The Functioning of Offshore Banks

Offshore banks provide financial opportunities and services not necessarily possible or available in one’s place of residence. Many people associate offshore Banking with gangsters and criminals trying to hide their money. To some extent these stereotypes are true but it is not the complete picture. Criminals may take advantage of the greater confidentiality to launder money and evade taxes, but law abiding banking clients may also benefit.

• Regulatory environment of offshore banking

Not reporting income earned in offshore banks is illegal in the United States as per U.S. tax code. However, several additional beneficial services and legal protections are facilitated by offshore banks. Fees and account maintenance expenses vary from offshore bank to offshore bank, but this information is generally available upon inquiry by the potential bank holder.

The reasons contributing to an offshore banks profitable operations include the unique advantages they have as ‘offshore’ Institutions. Often the countries they are located in do not heavily regulate them enabling them much freedom of service and lower operating costs associated with taxation.

In other words, the unregulated banking atmosphere in which these banks operate can increase their profit margin because they themselves may not have to pay high taxes and can charge rates and fees that are above typical. This can also make the banks more liquid, have great financial leveraging and offer potentially more profitable investment opportunities to international investors. In this sense the banking must comply with the national banking regulations in which the offshore bank is regulated and in terms of any applicable international laws.

• Offshore banking services

Services provided from offshore banks can include greater privacy, financial security and investment vehicles which may not be available to clients in their home countries. An example of some favorable investment vehicles not necessarily available at local banks include access to international markets according to Offshore banks have a lower operating cost environment due to less regulatory constraints.

The offshore banking environment allows its banks to operate in greater ease and with less fear of failure. In other words because these banks are not as heavily regulated as banks in developed countries such as the United States or Member of the European Union, they are not subject to the same constraints on fees, rates, legal reporting requirements, scope of services and associated operating costs. This freedom from regulatory constraint may allow them to offer better rates on loans and offer services not traditionally offered by local banks.

Offshore banks may not pay competitive interest rates on deposited money. Nevertheless, these banks can also offer asset protection from legal proceedings according to Shelter Offshore. Such protection enables individuals under litigation to protect themselves from total financial loss.

Individuals who are residents of countries with political instability can also benefit from offshore banks because they offer a safer environment to do banking. Offshore banking allows businesses that are registered in foreign countries to operate in a favorable tax environment. So a company that trades on an American Exchange does not necessarily have to operate solely out of the country in which the exchange listing is offered. The cost implications and benefits of such a business operation can make the difference between provability and loss.

• Where to find an offshore bank

Several countries offer offshore banking services and include panama, Bahamas, Bermuda and many others. Theoretically, money held in these banks can be frozen under international law that protect country’s citizens from potential harm, and/or extreme criminal activity.

Some countries such as Anguilla have their banking law posted on the Internet. The link at the bottom of the page demonstrates this ‘transparency’ of operational activity but not necessarily transparency of the activities that occur under such law.

Due to the fact offshore banking has the potential to be vague in its reporting requirements this may also conceal the details of its financial success. For in investor placing money in such a bank, it is worth considering the stability of the bank in addition to the stability of the country in which the bank is located. Swiss offshore banks are recognized for their quality of service and relative stability in terms of the banking system within which they exist.

When considering whether to open an offshore bank, several factors may come into play with the decision. Items such as 1. quality of service 2. products and services, and 3. cost and ease of banking may all be pertinent concerns that offshore banks may or may not be able to meet.

Offshore banks exist to provide additional commercial revenue to the nation-states that allow for this type of banking via their national regulation. The services provided by offshore banks may not be available in one’s home country or the offshore bank may offer security that one cannot easily obtain in one’s own country.


1. (Yahoo Finance)
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3. (Bahamas Business to Business)
4. (Offshore Legal)
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