Finalisation of draft law Permission required for funds transfer in offshore banking

To transfer funds between units of offshore banks or relocate from an offshore bank unit to an onshore bank unit, prior approval from the Bangladesh Bank is required. Additionally, no income tax or any other direct or indirect tax will be imposed on profits or interest earned in offshore bank units. In case of any violation, a maximum penalty of 5,000 US dollars or an equivalent amount in local currency will be imposed.

These provisions are outlined in the Offshore Banking Act-2024, created by the Economic Institutions Division of the Ministry of Finance. Stakeholder opinions are being sought for review, and after obtaining feedback, the approval process will be presented in the cabinet for final approval. It has been emphasized that this law is primarily aligned with international financial management practices.

Offshore banking refers to a separate banking service within a bank, offering distinct financial services. It provides opportunities for foreign companies to receive loans and collect deposits from foreign sources. In offshore banking, accounts are maintained in foreign currencies instead of local currencies, and the standard rules and policies of regular banking do not apply. Only the bank's core profits, such as interest and fees, are accounted for in offshore banking.

It is known that in 2019, the Central Bank issued offshore banking guidelines. These guidelines govern the operations of offshore bank units in various banks. However, the enforcement and penalty provisions of those guidelines were weak. Efforts are now being made to enact comprehensive legislation to regulate offshore banking more effectively.

Under the current policy, businesses with entirely foreign ownership can engage in banking activities in various economic sectors in the country. They can disburse loans and collect deposits. However, in the case of joint ventures with foreign ownership, prior approval from the Bangladesh Bank is required.

In 1985, the establishment of offshore banking units was permitted through a directive. Due to the absence of specific guidelines, some banks have operated offshore banking at their discretion. Allegations have surfaced that several banks have engaged in illicit financial activities through this method. Following the approval from the central bank to initiate offshore banking activities, each bank is now required to adopt its own set of guidelines. The Ministry of Finance is now moving towards the formulation of a full-fledged law.

According to the proposed law, no income tax or any other direct or indirect taxes will be imposed on the earned interest or profits through the units of offshore banks. Similarly, no tax on income, either direct or indirect, will be levied on the interest or profits given to depositors or borrowers by these units. Additionally, there will be no fees or levies imposed on the accounts of depositors or foreign lenders of these units.
Furthermore, the law specifies that if any offshore banking unit violates the provisions of the law, the organization will be fined a maximum of 2,000 US dollars or an equivalent amount in Bangladeshi Taka.

In case of continuous violation, starting from the second day after the initial violation, a daily penalty of 100 US dollars or an equivalent amount in local currency will be imposed.

Moreover, if any director, officer, employee, or staff associated with the offshore banking unit provides false or misleading information to the Bangladesh Bank, they will be subject to a maximum penalty of 5,000 US dollars or an equivalent amount in Bangladeshi Taka. In the case of intentional delays in providing information, the respective officer or employee will be fined a maximum of 2,000 US dollars or an equivalent amount in local currency.
The directive also states that documents of offshore bank units should be kept separately. Bangladesh Bank can visit the unit from time to time. However, no depositor's account information can be provided during inspection without the permission of Bangladesh Bank or the court.

Through offshore banking, entities with one hundred percent foreign ownership will be allowed to accept deposits from EPZ, PEPZ, economic zones, and high-tech parks. In addition to accepting deposits, these units can provide services such as lending, investment, guaranteeing loans, bill discounting, bill negotiation, and other foreign trade-related services. Any foreign currency account can be managed within this banking unit. However, transactions in any funded or non-funded bank outside this unit will not be permitted.

As per the provisions of the proposed law, individuals, excluding Details Bank, will not be permitted to engage in offshore banking business. Commencement of offshore banking operations must occur within six months of obtaining the license. Failure to do so will result in the cancellation of the license, and after cancellation or suspension, the operations will cease. Moreover, the use of the term "Offshore Bank" is restricted to entities holding a valid license. Failure to adhere to the conditions of the license and providing false information related to offshore banking activities to the Bangladesh Bank will result in the cancellation of the license. Entities may voluntarily surrender their license to use the term "Offshore Bank" with the approval of the Bangladesh Bank. However, if there is sufficient justification against the relevant offshore bank, the central bank may grant approval for the surrender of the license.