Definition of Offshore Banking
Many people associate offshore banking with the rich or those wishing to evade the law in some way. Upon closer examination, you may find that banking in a country outside of the United States offers various advantages for those with different financial situations.
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Background
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During the 1960s, banks in the Bahamas and the Cayman Islands offered the first offshore banking services. Then, in the 1970s, banks in the Channel Islands off the coast of France, as well as in Panama, Manila and Bahrain, followed suit. These banks focused on increasing confidentiality and lowering the tax burdens of their depositors. The popularity of these institutions eventually led more banks in Caribbean countries to revise their regulations in an attempt to attract foreign customers. Though banks in the Caribbean are synonymous with “offshore banking,” the phrase may have been coined in the Channel Islands. Switzerland, Lichtenstein, Austria, Singapore and Hong Kong, to name a few, also offer attractive offshore banking opportunities.
Options
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One type of offshore account, the current account, allows you to deposit money and withdraw all or part of it at any time. Accounts can be in U.S. dollars or foreign currency. A deposit account allows you to deposit money and receive interest. The interest rate depends on the deposit amount and the length of time you keep it there. This account usually requires a deposit of at least $2,500. If you prefer confidentiality, some offshore banks offer the option of numbered accounts that identify you by account number instead of name. You may also deposit valuables or stocks and bonds in a safekeeping account, similar to a safe deposit box. Offshore banks offer credit and debit card services as well as checks.
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Advantages
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If you live in a country that has an unstable economy, putting money in an offshore bank may protect you from having your money frozen or seized by the government. Some offshore banks have lower operating costs because the government does not impose taxes or regulations on the banking process. Therefore, they may offer you services at a lower cost or with higher interest rates on your accounts. A depositor living in a country that does not require payment of taxes from foreign income benefits by being able to avoid paying taxes on the interest.
Considerations
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Offshore accounts in Singapore carry deposit insurance, similar to the FDIC insurance in the United States. Countries like the Dominican Republic or Panama do not provide deposit insurance, but the government regulates the banking industry, and banks keep cash reserves on hand to provide stability. It's recommended to check the banking regulations and insurance in the country where you plan to open an account. Since the terrorist activities of Sept. 11, 2001, governments have cracked down on offshore banking practices to prevent funding terrorist activities and investor abuse. Though government taxing authorities do not receive reports from offshore banks, Americans and citizens in the UK have the duty to report interest earned on all bank accounts, offshore or not.
How to Open an Account
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When opening an account, research specific jurisdictions to learn about their banking regulations. Then determine which banks offer the services that fit your needs. Individual banks determine what kind of identification you need to provide to open an account, but you can provide this through fax or email. You may also fund the account by doing a money transfer by phone or online. You can open an off shore account with as little as $500.
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References
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