Offshore Banking Competition Hots Up

Article excerpt

Offshore banking has been crucial to the movement of funds in and around the Middle East. Changing business patterns, and concern over stability in Bahrain and Lebanon, has caused many banks to reconsider where they should base their offshore operations in the Levant. Two potential offshore banking centres are emerging: Dubai and Cyprus.

Financial markets in the Middle East are engaged in a fierce competition to attract international banks to open offshore banking units. At stake are an estimated $100 to $150 billion in Arab liquid capital now on deposit at offshore institutions in Bahrain, Cyprus and Beirut.

Beirut's hope to re-establish its role as the pre-eminent banking centre for the entire Levant suffered a severe setback as a result of the Israeli military incursion into Lebanon this past spring. So far, no other single country or city has emerged to take its place.

But the high stakes - offshore funds can attract onshore investment and consolidate efforts in several countries to create a substantial regional financial market - ensures that there are several contenders seeking the title 'offshore banking centre of the Middle East'.

Offshore banking units (OBUs) allow corporations, government agencies and high-net-worth individuals to move monies between third-party destinations. For example, a corporation in country A wants to move money from country B to country C. By using an offshore bank, the company can do so without paying the taxes involved in repatriation of monies. OBUs are also used to safeguard funds by placing them beyond national jurisdiction.

Gulf Arabs have historically used Bahrain and Beirut-based institutions to move funds out of the Gulf to Europe and beyond.

Large money centre institutions like American Express, Citibank, Chase Manhattan, Hong Kong & Shanghai Bank, Standard Chartered, and the Union Bank of Switzerland all have OBU subsidiaries in the Levant. They can be extremely profitable, and can become pipelines delivering customers to other services and products offered by the parent company.

There have been some notable changes in business activities which drive offshore banking. The vast oil revenues which originally propelled Bahrain to prominence as an offshore centre have declined. At the same time, privatisation programmes and the demand for private capital throughout the Levant has risen, creating the need for hybrid onshore and offshore banking services. In addition, ongoing concerns over civil unrest in Bahrain, Lebanon and Palestinian territories will continue to prompt capital flight via OBUs.

"It's no secret that capital tries to find a safe place," observed one banker in the Levant. "Any businessman tries to have a connection in a place where he can transact business without interruption."

The freedom offered by OBUs has resulted in their getting a reputation for condoning or enabling tax dodging or money laundering. The current GATT agreements (now subscribed to by most Arab countries), as well as bilateral free trade agreements between various Middle East countries and the European Union, call for a curtailing of OBU activities.

Bankers in the region point out that efforts by the European Union to limit offshore banking activities are unlikely to have a significant impact. George Georgiou, an analyst in the Central Bank of Cyprus' Offshore Enterprises Section, points out that the EU continues to tolerate offshore centres of member states, in Dublin, Luxembourg and Gibraltar. He expects that Cyprus and other countries in the Middle East will negotiate "grace periods to wind down off shores". Those grace periods might be extended easily, he adds, noting that Dublin was recently given a five-year extension to 2005.

"Cyprus will continue to play a key offshore role," says Eleftherios Ioannou, managing director of Lombard NatWest Bank's Cyprus operations. "The system here has proved itself stable and effective. …