Offshore banking is a thing you hear don’t hear about in normal, everyday, real life. It’s for news stories about tax-evaders who got caught. It’s for this season’s plot of of How to Get Away With Murder.
But the practice of storing your cash in a bank account outside your home country’s borders is far more widespread than its use specifically for criminal activity.
Some people choose offshore accounts for privacy, or to make international transactions easier. Others choose it to ensure economic or political stability.
You? Maybe you’re not concerned about any of those things. And we’re going to assume you’re not trying to evade your taxes. But you’ve watched enough action movies to know that this is knowledge you might want to have handy someday.
When you bank offshore, you still owe the government
Offshore accounts are often considered tax havens. If your home government doesn’t know about your money, they can’t tax it, right? Wrong, my aspiring sneaky friend.
Holding your money in an offshore account is legal. Hiding it is very much illegal.
Depending on your amount held overseas and your place of residence, you may have to submit a Statement of Foreign Financial Assets or the equivalent in your country. For example, if you live in the U.S. and your offshore assets are valued at more than $US75,000 ($109,250) (for an individual) or more than $US150,000 ($218,500) (for a joint return) at any point during the year, you need to file an FBAR.
That’s not all! If your foreign account balances add up to more than $US10,000 ($14,567) at any point during the year, you have to complete separate filing on top of your taxes. That form, the Report of Foreign Bank and Financial Accounts (FBAR) gets filed through a separate electronic filing system and is due by June 30 each year.
If you don’t file all the necessary paperwork with your government, there could be serious consequences. In the U.S., for example:
If you must file Form 8938 and do not do so, you may be subject to penalties: a $US10,000 ($14,567) failure to file penalty, an additional penalty of up to $US50,000 ($72,833) for continued failure to file after IRS notification, and a 40 per cent penalty on an understatement of tax attributable to non-disclosed assets.
For the FBAR, you’re looking at a maximum penalty of $US12,921 ($18,822) for failing to disclose transactions if you did so unwillingly, and 50% of the undisclosed amount (at least $US129,210 ($188,216)) if you withheld that information willingly.
There used to be a voluntary disclosure program for people who became aware they needed to have filed reports for their offshore accounts. Between 2009 and 2018, more than 56,000 taxpayers voluntarily disclosed their offshore accounts and paid $US11.1 ($16) billion in back taxes, interest and penalties, according to CNBC. The IRS closed its voluntary disclosure program in September 2018.
So, how do you even open an offshore account?
Opening an offshore account is complex, but not difficult. Popular spots include Belize, Switzerland, the Cayman Islands, and Singapore, according to the blog The Expat Money Show. Hot spots for offshore accounts usually have low tax liability, a lot of ease and privacy around banking practices, and do business in English.
You should be prepared with the following items, according to Investopedia:
Driver’s licence or passport
Proof of residency
Authenticity documents to prove your identification, in some cases
Bank statements to prove you’re financially established
Documentation about the source of funds for your offshore account (pay stubs, investment statements)
Choice of currency
You’ll probably fund your offshore account through wire transfers, but depending on your bank, you may be able to use a debit card to withdraw money.
Once you’re all set up, all you have to worry about is doing all your tax forms! Everyone loves forms.
Back to the crime, though
A couple of high-profile cases have dominated the offshore banking and money laundering landscape lately, so let’s do a quick overview of those situations.
In 2017, 13.4 million documents leaked relating to offshore banking in what’s called the Paradise Papers scandal. A great deal of the leaked documents related to Appleby, a law firm based in Bermuda which set up complex corporate structures in small tropical islands (paradise, get it?). Many large, multinational companies (think Nike, Facebook and Apple) were implicated by the documents, as were major celebrities and politicians. For example, millions from Queen Elizabeth’s private estate were found to be invested in a Cayman Islands fund.
As I noted previously, having an offshore account doesn’t necessarily mean someone is up to trouble. But the Paradise papers pointed a finger at some notable people who were already up to no good, adding to a very bad overall look. The Paradise Papers reveal was the world’s second biggest data leak, according to The Guardian.
The biggest? The Panama Papers. The documents in that leak came from a law firm in Panama called Mossack Fonesca, whose clients laundered money and dodged taxes via shell companies. The leak implicated 12 current or former heads of state, more than 60 relatives and associates of those leaders, and even FIFA. So far, more than $US1.2 ($2) billion in back taxes has been collected from involved parties around the world.
Before you open an offshore bank account, it's important that you do your research and know your local laws.