International Offshore Banking

As a result, there is a huge spectrum of different offshore banking services available to expats, international investors, globetrotters, international consultants and corporations, offering varying degrees of return, protection, and privacy. Before we look into the different sorts of offshore bank account available, however, a brief rundown of the background of this ever-growing industry is necessary, in order to understand the present situation.

A Very Potted History of Offshore Banking

As more and more financial institutions became keen to establish themselves on an international level, regulators perceived a need for greater banking regulation, and introduced a set of minimum standards and safeguards, known as the Basle Accord (introduced 1988). The Accord outlined the requirements necessary for banks to obtain licenses, which included two minimum types of bank capitalisation- core capital and supplementary capital. Core (Tier 1) capital is basically a mixture of shareholder equity and disclosed reserves, and supplementary capital is a mixture of debt and equity instruments. (Wake up there, you at the back! There is a reason why I'm telling you this…).

The Basle Accord set the minimum capital adequacy level for each type of bank capital at 4%, meaning that many banks operating in countries under this accord were forced to increase their capital reserves and to invest in 'safer' investments. Recently introduced modifications to the original Basle Accord (originally enough, called Basle 2, and running to 541 pages) seek to align capital requirements with the underlying risks of loans made, and will further affect the amount of capital which each bank is required to hold. This may mean that banks in countries which are operating under the Basle Accord are forced to be more cautious about the instruments in which they invest, resulting in potentially less attractive returns. However, in non-Accord countries (which includes many offshore jurisdictions), regulation of this kind is usually down to the regulatory authorities of the jurisdiction, and the required capital adequacy levels can vary.

Other legislative issues have also had an effect on the offshore banking world. Initiatives by the OECD/FATF/G7 countries to combat money laundering have, in the process, severely damaged the banking secrecy laws of many offshore jurisdictions. 'Know your Customer' legislation has meant that privacy in high tax and certain low tax jurisdictions has been jettisoned in return for international acceptance. In addition, US rules have introduced 'Qualified Intermediary' status which also imposes more stringent controls on any institution wanting to avoid having to tax US-source income regardless of the nationality or tax status of the recipient. For all these reasons, opening an offshore account can now often require a small rainforest's worth of paperwork.

It must be made clear that although in most countries, having an offshore account is not illegal in itself, the illegality comes when the client doesn't declare the account, or the income from it. Banks in jurisdictions with strong banking secrecy legislation have tended to place the onus for this reporting on the client themselves (which is not to suggest for a moment that they recommend not reporting the income, merely that they do not volunteer the information to other countries, and will usually reject requests for the client's personal details unless there is evidence of criminal activity).

Why Do I Need An Offshore Bank Account?

Whether you are a professional expatriate, globetrotter, international investor, or consultant, an offshore bank account could prove invaluable. Relocation, whether on a regular or one-off basis can have serious taxation implications for your assets, but if they are safely anchored in an offshore jurisdiction, barring unforeseen events they can remain there for the duration of your expatriation (and beyond), usually attracting favourable taxation and higher returns. However, it is probably advisable to open an account in your country of secondment for day to day transactions as well.

If you are employed in a profession which has a greater than average chance of attracting litigation (for example the medical profession), or are concerned about future attacks on your assets from family members, offshore bank accounts can also prove effective as asset protection vehicles. If you have waited until your assets are under threat, and would now like to transfer them offshore and out of danger, however, I have four words for you - Stable Door. Horse. Bolted.

As previously mentioned, initiatives by the OECD and EU have dealt the concept of offshore privacy a bit of a blow, and in several jurisdictions it has been severely compromised. Some individuals choose to address this by interposing an International Business Company (or IBC) or trust between themselves and the offshore account, as it can be the case that the beneficial owner of an IBC or a trust does not have to be disclosed. Some providers also come to arrangements with banks in jurisdictions with strong secrecy laws, whereby reporting requirements (to the bank at least) are minimised. However, this is a complicated area, and professional advice needs to be taken in order to ensure that you are in compliance with the rules of both countries.

What Services do Offshore Banks Offer?

This depends upon the organisation you choose to bank with, and the jurisdiction in which it is located. Nearly all international and offshore banks offer checking, savings and current accounts, many offer credit and debit cards, and some offer foreign currency services and investment accounts. Larger organisations, usually in the more regulated jurisdictions, also sometimes provide mortgages and other financial products. Other institutions offer IBC registration and maintenance. Increasingly, banks and financial service providers are recognising the need for online facilities (especially if they are hoping to attract an expatriate audience), and many now offer 24 hour online account access, and allow you to conduct much of your banking by e-mail or telephone.

However, bear in mind that in a lot of cases, these services (with the exception of online banking) are not offered for free, and the charges can vary significantly between jurisdictions and institutions. Therefore it is probably best to decide what you need from your offshore bank account before you start looking, and if you decide that you do need extra facilities, use them wisely, otherwise the charges can start to mount up.

Which Offshore Jurisdiction Should I Choose?

Choosing a jurisdiction in which to locate your international bank account is tricky at the best of times, and made more so by the constant uncertainty foisted on the offshore community by the OECD, FATF et al. However, if circumstances dictate that you need an offshore bank account, then choose you must, so what should you look out for?

There are several key criteria which any offshore jurisdiction should fulfil before you consider banking there. These include (although are not limited to) the following:

Political and economic stability. Fairly self explanatory, really…

Strict secrecy legislation. Anti-money laundering initiatives have nibbled away at the privacy legislation of many offshore jurisdictions, and especially over the forthcoming months, you will need to keep your ear very firmly to the ground. Some smaller countries have signed exchange of information treaties with larger, more powerful nations in exchange for aid, so you will need to be aware of these if they exist between your country of residence and your preferred jurisdiction/s. Another factor for consideration is that some offshore jurisdictions are in fact the official territories of larger countries, which can sometimes bring pressure to bear on them, with unfortunate results. It is therefore advisable not to bank in a jurisdiction with strong ties to your country of residence, or with an offshore branch of your onshore bank.

Strong infrastructure. A modern and reliable business infrastructure is usually a fairly good indicator of the stability of a jurisdiction, and is essential for a number of reasons. Although it may sometimes be tempting to look to newer and smaller jurisdictions which may have slipped under the radar of the high tax countries, it is worth bearing in mind that their communications and business infrastructures may not be fully developed, which could make it difficult to contact your provider or access your assets. You should also ensure that your chosen jurisdiction has a full array of financial service providers (i.e. law firms, accountants, other banking institutions) in addition to the one you are looking at.

Convenient location. Although expatriation, by definition may mean that this differs as you move from country to country, it is still important to consider the geographical location of the country in which you intend to bank. Getting up in the middle of the night to talk to your bank manager sort of cancels out the convenience aspect of offshore banking, so try and make sure the country is at least in a convenient time zone for you!

Investor/customer protection. As previously mentioned, some jurisdictions are more stringently regulated than others, and as such the chances of there being some kind of investor protection measures in place vary. However, in countries where the legislation is geared towards minimising risk, there may be other restrictions in place which limit the returns that it is possible to achieve. Whether investor protection is a major issue with you or not, it is worth being aware that standards can vary tremendously from jurisdiction to jurisdiction, and sometimes between institutions.

What Due Diligence Should I Do Before Opening an Offshore Account?

First and foremost, you should enlist the services of a finance professional. They should be aware of the risks and ongoing issues in the jurisdiction in which you choose to locate, and should also be aware of any suspect institutions. However, initially, it is worth doing a little research for yourself, and there are several things that you can do:

First of all, look at the established institutions in your jurisdiction of choice. In this way, you can gauge the standards of the industry there, and in so doing, give yourself a frame of reference.

Although longevity is an important plus point for an offshore bank in due diligence terms, it is not the only factor to be considered. Keep an eye out for any negative publicity in the media (this is where the internet comes in especially handy!)

Don't do business with a 'brass plate' bank. Although there has been a drive towards eradicating this type of institution, you need to make sure that the bank that you intend to entrust your hard earned cash to is the real deal (i.e. has an office, staff, a license, money, etc. Little things like that!) If you have come across the institution via its website, make sure that it is possible to make contact by other means than e-mail. Although the presence of a physical mailing address, and telephone and fax details do not in themselves indicate that a bank is legitimate, their absence may be a red flag.

Be wary of banks or providers offering interest rates that seem unusually high. Although there is certainly scope for good returns in the offshore arena, things that seem too good to be true usually are. When dealing with your future happiness and financial well being, it is a good idea to leave your faith in human nature at home!

So, how do I go about opening an offshore bank account then?

Due diligence is not just a one way process, and the amount that banks are required to conduct on potential customers increased greatly with the advent of 'Know your Customer' legislation in the last few years. If you are applying to open a bank account through an intermediary, or with an institution that has agreed to implement KYC, you will need to provide at least the following:

A notarised copy of your passport. If you don't have a passport, then a notarised copy of your birth certificate or driving license should be acceptable.

It is difficult to discern whether 'Know Your Customer' legislation came about as a result of the efforts of the FATF (Financial Action Task Force), as a result of the efforts of the IRS, or as a combination of the two. In some people's minds, however, it is inextricably linked with the latter, and with the introduction of 'Qualified Intermediaries' and 'Qualified Jurisdictions' in 2001. Qualified intermediaries are primarily concerned with US citizens, and those with US source income, and are required by the IRS to implement KYC in return for simplified reporting, and withholding tax procedures.

However, it all gets a bit complicated from hereon in, because it is possible to find a qualified institution in a qualified jurisdiction, a non-qualified institution in a qualified jurisdiction, and sometimes a qualified institution in a non-qualified jurisdiction (although this is only permitted if the institution is a branch of a company resident in a qualified country). Got all that? All that this really means is that unfortunately US citizens have got the short end of the stick again, in that some banks may choose not to take them on as a result of the extra reporting requirements. However, once again this is a complicated matter, and best discussed with a qualified professional.

What Is The Future of Offshore Banking?

In a word - somewhat uncertain. (Okay, that's two words, but you know what I mean…!) The IRS, which was the driving force behind the introduction of the KYC legislation, has pushed for offshore and international banks in qualified jurisdictions to conduct independent audits demonstrating that they do indeed know their customers, or face heavy fines.

Meanwhile in Europe, the EU has introduced the Savings Tax Directive, which meant that from July, 2005, all EU member states and a number of their offshore dependent territories either place a 15% withholding tax on the returns on savings paid to citizens of EU member states, or pass information information about the payment to the citizens' home countries.

The EU has put pressure on Switzerland, where tax avoidance is not a criminal activity (and which is not actually an EU member), to agree to exchange of information on the identities of depositors and savers, but the Swiss, who have always been fiercely protective of their banking secrecy laws, put forward a compromise whereby their existing withholding tax system would be extended and strengthened, which was reluctantly accepted by the EU.

In Conclusion…

Although no-one would deny that there is uncertainty in the world of offshore banking and investing at the moment, with the proper planning, international banking can still offer the chance to achieve enhanced returns and greater privacy to both international investors and expatriates. Achieving tax efficiency may be becoming more complicated, but this does not mean that it is impossible, and there are an increasing number of qualified individuals and organisations that can help you structure your assets in the most effective way possible.

click on the links below for detailed information about each institution.

Abbey National Offshore

Stanford International

NatWest Offshore

Oceanic Bank

Royal Bank of Canada

Singer & Friedlander