What Are The Differences Between Onshore and Offshore Banking

Offshore banking tends to be featured in headlines due to the wrong reasons, such as some way of discretion, whereas onshore banking is presented as the alternative. Practically, there is no offshore vs onshore distinction but more sensationalism. The distinction is in jurisdiction, regulator control, and transparency expectations, thus defining the way banks serve the customers, evaluate the risk, and track the transactions.

The location of the account defines which laws are applicable, which regulator will be in charge, and how the onboarding and monitoring processes will be formed by the transparency and reporting frameworks. This is why the same corporate structure may appear to be low-risk onshore and high-risk offshore despite an underlying legitimate activity.

Offshore Vs Onshore banking for businesses

Offshore banking is when an account is opened and operated in a bank, but it is not made or used in the country where the business is located or based. The offshore jurisdiction may be a large financial center or a regional center that focuses on non-resident clientele, cross-border trade or multi-currency service.

Being offshore does not imply that it is lightly regulated. It implies that the relationship will be governed by another legal framework, and thus the bank will conduct due diligence, reporting and allowed activities differently than the home market of the business.

Onshore banking is the one that keeps the accounts in the host country or in the primary operating jurisdiction. Supervision, regulation and dispute solution are more inclined towards domestic regulation and the local banking framework.

Onshore accounts of many businesses are the most important operating accounts of these businesses since payroll, local tax payments, domestic collections, and local lending relationships tend to be most properly located within the home jurisdiction.

The Key Differences Between Offshore and Onshore Banking

1) Jurisdiction and regulatory oversight 

The greatest distinction is jurisdiction. An onshore account is subject to domestic banking legislation and domestic supervisory regulations. Offshore accounts are placed under the banking laws and the supervision of the host jurisdiction.

Such a change influences the realities of compliance daily. What is taken as evidence to verify the company in one country might not be enough in another country. Record keeping, periodic refresh and audit trails requirements can also be different. Thus, companies with offshore accounts are to anticipate additional work in terms of consistency of documentation between entities and markets.

2) Tax transparency and information exchange

The current offshore banking is conducted in an environment of increasing transparency regimes. Most of the jurisdictions also engage in automatic exchange of financial account information and this lessens the option of viewing offshore accounts as secret to the tax authorities.

The OECD Common Reporting Standard urges the involved jurisdictions to receive financial account information of the financial institutions and share it with other jurisdictions automatically on an annual basis.

FATCA is also a parallel framework in the US. According to the US Treasury direction, FATCA is meant to compel foreign financial institutions to disclose to the IRS the details of US taxpayers' accounts, or affiliate foreign entities with a high level of US ownership.

These frameworks determine the opening of accounts to businesses. Banks may demand tax residency details, ownership and self-certifications due to the reporting requirements that may arise depending on the status of account holders and beneficial owners. As such, offshore banking is often accompanied by more comprehensive pre-treatment disclosures than most companies anticipate.

3) Confidentiality and the limits of privacy

Offshore jurisdictions are sometimes preferred by businesses due to the expectation of greater privacy. Confidentiality is a better term used in regulated banking compared to secrecy. Confidentiality refers to the fact that customer information is secured and shared with specified legal authorities. Secrecy means hiding so as not to be reported or enforced legally, increasing compliance risk and potentializing an escalated due diligence or refusal.

Since offshore banking is usually a cross-border activity, the regulators and the bank attach much attention to the fact that such a relationship is clear and documented and corresponds to the legitimate economic purpose. Thus, properly managed offshore banking associations are highly likely to be paper-intensive instead of anonymous.

4) KYC and KYB expectations

Onshore onboarding is somewhat more standardized, as domestic identity evidence, domestic registries and local risk patterns are known. Offshore onboarding is more evidence-based due to more frequent non-resident clients, complicated ownership chains, and international payment corridors.

The FATF sets the way forward with the risk-based approach. In areas with an elevated likelihood of money laundering and terrorist financing, banks are encouraged to use enhanced due diligence, although the precise procedure may not be described within legislation. Hence, the offshore relations which add more risk factors tend to cause increased checks in the business model, counterparties and ownership structure.

In the case of businesses, this may be requests like:

• Registry documents and evidence of active activity of corporations.
• Information on the director and persons in control.
• Evidence of ultimate beneficial ownership and control structure.
• Purpose of the account and description of the expected activity.
• Explanations of the source of funds that is backed by a contract, invoice, or financial statement.

These are not exclusive to offshore banking, but offshore situations may raise the risks of improved actions due to the complexity of jurisdiction.

5) Beneficial ownership and control clarity

Corporate banking tends to be difficult when there is a layered ownership. The offshore banking may enhance that difficulty since the holding corporations, cross-border stockholders and nominee structures may be manifested in systems that are employed to serve lawful purposes.

The FATF guidelines and associated recommendations are based on the concept of transparency concerning beneficial ownership as an element of sound AML measures. In the EU, the beneficial ownership transparency reports also influence the way the obliged parties consider ownership registers, although the implementation in different member states varies.

Thus, whenever businesses contemplate offshore banking, there is a tendency to develop a straightforward story of ownership that can be aligned with documents of corporate entities and can be established as reliable in all jurisdictions.

6) Cross-border payments and ongoing monitoring

Monitoring is different as there is a difference in transaction patterns. Domestic baselines of onshore business accounts are usually more evident. Multipurpose multi-currency balances, foreign counterparties, and payments channeled through more than one bank are more frequently supported by offshore accounts.

That has the ability to impact monitoring thresholds and alert logic. What appears to be normal in a trade finance setting can be abnormal once the purpose of the business is unclear or the counterparty is not what is specified in the model itself. Consequently, an offshore banking relationship customarily necessitates greater coordination between what the business will do or does in reality.

7) Operational convenience and access to local rails

Onshore accounts are normally integrated readily with local payment rails, domestic tax systems and payroll providers. Offshore accounts can provide strong international capabilities whereas local convenience can be inferior in case the business has to operate on a daily domestic basis.

The common trade-offs in practice are:

• Local beneficiaries on the speed of payment.
• Availability of local merchant services or local domestic direct debit systems.
• Facility to open other accounts of their subsidiaries.
• Local credit and relationship lending.

Accordingly, offshore accounts are often applied as secondary accounts to serve a particular purpose instead of the replacement of core onshore operating accounts.

8) Costs and minimum balances

The offshore banking may be accompanied by various fee structures, account requirements or relationship requirements particularly when the bank is interested in international corporate customers. In most markets, it is possible to have onshore banking to SMEs which is more standardized and price-competitive.

Prices are diverse depending on jurisdiction and bank structure and thus, businesses would normally consider offshore accounts in terms of overall value, not only in terms of fees. Value may comprise multi-currency capability, international transfers, treasury management or access coordinated to the business footprint.

What are legitimate reasons businesses use offshore banking?

Offshore banking may be justifiable and feasible to different extents provided that it carries with it a definite economic rationale and open-minded reporting. Common reasons include:

• Trading of goods internationally that involves making payments in several regions.
• Multi-currency sales and supplier remittance.
• Multinational group treasury management.
• Moving to new markets where an offshore center is present locally.
• Risk management that is allowed, such as cross-jurisdictional diversification.

The fact that this is not the offshore label is the deciding factor. The determination will be whether or not the business is able to record reasons why the account exists and how money will pass through it, hence expectations of compliance.

When onshore banking is usually the better fit

Onshore banking is likely to be the optimal default in the event:

• The revenues, payroll, and supplier activity are primarily domestic.
• The ownership and operations are simple.
• The priorities include local cash management and domestic lending.
• The company would like to avoid more cross-border documentation cycles.

In the case of most businesses, onshore accounts have been the centre of the operations of the business, and offshore accounts have been selectively applied in relation to the cross-border requirements.

Summary

Banking that is not within the home jurisdiction is known as offshore banking and within the jurisdiction is known as onshore banking. To companies, the largest disparities appear to be those of jurisdiction, transparency regimes, and risk-based controls of banks. In most mainstream settings, the concept of concealed offshore accounts is minimized by reporting systems like OECD CRS and the US FATCA.

Thus, the practical question is not whether or not offshore banking is by nature good or bad. The question to answer in practice is: Is a business capable of maintaining a clear economic purpose, apparent ownership, and regular documentation, which is in line with the risks expectation of the preferred jurisdiction and banking partner?