How To Open and Access an Offshore Bank Account

Having an offshore account simply means you're banking with a financial institution that's not in the country where you live. Anyone 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 specific requirements relevant to your situation. The following is an overview of what you can expect if you decide to open an offshore bank account.

What Is Offshore Banking?

People who bank offshore do so in a part of the world outside their country. As such, the term offshore banking is generally used to describe international banks, companies, and investments. Some places have become well-known providers of offshore banking including Switzerland, Bermuda, or the Cayman Islands. But offshore banking is available in many other countries as well.

Anyone can open an offshore banking account. In fact, you're banking "offshore" if you're an American who has a bank account in Canada.

Offshore banking is often discussed in a negative way because many people use it to hide their money and avoid paying taxes. Others use it for illicit purposes like money laundering and tax evasion. While these activities are criminal and can result in prosecution, jail time, or heavy fines, offshore banking itself isn't illegal.

You may also choose to use offshore banking in a country that has favorable tax treatment. Some parts of the world allow you to invest your money while earning income on that money tax-free.

Be aware that if you are a U.S. citizen, you must declare offshore accounts to the Internal Revenue Service (IRS). It requires that Americans file the IRS FBAR form and report any money exceeding $10,000 in the aggregate that is held in foreign accounts. There is a foreign-earned income tax exclusion for the money you earn abroad, but the rest is taxable.

The Basic Requirements

The basics of opening an offshore bank account are similar to opening a bank account in your home country. Offshore banks require your personal information, such as your name, date of birth, address, citizenship, and occupation.

• Personal information: Be prepared to submit a copy of your passport, driver's license, or other identifying documents issued by a governmental agency.
• Residence or physical address: This may affect taxation, and confirming where you live often can be accomplished by presenting a utility bill or a similar document.
• Notarization or apostille stamp: Regardless of what type of document you provide, banks will need to make sure it is authentic. A notarized copy of certain documents may suffice in some cases. But other offshore centers prefer an apostille stamp—a special type of certification mark that's used internationally. If this is the case, you will need to visit the government office that is authorized to issue this stamp for your state or nation.

Additional Verification Documents

There are often considerable additional requirements to open an account with an offshore bank. These requirements are designed to discourage money laundering, tax fraud, or other illegal activities often associated with offshore banking.

• Financial reference: You may need to provide documents from your current bank, indicating average balances and a satisfactory relationship. This is commonly satisfied by bank statements for the last six to 12 months.
• Nature of transactions: Banks want to know how you plan to use the account. This may seem 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 funds you are depositing in the bank. For instance, a wage slip from your employer will likely suffice if you're using the account to make deposits from your employer. To verify your investment income, an offshore bank may ask for information about your investments and where they are held.
• Business or real estate: If you plan to use the account for business purposes, you may need to provide sales contracts or other relevant documents. If you deposit 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

Unlike domestic accounts, offshore bank accounts offer the option of the currency in which you wish to hold your funds. This can be a highly valuable feature of an offshore account, especially if one's domestic currency is unstable or expected to depreciate.

While that may be an attractive feature, it's 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 tax liability.

Depositing to an Offshore Bank Account

Offshore bank accounts are most often funded electronically through international wire transfers. However, 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 process, but almost all banks charge international wire transfer fees to send or receive funds. Pricing for wire transfers varies between banks, so be sure to look for deals. 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.

Making Withdrawals

Offshore banks offer a variety of ways to withdraw funds to maximize the convenience of using their services. Many offshore banks issue a debit card that allows you to easily access your funds worldwide. Make sure you're aware of the fees for using the card because they can add up. 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 because checks drawn on foreign accounts aren't always accepted locally.

The best option may be to use two accounts—one offshore and 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 them, offshore accounts are relatively simple to open. Typically, all it requires that you fill out paperwork, supply basic identifying documents, and provide additional information to show that you aren't planning to use the account for illegal activity.

Choosing the best currency and optimizing deposits and withdrawals are slightly more complicated, but optimal choices become clearer as you study the options. When using offshore bank accounts and receiving international wire transfers, consider consulting with a tax professional to ensure you are following all the tax regulations at home and abroad.