Offshore banking is often associated with a high level of financial sophistication and, sometimes, chicanery. However, the reality is that the average person can open an offshore bank account with just a few hours of work. 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
While the basics are similar, there are often considerable additional requirements to open the account. 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 the source of the funds you are depositing in the bank.
If the money is from your job, 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 an inheritance, the bank 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 funds in. This can be a highly valuable feature of an offshore account, especially if one's domestic currency is unstable or expected to depreciate.
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 it can also result in foreign tax liability. Also, 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 (see 6 Factors That Influence Exchange Rates.)
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 depositing funds in person on a regular basis is impractical.
Withdrawing from an Offshore Bank Account
Offshore banks offer a variety of ways to withdraw funds 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 they 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– primarily, because confidentiality is often desired in offshore accounts. Problems may also arise since checks drawn on foreign accounts are not always accepted locally.
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 providing the convenience of local banking services.
The Bottom Line
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 choices should become clearer as you study the various options. When using offshore bank accounts and receiving international wire transfers, it is important to consult with a tax professional to ensure you are following all the tax regulations at home and abroad.