Offshore Banking – Definition, Advantages, Disadvantages

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:

• 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.

Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering.

Advantages of Offshore Banking

• Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is a risk of political turmoil, who fear their assets may be frozen, seized or disappear.
• Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention.
• Interest is generally paid by offshore banks without tax being deducted. 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.
• Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere.

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Disadvantages of Offshore Banking

• Offshore bank accounts are sometimes less financially secure. In a banking crisis which swept the world in 2008, some savers lost funds that were not insured by the country in which they were deposited. Those who had deposited with the same banks onshore received all of their money back. Thus, banking offshore is historically riskier than banking onshore.
• Offshore banking has been associated in the past with the underground economy and organized crime, through money laundering. Following September 11, 2001, offshore banks and tax havens, along with clearing houses, 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 jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult.