[Estimated time to read: 3 minutes or while you download an account opening form]
The world has been in a bit of a frenzy since the Panama Papers were leaked – thousands of confidential documents detailing offshore accounts published, with the secrets of some of the world’s richest exposed.
The media has been calling out politicians as corrupt and business tycoons as evaders of tax, and all this brings to mind a question that many people are asking:
Are offshore accounts illegal?
Offshore accounts are not illegal, neither is offshore banking as a business sector. In fact, many international executive professionals and expats open offshore accounts when they relocate abroad, because such accounts give flexible access to funds anywhere in the world.
In addition, for those who live in poorly financially regulated countries, or where capital controls or poor governance exist perhaps, it can be safer to hold funds in an offshore bank account.
International financial regulation is such nowadays that offshore banks are required to fulfil so-called Know Your Client due diligence, and scrutinise all transactions. For those for whom it makes sense to hold funds offshore, i.e., outside their current country of residence, the process of opening a simple offshore bank account can be straightforward.
However, offshore banking has managed to attract a bad name, particularly in recent years, as the rich and famous drag it through the mud with their tax evading antics.
This, and years of Hollywood films glamorising international playboys and crooks, has helped create a few myths around the simple offshore bank.
Here, we dispel the 5 main myths about offshore banking, and explain the simple truths behind this less-than-murky world that the media has made us believe in.
Myth 1 – People only use offshore banks to evade tax
The media can probably take most of the credit for this myth.
Where there has been a high profile case of tax evasion, more often than not, a big deal will be made out of the fact the cash was sheltered in an offshore location.
The stark reality though is that the majority of people who use offshore accounts are normal people simply looking for a convenient way to access their cash while they live abroad.
Using an offshore bank account can legitimately help lower your tax bill, but only through legal routes.
Myth 2 – Offshore banks are based in far flung dodgy corners of the world
There are banks based all over the world, and yes, some offshore banks are based in exotic places like the Caribbean. However, many are also based in less exotic places like the Isle of Man, Singapore or Switzerland. All of which are well-run, highly regulated jurisdictions with first class financial reputations.
Myth 3 – You need to be loaded to open an offshore bank account
If you are impressed when you hear the words “I have a Swiss bank account”, then you needn’t be!
The truth is there are many different levels of offshore banking.
Some banks will let you open an account with as little as $500, while there are some which won’t even say hello unless you have at least a million readily investible.
In reality, most offshore banks are offering a private banking service, for which you would expect to pay more. But if you're looking for a long term partner with which to help build your future, most decent banks will be happy to talk to you.
Myth 4 – You need to visit the bank in person to open an account
The movies can take responsibility for this myth!
The image of a man carrying a suitcase full of cash into the reception of a bank somewhere in the sun, probably wearing an Hawaiian shirt, can largely be blamed for many of these myths in fact.
As with all of them though, it’s simply not true and with Internet and telephone banking now the norm, the location of your high street bank, let alone your offshore bank, means less and less.
Of course Internet banking is perhaps not quite exciting enough for Hollywood, and the time when Leonardo DiCaprio was playing Jordan Belfort in Wolf of Wall Street, mobile phones were still the size of a shoe box.
But, you don't necessarily need to open an account in person, as long as you fulfil your chosen banks' 'know your client' due diligence process, and can provide full evidence of where all funds originate from, you may be able to open an account remotely.
Myth 5 – Is offshore banking is illegal?
This is completely false.
Unfortunately, offshore banking has garnered rather a bad name over the years and has become associated in people’s minds with murky dealings and illegal activity.
The plain and simple truth though is that the vast majority of account holders, just like with a high street bank, are normal everyday people, who want to keep their money safe...such as expats who reside in unregulated jurisdictions.
For some people, offshore banks also provide a wide choice of funds and investments that are not usually available in their home country or in the country where they are currently residing.
Offshore banking is not illegal for the following key reasons:
- Offshore banking is simply holding funds in a country other than the one you live in
- The most respectable offshore banks are in highly regulated, financially stable jurisdictions including the Isle of Man, Switzerland and Singapore
- International financial regulatory requirements from the likes of the OECD have to be observed by offshore banks, meaning all activity must be legal
- Anyone can open an offshore bank account, and they can be very flexible solutions for those who live, work or travel abroad.
If you would like to know more about this subject we have a dedicated offshore private banking section.
Editor's note: This blog was originally published in July 2015 and has been fully updated February 2018.