Offshore Banking and the Labuan IBFC
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BACKGROUND OF OFFSHORE FINANCIAL CENTRE (OFC)
Offshore Financial Centers in the world
An offshore financial centre (OFC) is usually a small jurisdiction that provides financial services to non-residents. According to International Monetary Fund (IMF), Offshore Financial Centers (OFCs) can be defined as financial centers where offshore activity takes place.
In addition, offshore finance provides financial services through banks and other agents in a particular offshore financial center to residents outside of the country. Borrowing of money from non-residents and lending to non-residents is of one of the services provided by offshore finance. This can take the form of lending to corporates and other financial institutions, funded by liabilities to offices of the lending bank elsewhere, or to market participants. It can also take the form of the taking of deposits from individuals, and investing the proceeds in financial markets elsewhere.
Besides that, Offshore Financial Centers are centers where the bulk of financial sector activity is offshore on both sides of the balance sheet, (that is the counterparties of the majority of financial institutions liabilities and assets are non-residents), where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents.
In addition to banking activities, other services provided by offshore centers include fund management, insurance, trust business, tax planning, and IBC activity. Statistics are sparse—but impressions are of rapid growth in many of these areas in recent years, in contrast to some decline in banking
According to Organisation for Economic Cooperation and Development (OECD), offshore financial centers are quite tough to be defined. However, offshore financial centers can be said as jurisdictions that are able to attract a high level of non-resident activity.
Countries may choose to develop offshore business and become an Offshore Financial Center for a number of reasons. These include income generating activities and employment in the host economy, and government revenue through licensing fees and so on. Indeed the more successful Offshore Financial Centers have come to rely on offshore business as a major source of both government revenues and economic activity.
There are three types of Offshore Financial Centers which have been classified by International Monetary Fund. They are International Financial Centers (IFCs), Regional Financial Centers (RFCs), and third category that are usually much smaller, and provide more limited specialist services.
There are good and bad about the Offshore Financial Centers. Offshore Financial Centers can be used for legitimate reasons, taking advantage of lower explicit taxation and consequentially increased after tax profit; simpler prudential regulatory frameworks that reduce implicit taxation; minimum formalities for incorporation; the existence of adequate legal frameworks that safeguard the integrity of principal-agent relations; the proximity to major economies, or to countries attracting capital inflows; the reputation of specific Offshore Financial Centers, and the specialist services provided; freedom from exchange controls; and a means for safeguarding assets from the impact of litigation.
However, Offshore Financial Centers can also be used for dubious purposes, such as tax evasion and money-laundering, by taking advantage of a higher potential for less transparent operating environments, including a higher level of anonymity, to escape the notice of the law enforcement agencies in the “home” country of the beneficial owner of the funds.
The presence of Offshore Financial Centers brings effects to the work of the Fund in few ways. First, Offshore Financial Centers are able to strengthen and toughen the financial system government through the activities taking place in Offshore Financial Centers. They help to improve their abilities to recognize and deal with surrounding risks at an early stage. Besides that, not only major industrial countries use Offshore Financial Centers, emerging market economies, whose financial systems are probably more weak than others to reversals in capital flows, unhedged exposure to currency fluctuations, rapid accumulation of short-term debt, and selective capital account liberalization, are also using Offshore Financial Centers. In addition, the operation of Offshore Financial Centers can reduce transparency, including through the exploitation of complicated ownership structures and relationships among different jurisdictions involved.
LITERATURE REVIEWS ON LABUAN IBFC
Photos of Labuan
Source: Labuan FSA
Labuan is an island strategically located in the Asia-Pacific region, off the coast of East Malaysia. Labuan is governed and controlled by the Federal Government of Malaysia. It is easy to be accessed. Besides that, it has a developed infrastructure, advanced satellite telecommunication, stable politic, low cost of operation and shares the same time zone with other major Asian cities. These are advantages or benefits of Labuan which can attract non-residents to invest in Labuan. Labuan also attributes its success to the Malaysian government's commitment to develop Labuan to its fullest potential.
Labuan's location shown on Google Earth
Source: Google Earth
Besides that, Labuan is an integrated International Business & Financial Centre (IBFC), like some other offshore financial centers, that offers a wide range of financial products and services to customers from all over the world. The products and services include fund management, captives, insurance, company management, banking and investment banking, trust business, investment holding and Islamic financing.
In Labuan, in order for offshore banking to be carried out, an offshore company or a foreign offshore company must be incorporated or registered for that sole and exclusive purpose, and by an office, branch or subsidiary of a licensed Malaysian bank.
Furthermore, in order for them to be able to carry out business in Labuan, they first need to apply for license and send the application to Labuan Offshore Financial Services Authority (LOFSA). They must come out a minimum capital funds of RM10 million. Besides that, an annual fee of RM80,000 (at the time of writing) need to be paid to Central Bank too no later than 15 January. Accounts of the companies need to be audited and filed with the Central Bank each and every year.
A wide range of financial activities are offered and provided by Labuan offshore banks. The financial activities including the management of investment portfolios, accept of foreign currency deposits, borrow or lend of money to Malaysian residents or to foreigners to purchase properties situated within the country, which in Labuan case is Malaysia, granting of loans to non-residents, Islamic banking, investment banking, securitization, leasing, and others.
In 1999, Labuan decided to liberalize its entry criteria for offshore banks in order to solve the problems caused by the Asian crisis in 1998. Besides that, in order to allow Labuan to have greater access to ringgit Malaysia business and to promote and advertise money market operations in Labuan, Labuan also permits offshore banks to trade in ringgit instruments in the secondary market. They are also allowed to purchase ringgit instruments in the primary market using foreign currency.
Labuan Trust Management
In Labuan, a trust company must register itself under the Malaysian Companies Act before it can legally carry on a trust business in Labuan. There are very strong secrecy provisions in the Labuan Trust Companies Act prohibiting disclosure of information unless requested and demanded by a court as the offices of the trust company are privy to confidential information,.
Besides that, a trust company is requested and asked (at the time of writing) prepare RM500,000 and RM150,000 for authorized and paid up capital respectively, and to deposit RM100,000 with the Accountant-General as a security deposit. In addition, a nominal annual license fee is payable.
In addition, a trust company having business in Labuan may act as a trustee, agent, executor or administrator pursuant to its memorandum, and may provide share registration services, administer, manage or otherwise deal with property as an agent or trustee, maintain an office, agency or branch for another company, provide management and accounting services, directors, secretaries and registered offices of offshore companies, and incorporate and register offshore companies.
Labuan Financial Services Authority (Labuan FSA)
The Labuan Financial Services Authority (Labuan FSA), formerly known as Labuan Offshore Financial Services Authority (LOFSA), is a one-stop agency which was established on 15 February 1996 as a single regulatory body to promote and develop Labuan as an International Business & Financial Centre (IBFC). Its establishment further draws the attention of the government's commitment to make Labuan a premier IBFC of high repute.
Labuan FSA is formed to focus on business development and promotion, process application and supervise business and financial activities, develop national objectives, policies and set priorities, administer and enforce legislation, and incorporate/register Labuan companies
Besides that, Labuan FSA helps in managing and regulating the international business and financial centre and undertakes research and development works. Labuan FSA also comes out plans for further growth and greater efficiency of the Labuan IBFC.
In addition, the challenge for Labuan FSA is to tactically and carefully make Labuan as a vibrant financial centre region. Towards this end, Labuan FSA currently start on a two-prong plan to develop the Labuan IBFC. The first plan is to to create an integrated business and financial centre which offers a big range of products and services including the development of Islamic instruments. The second plan is to provide a legal framework beneficial and helpful for the development of industry in Labuan IBFC.
Furthermore, since Labuan's establishment in 1996, it has reviewed the current legislations for the purpose of making the required and proper changes as well as to plan new activities to enlarge and deepen the financial services industry. Labuan FSA is also taking measures to draw more interest to a bigger number of professionals and skilled workers to live and work in Labuan IBFC to support the industry.
As a one stop-agency, Labuan FSA has been developing and supporting the growth of the Labuan IBFC. Labuan FSA is greatly committed to the objective of changing and making Labuan to become a full-fledged and top class international financial centre not only in Asia but the whole world.
Besides that, Labuan FSA has come out policies that help to facilitate and assist the creation of a competitive and attractive business environment in Labuan. Furthermore, Labuan's legislative framework is not only business-friendly but at the same time it helps to protect Labuan's international image as a clean and reputable international business and financial centre.
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