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Home Banking Banking How International Banking Works

How International Banking Works

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You've probably heard of offshorebank accounts and Swiss bank accounts. You may have­ heard there’s great wealth to be found in these foreign bank investments. But what's really so special about these esoteric banking opportunities?

An international bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies outlining with whom they do business.

According to OCRA Worldwide -- an organization that matches people and companies to international banking -- international banks tend to offer their services to companies and to fairly wealthy individuals, i.e., people with $100,000 and counting . But plenty of international banks, particularly Swiss banks, open their doors to customers of any income bracket .

Companies do business with international banks to help facilitate international business, the complexities of which can be quite costly.

Individuals work with international banks for a number of reasons, including tax avoidance, probably the term you've heard the most in relation to offshore banking. Tax avoidance isn't necessarily illegal, as you will learn on the pages that follow. But there are plenty of other hazards in international banking.


Reasons to Bank Internationally

There’s a wealth of reasons for individuals and companies to bank internationally. Many people around the world use international banks to shelter their money from their home country's income andestate taxes. Hosts of banks are based in countries with low or no income and estate taxes, such as the Cayman Islands, Belize, Panama and the Isle of Man. But you can't just put your income in Belize and not pay taxes. Customers must report their income and work with their bank to make sure tax avoidance doesn't turn into tax evasion.

Some individuals use international banks to invest in the economies of booming countries and in developing countries, the same way they might invest in a domestic corporation or real estate venture.

A number of wealthy individuals keep their wealth in offshore banks and other entities to keep it safe from lawsuits. That doesn't mean these people are criminals; they simply want to avoid losing every penny to a sudden, unexpected or predatory lawsuit.

Since international banks lend and borrow on international markets, they’re less affected by domesticinterest rate fluctuations. For example, when Mr. and Mrs. Platinum want to avoid sinking interest rates in their own country, one thing they might do is move their money into an international bank.

Also, some foreign banks might offer better interest rates than domestic banks, providing a money-making opportunity for customers.

International banks also make it easier for a company with an international presence to do business around the world.

For one, the company doesn't have to set up a million different bank accounts around the world, then wait to receive money while the banks deal with one another.

In addition, international banks offer many financial services to facilitate international trade. Besides offering payroll services for companies with employees and contractors in other countries, they offer letters of credit to ensure that companies in different countries pay one another for goods and services. They also offer financing services to support businesses facing the large costs of importing and exporting products.

The process of establishing an account at a reputable international bank will probably include the following:

  • The bank will confirm your identity and the identities of anyone who has an ownership interest in your money.
  • Like a good father, the bank will ask you about your intentions. Why do you need an international bank account? What does your business do?
  • The bank will inquire about the origin of your deposits, especially very large ones. Where'd you get that $756 million, son? Hopefully not from that big heist in downtown Rome.
  • The bank will ask for references. Are you a reputable individual or company?
  • The bank will analyze how risky a customer you would be. Can you or your company pay back loans?

Next we'll take a look at the hazards of international banking.


Hazards of International Banking

There are some hazards in international banking:

Is the bank in a country on the verge of civil war or economic collapse? Is the bank in a country notorious for its corruption? Keep your money away from fire.

Is the bank known for efficiency and smart investments or for poorcustomer service and federal bailouts? Again, do your homework.

Just as domestic currency can change value, so can foreign currency. If you invest your money in a foreign bank, and then the value of the foreign currency plummets, you lose money. Furthermore, if you make a bunch of money through an international investment, your profit may be greatly reduced when you convert the money to your less-than-booming home currency.

To address this issue, many international banks encourage account-holders to keep their money in interest-bearing accounts and other investments. Customers can use the money they earn on such accounts to conduct business abroad. When the currency exchange rate improves, the customer can bring some money home to the Missus or Mister.

The Federal Deposit Insurance Corporation (FDIC) does not insure foreign banks, though it can insure U.S. divisions of foreign-based banks. If you're planning on banking internationally, inquire about depositor insurance provided by the bank's home government or other entity.

Because of rising international concern about money laundering, terrorism and tax evasion, many international banks will keep an eye on your account activity. If you're moving massive amounts of money around quickly, you will raise a red flag. Criminals and terrorists love to launder money through international banks, passing their questionable funds through foreign accounts, many of them anonymously held, until the legal trail is lost.

Tax evaders often use international banks to set up companies and trusts whose sole purpose is to hide money and erase its relationship to the owner. If a tax collector, such as the Internal Revenue Service, can't prove you own the money, it can't collect taxes on it. If these companies and trusts aren’t legitimate money-making entities, you’re participating in an abusive tax shelter (by U.S. law, at least). The IRS charges very stiff penalties for participating in abusive shelters. In the settlement offered by the IRS in the Son of Boss abusive tax shelter, participants paid penalties of as much as 20 percent of their unpaid tax on top of their outstanding tax liability.

Be careful with the offshore banks you do business with -- don't be collateral damage in the wars against tax evasion, money laundering and terrorism.


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