Holding an offshore company and bank account is legal
By: Sibin Sebastian
Tags: Tax Planning, Taxes, Offshore Banking, Offshore Investments, Offshore Company

Since the Panama Papers leak, the world went into a frenzy regarding offshore banking and the world of the rich. Additionally, the media has been calling out politicians and businessmen operating offshore accounts as tax evaders, which begs the question, is offshore banking illegal?

Are offshore accounts illegal? NO, as a matter of fact, it is very legal. Many ex-pats and international executive professionals will consider opening and operating offshore accounts when relocating from their countries due to the benefits offered by such accounts, i.e., the ability to access one’s fund anywhere across the world.

How offshore banking works

Offshore banking refers to opening and operating a bank account in a foreign country. People will often opt for offshore banking due to the financial conditions they offer, such as accessibility and lower tax rates. Offshore bank accounts are opened by a non-resident of the country offering offshore baking (such countries are also known as offshore financial centers).

The mention of offshore banking is often followed by sentiments of illegal practices such as tax evasion and money laundering. However, offshore banking is not illegal. Actually, opening an offshore account in a foreign country is very simple.

Similar to the traditional accounts, the individual has to show proof of residency and that the money being deposited into the accounts was acquired legally. However, there are cases whereby some offshore financial institutions will decline doing business with some foreign due to the involved compliance.

Offshore accounts vs. Swiss bank accounts

Swiss Bank accounts, also known as James Bond-like accounts, are used to keep an individual’s money out of the government’s reach. Recent years have seen the U.S. come up with stringent Swiss privacy laws. These accounts are operated with the highest level of privacy, and even in the past, Swiss account holders did not even have to attach their names to the accounts.

However, recent times have seen countries such as Switzerland agree to turn over clients’ banking information to foreign governments in a bid to effectively end cases of tax evasion, which is brought about by having hidden or unreported bank accounts.

Benefits of opening an offshore account

Sound banks and banking systems

Most banking systems from most western countries are unsound and only backed by the promises of an insolvent government. Additionally, these banks will often keep only a small fraction of their cash to handle customer withdrawal requests. However, there still exists the challenge associated with trying to access your money during financial shocks.

Offshore banks are often created in stable jurisdictions, keep a huge fraction of their cash in hand, are better capitalized, and are run conservatively run compared to their U.S. counterparts. Offshore banks are very responsible with their client’s money.

Currency diversification

One way to diversify one’s portfolio is by holding foreign currencies, internationalizing savings, and protecting purchasing power. However, these are not offered through domestic bank offers. Offshore banking systems, on the other hand, offer convenience when it comes to currency diversification.

Asset Protection

According to the Legal Resource Network, 15 million are filed in the U.S. on an annual basis, translating to about a lawsuit is filed against one in every 12 adults. It is a no-brainer that 80% of the world’s lawyers are in the U.S., meaning that that is where the money is. Your money is the prize.

While your money and property are not 100% safe, a foreign account makes you a less attractive target for lawsuits.

Diluting political risk

The biggest threat to banking systems is not market risks but the government. Governments play a great role in determining the safety and risks associated with your savings. With governments sinking into greater insolvency, they are turning to the same measures they have relied on throughout history. In such cases, governments will turn into more capital controls, retirement savings nationalization, bank tax deposits, and bail-ins in addition to other destructive actions.

One way to reduce the political risks is by placing some of the savings in foreign accounts, where they will be out of reach to the government. Opening an offshore bank account is one way to do that.

Higher interest rates for deposits

Over the years, the Fed and the European central bank have manipulated interest rates, moving them to all-time lows. Low-interest rates transfer wealth from savers, who should be enjoying higher returns for all the money they deposit.

However, offshore banks offer significantly higher rates than what you are likely to find in your home country.

Verdict

Opening and operating an offshore bank is completely LEGAL, unless you are doing it for purposes of tax evasion. Under The Foreign Account Tax Compliance Act (FATCA), banks around the world have to report the activities and balances of bank accounts belonging to American citizens to the IRS.

It is important that you do your due diligence to get the best offshore bank as some U.S. firms will hold money in foreign accounts and will claim to use lawyers that ensure that their foreign activity is reported to the respective U.S. institutions. However, there are some that will be people that will put your investments at risk by using the system to profit illegally.