Demystifying the Practice of Offshore Banking

Posted in Banking • November 3, 2010

offshore-banking

The idea of owning an offshore bank account is a glamorous one for many people–it brings to mind images of billionaires in tuxedos, spy movie villains and mobsters in need of money laundering. Ask your everyday Joe what the purpose of offshore banking is and he may reply with something along the lines of keeping your wealth a secret or tax evasion.

However, there are actually quite a few logical and totally legal reasons someone would invest their money overseas rather than with an American bank account. Holding an offshore account certainly isn’t for everyone, but it’s not quite what’s depicted in the movies. Surreptitious accounts and Hollywood-inspired scenarios aside, here’s what the everyday investor should know about offshore banking.

Offshore Banking Definition

The term “offshore” developed from depositors in the United Kingdom referring to accounts held in the Channel Islands. However, offshore banking is now more loosely used to refer to holding any out-of-country account regardless of where it’s located, including within landlocked countries.

Benefits of Offshore Banking

When it comes to offshore banking services, the actual types of accounts don’t really differ from what’s available from the average bank in any country. However, there are quite a few reasons why someone may want to open an account in a foreign country:

Economic and Political Stability: It may not be much of an issue in the U.S., but in places where economic and political turmoil threatens the safety of funds in financial institutions, offshore banking provides a more stable account out of harm’s way.

Privacy: High-net worth individuals who wish to keep their wealth private appreciate that many foreign banks are much more secretive about their customers’ accounts. While this trait may be what contributed to the stigma that offshore banking protects criminals, it also greatly helps to guard law-abiding citizens in an increasingly litigious society from being targeted for their high level of wealth.

Potential Tax Advantages: While you can’t legally escape paying income taxes on the money you deposit in an offshore account, you might end up paying less on any earned income overseas. These tax-advantaged foreign accounts are referred to as tax havens and provide a huge incentive for anyone looking to avoid things like capital gains taxes, inheritance taxes, etc.

Disadvantages of Holding an Account Overseas

Limited Access: Anyone who travels knows how costly it can be to visit another country, or even make a phone call for that matter. You may find that communicating with the bank where your money is held or visiting the actual branch is quite difficult if you don’t want to spend a fortune.

No FDIC: For the very reason that some choose to bank offshore, you may find to be a disadvantage, or at least an unnecessary risk. While some foreign banks are much more stable and financially secure than those found in other countries, you won’t find the same government protection as in the United States. For instance, the FDIC insures all qualifying accounts up to $250,000, but if that money is held outside the U.S., that insurance disappears in the event your offshore bank fails.

Opening an Offshore Bank Account

Interestingly enough, you can access the world of offshore banking right here at home. HSBC, which touts itself as “the world’s local bank,” is living up to the title by providing accounts based in Jersey, Channel Islands, through HSBC Bank International. In fact, several national banks are making offshore accounts available to U.S. customers.

However, just because your money is placed “offshore” doesn’t mean you will reap huge financial benefits. The idea that offshore banking is the solution to any legal, tax or other financial issue is greatly exaggerated. Your local bank or credit union probably offers the same security and competitive interest as an offshore account without the hassle of limited access and foreign rules and regulations.

The best way to find out if offshore banking could really benefit you is by discussing it with a financial professional to determine whether your individual financial goals would best be met with a foreign bank account.

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We would love to hear your comments and feedback

  • Grishnakh

    This article misses out on one giant advantage most offshore accounts have over US-based accounts: multiple currencies. Instead of keeping all your money in rapidly-devaluing US Dollars, you can change them into a more stable currency just by going to the bank’s website.

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