Offshore Banking: The Origins of Transactional Privacy

Introducing the Obstacle

The transformation of the offshore banking business over the last 5-10 year has been remarkable. Many of the traditional freedoms that were sought by individual and corporate entities have largely evaporated from offshore industry and the banking industry at large. Many factors have influenced the demise of offshore banking as a viable option for consumers to structure tax efficiency and minimize exposure of assets confiscation by national governments. As governments increasingly become insolvent due lower tax collections and high entitlement costs, they have to the best of their ability attempted to regulate and legislate out of existence the transactional freedom and privacy of their citizens. I will touch briefly on the offshore banking world and some obstacles faced by the industry, and tie this all back to the rise of the Distributed Ledger and the cryptographic currency.

The King of the Hill Always has the Furthest to Fall

Offshore banks used to provide industry leading currency services that included being able to hold multiple currencies accounts and converting currencies with very little hassle. The major banks in the offshore industry are sufficiently large to be market makers for currencies but the small and medium sized banks have become very limited in their capacity to hold and transact in multiple currencies especially the U.S. Dollar. Intermediary banks willing to facilitate institutional interbank level currency holding and transactional service accounts are a rare thing, and many banks are de-risking out of holding assets for offshore banks due to compliance and regulatory danger.

Regulated Out of Existence

The days of having your own private banking consultant that would provide for your every need is limited to the very High Net Worth (HNW) Clients. Nowadays clients will rarely encounter a bank agent and technology has taken the place of personal connection. The immense progression in banking technology has removed the much necessary personal touch which provided legitimacy and strength to the offshore banking as a robust product. The most often vocalized fear about offshore banking that I have heard is that it is a black hole for money and once the money comes into the bank it seems impossible to get it out. Many of the personalized and flexible expert banking services offered by offshore banks before 2008 have become very difficult to obtain. A simply transactional international business account for many industries such as oil and gas and commodity trading have become next to impossible to secure. Basic trust and foundations accounts can be extremely difficult to open and face increased scrutiny and compliance requirements from banks as to the Ultimate Beneficiary Owner (UBO) or the Ultimate Beneficiary are not only to be disclosed but a Know Your Client Standards are applied to these beneficiaries. This makes privacy near to impossible in the model of offshore banking which was its very raison d'etre.

Impressions Can Lessen Reputation

The offshore banking industry has suffered significant damage to its reputation after the release of the Panama Paper on May 9, 2016 and the subsequent Paradise Papers on November 5th, 2017. These documents protected under attorney client privilege contained details about activities that would amount to tax evasion and other financial crimes. The law firms utilized exotic offshore banks and corporate structuring techniques to break the law and I do not condone this behavior. It is important to remember that these practices where not widespread in the industry as most banks where in fact compliant and acted in an ethical and legal manner as it related to the services they provided. This small minority of bad actors had a profound impact on the public’s impression of what an offshore bank was designed to accomplish to its clients. These perceptions are used as cover for the new hyper regulatory environment which has been unleashed on the industry as governments are now actively targeting individuals who choose to use offshore banks accounts. The media has done a good job of reporting the abuses in the usage of offshore banks and company structuring, but this sensationalisation hides the real nature of the industry and does nothing to truly educate the public. There are many advantages to utilizing an offshore banking structure and these can mitigate many of the same risks that drive consumers to use decentralized blockchain currencies. With governments invading our privacy by collecting transactional data the need to preserve transactional liberty and privacy is of paramount importance now more than ever.

Final Remarks

I remark that governments and regulators have been more effective than not in pressuring and shutting down those offshore banks that will not play by their rule book. The amazing development is that as regulator and the largest banks were shutting out of the central banking systems private banks with privacy-oriented mandates, the blockchain and cryptographic currencies were rising to prominence. This provided an even more robust transactional option for consumers and made this product widely available unlike anything we have seen before. It is for this reason that I am widely optimistic for the future of offshore banking as I believe it to be a future founded on the blockchain and distributed ledgers.