James Bond 101: How To Set Up An Offshore Bank Account

Posted on 05. Jul, 2006 by in Saving & Investing, Taxes

swissbankaccount.jpgHave you always dreamed of being like James Bond? Do you need a new pickup line that includes, “well, I’ll have to check with my Swiss bank account…”? Then this post is for you!

Why Have an Offshore Account?
The main reason people use when justifying the use of an offshore bank account is taxes. Interest is generally paid by offshore banks without tax deducted, BUT this is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. You can’t simply avoid taxes by hiding your cash in a Swiss bank account. Although foreign or offshore banks are not required to report income like they are in the U.S., anyone subject to U.S. taxes must report that income themselves – regardless of whether or not your bank reports it as well. In fact, the law states:

Any United States person who has a financial interest in or signature authority, or other authority over any financial account(s) in a foreign country is required to file a Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.

And since most offshore accounts are used to hold amounts greater than $10,000 – chances are you’re going to have to report that Swiss bank account to the IRS and Dept. of the Treasury. But there are a few other reasons people use as to why they need an offshore account including:

  • Stability – this one really doesn’t apply to US citizens, but individuals from other countries might look to other countries for more political and economic stability
  • Higher Interest Rates – although the dawn of the internet banking industry has seen record-high interest rates, some countries might have higher interest rates due to lower overhead or regulatory costs
  • Special Services – these “special services” include investment opportunities or risk not offered elsewhere; however, the biggest service is anonymity

What’s the Risk?
If your cash is safe at home in your local Wells Fargo branch, it’s federally insured by the government; however, there are no guarantees that your money will be in your offshore account tomorrow morning. Although many countries (Switzerland comes to mind) have a great track record of safeguarding your assets, there is no guarantee that a government coup in the Cayman Islands or some scam out of Switzerland will leave you penniless. You have to keep in mind that most people who run offshore accounts are doing it to protect things they don’t want found… if you feel comfortable working with these individuals then read on.

It is also important to mention that since September 11, 2001 the US government has begun to look closely at offshore accounts as potential financial harbors for terrorists. Legislatures have been trying to increase the government’s control over offshore accounts which could potentially eliminate your anonymity.

How Much Does it Cost?
The easy answer is, it depends. Although offshore banking is no longer for the filthy rich – most banks require a minimum of $1,000 deposit. Application fees will add up as well – most banks charge at least $250 for setting up accounts but most charge over $1,000. As you can see, minimum deposit requirements and application fees still force most of us to keep our money at home.

Switzerland or The Cayman Islands?
If you’re intent on banking offshore, the biggest decision will be location. The following are popular spots to consider (via AskMen.com):

  • Switzerland: Accounts can be set up in person or via mail. The key feature of a Swiss bank account is secrecy. It works like your American bank, but most legal matters like divorce, taxes and bankruptcy are considered private. In fact, the Swiss are known for keeping their secrets. While some countries change their laws under American pressure, Switzerland just keeps going. On the other hand, everyone knows about Swiss bank accounts, so if a creditor knows you’ve got one, they also know you’re hiding something.
  • Cayman Islands: Once again, it’s basically like setting up a U.S. account. The difference is that Cayman accounts are geared to corporations, so it’s possible to open an account and keep your identity a secret (these are known as IBCs or International Business Companies). In other words, your corporate name will be the only name the bank knows. If you’re clever and really concerned about secrecy, you’ll insulate yourself with a series of corporations, making a paper trail of holding companies that don’t lead to you.

    The Cayman Islands don’t officially encourage illegal activity like tax evasion, but they don’t report deposits or interest on those deposits. That’s your job. But remember: In the war on terror and drugs, Cayman banks have buckled under American pressure. This means that when the bank opens its doors to the American government to catch a drug dealer or terrorist, it also opens the door to your information.

  • Singapore: The setup in Singapore is much the same as anywhere else. Money moves to Singapore primarily for tax reasons because the country has the lowest tax rate in Asia. If you play your cards right, interest earned in Singapore can be tax free. While you might get tax breaks on interest in a lot of places, there’s a good reason to choose Singapore: Investment happens locally.

    Singapore banks pump money into China’s growing economy. So when you put your money in a Singapore bank, you’re doing three things: saving on taxes, investing in the world’s fastest growing economy and protecting your money by letting local experts pick and choose the investments for you. In other words, you get to invest in Asia without leaving home and without paying U.S. taxes.

  • Luxembourg: There are a few hurdles to opening an account in Luxembourg, but they’re minor. For example, you’ll need a reference from your current bank and you’ll need to be able to answer some financial questions about how you intend to use that money in Luxembourg (if at all).

    Like Singapore, Luxembourg is known for a great return on its investment, but that return has dropped for some deposit holders who are citizens of European countries. If you’re not affected, you’ll grow your money tax-free in a very stable country. In other words, if you pick Luxembourg over Singapore, you make a tradeoff. Your money might not grow as fast (although it will likely grow), but you won’t be exposed to the risk of investing in a developing economy.

    The Bottom Line:
    The bottom line is that offshore accounts are not necessarily illegal or “shady”, but they still have that stigma attached. If you’ve got the money and a legitimate reason for doing so (other than the occasional pick-up line) then offshore accounts might be a great solution for your banking needs. Otherwise, I’d stick to your local Wells Fargo branch.

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10 Responses to “James Bond 101: How To Set Up An Offshore Bank Account”

  1. ricemutt

    05. Jul, 2006

    This is a great post. Entertaining, but very informative! I’ve always wondered what offshore accounts were all about!

  2. AJ

    05. Jul, 2006

    Jason, you run a great finance blog here. Something like this will never apply to me but it is still great to know the whole allure of off shore bank accounts.

  3. Zetra

    27. Jul, 2006

    Need some information in opening a bank account in china. (renminbi)
    Is it hard for a foreigner to open a bank account in china? 😕

  4. Gabriel

    13. Aug, 2006

    Sir,

    Do you know any bank in Asia that offers compounded interest rate for savings? I am from Malaysia but so far, there is no bank here that offers compounded return. Pls advise.

    Thank you.

    Regards,
    Gabriel

  5. Cindy Toney

    13. Oct, 2006

    I imported some merchandise from China and it was poor quality. They said they would refund our money but they can not figure out a way to do this. They said they can’t send us money anyway. What is the real answer to this. We just want our money back.

  6. Jacob

    25. Sep, 2007

    I’ve heard that Germany is a great place to have an account but i didn’t see anything on here.. Any thoughts??

  7. Jason Guthrie

    25. Sep, 2007

    I hadn’t heard anything about Germany in particular. However, opening an offshore or non-resident account vary considerably; in particular many institutions require a minimum opening balance. Charges for offshore or non-resident accounts can also be quite hefty.

    But I think the rule of thumb is to call the bank personally, and see what kind of deal they can make for you. You’ll have to let me know how your German offshore banking goes!

  8. Sir, in this blog you say that the main reason people use when justifying the use of an offshore bank account is taxes, because interest is generally paid by offshore banks without tax deducted. In our investigations, we find out that in some countries, the main reason is asset protection.

  9. shanmugam

    10. May, 2009

    My friends requested for opening an offshore account in dubai or malaysia for his bussiness purpose for the client to deposit money dircetly into the account see therer is no illegal its that for export bussiness if anybody have information pls mail me

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