offshore banking

risks and opportunities

Offshore BankingThe term offshore banking refers to a type of banking institutions, usually located in so-called tax havens, which are regulated by special laws that grant them greater freedom in their operations and a more favorable tax treatment. They are institutions 100% aimed on taking deposits and investments from non resident individuals and businesses and to which the country’s own citizens have no access. It is worth mentioning that not all banks located in tax havens are offshore banks. They also coexist with the regular or onshore banks that serve residents and do not benefit from the aforementioned specific legislation.

Main advantages of offshore banking

Greater freedom. Less government intervention and exemption from complying with regulations on capital such as exchange controls, on foreign transactions or on investment policy. This means greater freedom of movement for its clients and very often a reduction of costs that allows the payment of higher interest rates.

Lower taxes. The deposits in offshore banks and their yields are generally free of tax.

Increased privacy. They are almost always established in areas with strict bank secrecy and privacy laws.

Financial and monetary stability. Offshore banking is located in major financial centers, with good political and monetary stability.

Special services. Many offshore banks offer products that are not available to their onshore competitors, such as numbered accounts, anonymous credit cards, or high-yield investments.

Disadvantages of offshore banking

Mistrust of authorities and financial institutions. Banks located in tax havens are often related to tax evasion or money laundering. For this reason transactions coming from or going to these banks usually trigger alerts and attract more control from the tax inspection authorities. Sometimes, although not very often, some offshore banks may be vetted by agencies such as the FATF (Financial Action Task Force) or even by other onshore banks.

Deposit insurance. Some countries have a government insurance or a fund created by their own banks, which covers customer deposits up to a certain amount. This protects clients against a possible insolvency of their bank entity. In many cases, though not all, offshore banking is excluded from these agreements. It is true that this need not be related to the solvency or the risk of an entity. Swiss banks for example, which are the most creditworthy in the world, were not secured by any type of deposit insurance for many years (now this has changed), which is precisely what has helped them carry out their operations more prudently and make substantial reserves of their own available.

Increased maintenance costs. The administrative expenses of an offshore account are usually slightly higher than a traditional one. Often institutions charge a monthly or quarterly maintenance fee, and in some cases a charge for opening or closing the account. The amount varies from bank to bank, although it is normal for the maintenance of the account to range from between 10 to 30 dollars a month and for the opening cost to be about 100 or 200 dollars. It is also common for the bank to charge a small fee for receiving cash deposits or incoming wire transfers.

types of offshore banks

Following the classification of banks that we saw in the article on foreign banking, offshore banks can be divided into two groups:

Retail and commercial banks. Usually an initial deposit of less than 10,000 dollars is required to open an account at one of these entities. Amounts ranging from between 1,000 to 5,000 dollars are the most common, although there are many cases that do not require any opening deposit. They basically offer the same services as any bank you could find in your country of residence. They are primarily designed to be used for trade and small-scale savings, but also offer some investment opportunities. It is very common for them to operate with multicurrency accounts, or the so-called multiple currency accounts. In the first case, it is a single bank account that accepts deposits and withdrawals in different currencies, while in the second case, the bank opens several account numbers for the same client, each of which is denominated in a different currency.

Normally there is no close contact between the user and these banks because their services are standard and can be managed easily through the Internet. Most of the offshore entities have modern banking systems, which allow transactions from anywhere in the world. They are very secure applications that incorporate the latest technology in encryption or even authentication using electronic devices such as the renowned "Digipass".

Private Banking. They are institutions focussed to saving and to high-level investing and they are usually accessible only to relatively wealthy people. In order to open an account at one of these banks a minimum deposit of around 100,000 U.S. dollars is required. In some very exclusive banks, clients who deposit less than a million dollars are not accepted. Obviously, these institutions offer a premium service and develop a personalized investment pattern for each customer, who has their own personal manager. They offer all kinds of investments, some very exclusive, only available to their customers.

opening offshore accounts

The procedure for opening accounts in offshore banks is not very complicated and can usually be made by mail within a period of time that can vary significantly. Depending on the speed of the people or institutions concerned, the process can last from a few days to a few months.

As for the documents required, for personal accounts at least one certified copy of a passport and a proof of address of the account holder is requested. A bank or credit card statement or a utility bill is usually enough.

Numerous banks, but not all, also request a letter of reference from another bank or an authorization that allows them to consult the solvency and integrity of the client with the entity. A simple letter from your regular banker confirming that you have an account with the bank and your credit standing is correct is usually more than enough. On occasions, a second letter of recommendation from an attorney or accountant with whom you normally carry out business may also required.

For corporate accounts, in addition to the documents of the company duly certified and sometimes apostilled, the personal identification of all beneficial owners, shareholders, directors and persons entitled to sign the account is also required. For this reason, the personal documents mentioned above are required for each of them. For companies that use nominee directors or nominee shareholders, the bank always requires the identification of the real beneficial owner of the company.

For offshore companies that use bearer shares, in many cases the bank will require those shares to be deposited on their premises or at a licensed fiduciary institution to prevent a change of ownership without being notified. There are also banks that as a company policy do not accept companies formed with bearer shares. Each entity has its own policy in terms of documentation and requirements.

After the attacks of September 11 in New York, various measures to fight money laundering and financing of terrorist networks were taken. The controversial Patriot Act, which was approved by the United States, was a major curtailment of the privacy and civil liberties of the citizens of that country.

But also in the rest of the world, including offshore banking, the pressure of the United States and of international organizations like the OECD and especially the FATF has made virtually all financial institutions implement the KYC (or “know your customer”) and “due diligence” rules. These policies basically consist of identifying correctly all bank customers, checking the origin of the funds deposited and the reasons for wishing to open an account.

Any respectable bank, either offshore or onshore, will perform due diligence and KYC to a greater or lesser extent. Normally they will settle with the information on the account application form, but it is not uncommon, especially in cases where significant amounts are deposited, for the bank to request additional documentation to prove the origin of the money (labor contracts, supporting documents of the sale of property, an inheritance, etc.). This information, however, is private and protected by banking secrecy.

As a final conclusion we can assure that offshore banking offers many opportunities and advantages for the investor, but it also presents some risks. It is therefore of utmost importance to carefully select the jurisdiction and the entity to open an account, choosing those institutions that offer greater guarantees of solvency, security and privacy.

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