Editorial: Kufuor's Offshore Banking Bombshell
Guess what? President John Agyekum Kufuor has given indication that by the middle of this year his government will establish offshore banking services in Ghana to provide long-term credit to businesses.
In his State of the Nation Address to Parliament last Tuesday, President Kufuor cleverly buried this new financial policy in a wordy paragraph in the middle of his speech.
“Hopefully, by midyear, an international financial Services Centre (off-shore), to be the first west of the Atlantic, will be established as a joint venture between government and Barclays,” the president announced.
Plans to introduce offshore banking services by mid year is a major government financial policy for 2006, though Alban Bagbin, Doe Ajaho and Haruna Iddrisu, all minority backbenchers were quick to describe President Kufuor's address as a recycled piece, (perhaps, to score cheap political points). Little they did they recognize that the plan was not a recycled piece, but a new year's lethal gift from the President.
There is no doubt that offshore banking provides a less restrictive legal regulation and protection against local political or financial instability, but it is also a conduit through which illegal business activities, organized crime, tax evasion and money laundering are being perpetuated around the world. In fact, the Wikipedia, the world's largest free online encyclopedia lists Adolph Hitler of Naxi Germany, Osama Bin Ladin of the Alqaeda terrorist group, and General Sani Abacha of Nigeria among some of the world's corrupt and notorious leaders who rode on the back offshore banking to commit crimes and terrorists acts against humanity.
The September 11, 2001, attacks on the US, masterminded by Alqaeda were reportedly funded from illegal monies channelled through offshore banking services.
Since September 11, the US has led the call for more regulation on international finance, in particular from offshore banks, tax havens and clearing-houses such as Clearstream, based in Luxembourg. Is Ghana about to become a launching pad for money laundering through offshore banking? The answer depends on who talks to.
Information available indicates that the number of bank failures and their costs have been rising rapidly since the 1990s. Since bank problems aren't isolated from other economic problems, some economic analysts Public Agenda spoke to have advised the government to tread carefully in its apparent enthusiasm to further liberalise the financial sector.
Argentina has had its fair share of the activities of offshore banking when during its economic and political crisis it suffered massive capital flights. Argentina's economy virtually went on its knees because operations of offshore banks allowed easy transfer of capital out of the economy.
Definitionally, an offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction that provides financial and legal advantages. These advantages typically include some or all of strong privacy, less restrictive legal regulation, low or no taxation (i.e. tax havens), easy access to deposits and protection against local political or financial instability
While the term originates from the Channel Islands “offshore” from Britain, and most offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location.
To its proponents, offshore banks provide access to politically and economically stable jurisdictions. This may be an advantage for those resident in areas where there is a risk of political turmoil who fear their assets may be freezed, seized or disappear.
That some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country and that offshore finance is one of the few industries, along with tourism, that geographically remote island nations can competitively engage in.
Interest, they say, is generally paid by offshore banks without being tax imposed. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income and that some offshore banks offer banking services that may not be available from Domestic Banks.
But as stated, the reality is not all that rosy, albeit debatable. First, it is important to note that not all offshore jurisdictions have depositor compensation schemes, to bail out depositors in the event that a bank becomes insolvent. This could therefore lead to depositors loosing their savings to fraud especially that offshore jurisdictions are often remote so physical access and access to information can be difficult.
Besides, the stated advantages of offshore banking may also come at a high cost as the returns on some offshore banking accounts may be substantially below those of domestic bank accounts.