Risks of Offshore Banking

Risks Offshore BankingIt is important to address the risks of moving your assets offshore. Too often, offshore banking is portrayed as a be all and end all solution. This post is intended to problematize this view and hopefully lead to more informed decisions being made about going offshore. The risks below do not constitute an exhaustive list.

Legal Risk

In some backwater countries, having a bank account abroad can on its own be illegal.

Fortunately, those countries are few and far between. However, having funds offshore may create legal implications in that your tax authority may think that you are evading tax. Assuming you’re not, you often have to go through additional paperwork to declare your assets and pay whatever taxes are due.

Worst case scenario: You are violating a law and/or presumed guilty of tax evasion or money laundering.

Mitigation: Speak to a professional about your offshore structure and inquire if they can do your taxes for you. This can be especially important in countries where annual tax returns are more or less automatic.

Regulatory Risk

This one is two-folded. It applies both to you and to your customers.

Aside from sanctions, which are covered later in this post, a handful of industries and branches will have regulatory limitations on where they can place money. For example, adult or gambling companies will not be welcome by banks in most of Asia.

Another risk you need to consider is that some customers (whether it’s B2B, B2C, or – especially – B2G) will be wary about or prohibited due to regulations from transacting with offshore banks and companies.

Worst case scenario: No one wants to or can do business with you.

Mitigation: Be honest with your bank. If your clients are concerned about paying to a tax haven, consider a bank account in an onshore jurisdiction as a transit account.

Financial Risk

This goes beyond the usual risks of banking and investing, but you should naturally also consider those as well.

While offshore jurisdictions tend to be financially sound and solvent, not all of them are. Several Caribbean tax havens are in reality quite poor. Review relevant laws to see if offshore assets are at risk in case of a government default, particularly when investing or placing your money in poor nations.

How safe is your money?

Does the bank have a good credit rating? Is it solvent?

Does the country have a good credit rating? Is it solvent?

Worst case scenario: Funds lost.

Mitigation: Stay alert. Spread your assets.

Sanctions Risk

As long as you stick to reputable offshore jurisdictions, this is unlikely to affect you. However, if you have a bank account – for whatever reason – in a country with a bad international reputation and strained international relations, you may suddenly find it impossible to wire funds in and out. Iran, for example, has been disconnected from SWIFT, making international transaction very cumbersome.

If you bank in an especially high risk country, always make sure you have a contingency plan to get your money out. This can usually be done by having a bank account (transit or regular) in a country with friendly or neutral relations to the first country.

Note that transferring funds from the second country bank account to a country which has placed sanctions on the first country may have severe repercussions if it’s a straight-through transaction. The implications of sanctions avoidance can be very severe, including prison time. It’s usually fine to remove the money from the sanctioned jurisdiction, wait out the dispute that’s causing the sanctions, and then transfer the funds back into the country.

Worst case scenario: You have funds in a bank and you cannot wire the funds out or access them in any way; all cards are blocked.

Mitigation: Plan ahead. Assess your risks and reassess them regularly.

Litigative Risk

Or risk of no last resort.

Your offshore bank is located far away and/or in a jurisdiction that maybe doesn’t have the best of track records when it comes to customer protection. This can be an especially prevalent risk in jurisdictions with International Banking Acts (IBAs; more on those in the future).

The risk here is that a dispute arises between you and the bank. If a dispute arises between you and your local bank, you can typically turn to a regulatory authority of some kind and file a complaint or grievance against the bank. While rarely a speedy or enjoyable process, you at least have some non-litigative resort. Should it not yield the desired results, you can go on and sue the bank, file a police report, and take any other measures your jurisdiction has available.

This can be nearly impossible with an offshore bank, either because there are none or extremely limited protections available to you or simply because the bank is far away, making it extremely costly to litigate.

Worst case scenario: What can you do if your bank freezes your account? Nothing.

Mitigation: Pick your bank carefully. Learn about assessing the reputability of jurisdictions. Pay especial attention to IBA jurisdictions.

3 Comments on "Risks of Offshore Banking"

  1. Great. Looking forward to it. And what would be helpful is, in your List of Jurisdictions, if you could put a checkmark beside those countries which license IBA banks. https://www.streber.org//list-of-offshore-jurisdictions/

  2. You need to bump up the date of publication for your piece on International Banking Act jurisdictions. I’m not having too much luck finding an internationally recognized definition of an IBA, or, at least, why IBAJ’s would be less protective than otherwise. A Google search mentions the U.S. IBA of 1978 which put domestic branches of foreign banks under the purview of the FDIC. Belize and Samoa are prominently mentioned as being IBA “jurisdictions”, but I’d like to know, definitively, which countries are and which aren’t. And why they are lacking in consumer protections vis-a-vis other jurisdictions!

    • It’s currently scheduled for posting late this fall. I’ll return to banking risks in one or two other posts before then, though.

      It mostly comes down to lack of incentive for regulators to get involved.

      If an international bank in an IBA jurisdiction is misbehaving (freezing accounts for no good reason, leaking information, failing to provide services, and so on), the regulator has very little incentive to take action because none of its residents/citizens have money in that bank. In the eyes of the authorities, it is effectively a foreign bank in a foreign territory.

      If a bank in an IBA jurisdiction freezes your account, you’re pretty much out of luck. If a Swiss or Singaporean bank freezes your account, you can complain to authorities that will actually listen and, if that fails, take legal action (go to the police and/or sue) far more easily than in your average Caribbean island IBA jurisdiction.

      The regulators in many IBA jurisdictions run on an absolutely bare-minimum budget, with just a skeleton staff. They exist solely to please the likes of OECD. Corruption is also rampant in many of these jurisdictions.

      IBAs are written to ring-fence and separate itself from the country’s domestic banking system. This can be a good thing because some these countries are quite poor and fiscally mismanaged, but it is also risk because whatever goes on with IBA licensed banks does not impact the local authorities and they as such have little to no reason to enforce what lax legislation there is to enforce.

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