Myth of the Offshore Bank Account in 2014

Myth of the Offshore Bank Account in 2014

05/13/2014 - 1:02 PM
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Offshore Bank Account

The offshore industry in general, and the offshore bank account niche in particular, is covered in myth and wrapped in an enigma. Do you want to open an offshore bank account? No problem. Are offshore bank accounts safe? Probably more so than your account in the good ole U. S. of A.

In this article, I will take a look at the common misconceptions about opening an offshore bank account and the offshore banking industry in general.

Offshore bank account myth 1: Foreign banks are smaller than those blessed by Uncle Sam

The number one reason I hear as to why people don’t diversify out of the U.S. is a fear of the non-US banks. The uninitiated believe that banks in America are big, safe, and the best in the world…and they couldn’t be more wrong. This is a myth that we grow up with and one we are indoctrinated in to right along with the U.S. is the greatest nation in the world and a beacon of freedom.

I’ll leave politics to other pontificators, but the U.S. banking system is far from the best in the world. No matter what matrix you use to determine “best,” the U.S. is nowhere to be found.

Most believe that bigger is better. If your bank is 0big…has more assets under management…it must be safe! While I believe the opposite to be true, let’s take a look at the largest banks in the world as of February 2014 as determined by Banker’s Almanac.

The top bank in the world today is Industrial and Commercial Bank of China with $2.815 trillion in assets. The second spot goes to Germany’s Deutsche Bank with $2.655 trillion followed by France’s BNP Paribas and $2.474 trillion.

Note that not one U.S. bank makes it to the top ten. J.P. Morgan Chase comes in 12th for the U.S. at $1.945 trillion in assets. The next appearance on the list is Bank of America in 18th, followed by Wells Fargo in 20th and Citibank at 21…and that’s it for the top 50 banks of the world. Yes, the United States has only 4 banks in the top 50! For the complete list, see Accuity.com.

  • Looking for the largest banks offshore? The Cayman Islands has 1.9 trillion United States dollars on deposit in 281 banks, including 40 of the world’s top 50 banks. For a detailed article, please read my Cayman Islands Banking Guide.

Don’t get me wrong. I don’t believe bigger is better. I think it leads to mediocrity and poor service. More importantly, I would never have an offshore bank account at an institution with a branch in the United States.

Offshore bank account myth 2: Foreign banks are higher risk that U.S. banks

Don’t buy in to the myth that an offshore bank account is higher risk than a U.S. bank account. While it is true that most offshore bank accounts don’t include insurance equivalent to FDIC, they also don’t come with the risk of U.S. accounts.

For example, 65 banks in the United States, with $55 billion in assets, went under and were taken over by FDIC in 2008 through 2010. For a complete list since 2000, see the FDIC site.

During this same time, only 3 banks in offshore jurisdictions have closed and, of those depositors, 90% of them received 100% of their cash.

Of these failures, the most dramatic was Stanford Bank in Antigua (1990 to 2009). As you may recall, Alan Stanford was a Texas financial advisor and used car salesman who ran a $7 billion dollar Ponzi scheme from Antigua, primarily marketed to United States investors. I note that this scam passed U.S. auditors for over a decade and was a black eye to the offshore bank account industry.

The Stanford bank scam is instructive for those wanting to open an offshore bank account and a lesson in banking regulations. For example, Stanford had a bank licensed in Panama which got caught up in the mess. A number of my friends and associates held funds at this institution. Regulators froze the assets of this bank and kept them frozen for about one year. When the dust settled, every depositor received their money…not a single dollar was lost.

This is a testament to the security offered by Panama and their banking regulations. In the United States, the investments management / brokerage firm (which was regulated by the SEC and a number of other agencies) “lost” $7 billion. In Panama, $0 was missing.

Author’s Note: I am not considering European or Russian offshore centers, such as Cyprus, and I did not research fringe jurisdictions like Ghana. I often write from my personal experience, which means my focus is on the Caribbean, Belize and Panama as being “offshore.”

Offshore bank account myth 3: International banks offer fewer investments

In my experience, those who open an offshore bank account fall in to two categories: those who want to invest in something specific, such as real estate, and those who just want to get some of their portfolio out of the United States and U.S. dollar.

For those who open an offshore bank account to invest in real estate, or just to start their life overseas, a small bank with no minimum account size is usually the best option. One reason for this is that real estate investors rarely keep significant cash in their offshore bank account.

Those who want to get their money out of the U.S. are usually looking for more from their offshore bank account. They require managed investment services, the ability hold gold or precious metals, to diversify in to other currencies and generally more investment options.

Conversations with this group usually begin with the feeling that offshore bank accounts do not offer as many investment options as US accounts. This couldn’t be further from the truth. Offshore accounts offer far more diversified investment options that US bank accounts.

First, offshore bank accounts allow you to hold money in any number of currencies. This diversification is a form of investment…as currencies fluctuate vs the US dollar, you stand to profit. Holding cash in a multi-currency account also allows you to keep a hedge against investments denominated in other currencies.

Second, offshore banks typically have relationships with offshore brokerage firms. In these cases, you can swap cash between your brokers and bank efficiently and invest in just about any stock or bond in the world. That’s right, offshore brokerages give you access to thousands of stocks or funds not available in the United States.

Are you considering utilizing an investment manager for your offshore bank account? There are a number of qualified firms in Belize, Cayman Islands, Panama, and elsewhere that will be happy to work at your direction.

In my experience, offshore bank accounts offer better access to world markets and don’t try to lock in in to their in-house products…because they usually don’t have any in-house products. While a US broker like Fidelity will push you in to their most profitable funds, and entice you with low transition fees to get you in to a poor investment, offshore banks make money on the transaction, not the investment. In other words, they offer unbiased advice and access to a diverse universe of funds.

An offshore bank will typically offer a range of expertly managed portfolios to suit different risk attitudes.

  • Exchange traded funds (ETFs)
  • Expertly managed fund portfolios
  • Structured notes
  • Structured deposits
  • Longer-term investment options

Offshore bank account fact: Banks outside of the U.S. are more expensive than those onshore

If you are thinking about opening an offshore bank account or an offshore brokerage account, you should know upfront that it will be more 0expensive than your U.S. account. Because of new IRS reporting requirements for banks worldwide, many have been forced to spend big on staff and technology to get into compliance. These expenses are being passed on to American clients in the form of account opening fees (up to $500) and higher monthly fees (as much as $30).

Next, your typical transactional costs for an offshore bank account will be about double of what you will find in the United States and wire transfers will be about 30% higher. If you also want an offshore brokerage account, expect to pay twice as much as online services such as e-trade or professional services like Interactive Brokers.

Remember that offshore bank accounts are not making money on your investment, they are only profiting from the related transactional costs. As a result, your fees will be higher and your returns should also be greater.

Many clients get sticker shock when they first look in to opening an offshore bank account. After that passes, if you can arrange your transactions to minimize wires, or your investments are “buy and hold” rather than high volume day trading, an offshore bank account or brokerage account should still be cost effective.

I hope you find this information helpful. Feel free to contact us at info@premieroffshore.com or (619) 550-2743. We always offer a free and confidential consultation and will be happy to review your offshore bank account options in detail.

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