What Is Meant by Offshore Banking?
An offshore bank is any bank that is located outside of the territorial boundaries of your home country. In other words, this type of banking is a financial operation that takes place outside the country of residence (an extra-territorial operation). This means, for example, that if you live in the United States, a bank located in Italy could technically be considered offshore, but an operation carried out in Puerto Rico would be onshore. Traditionally, banks situated in the Caribbean or in some South American countries are what are considered offshore in the USA. Other traditional offshore banks would include Switzerland, Andorra and Luxembourg.
In the past, offshore banking has had a bad name mainly because of links to money laundering – the exchange of money that is obtained through illicit trade for money that is considered “clean” or obtained legitimately. Another reason is a misunderstanding of the term “tax shelter.” Many people think that this means that you can legally evade taxes, which is actually a criminal offence. Tax avoidance is completely different and legal. The two DON’T mean the same thing.
Is Offshore Banking for You?
Most who choose offshore banking are very wealthy or large corporations. This is because most offshore banks actually prefer VIP clients who intend to stay where they are without making large transfers from one account to another. Opening an account is rather expensive, including a minimum balance that varies according to the bank or country – usually running from about $10,000 to $500,000 – which rather inhibits those with a small patrimony or a variable income. The Caribbean Islands accept $1,000 to $2,000, while African countries have no minimum requirements. Yearly expenses usually run to approximately 30 percent higher than the bank just around the corner.
Offshore banking is also advantageous for those countries where there is political and economic instability. If there is some risk of your funds being seized, disappearing or being frozen, you might wish to open an account in a country where there is more stability. However, banks in politically stable countries offer the same advantages in stability as offshore banks.
Advantages and Disadvantages in Offshore Banking
Of course, offshore banking can offer tantalizing advantages, such as higher interest rates on savings and lower rates on loans. Offshore banks are often linked to other types of service, such as offshore companies, trusts or foundations that often offer special tax benefits for their clients. There are also many who do not deduct taxes on interest received, unlike banks in many countries. This is particularly interesting for those who are not required to pay taxes on international income in their own country or for those who erroneously think they can evade taxes. Again, it is well to repeat that tax evasion is illegal and is severely punished.
Fortunately, monitoring of offshore accounts has become much more rigorous since September 11, 2001, and laundering and evasions are becoming more and more a rarity. According to Giovanni Caporaso (Apprehension in the Offshore Banks, 2010) more than 15,000 account holders, including many Americans and Europeans, of an unnamed Swiss bank are being monitored because of suspected tax evasion. This number is continuously increasing as more and more banks are falling under the magnifying glass of the world revenue services. Banks that previously upheld an iron rod privacy policy – while not actually encouraging illegal activities, permitted them to pass unchecked – are now bowing down to bribes and blackmail.
This type of banking can also be advantageous for those whose traffic volume includes working with various international currencies. Usually for an additional fee when setting up your account, you can receive or pay international currencies without the loss of value that usually occurs during international exchanges. If this doesn’t happen to be your case, most offshore banks deal with the US dollar.
The Economic Significance of Offshore Banking
Offshore banking controls about 50 percent of the flow of international capital. Approximately 1.5 percent of the world’s population resides in these so-called tax havens, while circa 25 percent of the world’s capital is maintained in these banks. Offshore banking is one of the few sectors, including tourism, that provide economic stability for these small far-flung island nations.
For the most part, banking secrecy continues to be one of the most important features, together with higher interest rates and lower taxes, offered by offshore banks. However, privacy regulations can be overcome if there is even a minimal possibility that a client’s capital derives from an illegal source. Offshore banks are now very careful when accepting new clients, and it is very difficult to open an account if one hasn’t been recommended by someone known to the bank.
Tax havens have always been both a joy and a problem in the financial world. They hold an essential role in the world economy, easing the flow of capital and maintaining a sense of security in countries that otherwise might have no stable income. Perhaps their biggest asset is as a pressure on domestic banks to be more accessible to their clients. Certainly, their elimination would cause serious problems in today's financial system worldwide.
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