The Little Known World of Offshore Banking Exposed


The Little Known World of Offshore Banking Exposed

Earlier this month, the International Consortium of Investigative Journalists (ICIJ) published an enormous set of over 11.5 million confidential leaked documents. These documents exposed the offshore holdings of “political leaders, links to global scandals, and details of the hidden financial dealings of fraudsters, drug traffickers, billionaires, celebrities, sports stars and more.” This publication is collectively known as The Panama Papers.

Though not a new phenomenon, offshore accounts have recently been pulled back into the public eye. In a post-Panama Papers world, people have been left with a lot of questions about offshore accounts. Let’s address some of those questions.

What are Offshore Accounts?

Simply put, an off shore account is any bank account that is located in a different country than the account’s depositor. For example, a United States citizen’s bank accounts in the Cayman Islands, Nevis, or British Virgin Islands would be considered offshore accounts. Likewise, a Chinese citizen’s bank account in the United States would also be an offshore account.

Despite the images of tropical foliage and white sand beaches that the term “offshore” may bring to mind, even a bank account in a landlocked country such as Switzerland can be considered offshore if the depositor resides in a different country. Hence the infamous “Swiss bank accounts” we’ve all heard of.

Why Do Offshore Accounts Get a Bad Rap?

Out of sight, out of mind. For many, the primary appeal of an offshore account is the distance (both literal and figurative) that such an account provides between the depositor and their money. Needless to say, this appeals to those individuals whose motives may not be aboveboard.

A quick Google search of “offshore bank account” or related terms is likely to generate a multitude of links related to tax avoidance. Offshore accounts have long been touted as a way to keep the tax man’s hands off your money, the implication being “they can’t tax what they can’t find.”

While here in the United States (as in most countries), there has long been a requirement that citizens disclose all foreign assets, this requirement is not always followed. Traditionally, popular offshore locations such as Switzerland and Cayman Islands were well known for their banking secrecy laws.

In fact, only as recently as 2014 has the United States government begun forcing foreign financial institutions, such as Swiss banks, to reveal formerly private banking information under the auspices of the 2010 Foreign Account Tax Compliance Act, or FATCA.

The tax man isn’t the only one shady offshore account holders may be looking to avoid. The relative secrecy also attracts those involved in the international drug trade.

Are Offshore Accounts Legal?

Generally, yes. Here in the United States, citizens are free to hold assets and invest anywhere in the world. That being said, the United States tries hard to keep tabs on its citizen’s foreign holdings and the IRS has extensive reporting requirements when it comes to offshore holdings.


Tax avoidance is not a legitimate reason to hold assets offshore. Proper use of offshore accounts is 100% tax neutral. In other words, because of the IRS’s strict reporting requirements, United States citizens should not use offshore accounts to hide assets.

As one would expect, many of the reporting requirements involve filling out and filing of ominously named forms with the IRS and related entities, the most common being Form 8938 and the FBAR.

The FBAR, or “FinCEN Form 114, Report of Foreign Bank and Financial Accounts” as it is officially known, is the primary disclosure method for offshore assets. According to the IRS, an FBAR filing is required if:

  1. the United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and

  2. the aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported

According to the IRS, income from abroad is taxable.

Not reporting income from foreign sources may be a crime.  The IRS and its international partners are pursuing those who hide income or assets offshore to evade taxes. Specially trained IRS examiners focus on aggressive international tax planning, including the abusive use of entities and structures established in foreign jurisdictions. The goal is to ensure U.S. citizens, and residents are accurately reporting their income and paying the correct tax.

Then Why Open an Offshore Account?

Notwithstanding the nefarious purposes listed above, some argue that there are legitimate (and legal) reasons to open an offshore bank account.

Privacy – The privacy granted by offshore accounts is becoming increasingly more narrow, and one should not expect privacy from the IRS. That being said, just because you have to tell the IRS where all your foreign assets are doesn’t mean you need to tell everyone.

Flexibility for Expats – Many offshore bank accounts give the depositor the option of holding funds in multiple currencies. This can be useful for expats and other individuals who migrate from country to country and want the convenience of a central location for their banking.

Asset protection – Using offshore accounts is one of the more controversial methods of asset protection and is generally only used by those with very high net worth. Some believe that for those individuals with significant wealth, and/or professionals with high risks of liability, such as physicians, offshore accounts can provide some asset protection. However, those seeking significant asset protection would likely also hold the accounts in an offshore trust or via a business entity.

Needless to say, such an arrangement can get very complicated very quickly. For those willing to go the extra mile, keeping money in trust offshore creates significant barrier for creditors, as assets held abroad in trust may be outside the reach of United States courts. Moreover, it’s sometimes the case that creditors must litigate their claims in the foreign jurisdiction in order to access the foreign assets. Many foreign jurisdictions do not recognize judgments of United States courts. So, even if a creditor has obtained a judgement in the United States, the creditor may be forced to repeat the whole process again in the foreign locale.

Should You Open an Offshore Account?

Probably not. While there are legitimate reasons to open and maintain bank accounts abroad, the reality is that for most people, offshore bank accounts are unnecessary and would provide little or no benefit. Given that the average person is loathe to invite additional scrutiny from the IRS, the additional reporting requirements and tax forms are likely enough of a deterrent.

Topics: Banking

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