Offshore Banking for the Average Joe

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Because of its appeal to drug and human traffickers (not to mention terrorists and Bond villains) offshore banking is often seen as a shady, illegal and immoral activity that would never be practiced by law-abiding folk. The reality of it, though, is that offshore banks provide a valuable service for people who legitimately want to protect their money, and it’s not only the super-rich who can access these protections.

True, certain people use offshore banking for the questionable purposes of avoiding taxes and regulation in their home countries, but for people in countries suffering from political or economic instability, offshore banking may be the only way to protect one’s assets, which could be subject to nationalization or devaluation in the event of a financial or political crisis.

Similarly, the question of privacy can be very important for legitimate reasons other than to simply avoid taxes. Entrepreneurs and investors need to protect the confidentiality of their investments as intellectual property; If they can’t keep their financial dealings secret, they will suffer less profit as others get in on the game in which they are experts.

But for the Average Joe who worries about the government’s increasing role in managing financial firms (set to increase significantly after this summer’s financial reform bill) or who is looking to conduct some business abroad, how can offshore banking benefit all those without million-dollar balances? Whether it's beind used by a private individual or someone looking to start a small business, offshore banking involves risks and rewards like anything else.

WHAT IS IT?

Offshore banking, in a nutshell, means putting your money in any of the many banks outside your country of residence. While the simplest expression of the process could involve, for example, an American with rental property in Spain who opens an account in a Spanish bank to collect rent payments and deal with the property’s finances, the similar regulatory environment in the U.S. and Europe mean that such an arrangement would yield no real benefit other than simple convenience.

More common is putting money in a bank based in one of a number of countries (with Switzerland and the Cayman Islands topping that list) that offer specific tax breaks and privacy guarantees to depositors. The basic benefits of banking in these tax havens apply to anyone, regardless of income or country of residence.

When you put money in a savings account in the United States, the interest you earn and the dividends you collect are automatically registered with the IRS, which deducts income tax from those amounts. Interest from offshore accounts is not disclosed to the IRS, and is paid in full to the account holder. Though the United States requires citizens to include interest earned in offshore accounts on their taxes, it’s up to the individual to do so.

Second, the money in offshore accounts is not automatically subject to estate taxes when the account holder dies as it is in the U.S. While inheritors are required to file such assets on their taxes, the duties are not deducted automatically, which gives account holders (or their next of kin) more freedom in managing their own assets.

Third, privacy laws in certain countries mean that banks based there are under no obligation to share information about their clients with anyone, including foreign governments. While new efforts to increase transparency have changed the game a bit since Sept. 11, these regulations focus quite specifically on terrorism and al-Qaida, and in some cases amount to no more than a request for banks to report suspected money laundering to the U.S. government. Wherever there is an honor code, however, there are ways to ignore it.

Of course, there are certain risks inherent in offshore banking as well, notably the weaker protection of deposits in offshore banks. Money deposited in the United States is automatically covered by the Federal Deposit Insurance Corporation, or the FDIC, which reimburses any deposits lost in the event of a bank failure. With bank failures happening quite regularly these days, it is not unreasonable to worry about one’s assets being protected in the event of continued instability.

INVESTING OFFSHORE

The options for banking offshore are extensive, and every bank offers its own financial services and its own requirements for opening an account. The number of Swiss banks and banks in the Cayman Islands is staggering, and in the aggregate offer depositors of all sizes the ability to move their money abroad.

Without a financial consultant to help target the right bank, many will wisely choose to go with the offshore affiliates of established international banks in search of a bit more security. These also vary greatly in the services they offer. Toward the lower end of the spectrum, HSBC will open an offshore account for most anyone with a minimum of $10,000. Moving up the scale, the offshore arm of Citibank requires investors to have a minimum of $100,000 on hand to take advantage of their services.

Because the instruments involved in moving money offshore are more complex than when dealing in the United States, most banks have specific advisers to help people target the best locations and financial services available. So even though offshore banking is accessible to anyone with a little bit of money, the same caveats apply to all other forms of investing: Stay informed, investigate your options and you can open your very own Swiss bank account, just like in the movies.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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