What is an Offshore Banking Unit (OBU)
An offshore banking unit (OBU) is a bank shell branch, located in another international financial center (or, in the case of India, a Special Economic Zone). Offshore banking units (OBUs) make loans in the Eurocurrency market, when they accept deposits from foreign banks and other OBUs. 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.
BREAKING DOWN Offshore Banking Unit (OBU)
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; while in other cases an OBU may be an independent establishment. In the first case the OBU is within 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 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 to obtain better interest rates 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.
History of Offshore Banking Units
The euro market allowed the first application of an offshore banking unit. Shortly afterwards 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) 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.