I speak with Americans every day who want to diversify their investments and open an offshore brokerage account or offshore bank account. One of their biggest concerns is whether their offshore brokerage account is secure. What I want to say is you’re much more secure offshore than you are onshore. Here’s why:
The news in the U.S. is filled with stores of gross misconduct in the financial sector: big banks and brokerages paying monster fines, running ponzi or other kind of scam, and going bankrupt. One reason for this is that, contrary to popular belief, the U.S. is on of the most lax jurisdictions when it comes to bank and brokerage accounts.
Don’t believe me? Go in to any bank in America and try to open an account. You should be up and running in about 30 minutes. Try to do the same offshore and you will be lucky to be making your first transfer in 30 days.
Americans often buy the hype of bank insurance and brokerage coverage. Your domestic bank account is guaranteed for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC), which is a government agency. Your brokerage account is covered by a Wall Street company called the Securities Investor Protection Corporation (SIPC). This is a for profit business and not government guaranteed. Though, it was created by an act of Congress, so it has a similar charter and rating as Sallie and Fanny in real estate… and you know how well that went.
According to the SIPC website, they “Protect customers if their brokerage firm fails.” This is absolute hogwash and I will tell you why. Avoid this type of “protection” with an offshore brokerage as soon as possible.
The SIPC guarantees your original deposit only. Any interest or capital gains derived thereon are not covered. If you brokerage goes under, you may be making payments to the SIPC, and not the other way around.
Here’s how this scam works: let’s say you deposit $50,000 in 2000 in to your local brokerage firm. You account does relatively well over the years and, in 2014, you take your profits and go. Your gain is $100,000, so your total account balance at the time you close out is $150,000.
One and a half years later, the brokerage goes under. You think to yourself, “Thank God I got out in time!” You are in for a rude awakening. The SIPC will demand you pay back 100% of your profits, or $100,000. If you don’t pay, so the SIPC can distribute your cash to others who didn’t get out before the crash, you will be sued and a trustee will be looking to seize your home and any other assets he can get his hands on.
Adding insult to injury, this trustee will be billing the SIPC about $500 and hour and will likely run up a bill in the millions of dollars chasing down the assets of investors who exited within two years of the failure.
This is all to say that the U.S. SIPC treats you as if you were complicit in the fraud or scam that brought down the brokerage firm. They will demand you pay back any profits you took out up to two years before the crash. None of this is possible in an offshore brokerage.
So, if we take the same example as above, but you took out only $50,000 in 2014 and left the balance in the account, your $100,000 profit is gone. You won’t get sued and the SIPC won’t be looking to seize your assets, but you get zero profits.
What if you took cash out in 2013 and 2014, paid tax on it, and now the SIPC wants it back? Too bad for you. Pay them and attempt to get a refund from the IRS.
This is one of many reasons why I recommend an offshore brokerage account. You have no “insurance,” but you have a smaller probability of getting in with a scammer and no trustee coming after you assets once you exit the firm.
The SIPC’s purpose is to protect Wall Street, not to protect you or your profits. Every dollar the SIPC takes from you or your account increases the SIPC’s profit margin and reduces the amount Wall Street firms need to pay in to cover the failures. If and when the SIPC must choose between taking money from you or its member firms, you will lose every time.
Avoid the “protection” of Uncle Sam by moving your account to an offshore brokerage. This will also allow you to diversify out of the United States and out of the U.S. dollar.
If you would like more information on taking your account offshore, or on how to set up an offshore company to hold that account, please contact me at firstname.lastname@example.org. I will be happy to work with you to structure your international affairs in an efficient and tax compliant manner.