In the ninth of a ten part series into the world of finance, Mark Johnson explains why offshore banks exist, and whether or not they might be of any use for you.
What is offshore banking?
It may sound glamorous, mysterious even, but offshore banking is basically another type of banking service offered by regular financial institutions in a particular location outside of the country you live in, but with some uniquely attractive features.
Of course there was a time when offshore banking was really the preserve of the well-heeled and affluent - and occasionally the odd rogue or two - but these days, pretty much anyone from anywhere can open and run a bank account in an offshore location.
Indeed, they are particularly popular with expats living and working abroad, who often need to hold their cash in multiple currencies.
What's the attraction?
As usual, it's all about tax. One of the main pull factors for those seeking offshore facilities is that they are usually seen as tax havens.
So investors who have their money sitting in offshore accounts can usually guarantee they won't have to pay taxes on their investments, savings and other financial accounts.
However, offshore banking locations also offer attractive life assurance, trust, funds, investments and many other financial products, including credit cards, insurance products and mortgages.
Another major attraction is anonymity. Offshore accounts are usually held not in your name, but in a unique account number, and this is often attractive to wealthy investors, for reasons of security.
Of course, this can leave the system exposed to the possibility of abuse from criminals and the prospect of money laundering.
However, most of the world's offshore centres now co-operate with leading regulators and the Bank for International Settlements (BIS) to ensure such occurrences are outlawed.
Suitable for expats?
Offshore banking is seen as particularly useful for expats because they tend to offer a range of hassle-free products and services which have been designed with expats in mind.
Having an offshore account often makes the transition to a new country less onerous, because your bank account and financial arrangements are already in place.
Of course many it can often mean that it takes an extra day or so for your salary to reach your offshore account, but most see this as an acceptable price to pay for all the benefits offered by offshore banking.
Moreover, with the advent of the Internet and telephone banking, offshore banking has become even more attractive as it allows people living and working abroad easy access to all their banking and investment needs, so they can manage their accounts, transfers and investments 24 hours a day.
In fact, given the global nature of offshore banking, it has now become standard practice among most banks to allow customers to manage all their banking transactions via the internet.
Where are these offshore banks located?
No surprise then that the number of "offshore" banking centres around the world is growing.
However, the main offshore locations include places such as the Isle of Man, Jersey, in the Channel Islands, Luxembourg, Grand Cayman in the Caribbean, even Switzerland, all of which have a long history of providing offshore services.
Don't be fooled into thinking it has to be an island to offer offshore banking facilities: Switzerland and Luxembourg are amongst the most popular destinations for those keen to open an offshore account.
Does the Gulf have offshore centres?
Bahrain has been an offshore location for years and has attracted many big businesses to its financial hub, which offers a range of offshore banking services.
It also has many banks that provide banking and asset management facilities to individuals. Moreover, Dubai, which, as we all know, has little or no tax system, is increasingly keen to be seen as an "on-shore" offshore centre for investors.
The opening up of the stock market to foreigners and the recent launch of the Dubai International Financial Centre (DIFC) - which will also allow foreigners to invest in the region - is set to attract even more investors from around the world.
Who offers offshore banking here?
Increasingly, the big names of the global banking scene are offering offshore banking facilities to customers around the world. Companies such as Citibank and HSBC and Standard Chartered Bank have offshore banking offices in Dubai.
Is it expensive?
Offshore banking services invariably do come with fees and charges attached - it is a business after all. However, those who use offshore banking facilities often find that the costs of offshore services work out to be less than those of traditional banks in the long run.
This is especially true for expats, who often have to shoulder the burden of heavy fees associated with transferring cash from their ordinary foreign accounts to the current accounts in their home country, in order to maintain payments on mortgages and family costs.
If you're planning on opening an offshore account, you should make sure you fully understand all the charges associated with it, and ask for clarification on anything that may not be fully explained.
How do I know which services are good for me?
Institutions specialising in offshore banking services also offer useful advisory services such as investment advice and information on tax benefits.
Most have specialist teams of advisers who can offer a wide range of investment advice on such matters as stock market investing, property and pension plans.
It's also possible to arrange for regular financial reviews of your finances, where you can get the latest insights into how to exploit possible tax benefits not only while you're abroad, but also prior to moving away and upon returning home.
Are offshore banks any more risky than regular ones?
Well, of course, wherever you decide to base your money, or how you decide to invest, it always comes with its attendant risks, and offshore banking is no different.
You would be well advised to stick to well-known banking names and avoid institutions and companies that cannot provide proper guarantees or safeguards, and it's always worth checking with a regulator in your home country before placing any of your cash oversees.
However, many of the facilities offered by offshore banks are often more comprehensive than those you'll find in the high street from your local bank.
© 7Days 2005
