Offshore banking - the mere term conjures up images of exotic locales like the Cayman Islands, San Marino and Switzerland, complete with swarthy millionaires depositing briefcases full of money into secret, numbered accounts.
Recently Ghana quietly took its first steps towards joining this shadowy fraternity. Just before parliament broke for its Spring recess, and without any fanfare, it passed an amendment to the Banking Act. This amendment paves the way for offshore banking in Ghana, and eventually other offshore financial services, like insurance and leasing.
But, Ministry of Finance member Dr. Sam Mensah says the real world of offshore banking is far from the cloak and dagger, James Bond-esque portrayal seen in movies.
"Offshore Finance is all about service now," he says, adding "we [Ghana] are not getting into this market simply to provide tax-havens".
Mensah should know what he's talking about – he"s one of the leaders of the project, a project he says has "been a vision of the President for a long time".
The first step of the plan will see Ghana license offshore banks. One bank likely to look for a license is Barclays, which consulted with the government on the bill, and who considers itself a "partner" in the endeavour. Mensah says Ghana will eventually expand to allow for offshore insurance brokers, leasing agents, and providers of investment products.
The term "offshore bank" originates with the financial institutions located on the Jersey and Guernsey islands which sit in the British Channel, and were formed to serve the UK’s financial interests. But, most people associate "offshore" banking with Switzerland – even though the nation is landlocked. In 1934 Switzerland passed the Banking Law which codified the rules of secrecy financial institutions adhere to in the country. The secrecy rules were not in the first draft of the law, but were added in order to prevent the Nazi’s from probing the bank accounts of Jews and other "enemies of the German state" held in Switzerland.
The secrecy, lower tax levels and lack of regulations have made offshore banks a popular place for large organisations to place their money. That secrecy also prohibits some offshore banks from disclosing to authorities who or what organizations have placed assets with the bank. And although account holders are still legally obligated to disclose their holdings to tax authorities critics of offshore banking say they often don’t.
That’s one of the reasons offshore banks have been accused of making it easy for individuals and corporations to dodge taxes. Offshore banks have also been linked to terrorists and drug-dealers who use anonymity regulations to help launder money. The banks also cater almost exclusively to large organisations or wealthy individuals. Opponents of the system say since this can lead tax avoidance by the wealthiest members of society it thereby increases the tax burden of the middle-class who must make up the shortfall.
But, those who support offshore banking say the industry is not the bastion of lawlessness its detractors claim. Indeed in recent years many nations, especially those in Europe, have taken steps to make it easier for authorities to collect taxes. In 2005 the EU passed legislation that forces its citizens depositing money into offshore banks to either pay a withholding tax upon deposit, or allow the banks to communicate with tax authorities in the person’s home country.
Ghana is also preparing to deal with the threats posed by tax evasion and organized crime. In addition to a new Anti-Money Laundering Bill working its way through Parliament, Dr. Mensah says the government plans an "18-month to two year plan" to help "re-engineer" existing institutions, such as the Bank of Ghana, the National Insurance Centre, and the Securities and Exchange Commission. It’s intended to better prepare Ghana for the often complex transactions that come with offshore finance.
But, will it be enough? Professor Anthony Aboagye the head of the Department of Finance at the University of Ghana, Legon thinks Ghanaian financial professionals can handle most of the load saying there is "no question about the quality of auditors". But, he worries about multinational corporations and their increasing use of Financial Engineering, a complex form of finance used in risk analysis.
"That is an issue," he says "modern finance is all about financial engineering." He
adds that a "simple workshop" won’t be enough to train auditors to recognise when these systems are being applied suspiciously. He argues that knowledge can only be gained from years of working in the field.
And, the success of offshore banking in Ghana may depend on its ability to properly police the new industry. As economist and Cato Institute fellow Dr Richard Rahn writes, successful off-shore banking communities like the Cayman Islands do everything possible to keep the money that flows through its bank clean. Otherwise, he argues, the banks would be unable to attract the massive institutions that make the tiny nation the world’s fifth biggest financial centre.
Rahn also writes offshore banks, if run properly, can help maximize worldwide growth, and indirectly reduce poverty since they expose corporations to fewer taxes and restrictions. He feels that makes it easier for organisations to save and invest money, leading to more efficient capital investment.
Mensah says that benefit will be felt in Ghana, as top domestic companies will be able to access the capital held in offshore banks. "Ghanaian companies already try to borrow offshore… they will still borrow offshore but the transactions will be easier to close". He also says the firms may receive better rates than from other offshore banks, because Ghana’s offshore industry will be more familiar with the risks of doing business in the country.
And Ghana also stands to earn revenue from the taxes and registration fees offshore institutions will pay. Exactly how much is unknown. The Bank of Ghana is working with a multi-party steering committee to set the fees, as well as create the exact regulations the offshore institutions will have to abide by.
But, Mensah says the planned re-engineering will properly prepare Ghana for the rigors of offshore banking and he says the industry will lead Ghana to "develop a cadre of financial experts," increasing the nation’s knowledge pool.
The Ministry of Finance is betting Ghanaians proficiency with the English language, and "high education levels" will help the country beat out offshore banks in other developing nations, while Ghana’s lower labour costs will allow it to take business from more established nations. As Mensah says "we are in the same time zone as London [one of the biggest international financial centres in the world], we can do the same thing here as in Switzerland or in London but it might end up being a lot cheaper to bring that business to Ghana".
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