Review of managing the risks of offshore banking and its implications for the China (Shanghai) Pilot Free Trade Zone

Abstract

As more and more Chinese and foreign-funded banks settle in the China (Shanghai) Pilot Free Trade Zone (CSPFTZ), it has become an imperative to enhance risk management of offshore banking. At the international level, the regulatory effort for offshore banking mainly focuses on tax evasion and money laundering. Existing regulatory frameworks have established standards to identify countries providing facilities for money laundering and developed punitive measures. In terms of strategy, it is suggested that, firstly, relevant regulatory measures should be improved in the short term, and it is necessary to define the scope of offshore banking and regulatory measures for Chinese banks and foreign-funded banks under a suitable legal framework. Secondly, it is necessary to establish risk exposure mechanism and risk evaluation system for the offshore banking in the CSPFTZ, while risk management measures are implemented based on on-site supervision. Thirdly, in the medium and long term, it is necessary to enhance management of potential risks which can be created by offshore banking due to deregulation. Fourthly, on the one hand, specific regulations should be formulated to provide a regulatory basis for taxation; on the other hand, tax informational exchange agreements (TIEAs) may be used as a reference for achieving effective tax regulation.