the trust assets.

Custodian Services
This is a service whereby a person or entity agrees to hold and manage assets on behalf of another person or entity.

Letter of Wishes
A letter of wishes is a document that purportedly has no legal status. In fact the document is used to transmit the wishes of the creator or the alleged owner of the trust to the trustee. A letter of wishes is a separate document and not a part of the trust instrument. Letters of wishes are generally used by the beneficial owner of the trust assets to retain some control over the trust assets. Trustees normally welcome this tool. It enables them to exercise their discretion having in mind the wishes of the grantor. The trustee may consider the letter but is not bound or otherwise accountable by its terms. In reality the letter of wishes will be honored as if it were a binding legal document. Although a letter of wishes is frequently associated with abusive trusts, both domestic and offshore, it is also used as a part of normal estate planning and in other contexts for legitimate purposes.

Fictitious Invoices
It is common practice in the offshore industry to issue false invoices as a means to transfer money to an offshore jurisdiction, while at the same time achieving a tax deduction for the paying entity. Commonly an entity associated with an offshore promoter will issue the invoice.

Red Cross Scheme
This is a scheme that uses a charitable entity to disguise a transfer of funds offshore. For example, $1,000,000 is donated to a charitable organization. The charitable organization then remits a portion of the "donation" to an account offshore and retains a portion of the initial donation. The orchestrator takes a $1,000,000 donation and also has the benefit of transferring a portion of the "donation" to the orchestrator's offshore account.

Offshore Promoter
An offshore promoter is a person or entity who markets offshore arrangements to the public. The promoter can be a financial institution, lawyer, accountant, broker, financial planner, or other individual.

Nominee Director
Every IBC must have a Board of Directors. The Board may consist of one person or many people. For instance, the beneficial owner of the IBC may appoint himself/herself as the director and sole officer of the corporation. However, most IBCs are formed with a nominee director. The nominee may be, but does not have to be, an individual who works and/or resides in the country where the IBC was formed. The nominee may be used to sign (contracts, loans, etc.) for the IBC should the beneficial owner not want his/her signature to be connected with the corporation. Typically, the nominee director will have no knowledge of the IBC's affairs or accounts, cannot control or influence the IBC, and will not act unless instructed to by the beneficial owner.

Bearer Shares
Many offshore financial secrecy jurisdictions permit the issuance of bearer shares by corporations chartered in their jurisdiction. The bearer (the holder, or the one with possession of) the share certificate(s) is the owner of the share(s). Only the bearer knows that he/she owns stock in the offshore corporation. Therefore, the ownership of this offshore corporation (IBC) remains private. Bearer shares may be bought, sold, or exchanged in complete privacy.

Offshore Mail Forwarding Address
Often an IBC's offshore address is nothing more than a mail drop (P.O. Box) assigned to the IBC. Bank and brokerage statements and any other type of company mail may be sent to this address. The mail will typically be picked up twice monthly by the offshore facilitator. The IBC's mail will be put into a plain, brown envelope and mailed to the address of the beneficial owner's choice. Only the domestic return address and the recipient's address appear on the envelope. Thus, the discrete envelope arrives with the offshore IBC's mail inside. Using offshore mail forwarding insures that the wrong eyes will never view sensitive offshore mail.

Other Relevant Terms:

"Criminalized Drug Money Laundering": The jurisdiction has enacted laws criminalizing the offense of money laundering related to drug trafficking.

"Criminalized Beyond Drugs": The jurisdiction has extended anti-money laundering statutes and regulations to include non-drug-related money laundering.

"Record Large Transactions": By law or regulation, banks are required to maintain records of large transactions in currency or other monetary instruments.

"Maintain Records Over Time": By law or regulation, banks are required to keep records, especially of large or unusual transactions, for a specified period of time, e.g., five years.

"Report Suspicious Transactions": An "M" (for "mandatory") indicates that by law or regulation, banks are required to record and report suspicious or unusual transactions to designated authorities. A "P" indicates that by law or regulation, banks are permitted to record and report suspicious transactions. An effective know-your-customer policy is considered a prerequisite in this category.

"Financial Intelligence Unit": The jurisdiction has established a central, national agency responsible for receiving (and, as permitted, requesting), analyzing, and disseminating to the competent authorities disclosures of financial information concerning suspected proceeds of crime, or required by national legislation or regulation, in order to counter money laundering. These reflect those jurisdictions that have met the Egmont definition of an FIU.

"System for Identifying and Forfeiting Assets": The jurisdiction has enacted laws authorizing the tracing, freezing, seizure and forfeiture of assets identified as relating to or generated by money laundering activities.

"Arrangements for Asset Sharing": By law, regulation or bilateral agreement, the jurisdiction permits sharing of seized assets with third party jurisdictions which assisted in the conduct of the underlying investigation.

"Cooperates w/Domestic Law Enforcement": By law or regulation, banks are required to cooperate with authorized law enforcement investigations into money laundering or the predicate offense, including production of bank records, or otherwise lifting the veil of bank secrecy.

"Cooperates w/International Law Enforcement": By law or regulation, banks are permitted/required to cooperate with authorized investigations involving or initiated by third party jurisdictions, including sharing of records or other financial data.

"International Transportation of Currency": By law or regulation, the jurisdiction, in cooperation with banks, controls or monitors the flow of currency and monetary instruments crossing its borders. Of critical weight here are the presence or absence of wire transfer regulations and use of reports completed by each person transiting the jurisdiction and reports of monetary instrument transmitters.

"Mutual Legal Assistance": By law or through treaty, the jurisdiction has agreed to provide and receive mutual legal assistance, including the sharing of records and data.

"Non-Bank Financial Institutions": By law or regulation, the jurisdiction requires non-bank financial institutions to meet the same customer identification standards and adhere to the same reporting requirements that it imposes on banks.

"Disclosure Protection Safe Harbor": By law, the jurisdiction provides a "safe harbor" defense to banks or other financial institutions and their employees who provide otherwise confidential banking data to authorities in pursuit of authorized investigations.

"Offshore Financial Centers": By law or regulation, the jurisdiction authorizes the licensing of offshore banking and business facilities.

"States Parties to 1988 UN Drug Convention": The jurisdiction is a party to the 1988 United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, or the country that is responsible for the jurisdiction's international relations has extended the application of the Convention to the jurisdiction.

Consult with a lawyer or your compliance department to research and understand these terms and determine if any updates have been made.