Evolution Of Offshore Banking In Mauritius

Published Date: 02 Nov 2017

The offshore banking is the deposit of funds by either a company or an individual in a bank which is situated outside their national residence. The geneses of the offshore banking industry are found in a group of island off the northwest coast of France, the Channel Island. Many years back, a group of government officials and bankers decided to propose a remedy against lower taxation together with discretion and anonymity. The intent was to grasp upon the frustration of UK and European residents having enough with overbearingly high rates of taxation and insufficient safeguards to privacy and confidentiality in their home countries. These offshore banking institutions and new offshore financial centers gained instant notoriety and popularity. The Offshore banking sector was born. This spread across Europe and around the world, other small nations and jurisdiction seized upon the opportunity and began strengthening regulations regarding banking practices and client confidentiality in the hopes of attracting foreign depositors; thus becoming offshore banking jurisdictions and offshore financial centers. This became particularly popular in the small island nations which are what many tend to associate with offshore banking jurisdictions. Investors and depositors seeking politically and economically stable jurisdictions found their way to these offshore financial centers and this practice continues today.

Mauritius has been able to find its way in the offshore banking and today most of the banks in Mauritius offer the offshore banking, some banks are new to this service while others have been able to offer this service for many years. As per the Mauritian Bankers Association Limited, Barclays Mauritius was established in 1919 and it was the first bank to obtain an offshore banking license in 1989. Prior to December 2004, banks were required to obtain a separate license and there were restrictions on using the domestic currency and operating in the domestic banking environment. The separate licensing requirements for banks engaged in "domestic" and "offshore" banking activities were removed by the new Banking Act, which came into effect in November 2004 as per the Bank of Mauritius (BOM) enactments.

To sustain its development as an international financial centre of substance, Mauritius has already embarked on a strategy of enhancing its range of financial products and moving towards the provision of higher end and value added services. As per the MBA, Mauritius has 19 banks which comprises of 6 local banks, 8 foreign owned subsidiaries, 1 joint venture, 1 Islamic bank and 4 branches of foreign banks. The total assets of banks stood at USD 29.2Bn as at the end of June 2011 and some 800 Global Funds with an NAV of USD 70.5Bn as at October 2011. 27,057 Global Business Companies has been locally incorporated as at October 2011 and the Financial Services Commission (FSC) has licensed 154 Management Companies as at October 2011. The Stock Exchange of Mauritius has a Market Cap of USD 7Bn as at 29 November 2011 and international multi-asset class exchange offering a basket of commodities and currency derivative products including metals, energy, agri-soft, and currency pairs.(source FSC website)

Nowadays, the Mauritius financial platform is recognized by international institutions like the OECD, IAIS, IOSCO, FATF and the IFSB. Financial Services remains one of the most important contributors to the Mauritian economy, representing 13% of GDP and directly employing over 15,000 highly skilled professionals. The appropriate legal and regulatory frameworks coupled with sufficient level of expertise, attractive fiscal regime and the vast network of Double Taxation Treaties (DTA) making the island an attractive and business friendly jurisdiction for investment purposes.

Services and Products offered by Offshore banks

The types of services and products offered by offshore banks are various and mostly similar to what onshore banking offers. Offshore banks offer a wide range of services and products to their clients namely, International Money Payments through the global swift network in all major currencies, deposit products: call and term deposit accounts, structured investments, multi-currency cheque book, US dollar and EURO deferred debit cards as well as foreign currencies credit cards, internet banking, credit facilities - short term loans and working capital finance, medium and long term loans in a variety of sectors, structured financing, foreign exchange and derivatives transactions, international trade finance instruments- letter of credit (LC) issuance, guarantees, bill discounting and documentary collections, syndicated loan market, participation in syndicated loan market by actively seeking transactions in London/Far East /Africa, Escrow account services and custody services.

The corporate vehicles available to carry out global business activities from Mauritius are companies holding a Category 1 Global Business Licence (GBC1) and companies holding a Category 2 Global Business Licence (GBC2). Other entities available are trust, protected cell companies, limited partnerships and Global Funds.(Source FSC)

The regulatory framework of the financial services environment in Mauritius.

The local legislations have evolved towards a more stringent and regulated environment. Mauritius depending on the circumstances has not missed the least opportunity to intervene and caused the required legislations to be enacted to pave the way for a secured financial environment. The FSC is the regulatory body for all non-banking financial services while the BOM is the regulatory body for the banking sectors. One of the objectives of the FSC is to ensure the orderly administration of the financial services and the GB activities which includes, the administration of the relevant acts as well. In addition, it licenses, regulates, monitors and supervises the conduct of business activities in the financial sector and that of the GB. Furthermore, the FSC sets rules and guidance governing the conduct of business in the financial services sector. It identifies and takes measures to prevent and eliminates investment business abuse. It also establishes norms and standards in order to preserve and maintain the good repute of Mauritius. It advises the Ministers generally on any matter relating to the financial services sector and to GB. In doing so, it collects, compiles, publishes and disseminates statistics in respect of the financial services sector. It identifies and maintains such links and liaisons in the field of financial services and GB as may be necessary for the furtherance of its objects. It is to be noted that no person has the right to carry out or hold himself as carrying out any financial services without a license issued by the commission. Any person, who does so, shall commit an offence and shall with the convictions be liable for a fine not exceeding MUR 1.8millions and an imprisonment not greater than 8 years. (fm….)

The facilities offered to GB companies are numerous. The GBC 1 structure is used generally for large scale trading or investment holding. When income from overseas is mainly in the form of dividends, capital gains, royalties and benefits of tax treaties can be availed. Effective Income Tax Rate of 3% and there is neither capital gains tax nor withholding or dividend taxes. While, the GBC 2 is the ideal vehicle for trading purposes or for holding and managing private assets. A GBC 2 company is not authorised to provide financial services and has no access to the treaty network but is still tax exempt. When a trust is established in suitable offshore jurisdiction, provided that residents of the offshore jurisdiction are excluded from receiving benefit from the offshore trusts, there will be no local taxes applicable to the assets and income of the trust. Mauritius offers a low tax jurisdiction and an investor friendly environment to encourage local and foreign companies to set up a business. The Fiscal Regimes offered, harmonised corporate and income tax of 15%,tax free dividend, no capital gains tax, 100% foreign ownership, exemption from customs duty on equipment, free repatriation of profits, dividends and capital and 50% annual allowance on declining balance for the purchase of electronic and computer equipment (source from BOI)

According to the latest World Bank Doing Business Survey, Mauritius is the No.1 in Africa and 23rd globally in terms of ease of doing business. Canadian Fraser Institute also ranked Mauritius 1st in Africa and 9th worldwide on its chart of economic freedom.

Mauritius is located in a convenient time zone allowing for the conduct of business in the Far East in the morning, Europe during the early afternoon and the USA, later in the day remains one of the fastest growing international financial centre. Well regulated legislative framework as mentioned above together with highly skilled professional, international standard banking sector and the continuous expansion of the double taxation treaty network have led to the success of the Mauritian global business sector. With a widespread treaty network of over 35 countries, the island offers great opportunities to plan your investment through the use of the Mauritian global business vehicles. The treaties provide attractive concessions for tax planning opportunities such as the elimination of double taxation through tax credit, reduction in withholding taxes on dividends, interests and royalties and the exemption from capital gains.

African Perspective

Africa is becoming increasingly attractive as an investment destination. Mauritius currently has tax treaties with 13 African states (Botswana, Lesotho, Madagascar, Mozambique, Namibia, Rwanda, Senegal, Seychelles, South Africa, Swaziland, Tunisia, Uganda and Zimbabwe) and is in negotiation with 7 other states (Congo, Egypt, Malawi, Nigeria, Zambia, Burkina Faso and Ghana). Special advantages for setting up of Investment Vehicles in Mauritius for investment in Africa through Mauritius are, capital gains tax minimization and minimization of withholding tax on dividend through the use of DTA. Secondly, free repatriation of investment capital and returns and the guarantee against expropriation under the Investment Promotion and Protection Agreements (IPPAs). Thirdly, there are no exchange control restrictions. Fourthly, access to foreign currency loans and advances.

IPPAs signed by Mauritius with 15 African member states offer the right incentive and guarantee to investors targeting investment into Africa. The country’s membership in regional organizations – such as the South African Development Community (SADC), the Common Market for Eastern and Southern Africa (COMESA) and the Indian Ocean Rim association for the regional Cooperation (IOR-ARC) – and being a signatory to major African conventions make Mauritius the best offshore financial service centre for establishing any Fund or Investment Holding Company.

Asian Perspective

With DTAs in place with the 2 largest emerging countries namely India and China, the Mauritian global business platform is being widely used for Structured Trade Finance between Asia, Africa and Middle-East as well as Investment into India.

Other facilities offered to Offshore banks in Mauritius is that for all those companies which are listed on the stock exchange of Mauritius or abroad are exempt from the KYC procedures. Furthermore, for all those companies which has been struck off or which have had their license revoked are published in the government gazette, thus making the banks aware of the necessary actions to be taken to close down the accounts which is still opened in their books after the procedures have been adhere to and respected.

However, it is noted that the offshore sector are exposed to different types of risks. Those companies mainly transact in foreign currencies and faced with transaction, translation and economic risks. Offshore sector also faces the investment risks which can be categories into two main groups, namely systematic and unsystematic risks.

OVERVIEW OF THE FINANCIAL CRISIS

During the year 2008 and 2009, the financial crisis was a shockwave for the world economy and is actually considered as the most shocking economic transformation after the great depression of 1930s. Developing financial markets have essentially proven resistant to the consequences of the Global Financial Crisis. In an environment where the world economy continues to feel the magnitudes of the Global Financial Crisis, the role of emerging markets has reached unprecedented importance. While much attention has concentrated on the better growth prospects of these nations, the continued build-up of their foreign reserves, and the form and method chosen for their allocation, especially those from the Asia-Pacific region, the situation is more complex and anomalous than it would first seem. For example, many developing nations domiciled in some of the poorest regions of the world, including Africa, the South America and Middle East, are now capital exporters to the developed economies, not only in the traditional form of portfolio investment, but increasingly as Foreign Direct Investment (FDI). The latter brings with it a host of geopolitical issues and concerns. Nevertheless, one thing is now clear, the economic and financial landscape of this century will be shaped not just by the saving and consumption patterns of countries in the developed world but also by the manner and direction of allocation of the wealth that has now been accumulated in many emerging nations. These flows, given their scale and scope, now appear unstoppable.

The crisis which started in US had a systemic effect, affecting the European countries and all the countries. We note that as at date, European countries such as Greece and Italy are still in the eye of the crisis. We could clearly see that the eurozone unemployment rate has hit a record high at 11.8% with 18.8m people out of jobs according to Eurostat and youth unemployment at a new high. The eurozone unemployment rate rose to 11.8% in November 2012 - the highest rate on record according to official figures out today. The highest rate was seen in Spain at 26.6% followed by Greece at 26% (recorded for September 2012). According to Eurostat, the unemployment rate increased in 18 of the EU member states, fell in seven and remained stable in both Denmark and Hungary. The latest figures from Eurostat, the statistical office of the European Union, also show the EU27 unemployment rate stood at 10.7% in November, stable compared with the previous month

It all started in US where a low interest rate regime together with a large inflows of foreign funds for construction of houses were encourages by high debt-financed in the US. Hugh amounts of loans have been granted to the US citizens without taking into consideration their repayment capacity. According to Gorton and Winton (1998), early reforms in majority of the emerging economies were influenced by the existence of large percentage of bad loans and risky credits

The banking system provides the support around which the economy turns. It underpins the efficient allocation of capital stock, provides essential transaction and intermediation services and funds the development of new businesses and technologies in the wider economy (Harper and Chan, 2003). As at the late 1990s, according to Mihaljeck (2006, p. 46), the banking systems of many emerging market economies were highly fragmented in terms of the number and size of institutions, ownership patterns, profitability, and competitiveness, use of modern technology, and other structural features. Several scholars studied the ethical issues related to the global financial crisis from various perspectives. Buiter (2007) pointed out that the crisis was the product of a perfect storm bringing together a number of microeconomic and macroeconomic pathologies.

Researchers found out that a failure in ethics has contributed to the crisis. Wesberry (2009) related the crisis to ethical and cultural decline while, Longstaff (2008) revealed that negative values of, cheating, lying, using power oppressively and financial dishonesty had distorted the free market leading to the crisis. Gilani (2009) stated that the compensation-defined culture of Wall Street led to the crisis. These above named researchers called for a stronger values system to prevent such crisis. Benton (2009) in this regard emphasized that it is necessary to empower employees to stand in opposition, to question, to push, and to think morally about ways to meet corporate goals in order to create an ethical financial system. The need of the hour is to develop a better work ethic, reduce greed and be conservative (Robinson, 2008). Sen (2009) argued that the crisis raised concerns whether capitalism in its current form needs revision. The crisis necessitated economic organizations to go beyond providing short-term solutions to enabling creating a more decent world.

Following high market volatility with prices of stocks going more and more speculative, banks, mortgage companies and insurances were unable to pay back their debts. The problem is in such a magnitude that those banks even with large capital reserves ran out, we could here make reference to the closing down of the Northern Rock Bank in UK, 2007 which actually closed its doors due to insolvency. This systemic effect of insolvency, lead to the ruin of even the wealthiest economies which had to come up with rescue packages to bail out their financial systems (Moshirian,2009).

For Chan Lau (2008), the financial quake shakes the ailing US economy and run the risk of a major bankruptcy. European economies which were well aligned with their American counterparts in the form of overseas subsidiaries and affiliates were eventually vulnerable by the crisis and it was predicted that emerging economies in the developing world would also suffer from the changes.

In the first few months of the financial crisis, there was the widely held view that the impact on African countries would be minimal as we thought that African countries being far from those big countries such as the US and the European countries, as there is less exposure to complex financial products. Yet, we note that we were wrong and that indeed African countries were impacted by the crisis. This has been confirmed by, Ramlall (2009) who showed that with the crisis, the main index of the Mauritius stock market, SEMDEX, had become more sensitive to movements in international stock markets. He went further as to account for the retreat by foreigners made during the crisis on the back of undermined international portfolio diversification.

However, as the crisis continued leading to an economic slowdown, risks could grow as the banking sector remains defenseless to reduction in income and debt servicing capacities as well as problems faced by the sectors which are pillars to the economy. According to Kamara and al. (2009) African countries have been taking several measures to mitigate the impact of the crisis on their financial institutions , including interest rate reductions, recapitalization of financial institutions, increasing liquidity to banks and firms, fiscal stimulus packages, trade policy changes, and regulatory reforms.

Larose (2003) showed that during the Asian financial crisis in the late 90’s, remote small island economies like Mauritius faced downtowns in their stock markets although they were not connected with the origins of the crisis. Mauritius is currently more exposed to the global slowdown arising from the financial crisis due to the growing interdependence of its financial institutions into a global market place. The global economic recession is likely to continue to hold back the island’s economic growth. Mauritius is a small, export-driven country and the sharp decrease in export volumes during the latter half of 2008 and the first quarters of 2009 has already had a major impact on industry.

The pace of globalisation over the past quarter century is reflected in the degree to which trade has outpaced world growth since the 1980s (OECD, 2007), the increasingly global production networks and supply chains (De Bakker & Yamano, 2007) and the acceleration in foreign direct investment (FDI) since the 1990s (UNCTAD, 2010).

As per the Mauritius ICT Export Portal, it has been proved that the developments in the ICT sector have so far been rapid, sustained and above all very encouraging. Unlike other sectors of the economy, the ICT sector in Mauritius has been resilient to the present financial crisis and is today a fast growing and promising sector with a huge potential for job and wealth creation. As per the World Bank Doing Business Survey 2012, Mauritius came out 23rd out of 183 countries and came out first out of the 53 African countries in the Ibrahim Index of African Governance 2011. Also, for those International banks, whose parent company are faced with the crisis or have been directly impacted by the crisis transmit their strategy and expertise to those bank implanted in Mauritius. Barclays cuts 285 UK jobs transferring back office roles to India. The Guardian, 2011, 2 February. This is one example whereby what is being implemented in other countries by International banks are also implemented in Mauritius. The response rate provided is in line with the same section.

So far, Mauritius has concluded 36 tax treaties and is party to a series of treaties under negotiation.

5 treaties awaits ratification: Congo, Egypt, Kenya, Nigeria, Russia

4 treaties await signature with Ghana, Gabon, Monaco, South Africa

14 treaties are being negotiated with: Algeria, Burkina Faso, Canada, Czech Republic, Greece, Hong Kong, Malawi, Portugal, Republic of Iran, Saudi Arabia ,St. Kitts & Nevis, Vietnam ,Yemen and Tanzania

(Source: Mauritius Revenue Authority)

These treaties countries which already existed encourage investment in Mauritius as well as FDI.

Today, any foreign investor can set up a company hassle-free in Mauritius and be operational in just 3 working days. Mauritius offers a business environment which is very conducive to business growth and investment: a low tax regime is in place where personal and corporate tax are harmonized at a low 15%, dividends are tax free, there is no exchange control and export-oriented operators enjoy duty-free privilege for their inputs and equipment. So far, Mauritius has signed Double Taxation Avoidance Agreements (DTAAs) with 39 countries and Investment Promotion and Protection Agreements (IPPAs) agreements with 36. In addition, Mauritius has secured preferential market access to the European Union, the USA through the Africa Growth and Opportunity Act, the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC). To facilitate business and commercial activities, Mauritius has a well-developed infrastructural network comprising of an extensive and well maintained road infrastructure, a modern and efficient port capable of berthing vessels up to 100 metres, direct air connections with several cities around the world; high bandwidth fibre cable connectivity and a reliable fixed and mobile telephone network.

As per Rundheersing Bheenick, the governor of the BOM in the Letter to stakeholders, Bank of Mauritius, Port Louis, December 2008 where he mentioned that , Mauritius has not of course entirely escaped the spillover effects of the global crisis on the real economy. Indeed, the impact is becoming increasingly visible. A slowdown is being witnessed in the levels of production and investment in Mauritius

General Anti-Avoidance rule (GAAR)- India.

GAAR is a new chapter introduced in the Finance Bill 2012 of India. GAAR is a simple rule which allow the Indian tax authorities to levy tax if the arrangement or transactions done are "impermissible avoidance arrangements": the first one is the main purpose test and the second is the specified condition test. The main purpose test is to obtain tax benefit. And in addition to the first condition, there is the specified condition test which must satisfy any one or more of the following conditions: there has been misuse or abuse of the provision, the transaction or agreement is non-arm length or the transaction or agreement is not bonafide or the transaction or agreement lacks commercial substance. In simple terms, the above points mean that one should not get into agreement for which the main purpose is to obtain tax benefit. For example, many of the companies are now getting converting into Limited Liability Partnership (LLP) where there are tax benefits like lower tax rate, absence of dividend distribution tax. Hence, companies that have converted into LLP might face adverse consequence if the arrangement is not for bonafide commercial purpose. Therefore the burden would lie on the tax payer.

The finance bill has provided very little guidance as to what the misuse and abuse of the provision mean. For example, it could be considered as cross-border mergers wherein foreign companies take over Indian companies for tax benefits or vice versa. This may be considered as an exposure to GAAR. Hence, proper business rational and proof should be documented to avoid such as situation.

Further, under the provisions of GAAR, no clear definition of commercial substance has been provided which further gives unrestricted powers to the tax authorities to interpret the term, resulting into a loosing situation for the tax payers.

The provisions made under GAAR still do not have much clarity but may impact many companies. This has led to creating negative sentiments in the environment. Foreign institutional investors, which were the net buyer in the initial month 2012, are now being the sellers a there is still high uncertainty about their investments. There is also news in the market that the investments made through the Mauritius route might also come under the eye of the GAAR

METHODOLOGY

It has been perceived that past studies done to assess the impact of the financial crisis on the financial sector in Mauritius are few and only few scholars have as at date assess the impact of the crisis on the offshore banking sector in Mauritius. The offshore sector has much developed and has become one of the pillars of the economy. To be able to assess the impact of the financial crisis in the offshore sector of different banks, a questionnaire has been designed containing specific questions to gauge whether these banks have been impacted by the financial crisis or not and whether they have been proactive in view of curbing the adverse effect of the crisis both moneywise and as well as in terms of human resource. Banks which already existed for the past five years have been chosen and preference has been given to those international banks implanted in Mauritius such as the Deutsche Bank, Barclays Bank PLC and the Standard Bank (Mauritius) Ltd . These International banks have their offshore department well set up in Mauritius earlier than those locally incorporated banks and with the years, these banks have been able to grow in terms of client portfolio.

A well designed questionnaire containing 15 well-structured open ended as well as closed ended questions were sent out to the Head/Senior Relationship managers of the Offshore Department/ Global Business Desk of the ten banks in Mauritius. However, we should point out that the response rate was low and only 5 banks reverted back to us and the other banks did not respond due to confidentiality issue. We were therefore left with five banks of which, there is only one local bank and the remaining are International banks. It has been observed that those international banks having their brand name globally known are mostly those who have been in the offshore banking in Mauritius well before the local banks. Those international banks carry their name as a strong marketing tool to attract foreign investment and obtain publicity by their subsidiaries situated in different parts of the world. However, none of the responding banks offer Islamic banking, and as such, the analysis was therefore restricted to the normal banking sector only and there was no possibility to make comparative analysis which was one of our initial objectives.

Together with the primary data collected as per the questionnaires, an analysis of how was the behavior and reactiveness of these banks to the financial crisis was done. Besides, all the available information were gathered as per the past annual reports published by banks starting from the year 2006 to 2011 to gauge the impact of the financial crisis to these banks in terms of their profitability, liquidity Return of Capital Employed, gearing, asset turnover ratios etc. An analysis was done to show how the banks have performed over the past five years, together with a comparison with the competitors. The use of the excel tool has been used to make diagrammatic illustrations of the findings. The analysis has been subdivided into two parts, the first being the result obtained from the questionnaires and the second from the published financial statements of the different banks. Likewise, the data that have been collected from the website of the UNCAD to identify the level of Foreign Direct Investment (FDI) flowing into the country and to know whether the level of FDI has been affected by the financial crisis taking into consideration that Mauritius is amongst those countries which encourage FDI. In other words, the healthiness of the offshore banking sector is going to be assessed: whether the banks have been able to resist the financial crisis and to which extent. What are the strategies which the banks have put ahead so as to mitigate the impact of the crisis if in case they have been affected.

The liquidity ratios calculated gives an indication as to whether or not a company will be able to meet its commitments as it fall due. Please note that the total Asset and total liabilities has been used to calculate the Current Ratio. In practice, the current asset/current liabilities is used. And for the Quick Ratio(Acid test) the cash and cash equivalents have been used since the inventories should be excluded.

For those offshore banks operating in Mauritius, such as the Barclays Bank PLC and The Standard Bank (Mauritius) Ltd, their financial statements show the actual figures with regards to the offshore sector since this is their main business activity which is the offshore banking. Nonetheless, this is not the situation for the local bank whose financial statements consist of the revenue from all the other segments of the bank, such as the domestic corporate banking, the retail banking etc. In such a case, if a comparison has to be done, the figures as per the financial statement of Standard Bank (Mauritius) Ltd and that of a local Bank such as the MCB Ltd will not correspond. In such a case, this is to be considered as a constraint in the analysis being done.

The strategy that an organisation has implemented differs from one another. The way and the extent to which the manager of Bank A interprete the impact of the global financial crisis is different depending on the type of investment and on the type of clients which the organisation will take on board. Discussing by way of questionnaire is very fruitful as it is a very rich instrument. An assessment was made on the personal opinion of the managers about the prospect of the offshore sector in Mauritius as well as the time it which will take for the financial crisis to prevail.