Having an offshore account is a fundamental step in diversifying yourself internationally. It is an excellent way to protect yourself from sovereign risk, currency risk, and more.
It’s especially important in today’s environment where governments will find any excuse – from terrorism to money laundering to economic downturn – to impose de facto capital controls. Having a portion of your assets out of your home country makes it more difficult, if not impossible, for your home government to freeze or confiscate your assets.
There are a number of important factors to consider when opening your Offshore Account.
• The Offshore jurisdiction’s openness to foreigners
• Taxation of interest income
• Range of services including currency options
• Stability of the Offshore jurisdiction
• Deposit insurance
Let’s take deposit insurance. In places like the United States or the European Union, deposit insurance is almost an afterthought. (Unless, of course, you’re a small European country needing a bail-out and thought to be holding money for the Russian mob – then you’re in trouble).
However, each Offshore Banking Jurisdiction has its own bank insurance policy that you should examine before opening an account. Places like Singapore take an attitude that deposit insurance is somewhat of a moral hazard and have much lower insurance maximums than other developed countries.
Singapore, for one, also does not insure deposits in foreign currencies, which again matches their goal of protecting smaller, domestic depositors who need the money, not foreigners looking to diversify their assets.
While most of the developed world does insure bank deposits, a few Offshore Jurisdictions do not. Andorra, for example, has a deposit insurance scheme which is hard to understand and it is unclear how the fund would actually repay depositors of a failed bank.
Of course, you should again evaluate the stability and history of any Offshore Banking Centre where you plan to put your money to make sure you won’t get Cyprus-ed in the future (For those of you who aren’t aware Cyprus passed a law a year or two back authorizing the Cyprus government to seize a sizeable percentage of all funds held in Cyprus Banks).
Many Offshore jurisdictions worldwide are open to accepting foreign customers, although some have many hoops you must jump through. An unfortunate part of the global “war on terror” is the OECD’s heightened “Know Your Customer” requirements, (which means it takes longer now to open an Offshore Account than what it used to).
Some Offshore banks, require you to visit them to open your account (eg Hong Kong Banks, Singaporean Banks and most Swiss Banks). However, there are plenty of Offshore Banks that open accounts remotely.
Along those lines, an important consideration to make is which type of Offshore Bank you feel most comfortable with.
You may prefer a more liquid, local bank over a huge multi-national. It should also be considered that it may be easier for your government agency, court, or plaintiff’s lawyer in your home country to access funds in a bank which maintains a presence there: It will be easier to get the “Offshore” Bank to hand over your funds if the bank also does business in your home country and could be sanctioned for not doing as they’re told.
Another important factor is taxation. While many International Offshore Financial Centers boast a territorial tax system (ie where income earned outside the jurisdiction isn’t subject to tax), income earned in their banks certainly meets the “local source” test. Some of these jurisdictions do tax interest, others do not. Those that do tax interest may require a local tax ID number to be obtained and/or a return to be filed.
Finally, you should consider the range of services each Offshore Bank offers. If you are moving money to another jurisdiction to avoid sovereign risk, you may well want to hold your foreign deposits in another currency.
Obviously, each country has its own currency which will be the default currency that most people there hold their assets in. You may or may not be comfortable holding your deposit in that currency, however, and may want to choose a bank that offers an array of currencies to choose from. The good news is most, if not all, “Offshore” Banks offer multi-currency accounts (ie the ability to hold monies in a range of currencies).
When opening an Offshore account in a foreign currency, you should consider the stability of the currency, its exchange rate history, and other factors that may come in the future. A number of countries are looking to devalue their currencies, which you should take into account.
For example, is the currency backed by resources in the country? Is it pegged to another currency?
The Hong Kong dollar, for instance, is pegged to a tight range of the US dollar. However, some commentators believe that the Hong Kong authorities will be forced to re-peg the value against the dollar, causing an immediate change in value, or peg it to the Chinese yuan. You should do your homework to understand any currency you choose to hold your assets in.
At the same time, foreign currencies whose countries haven’t set interest rates at zero may also offer higher interest rates. Many emerging Offshore Banking jurisdictions offer high – even sky high – interest rates out of need for foreign capital and to generate an ability to loan money at uber-usurious rates. Places like Australia simply haven’t joined the global race to the bottom because they haven’t needed to. But again, always do your homework.
The media and government want you to believe international banking is illegal. It’s not. Millions of expats from around the world live outside their home country and maintain bank accounts in their places of residence.
You, too, can achieve global diversification and take advantage of a better banking environment elsewhere in the world. For many, it’s amazing to think that a number of Offshore Banking Centres have never experienced a bank failure in their history (and many haven’t had one for decades). Suffice it to say you can hedge against this risk also by holding Offshore Accounts at several different Offshore Banks.
Offshore Banking (particularly when funds are held by a tailor designed Offshore Corporate structure) and multi-currency accounts are a great way to protect yourself against sovereign risk (ie the risk of government confiscating your money), predatory law suits (ie Courts in your home country ordering you to hand over your money) and sudden currency devaluations (as happened recently in Switzerland when the Swiss Franc was devalued significantly overnight).
As always speak to your tax adviser and or your lawyer before committing to embark on such an endeavor.