Offshore financial centers maximize the protection of the privacy of their users. Such privacy includes both direct services from domestic financial institutions and offshore banks, as well as international business corporations formed in the offshore financial center. The scope, nature and infrastructure of the industry invites for abuse of the system. As such, obscure actors find their ways to locations often alleged to be tax havens. Efforts to combat the outflow of illicit assets to these tax havens and the return of laundered funds into society result in an extensive legal framework.
Financial privacy and diversification form the backbone of offshore banking. The combination of both elements allow bank customers to benefit from specialized services but also mitigate risk in case of setbacks. Unfortunately, the financial system is constantly abused by wrongdoers and thus invites global regulators to control parts of the industry. International business corporations formed in offshore jurisdictions, and financial institutions that operate in these locations are therefore subject to unfamiliar and periodic examination.
For both international business corporations and the facilities used by such company types, Know Your Client (KYC) procedures are common for maintaining a business relationship. Corporate service providers and financial institutions that operate in these jurisdictions must be periodically informed on the status of the client. As such, review of the good standing, activities and controlling persons became ordinary.
Over the years, global banking became complicated. The nature of the financial industry is vulnerable for crime, money laundering and even terrorism financing. Therefore, these financial centers, whilst often being covered with a layer of secrecy, are subject to advanced regulatory scrutiny. Stakeholders, their corporate activities and transactions may become part of further questions before services are approved and transactions concluded.
Offshore companies and offshore financial institutions deal with non-resident customers. These creditors have no direct link with the jurisdiction where they manage their financial matters. A consequence can be that a local economic downturn leads to a redistribution of wealth to other (offshore) jurisdictions. This is one of the reasons that these financial centers have alternative risk profiles and thus are imposed with distinct capital requirements.