Offshore Bank Accounts

Offshore Bank Accounts

When someone mentions “offshore bank accounts” chances are that you probably think about crooked politicians, tax dodgers, money laundering syndicates, and maniacal James Bond villains.

The truth is, like many financial instruments, offshore bank accounts are simply financial tools that individuals can use to further their financial stability.
Offshore accounts can prove useful for expatriates, especially those that tend to move often or spend time in multiple countries.

In fact, I would say that an offshore bank account is probably the single most important tool in any expatriates financial toolbox.

Perhaps, you find yourself asking why you open an offshore bank account?
Surprisingly the main benefits of an offshore account are not really to avoid taxes. Expatriates in tax free jurisdictions, such as parts of the Middle East, can happily bank onshore without any tax demands on their hard earned cash. So why would you want to move your money offshore then?

For me, the core reason would have to be stability.

Stability

If you are a Brit, living and working in the UK with plans to retire in the UK then the prospect of how the British pound performs against other currencies is fairly academic to you.
However, if you are a Brit living in South East Asia, earning in Filipino pesos, with a UK mortgage in British pounds, and an outstanding personal loan in Emirati dirhams, then the movements of the international currency markets can make or lose you hundreds or thousands of dollars in any given week.

As an international expat, you most likely have financial assets and liabilities in at least two countries and currencies. Your income will typically be in the currency of your adopted country and you will usually require a local bank account to deal with living expenses in the country.
Assuming that your salary is paid into your local (onshore) bank account in the local currency, this puts all of your income and savings under the jurisdiction of that countries financial regulation.

For the most part this shouldn’t pose a problem, but you are putting all of your eggs into one proverbial basket and concentrating your currency and international risk which is the core issue here.

Local Banking Regulations

If you live in one of the Gulf states, such as the UAE or Qatar, your bank account is tied very closely with your employment status.
If you have an outstanding loan, or credit card, or other debt obligation, and happen to lose your job the local banks can (and do) freeze any money in your account up to the value of any obligations you have, in addition to freezing all lines of credit. If the value of your current account is below the value of your outstanding obligations then you can anticipate a freeze on the full amount of your account.
The reasons for this are clear, the banks act to cover themselves against default by expatriates that no longer have a job in the country. The number of expats that flee with debts, speak for themselves, and make the position taken by the banks quite understandable.

However, if the single, onshore, account that has been frozen is your only bank account then you would find yourself entirely penniless and unable to buy a bowl of rice, nevermind making payments on health insurance premiums, or mortgage payments on your house back in your home country, rental payments in your resident country, etc.
This essentially means losing your job could lead to you and losing your house, being homeless, without healthcare, etc.

Quite frightening.

This alone should convince you of the importance of holding a volume of funds offshore, under a different jurisdiction to that of your resident country.

Currency and Capital Controls

But what if you don’t live in one of the Gulf states?
What if you live somewhere in East Asia?

Well, then an offshore bank account is all the more valuable…

The main Gulf states have fixed currency exchange rates with the United States Dollar which are defended by highly solvent and capitalised national banks. This gives a large amount of protection in regards to currency fluctuations.
The same is not true for many of the East Asian nations.

When international investors start to lose confidence in a nations economy it is often followed in quick succession with the outflow of capital from the country in a “flight to safety”.
The outflow of currency puts a large amount of downward pressure on the currency exchange of that currency.

Which leads others to flock to move money out of the currency before the rate drops any lower.
Which leads to more downward pressure on the currency exchange rate.
Which leads to…

Very quickly, a small decrease in the confidence in a nation’s economy can become a self fulfilling prophecy.

This is not some hypothetical scenario.
We need look back less than 20 years to the Asian Financial Crisis of 1997 to see a scenario in which having all of your assets in local Asian banks would have been utterly ruinous.

With confidence in the local markets entirely shot, capital began to flow out of the Asian nations at unprecidented levels.
The national banks of the affected countries defended their currency pegs to the USD until they ran out of foreign exchange reserves, and were forced to float the currencies.
This lead to drastic currency devaluations.
Anyone holding assets in the local Asian currencies instantly saw their savings cut in half.

USD THB 1996-1998

USD THB 1996-1998

In May 1997 ฿2,500,000 of savings in a Thai bank would get you $100,000 USD.
Less than a year later, that same ฿2,500,000 was worth less than $45,000 USD.

A 65% haircut on any locally held assets is terrible enough, but at least you are still able to remit money back home to pay your mortgage in your home country, or other debt obligations overseas.

The thing is, with the currency in freefall, everyone (including local nationals) is trying to move money out of the country to avoid the increasing currency collapse. Which, as mentioned above, further drives down the currency and continues this deadly sprial.
At this point, severely embattled countries can be forced to implement “Capital Controls” to legally prevent the exchange of local currency.
At which point, you are no longer able to move your money offshore, no longer to make mortgage payments to your home country, no longer able to meet any foreign country debt payments, etc.

Again, you find yourself at risk of losing your home and any other foreign currency assets that you hold finance on.

This isn’t isolated just to East Asia.
The Swiss Central Bank recently abandoned the peg to the Euro and hit Swiss savers in Euros with an effective 30% haircut.

But more relevantly is the current state of affairs in Russia with the Western sanctions and low oil price hammering the local economy and capital outflows at record levels.

Many speculate that capital controls are on the horizon for the Russian Ruble.
Venezuela and Argentina are both currently wrangling with capital controls to some degree, and have limits on capital outflow.

Parking Money Offshore

The above issues alone should be enough to stress the importance of moving your money to a “Safe Haven” currency before the wheel starts to come off of the economy you reside in.

Traditional “Reserve Currencies” include the US Dollar, British Pound, and more recently the Euro.

Personally, I prefer to put most of my assets in USD not least because it is the primary world reserve currency with over $14Trillion in USD denominated government debt, $10Trillion of which is privately owned, with almost half of that held by international governments.
Theoretically at least, the fact that many international governments hold substantial volumes of USD denominated debts mean that the devaluation of the USD would be counter to their own financial interests.

China and Japan each hold over $1tn in US Governemnt debt.
Russia currently holds over $100bn.
Full breakdown by country

This gives the USD an unrivaled stance on the international stage.

Many UK and International banks offer offshore Banking in USD, EUR, and GBP, in locations such as the Channel Islands, or the Isle of Mann, offering tax free jurisdictions whislt still covered by UK banking regulation.

These include Lloyds and HSBC

From my experience, Lloyds seem to offer an account with one of the lowest minimum balance requirements ($3,500 at time of writing) but HSBC have a larger international network and cater more to expatriates that are HNWI.

Whoever you decide to bank with, I hope this article has made clear the importance of keeping 2-3 months expenses offshore in a stable currency, in order to remain financially solvent regardless of the twists and turns of the international economy.

The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent professional advice for your own particular situation.

6 Comments

  1. world-offshore.com

    13th March 2015 9:15 am, Reply

    Hi,
    Regarding your post, offshore bank account opening is a complicated process.
    First, you need to submit your profile to the offshore bank. After that follow all banking introductions procedures. If you want to get a benefit from a full range of services: multicurrency account, online banking (Internet Banking), provision of means of payment in international concern (Visa, Mastercard) etc. The best way is to use an adequate consultant help.

    • Dan Clarke

      16th March 2015 2:59 am, Reply

      Opening a personal offshore bank account with one of the UK high-street banks is really not that difficult.

      I would say that 90% of people can do it without any external consultancy.

  2. Neobavesten

    18th March 2015 11:42 am, Reply

    Hi Dan,

    Many thanks for this useful info. I am also in the UAE for the last 5 years and am looking for a way to open an offshore account with Lloyds. I have also followed your article for investing in index funds through Saxo bank and believe that having offshore USD account is definitely a good move.

    When you are talking about offshore account with Lloyds, do you think it would be better to have current or saving account. I believe savings account would be a better option since UAE expats can not get their salaries deposited to UK offshore accounts. Also their minimum balance is $5,000 according to:
    http://international.lloydsbank.com/international-savings/

    Do you have any other info about this? Did you manage to contact their UAE representative about this? I would appreciate if you could share your experience.

    Many thanks!

  3. Almost caught

    21st September 2015 7:57 am, Reply

    Dan,

    Very wise advice indeed. Your comments about UAE are reflected in Singapore – where I recently changed international employers.

    Through a breakdown in internal communications, my former employers agent notified the Ministry of Manpower to cancel my Employment Pass as I had supposedly already left the country.

    MOM notified the Internal Revenue Authority of Singapore (IRAS) who seized my last months entire pay, froze my bank account and placed a departure freeze on my passport – all in the name of allegedly unpaid taxes.

    It took 6 weeks to resolve it all and if I hadn’t had money parked overseas, I would have been evicted from my apartment and probably starved to death.

    Best regards…

    • Dan Clarke

      21st September 2015 8:22 am, Reply

      Wow that’s an incredible story!

      I spend a lot of time in Singapore these days, maybe we should catch up for a beer.

      Dan

  4. Rudy SMT

    10th June 2016 1:57 pm, Reply

    Great article Dan.

    However, I disagree with your bank choice “Lloyds” for expatriate. So old fashion and not flexible.

    Was it bankrupt some years ago and the government had to bail it out?

    The choice for the serious expatriate is HSBC and UOB.

    One more things; stay away from any institutions in Channel Islands and the Isle of Man, especially insurance.

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