What Are the Functions of Offshore Banking?

According to Offshorecompany.com, offshore banking is often considered as a form of tax evasion and money laundering in poorly regulated, unsafe environments; however, the website explains that offshore banking provides "sophisticated, stable banking regulations." A small fraction of offshore banking centers may be poorly regulated, but it is up to a potential offshore account holder or investor to establish accounts in places such as the Cayman or Channel Islands or Switzerland, since they provide substantial security. Functions of offshore banking include asset protection, privacy and tax relief for business relations.

Offshore banking functions as a means to protect assets for account holders. Individuals who live in an economically or politically unstable country benefit from such asset protection. Many countries allow offshore banking, serving as tax havens--offering little or no tax liabilities--to protect assets of account holders or investors.

An individual may establish an international business company (IBC) for offshore banking purposes. Based on Offshorebank.net, once the individual becomes an account holder at an offshore bank he is not required to reveal his account ownership to his country. This individual can establish a foundation, so that the offshore company would be considered as a separate entity--separate from the owner. In addition, an offshore bank account should be opened in a bank other than the one in which an IBC is founded. This separation enables greater account security and privacy.

Based on MyOffshoreAccounts.com, when account holders earn interest on money that is deposited in offshore bank accounts, taxes are not deducted from the earned interest.

A jurisdiction known for providing tax relief to account holders is Andorra; here only custom duties and local property taxes are involved. Andorra does not have tax regulations for banking. When an account holder conducts business in a highly taxed country, trading, licensing and investments should be conducted in an offshore location such as Malta. Then, proceeds should be transferred to an Andorran company. An Andorran company does not pay taxes; however, its jurisdiction requires that business activities be majority-owned by Andorran citizens, based on Offshorebank.net.