Quora Answer: Why Do Offshore Banks Exist When They Can be Used for Tax Evasion & Fraud?

The following is my answer to a Quora question: “How can offshore banks exist in the first place if it is known to be used for tax evasion and fraudulent schemes?”

There is an assumption that offshore banks are solely the vehicle of tax evasion, and fraudulent transactions.  That is patently false.  The fact that they exist should be anecdotal proof that governments and the finance industry do not hold your view.

An offshore bank is simply a bank regulated under an offshore license, which precludes the bank from establishing retail business activities in the jurisdiction of the country that issued the license.  Sometimes, a country offers foreign banks offshore licenses so that these banks do not compete, and crowd out, local banks.  Sometimes, certain banks take an offshore license to mitigate political risk as they expand into a new jurisdiction, or because they serve a specific client demographic that does not justify the cost of a full banking license.

Offshore banks are still regulated, and still need to fulfill a compliance regime.  Due to the nature of their client demographic, there are places where the reporting standards are far more stringent, and the AML compliance is much more closely scrutinised.  Offshore banks play a role in tax avoidance and mitigation, which is perfectly legal, and mitigate political risk for clients in nations where government stability is less than ideal.  They are also useful vehicles when the banking requirements cover transactions across different jurisdictions, such as in international commodities trade.