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What Is an Offshore Account & Why Should I Have One?

Chapter 1


The first thing to realize when considering offshore banking is that it is very similar to banking down the street. You can view your account online. You can transmit bank wire transfers in and out of your account. Many offshore banks have debit cards associated with the account. There are offshore prepaid debit card companies that you can link to your account.

Offshore Banking Safety

With regards to bank safety, keep in mind that there are international standards that must be met before a bank can accept depositors from abroad. For example, before a bank in Belize, Nevis, Cook Islands, Switzerland or the Cayman Islands can transmit wire transfers in US dollars, it generally needs to obtain a US correspondent bank. Before it can attain a correspondent banking relationship, it must prove to the US institution that its financial strength ratios comply with strict international standards. Moreover, it must continuously pass these tests in order to maintain the relationship.

Additionally, there are rigorous government regulations within each of these jurisdictions that require substantial capital reserves in order to insure depositor safety. To insure the banks remain in compliance and to uphold the reputations of these popular financial centers, the banks are regularly audited. There are restrictions on the number, amount and security required for bank loans and investments. There are quarterly reporting requirements. Plus, bank officials must pass intensive background checks before they can obtain a directorship with the institution.

Standard & Regulations

There is an international regulatory framework for banks. These are standards to which all banks worldwide must comply in order to transmit funds overseas. This includes the Basel III, which is a detailed set of standards, developed by the Basel Committee on Banking Supervision. Its purpose is to solidify and unify the regulation, supervision and risk management of the banking industry around the globe. The intent of these measure is to do the following;

  • Improve the banking industry’s ability to absorb blows stemming from financial and economic stress, regardless of the source
  • Improve risk management, operations and oversight
  • Strengthen banks’ transparency and disclosures

There are international standards for the Liquidity Coverage Ratio and risk monitoring tools that banks must have in place. It accomplishes this by making sure that a banking institution has a sufficient amount of unencumbered high-quality liquid assets (HQLA) that can converted to cash easily and immediately in private markets in order to meet its liquidity demands for a 30 calendar-day liquidity stress scenario. There there is the Net Stable Funding Ratio requirement that require banks to keep a secure funding profile for both the short-term and the long-term.

Banking Offshore Is Common

Offshore banking is very common. Over 2.7 million US citizens reportedly have offshore accounts. Offshore banking is not just for the top 1%. Banking offshore is available to anyone and everyone wanting to take advantage of the various benefits. Many foreign banks offer low deposit minimums, making it a plausible option for anyone with a desire to set up an account.

Moreover, the benefits of offshore banking go way beyond alternative investment opportunities and hiding your assets. These benefits affect the average person and can greatly improve your daily banking experience. In terms of security, accessibility, convenience, and peace of mind, it would seem that offshore banking is the ideal solution. Gone are the days of thinking of foreign banking as some distant, idealistic tax evasion from your domestic government. It is a real, viable, and sustainable option available to all willing to take advantage of it.

Many Americans are not aware of what offshore banking really is. But, alas, now is the time to start learning the truth about it. Offshore banking is the utilization of a banking system in a nation different than the one in which you reside; most favorably in a strong, stable jurisdiction. There are numerous financial and legal benefits to banking offshore. Whether from an economy in the negative, poor federal reserve, or hugely capitalized banks failing stress tests, it seems imperative to start examining offshore banking as a legitimate option. With the American banking system being unstable, at best, you may also want to look at these reasons.

Offers Diversification

Banking offshore offers currency diversification holdings—which is very useful for maintaining a safe, stable long-term investment portfolio. Very few domestic banks offer options for holding diverse currencies. Holding assets overseas in different currencies allows one to take advantages of jumps in currency fluctuations. After the 9/11 disaster, many people opened Canadian bank accounts and converted US dollars to Canadian dollars. Many made a handsome 30% profit as the US dollar tanked and Canadian on strengthened. So, holding various currencies can diversify investments, offer a higher return in certain market conditions and lower risks.

It allows for diverse flow of income. It is also pertinent to consider that while the U.S. was in a recession in 2008, Asia’s market was booming. Limiting your business domestically restricts you from being able to reap the benefits of economies doing well while your domestic economy may not be. In fact, you may consider establishing more than one foreign account to ensure you are taking full advantage of the favorable international laws regarding foreign banking. In Switzerland, for example, the banks are also the investment management firms. With some of the top money managers in the world, a financial planner can suggest a portfolio that offers a great combination of growth and safety. The US limits the number of trades in which a day trader can participate. That cap is removed when trading offshore.

Banks in the U.S. typically offer very low interest on your deposits. For example, at current market rates, if you deposit $1,000 USD in January, you will make only $10 interest for the year. Some may be satisfied, or even thrilled, to be making any amount on their savings. However, when you compare to some international banks, you can find some significantly higher interest rates on your deposits. We are talking enough interest to make you set up an account just based on this benefit alone. Locations such as Australia, Switzerland, Netherlands, and France may not only offer great interest rates on your deposits, but they were also listed as home to some of the safest banks worldwide.

Along with diversifying your assets, having even a small offshore account allows you to move quickly. Offshore bankers have the flexibility to move their funds, if needed. In situations where asset protection from lawsuits become necessary, or transactions on international business deals, this fundamental is invaluable in itself. Additionally, domestic banks are known for keeping very limited funds on hand for very large withdrawals, making it much harder to readily access your money. Now, there are numerous situations where this sort of limitation can be lethal in terms of asset protection. If you cannot withdraw your funds quickly, you may have a lawyer in the line behind you who wants to freeze your account until the bank hands it over.

Misconceptions

Perhaps a more common misconception of offshore banking is hiding assets from the tax man. In reality, this is rarely true, as offshore banks are typically transparent for tax purposes. That being said, there are some ways to maintain limited privacy when utilizing an offshore account. Any American relocating $10,000 USD or more, at any time, must report it. However, it is possible to allocate under $10,000 USD without reporting it. We highly recommend you speak with your tax advisor before doing this or using any similar method.

Safest Banks Are International

A more secure banking experience. It is typical to find a domestic U.S. bank backed solely by the most debt-ridden country on the planet. Also keep in mind that a several top finance publications have released lists of the safest banks worldwide; none of which were national U.S. banks. Absolutely none. Take Global Finance Magazine which releases a list of the 50 safest banks every year, but does not mention any big American bank. As of this writing, the only American banks on the “safest” list are three small farming banks, listed at numbers 30, 45 and 50.

Internationally, however, it is easy to find banks in low debt countries that don’t (and won’t) gamble with your money; and consequently, are able to keep more cash on hand for your withdrawals. When you put it in terms of investing, it seems clear that you would want invest in a company swimming in cash, as opposed to one drowning in debt. Countries such as Switzerland and Luxembourg have central banking regulators that implement a “checks and balances” on all bank accounting practices. Many other offshore banks and countries have similar systems, helping to ensure people who are looking to bank offshore can do so safely and soundly.

Additionally, many sources say, you are less attractive to lawsuits domestically if a chunk of your assets are tied up in offshore accounts. This may not be a concern for everyone, but keep in mind it is more difficult for someone to freeze your accounts in a snap if they are sitting in foreign banks. For long-term security, experts recommend holding your account in an offshore company and/or trust. Holding funds in these tools not only gives privacy but can also offer substantial legal protection if a court order demands repatriation of the funds.

Setting Up an Offshore Account

It will most likely come as no surprise that it is becoming more and more difficult for Americans to set up offshore accounts. While this information is highly pertinent, it is essential to ask an experienced professional to find the best bank for you.

Some things to look for:

  • Availability for American clients—not all banks still accept American clients.
  • Ability to open an account remotely—there are some overseas banks that have options for clients to open an account online or over the phone. Other banks require that you visit their bank directly to open an account. That being said, some of those banks have domestic branches, which will allow you to set up an overseas account at that branch. The problem is that US courts have jurisdiction over the local branches. So it is important to us a bank that does not have corresponding US locations.
  • Low minimums—most banks require a minimum deposit to open an account (that goes for domestic and international). So you will want to seek a bank with a minimum within reason for you.
  • Banks that have local clients as well as foreign clients—you can rest assured that a bank offering services to locals is going to be well scrutinized. A bank that has foreign clients, often called a “Class B” bank, only may be more easily overlooked by regulators. “Class A” banks can typically accept both domestic and foreign depositors.

Tax Information

Many foreign banks have strict privacy laws and do not disclose account information. Tax reporting, however, is a different issue. International financial institutions are responsible for filing certain forms for US residents and citizens in order to comply with tax regulations. The responsibility also lies with the account holder to report it properly. When setting up an offshore account you will also want to keep basic tax laws in mind. It is important to note, by the way, this is meant to be helpful information only and not tax advice. It is subject to change, so first seek advice from a licensed accountant. That being said, it is recommended that Americans keep the following in mind:

  • You must report all worldwide income. This applies even if you pay foreign taxes on your income. Keeping money over yonder and only paying taxes when you bring it back ceased in 1962. Large corporations with a broad shareholder base can get away with this; but not an individual or closely held corporation.
  • You have to report any foreign bank account exceeding $10,000 USD. Supplementary to your income report, if you have an account exceeding ten thousand dollars, you have to file an FBAR form.
  • If you have any interest (income, losses, gains, deductions, proceeds, and distributions) in any foreign asset higher than $50,000 USD on the last day of the tax year or $75,000 USD at any time during the year, you have to file a Form 8928.
  • Penalties and interest for improperly reporting your taxes. There is no statute of limitations on tax evasion and penalties can range from $10,000 to hundreds of thousands of dollars. Tax evasion, false reporting, and failing to report may carry stiff penalties, so be sure to comply with all tax laws.

Aside from all of that, you also need to bear in mind that no one bank is right for everyone. While some people need highly capitalized banks with easy access to withdrawals, others may look for “asset protection” benefits.

Contrary to popular belief, offshore banking isn’t about evading taxes or hiding your assets. It is more about building your business, securing assets from vexatious litigation, and establishing accounts to benefit from favorable international regulations.

Safer Offshore Than Onshore

As time goes on, in fact, it seems the question is less “Is foreign banking for me?” and more “Is domestic banking right for me?” This is not some fluke. This is the direct result of a shaky banking system backed by a government in debt that is burning through the people’s money while the federal reserve is in shambles. Certainly the question is no longer about whether offshore banking is safe. The question we should be asking is about which secure offshore bank we should use to our personal, legal, business, and financial benefit.


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By Jeweliet Tangen