Offshore Financial Centers – Definition

Cite this article as:"Offshore Financial Centers – Definition," in The Business Professor, updated March 28, 2019, last accessed October 26, 2020,


Offshore Financial Centers (OFCs) Definition

An Offshore Financial Center, otherwise known as an OFC, is defined as a country or jurisdiction that makes available financial services to non residents with the purpose of not disturbing the size or financing of its domestic economy. These financial centers are generally used as holding companies to achieve tax avoidance. Too often, they are used illegally for tax evasion.

The international monetary fund categorizes OFCs as being third class financial centres, along with International Financial Centres (IFCs), and Regional Financial Centres (RFCs).

A Little More on What is an Offshore Financial Center

In 2018, the IMF came up with a revised quantitative-based list of 22 OFCs. 85% of OFC are located in Ireland, the Caribbean, Luxembourg, Singapore, Hong Kong and the Netherlands. From the year 2000 onwards, the IMFOECDFATF initiatives on common standards, regulatory compliance, and banking transparency, greatly reduced the regulatory attraction of OFCs, thus resulting in OFCs being known as tax havens by academics.

Legal Function of Offshore Financial Centers

As stated above, these organizations are asset holding vehicles. Company assets (such as intellectual property) are parked in these foriegn entities. This can protect these assets from liability and allow the allocation of certain revenues to the assets (rather than allocation to the country of use or sale – where taxes may be higher).

This structure also allows the holder of assets (at death) to pass ownership to heirs or third parties without going through their home country probate system.

Collective Investment Vehicles: Hedge funds, mutual funds, unit trusts and SICAVs are created offshore to facilitate international distribution. By being placed in a low tax jurisdiction, investors need only consider the tax implications of their own place of residence.

Derivatives and securities trading: Wealthy individuals often form offshore vehicles to engage in risky yet profitable investments, which may be impossible onshore due to strict finance market laws.

Exchange control trading vehicles: Major exporters often form trading vehicles in offshore companies so that the sales from exports can be “parked” in offshore vehicle until needed for further investment. All this is done in a bid to maximize profit.

Trade finance vehicles: Large corporate groups often create offshore companies,  under an orphan structure to enable them to obtain financing and to treat the financing as “off-balance-sheet” under applicable accounting procedures.

Creditor avoidance: Through the transfer of funds into an anonymous offshore company, near bankrupt persons may escape total bankruptcy.

Market manipulation: The Enron and Parmalat scandals revealed how companies could create offshore vehicles to manipulate financial results.

Tax evasion: Cases abound of wealthy persons evading taxes via non declaration of gains made by private owned offshore vehicles.

References for Offshore Financial Centers

Academic Research on Offshore Financial Centers (OFCs)

Global finance and the growth of offshore financial centers: The Manx experience, Cobb, S. C. (1998). Geoforum, 29(1), 7-21. With the increase in the complexity of the world’s financial system, OFCs provide an alternative for capital to be invested into offshore markets. This paper explains that small scale companies find a hard time in accessing the global economy and the only means available to them is through the creation of spatially focused financial regulation and supervision.

Why reregulation after the crisis is feeble: Shadow banking, offshore financial centers, and jurisdictional competition, Rixen, T. (2013). Regulation & Governance, 7(4), 435. This paper provides insight on two levels of perspective concerning the radical regulatory reforms enacted to quell subsequent financial crisis.

Chinese capital flows and offshore financial centers, Sharman, J. C. (2012). The Pacific Review, 25(3), 317-337. This paper expounds on the reasons for foreign investment into the British Virgin Islands as a representation of China and foreign investors to reduce governance and measurement transaction costs.

Bank secrecy, illicit money and offshore financial centers, Picard, P. M., & Pieretti, P. (2011).  Journal of public economics, 95(7-8), 942-955. This paper analyzes the effects of pressure policies on offshore financial centers and their ability to enforce the compliance of those centers with anti-money laundering regulations.

On the Use and Abuse of Standards for Law: Global Governance and Offshore Financial Centers, Gordon, R. K. (2009). NCL Rev., 88, 501. This article expounds on the OFC’s experience with prudent regulation and anti-money laundering rules.

The role of offshore financial centers in the process of renminbi internationalization, Cheung, Y. W. (2014). This article examines the active stance of China in promoting the international use of its currency, the renminbi.


Uncovering offshore financial centers: Conduits and sinks in the global corporate ownership network, Garcia-Bernardo, J., Fichtner, J., Takes, F. W., & Heemskerk, E. M. (2017). Scientific Reports, 7(1), 6246. This paper provides a unique data-driven approach for identifying OFCs based on the global corporate ownership network.

Offshore financial centers and the Canadian economy, Hejazi, W. (2007). University of Toronto. Mimeographed. The analysis as provided by this paper posits that CDIA that go through conduit jurisdictions results in broad-based increases in Canadian exports to the global economy.

Sources of polarization of income and wealth: Offshore financial centers, Larudee, M. (2009). Review of Radical Political Economics, 41(3), 343-351. This paper analyses the sources of polarization of income and wealth with relevant evidence on how much tax havens hold in terms of assets.

Regulatory Effectiveness & Offshore Financial Centers, Morriss, A. P., & Henson, C. C. (2012). Va. J. Int’l L., 53, 417. This paper analyses the effectiveness of OFCs in relation to reducing the strain of Onshore jurisdictions and laws, and it is perceived in bad light as a result under the excuse of its regulations being lax.

The conman and the sheriff: SEC jurisdiction and the role of offshore financial centers in modern securities fraud, Dhesi, N. S. (2009). Tex. L. Rev., 88, 1345. This paper focuses on the responsibility of OFCs in finance frauds.

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