Is Offshore Banking Legal?

Is offshore banking legal? This is a question often asked these days, as various nations seek to clamp down on offshore tax havens and offshore banking. And while such banking may raise eyebrows in certain quarters, or invite disapproving comments from politicians seeking to balance budgets and maximise tax revenue, the fact is banking offshore is perfectly legal.

However, it helps if one first clarifies the situation by defining the words "offshore" and "tax havens".

Offshore simply means some place other than your home country. So if you're in the USA, then having a bank account in the UK would be considered offshore. Or if you live in Australia and have a bank account in Singapore then that would be offshore also. Neither of these places are known tax havens of course, but never-the-less they would be considered "offshore" if you banked there but didn't live there.

So while an offshore account may very well be in a tax haven, it doesn't have to be.

There are various negative associations with the term "tax haven", as such countries are widely perceived to be places where unsavoury characters do shady business dealings or worse, engage in money laundering. But the truth is, a tax haven is simply a country where either no income tax is paid, or less tax compared with other countries.

The motivation for a country to become a low tax or no tax haven is usually to gain some competitive advantage. They do this by offering financial and incorporation services designed to attract foreign business - and boost the local economy. And this is usually the essence of the hostility towards such places. Most developed Western countries have a large socialist component to their economies, where high taxes are used to fund various social welfare programmes. So when some countries lower or eliminate their income tax it naturally attracts those who seek to pay less tax - both companies and individuals.

The fact is, any sovereign nation has the right to determine its own tax rules and the rate of tax they seek to impose. And it's perfectly natural for there to be tax competition in the world. Without it, nations would find no barrier to raising taxes and would no doubt exploit all of us in the process. Low tax and no tax nations provide an important counterbalance to the high tax countries and the existence of such tax competition is healthy and should not be discouraged.

So if you see the advantage of banking in another country - offshore - then you are certainly free to do so. And provided you live in a country without currency exchange controls - which is most of the developed world - then transferring your funds to an overseas bank account is a simple matter, and like I said 100% legal. However, there can be complications, if you don't know your own country's rules and regulations.

Give you one example. If you're a US citizen or resident, then you are obliged to report the existence of any offshore bank account with a balance of $10,000 or more - or the existence of accounts where the aggregate balance is over $10,000. You're allowed to have as much money as you like in the account - but are required to report it. Most other countries do not have this requirement.

Another example would be the existence of various funds transfer reporting requirements. These vary from country to country, but let's say you wanted to transfer $50,000 from your domestic bank account to an offshore one - then it's highly likely the transaction would be reportable by your bank, meaning they would have to notify the relevant authorities that it has been done.

Given these potential reporting requirements another obvious question would be, "So what are the advantages of banking offshore?". And the potential answers are many. It could be to seek more security, more financial privacy, to diversify currencies, or that overseas business dealings make having such a bank account necessary.

Having access to foreign currencies is becoming increasingly useful, given the wild fluctuations between the value of such currencies. Right now, for example, the USD is on a long term downward trend, due to the negative economic fundamentals affecting the country. This means that anyone inside the USA, whose funds are exclusively in US dollars, is likely to see the value of their savings erode over time. Holding such savings in a stronger currency would be a rational decision, and using an offshore bank to achieve this would be a sane financial strategy.

At the end of the day, given the increasing global nature of living and business, it's perfectly natural for people to consider opening bank accounts in other countries if they can see any personal gain to be had from it. And as long as that demand exists there will always be reasons and ways to bank offshore.

by David MacGregor

David MacGregor has been active in the offshore banking world since 1998 and lives the Internationalist lifestyle he writes and advises about. He operates a private information service for those seeking more personal and financial freedom, and offers a free introductory e-course called the FreedomShift.