Is Offshore Banking For You?

Say the term “offshore banking” and most people will conjure images of exotic locales with shady banks and secret, nameless accounts. While offshore banking has been and can be used by criminals and money launderers, it is also a vital element of the global banking system and offers many advantages to “in country banking”.

So grab a drink with an umbrella in it, get your passport stamped and let’s take a tour of the wonderful world of offshore banking!

An offshore bank is any financial institution that is located in a country different than the one of residency. People and companies use offshore banking in order to gain tax or financial advantages. While many offshore banks are located on small country islands, the term is loosely used to define any place that offers these banking services. Switzerland is the most famous example; for a long time the Swiss were the kings of private banking, which offered many tax advantages. Now offshore banks can be found in Luxemburg, Andorra, the Bahamas, Belize and Isle of Man and so on.

Tax havens, or countries with lax banking laws where offshore banks are located, have 1.2% of the world population buy and hold 26% of the world banking assets. U.S. corporations and the ultra rich are the biggest users of these banks. Some estimates put 1/3 of the world high net-worth individuals, over $6 trillion, in offshore banks. The sheer volume and magnitude of these deposits illustrates how important this kind of banking is to the world economy.

For a long time, offshore banking got a negative image because many people used them to hold their money and avoid paying taxes on those funds and any interest earned. They also used the privacy afforded by these banks to hide assets from the government, lawsuits and even soon to be ex-wives. However, there are many legal and practical reasons to bank offshore.

Offshore banking offers stability and accessibility to those who reside in countries with shaky banking systems. By banking in another jurisdiction customers can insure that their money will be available when needed and their assets protected. Another reason to bank offshore is lower costs and higher interest. Since many of these banks work exclusively with offshore banking customers and don’t focus on other areas of banking like domestic banks their cost structure is significantly lower. They can offer higher interest rates as a consequence.

Offshore banking also offers many services domestic banks don’t. They can offer high-risk loans or loans at lower rates than other banks. They can also connect their customers to corporate structures not available “on-shore” like offshore corporations and trusts.

While there are many advantages to using offshore banks and offshore banking, there are some disadvantages as well. Often the banks have high minimum deposits and thus are only used by higher income customers. They also don’t offer an easily accessible “brick and mortar” bank. While the Internet and easy communication make the funds accessible from anywhere in the world, it’s hard to just swing by the bank whenever you want. Also, while these banks are legitimate and legal banking at one may draw the attention of Federal agencies like the IRS or worse.

Come on; let’s not kid ourselves, no one is worse than the IRS?

Offshore banking may or may not be for you. Consult with local laws and maybe even a lawyer specializing in offshore banking and asset protection before moving your money offshore.