Is Offshore Banking Legal? Illegal Operations, Fraud, Tax Evasion

People often ask a question: is offshore banking legal or illegal? Answer is quite simple: it is legal; nobody will come and arrest you for having offshore bank account, or for being a shareholder of an offshore company, or for making an offshore investment. It is absolutely legal service provided by a licensed financial institution that licensed in full compliance with the legislation of a tax haven.

So why do people think that offshore banking is illegal? Why does the question “is offshore banking legal” at all appears. Most probably because offshore banking provides bank secrecy that is essential element of offshore services and it creates a fertile ground for evading taxes. To answer this question in detail let us imagine the following situation: Mr. White receives income generated from foreign sources. Imagine that his home country taxes foreign-generated income, but Mr. White chooses not to report his foreign income and pay taxes. So he uses his offshore bank account that is protected by the bank secrecy principle to keep illegal cash.

Mr. White is protected against any legal charges for his actions, since the home country’s tax authorities can not access his account, because by offshore legislation banks can only give access to Mr. White’s offshore bank account based on appropriate order from tax haven’s local court that in practice is extremely difficult to acquire. This mechanism makes money laundering and tax evading practices difficult to discover and trace. That is why offshore banking is often associated with money laundering, tax evasion and terrorism financing.

For the reason of clarity it important to note that absolute majority of offshore banking centers does not penalize for evading taxes due to a simple reason that there are no taxes at all and you can not evade them. All incomes domestic and foreign are exempt from any taxes at tax havens. Where you can get penalized for such actions is your own country, if you evade paying taxes.

Offshore banking services are extremely widespread nowadays. According to the research done by the World Bank above 50% of world population’s personal incomes that is around US$50 trillion is heterogeneously distributed among 60 offshore banking centers all over the globe. Out of this $50 trillion about 30% is accumulated in Swiss banks and the remaining is kept in Hong Kong, Cayman Islands, Isle of Man, Jersey, Guernsey, Panama, Bermuda, Bahrain and in many others. Besides offshore banking centers offer investment opportunities that are unavailable in the United States, such as several thousand publicly traded securities that are not available in US.