- Offshore banking is the practice of saving one's money in a bank that lies outside the country in which the depositor lives. An example would be a U.S. citizen saving her money at a German bank. The term offshore is somewhat of a misnomer in that a bank need not necessarily be offshore or across a body of water from the depositor, meaning a French saver putting money into a Swiss bank could still be considered an offshore account. Like all banks, foreign banks run by bringing in capital and using it for a variety of lending and managing practices--banks generally do not discriminate where their money comes from.
- There are several advantages to offshore banking which make it a desirable option for many savers. For one, an offshore bank can be used to avoid problems resulting from economic or political instability in a depositor's home country. Offshore banks may also operate with lower expenses, resulting in fewer or no handling fees, and might also offer higher interest rates than the home country. Another major reason for using offshore banks is that they present possible tax advantages; interest earned at offshore banks is often paid without a tax being taken out, so if the home country does not charge tax on income earned outside of the country, that money is earned tax free.
- Since offshore banks present safe havens for money, often granting a great deal of privacy and anonymity, they have become known as a place for organized criminals and terrorists to safely hold and exchange funds. Switzerland, for example, is known for its secure and private banking system, which makes it difficult to trace potential criminal transactions. Another, more innocuous issue with offshore banks is that as tax havens, they can be used as a tool to earn interest while evading taxes, since foreign banks are not always required to report their depositors' earnings to authorities like the IRS. If depositors can hide their accounts, they can potentially earn interest tax-free.
