Offshore Banking Trends in 2011

The banking world has seen huge changes over the last three years, and 2011 will continue to manifest the results of these events. Reactions to the economic and financial crises show consumers have less tolerance for risk, governments have less tolerance for bank secrecy, and more business and consumers are moving their money back onshore. But these changes in 2011 will result in increased competition in low tax jurisdictions and more money flowing between continents.

Here are some trends to watch for in 2011:

• Competition: Hong Kong, Singapore will see competition as low tax zones.

Emerging markets are experiencing the fastest increase in high net worth individuals (i.e., persons with $1 million in assets) in the world, creating a new stream of revenue from consumers seeking wealth protection. This will help to ensure continued growth in offshore banking in low tax jurisdictions, especially from Asian hubs.

According to a report from KPMG on Hong Kong corporate tax rates, "Global competitive developments over the past decade mean that many jurisdictions now have corporate tax rates of similar or lower levels." Low tax jurisdictions must fight to remain competitive in 2011 or tax rates may not be enough to keep them competitive over the long term.

Hong Kong, rated last month as the most globalized economy in the world in 2010, "is facing an intense challenge to maintain its number one status in terms of globalization," according to Agnes Chan, Ernst & Young's Regional Managing Partner, Hong Kong and Macau. "Despite its success in evolving to become the most globalized economy in the world, Hong Kong should not rest on its laurels," Chan said.

• Regulations: Greater transparency will be demanded from both individuals and financial institutions, with stronger criminal enforcement efforts followed through.

A number of sanctions in overseas banking are likely to be enforced during in 2011, offshore assets be the focus of many governmental organisations. Requirements imposed will include stricter and more extensive asset reporting, looser privacy protections; and greater scrutiny all around. The U.S. is making bank accounts for non-residents more transparent. If the U.S. joins the European Savings Tax Directive (ESTD), non-U.S. account holders information will be divulged, diminishing the attraction to investing in America. The directive would give the U.S. greater access to information about its residents' offshore bank accounts.

Criminal enforcement efforts are will also be a focus of governments. The U.S. is also stepping up enforcement and investigation of tax evasion through offshore banks. But this could also mean more witch-hunting, both for individual taxpayers and the professionals who have assisted them, and bigger cases could be used to make examples of and set precedents. Stronger regulations under the Bank Secrecy Act, will see an increase in filing disclosure statements (FBAR filings), intensified programs for anti-money laundering, and increased reporting for suspicious activity and cross-border transaction. The IRS has announced plans to introduce a new Offshore Voluntary Disclosure Program, but with stricter measures and repercussions than a similar program introduced two years ago.

• Asset protection: Investors will head East.

With an increasingly unfavorable mood to offshore investing in western and OECD countries, more investors will be driven away from Europe and the U.S. Investing individuals and institutions may choose to protect their assets by moving them to emerging economies that offer greater growth outlooks in the recovery stages of the global recession, as well as greater privacy, such as in Asia and the Middle East. This is potentially damaging for the very countries asking for greater sanctions, as legal use of offshore financial centers represents a large portion of financial revenue for the U.K.'s banking system and the U.S. – technically the largest offshore jurisdiction in the world.

• Technology: Trends that will make it easier to conduct business abroad.

Just a year ago, amidst intense IRS and OECD pressure, UBS bankers in Switzerland were confident that the privacy concessions would have minimal effect on the Swiss offshore financial sector. However, a recent case where identities were leaked to website Wikileaks, shows the pervasiveness of the Internet, secrecy is fast becoming a non-option for offshore banking providers. The future of the industry is in legal low-tax hubs.

Growth in cloud computing results in more business conducted virtually. Get ready to see more transactions processed over the web, and more business conducted internationally. Trends to watch in 2011 include security threats to banking institutions, challenges and opportunities in tokenization, cloud computing and key management.

• Consumer Behaviour

Much that will happen this year will be dictated by consumer behaviour. Recession and collapses of real estate and stock markets have scared investors away from risk.

In a recent interview with Financial Wealth Magazine, ABN AMRO Chief Executive Officer Private Banking Asia, Hans Diederen, shared that in the post-financial crisis climate, high net worth clients had increased their demand for:
• Products: Simpler, more liquid investment products, that offer more peace of mind.
• Diversifying: Increasing diversification to non-equity asset classes (e.g. bonds and funds).
• Proximity: Investments made closer to home country and region.
• Information: more product information
But one thing that hasn't changed, Diederen noted, "is, clients' investment appetite is still very much driven by market sentiment." With these consumer trends, offshore banking in Singapore and offshore banking in Hong Kong will be optimal jurisdictions for investing with mitigated risks.

Offshore wealth management will continue to remain dominant, according to Financial Wealth Magazine. Asia will continue to be a key growth market for wealth management, outpacing the global average for actual and expected wealth growth rates. This will continue to make the international business model attractive for the region, with Hong Kong and Singapore remaining strong regional hubs to serve clients in Asia.

There is a lot of change that is going to happen regardless of banks or investors being well-prepared. It is clear adaption to many steep changes will be imperative in 2011.