The Role of Offshore Banks in Money Laundering

Offshore banking itself is legal, and often used for acts like asset diversification, tax planning, and international business. However, the secrecy it brings, the complex structures it involves, and the jurisdictional gaps that surround it make offshore banks popular amongst criminals. These criminals exploit shell companies, use trade based techniques, exploit nominee directors to hide beneficial owners, and rapid international transfers. Weak or opaque regulatory regimes make it possible for these criminals to commit money laundering without detection. In this blog post, we’ll be talking more about the details of offshore banking and how it’s used in money laundering to hopefully better guide our readers against these crimes. 

What Are Offshore Banks?

Offshore banks are establishments located outside a person’s country of residence, often chosen for its beneficial tax regimes, as well as business friendly regulations and strict privacy laws. You or your company may use these banks for legitimate reasons like diversifying assets, protecting your wealth, or having an access to international markets. But, the regulations and tax leniency it brings alongside solid privacy laws creates a space for criminals to use. Therefore, tax evasion and money laundering occurs mostly linked to these banks. Regulatory bodies around the world take precautions against these banks accordingly.

Common Offshore Banking Jurisdictions

Some jurisdictions are popular with their offshore banking offers. The first example we can give is Switzerland. The country has been under scrutiny for its privacy laws and it is urged to reform. Switzerland has started using automatic exchanges of account information through the Common Reporting Standard, which in turn has weakened its traditional banking secrecy. In 2025, Credit Suisse Services AG agreed to pay nearly $511 million to settle a U.S. criminal case accusing the bank of helping wealthy American clients evade taxes by hiding over $4 billion in offshore accounts for over a decade. 

The Cayman Islands are similarly famous because of the chances they bring criminals in terms of tax evasion, but, improvements regarding regulations are being made. Missing documentation is no longer allowed for residents with bank accounts.

Panama is famously known for its 2016 Panama Papers leak which has uncovered the acts of Mossack Fonseca where he helped politicians, businesspeople, and criminals commit offshore financial activities. The country has been removed from the EU's high-risk list for money laundering and terrorism financing in 2025 but remains on the EU’s tax haven list.  

In 2022, Mauritius has been mentioned on a big case involving a Mauritian bank. The bank and an offshore company was involved in a $200 million tax evasion case with a Kenyan real estate firm.  This shows that Mauritius is still used for illicit financial activities. Countries like British Virgin Islands, Liechstenstein, Seychelles, and Belize are also known for their offshore banking activities. 

Why Are Offshore Banks Used for Money Laundering?

Offshore banks get used for money laundering since it is easier to hide illicit money within these establishments. Companies and people get more of an anonymity and privacy thanks to these banks, and these countries have high secrecy laws. Adding the integration of shell companies to this, criminals can then hide the true ownership of assets they actually own. Most offshore banks are known for having loose anti-money laundering (AML) measures, especially Know Your Customer (KYC) requirements. This way, you can open accounts without detailed identity checks and money laundering can slip through these banks. Since these banks also have minimal cooperation with foreign authorities, requests for documents from them can go unnoticed or delayed, making it harder to track money launderers down.

How Does Money Laundering Work Through Offshore Banks?

There are three steps to using offshore banks for money laundering. The first step criminals use is placement. The illicit funds they possess are put into the system; it can be done by putting funds into an offshore account, buying a company in a jurisdiction where secrecy laws are high, and routing money through cash-intensive businesses. 

After the money is put into a bank without drawing attention to itself, the next step is layering. Criminals then move these funds through various transactions to hide the money’s origin. Offshore accounts can be used for this, as well as shell companies to move money from and to, fake trade invoices, and frequent wire transfers between jurisdictions. The last step then is integration. These illicit funds are then used in legitimate economy. It can be done by using it for apparent business revenue, loan repayments, and investments in property and luxury goods. The money then seems “clean”. This makes it difficult for officials to find out the criminal connection.

Notable Offshore Money Laundering Scandals

There have been several news around the world about offshore money laundering. The first big scandal is from Panama, and it’s known as the Panama Papers.  As we mentioned above it was discovered in 2016, the papers revealed how the law firm Mossack Fonseca helped high risk individuals like politicians, celebrities and criminals. They helped by hiding their wealth offshore through shell companies and secret accounts. After publication of the Panama Papers investigation, countries around the world initiated proceedings to recover unpaid taxes that had been hidden using offshore companies. By 2021 more than $1.36bn in fines and penalties for unpaid taxes were said to have been recovered by exchequers around the world. Another scandal is the Danske Bank scandal that was going on between 2007 and 2015.  It’s been discovered that the bank funneled €200 billion in suspicious funds through the Estonian branch, much of these funds were linked to Russia and the scandal made lots of noise globally. The last scandal we’ll talk about is the FinCEN Files of 2020.  These files revealed leaked U.S. Treasury reports that showed how global banks like JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon, helped transfer $2 trillion of illicit funds in suspicious transactions, regardless of red flags, because of their non-compliance.

What Are Shell Companies and Why Do They Matter?

Shell companies are entities that operate legally, but these entities have no physical operations, employees, or business activity. They can be of service by holding assets or enabling mergers, but the most common usage of them is for financial crimes. Using these companies, criminals hide beneficial ownership and they make it hard to find out who truly is holding the control of assets. One other way criminals use shell companies is by conducting fabricated transactions. They do this to cover up the movement of funds and we advise our readers to check shell companies twice because of this reason. These companies also allow criminals to move money internationally without attracting the attention of regulatory bodies, at least for a while.

Offshore Banking and Tax Havens: What’s the Difference?

These two terms get mentioned in similar conversations, but they have their differences. As we've mentioned above, an offshore bank is simply a financial institution that operates outside of your home country. A tax haven, however, is a jurisdiction with zero or close to zero taxes, coupled with strong privacy laws, and limited regulation done by regulatory bodies. There are lots of offshore banks that operate within tax havens. Like so, international banking gets combined with secrecy and little to no taxation. They should be paid more attention to, since both of these are likely to be used for money laundering and other financial crimes given that it is harder to detect illicit activity because of their features.

Legal Loopholes That Facilitate Laundering

There are easy way outs that criminals use regarding offshore institutions and financial crimes. The first example we can give is the lack of transparency surrounding ultimate beneficial ownership (UBO). Criminals use this to hide actual owners of companies and accounts, and they likely commit crimes or avoid sanctions. Since there are many jurisdictions where no public access is given to corporate registers, authorities, banks, and investigative personalities like journalists struggle to trace ownership or financial flows to expose these crimes. Some offshore institutions also give minimal regulatory penalties for violations. You can probably guess that this leads to criminals using them to avoid getting caught. 

FATF & Global Response to Offshore Laundering

Regulatory bodies try to stop financial crimes, especially money laundering, involving offshore banks and shell companies. The Financial Action Task Force (FATF) is one example of a global regulatory body that enforces rules to help lead companies and countries to compliance. Recommendation 24 of FATF is put in place to improve the transparency of beneficial ownership. On the other hand, Recommendation 25 is focused on trusts and legal arrangements to make sure they can’t be used to hide illicit funds and activity. When thinking of regional and national regulations, the European Union has the AMLD 4 to 6 directives that require public registers of ultimate beneficial owners (UBOs). For the U.S., there is the Corporate Transparency Act which operates in a similar way. The act requires companies to report their UBO to federal authorities. 

AML & KYC Challenges in Offshore Banking

AML and KYC measures should be implemented in offshore banking but it is difficult and there are a few struggles companies face. One is jurisdictional fragmentation. Different countries have specific standards and keeping track of these differences can be difficult. Criminals use these knowledge gaps to their advantage. Another difficulty that may faced is limited international cooperation. Since financial information is not shared by some jurisdictions, it may be harder to continue investigations as a regulatory body. Criminals use trusts, or nominee directors and shell companies to hide their identity. Since companies still use old compliance systems that can’t handle large volumes of transactions, financial crimes are made easier for criminals.

How to Detect Suspicious Offshore Activity

There are some clues that lead to the detection of suspicious offshore activity. One of them is frequently done international wire transfers. Criminals complete these to layer funds and hide the origin of them. Companies based in tax havens or secrecy jurisdictions get used to hide ownership or evade taxes, which can be another indicator of financial crime. If someone is rapidly moving funds, it can indicate money laundering or illicit financing, especially when done without a clear business purpose. Complex company structures can also signal financial crimes, since these structures usually hide the UBOs and try to make it more difficult to trace them back. 

Compliance Best Practices for Financial Institutions

Your company can defend itself against offshore money laundering by following our advices. For high-risk jurisdictions, enhanced due diligence (EDD) should be used to make sure risks are fully found even in parts of the world with higher risk of financial crimes. Banks and other firms should be screening customers and transactions against global watchlists including sanctions lists and politically exposed persons (PEPs) lists. This is done to detect criminals and suspicious activities early on. Ongoing monitoring of international transactions should be conducted to find odd patterns or behavioural anomalies, which can mean money laundering. Verifying beneficial ownership is also helpful to figure out whether a company is hiding the true owners. 

How Sanction Scanner Helps

Our Sanction Scanner team is there to help you fight money laundering and offshore risks. The real time name screening process we provide allows you to instantly check customers against sanctions lists, PEP lists, and more high-risk lists. The transaction monitoring feature also helps you track transactions to make sure you miss no odd activity. UBO checks and the KYB module is especially helpful when it comes to the subject of offshore banks and shell companies. Finding out the UBOs and verifying customers via KYB modules will help create a safer environment. The geographic risk assessment feature also allows you to focus more on customers and entities from higher risk jurisdictions.