Are Offshore Accounts Used as Money Laundering Vehicles?

By: Amynutt

An offshore bank account is an account at a bank located outside the United States or other country of residence of the banking client. These bank accounts are known for having low tax liabilities, thus making them also commonly known as tax havens.

Offshore bank accounts also tend to provide financial and legal benefits. These benefits may include:

  • less controlling legal regulation
  • little to no taxation
  • greater secrecy
  • easy access to funds
  • protection against local financial or political instability

Popular Offshore Banking Destinations
The most infamous and popular offshore banking centers in the global market are;

  • Cayman Islands
  • Switzerland.

Other well-known established destinations for offshore banking include the following (in alphabetical order):

  • Bahamas, Barbados, Belize, Bermuda
  • British Virgin Islands
  • Cayman, Cyprus, Caicos Islands
  • Dominica
  • Gibraltar, Ghana
  • Hong Kong Labuan,
  • Liechtenstein, Luxembourg
  • Nauru
  • Malaysia, Malta, Macau, Mauritius, Monaco, Montserrat
  • Panama
  • Turkey
  • Seychelles, Switzerland

Bad Reputation Associated with Offshore Banking

Because of the seemingly lax regulation of monies deposited in offshore bank accounts, offshore banking has gotten something of a bad rap over the last few years. These types of bank accounts have often been associated with tax evasion, money laundering and organized crime. Offshore banking has been erroneously linked to shady business practices and underground economy.

Legally, however, this type of banking does not deem personal funds safe from being subject to income tax on earned interest. U.S. taxpayers are required to report (on penalty of perjury), any offshore bank accounts which may be in their possession. Offshore banking institutions are not obligated to declare any income to foreign tax authorities (A.K.A. the IRS) because they are protected by bank secrecy. This lack of regulation toward reporting suspected tax evaders does not make not reporting the income (or evading income tax associated with it) legal.

On the Other Hand

Proponents of offshore banking have condemned any efforts towards supervision and control. They claim the process is driven, not by safety and financial issues, but by the aspiration of local banks and the IRS to control the funds stored in offshore bank accounts. They refer to the alleged fact that offshore banking offers a competitive threat to the established banking and taxation systems in countries such as the U.S.

Tightening of Regulations With Offshore Banking

Those hoping to find easy tax havens and money laundering shelters in offshore accounts will find that the old rules no longer apply. The regulation of offshore banking is improving in many ways.

  • The regulation of these elusive banking institutions is increasingly monitored by supranational nongovernmental organizations such as the International Monetary Fund.
  • Offshore banks are required to report at least quarterly on many different aspects of their business. The increased focus on anti-money laundering initiatives in several different countries signifies that bank employees at all levels are encouraged to report suspicion of money laundering to the local authorities despite bank secrecy. Additionally, there is increased cooperation between police authorities across international borders.

Conclusion of Offshore Banking

Though offshore banking has traditionally been notorious for money laundering, tax evasion and for being a tool for organized crime, increased regulation is making those stigmas a thing of the past. There are many advantages of offshore banking, most of which are legal and perfectly honorable. The desire of local banks to control all funds originated in the U.S. and 'get a piece of the pie' does not immediately translate to dishonest money laundering schemes.

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