(Aaron Escobar ♦ (the spaniard)™)
For much of its history, offshore banking has been seen first and foremost as an avoidance maneuver. Countless action and mystery movies depict Swiss bank accounts as places for villains to hide ill-gotten fortunes. Indeed, one need not rely on movies for evidence of offshore banks housing shady activities. Offshore bank accounts have been used to hide the profits for everything from drug sales to arms dealing to bribes – not to mention tax evasion schemes. But today, offshore banking is much more than a haven for underhanded financial shell games. Increasingly, legitimate businesses and individuals are finding it more advantageous than ever to utilize offshore banks for the privacy, flexibility and accessibility that they offer. With identity theft and bogus lawsuits as prevalent as ever, it’s plain to see why people take comfort in storing assets overseas – especially in countries where banks pride themselves on being loyal to customers first, and governments second. Swiss banks, for instance, are famous for refusing to cooperate with all but the most serious and unavoidable of government snooping. Such secrecy protects not just devious crooks, but innocent citizens with legitimate reasons to keep prying eyes out of their finances.
Today, we’ll take a deeper look at offshore banking – including its key advantages, what it offers to different types of people and several nations known for protecting the assets and identities of their foreign depositors.
Arguably most compelling benefit of offshore banking is, and always has been, privacy. The advantages of bank account privacy to criminals are too obvious to require elaboration here. However, privacy also has its advantages to completely honest, fair-dealing people and businesses. For one thing, the United States is currently the most litigious society that has ever existed. Sixwise.com cites a study from the Economic Journal showing that, “…Americans spend more on civil litigation than any other industrialized country.” The American Bar Association reported in 2006 that, “…there are over 1 million lawyers in the United States” – more per capita than any other country. Nor are all of those lawyers sitting around idly in their offices, as Sixwise states that the number of civil suits filed increased by 12% from 1993-2002 alone. Frivolous lawsuits are a big part of the problem and, “…are said to cost the United States $200 billion a year, according to Congressman Terry Everett.” Unlike in many European countries, the losers of American civil suits are not generally required to pay the winner’s legal fees. Within that kind of legal climate, simply possessing significant assets can be enough to make you the target of a lawsuit. Given such overwhelming incentives to sue, high net worth individuals often find it to their benefit to conceal some or all of their assets overseas. While it is relatively simple for lawyers to run asset checks on bank accounts residing in the United States, many offshore banks are far less transparent.
Despite a recent agreement to cooperate with US tax authorities, Swiss banks are still quite secretive. A recent BusinessWeek story reveals that while Swiss banks cooperate with investigations of tax fraud (a criminal matter), they will not turn over documents or the identities of account holders for civil matters (private lawsuits.) It’s tough to beat that kind of privacy when it comes to shielding assets from frivolous lawyers and lawsuits. Such people will not even know that you have an account, much less whether or how much money is inside.
Another attractive benefit of offshore banking is the flexibility that it can offer. This is particularly true for traveling or international businesspeople, many of whom come to find it difficult or costly to run an international operation from a domestic, neighborhood bank account. Accepting payments in foreign currencies, for instance, often triggers hefty fees when those payments are received into American bank accounts. If you or your business regularly transacts in one or a handful of foreign countries, it quickly makes sense to simply set up accounts in those countries, rather than incurring fees by redundantly shuttling money overseas and back again. Best of all, it is usually not even necessary to visit the country in which you wish to set up the account. Belize.com, a website set up to attract customers to Belize’s offshore banks, states that, “…you can simply bank from wherever in the world you live, via a secure Internet connection, secure e-mail, post or telephone.” Many offshore banks in Belize even provide ATM cards that can be used in your home country. To its credit, Belize also promises ,”…near hermetic confidentiality” to its offshore banking clients. Additionally, many offshore banks provide 24 hour call centers whose operatives speak your native language and are available to you regardless of time zone differences. Clearly, flexibility is a compelling reason to bank offshore.
Hedging Against Political Risk
A somewhat overlooked advantage to offshore banking is the partial hedge it provides against political risk. As Offshore-Fox.com wisely points out, “…assets held domestically are subject to political and social risks that you cannot control.” These risks are broad and innumerable in possibilities, including the risk that your government, “…may suddenly raise taxes to fund a failing economic experiment.” Recently, the federal government has taken a larger authoritative role in the banking and financial sector than at any time in US history. While it isn’t certain that their actions will adversely affect your domestic bank holdings, the risk is unquestionably there. Inflation is another looming danger with the potential to eat away at domestically held bank assets. In his article on inflation, John T. Reed recalls that, “…President Roosevelt issued Executive Order 6102 that required all Americans to turn in gold to the Federal Reserve bank for $20.67 per ounce—a below-market price—by 5/31/33.” Failure to comply with Roosevelt’s order resulted in, “…a fine of $164,000 in today’s dollars and/or a prison sentence.”
There have also been laws such as Regulation Q, which was instituted in 1933 to limit the interest rates that US banks could pay their depositors. The current financial crisis, again, has triggered massive new interventions into private finance whose implications (good or bad) for domestic depositors are not yet clear. It is easy to shrug off such risks as remote possibilities that seem unlikely to ever occur. However, when hundreds of thousands (or even millions) of dollars are at stake, high net worth individuals often prefer to hedge against political risk when doing so is cost-effective. Offshore banking is one of several ways to do that with respect to their assets. Indeed, QWealthReport.com‘s article on myths about offshore banking reports that, “…most people who bank offshore these days are not evading taxes” – as is commonly assumed – but are instead seeking, “…protection against political risk factors”, among other things.
Essentially, the most compelling advantages of offshore banking are privacy, flexibility, and protection from political risk. Conservative or high net worth individuals can often keep assets under the radar of frivolous lawyers by storing them in offshore accounts. Businesspeople with nothing whatsoever to hide can nonetheless benefit from the tremendous flexibility and cost savings (in eliminated fees) that banking overseas can offer. Finally, citizens from all walks of life can utilize offshore banking as a partial hedge against political and social uncertainty by ensuring that at least the money they keep overseas will not be harmed by adverse laws or regulations. To be sure, offshore banking has come a long way from being the sole province of criminals and con-men.