Anyone who keeps money offshore has to be a tax cheat, right? Wrong, experts say.
Despite the recent ramp up of government muscle-flexing about catching taxpayers who haven’t been paying taxes on money they hold in foreign bank accounts, tax evasion is not why U.S. citizens continue to ship at least some of their financial assets offshore.
Protection from predatory litigation, for which even small business owners of comparatively modest means have become targets, is the primary reason to move money overseas today, says Rick Checkan, head of Asset Strategies International. Whether defending against a lawsuit filed by a disgruntled former employee seeking revenge for being fired or by a customer alleging personal injury from a slip and fall, these lawsuits can cost honest business owners a bundle in legal fees paid to defend themselves.
Avoiding Taxes is not a Reason to Bank Offshore
“Thirty or forty years ago, hiding money from the taxman may have been a primary motivation,” says Checkan, who adds that his clients move money abroad to get asset diversification, currency diversification and access to new markets and products as well as to protect themselves from frivolous lawsuits.
“There are a lot of good stocks, bonds and mutual funds offshore that are not registered with the SEC and cannot be offered or advertised here,” he says. “Opening an account with a foreign bank provides access to these investments.”
Opening an offshore account, whether it’s a bank account, foundation or corporation, is perfectly legal, notes John Truman Wolfe, author of “America the Litigious.” Wolfe stresses that U.S. citizens are required to report income they earn anywhere in the world. “People shouldn’t get the idea they can set up an offshore corporation in Panama or Hong Kong or Belize, make a bunch of money and not report it,” Wolfe says. “That’s against the law.”
Foreign Banks Respect Account Holders Privacy
And while keeping funds in another country isn’t a foolproof method against having them discovered (and then used to convince a jury that the small businessperson being sued has money to pay the plaintiff’s often specious and exaggerated claim) it makes discovering assets more difficult than it would otherwise be.
The reason is that even though foreign banks are now cooperating to a greater degree than they used to with the U.S. Internal Revenue Service, they have no reason to cooperate with plaintiffs’ attorneys, who have no power over them.
Checkan relates a story told to him by an Austrian banker whose happily married U.S. client and his wife frequently visited Austria and the bank. When the wife, at the request of her husband, called the bank and asked for some information, a clerk who knew her and her husband provided it. The clerk wound up in jail. “Those are privacy laws with some teeth,” Checkan observes.
What to Look for in an Offshore Bank
Erika Nolan, editor of the newsletter for the Sovereign Society, an organization that provides advice on offshore accounts, says that the initial deposits required to open bank accounts vary widely from country to country.
The first step in opening an offshore bank account is choosing the jurisdiction that’s best suited for you, says Nolan. “While selecting an offshore bank may sound exotic or even difficult, it is actually not that different from picking a local one,” she says. “It’s important to closely examine the bank’s reputation and financial condition. What kind of fees does it require? What services does the bank provide? What do those services cost?”
However, Nolan notes that when it comes to offshore banks, there’s one critical extra step: Ensuring that the bank welcomes U.S. citizens and has experience with U.S. tax reporting requirements. “Make sure they speak fluent English,” Nolan adds. “The last thing you want is to open your account only to find out too late that no one understood your instructions.”
In addition, Nolan offers these 10 questions Americans should always ask a foreign bank about investment accounts:
1. What types of accounts are available to international investors?
2. Are there any restrictions on foreigners’ investments — specifically with American account holders?
3. What taxes, if any, will be withheld from my investment income?
4. What investments are considered part of the bank’s balance sheet and available to the bank’s creditors (including depositors) in the event of the bank’s insolvency?
5. What are the fees for securities transactions and custody.
6. What other fees may apply to the account?
7. Is my account insured by law or otherwise against loss in the event of the bank’s insolvency?
8. How do I transact business with the bank — are telephone, fax, or e-mail orders accepted?
9. Is Internet banking available (and secure)? If so, is this service available in English?
10. Will the bank send U.S. clients a year-end statement showing any taxable interest paid?
Be aware, too, that there will be at least some costs involved in opening an offshore account. Depending on the country you choose, these may be nominal or high.
For example, Wolfe spent a week in Panama researching that country’s banking arrangements by speaking to with lawyers, banks and money managers. “In Panama, you almost always need a lawyer to provide you with an introduction to a bank or brokerage house,” says Wolfe. “Attorneys there have established close relationships with banks.”
Written By: Julie Crawshaw