What is an Offshore Bank Account?

What is an Offshore Bank Account?

An offshore bank account is a depository account maintained at a bank outside the United States. Offshore bank accounts are viewed by many as an exotic tool for privacy and tax avoidance—and only for the very wealthy. But an offshore bank account can actually be a useful tool for asset protection planning for people with even moderate wealth.

Some people with creditor concerns have significant amounts of cash held in banks or financial institutions. Bank accounts are an important focus of asset protection planning. A creditor that obtains a money judgment hopes to satisfy the judgment quickly, and seizing the judgment debtor’s liquid cash held in bank accounts is usually the first target. Garnishment is the collection tool available to creditors to seize a debtor’s bank accounts.

Understanding Offshore Bank Accounts

In prior years, a U.S. citizen easily could open an offshore bank almost anywhere in the world. Swiss banks were popular because they kept confidential the names of their U.S. customers. Judgment debtors used offshore banks in asset protection countries to hide and defend money from U.S. civil judgments.

However, since 9/11, the United States government has made it more difficult for U.S. citizens to open a foreign bank account. Swiss bank accounts are no longer confidential and do not generally accept U.S. customers. Foreign countries now cooperate with the IRS to stop U.S. citizens from using foreign financial accounts to evade U.S. taxation. A U.S. citizen can no longer easily open a personal account at a foreign bank in any country.

However, some foreign banks in countries known for asset protection still allow U.S. individuals to open bank accounts. These banks will typically hire a third-party service, such as KROLL, to conduct a background check on the potential customer to make sure there is no criminal or negative banking history. The banks will seek to minimize risk during the onboarding process.

Offshore Bank Account Requirements

For most financial institutions, the requirements for opening an offshore bank account include:

• A copy of your passport.
• An up-to-date picture.
• Proof of address, such as a utility bill, phone bill, credit card statement, tax bill, or lease agreement.
• For U.S. citizens, a W9 form.
• For non-U.S. citizens, a W-8BEN form.

There are more requirements for business bank accounts, which include:

• Certificate of incorporation (or equivalent, depending on the type of company).
• Certificate of good standing from the jurisdiction in which the entity was formed.
• Documentation showing evidence of ownership or control of the business.
• Copies of passports for all people who own or control the business.
• A company resolution stating the names of people authorized to sign for or control the company.
• A W-8BEN-E form.

Garnishment of Offshore Bank Accounts

In a typical bank account garnishment, a creditor starts a garnishment by serving a writ of garnishment on the debtor’s bank, causing the bank to freeze the debtor’s accounts. The debtor then has an opportunity either to claim that the money in the account is exempt from process or to challenge garnishment procedures.

A court will order the bank to pay the money in the account to the creditor up to the amount of the judgment unless the court finds that the debtor’s money is protected from garnishment.

However, several Florida cases have held that a Florida court may issue a writ of garnishment only against banks located within the court’s geographical jurisdiction. Even U.S. banks located outside of Florida, with no branches in Florida, are not subject to writs of garnishment issued by a Florida court.

No Florida court has ever permitted a writ of garnishment of a foreign bank without branches anywhere in the United States. Offshore bank accounts provide asset protection because the banks have no branches within the United States subject to any U.S. state or federal court jurisdiction.

To garnish a debtor’s foreign financial account, a creditor would have to first domesticate the U.S. judgment in the foreign country where the account was opened. Then, the creditor would have to hire a foreign attorney to enforce the newly domesticated judgment against the debtor’s foreign bank account. The process is possible if and when the United States has an agreement with a foreign country regarding the reciprocity of judgments, but even then, the process is costly and complicated.

Many countries have no agreements with the U.S. regarding judgment reciprocity. These countries refuse to recognize U.S. judgments. These so-called asset protection countries are popular for offshore bank accounts. A creditor cannot use its U.S. judgment to garnish bank accounts in these asset protection countries.

Instead, the judgment creditor must start a new lawsuit in foreign courts under the country’s own laws and procedures to get a new judgment. Then the creditor with the new foreign judgment would have to find equitable remedies to prevent further movement of the money.

Five Reasons to Open an Offshore Bank Account

For most people, there are five reasons to open an offshore bank account:

1. Asset protection

Offshore banks are not subject to U.S. state court jurisdiction. In other words, a court cannot enter a garnishment order against a bank situated outside the United States.

Moving funds to an offshore bank provides substantial leverage in settlement negotiations. A creditor would need to decide whether it is worth the risk of substantial legal fees and time in pursuing funds deposited at an offshore bank account.

2. Ability to finance litigation

People under threat of litigation from a federal agency, such as the DOJ, FTC, or SEC, can consider storing funds at an offshore bank to ensure their availability. One of the most powerful tools that a Federal agency wields is the ability to freeze the U.S. financial accounts of the defendant before the lawsuit begins.

Most offshore accounts would not be subject to an asset freeze entered by a U.S. court, allowing the defendant to still finance a legal defense.

3. Currency diversification

With very few exceptions, depository accounts at U.S. banks can only hold U.S. dollars. Offshore bank accounts, on the other hand, can often hold currencies of any type, allowing the depositor to diversify their cash holdings.

Often the offshore banks will offer higher interest rates on deposits than domestic banks as well.

Offshore Bank Accounts Through Offshore Companies

In addition to a personal bank account, a U.S. citizen can indirectly deposit money in an offshore bank account through a foreign entity.

The individual first establishes an offshore legal entity such as a trust, LLC, or corporation. He appoints a non-U.S. citizen as an authorized agent of the entity, such as a trustee, LLC manager, or corporate officer. Then, the offshore entity opens a bank account in the entity’s name.

It may be easier for the offshore entity to open an account because its agent is not a U.S. citizen. The U.S. citizen can access the money by requesting the entity’s foreign agent to transfer money from the offshore account to the U.S. citizen’s domestic bank.

Offshore Bank Account vs. Offshore Trust

Everything else being equal, assets in an offshore bank account owned by a foreign LLC or trust are generally more protected than they would be if the account were instead owned by the individual directly.

However, to obtain that added protection, the individual open must give up the direct control over the funds they would enjoy through direct ownership of the offshore account. Plus, an offshore LLC or trust is significantly more expensive to set up and maintain.

How to Open an Offshore Bank Account

To open an offshore bank account, a person should:

1. Locate a bank in a jurisdiction that opens accounts for U.S. individuals.
2. Review the jurisdiction’s laws to determine if they would thwart collection from a U.S. judgment creditor.
3. Determine the bank’s fee structure to make sure it is economical to open an account at the bank.
4. Assess comfort level with the bank’s accessibility, including online banking, wiring, and EFT procedures.
5. Complete the bank’s application, including all of the bank’s due diligence requirements.
6. Once approved, transfer funds to the offshore account using one of the bank’s approved methods.

FAQs about Offshore Bank Accounts

Below are answers to some frequently asked questions about offshore bank accounts.

Last updated on May 24, 2022