Offshore Financial Centres: Effects on the Global Economy

Introduction and Background

"Only the little people pay taxes." — Leona Helmsley, 1989

Critics of offshore financial centres would likely suggest that the epigraph above indicates that Ms. Helmsley would have made a good "poster child" for the offshore financial services industry, while proponents would likely counter that the global economy absolutely needs such offshore financial services in order to grow. Despite the controversy and a modest reduction in the total number of offshore financial centres following the passage of the U.S.A. PATRIOT Act, there has been overall continued growth in the offshore financial services sector since 1936 that has resulted in hundreds of offshore financial centres (OFCs) being concentrated in several geographic regions of the world. These OFCs are typically located in small, low-tax jurisdictions that specialize in the provision of corporate and commercial services to non-resident customers (Suss & Williams 2002). The growth in offshore financial centres has been due in large part to several of the same reasons around the world. These centres feature specific tax advantages, enhanced privacy, lower banking costs, and more relaxed regulatory systems than their onshore counterparts (Masciandaro 2004). According to an analysis conducted by KPMG (2010), one of the largest professional services firms in the world and one of the Big Four auditors, although OFCs continue to focus on the same types of financial services, they must remain sufficiently flexible and agile to respond to rapidly changing conditions in the global economy.

Based on the evidence to date, offshore financial centres appear to be increasing in popularity for many of the same reasons (Offshore Financial Centres 2008). For example, offshore financial centres provide a viable alternative for banks competing in regions of the world where emerging market economies are highly regulated. A good indication of this can be seen in the amount of cross-border assets being exchanged through offshore financial centres (Offshore Financial Centres 2008). Besides the U.K. and the low countries of Belgium-Luxembourg (but including the Netherlands), total transnational exchanges with emerging countries increased from 58.5% in 1991 to a record of 67% in 1997 and, as of year-end June 1999, receded to about 56% (Offshore Financial Centres 2008). This significant reduction in emerging economy exchanges may be attributable to a wave of consolidations that occurred in the Japanese banking system during the late twentieth century, together with the Asian monetary crisis that occurred shortly thereafter, resulting in a sharp decline in offshore financial services activity in Hong Kong (Offshore Financial Centres 2000). Since that time, the industry has experienced consistent growth in terms of the number of such centres as well as the amount of money that passes through them, to the point where more than half of the global monetary supply is handled at some point by offshore financial centres.

One of the recurring themes that quickly emerges from a review of the literature concerning offshore financial centres is their dual-edged quality. On the one hand, offshore financial centres have been demonstrated time and again to be an essential component of successful multinational corporate business, facilitating financing and insurance requirements, mitigating risk, and providing the foreign exchange services required between banks and commercial customers (Rose 2006). On the other hand, the same attributes that make offshore financial centres attractive for legitimate businesses are also highly attractive to organized criminal and terrorist organizations. Indeed, in popular context, offshore financial centres have become virtually synonymous with money laundering and tax evasion, and for good reason. These criminal groups have exploited offshore financial centres with the assistance of collusion from some unscrupulous banking officials, making detection difficult or impossible, and regulating this industry has been challenging to say the least.

In response to the illegal activities that have characterized the offshore financial services sector, a wide range of initiatives sponsored by the international community have been implemented in recent years, including an OECD initiative designed to address the effects of harmful tax competition, the G7's Financial Action Task Force (FATF), the Financial Stability Forum (FSF), the United Nations Office on Drugs and Crime (UNODC), the EU, and international non-governmental organizations (NGOs) (Rose 2006). These and other regulatory and law enforcement agencies around the world are actively involved in searching for better ways to monitor and regulate the offshore financial services sector in order to identify criminal activity and reduce the prevalence of these practices in the future (Dwyer 2009). By and large, the overwhelming majority of offshore financial centres have been compliant with these initiatives and have implemented the OECD program targeting harmful tax practices (Dwyer 2009). Notwithstanding the increased costs of compliance (not to mention the lost illicit revenues previously attained), these trends in increased oversight are expected to continue in response to corresponding growth in the offshore financial services sector (Dwyer 2009). Although it might be possible to improve domestic tax receipts through the elimination of offshore financial centres, the impact on the global corporate community would more than offset any gains realized through such a drastic measure (Dwyer 2009).

The overarching purpose of this study was to deliver a comprehensive and critical review of the relevant literature concerning offshore financial centres and their effect on the global economy. In support of this purpose, the study was guided by the following research question: "Is the demand for financial services going to increase or decrease the importance of offshore financial centres in the global financial market?"

A 2008 updated report from the IMF emphasized that, "In recent years, there has been increased recognition of the need to improve understanding of the activities of offshore financial centers. Some offshore financial centres have captured a significant part of global financial flows, and their linkages with other financial centers creates the potential for their activities to affect financial stability in many countries" (Offshore Financial Centres: IMF Staff Assessments 2008, p. 1). By definition, offshore financial centres are popular with the international banking community specifically because there are fewer restrictions involved, more lenient regulatory policies, and lower taxes than their mainstream banking counterparts; however, offshore financial centres do not have the same fundamental interests in protecting their depositors as their onshore counterparts because most of their depositors are non-residents located in other countries (Edwards 1999).

Definitions and Geographic Distribution of Offshore Financial Centres

Because the home country is not required to reimburse foreign depositors for losses, there is no corresponding financial penalty for lax supervision; there is, however, a benefit to the country with lenient regulatory policies because of increased revenues generated and the employment opportunities these services provide (Edwards 1999). Furthermore, banks seeking to conduct multinational business are attracted to countries where incorporation laws and the regulatory framework offer less regulatory oversight (Edwards 1999). The quid pro quo nature of offshore financial services is clearly indicated by Edwards's observation that, "Multinational banks provide the offshore financial centre with increased tax revenue and employment for its citizens. Because the benefits outweigh the costs, offshore financial centres have a powerful incentive to maintain lenient regulatory policies. As a result, multinational banks incorporated in an offshore financial center successfully avoid supervision by an effective home country regulator" (1999, p. 1267).

The research shows that, notwithstanding their exploitation by criminal elements and terrorist organizations, offshore financial centres are not expected to disappear anytime soon. The importance of the legitimate financial transactions that take place in offshore financial centres makes them an important addition to the international community, and restrictions on the industry — or its outright elimination, if that were even possible — would have dire consequences for the global economy. According to McKee, Garner, and McKee, "Through the activities they house, [offshore financial centres] are actually facilitators of various international activities. Indeed it appears as though the leading participants in the global economy, whether corporate or public, are in need of various services provided by or through offshore financial centers" (2000, p. 3). In this environment where each positive is balanced by a corresponding negative, identifying opportunities to eliminate the abuse of offshore financial centres by criminals and terrorists while improving their ability to provide vital legitimate financial services to the international community represents a timely and valuable enterprise.

Although there is no universal definition of offshore financial centre, a number of such definitions have been offered over the years. According to Mauer, "There is a significant literature on the dimensions and definitions of the offshore finance industry. The first definitional quandary is whether offshore refers to a place or series of places on the one hand, or a phenomenon of financial flows on the other hand" (2008, p. 155). The legal definition provided by Black's Law Dictionary (1999) indicates that offshore transactions are financial dealings that occur outside of a given country. A more useful definition is provided by the International Monetary Fund (IMF), which reports that, "Offshore finance is, at its simplest, the provision of financial services by banks and other agents to non-residents. These services include the borrowing of money from non-residents and lending to non-residents. 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" (Offshore Financial Centers 2000, p. 2).

An offshore financial centre is an area officially designated by the IMF as being a place where the following types of activity take place: offshore banking, investment, incorporation, company formation, foundation formation, trust formation, insurance, and other vehicles of wealth preservation and asset protection. The criteria required to be placed on the IMF's official list are as follows:

1. Having relatively large numbers of financial institutions engaged primarily in business with non-residents; and,
2. Having financial systems with external assets and liabilities out of proportion to domestic financial intermediation designed to finance domestic economies (Mauer 2008).

Offshore financial centres must provide some or all of the following services: (1) low or zero taxation; (2) moderate or light financial regulation; and (3) banking anonymity (Definition of Offshore Financial Centers 2011).

The IMF also reports that offshore financial institutions can accept deposits from individuals and invest those proceeds in other financial markets (Offshore Financial Centers 2000). Some regions of the world appear to attract more of this type of business than others. According to Stessens (2000), numerous Caribbean jurisdictions are frequently identified as both secret and tax havens; however, this type of identification can also be applied to financial services centres located in Andorra, Malta, the Channel Islands, Liechtenstein, Monaco, Madeira, Gibraltar, Switzerland, and Luxembourg — countries and territories that are also described as offshore financial centres and categorized as "fiscal havens" by the U.S. Internal Revenue Service (Stessens 2000). In the context of financial transactions, Stessens adds, "the term 'offshore' refers to transactions which take place between non-residents. An offshore bank can be defined as a financial institution which is legally domiciled in one jurisdiction, but conducts business solely with non-residents" (2000, p. 93).

Other formal definitions have been offered by Jao, who reports that "by general agreement, an 'offshore financial centre' or, more narrowly, an 'offshore banking center' is a center where the host country accords preferential treatment to banks and other financial institutions in terms of taxation, regulatory restrictions, prudential supervision, and so on, provided that such banks and financial institutions deal only with nonresidents and in foreign currencies and are thus effectively insulated from the host country's domestic financial sector" (2001, p. 45). According to Stessens, "By this definition 'offshore transactions' can take place in any jurisdiction, but as a result of their fiscal and secrecy rules, some jurisdictions attract a very high number of offshore transactions and offshore banks and have thereby become known as offshore financial centres" (2000, p. 93).

There is sufficient evidence available to indicate that money launderers frequently use offshore financial centres to conceal the proceeds of criminal activities or to avoid taxation on legitimate earnings. As Stessens observes, "In both instances they are likely to benefit from the secrecy rules and from the inertia of local law enforcement or fiscal authorities or their refusal to reply to requests for information" (2000, p. 93). Efforts to address these illegal activities have been hampered by the increasing internationalization of the money laundering enterprise, and a broad-based and sustained effort is required by the international community in order to be effective. According to Stessens, "Strictly national interventions are likely to result only in a geographical shift of the phenomenon. Because of the increasing globalisation of the financial world, the proceeds of crime which have been deposited within one jurisdiction where the rules on the prevention of money laundering are less strict can penetrate into the financial system of other countries as well" (2000, p. 93).

This point is also made by Schiffrin and Bisat, who report that "Offshore financial centres have become synonymous with banking secrecy and tax evasion. In today's open and global financial world, characterized by a high mobility of funds and the rapid development of new payment technologies, the tools for laundering the proceeds of serious crimes as well as the means for anonymous protection of illegal assets in certain countries or territories make them even more attractive for money laundering" (2004, p. 231).

Current debates concerning the true nature of offshore financial centres tend to focus on the following questions: (1) whether offshore is a consequence of the system of state sovereignty or a consequence or cause of global financial liberalization; (2) whether offshore is an effect of the law or an effect of markets and inherent structural tendencies in capitalism; (3) whether offshore is part of a long-term story about conflicts among elites in offshore jurisdictions linked to local development efforts, or is delinked from national aspirations in those jurisdictions; or (4) whether offshore is an index of a new postmodern political geography (Mauer 2008, p. 158).

In reality, any jurisdiction can serve as a tax haven for commercial enterprises and individuals located in more highly regulated venues, provided that it features lower tax rates or more favorable secrecy laws. A number of jurisdictions have specifically designated tax havens that offer different rules for non-residents, as well as a high degree of bank deposit and/or corporate ownership secrecy (Rawlings 2005). Proponents of offshore financial centres would most likely emphasize the positive aspects of such jurisdictions — the opportunities for tax, estate, and corporate planning they offer — rather than tax evasion or money laundering activities, which these jurisdictions also attract.

In spite of their use by criminal elements, offshore financial centres are an important element in the conduct of multinational corporate business today, providing trade financing, insurance, pension administration, and more sophisticated financial instruments such as derivatives and hedge fund investment guidance (Mauer 2008). From a fundamental perspective, offshore financial centres offer valuable risk mitigation services as well as real-time guidance concerning the movement of resources and provide for the efficient processing of foreign exchange between corporations and banks (Mauer 2008). Moreover, offshore financial centres provide the opportunity for individuals and corporations to manage income streams from different jurisdictions without being forced to deal with double-taxation issues (Mauer 2008). As a result, offshore financial centres represent an important form of asset protection for those entities that require such services, and the mitigation of risk through the techniques used by offshore financial centres is widely recognized as sound business practice (Rawlings 2005). Nevertheless, the potential always exists for offshore financial centres to engage in illegal practices intended to camouflage the true source of profits and cloud the distinction between revenues generated through legitimate trade and monies received as payment of some other type (Mauer 2008).

McKee et al. identify three types of geographical locations among offshore financial centre jurisdictions: (a) inland enclave states, (b) coastal enclave states, and (c) island states (McKee et al. 2000). These enclave states have tended to congregate in a global pattern of what McKee et al. term "satellite clusters" that are compatible with four main business time zones corresponding to major global and regional capital markets:

The Effect of Offshore Financial Centres on Taxation

1. The Western Hemisphere was served through the New York epicenter by the Caribbean and the Central American Basin.
2. European enclaves, coastal enclaves, and independent islands were included in the London epicenter.
3. The Asian-Pacific region and Oceania were served within the Tokyo time zone by Hong Kong, Singapore, Vanuatu, and Nauru.
4. The final cluster was composed of Persian Gulf jurisdictions providing service to Middle Eastern oil countries (McKee et al. 2000, p. 5).

Given the high stakes involved, the importance of applying appropriate tax laws to monies passing through offshore financial centres is clearly a high priority. A recent report from the World Bank's International Finance Corporation (IFC) notes that private sector projects in which the World Bank Group (WBG) invests through the IFC and the Multilateral Investment Guarantee Agency (MIGA) should be subject to appropriate and transparent taxation by host countries (Offshore Financial Centers and Tax Evasion in World Bank Operations 2010). Likewise, sponsor home countries should possess the ability to collect appropriate taxes, and the countries must remain in compliance with requirements to report income generated from any initiative (Offshore Financial Centers and Tax Evasion in World Bank Operations 2010). More stringent safeguards have been implemented in recent years with the primary objective of assuring the reporting of all such transactions.

At present, the WBG primarily responds to the issue of offshore financial centres and tax evasion through engagement with its member countries and through coordination with other international organizations and civil societies (Offshore Financial Centers and Tax Evasion in World Bank Operations 2010). The main framework for this engagement is the strengthening of tax systems, improved due diligence in private sector investment operations, and domestic resource mobilization.

The strategy used by the WBG to address tax evasion has largely focused on strengthening tax systems and applying anti-corruption efforts in developing nations. These efforts are being further amplified to support nations in complying with recommendations from international organizations concerning ways to improve tax transparency, thereby facilitating their participation in the broader effort to address tax practices that fall outside of legitimate avenues (Offshore Financial Centers and Tax Evasion in World Bank Operations 2010). Because of the public resources they have been entrusted with, the World Bank Group regards any level of tax evasion in any transaction as unacceptable. In response, the WBG applies due diligence to ensure that the structures in which it invests are selected for legitimate purposes and are not engaged in tax evasive practices, tax abuse, or other illicit purposes.

It should be noted that there are no provisions preventing the World Bank Group from engaging in transactions with offshore financial centres, provided that all partners comply with controlling legislation and regulations and that a high degree of integrity is maintained throughout (Offshore Financial Centers and Tax Evasion in World Bank Operations 2010). In this regard, the World Bank Group reports that, "Jurisdictions may be used to avoid double taxation of investments in developing countries, or may provide legal infrastructure that a given host country lacks. However, a lack of transparency and inability to exchange information on the part of some jurisdictions can provide an environment that facilitates cross-border tax evasion, fraud, money laundering, and other illegal activities" (Offshore Financial Centers and Tax Evasion in World Bank Operations 2010, p. 4).

As noted above, although much of the financial activity conducted in offshore financial centres is conducted for lawful purposes, a common theme in the literature is how some individuals and criminal enterprises are taking advantage of these institutions to avoid taxation in their own countries. For example, Shelley reports that, "The ability to deposit large sums in offshore bank accounts that are outside the scrutiny of governments has reduced risks and permitted illicit capital to grow without taxation. Outside the regulations of the world's major financial systems they enjoy a competitive advantage for their capital that permits higher profits" (p. 605). The attractiveness of offshore financial centres, particularly for certain individuals and commercial enterprises in need of such services, is based in large part on their lenient tax regulations that permit non-residents to avoid taxation on their capital (Shelley 1998).

Offshore financial centres therefore provide both the opportunity and means for individuals and corporations to use international capital in ways that are unlawful in their more heavily regulated countries of origin. Indeed, the absence of regulation is what makes offshore financial centres highly desirable for money launderers — they are cloaked in secrecy, provide a haven from onerous taxes, and offer the capability to easily transfer capital. To date, the International Monetary Fund has identified more than a dozen major offshore financial geographic centres. A good example of this can be found in the Cayman Islands, where there are 550 banks for a total population of just 30,000 citizens, with only 17 of those 550 banks maintaining a physical presence in the jurisdiction; the remaining 533 banks conduct the vast majority of their transactions using telecommunications (Shelley 1998). In fact, based on estimates from the United Nations Drug Control Programme, Shelley reports that "more than half of the world's stock of money transits through offshore centers, with about U.S. $2 trillion of private wealth — 20% of the world total — invested there" (p. 605).

Likewise, a recent report from Jennings cites the need for offshore financial centres as essential to the health of the global economy. Jennings notes that, "Whether G-20 leaders choose to recognize it or not, the Cayman Islands and other well-regulated offshore jurisdictions are key players in the international financial community, ideally placed to play a part in a solution to the present economic difficulties" (2009, p. 2). At one extreme are world leaders who place the blame for the ongoing global economic crisis squarely on offshore financial centres. For example, in a speech to the U.S. Congress, British Prime Minister Gordon Brown asked, "How much safer would everybody's savings be if the whole world finally came together to outlaw shadow-banking systems and offshore tax havens?" (quoted in Jennings 2009, p. 2).

The dichotomous nature of the offshore financial services sector — as representing an important asset for both legitimate business purposes and illicit ones — is cited as a reason the sector is so difficult to oversee and regulate. The assertion by Prime Minister Brown and other political leaders that offshore financial centres were to blame for the global financial crisis is misplaced, however. Jennings specifically points to the results of a recent U.K. Financial Services Authority report that identified the real culprits as being among the most vocal critics of OFCs. According to Jennings, "The answer to the prime minister's question is simple: banning offshore centers won't make a blind bit of difference in making financial markets safer or less volatile, and in fact could make things worse. A recent report from the Financial Services Authority, the U.K. regulator, explicitly noted that offshore financial centers were not the cause of the global financial crisis. Instead, the report blamed inadequate regulation of banks in London and New York. Bashing offshore banking is just a convenient smokescreen for the shortcomings of 'onshore' oversight" (2009, p. 3).

By referring to legitimate business transactions using negative umbrella terms such as "shadow-banks" and "tax havens," onshore regulators and politicians are apparently seeking to divert blame away from themselves. For instance, Jennings reports that, "My firm's office building, Ugland House in George Town, Grand Cayman, has drawn attention because it provides registered office services to over 18,000 companies. U.S. President Barack Obama, during his election campaign, referred to Ugland House as 'either the biggest building or the biggest tax scam in the world.' This elicited cheers from the audience but overlooked the fact that there are many such places all over the world, including onshore jurisdictions" (2009, p. 3). As Jennings points out, "Ugland House simply provides companies with a registered office address as required by local law, a law similar to that of every U.S. state. A single building in Delaware, for example, provides a registered office for over 200,000 companies. A well-researched report by the U.S. Government Accountability Office, the congressional watchdog, fully acknowledged Ugland House's registered office function and has helped to confirm the reality" (2009, p. 3).

In reality, offshore financial centres do provide a number of valuable business and financial services that positively affect the global economy in significant ways. For instance, Jennings reports that Cayman Islands companies help American businesses, and fund managers in particular, compete for and service an international client base. International businesses with stakeholders from several countries frequently have to choose where to incorporate without giving any one stakeholder a "home field advantage." Additionally, many international investors will not invest directly in a U.S. company for a variety of business, tax, and legal reasons, such as class action litigation risk. "Cayman solves these problems by enabling businesses and investors from around the world to form an entity in a neutral jurisdiction with stable political and judicial institutions, a deep reserve of local professionals, and a legal system that safeguards the rights of creditors and investors" (Jennings 2009, p. 3).

Furthermore, Jennings reports that, "Cayman Islands companies engage in a range of cross-border business transactions. For example, they help Boeing sell aircraft to emerging-market airlines; enable U.S. corporations to access global markets more competitively; enable banks to make secured loans to finance power projects in developing countries; and help hedge fund managers to attract international investors. These transactions support thousands of jobs and ultimately generate taxable business activities in the United States and other G-20 countries" (Jennings 2009, p. 3).

More importantly, although these offshore financial centres are a so-called "tax haven" in that they help banking customers avoid double taxation, they do not help their customers avoid taxation in their home jurisdictions. As Jennings points out, "The fact that Cayman is tax-neutral does not affect the obligation of the stakeholders in these transactions to pay tax in their home jurisdictions" (2009, p. 4). The Cayman government remains committed to combating tax evasion and has taken steps to improve transparency requirements. For instance, Cayman has: (1) entered into a number of Tax Information Exchange Agreements with other governments; (2) shared tax information with U.S. authorities; and (3) adopted the E.U. Savings Directive in 2004, which provides for automatic reporting of accounts established by E.U. citizens (Jennings 2009).

Moreover, Cayman has established a proven track record of cooperation and compliance with these voluntary agreements. The U.S. GAO report confirmed that "Cayman has won plaudits from U.S. federal agencies, including the Internal Revenue Service, for its timely cooperation with information requests" (Jennings 2009, p. 4). Indeed, Jennings argues that offshore financial centres have helped minimize the overall impact of the global economic crisis and have hastened recovery. He cites U.S. Treasury figures showing that Cayman investment funds are the third largest holders of U.S. debt, both public and private. As Jennings notes, "Cayman investment funds are already lining up to play a role in the economic recovery by attracting international institutional investors to investment funds that will support economically productive ventures, including many in G-20 economies. For example, several funds registered at Ugland House have been established to acquire so-called 'toxic assets' for international investors in the manner advocated by the U.S. Treasury secretary, thus helping banks onshore to resume much-needed lending" (2009, p. 5).

Jennings concludes that, "While overheated political rhetoric drowns out reasoned discussions on the uses of offshore centers, those who understand international economics value the role that they play. U.S. senators and G-20 leaders must beware of unexpected and unintended consequences of sweeping anti-offshore legislation that risks inhibiting the flow of capital into the U.S. and Europe at a time when it is needed most to support businesses and jobs" (2009, p. 5).

McKee et al. also suggest that there are two sides to the offshore financial centre coin, and the negative aspects tend to overshadow the legitimate contributions. Conventional economists typically assess the effects of offshore financial centres in terms of the combination of benefits to the tax revenue base of offshore jurisdictions versus the damage they do to onshore jurisdictions; however, this analysis is misguided because of the highly subjective variables involved. As Perry and Mauer note, the analytical methods used by conventional economists are "based on the erroneous assumption that offshore financial centres make money from foreign direct investment, or from taxes on corporate earnings. Economists also measure the impact that offshore financial services have on tax revenues 'at home,' in the onshore jurisdiction from which offshore money originates. They rarely examine the phenomenon of offshore finance from the point of view of the countries offering the services, or ask what it means to a country to be a tax haven" (2003, p. 85).

Moreover, the multiplier effect means that any original infusion of autonomous money will be increased two- or threefold as these funds are spent and re-spent in the offshore financial centre-hosting country. The revenues generated by many Caribbean-region offshore financial centres are based on the fees they assess for their financial services rather than taxes imposed on the funds themselves. As an example, Perry and Mauer cite the case of the British Virgin Islands (BVI), where laws stipulate that individuals and corporations may establish a so-called "international business company" (IBC) based in the BVI with a one-time fee of $300, remaining active so long as an annual licensing fee of $300 is paid (Perry & Mauer 2003). These types of transactions have generated fees that account for almost half of the BVI government's revenues each year, surpassing even tourism. Perry and Mauer conclude that, "In 1992, out of a total British Virgin Islands government revenue of U.S. $54 million, the offshore financial services sector contributed U.S. $21 million, outstripping tourism for the first time in the islands' history" (2003, p. 86).

There are a number of offshore financial service enclaves currently available to interested parties of every kind. The Cayman Islands, for instance, are free of direct taxation and provide "the ability to accumulate profits free of tax and, for branches or subsidiaries of parent companies elsewhere, the ability to repatriate profits at most advantageous times. There are no exchange controls, thus permitting the movement of capital in and out, as well as the holding of accounts in any major currency" (McKee et al. 2000, p. 31). As Frank observes, "After all, such places can sometimes have a function that isn't simply mischievous. Who can blame those Argentines who foresaw possible financial unrest and parked their life savings outside of the country before disaster struck in 2001? Or those businesspeople in countries with poor legal systems and unstable banks who choose to conduct their deals through more reliable offshore institutions?" (2005, p. 44).

Moreover, some offshore financial centres are considered an essential part of global commerce for less than obvious reasons. Elizur and Malkin (2000) note that, "In many countries assets must be hidden offshore against kidnapping and extortion, rapacious governments, or simply as part of estate planning. Offshore banks protect the money of businessmen in countries where no one, including a bank's own management, ever really knows how sound it is" (p. 17). These legitimate and lawful purposes, however, can also provide a front for criminal activities, and some major U.S. and foreign banks have established offshore branches specifically for clients wanting to avoid regulations and laws as well as unwanted attention from law enforcement authorities in their own countries (Connolly 2003). As Perry and Maurer point out, "The offshore financial services sector provides one case of putting procedural norms and accountancy techniques to new purposes. Offshore finance points up the limits of the accounting rituals by so nicely demonstrating that the line between shady and sound dealings is incredibly difficult to draw" (2003, p. 84). Human rights activist groups have estimated that at least $50 billion a year is exploited from developing nations through some offshore financial centres (Elizur & Malkin 2001).