Offshore banking is simply the process of depositing money into an account at a financial institution located outside of your country of residence. Offshore banking is not just for the rich and famous. Anyone, no matter how much money someone has, can open an offshore bank account. Having an offshore account, in and of itself, is perfectly legal. However, offshore depositors must be aware of their country’s tax laws so they can avoid legal problems.
Some offshore account holders transfer funds to gain access to banking services and products that may not be offered domestically, while others seek to invest globally. Less developed nations provide financial and tax incentives for companies and individuals to invest and help stimulate the country’s overall economy. Offshore banking also affords investors and depositors a certain amount of privacy. Foreign banks are governed by their country’s laws and will not disclose information about their investors or depositors. Some countries allow its citizens to use offshore banking as a way of sheltering assets for tax purposes. The United States; however, requires its citizen to report offshore accounts to the Internal Revenue Service.
One of the biggest disadvantages of offshore banking is that investors and depositors are not protected by the Federal Deposit Insurance Corporation, FDIC, which insures and protects depositors and investors in the United States. If your offshore bank or financial institution closes it doors, you probably will not have any access to your account. Offshore banking also can be costly. Investors and depositors must pay fees for setting up offshore accounts, and there may be fees incurred for money transfers and currency conversions. U.S. citizens and companies must be careful to report the existence of any offshore account that has a balance of $10,000 or more or the existence of offshore accounts when the combined balances totals $10,000 or more.