What Is Offshore Banking? | Banking Advice

When you open a bank account in a country you don’t otherwise live or do business in, you engage in offshore banking. Offshore banking can offer privacy, asset protection and potential tax benefits, but it’s associated with concerns related to tax avoidance, money laundering and other illegal activities.

Learn what’s appealing about offshore banking, its drawbacks and how to maintain compliance using an offshore banking account.

Offshore banking can appeal to businesses and individuals seeking financial privacy, asset protection and tax efficiency.

“There are various benefits, mostly protections associated with privacy and guaranteeing anonymity, that incorporating offshore will bring,” says Bill Maurer, professor of anthropology and law at the University of California, Irvine.

Offshore banking offers higher financial privacy and confidentiality than traditional banking, benefiting the privacy-minded with robust bank secrecy laws that protect account holders’ identity and financial information.

“Offshore banks are often located in countries with highly strict banking secrecy laws, which then offer more confidentiality and privacy to their clients’ identities and money,” says Robert Siciliano, security expert and CEO of Protect Now, a cyber security training company. “However, with various data breaches exposing individuals’ and companies’ money in offshore accounts, all of these considerations influence the level of financial privacy in offshore banking.”

The legal frameworks of offshore bank accounts may shield assets from potential legal threats. Holding assets in these accounts can protect them from lawsuits, creditors or government seizure.

So-called “tax havens” with favorable tax laws may provide offshore account holders with lower tax rates, tax exemptions or tax credits than onshore banking.

“As the world becomes smaller and hiding money is more scrutinized, it’s essential to note that international regulations and transparency initiatives have been increasing to combat money laundering, tax evasion and other financial crimes,” says Siciliano. “Just like there’s no such thing as 100% security, there is also no guarantee in 100% privacy in offshore accounts.”

Other benefits of offshore banking include spreading financial exposure across multiple economies and currencies, access to international financial services such as specialized investment or financing opportunities, currency hedging and estate planning.

While offshore banking can offer benefits, it’s not without drawbacks. There are potential legal and reputational risks along with limited protections, complexity and limited accessibility and services.

Is offshore banking illegal? While not inherently illegal, offshore banking could be used for illegal purposes such as tax evasion, money laundering or hiding assets from creditors. Regulatory authorities such as the Internal Revenue Service may subject your accounts to closer examination.

Multinational financial and legal representation doesn’t come cheap, and you’ll need both to navigate the regulations and requirements for holding an offshore bank account. Additionally, offshore bank accounts may have higher fees and minimum deposits than domestic bank accounts.

Offshore banking carries a negative stigma associated with tax havens and financial secrecy. You may face reputational risks even using offshore banking for legitimate reasons.

“Any time you’re doing anything offshore and people know about it, they will automatically be suspicious,” says Maurer. “Are you engaging in tax evasion? Why are you wanting to hide your beneficial ownership?”

Common users of offshore banking include:

Offshore banking should be conducted legally and in compliance with regulations. Doing so can be costly, involving tax implications, account reporting, international transaction fees, compliance documentation and legal services.

For example, you’ll pay an agent to set up and maintain your account. Your account agent must regularly monitor offshore accounts and stay on top of tax laws and reporting requirements both in your home country and the offshore jurisdiction. That requires completing the necessary documentation and information to comply with anti-money laundering regulations.

You’ll also have to report your offshore accounts and income to your home country’s tax authorities and manage tax residency. For example, U.S. citizens and tax residents must file Foreign Bank and Financial Accounts (FBAR) and Foreign Account Tax Compliance Act (FACTA) forms to report foreign bank accounts and other financial assets. In addition to reporting and taxation, offshore accounts are subject to currency exchange rates and international transaction fees.

If you’re considering offshore banking, Maurer recommends talking to a wealth manager or an estate planner first to determine your goals. “Slow down, talk to a professional who is a normal trust and estate planner or wealth manager about your goals, and come up with an appropriate structure for those goals,” he says.