Guide to Offshore Banking

Offshore banking refers to the provision of financial and banking services by an offshore bank, located outside the jurisdiction of residence of the end customer or depositor. Offshore banking is conducted for various financial and legal reasons, typically in a low tax country. Below are some advantages of offshore banking in comparison to banking locally.

Many offshore banks offer greater privacy of the financial transactions. In particular, some countries have enacted bank secrecy laws, pioneered by the Swiss banking system in 1934. That being said, offshore banks are aware of the transaction flow and will time-to-time request for clarification regarding questionable transactions, including requests for copies of contracts, invoices, etc. In addition, the best privacy is achieved when banking is conducted through an offshore company. Otherwise, the name of the depositor appears on the wire transfers and other transactional records.

The funds, deposited in an offshore bank, may be easily accessible despite being outside the country of residence of their depositor. This is a result of often liberal regulations when it comes to withdrawal of funds. Non-offshore jurisdictions often impose strict limits and other requirements on withdrawals.

Offshore banks often serve as vehicles for asset protection against potential lawsuits and political turmoil in a depositor's country of residence. This is especially the case when an account is opened in the name of an offshore company or a trust. This creates an extra level of anonymity to the beneficial owners since offshore companies are regulated by the relevant offshore legislature, often with favourable corporate laws. That being said, the recent turmoil in Libya and the subsequent freezing of Kaddafi's funds by various governments around the world, show that no funds are immune to government policies.

Perhaps, the most important aspect of offshore banking is low or no taxation applied to the deposits. This becomes important for saving accounts generating interest on deposits. Since many of the offshore financial centers are located in developing nations, such as Belize, the interest on term deposits may exceed that of the interest generated in Western banks. Furthermore, offshore companies may deposit the proceeds from their activities tax-free, thereby creating the compounding effect, associated with tax shelter accounts.

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