Offshore bank accounts have created substantial buzz in the financial world due to the IRS's recent probe into tax evasion by US MasterCard and American Express credit card holders. In one of the largest offshore investigations ever by the IRS, thousands of credit card accounts were investigated for unreported income in banks in the Cayman Islands, Antigua, and Switzerland. An affidavit filed in conjuction with the investigation says the U.S. Treasury loses an estimated $70 billion yearly from individual taxpayers who use offshore accounts to evade taxes.
This news dispels the images of offshore bank accounts as untouchable and completely secretive piggy banks. "I thought you could just go over, open an account, and start saving for when you're wanted in 49 states," said third year Bruce Schlomer. "I guess the IRS is more 'Big Brother' than I thought."
Over the years, a long list of corrupt dictators have emerged as big customers of offshore banks. These include Congo's Mobuto Sese Seko, Philippine President Ferdinand Marcos, and Haiti's Jean-Claude "Baby Doc" Duvalier.
In September, the Swiss government reported that they had frozen the accounts in 19 different banks containing a hidden $660 million of Nigerian dictator Sani Abacha's fortune. The Swiss government broke ground when they actually named which banks Abacha was using.
The offshore banking firms of some countries have earned a global reputation for providing sophisticated and discreet banking services. There are over 400 banks in the small country of Switzerland, ranging from the "Two Biggies" down to smaller banks serving the needs of a few special clients. The "Two Biggies," Credit Suisse and UBS, have extensive branch networks both throughout Switzerland and in many international centers.
Because of these highly respected discreet policies, offshore banks have long been a place where people across the world could hide money from the government for purposes of tax evasion or simply to hide ill gotten gains such as drug money.
Especially after September's IRS crackdown on crooked offshore banking practices, offshore banks around the globe are trying to fight this reputation of being financial centers of corruption.
Last week, UBS and Credit Suisse announced that they have joined 10 other of the world's largest banks in agreeing to a set of anti-money laundering rules for international private banks. These guidelines were developed by Transparency International (TI), a global anti-corruption organization. TI has stated that it is anticipated that these guidelines will be widely accepted in the future. The Cayman Islands have even agreed to completely end their "tax-haven" practices within 5 years.
Despite the tax-evasion turmoil, offshore banks still offer attractive benefits to United States citizens. Apart from the secrecy, the banks of Switzerland offer extreme stability. The Swiss have always had a reputation as being stable. "Switzerland is a rugged, mountainous country, next to impossible to invade. Even the Nazis let it be," said Economics Prof. Robert Wright.
Wright went on to say that Switzerland has a well constructed federal government, which affords the banks the rare safety of being free from "political risk" to some extent.
Switzerland's currency, the Franc, is also another attractive element. "Thanks to its staunchly independent central bank the Swiss have next to no inflation, low interest rates, and low unemployment. The Swiss Franc is one of the world's most stable currencies," said Wright.
Transition
"The act of opening an account in another country is not illegal," says IRS Tax Education Specialist Lauren Johnson, "As long as it is reported to the IRS." According to Johnson, the IRS has agreements with other countries for reciprocal reporting, meaning that if you are a US citizen, your offshore bank will notify the IRS of your account. "As a US citizen you will have to report your money to the IRS whether it's in Paris or Charlottesville," said Johnson.
Before WWII, Jews seeking to hide their money from the threat of Nazi oppression would trek across the mountains to Switzerland. They would smuggle the money inside their shoes in hopes of not getting caught before they made it to Zurich. Today, getting an offshore account isn't quite as difficult as it used to be. Logging on to a bank's web site and sending an email is usually all that is necessary to start the process.
Not all banks are interested however. Due to years of abuse, some banks restrict their services from being used by Americans. Credit Suisse won't even let surfers use their site once they are identified as US citizens.
The reputation and purpose of offshore accounts continues to evolve. The communication revolution and globalization of business may lead to Bank of Antigua ATM's on grounds in the future. For now it looks like dictators and drug dealers will just have to find a big mattress.
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