Is depositing money in an offshore account very wise?

In the United States, all income earned outside the country is taxable. In Canada, there are limits on non-taxable offshore earnings. However in an atmosphere of increasing predatory litigation and increasing infringement on privacy, the real concern is not just taxation but how can one safely protect what one has built up over a lifetime. The concept of having an offshore bank account is very tempting. But are you really protected by the laws of that country or are you just putting yourself in a position of new vulnerability? Those are real concerns.

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages to the depositor. Although most offshore banks are located in island nations, the term is used figuratively to refer to such banks regardless of location, including Swiss banks and those of other landlocked nations such as Luxembourg and Andorra.

The main purpose of people depositing their money in offshore bank accounts is to avoid paying taxes on their deposits. Generally, only rich people and criminal organizations make such deposits. The rich do it to avoid paying taxes on their money and the criminals do it to launder their money for other ventures.

Except for certain persons who meet fairly complex requirements, the personal income tax of many countries makes no distinction between interest earned in local banks and those earned abroad. Persons subject to US income tax, for example, are required to declare on penalty of perjury, any offshore bank accounts—which may or may not be numbered bank accounts—they may have. Offshore banks may decide not to report income to other tax authorities, and have no legal obligation to do so as they are protected by bank secrecy.

Defenders of offshore banking have criticized these attempts at regulation. They claim the process is prompted, not by security and financial concerns, but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that ‘Organization for Economic Co-operation and Development’ countries are trying to stamp out competition.

It is true that tax agencies want to have access to money earned in their country but to suggest that home banks are trying to stamp put competition is utter nonsense.

UBS is one of the worlds leading financial firms. It is a diversified global financial services company, with its main headquarters in Basel and Zürich, Switzerland. It is the world's largest manager of private wealth assets, in other words, the world's biggest manager of other people's money. It is also the second-largest bank in Europe, by both market capitalization and profitability. UBS has a major presence in the United States, with its American headquarters located in New York City. The NY branch deals with investment banking.

On the 22nd of June 2008, the US Federal Bureau of Investigation made a formal request to travel to Switzerland to probe a multi-million-dollar tax evasion case involving UBS. The New York Times reported that the case could involve some 20,000 U.S. citizens who were depositing their money in UBS to avoid paying American taxes on their deposits.

On February 21, 2009, UBS AG warned that it could go out of business if it complied with an order to reveal the names of thousands of suspected U.S. tax dodgers with secret offshore accounts at the Swiss bank. In papers filed in federal court in Miami, attorneys for UBS said a U. S. government lawsuit filed on February 19th could force it to violate Swiss criminal law by turning over information protected by Swiss financial privacy laws. Such a violation would expose UBS employees in Switzerland to substantial prison terms as well as fines, penalties and other sanctions. Their lawyers said that compliance with demands made in the suit filed on behalf of the U.S. Internal Revenue Service would also require UBS to violate Swiss law. The suit came just a day after UBS agreed to pay US$789-million and identify some of its clients in a deal to resolve U. S. criminal fraud charges that it helped wealthy Americans evade taxes.

I can appreciate why the US government is going ahead with this lawsuit. On 17 July 2008, the United States Senate disclosed that the U.S. loses as much as $100 billion in tax revenues annually due to offshore tax evasion. The Senate report accused Swiss bank UBS AG and Liechtenstein's LGT Group for allegedly marketing tax-evasion strategies to wealthy Americans. American clients hold about 19,000 accounts at UBS, with an estimated $18 billion to $20 billion in assets in Switzerland, according to the findings from the Senate probe and Justice Department prosecutors.

On that same day, UBS had announced that it would cease providing cross-border private banking services to US-domiciled clients through its non-US regulated units. In January, 2009, Raoul Weil, a senior executive with UBS, was charged with conspiring to hide $20 billion in assets from the IRS using secret overseas accounts for thousands of wealthy customers. He was formally declared a fugitive after failing to surrender to U.S. authorities on charges of conspiring to help wealthy Americans hide assets to avoid paying taxes on their offshore deposits.

On 18 February 2009, UBS agreed to pay a fine of $780 million to the U.S. Government and entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service. In an unprecedented move, UBS, based on an order by the Swiss Financial Markets Supervisory Authority, had then agreed to immediately provide the United States government with the identities of, and account information for, certain United States customers of UBS’s cross-border business.

The next day, the U.S. government filed suit against UBS to reveal the names of all 52,000 American customers, alleging that the bank and these customers conspired to defraud the IRS and federal government of legitimately owed tax revenue. If UBS does not comply with the approved summons, it could be in default of its deferred prosecution agreement, potentially opening itself and its senior executives to criminal charges. The Swiss People's Party called for retaliation against the United States, and for an urgent debate in Parliament on ways to protect Swiss banking secrecy from the American’s ‘foreign blackmail’.

On April 2, 2009, Steven Michael Rubinstein, 55, of Boca Raton, Florida, a yacht company accountant, became the first U.S. citizen arrested for tax evasion, allegedly hiding assets from tax collectors, via offshore deposits in UBS in Switzerland. Rubinstein deposited more than $2 million in Kruggerrand gold coins into his UBS accounts and bought securities worth more than 4.5 million Swiss Francs. Further, he met with UBS bankers in several locations around South Florida from 2001 through 2008 for that purpose.

Switzerland, Austria and Luxembourg subsequently offered to relax strict bank secrecy in some tax evasion cases on March 13, 2009 in a response to a global crackdown on tax havens that is rattling the offshore banking industry. The decision will permit the exchange of information with other countries in individual cases where a specific and justified request has been made. Unfortunately, that decision has no bearing on offshore accounts in island nations.

With increasing insecurity and taxes, tax havens such as depositing your money in an offshore bank may be a temptation. The problem is the landscape is constantly changing. Making the wrong move can expose you to severe monetary penalties or at worst, the loss of physical liberty and/or all your assets.

The S.E.C. (the Security and Exchange Commission) has used the terrorist threat as a strong arm tactic to gain access to the information on offshore accounts in virtually all jurisdictions. In essence, with electronic banking and excessive tracking, there is no such thing as banking privacy anymore. All the SEC has to do is compare declared offshore earnings with the information in those accounts to charge American investors with tax evasion. The only way to get around that is for the investors to hand-deliver the money directly to the offshore banks. That can be very risky of course. Who wants to carry half a million dollars around with them in cash when traveling to another part of the world to make a deposit?

In some jurisdictions, if you or your company is domiciled but not actually living in that country, 100% of what you earn outside the country can be considered tax-free, notwithstanding the fact that you may have to pay a small annual business fee. This by definition is a tax haven.

Typically a tax free haven is offered by countries that have little or no means of exporting goods and services to offset the imbalance they would otherwise have in terms of their overall currency exchange. They benefit because of the cash flow in, whereas the tax avoider benefits in that what he or she earn offshore is tax free. The United States and Canada play a similar game – they make it very difficult for residents to move money out by discouraging offshore investment but at the same time, they make it very lucrative for foreign investors to move money in.

What really riles me is that a number of companies that operate in Canada transfer their monetary assets to offshore bank accounts so that they don’t have to pay Canadian taxes. They get all the benefits of doing business in Canada without paying for it in their taxes. To accomplish this, they rent an office in the other country and call it its head office so that the money can appear to be legitimately placed in the offshore bank account of its head office.

Most individuals looking for asset protection or privacy generally do not open offshore accounts in their personal names. Wire transfers, credit card transactions and checks will identify them as the person holding this asset. Forming a corporation and opening a corporate bank account on the other hand, will give them more privacy and more options for transacting their business. For instance, wire transfers carry the company name and credit card transactions go through the system in the company name. Typically the company's bank accounts are the only places the owner and the corporate relationship meet, that is if the owner chooses to be the signer of the accounts. For this reason, the banking and other financial institutions they choose to deal with will be a far more important decision and privacy concern than the jurisdiction of their company's incorporation.

The way to get around this tax avoidance scam is for the government of Canada to pass a law that states that where the majority of the employees of the firm work is where the head office is located.

An offshore corporation can conduct any type of business in Canada that a Canadian corporation chooses. It sacrifices nothing by having complete privacy and a corporate veil with real teeth in it. As an example; if the company is incorporated in the Bahamas but its factory is in Canada and it becomes involved in a lawsuit originating in Canada, the Bahamian Supreme Court will not recognize any Canadian judgments against the company that is incorporated in its jurisdiction.

A plaintiff would have to hire a Bahamian attorney (there are no contingency fees in the Bahamas) and try to convince the Bahamian Court to hear the case. Historically, the Bahamian Courts will not rule in favor of a plaintiff if it can be shown that the assets were moved before the judgment was filed. Once the plaintiff sees the uphill battle involved plus the enormous cost out of his/her own pocket, he/she may either reevaluate the merits of filing a lawsuit or settle for a fraction of the settlement he/she may have received in a Canadian Court.

More and more doctors, professional business people and small businesses are going offshore to lower their liability insurance coverage. This alone can be a savings of tens of thousands of dollars each year in premiums. Small businesses also go offshore to reduce or eliminate provincial or federal income (franchise) taxes and to give them other alternatives to insurance coverage that have become too expensive to carry.

With respect to doctors doing this, the way to stop them is to yank their professional licences if they don’t settle the judgments.

When you bank in the U.S., or Canada, you can be secure in the knowledge that your money is insured by the government. No such guarantees exist with offshore banks. In other words, a country could have a coup or a natural disaster or an accounting scandal one day and all the money could be gone the next. Furthermore, you could find yourself scammed; it does happen. Remember, this is a business built on skirting the law, so you won’t always deal with the most honest people.

Five people who never got much past a high school education somehow managed to pass themselves off as sophisticated financial experts and defraud thousands of investors out of more than US$170 million through an offshore bank in Grenada.

Four of them were sent to federal prison after they promised interest rates as high as 300 per cent through their First International Bank of Grenada, claiming that deposits were safe and sound, backed by the international equivalent of the Federal Deposit Insurance Corporation.

Every day some sucker gets off his or her cruise liner at some offshore centre, walks over to the nearest offshore service provider and says "I want a trust and a secret bank account." and then hands them the money. And, about once a month, a publication such as Offshore Alert or a scam site somewhere will run a story about how an offshore service provider disappeared with their clients' money.

Don’t ever trust your money to anybody but yourself, or a well-regulated bank or trust company. And don’t try to hide your money from the American IRS or Revenue Canada. Life is too short for the grief of worrying about this. Structure your affairs so that you can disclaim the money when creditors come knocking, but if you really own it, report it to the IRS or Revenue Canada and pay your taxes on it (there are a variety of ways that you can legally declare it to the IRS while at the same time inoculating it from creditors, such as by forming an offshore limited partnership) and then keep it in a respected and regulated offshore bank or trust company.

You might want to consider depositing your money in the West Mississippi Bank. If you float down the Mississippi, you will find the bank if you look to your right.