It is all over the news. How could it not be? Considered the biggest scandal in financial history, The Pandora Papers is a leak of private financial information which includes 6.4 million documents, almost three million images, more than a million emails, and almost half a million spreadsheets. The files expose how some of the most powerful people in the world - including more than 330 politicians from 90 countries - use secret offshore companies to hide their wealth.
The Rules of Thumb blog from MoneyThumb likes to keep our readers informed and educated on major occurrences in the financial space. This post will help explain more about offshore bank accounts and how to avoid getting in trouble like those in the Pandora Papers have.
There's nothing illegal about having an offshore bank account --in fact, there are several advantages--but hiding money anywhere to avoid paying taxes on it is illegal. It is called tax evasion. Typically, tax evasion schemes involve an individual or corporation misrepresenting their income or hiding money to avoid paying taxes on it.
There are a lot of private lenders and wealthy people who have offshore bank accounts. In fact, it is strongly suggested as a way to save money and build wealth. However, the tax laws must be followed, no matter where you put your money.
For our blog readers who want to become more educated about offshore bank accounts, read this article from Investopedia. Below are major takeaways from that article:
- Using the services of a bank outside of your home country is not illegal if it is done for legitimate reasons.
- Some foreign banks will start an account from a foreign customer with as little as $300 while others will not do business at all with foreign customers because of compliance requirements.
- Offshore bank accounts must be declared to the holder's home country for tax reasons; however, some countries allow foreigners to earn capital gains tax-free.
- Individuals may choose to keep their money offshore if there is instability in their own country, and they fear losing their investments.
How Offshore Banking Works
First, let’s nix misleading terms such as “stash,” “hide,” or even “offshore bank account.” Using the services of a bank outside of your home country is not illegal. And although the term “offshore” literally applies in some cases—a bank account in the Bahamas, for example—doing business in Canada could be just a drive away.
The practice is not just for the wealthy. Some foreign banks will take as little as $300 of your money and start an account. Like banks everywhere, those overseas set their own account minimums and other terms for customers.
On the other hand, some foreign banks will not do business with some foreign clients because of the required compliance. The Organization for Economic Cooperation and Development (OECD) and the World Trade Organization (WTO) have rules that require banks to report information on their foreign customers. Each country complies with these laws differently. Some countries don’t comply at all.
There’s nothing illegal about establishing an offshore account unless you do it with the intent of tax evasion. The Foreign Account Tax Compliance Act (FATCA) requires banks around the world to report balances and any activity of American citizens to the IRS or face fines.
Some U.S. firms that hold foreign money claim to use a team of lawyers to make sure they are reporting their foreign activity to their home country accurately and legally. Inevitably, there will be people who use the system to profit illegally. The U.N. Office on Drugs and Crimes estimates that the proceeds from illicit funds and money laundering totaled more than $2 trillion globally and $300 billion in 2010 (latest data as of 2018), which is 2% of the overall U.S. economy.
In summary, holding money in an offshore bank account is not illegal, and it is also not tax-exempt. As long as you have legitimate business reasons, you can invest in “secret” bank accounts—although it will not really be secret at all.