If you speak publicly about offshore banking, there is a good chance that you will be suspected or even criminalized. You certainly have something to hide! However, what most people don’t know is that an offshore bank account is perfectly legal. But why does it have a bad reputation then? This and a stock that provides you an investment opportunity (exclusively for my Premium Members) in this sector are today’s topics.

Note: In this article, I am looking at this topic solely from the perspective of a small, private investor like you and me. What I am not discussing are opaque trust or other business structures as well as shell companies or any other complex constructions.

Offshore banking is one of those phrases that commonly has a bad tone to it. Talking to most people about this topic already will make you half a criminal in their perception. If someone is publicly thinking about or even already dealing with pulling money out of the home country, there certainly will be a reason for it.

But who says that this has to be illegal or that someone has secrets to hide?

Indeed, there will most likely always be ways – at least for some people with the right connections – to hide something. A few cases pop up as scandals that after a certain time fade away. Others are so irrelevant that no one actually cares. It’s good for a short click-baity headline, but seldom can there be bigger developments observed afterwards.

As a matter of fact, governments in most jurisdiction have tightened the screws, especially after the global financial crisis (GFC) of 2008–2009. The majority of countries have entered into international agreements to transmit certain financial data of foreign depositors to their respective home countries on an annual basis.

Disclaimer: Neither this article, nor any of my other publications are meant as tax or financial advise. The only advise I can give to you: Always do your own research, act accordingly to (tax) laws and if needed seek for professional consultation!

In today’s Weekly, we are going to look at the history and the meaning of offshore banking. You will notice that it is neither illegal nor criminal. You just have to act according to taxation laws.

Then we will discuss the developments since the GFC where you will see that governments nearly worldwide have tried to make it more difficult to hide something.

Lastly, I am going to briefly introduce you to an exciting investment opportunity in this opaque, but exciting sector. My Premium Members will be able to download an exclusive research report in the member’s area (click here to login or register) on Saturday, 8 October 2022. I will send out a separate email alert.

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Offshore banking definition

(look here, here, here, here or here for sources and a good video for starters here)

Overall, the perception of offshore banking is negative, as you probably know and could read out form the intro above.

The most common associations with “offshore” are:

• money laundering
• financing of questionable uses
• tax avoidance due to using so-called “tax havens”
• hiding something from someone
• being rich and greedy

The points above of course mixed all together and everything in an illegal way.

It is not that easy, though!

Here, the biased public already taps into certain misconceptions, simply due to not knowing better and being “educated” by the general media.

The main concept of offshore banking is misinterpreted, however.

“Offshore” just means outside of your home country. Nothing more and certainly nothing in conjunction with the points listed above. Or the other way around: A non-resident doing banking activities in a foreign jurisdiction. If you have two bank accounts in two different territories, you have already gone offshore!

The second misunderstanding goes with the word “haven”. Maybe you already noticed that it is not spelled “heaven”, but “haven” – without an “e” as a second character. While sounding similarly, the former word gives you an impression of paradise-like circumstances. In fact, the latter and correct word, just has the meaning of a “hub”.

And this is the original meaning as well as the intended function.

With offshore banking, you are not necessarily hiding money in a no-tax paradise, but using one or more locations outside of your home country as a financial hub for certain financial services, your bank at home probably doesn’t even offer.

This is the basic meaning of offshore banking.

In 2000, the International Monetary Fund, published its own definition of so-called “Offshore Financial Centers” or OFCs (see here) where the following criteria had to be met (in my own words):

• primarily doing business with non-residents
• disproportionately more financial business activity and assets held than the domestic economies would need to for themselves
• the financial sectors often have very high weightings in relation to their overall economies
• no or low tax and favorable legislations
• banking secrecy and more privacy

Foreign customers often receive a more liberal environment for doing business and financial services. Plus, they get more secrecy and minimum interference into private and business activities.

There are many benefits to open up banking accounts in foreign jurisdictions like:

• reduce political, currency and economical risks of your home country (diversification)
• access to safer banking systems in general and to safer banks specifically
• increase privacy and confidentiality
• enhanced asset and wealth protection
• less risk of a frozen account or account closures
• access to a wider range of banking services and investment options (other jurisdictions or investment vehicles to choose from)
• possibly access to higher interest rates
• reduce taxes (in some instances, any benefits depend on personal circumstances and laws of one’s home jurisdiction)
• maybe even just because you are working abroad or traveling much, you simply need a banking account abroad
• you are getting paid in a foreign currency

There are certainly more legitimate reasons for having a bank account “offshore”.

There will also be constructions that abuse certain loopholes. But you can also abuse loopholes in high-tax countries (see here), hence it would be unfair to generalize and stamp this only on lower-tax “offshore” jurisdictions.

By the way, among the biggest tax havens are the USA, UK, Luxembourg and Switzerland. These are all no no-tax countries (see here)!

While some points are clear without further explanation, the point of taxes is rather exaggerated (for small private investors). There are no tax-free benefits per se for all depositors, because it all depends on your personal structure of living and residency. In many countries, your are taxed on worldwide income, anyway. Hence, you can hardly profit from lower or no taxes, except you completely move there.

Maybe taxes are not too low in certain smaller jurisdictions that just don’t need that much tax income, but too high in bigger ones where governments are interfering in too many everyday tasks?

The smaller places need to offer certain incentives and advantages to their customers just to stay competitive, while certain governments would prefer tax rates of 100%.

Plus, in most cases you will need to disclose your income from investments like interest to any relevant tax authorities, anyhow. Hence, you will be obliged to declare what you earned and where and maybe even pay taxes in your home country for your “tax free earnings” from abroad. Before setting anything up, you should seek a professional advisor.

Short history of offshore banking

The emergence of what we know today as offshore banking seems to be traceable back around 200 years ago. I also found some hints to the Roman Empire, but let’s stick to the more modern history that still applies today in at least a similar form.

With every financial and economical crisis or also war, the resulting shake-ups seem to let more people question the stability and security at home. Thus money seeks a place where it is not in danger of confiscation or over-taxation.

What I just described is the natural human instinctive search for means of diversification!

This is how it is said to have begun in the 19th century. After the Napoleonic wars, the Congress of Vienna was held in 1814–1815 where the neutrality of Switzerland was recognized (see here). Sovereignty, political neutrality and low taxes made Switzerland the perfect place to have wealth stashed away under safe custody and anonimty from war-seeking politicians in the home countries.

Other sources claim that this first steps of offshore banking took place in the British Crown dependencies of the Chanel Islands close to France (see here).

Anyway, offshore banking further “developed” during the darkest hours of German history, when in 1934 the Swiss Banking Law was introduced. It is more or less the confidentiality framework that Switzerland is still respected for today. Back then it was helpful for many people fleeing Germany, but also France, in order to escape looming confiscations of assets in the name of “the good of the state” (see here).

As it is still in place today, there must be very harsh and substantial criminal allegations in order to receive any kind of information from Swiss banking houses. Their employees are tied to strict confidentiality agreements. Punishments reach from high monetary penalties to even time in prison for violations.

Those banks that had to give certain information to US authorities seem to be limited to Swiss banks with US branches which in turn are obliged to US laws.

From there on, more places started offering places of shelter. Among the most prominent, but also opaque and hotly discussed are Panama, Cayman Islands, Bermuda, British Virgin Islands and the Bahamas.

Offshore banking – the current status-quo

In the past, there were only a small number of possibilities to open offshore bank accounts.

Today, the offerings are vast. You likely have heard of countries or Islands like the Cayman Islands, British Virgin Islands, Belize, Seychelles, Mauritius, Panama, Singapore or Hongkong. This list is far from being complete. The names listed here accommodate a small jurisdiction with comparatively low tax rates, if any.

But to dry tax evasion up, certain regulations were imposed in the last years, especially after the GFC. One such regulatory framework is the “Common Reporting Standard”, also known as CRS. The CRS is an automated exchange of tax information by the participating countries.

It was drafted by the Organization for Economic Cooperation and Development (OECD) in 2014 and so far implemented by more than 100 jurisdictions (see here). Some are still missing, but many more likely will be following, like Georgia (the country, not US-state) in 2023 or Tunisia in 2024. Here you can see on the site of the OECD which countries are already participating and here you can find updates.

Interestingly, the USA is NOT part of CRS…

Banks of the CRS-participating countries have to report certain financial information to the depositor’s country of residence. You can expect more and more countries to join or otherwise be expelled from the international financial system. Especially the very small jurisdictions will likely not be able to withstand for too long, should the pressure increase further.

Another such step to try to make tax haven territories compliant, was a blacklist with so-called “non-cooperative” countries released in 2015 by the EU (see here for the original and an update here). Among those listed jurisdictions were places like the obvious suspects. But also for example Liechtenstein, which in the meantime has adjusted its internal operations accordingly.

This shows you that governments worldwide are trying to further put pressure on non-compliant jurisdictions. In the same direction goes the “worldwide minimum tax rate” that was decided on in 2021 (see here for example an article from Reuters).

However, for those affected by likely higher tax rates in the tax-havens, it will probably still be cheaper and more flexible to stay offshore.

This should be enough for a basic understanding of the history, the recent developments and the current status quo.

It is not forbidden to have bank accounts offshore. You just have to stick to the rules and fulfill your obligations.

Interestingly, there is also a (non US-domiciled) bank listed on the NYSE that has specialized in the business of offshore banking. The stock has two powering engines:
– One, the bank is buying up unloved assets from other banks that no longer want to engage in this business (or are pressured out).
– Two, the bank benefits like no other from rising interest rates.
As a bonus, you can collect a dividend of around 5.1% with the prospect of more to come due to probably strongly growing earnings in the current environment of rising interest rates.

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Conclusion

Although the times of full anonymity are coming to an end, privacy has not necessarily.

The main goal of going offshore with one’s banking operations has not been to hide un-taxed money, but first and foremost to internationalize and diversify the personal asset base. Besides asset protection and financial security, there are also good reasons for advanced financial services or the ability to invest in more territories that your bank at home does not offer you.

Think of offshore banking as a hub and a way to have more possibilities, not as means for criminal actions.