A financial centre (financial center in American English) or financial hub is a location with a significant concentration of participants in banking asset management, insurance, and financial markets, with venues and supporting services for these activities to take place.[3][4] Participants can include financial intermediaries (such as banks and brokers), institutional investors (such as investment managers, pension funds, insurers, and hedge funds), and issuers (such as companies and governments). Trading activity can take place on venues such as exchanges and involve clearing houses, although many transactions take place over-the-counter (OTC), directly between participants. Financial centres usually host companies that offer a wide range of financial services, for example relating to mergers and acquisitions, public offerings, or corporate actions; or which participate in other areas of finance, such as private equity, hedge funds, and reinsurance. Ancillary financial services include rating agencies, as well as provision of related professional services, particularly legal advice and accounting services.[5]
The International Monetary Fund's classes of major financial centres are: International Financial Centres (IFCs), such as New York City,[6] London, and Singapore; Regional Financial Centres (RFCs), such as Hong Kong, Shanghai, and Frankfurt; and Offshore Financial Centres (OFCs), such as the Cayman Islands, Dublin, Cyprus, and Luxembourg.[a] The IMF notes some overlap between Regional Financial Centres and Offshore Financial Centres.
International Financial Centres, and many Regional Financial Centres, are full–service financial centres with direct access to large capital pools from banks, insurance companies, investment funds, and listed capital markets, and are major global cities. Offshore Financial Centres, and also some Regional Financial Centres, tend to specialise in tax-driven services, such as corporate tax planning tools, tax–neutral vehicles,[b] and shadow banking/securitisation, and can include smaller locations (e.g. Luxembourg), or city-states (e.g. Singapore). Since 2010, academics consider Offshore Financial Centres synonymous with tax havens.[c]
In April 2000, the Financial Stability Forum ("FSF"),[d] concerned about OFCs on global financial stability produced a report listing 42 OFCs.[9] In June 2000, the International Monetary Fund (IMF) published a working paper on OFCs, but which also proposed a taxonomy on classifying the various types of global financial centres, which they listed as follows (with the description and examples they noted as typical of each category, also noted):[10]
The IMF noted that the three categories were not mutually exclusive and that various locations could fall under the definition of an OFC and an RFC, in particular (e.g. Singapore and Hong Kong were cited).[10]
The IMF noted that OFCs could be set up for legitimate purposes (listing various reasons), but also for what the IMF called dubious purposes, citing tax evasion and money–laundering. In 2007, the IMF produced the following definition of an OFC: a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy.[12] The FSF annual reports on global shadow banking use the IMF definition to track the OFCs with the largest financial centres relative to their domestic economies.[13]
Progress from 2000 onwards from IMF–OECD–FATF initiatives on common standards, regulatory compliance, and banking transparency, has reduced the regulatory attraction of OFCs over IFCs and RFCs. Since 2010, academics considered the services of OFCs to be synonymous with tax havens, and use the term OFC and tax haven interchangeably (e.g. the academic lists of tax havens include all the FSF–IMF OFCs).[7][8]
In July 2017, a study by the University of Amsterdam's CORPNET group, broke down the definition of an OFC into two subgroups, Conduit and Sink OFCs:[14]