Offshore Banking Definition, Benefits & Offshore Account Types
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Offshore Banking Definition?
Offshore banking is simply a term used to refer to the use of banking services in a foreign jurisdiction outside of the country where one resides. So any individual who owns a bank account in a foreign country outside of their country of residence is engaging in offshore banking.
If you are a UK citizen and open an account in the US, that can be considered an offshore bank account. In the past, there were typically only a small number of jurisdictions in which banks offered offshore banking services, however, nowadays, one can open an offshore bank account almost anywhere.
That being said, there are still certain jurisdictions (such as Singapore, Belize, Cayman Islands and Switzerland) that are more renowned for their use as favourable offshore environments that have a perfect blend of financial advantages together with strong banking policies and practices. Because each jurisdiction is unique they each have their own pros and cons and so the choice where to open an offshore account will vary according to individual needs and circumstances.
For instance, if you are looking for investment accounts with a range of offshore investment advantages and options, Switzerland and Singapore might be right for you. If, however, you would like to open a personal account with a low deposit threshold, and would rather do it all online then perhaps Belize might work for you.
Table of Contents:
- Offshore Banking Definition?
- Why Use an Offshore Bank?
- Offshore Bank Accounts
- Personal Account vs. Corporate Account
- Offshore Investment Account vs. Transactional Account
- Investment Accounts
- Transactional Accounts
- Remote Account Opening
- The Best Way to Structure Your Offshore Bank Account
- Offshore Banking Benefits
Why Use an Offshore Bank?
Offshore banking provides a number of benefits that can not be found in your regular domestic banking system. Additionally diversifying your assets across different channels, countries, accounts and currencies helps to protect your money and reduces the risk of being left unprepared in case of bank failures, currency depreciation or economic collapse.
Having a plan B is important in times of uncertainty and having a foreign account outside of the country where you live is the first step to ensure your future financial longevity.
Offshore accounts offer a wealth of opportunities as an insurance against the negligence of an irresponsible banking system that has overextended itself by having low interest rates, poor capital reserves, and mountains of debt practically making many banks insolvent. If you add all that together with a general economic banking system and the laws that dictate banking governance and policymaking, together represent pieces of a broken system. Why? We shall see in a minute.
Banking in an offshore jurisdiction reduces your risk while increasing your financial freedom giving you flexibility and protection of your assets. Many people recognise the importance of diversifying assets, but few people consider diversifying across different locations.
Offshore Bank Accounts
There are a few different ways in which one can go about opening an international bank account, as well as different account types, which we will briefly explore:
Personal Account vs. Corporate Account
While it is possible to open up a private offshore account in your own personal name, it is generally recommended to incorporate an offshore company in a foreign jurisdiction and subsequently open a corporate account under the name of the company.
There are a few reasons why this is recommended:
1. Corporate accounts are easier to open whereas personal accounts can be more difficult.
In theory, it would seem easier to open an account in your own name compared to going through the additional steps of forming an offshore company, but in reality, having a corporate entity be the holder of the account allows for many advantages
Established banks will generally have much stricter requirements for accepting a foreign individual as opposed to a company. You will likely need a great deal of documentation, references etc. as well as a sizable initial deposit, and even then there are no guarantees of being accepted.
2. A corporate account provides much greater protection and privacy.
Opening an account in the name of an offshore company separates and dis-identifies you personally from the account. This means that your assets will be much safer and less open to unwanted attention.
3. There can be tax and income advantages.
In many jurisdictions, companies that are structured in the right way can be eligible for reduced tax rates and rebates. It may also give you access to certain investment options that wouldn’t be as easily available to an individual, which can help maximize your returns.
In most situations, it is best to go with an offshore company corporate route, although some rare circumstances may require opening a personal account.
It is very useful to seek the right expert guidance to help you with the process of forming a corporate offshore account in your chosen jurisdiction and structuring it in the most advantageous way.
Offshore Investment Account vs. Transactional Account
Besides choosing a personal account or a corporate account with an offshore company, there are a few other major account types, each with their own requirements and uses. These different types of accounts can broadly be separated as investment accounts and transactional accounts.
Generally, give one greater access to a wide range of investment and trading options.
They have a complex structure, usually needing the formation of an offshore trust and a reliable investment manager or broker. They also require large opening deposits of at least USD 500,000 or more. They are ideal for high-value investors who want maximum returns and protection for their wealth and do not plan on having many transactions.
Transactional accounts on the other hand, are better for those who require daily transactions.
They operate similarly to orthodox domestic transactional accounts. While they do not offer the same range of investment options and premier services as large investment accounts, they are useful for those who want to have easier access to their funds, make regular transactions, and who are just looking to initiate their offshore plan with a small and simple account.
Each one of these types of accounts can be opened both as a personal account or as a corporate account that is opened with a company. We usually recommend the latter due to the added security, protection that an LLC brings.
Remote Account Opening
Certain jurisdictions and account types lend themselves more to opening an account remotely (e.g. Belize), and in certain situations, it may be more practical to open an account remotely (if, for example, you are only opening a small account; it may not be financially viable to travel all the way to the country of choice).
However, the last couple of years the offshore banking industry has changed making it much more difficult to open an account in some jurisdictions. Places like Singapore and Panama for instance, generally require an in-person visit, local company management and a sizeable initial deposit to get started.
Though not all countries have the same barriers to entry, making it still possible to open an account remotely without any in-person visit.
The Best Way to Structure Your Offshore Bank Account
With offshore banking, there is no ‘one size fits all’ solution. Deciding exactly how to structure your account will depend on many factors and will differ according to your specific needs and circumstances. Factors that will determine the best place to open an offshore bank account would be:
- What is your initial deposit?
- What type of account do you need?
- Where do you live and what passport do you hold?
- What type of financial services do you require?
- What is the purpose of the account?
- What are your tax obligations?
The above information may help you get a general idea of the type of offshore account you are looking for, but for a more tailor-made offshore solution, it is best to get a personalised approach as each country has subtle differences that can make all the difference.
Offshore Banking Benefits
- Higher Returns in International Investments
- Economic and Political Stability
- Generate Higher Interest Rates
- Foreign Banking Systems Offer Security
- Diversify Your Wealth
- Higher Liquidity
- Hold Multiple Currencies
- Asset Protection
- Account Confidentiality
1. Opportunities in Overseas Investments and International Markets
Many international and offshore funds generate much higher returns through Private Hedge Funds and investment portfolios not readily available to domestic corporate account holders. Offshore investment accounts open up investments in multiple jurisdictions, regional as well as developing markets.
Spreading investments in different countries and global currencies allow you to play global markets and capitalize on regional trends. When a domestic economy enters a financial recession having offshore funds spreads your risk.
Spreading your assets liberates you from being dependent on the financial continuity of one country and having access to different markets greatly enhances your future financial stability.
2. Banking in Economic and Political Stable Countries
There is a lot of political and economic uncertainty in the world. Countries governed by dictators or corrupt autocratic regimes face huge uncertainties that make financial security untenable.
At any given moment, entire savings could be seized, bank accounts could be frozen, investments could be taken just for being a political opponent, high-profile individual, or even an outspoken critic. One does not have to look very far across the world headlines to see that corrupt regimes are still at large.
Living in a high-risk environment, it is only common sense that one would want to have a nest egg stored in a different location for safekeeping. Even in more 'democratic' countries that might not be directly threatening there are still economic and financial uncertainties that one would want to be well prepared for.
Economic downturns are cyclical, and so, in reality, its only a matter of time before any single country faces a crisis of confidence, currency depreciation, capital control, bank system failure, or financial market collapse.
To be prepared is to be forearmed.
3. Higher-Interest Rates
If you live in Germany or Japan for example, banks there have negative interest rates. Thats right, negative. That means not only do you not earn any interest on your savings, but you actually lose money. Both Japan and Germany hover around minus .01% - 1.0%.
That means if you have 100,000 Euro parked in a foreign German Bank, you will have to pay the bank 1000 EUR for the pleasure of you giving them your money! In foreign offshore accounts, one can expect a much higher interest rate than found your local checking accounts in the US or UK for instance.
Instead of a lousy 0.2% or 0.3%, some offshore banks can get upwards of 3-4%, though this might not sufficient reason alone to bank within the jurisdiction, it does tell you that not all banking systems were created equal.
4. Foreign Banks Have a Safer Banking System
It is important to make sure your assets are stored in a sound banking jurisdiction. Putting your wealth in a secure, and more importantly, time-tested banking system is extremely important.
To prevent yourself from going down with the ship its important to have your assets spread across different banking institutions, so that if one defaults you have a plan B. Many banks failed in Cyprus and Greece these last few years showing the already growing cracks in many institutions, as well as in banking systems in Argentina, Venezuela, Hungary, Italy, and Poland all were hit hard by the global financial uncertainty.
The US, despite its global economic superiority, has a very unsound banking system. The US only comes in at 23, 35 and 50, safest banks in the world, and those banks were only small agricultural banks. The large commercial banks didn't even come close.
Foreign banks are much safer alternative, for one, they require higher capital reserves than many banks in the US and UK. While many banks in the UK and US require roughly only 5% reserves, many international banks have a much higher capital reserve ratio such as Belize and Cayman Islands which have on average 20% and 25% respectively.
5. Offshore Diversification of your Wealth and Investments
Opening an account in a foreign jurisdiction helps to ensure your freedom by being independent from a central authority. Being dependent upon one country or system makes you dependent upon its success.
Diversifying your assets is an important step in ensuring financial security.
If you have all your assets in one basket, all it takes is a push of a button and you could be frozen out of your accounts.
It is essential that you and your assets remain diversified across different accounts and different jurisdictions to ensure you don’t end up in a similar position as thousands of Greeks whose savings were taken by the government to bail out the failing banks. The quickest way to prevent this from happening is to set up an international bank account in an overseas jurisdiction account that is outside the reach of the government.
6. Using a Banking System that is Safe and Has Sound Economic Policies
Offshore banks are much more liquid than traditional commercial domestic banks in your home country. Some offshore banks, for example, do not lead out any money and keep 100% of all deposits on hand.
Foreign accounts also allow you to access and move large amounts of funds quicker. This matters if you are in a position where you need access to emergency funds are you need to transfer funds from one country to another.
7. Overseas Accounts Allows you to hold Multiple Currencies
Domestic accounts usually hold all of your assets in a single currency. If your entire savings is in a single currency, especially if you live in a country where there are: capital controls (Greece), a fluctuating currency (Argentina) or economic uncertainties (insert your country here), having your assets in multiple currencies is something you can not do without.
Holding all your assets in one currency, is not advisable, especially if your accounts are in a currency that is volatile. While many domestic accounts limit your ability in holding other currency denominations, accounts in Hong Kong or Singapore, for example, allow you to have upwards of a dozen currencies to chose from all in just one account.
8. Foreign Accounts Gives You Greater Asset Protection
It pays to have well-protected finances. And this is not to defraud the government or hide your wealth for tax evasion, it is for asset security. Conspiracy theories aside, the fact that it's possible of being frozen out of your bank accounts at the touch of a button because some court says you are under investigation- is scary.
Without any access to your assets, how can you defend yourself in court?
Money and assets that are kept offshore are much harder to seize because foreign governments do not have any jurisdiction and therefore can not force banks to do anything. Local courts and governments that control them only have limited influence.
This is not to say you are 100% immune from criminal prosecution, or that you can hide assets from foreign governments, but are much safer than if your assets were in their back pockets. Offshore Bank accounts are just creating checks and balances on a system that has gone out of control.
Protecting your wealth from domestic political or economic fluctuations by diversifying your assets across jurisdictions and accounts is financial advice you would find anywhere.
Having a successful business or having wealth, unfortunately, makes you a target. If you are a doctor, lawyer, fund manager, or any type of professional the chances of being faced with some type of legal battle is high. It's not if - it's when.
In the US, there are over 40 million new lawsuits filed every year, with 80% of the world's lawyers living in the USA, that is not too surprising. If you are hit with a lawsuit you can be virtually cut off from all your assets before being brought to trial. It seems that one is guilty until proven innocent.
9. Extra Layer of Privacy and Confidentiality
Anonymous offshore bank accounts are no longer around. Though there are still many layers of security and privacy that can be used to protect your name. You still can retain much higher levels of privacy than in domestic banks, as many jurisdictions have secrecy laws that require non-disclosure, but not if there is a criminal investigation or if you are suspected of tax evasion.
Because of the numerous Double Taxation Treaties (DTTs), FATF, and the CRS, details of customers are widely shared amongst countries, however, that is only if they are in a reciprocal sharing of information. So be sure to check your countries agreements and if they are a signatory for the Common Reporting Scheme (CRS).
However, properly structuring a personal or corporate offshore account with an offshore LLC, Limited Company or Trust can provide a measure of confidentiality that can not be found in any personal domestic account. Banks do have an interest in keeping confidential the names and details of their clients as in places like Panama where privacy is militantly maintained, however, Know Your Customer (KYC) rules, the CRS and the OECD have radically reshaped banking privacy.
Opening an offshore bank account held by an offshore company removes your name from being directly affiliated with the assets. Using nominee directors can also be used to create another layer of security that removes your name from the paperwork.
Though this still does not make you completely anonymous it can provide layers of security and privacy that would otherwise not be possible.
It is never too late to establish a Plan B. Your first step toward securing your financial future is to internationalize your assets. Whether you are looking for greater asset protection, privacy, financial security, economic diversification or freedom from being dependent upon any single state or financial authority offshore banking provides a wealth of benefits that can be had at just a few clicks away.