Offshore Financial Centre (OFC)

An offshore financial centre (OFC) is a jurisdiction whose financial institutions conduct most of their business with non-residents, so that the financial sector's external assets and liabilities are very large relative to the size of the domestic economy. OFCs typically offer some combination of low or zero taxation, flexible company and trust law, a light or specialized regulatory regime, and confidentiality, which attract companies, funds, banks and wealthy individuals from elsewhere. The terms offshore financial centers, offshore jurisdictions and, more pejoratively, tax havens overlap but are not identical.

There is no single official list of OFCs. The International Monetary Fund, the OECD, the European Union and research institutions have each used different criteria and lists.

• Non-resident focus. Banks, insurers and funds deal mostly with foreign clients and foreign assets.
• Tax treatment. Low or zero corporate tax, no withholding tax on payments to non-residents, or regimes of tax neutrality that leave income to be taxed where investors are based.
• Corporate vehicles. Fast incorporation of exempt companies, limited partnerships, trusts, foundations and special purpose vehicles, often with few local requirements.
• Specialized regulation. Regimes designed for funds, captive insurance, structured finance or offshore banking, sometimes separated from domestic rules.
• Professional services. A concentration of lawyers, accountants, administrators and trust companies.

Jurisdictions commonly described as OFCs include Caribbean territories such as the Cayman Islands, the British Virgin Islands and Bermuda; the Crown Dependencies of Jersey, Guernsey and the Isle of Man; and European centers such as Luxembourg. Large international centers such as Singapore and Hong Kong host significant offshore business but also have substantial domestic economies, so classification depends on the definition used. Some countries have created financial free zones with separate legal and regulatory regimes, which share features of OFCs. Regulators in these places include the Cayman Islands Monetary Authority, the BVI Financial Services Commission and the Jersey Financial Services Commission.

OFCs are used for many lawful purposes: domiciling investment funds that pool money from investors in many countries, issuing bonds through structures that are neutral for tax and insolvency purposes, holding company groups, captive insurance, aircraft and ship leasing, and estate planning for family offices. The same features, especially secrecy and the use of shell companies, have also been exploited for tax evasion, corruption, sanctions evasion and the layering stage of money laundering.

From the late 1990s, international bodies increased scrutiny. The OECD began work on harmful tax practices in 1998, the Financial Stability Forum reported on OFCs in 2000, and the IMF began assessing OFC supervision the same year, later folding these assessments into its regular financial sector reviews. The Financial Action Task Force listed non-cooperative jurisdictions for anti-money laundering failures.

Since the 2008 financial crisis, transparency rules have changed the offshore landscape substantially. The United States enacted FATCA in 2010, and more than 100 jurisdictions adopted the OECD's Common Reporting Standard for automatic exchange of financial account information. Many OFCs now maintain registers of beneficial ownership information available to authorities, and from 2019 several introduced economic substance laws requiring companies in certain activities to have real staff, premises and decision-making locally. The EU maintains a list of non-cooperative jurisdictions for tax purposes.

Critics argue that OFCs drain tax revenue from other countries, facilitate capital flight from developing economies and enable regulatory arbitrage that weakens oversight. Defenders respond that most OFCs now meet international transparency standards, that tax neutrality avoids double taxation in cross-border investment, and that large onshore economies offer similar secrecy through their own company and trust laws.