# Offshore Banking Unit (OBU): Definition and How They Work

## What Is an Offshore Banking Unit (OBU)?

An offshore banking unit (OBU) is a bank shell branch, located in another international financial center. For instance, an offshore banking unit could be a London-based bank with a branch located in Delhi. Offshore banking units make loans in the [Eurocurrency](https://www.investopedia.com/terms/e/eurocurrency.asp) market when they accept [deposits](https://www.investopedia.com/terms/d/deposit.asp) from foreign banks and other OBUs. Eurocurrency simply refers to money held in banks located outside of the country which issues the currency.

Local monetary authorities and governments do not restrict OBUs' activities; however, they are not allowed to accept domestic deposits or make loans to residents of the country, in which they are physically situated. Overall OBUs can enjoy significantly more flexibility regarding national regulations.

### Key Takeaways

*   Offshore banking units (OBUs) refer to bank branches located outside of its home country, and handling transactions made in foreign currency (known generically as "eurocurrency").
*   OBUs make it easier for individuals and businesses to bank internationally and establish offshore accounts.
*   Individuals may choose to keep their money offshore if there is instability in their own country, and they fear losing their investments.
*   Offshore bank accounts must be declared to the holder's home country for tax reasons; however, some countries allow foreigners to earn capital gains tax-free.

## Understanding Offshore Banking Units

OBUs have proliferated across the globe since the 1970s. They are found throughout Europe, as well as in the Middle East, Asia, and the Caribbean. U.S. OBUs are concentrated in the Bahamas, the Cayman Islands, Hong Kong, Panama, and Singapore.

In some cases, offshore banking units may be branches of resident and/or nonresident [banks](https://www.investopedia.com/terms/b/bank.asp); while in other cases an OBU may be an independent establishment. In the first case, the OBU is within the direct control of a parent company; in the second, even though an OBU may take the name of the parent company, the entity’s management and accounts are separate.

Some investors may, at times, consider moving money into OBUs to avoid [taxation](https://www.investopedia.com/terms/t/taxes.asp) and/or retain privacy. More specifically, tax exemptions on withholding tax and other relief packages on activities, such as offshore borrowing, are occasionally available.

In some cases, it is possible to obtain better [interest rates](https://www.investopedia.com/terms/i/interestrate.asp) from OBUs. Offshore banking units also often do not have currency restrictions. This enables them to make loans and payments in multiple currencies, often opening more flexible international trade options.

## How Offshore Banking Units Work

There are several steps for a client to get involved in depositing and transacting with an offshore banking unit. Broadly speaking, the offshore banking unit process starts based on an investor's specific needs. Investors choose an offshore jurisdiction based on factors such as its legal framework, tax advantages, [political stability](https://www.investopedia.com/terms/p/politicalrisk.asp), and banking regulations.

After selecting an offshore jurisdiction, investors can open an account with an offshore banking unit, which can be in various forms such as personal, corporate, investment, or trust accounts. They must complete necessary documentation and undergo a due diligence process, including identification documents, proof of address, and the source of funds.

Similar to a domestic bank, the investor must decide on the range of services needed as well. Offshore banking units offer a wide range of banking services including deposit accounts, international wire transfers, foreign currency exchange, investment products, loans, credit cards, and wealth management services.

In addition to banking services, offshore banking units can assist investors in optimizing their tax liabilities through legal means, such as favorable tax regimes. They may also offer access to a broader range of investment opportunities, including international stocks, bonds, [mutual funds](https://www.investopedia.com/terms/m/mutualfund.asp), commodities, and alternative investments.

These offshore banking units may also provide legal guidance to ensure compliance with both the offshore jurisdiction's laws and their home country's laws to avoid legal or regulatory issues.

> **Important**
>
> The Federal Reserve has prescribed guidance outlining general policies and procedures to be used when examining U.S. branches of foreign banking organizations.

## Offshore Banking Unit Regulation

Offshore jurisdictions typically have a dedicated regulatory body or financial authority responsible for overseeing the financial sector. These regulatory bodies include offshore banking units. OBUs must obtain proper licensing and authorization from the regulatory body, meeting specific requirements such as capital adequacy, operational infrastructure, and adherence to [anti-money laundering (AML)](https://www.investopedia.com/terms/a/aml.asp) and [know-your-customer (KYC)](https://www.investopedia.com/terms/k/knowyourclient.asp) regulations.

The regulatory framework aims to maintain the integrity of the financial system, protect customers, and prevent illicit activities. Therefore, regulatory authorities supervise OBUs to ensure compliance including ongoing monitoring, periodic audits, and examinations of operations. OBUs are required to submit periodic reports and financial statements to the regulatory authority.

Offshore jurisdictions also often engage in international cooperation and information exchange agreements to combat financial crimes and ensure regulatory compliance. This includes sharing information with foreign regulatory bodies, participating in international initiatives against tax evasion, and adhering to global standards like the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA).

## Offshore Banking Units vs. Domestic Banking Locations

There are some key distinctions between offshore banking units and "normal" bank branches. The obvious difference is physical location: OBUs are located in offshore financial centers or jurisdictions with specific legal and regulatory frameworks designed to attract international clients, while common bank branches are typically located within a country's domestic territory and subject to the regulations of that jurisdiction.

Another major difference is the underlying regulatory regimes. OBUs are known for their favorable tax structures, confidentiality laws, and business-friendly environments. Meanwhile, domestic bank branches operate within the regulatory framework of the country in which they are located and are subject to the laws and regulations applicable to domestic banking institutions. In many cases, since these laws are prevalent across the country, they are less incentivizing for those seeking specific shelter features.

The clientele base is often very different between the two as well. Offshore banking units typically serve international clients including individuals and corporations. They often cater to clients who want to optimize their tax liabilities, protect their assets, or access international investment opportunities.

On the other hand, normal bank branches primarily serve local customers and offer standard banking services to individuals, small businesses, and corporate clients within the country where the branch is located.

## History of Offshore Banking Units

The [euro](https://www.investopedia.com/terms/e/euro.asp) market allowed the first application of an offshore banking unit. Shortly afterward Singapore, Hong Kong, India, and other nations followed suit as the option allowed them to become more viable financial centers. While it took Australia longer to join, given less favorable tax policies, in 1990, the nation established more supportive legislation.

In the United States, the [International Banking Facility (IBF)](https://www.investopedia.com/terms/i/ibf.asp) acts as an in-house shell branch. Its function serves to make loans to foreign customers. As with other OBUs, IBF deposits are limited to non-U.S applicants.

### Offshore Banking Units and European Union

Offshore banking units have been impacted by recent developments in Europe. The Savings Tax Directive, applied in 2005, aimed to combat cross-border tax evasion in the EU. However, it has undergone several updates and revisions since then.

In 2014, the EU revised the directive to close loopholes allowing individuals to avoid paying taxes on their savings. The revised directive required all EU member states to automatically exchange information on non-residents' bank accounts with their country of residence. The OECD introduced the Common Reporting Standard (CRS) in 2014 to detect and deter tax evasion by offshore account holders.  

A 2013 directive required member states to automatically exchange non-residents' financial accounts, but this was separate from the revised Savings Tax Directive. The agreement between Switzerland and the EU, signed in May 2015, requires Swiss banks to automatically exchange information on EU residents' accounts with their country of residence. The exchange began in 2018, ending the special secrecy that EU-resident clients of Swiss banks had previously enjoyed.

## How Do Offshore Banking Units Ensure Privacy and Confidentiality?

Offshore banking units ensure privacy and confidentiality through strict regulations and robust legal frameworks. Offshore jurisdictions often have stringent penalties for breaching confidentiality, discouraging unauthorized disclosures. However, it's essential to note that privacy should not be confused with secrecy, as offshore banks are required to comply with anti-money laundering regulations and may be obligated to share information with relevant authorities under certain circumstances.

## What Types of Banking Services Are Offered by Offshore Banking Units?

Offshore banking units offer a range of banking services, similar to those provided by traditional banks. These services include deposit accounts, international wire transfers, foreign currency exchange, investment products, loans, credit cards, and wealth management services. Additionally, offshore banking units may assist with the establishment and administration of offshore companies, trusts, and investment funds.

## What Are the Risks and Challenges Associated with Offshore Banking Units?

Offshore banking units come with certain risks and challenges. These include potential reputational risks associated with using offshore jurisdictions, increased scrutiny from regulatory authorities, and compliance risks. Investors should be aware of the legal, regulatory, and reputational risks associated with offshore banking and conduct thorough due diligence to ensure compliance with applicable laws and regulations.

## How Do Offshore Banking Units Handle Anti-Money Laundering and Know Your Customer Regulations?

  

Offshore banking units handle AML and KYC regulations through robust policies, conducting thorough customer due diligence, monitoring transactions, reporting suspicious activities, and ensuring ongoing compliance with regulatory requirements to prevent money laundering and illicit financing.  

## The Bottom Line

Offshore banking units are specialized branches or subsidiaries of banks located in offshore financial centers. They offer a range of financial services to international clients, including individuals and corporations. OBUs operate under the regulatory framework of the offshore jurisdiction where they are established and provide advantages such as tax optimization, asset protection, privacy, and access to global markets.

> **Article Sources**
>
> 1.  Board of Governors of the Federal Reserve System. "[Examination Manual for U.S. Branches and Agencies of Foreign Banking Organizations.](https://www.federalreserve.gov/publications/supervision_foreignbank.htm)"
>     
> 2.  European Commission. "[Savings Taxation.](https://taxation-customs.ec.europa.eu/savings-taxation_en)"
>     
> 3.  Organization for Economic Cooperation and Development. "[What Is the CRS?](https://www.oecd.org/tax/automatic-exchange/common-reporting-standard/)"
>     
> 4.  European External Action Service. "[The European Union and Switzerland.](https://www.eeas.europa.eu/switzerland/european-union-and-switzerland_en?s=180)"