Offshore banking defined

Many of us may in one point of their life or another have heard of the term ”offshore”. And in most cases, it was associated with banking. And offshore banking in their minds was mostly associated with something negative, shady, illegal, part of the black market economy. As finance students, we did not fully agree with this hypothesis, so we decided to dig deeper into the topic and look at all the aspects of offshore banking.

First, to understand how offshore banking works, we decided to come up with a simple definition of the term, how we see it.

Definition

An offshore bank is a bank located out of the depositors country of residence, typically located in a duty-free/ low-tax juristiction. The location of the bank in an other country normally gives you financial and legal advantages when trading.

It also gives you as a businessman:

• •     Greater privacy

• •      Little or no tax (tax havens)

• •      Easy access to deposits

• •      Protection against local, political or financial instabillity

Background

The term ”offshore” originates from the Cayman Islands which are located in the western Caribbean Sea. Most of the offshore banks are located in island nations to this day, the term is used figuratively to refer to such banks regardless of location, including Swiss bank and those of other landlocked nations such as Luxembourg and Andorra.

Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Except for certain people who meet fairly complex requirements, the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad.

Persons subject to US income tax, for example, are required to declare, on penalty of perjury any foreign bank accounts which may or may not be numbered bank accounts they may have. Although offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so, as they are protected by bank security, this does not make the non-declaration of the income by the tax-payer or the evasion of the tax on that income legal.

Following the 9/11 attacks, there have been many calls for more regulation on international finance, in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows.

Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that OECD countries are trying to stamp out competition.

Now we have approached one of the main question, and that is: How does an offshore bank work?

You do not need to be a millionaire in order to be treated like one. Many banks will allow you to establish a savings account in US Dollars for anywhere from US$300 up to $2,500 or more (it all depends upon the bank). In addition, you will gain access to three things I am sure you do not have at the moment. Privacy, the ability to enjoy bank account interest free from local taxation, and personal attention plus banking services beyond what you have at the moment. Today's banking industry is highly regulated yet private, physically far away yet very accessible via e-mail - fax or telephone, attentive yet discreet about your affairs. In addition, access to your money is always possible with a bank or Visa debit card that is accepted worldwide. However, the ability to have accounts in different currencies, or the ability to access investments not available at home is not the only reason some people make seek out an offshore, or non-local account.

With the communication mediums we have today (telephone, fax, internet) it is very possible to live in one country and bank in two, three or more countries abroad for different reasons. In fact, many money managers often seek out higher returns for bank deposits globally and move assets around accordingly to take advantage. While this idea was very difficult for the average investor many years ago, today it is very possible and maybe even necessary (if you are living off the income from your investments or deposits). So, do not be affected from those that would have you believe that banking or investing in another country is a foolish idea. In reality, the reverse is true due to all the advantages. There are many advantages to offshore banking, and we managed to outline some of them.

• 1.    Personal Private Banking Service

• 2.    Foreign Exchange Services

• 3.    Tax Planning

• 4.    Lending and Credit

• 5.    Offshore Investments

• 6.    Privacy

• 7.    Convenience

Around the clock help if something goes wrong, with access to telephone and online banking 24 hours a day, 7 days a week, 365 days of the year. Unlike most high street accounts, this service comes as standard and a relationship manager is often assigned to your account, which is the level of service that international travellers and expats need in an emergency.

With multi-currency accounts, transferring money between your accounts is usually fast and free. However, if you do need to transfer money between currencies, having an offshore account will usually offer a very competitive foreign exchange rate, compared to a regular banking service, and this is one of the biggest advantages.

Some account holders who bank in countries like the Isle of Man and Jersey, for example, can choose to receive interest on their savings tax free. The interest is credited gross to their account, which means there is no income tax deduction at source. If you are an expat, this removes the need to reclaim tax paid, and avoids the hassle of reconciling your tax returns to ensure you are not overpaying tax.

Once your new banking arrangements are open, you will often be able to apply for a mortgage or lending facilities. They will usually be highly flexible in their lending arrangements, and you will often find highly competitive mortgage rates available for their property, particularly if it is in a mainstream market like the UK.

The offshore investment market usually offers funds and investments that are not available in your home country, and setting up an investment portfolio can be done fairly easily. Don’t forget you will need to think about what the purpose of investing is, how long you want to invest for, how much risk you are prepared to take with your funds and what fees and costs are involved in running an investment portfolio.

One of the attractions of having your accounts held outside your home country is the privacy. Bank secrecy in some countries like Switzerland and Singapore is a legal entitlement and banks cannot disclose details of their account holders or assets except in extreme circumstances like a criminal investigation. This has led to widespread tax evasion, but many banks and governments have moved forward in recent years to ensure all money upon which tax is due is declared and new anti-money laundering rules are in place.

Staying with the same bank, no matter how many times you move country as an expat, may be a good enough reason alone to open an offshore account.

Conclusion

Having looked at several aspects of offshore banking, we have come to a conclusion, that when being done with due respect to all the laws and regulations required, offshore banking can be useful, safe and convenient.

List of used sources:

• 1.    Investopedia,            online            financial            encyclopedia

• 2.    Investopedia,            online            financial            encyclopedia

• 3.    Offshore banking definition by the Business Dictionary, online source http://www.businessdictionary.com/definition/offshore-banking-unit-OBU.html

• 4.    ”The benefits of offshore banking” by Carlton Crabbe, 2014. http://blog.aesinternational.com/the-benefits-of-offshore-banking

• 5.    ”5 myths about offshore banking exposed” by Simon Danaher, 2015. http://blog.aesinternational.com/5-myths-about-offshore-banking-exposed

  "Экономика и социум" №1(20) 2016