Offshore Banking

The best first step you can take to internationalizing your life (one that we strongly recommend you make a plan to take as soon as possible, if you haven’t done so already) is to open an offshore bank account.

It’s a simple, straightforward recommendation. However, if you haven’t attempted it before, the idea can be intimidating. How? Where? Why?

Furthermore, the reality is that, simple idea as this is, opening a bank account in another country can sometimes be easier said than done. Especially if you’re an American.

First, we need to make a distinction. There are two kinds of bank accounts you could consider opening offshore.

Fortunately, some banks fall in between a high-end private bank and a local bank—meaning you can combine the advantages of private banking with the practical benefits of an operating account.

Beginning with the enactment of the Patriot Act after 9/11, the United States government has been waging a war on the surface against terrorists and organized criminals, but the effect of these actions has impacted hundreds of thousands of law abiding U.S. Citizens who simply want to protect their wealth. Anti-money laundering laws, expanded currency FBAR reporting, Sarbanes Oxley, high profile Department of Justice bank prosecutions in Switzerland, the enactment and implementation of FATCA (Foreign Account Tax Compliance Act) and the newest “de-risking” campaign have all been designed to intimidate foreign banks and U.S. customers alike.

Whether these laws and regulations have accomplished their intended effect to curb funding of organized crime and terrorism finance can be debated, but, the more apparent or dramatic consequence (intended or unintended) has been to significantly curb the use of offshore financial centers (especially banks) by U.S. citizens. The foreign banks are simply closing their doors more and more to U.S. customers because of the enhanced regulatory burdens of dealing with U.S. persons. The U.S. customer is likewise discouraged from maintaining foreign bank accounts because of the growing reports and hurdles associated with those accounts. These reports include disclosing the accounts on Schedule B of IRS Form 1040; the expanded nature of the FBAR (Foreign Bank Account Report) which now includes not only bank account information, but also brokerage accounts, cash value in insurance policies, hedge funds, and mutual funds; Form 8938 disclosure of foreign financial assets, as well as separate reporting requirements for ownership of foreign companies, trusts, and other foreign structures. While not outright bans on holding assets abroad, the cumulative impact has been to bring about de facto capital and exchange controls. Several large U.S. banks have already eliminated outbound wire transfers for all of their customers except their top net worth individuals and corporate accounts.

The latest step in the process is the new “de-risking” campaign by the United States Department of the Treasury. Unlike other steps toward discouraging the use of offshore financial centers, the “de-risking” campaign is neither law nor regulation, nor is it codified anywhere. It is a nebulous concept that the Treasury has developed to put pressure on U.S. private sector banks forcing them, in turn, to cut off bank to bank “correspondent” services to foreign banks, with or without any reason to do so. In one case a foreign bank with a thirty-four year business relationship with Bank of America was summarily cut off without any reason being given. Other foreign banks had their correspondent relationships cancelled and were told by their U.S. banks they were not permitted to disclose why the relationship was being terminated, nor would they meet with their foreign banks counterparts. Clearly, the U.S. Treasury was directly or indirectly responsible for the freeze and shutdown of these financial institutions, potentially in violation of international law.

The foreign banks have no appeals process in being cut off nor can they challenge the actions by the U.S. banks as it is solely private sector, commercial decisions being made. In some cases the correspondent relationship can be re-established if certain customers or certain transactions are eliminated. In other cases, the correspondent relationship is permanently cut off, putting the foreign bank in a situation where they can neither send, nor receive international payments. Many banks as well as entire Sovereign Nations in the Caribbean and Central America have been seriously affected by the current “de-risking” campaign that is bringing economies to their knees, making import/export transactions impossible, and cutting off bank depositors from their money.

One noted economist referred to the current “de-risking” campaign as a form of economic warfare being waged by the U.S. against smaller countries it seeks to dominate and control. U.S. persons with funds in those countries’ banks are caught in the crosshairs and have little recourse but to simply wait to access their money.

This is certainly an effective tool for the United States to force jurisdictions as well as particular banks to conduct or restrain from whatever banking business the States chooses by executive branch fiat to allow. The question is whether it will have long term success trying to control all global financial transactions in dollars or whether it will ultimately cause more and more jurisdictions, banks, and even individual customers to abandon the dollar in favor of other currencies over which the States cannot impose its financial will. To me it brings to mind Princess Leia’s famous quote to the Empire in the original Star Wars when she says “The more you tighten your grip… the more star systems will slip through your fingers.”

Already the Russians have announced they plan to launch an alternative to the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system through which most global transactions pass. The Chinese launched their own system called CIPS (China International Payment System) in 2015 in conjunction with the Asia Infrastructure Investment Bank (AIIB), which is also controlled by the Chinese, and it greatly seeks to eliminate the dominance of the United States and the U.S. dollar in the global payment system. It should be noted that pro U.S. western countries, such as the UK and Australia, have already signed up to join the AIIB and the CIPS systems. Those who are not U.S. allies will certainly turn sooner than later to these alternate payment systems which do not employ the U.S. dollar as the system’s base currency.

Finally, the Chinese are also supporting the initiative of the BRIC countries (Brazil, Russia, India, and China) through its development bank called the New Development Bank “NDB” to provide alternatives to the U.S. controlled dollar payment system. These initiatives will only grow as the Unites States seeks to unilaterally and perhaps arbitrarily control the dollar payment systems. These alternate payment systems also received a boost when the States imposed economic sanctions on Iran which still had plenty of oil to sell and buyers all over the world willing to pay for it with currencies other than the dollar.

One Central American Government Minister commented recently that commerce will continue regardless of United States action to strangle it. In fact, as the States uses its financial might to shut down banks and all banking transactions, including legal financial transactions in these jurisdictions, it arguably gives more power to criminal and terrorist elements which already operate largely outside of the current financial system and are largely unaffected by those restrictions. Clearly the U.S. actions are creating more enemies than friends in geographic areas that have historically been pro United States.

How this will ultimately end, of course, nobody knows. Yet as the United States drives more and more jurisdictions, banks, and customers away from using the dollar, it cannot have a beneficial long-term impact on the value of the U.S. dollar. The States is controlling the current “supply” of dollars through the U.S. Federal Reserve system, but as banks and other jurisdictions look for alternative currencies and payment systems in which to operate, ultimately the “demand” for U.S. dollars around the world will decrease affecting its overall value.

In the meantime, loud sirens should be going off for anyone concerned about protecting their wealth. Having a nest egg offshore is no longer enough. Individuals need to have a greater portion of their wealth diversified outside of the dollar, outside of the States, and in the future outside any international payment system controlled directly or indirectly by the United States, the U.S. Treasury, and the U.S. Internal Revenue Service.

Recently another bank has reminded us why we’ve long recommended having at least two bank accounts for every company you set up, as well as two person accounts. Banking overseas in today’s world, you need two of everything.

This year, the U.S. bank for one of Lief Simon’s companies unilaterally and without notice closed his account. They said, when he called to ask why his account balance had been zeroed out, that they had sent letters to inform him of the plan to close the account. He checked with the person who receives his U.S. mail, and no such letters could be found.

Meanwhile, the bank was sending a check for the balance in the account. While he does have alternative accounts for this company outside the United States, that’s not a hassle-free solution. It can take up to six weeks for a U.S. check deposited into an overseas account to clear.

What he needed was a second U.S. account for that company. He quickly put one in process. Better late than never.

The point for you is to act on this advice now, before you find yourself in a similar situation to Lief. Between the Patriot Act, FATCA, and other evolving banking regulations, U.S. banks are ever-warier of foreign entities, and it is harder all the time for any foreign entity, as a result, to hold a U.S. bank account.

When his account was closed, he called several U.S. banks to ask if they would open an account for a foreign corporation. The range of responses he got was interesting and telling.

The branch manager of a national bank with offices in more than a dozen states told him, after excusing himself to speak with his operations manager, that the corporation had to be registered in the state where the branch was located. We don’t believe that to be the case, according to the regulations. Still, that was his answer and the reason his bank wouldn’t open an account for Lief’s non-U.S. corporation.

Next he called a main branch of a money center bank in New York. At least the guy he got this time knew enough to transfer him to a business account manager. Unfortunately, that person wasn’t much more help than the guy at the previous bank. She suggested that he set up a U.S. corporation under his foreign corporation. That way the bank could comply with all the appropriate regulations for money laundering.

The bottom line is that banks are making up their own rules. They don’t want small or even medium-sized customers who create regulatory administration for them. So they come up with reasons to deny opening the account.

After FATCA was signed, it became harder and harder for an American to open a bank account overseas. We’d say that has been changing in recent months, as FATCA rules have been promulgated to foreign banks. Banks have had to decide whether to comply with FATCA rules for institutions with American clients, to comply by agreeing not to allow American clients, or to choose not to comply, in which case their clients are subject to a 30% withholding hit when sending wire transfers. Those decisions now made, the dust seems to be settling.

What we’re talking about now is something else, to do not with individual American account-holders, but non-U.S. corporate accounts. Now Americans and the rest of the world, too, are facing a harder time opening accounts in the States for their non-U.S. companies.

With the help of a personal introduction from a friend, Lief was able to identify another bank that would open an account for his non-U.S. corporation. However, they told him up front they don’t know how long he’ll be able to have the account, as the internal regulations of the bank could change at any time.

Once his account is open, he’ll need to start looking for his next bank.