Anti-Money Laundering(AML)/Combating Financing Terrorism(CFT) - India in the Global Context

  Uses of Offshore Financial Centers (OFCs) OFCs can be used for  legitimate reasons , taking advantage of: (1) lower explicit taxation and consequentially increased after tax profit; (2) simpler prudential regulatory frameworks that reduce implicit taxation; (3) minimum formalities for incorporation; (4) the existence of adequate legal frameworks that safeguard the integrity of principal-agent relations; (5) the proximity to major economies, or to countries attracting capital inflows; (6) the reputation of specific OFCs, and the specialist services provided; (7) freedom from exchange controls; and (8) a means for safeguarding assets from the impact of litigation etc.   Offshore banking licenses . A multinational corporation sets up an offshore bank to handle its foreign exchange operations or to facilitate financing of an international joint venture. An onshore bank establishes a wholly owned subsidiary in an OFC to provide offshore fund administration services (e....

  According to the paper  'Customer Due Diligence' published by Basel Committee on Banking Supervision in 2001, the inadequacy or absence of KYC standards can subject banks to serious customer and counterparty risks, especially reputational, operational, legal and concentration risks. It is worth noting that all these risks are interrelated. However, any one of them can result in significant financial cost to banks (e.g. through the withdrawal of funds by depositors, the termination of inter-bank facilities, claims against the bank, investigation costs, asset seizures and freezes, and loan losses), as well as the need to divert considerable management time and energy to resolving problems that arise. Reputational risk poses a major threat to banks, since the nature of their business requires maintaining the confidence of depositors, creditors and the general marketplace. Reputational risk is defined as the potential that adverse publicity regarding a bank’s business practices ...