Offshore Banking: Is it a Legitimate Option?

Offshore banking often conjures up visions of corrupt executives avoiding taxation or drug dealers and other unsavory characters using offshore accounts to keep their dubious dealings hidden. But …

Offshore banking often conjures up visions of corrupt executives avoiding taxation or drug dealers and other unsavory characters using offshore accounts to keep their dubious dealings hidden. But this is not necessarily the case. Certainly some people use offshore bank accounts in unethical ways, just as there are those who abuse loopholes in tax laws or engage in corrupt foreclosure rescue scams, but having an offshore bank account does not immediately brand someone a criminal. In fact, offshore banking can potentially be beneficial for investors looking to protect their assets, run a business while maintaining anonymity or avoid unreliable banking systems at home.

Offshore banks are often, but not always, located in countries providing no-tax or low-tax environments, known as tax havens. The term “offshore bank” simply refers to a bank located in a country other than the one in which the account holder resides.

Many people may legitimately open an offshore bank account. “It’s surprising how most people think [tax evasion] is the number one motivation, but I’d say 80 to 90 percent of people who call are interested in protecting their assets from lawsuits or some other threat. Or they just want the privacy of banking [offshore],” Doug Booth, a paralegal with Offshore Legal, a law firm based in Panama, said.

Wealthy businesspeople who want to get involved with a project and remain anonymous may choose to do so through an offshore corporation because of the privacy it offers. And diminishing confidence in the local economy may also be encouraging U.S. residents to move their money offshore.

Offshore account holders often want privacy and protection| “As of late we’ve been getting a lot of people coming along who are very upset with the American banking system…and they want to move their money to another system,” Booth said.

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The primary benefits of an offshore bank account are privacy and asset protection. Account holders can create offshore corporations, open accounts in its name and make deposits and withdrawals through the corporation, which can make it virtually impossible for the account to be connected with the depositor. The IRS considers foreign corporations to be a legitimate way to use offshore bank accounts, as long as the corporation is used for “valid business purposes.”

Swiss bank accounts have become so well known that Switzerland is likely the first place to spring to mind when thinking of offshore banking, but many jurisdictions offer such services. Countries such as Panama, Bermuda, Costa Rica and the Cayman Islands are all used for offshore banking. When selecting a bank at which to open an offshore account, there are several things investors should bear in mind. Being able to do online banking and to send and receive wire transfers are critical when conducting one’s affairs from abroad. Managing online banking and sending and receiving wire transfers are critical when conducting one’s affairs from abroad. You can compare money transfer companies with CompareRemit, a reliable site enabling you to select the exchange rates and fees that best suit your needs. Booth also advises considering whether one prefers a multinational bank or a local bank.

“A multinational bank has the stability and power behind it and has a lot of conveniences. But…if pressure is applied you never really know if they’re going to hold up, given that they are located onshore as well. Multinational banks have $20 to $80 billion in assets. Banks only in Panama are around the $1 billion mark. They’re smaller banks…but you get the security of knowing no one can pressure them,” Booth said.

Offshore bank accounts are not for everyone. “It’s not as convenient as banking down the street,” Booth said. “You can’t pay your North American bills from your [offshore] bank account; you need to wire the money in to pay bills, or use a card to pay for them.”

Investors considering putting their money into an offshore account should carefully weigh the pros and cons, as well as potential legal issues, before deciding whether or not it is the right decision for them and their money. Diverting and concealing income into offshore accounts to avoid taxation in the U.S. is considered an abuse of offshore banking; taxpayers and promoters of illegitimate offshore arrangements could be subject to civil and/or criminal penalties, according to the IRS.

“We specifically don’t encourage people to come offshore for tax-related matters,” Booth said. “Panama has been a privacy jurisdiction for a long time. It’s built right into the culture, so it’s an authentic privacy jurisdiction and a lot of people…take advantage of that. There are several sectors we don’t take: Gambling, pornography and pharmacy. Those areas we don’t even touch.”

When considering opening an offshore bank account, it is vital that investors select a law firm in the country of choice to ensure that everything is taken care of in a thorough and legal fashion. In Panama, for example, Booth warns of so-called company mills. These mills churn out offshore companies, but are not always reliable. “The real problem with dealing with those people is you lose your attorney client privilege,” he said. “That means someone…has your information and isn’t held by attorney client privilege. All the security in the world isn’t going to protect you if the person talks.”

Investors need to thoroughly research available options, as well as the legality of the course they wish to pursue, before deciding whether or not offshore banking is the right choice. Attorneys and accountants can provide critical counsel during the process, and investors should be as well-advised as possible before making any decisions.


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