What is an Offshore Bank Account?

If the term "offshore bank account" conjures up images of fugitive billionaires and organized crime bosses, be prepared for a reality check. Generally speaking, any bank account opened outside of one's native country can be considered an offshore bank account. There is usually not much difference in service or benefits between the bank on the corner and a bank located in the Cayman Islands. The appeal is much more apparent during tax time, when assets and income must be reported to the IRS or other government revenue agencies abroad.

Because the banking industry is perhaps 10% storage and 90% accounting, many smaller countries can offer offshore bank account services without a substantial investment of their own. Island nations such as the Cayman Islands or the Channel Islands can successfully compete with Switzerland or Belgium for offshore banking customers. Local laws can limit or eliminate the taxes placed on traditional bank accounts. This is why some companies and wealthier individuals prefer to open a bank account in small sovereign states that allow account holders to remain virtually anonymous.

For many years, an offshore bank account was indeed a convenient way to hide profits from illegal activities or underreported business earnings. The United States' Internal Revenue Service (IRS) would have little knowledge of money deposited elsewhere. The offshore banks were not obligated to report the existence of these accounts, and the account holders could legally pay little to no taxes to the host country. In recent years, however, the rules governing offshore banking have become much stiffer. Any bank account containing over $1,000 US Dollars (USD) must be reported as income to the IRS, no matter where that bank account is.

Many people consider opening an offshore bank account for very legitimate financial reasons. Residents of a politically or economically unstable country may arrange for an account in a more stable country. If the government should collapse financially, residents can still protect their money from a run on the national bank. Those who travel frequently to Europe or Asia may benefit from having an account in England or Japan. The exchange rate between foreign currencies is often more favorable with "local" accounts. With the advent of electronic banking, the holder of an offshore bank account can often easily conduct routine transactions without traveling abroad.

There is still a stigma attached to an offshore bank account because of some gray-area financial dealings, but there is nothing illegal or unethical about opening one for legitimate reasons. Some foreign banks may require a substantial initial deposit or other restrictions, but the benefits of a lower tax obligation or higher interest rate usually outweigh these hurdles. Most accounts are protected by international banking insurers. Many foreign banks that offer such account services advertise on the Internet and in investment-oriented periodicals.