Due to the pandemic, it has become more difficult for offshore owners to use the privileges of the legislation on controlled foreign companies, as well as tax benefits. Due to the coronavirus, many countries have closed their borders, which has narrowed the range of potential offshore territories. That is why, in the post-pandemic world, the question has arisen as to how and in what time offshore companies will be able to restore the previous structure of the commercial environment and return their investors.
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Pandemic-Induced Challenges
In fact, the coronavirus crisis hit every component of financial markets around the world like a whirlwind. Much of what seemed certain will soon disappear. The economic crisis due to the pandemic is not the only reason for this, but rather a catalyst for change that is long overdue.
1. Massive layoffs in the banking sector.
Plenty of banking institutions made a claim for their own lack of opportunities. It all started with Switzerland, since it has the largest number of offshore banks. In the coming months after the end of the pandemic, the Swiss financial market saw massive job losses. Most banks then operated with overly large staffs, despite advances in digitization, rising costs and lower profitability. With the onset of the recession, this came to an end.
2. Release of bank office premises.
Fewer jobs means less demand for offices. With the trend towards home working helping banks save more money, the office has become a thing of the past. This led to a problem commonly called decollectivization. That is, in many banking firms the collective spirit and unified commitment to work has disappeared.
3. Closure of bank branches.
The coronavirus crisis has given a powerful boost to digitalization and shown how difficult it is to make a profit from banking operations in staffed branches.
4. Cancellation of trips and business trips.
One of the important consequences of the coronavirus crisis is communication through video conferencing. It will not be able to completely replace personal meetings, however, their number has noticeably decreased. There have been huge impacts on airlines and hotels, with significant reductions in profits.
5. Disappearance or partial replacement of cash.
Digital payments have grown sharply in recent months, and debit and credit card issuers have decided to increase online payment limits. The trend towards contactless finance is extending to banking. In 2022, 44% of retail banking customers used mobile apps to conduct business. Both traditional players and financial technology companies have introduced financial applications or modernized existing ones to offer modern services and programs that meet consumer needs.
6. Transition to the cloud space.
Migration to the cloud is likely to remain a major priority for banks. 2022 has directly pushed the banking industry into the digital space. To quickly adapt, many banks have begun accelerating cloud solutions.
Regulatory Changes
When the COVID-19 virus pandemic began, most offshore legislation in force for the banking sector did not oblige banks to close their branches. Severe restrictions affected establishments where large numbers of people gather, that is, the sector of public presence and use. Thus, each organization made its own decisions about how it would operate. A big limitation was the closure of borders. In accordance with those rules, entry into the country without an important and exclusive reason was prohibited.
Some offshore banks have partially closed because investors simply could not enter a particular jurisdiction to deposit their funds with the bank. Because large amounts are involved, many offshore banking institutions do not allow large transfers virtually. Others chose one of the most acceptable options for themselves:
- work as usual;
- work in semi-hidden mode using predominantly virtual contact;
- creating your own schedule in a specific region.
The pandemic has brought to the surface the problems of many banks that have arisen for a long time. All financial institutions had to urgently look for ways to quickly organize remote customer service and employees to work from home.
During the crisis, neobanks (operating only online, without a traditional branch network) and fintech startups were the winners. They have ceased to be newcomers to the market and have become strong competitors of traditional banks. The demand for neobanks has forced them to sharply increase the number of customer service specialists and top managers with experience in a classic bank.
The Future of Offshore Banking and Investors’ Wishes
The pandemic should not be perceived as an unambiguously negative phenomenon from the point of view of industry development. People expect from offshore financial institutions to improve the personalization of services and actively promote a variety of digital services. Cooperation with fintech startups can help here, but not all banks have enough resources for this.
It is also worth noting one rather important trend. The European Commission has advised EU member states not to support companies affected by the coronavirus that have ties to countries on the blacklist. This list includes jurisdictions that do not cooperate with the EU on tax matters. Thus, the restoration of some offshore jurisdictions will drag on for a very long period, which will affect their overall economic condition. The purpose of the European Commission recommendations is to organize the conditions of financial support in such a way as to prevent the abuse of budget funds and provide protection against tax violations in the EU.
It is not yet possible to calculate the full economic damage, given that much of the world is still trying to stop the spread of the disease and chaos still reigns in some areas. Offshore governments are trying to keep the economy afloat, and after the acute phase of the pandemic, they need money from foreign investors more than ever.
The most famous offshore island – the Cayman Islands – was blacklisted by the EU. The assets of many capital owners held in the “hands” of a given territory are at risk. This situation may also arise for some other spaces. However, accurate forecasts will be possible only after the general recovery of the global economy by at least 80%.
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The author of this article is Denys Chernyshov – CEO and founder of the world-famous law firm Eternity Law International.