The Functioning of Offshore Banks

The basic definition of an offshore bank is, “a bank located outside the country of the residence of the depositor, typically in a low tax jurisdiction(or tax haven)that provides financial and legal advantages.”

If only we could all be so lucky to have need of an offshore account to protect our fortune!

The biggest single advantage of an offshore account is the watertight Privacy Act, or Bank Secrecy Act that guarantees the depositor that all information regarding their transaction with an offshore bank is held in strictest confidence. It was the Swiss who first adopted this principle, and since then, many countries have followed suit.

Some other advantages include less restrictive legal regulation, low or no taxation, easy access to deposits, and protection against local financial instability. In short, if you want to put your money somewhere and have your identity, and the transaction itself kept in strictest confidence, then an offshore bank is exactly what you need.

I suppose most people think offshore banks are all small islands in the Caribbean somewhere, but in fact the term is figurative and refers to all banks regardless of location. For instance, landlocked countries such as Switzerland and Luxembourg are certainly not offshore, but are well know for their banking systems.

Several years ago, I was visiting a girlfriend who lived near a hub for offshore banking and it was amazing to see all the 12 and 15 story Swiss banks that I had heard so much about over the years. It gives one the impression that it might be a very competitive business when you see so many of all lined up in a row on some of the most expensive real estate in the world.

Even though offshore banks are a tax haven, it is still necessary for depositors from the U.S. for instance, to declare any offshore accounts they might have. It doesn’t mean the U.S. government will be able to collect on your interest income, because offshore banks are under no obligation to report that income.

The events leading up to 9-11 caused quite a stir when it was discovered that funding for the terrorists was routed through offshore banking.

There are several reasons why offshore banking can present a few problems.

First of all, they have often been accused of helping various terrorist and organized crime groups.

Also, offshore jurisdictions are very remote, and in most cases are a perk that is available to only the very affluent.