Offshore banking, by definition, is when you open a financial account which is housed outside of your country of residency. Given the most current banking crisis, I’ve had a few questions in this regard.
So I’m going to explain a few of the basics. It should be known that there are both pluses and minuses in making this decision.
The main advantage, especially if you’re talking about a banking institution regulated by the English banking laws, is anonymity. Banks adhering to those rules and regulations have a substantial, although certainly not complete, amount of privacy.
Gone are the days of absolute privacy. If you open an account in the Cayman Islands, Bermuda, or Bahamas, the bank will report your account activity to the US. This was instituted in order to stop criminals from hiding and laundering money through those institutions.
Asset Protection can be a major factor. Given the fact that domestic banks only insure your deposits up to $250K, this might make or break your decision.
Tax Efficiency is not any sort of a concept given the new rules. The so-called Tax Havens with favorable tax laws no longer exist because of the reporting requirement.
US Income Tax returns are international in scope. All of your income from domestic and non-domestic sources is required reporting with any foreign tax paid credited against the return. At that point you pay the US Income Tax on the net domestic and foreign income.
There are potential legal risks associated with offshore banking. If the FBI thinks you’re doing something illegal, they’re going to call you in for questioning.
These offshore accounts aren’t cheap. This isn’t like walking into your local bank and opening a savings account for your fourteen-year-old nephew. The fees alone to open these scare most people away.
There’s also a reputational risk involved. Americans can be rather banal and pedestrian at times. If someone finds out that you have an offshore account, nine times out of ten, the assumption will be that you’re doing something illegal.
Let me leave you with this.
Back in the day, a thousand years ago, before the offshore account reporting rules went into place, the Cayman Islands were an interesting place. Included in two square miles of their capital were the forty largest banks in the world, the forty largest law firms, and the forty largest investment advisors.
Grand Cayman was the third largest banking destination in the world, only behind the US and Switzerland.
Back then if you wanted to put some money away in a perfectly safe and anonymous manner, you’d walk into one of the law practices and open a Cayman Island Corporation. At that point, you’d go to one of the banks with your new corporation, and open an account to deposit the money.
Next you’d go to one of the investment companies and sign an agreement to have them manage the money. The US Banking laws said that as long as the money was not inside the US for 24 hours or more, that it would not need to be reported. As such, the money would be invested internationally.
And the money was perfectly safe and properly invested because everything was done under Cayman Island Law.
If someone had a claim against the money they’d need to file a court case under Cayman Island Law. In order to do that, they’d need to know the name of the corporation and the banking institution where the money was actually held.
Let’s say that by some wild hallucination, the claimant actually knew this information. At that point they’d have to put up the amount they were claiming in a non-interest bearing account in order for the suit to be accepted and move forward in the Cayman Island Legal System.
So If you wanted to sue someone to get let’s say $5M, you’d have to be able write a check for $5M for the suit to move forward. The actual amount of time it used to take for a suit to go to trial in the Cayman Islands used to be 14.5 years. Your money sat without interest in that account for that amount of time waiting for the trial to begin.
In other words, the money was perfectly safe and properly invested.
But alas, given the reporting requirements imposed by our government, those days have come and gone. There are very few current reasons why a person would now open an offshore account.
We’re all going to get through this. Let’s get through it together.
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