Historically, OFC jurisdictions have been associated with one or a combination of the following: low or zero taxation; moderate financial regulation and supervision; and secrecy or anonymity in financial dealings. These features, of course, are also found in some onshore jurisdictions. The growth of offshore centres can be traced back to the restrictive regulatory regimes in many advanced countries in the 1960s and 1970s. These regimes blocked the flow of capital to and from other countries (excluding trade financing), or imposed restrictions on the interest rates banks could offer, or raised banks' funding costs in domestic markets (for example, through the imposition of high non-interest-bearing reserve requirements). These restrictions, which, in many cases, were intended to provide governments with more control over monetary policy, encouraged a shift of deposits and borrowing to less regulated institutions, including banks in jurisdictions not subject to such restrictions.

Business conducted in OFCs covers a wide range of financial sectors, such as banking, insurance, and securities, and some non-financial activities, such as shipping registries. However, most offshore centres specialize in specific types of financial services. Multinational corporations and high-net-worth persons are some of the most frequent users of OFCs. Banking is the most prevalent business. Most banks located in OFCs are branches or subsidiaries of international banks. Their main activity is collecting deposits from various markets and channelling them back to their parent institutions. Private banking is a major service offered to high-net-worth persons. Specialized services for such clients include asset management, estate planning, foreign exchange trading, and pension arrangements. Some banks also provide non-bank services, such as custodian and trustee services.Collective investment schemes (mutual funds and hedge funds) are also domiciled in OFCs, mainly for tax purposes, allowing their clients, the benefit to grow their investments tax free, thereby outstripping similar on shore funds. An opportunity, up until recent times, available only to large corporations or high net worth individuals. Therefore those individuals allowed by their nation's laws to access these markets, obtain access to vastly superior products and services and will accumulate a considerably larger fund. For example, two identical funds, with the same contribution each year, experiencing the same annual growth, will see the offshore fund accumulate substantially more than its rival. If the proceeds are used to buy a fixed interest annuity, both are required to notify their tax authorities by law. However, the offshore fund holder will have a considerably higher net income on simple mathematical grounds and have the whole world to choose the best annuity available. Something the on shore investor rarely if ever has.Related fund activities such as allocation of assets, fund distribution, asset management, fund administration, custodian services, and back-office work are also conducted in these centres. A large number of special purpose vehicles (SPVs), which are increasingly used by financial and non-financial corporations, are registered in OFCs. Financial firms use SPVs for securitisations, and non-financial corporations use them to lower the cost of raising capital. OFCs are attractive places to register SPVs because of the tax advantages they offer, which are supported by a facilitating regulatory regime.Asset protection, including trusts, is another service offered by OFCs. Reasons for managing assets in OFCs include protection from weak domestic banks or currencies, additional legal protection from lawsuits in the home jurisdictions, and legal tax avoidance.

For many years the major industrial powers were concerned that OFC's were being used for illegal tax evasion and criminal purposes. The IMF created an number of oversight groups in conjunction with these concerned authorities to assess the problem and find solutions, where necessary.

The IMF's OFC assessment program was designed to be a step-by-step process, flexible enough to be adapted to the different requirements of various jurisdictions. Before assessments began, an outreach exercise to explain the program was undertaken in August-September 2000; virtually all OFCs participated. It was envisaged that the programme would start with a basic self-assessment followed by a more comprehensive IMF staff-led assessment. Typically, the IMF would assess the compliance of supervisory and regulatory systems with international standards in the banking sector and in the insurance and securities sectors, if significant, and evaluate the effectiveness of anti-money laundering measures and the regime for combating the financing of terrorism (AML/CFT). Banking supervision was assessed relative to the Basel Core Principles for Effective Banking Supervision, insurance supervision relative to the International Association of Insurance Supervisors Insurance Core Principles, and securities regulation relative to the International Organization of Securities Commissions Objectives and Principles of Securities Regulation.

In April 2001, the IMF Executive Board endorsed the development of a methodology that would enhance the Assessment of financial standards, relevant to countering money laundering and, subsequently, the financing of terrorism. Since October 2002, the assessments have used the final methodology endorsed by the IMF's Executive Board, which provides a detailed exposition for assessing the implementation of the AML/CFT regime compared with the international standard-the FATF 40+8 recommendations. As the methodology has evolved, assessors in the program have used the most current version. Besides assessing the observance of supervisory and regulatory standards, some jurisdictions also volunteered for a more comprehensive assessment of the risks to, and vulnerabilities aspects of international finance, including banking, securities, and insurance. Cooperation and information exchange are typically much more complicated when several supervisory authorities in different jurisdictions and sectors are involved. Consequently, the supervisory standards applied in OFCs will need to be monitored to ensure that they are adequate. There is also a risk that market integrity may be compromised by financial crime, such as money laundering.

Concerns about the potential risk posed by offshore centres to other financial systems have been raised in several international forums, including the Financial Stability Forum (FSF), the Financial Action Task Force on Money Laundering (FATF), and the Organization for Economic Cooperation and Development (OECD). The April 2000 FSF report on offshore centres highlighted prudential and market integrity concerns stemming from factors in OFCs that impede effective supervision by the onshore home supervisor and hinder cooperation, which is necessary to enhance financial stability and fight financial fraud. In 2000, the FATF undertook an initiative to identify noncooperative countries and territories in the fight against money laundering. The FATF's first review (June 2000) named 15 jurisdictions, including 12 OFCs, as having critical deficiencies in their anti-money laundering systems. Since that review, all but three offshore centres have made significant and rapid progress in addressing deficiencies and have been removed from the list. The OECD has pursued a project on harmful tax practices that affect OFCs, among others. In 2000, it identified 47 countries with potentially harmful preferential tax regimes and listed 35 jurisdictions (mostly OFCs) that met the OECD's tax haven criteria. In 2002, the OECD made public a list of 7 uncooperative tax havens that included 6 OFCs; about 30 other OFCs had made commitments to transparency and effective exchange of information. The IMF has significantly stepped up its surveillance of financial systems in recent years to identify potential financial vulnerabilities, including those resulting from weaknesses in supervisory and regulatory systems. Traditionally, economic policies of its member countries are monitored by the IMF as part of its surveillance process and while some OFCs are members, many are non members or dependent territories of members and are thus excluded from IMF surveillance.

Two distinct groups were identified by the assessments: the larger, more important centres, which have supervisory systems, comparable to advanced onshore jurisdictions; and the smaller and poorer jurisdictions, which, have significantly weaker supervision. To safeguard their reputations and protect their niche markets, large jurisdictions have focused on supervising cross-border activities important to their centres. Nevertheless, some basic weaknesses in some of these regimes were identified-for example, the failure to ratify and implement international agreements and inadequate customer identification.

Human nature being what it is, many large On-shore financial institutions and centres used the genuine worldwide concern regarding illegal and criminal activities within some OFC's as an opportunity to dent, unfairly, the reputation and probity of well established OFC's which they compete with. Subsequently, on many occasions OFC's with greater regulatory standards, oversight and superior client guarantees than for example investors or depositors in the US, found themselves in the uncomfortable position of fighting excellent changes and strengthening in legislation, which they also agreed, to protect their commercial existence. Since 2000 agreement has been reached within the major OFC's and the regulatory compliance bodies and a more defined demarcation between the major centres, providing the highest levels of probity and quality and the others has been created. Thus, while there is no universal definition of the term, many expert observers point to a number of jurisdictions as having the requisite characteristics of a financial haven. The countries, territories, cities or areas falling into this category are listed below …