Is Offshore Banking right for you?

by Rick on July 22, 2010

Offshore banking is a massive industry. There are several countries whose economies are utterly dependent on what is seen by many an illicit trade. The most famous example of a country devoted to its offshore banking industry has to be Switzerland but other countries and territories rely on being an offshore banking center in order to survive. Other examples include the Cayman Islands, the Channel Islands, the Isle of Man, Liechtenstein, Monaco, Hong Kong, and Singapore. These are only the largest ones. An offshore banking center is a country or territory that allows banks to be established within its borders that will hold assets of individuals or businesses that are located elsewhere.

That sounds simple enough. But why is offshore banking making headlines? Why would a company or a person want to put their money in a bank in another country when they probably have a perfectly good bank down the street where they could open an account? The answer lies in the secrecy of the offshore banks. These banks often refuse to disclose information about their accounts to anyone. If you are a person or company with considerable assets that you want hidden from tax, or simply want stored elsewhere in case you get in trouble, an offshore bank is an ideal place to hold your money.

Offshore banking centers tend to be countries or territories that are lightly populated, have a high cost of living, and are dependent on the goodwill of their neighbors to avoid conflict. They exist and are allowed to act outside the law because so many people in power hold secret accounts with them. I’m sure Switzerland’s status as the world’s leading offshore banking center is one of the reasons why they were able to avoid World War II even though they are located right in the middle of Europe.

Offshore banking sounds like a great idea. All you have to do to avoid taxes is open an account with one of the many banks around the world that offers these services. Unfortunately, hiding assets abroad is almost always illegal. And many of the other people who are doing it are in fact criminals. And the United States is doing everything it can to hunt those who would hide assets from the tax man, including scouring Asian offshore accounts according to a recent article by the New York Times.

For this single reason, I suggest you never open an offshore bank account. From a legal perspective, it is usually an illegal act to own one. From an investment perspective, it may also be a bad idea. Offshore accounts only benefit you in that they allow you to avoid taxation. If you put your money in one of these accounts, due to the high fees they charge you are unlikely to make money with them. Instead your money will be tied up, rather than invested in financial exchanges or in government bonds and the like.

Offshore banking is really made for the very rich and the very evil (which I hope are mutually exclusive). They are not made for the average person. The average person, in order to successfully save enough for retirement must save considerable amounts of his or her income, and keep it invested in a portfolio of stocks and bonds throughout his or her lifetime. Offshore banking helps those who have already made large sums of money and are simply trying to maintain their wealth by keeping it from tax authorities and law enforcement.

So if you are very rich and very powerful, offshore banking is ideal for you. But you probably wouldn’t be reading this blog anyway and will have a cabal of lawyers, financial advisers, and accountants controlling your assets. For the rest of us, my advice is to obey the law and avoid offshore banking.

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