Offshore banking has often been associated with the underground economy and organized crime via tax evasion and money laundering. However, offshore banking does not legally prevent assets from being subject to personal income tax on interest.
What is Offshore Banking
An offshore bank is a bank located outside the country of residence of the depositor, typically in a low-tax jurisdiction (or tax haven) that provides financial and legal advantages.
These advantages typically include the following:
- Greater privacy.
- Low or no taxation (i.e., Tax havens).
- Easy access to deposits (at least in terms of regulation).
- Protection against local, political, or financial instability.
History of Offshore Banking
There is no clear information on where the offshore banking system originated and evolved. The root of banking is traced back to Vienna, Austria.
Some historians believe the offshore banking system started when the neutrality of Switzerland was established during the Vienna Congress in 1815. Some also claim that offshore banking originated in the Channel Islands of France.
It becomes a necessity for wealthy Europeans, most of them families and merchants; in post-Napoleon Europe.
During post-Napoleon Europe, wealthy families and merchants saw the need to find a safe place to keep their growing assets. This era in Europe was defined by constant economic turmoil and political strife.
During this time, the European kingdoms, empires, and territories imposed higher taxes without providing equivalent services such as security.
In the mid-1800s, bankers in the Northwestern Islands of France grabbed this opportunity and gave Europe’s super-rich a better place to deposit their wealth, better asset protection, and lower taxation.
Offshore Banking in Modern Times
Politically stable places like United Arab Emirates, Singapore, and others; provide offshore banking. They have taken offshore banking to offshore living. In 2023, offshore banking is now seen as a must for wealthy individuals and families.
The United Arab Emirates has become the most accessible place to not only open a bank account and business for foreign individuals; they are allowing resident permits and encouraging business activities, even providing loans to foreign individuals.
UAE leaders are doubling down on it.
Many countries use offshore banking to attract foreign investment and talent and boost their economy and various sectors of the country.
For example, Turkey (officially the Republic of Türkiye) is a prime example. A $500,000 deposit in a Turkish bank; will allow you to obtain the country’s passport. Also, a $400,000 investment in the Turkish Real estate industry through its banks also gives you the same opportunity.
Many European countries also have a similar program. Depending on the country, the investment amount is higher or lower.
The United States also has similar offshore banking to offshore living and citizenship programs. Under its EB-5 visa, one must invest $800,000 in business projects in targeted employment areas or $1,050,000 if the investment goes to any other region. After five years of living in America, the investor can obtain US citizenship.
Developing countries like Bangladesh also use offshore banking to attract foreign investment. Bangladesh will give you residency and citizenship after three years; if the investor transfers $1 million to a local bank or invests $500,000 in the country.
Despite the criticism of offshore banking, countries and banks use and improve them to attract investments.
4 Advantages of Offshore Banking
Offshore banks give politically and economically stable jurisdictions to people living in tyrannical places.
Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be advantageous for residents in areas with a risk of political turmoil who fear their assets may be frozen, seized, or disappear.
Often Offshore banks provide higher interest rates
Some offshore banks may operate with a lower cost base and offer higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention.
Offshore banks provide tax savings opportunities.
Offshore banks generally pay interest without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income or do not pay tax until the tax return is agreed upon or feel that they can illegally evade tax by hiding the interest income.
Offshore banks provide better service, such as privacy
Some offshore banks offer banking services that domestic banks may not provide, such as anonymous bank accounts, higher or lower-rate loans based on risk, and investment opportunities not available elsewhere.
3 Disadvantages of Offshore Banking
Offshore Banking is Less Financially Secure
Offshore bank accounts are sometimes less financially secure. In a banking crisis that swept the world in 2008, some savers lost funds not insured by the country in which they were deposited.
Those who had deposited with the same banks onshore received all their money back. Thus, banking offshore is historically riskier than banking onshore.
Offshore Banking used for underground economy and organized crime
Offshore banking has been associated in the past with the underground economy and organized crime through money laundering
Following September 11, 2001, offshore banks, tax havens, and clearinghouses have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors.
However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.
Offshore Banking is very costly.
Offshore jurisdictions are often remote and costly to visit, so physical access and access to information can be difficult.