If someone offered you a better rate of return, without risk, would you take it? Of course you would. You don't need to invest in a particular security or create a particular corporation to pass profits through to enjoy that better return. Depending on where you live, all you need is a country of origin and another country to move selected assets to. In other words, you need an offshore bank. Many famous tax evaders have used offshore banks to their advantages. You can use offshore banks as well if you know where to look.
What Is an Offshore Bank?
The expression "offshore" originates from British investors who moved their assets to banks in Jersey and Guernsey. Which, despite being dependencies of the mother country, employed some considerable advantages. An "offshore" bank can not only be off the mainland. It can be in a landlocked nation, and the Swiss Financial Market Supervisory Authority will attest to this. Those legendary numbered bank accounts from Bern, Switzerland to Zurich still exist but with an asterisk.
At least as important as the nationality of the bank holding a depositor's assets is the nationality of the depositor. Plenty of Brits still maintain their Channel Islands accounts. For American investors, offshore banking has recently turned from financial stratagem to risky proposition.
Some Recent Changes
Another example of how criminals change tax codes is the 2010 Foreign Account Tax Compliance Act (FATCA) initiative. It requires foreign banks to to disclose to the Internal Revenue Service (IRS) the names of all U.S. account holders. The banks also have to tell the IRS how much money those hold, how much they took out and when. If you're wondering how an arm of the U.S. government can push other autonomous nations around like that it is because the IRS threatens said banks with a 30% withholding tax on the American assets they hold.
Of course, that assumes that the nation in question is diligent about determining its customers' nationalities in the first place. So far only seven nations have agreed to do the IRS' work for it.
FATCA is scheduled to take effect on Jan. 1, 2013.
One of the holdouts is an unassuming island chain south of Cuba. The Cayman Islands is renowned for its banking practices and sheer volume of banks. In fact, it is the fifth largest banking center in the world. HSBC, Deutsche Bank and Development Bank of Singapore are just a few of the international giants with sophisticated Caymanian operations. All of these banks have operations in the United States, and they have agreed to abide by FATCA even though the government of the Cayman Islands itself has not.
That leaves smaller Caymanian banks which do not have operations in the U.S. Some of these banks have been in operation for decades, are legitimate business enterprises with never a hint of scandal and don't trade publicly. Despite this, they yet appear to the uninitiated as less slick and polished than their larger counterparts. They include Caribbean Bank of Exports, Altajir Bank and various other "Licensed Category B" banks that make up the overwhelming bulk of Caymanian lending institutions.
If you're looking for the definitive list of Caymanian banks, it's easy enough to find at the Cayman Islands Money Authority's official website. It takes its role as defender against both money laundering and terrorism financing seriously. It's also the first resource for many Americans looking to avoid the wrath of the IRS.
The Bottom Line
In short, it's considerably more difficult now than it was even a couple of years ago for Americans to open and access an offshore bank account. At least without renouncing American citizenship. That there even exists a market for Americans to minimize their tax obligations overseas speaks to the intricacy and incomprehensibility of the Internal Revenue Code as it stands. Instead of Congress radically streamlining the tax code, we instead operate under a code where complexity is patched over with ever-greater levels of complexity. Until that stops, offshore banks will continue to have American customers.