Offshore banking is often associated with a high level of financial sophistication. However, the reality is that the average person can open an offshore bank account with just a few hours of work. (For related reading, also see Pros And Cons Of Offshore Investing.)
TUTORIAL: How To Manage Credit And Debt
Each offshore bank and foreign jurisdiction has its own requirements, so you'll have to do some research to find the specifics relevant to your situation. The following is an overview of what you can expect, based on common offshore banking centers such as Switzerland, the Cayman Islands and the Channel Islands.
The Basic Requirements
The basics of opening an offshore bank account are similar to opening a bank account in your home country. Offshore banks will ask for your personal information, such as your name, date of birth, address, citizenship and occupation.
To verify your personal information, you can expect to submit a copy of your passport, driver's license or other identifying documents issued by a governmental agency. Additionally, banks are concerned with verifying your residence or physical address since this may affect taxation issues. This requirement may be satisfied by presenting a utility bill or similar documents.
Due to the wide range of different identification documents that may be presented to offshore banks, additional assurance of a document's authenticity is often required. A notarized copy of certain documents may suffice in some cases. Other offshore centers prefer an "apostilles" stamp, which is a special type of certification mark that is used internationally. Where this is the case, you will need to visit the government office that is authorized to issue this stamp for your state or nation. (For a general overview, also see Taking A Look At Tax Havens.)
Additional Verification Documents
In offshore banking, there are often considerable additional requirements to open the account to which you may not be accustomed. These requirements are in place to discourage money laundering, tax fraud or other illegal activities that are often associated with offshore banking.
First, offshore banks may ask for financial reference documents from your current bank, indicating average balances and a "satisfactory relationship." Most commonly, this is satisfied by bank statements for the last six to 12 months.
Second, many offshore banks ask about the nature of transactions expected to take place through the account. This may seem overly intrusive, but offshore banking centers have been under increasing pressure to stop illegal activity. For this purpose, many offshore banks want additional documentation, noting from where the money you are depositing in the bank is coming.
If your funds are from job income, a wage slip from your employer will likely suffice. To verify your investment income, an offshore bank may ask for information about your investments and where they are held.
If you have significant funds from a business or real estate transaction, you may need to provide sales contracts or other relevant documents. If you are depositing funds from an insurance contract, you may need to provide a letter from your insurance company. If your money comes from inheritance, they may ask for a letter from the executor of the estate testifying to this effect.
Choosing a Currency for Your Offshore Bank Account
Unlike domestic accounts, offshore bank accounts offer an option of which currency to hold the account in. This can be a highly valuable feature of an offshore account, since it offers the ability to hold funds in a different currency if one's domestic currency is unstable or expected to depreciate. (To learn what affects exchange rates, see 6 Factors That Influence Exchange Rates.)
It is important to understand the consequences of holding your account in different currencies. For example, holding funds in certain currencies may allow you to earn interest on your deposits, but this can also result in foreign tax liability. In addition, you may need to exchange currencies to make deposits and withdrawals, which could be a significant expense depending on the fee structure and exchange rates offered.
Depositing to an Offshore Bank Account
Offshore bank accounts are most often funded electronically through international wire transfers. Unfortunately, the systems that enable free electronic transfers common in domestic banking are typically not able to transfer money internationally.
Sending a wire transfer is a simple operation, but almost all banks charge international wire transfer fees to send or receive funds. Pricing for wire transfers varies from bank to bank, so be sure to look for deals. Unfortunately there are few good alternatives. Domestic checks are generally not accepted in foreign jurisdictions, and personally carrying funds is impractical.
TUTORIAL: Brokers and Online Trading
Withdrawing from an Offshore Bank Account
Offshore banks offer a variety of ways to withdraw funds in order to maximize the convenience of using their services. Many offshore banks issue a normal debit/ATM card that allows you to easily access your funds worldwide. You will want to look into the fees for using this method, since international ATM fees can be expensive. Withdrawing larger amounts of cash at one time may help to minimize these fees.
Some offshore banks offer checks. However, this is usually not a preferred method of withdrawing funds. Primarily, this is because confidentiality is often desired in offshore accounts. Problems may also arise since checks drawn on foreign accounts are not always accepted.
The best option may be to use two accounts: one offshore, one domestic. In this way, electronic wire transfers can be used to transfer larger amounts of offshore funds to a domestic account where they can be easily accessed. This method offers greater privacy and security, while also giving the convenience of local banking services.
Seeing Through the Offshore Mystique
Despite the mystique surrounding offshore banking, it is relatively simple to open an account. Often all it takes is filling out the paperwork, supplying some basic identifying documents and providing additional information to show that you are not planning to use the account for illegal activity.
Choosing the best currency and optimizing deposits and withdrawals are slightly more complicated, but the best choice for these items should become clearer as you study your personal banking situation. (For additional reading, also take a look at The Ins And Outs Of Bank Fees.)
Credit & LoansDiscover key differences between refinancing and restructuring debt in regard to terms, the negotiation process and effect on credit scores.
Investing BasicsRehypothecation occurs when an asset used as collateral for one party is reused in another transaction.
Technical IndicatorsLearn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
EconomicsAn irrevocable letter of credit (ILOC) is a financing vehicle used to facilitate commerce between two parties who are not familiar with one another.
SavingsGet the richest perks and red carpet treatment for you and your money from these financial institutions.
Personal FinanceInsurance companies and banks are both financial intermediaries. However, they don't always face the same risks and are regulated by different authorities.
SavingsEach consumer bank account has its own personal ID. And so does the bank. How do these numbers function and how do they protect the account holder?
SavingsWhen putting all your assets into one private banker basket, it pays to proceed with caution.
InvestingThey offer well-heeled clients unparalleled convenience, but could be prone to certain conflicts of interest.
Credit & LoansA financial institution is in business to, among other things, accept deposits, make loans, exchange currencies, and broker investment securities.
An electronic card issued by a bank which allows bank clients ...
A measure of how much income a business generates, given the ...
An interest-bearing account that typically pays a higher interest ...
Interest calculated on the initial principal and also on the ...
A type of letter of credit. A straight credit can only be paid ...
A type of offshore savings account used by a wealthy individual ...
Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
In the United States, the average net interest margin for banks was 3.03% in the first quarter of 2015. However, this was ... Read Full Answer >>
The appropriate benchmarks for tracking banking sector performance depend on the type of banking. For instance, commercial-only ... Read Full Answer >>
In today's financial services marketplace, a financial institution exists to provide a wide variety of deposit, lending and ... Read Full Answer >>
The activities and types of clients for an investment bank versus those for a retail bank highlight the primary difference ... Read Full Answer >>
The banking industry, including retail and investment banks, is subject to seasonal trends. Seasonality is most commonly ... Read Full Answer >>