What Are the 'Legitimate Reasons' to Have an Offshore Bank Account?

The leak of the so-called Panama Papers was big news, but the main takeaway from the stories circulating about offshore accounts and shell companies is what you always suspected is true: Rich people play by different rules than plebs, stashing their cash in hidden accounts, often to avoid paying taxes like the rest of us.

For most of us, the idea of putting money in an account in a bank located in some out-of-the-way island country is intrinsically shady, but as many news stories have taken pains to point out, not all offshoring is evil. An FAQ from the International Consortium of Investigative Journalists even says outright, "There are legitimate reasons to create a company in an offshore jurisdiction, and many people declare them to their tax authorities when that is required."

But what are those "legitimate reasons"? Is there any reason to create an offshore company that's not, "I'd like to not pay taxes, please, thank you"? Seeking answers, I called up Clinton Wallace, an international tax law expert at New York University. He told me that if someone's using a foreign bank, that doesn't mean he or she is automatically a piece of garbage. He divided the reasons one might have one into the categories "nefarious" and "practical." For instance, he pointed to the Foreign Account Tax Compliance Act (FATCA), which was implemented in 2010 and requires storefront banks to report customers from the US who use them.

"One of the effects [of FATCA] is that it makes it more expensive for foreign banks to have US customers," he told me. "So many of those banks aren't interested in setting up a checking account for US employees working there, because it's created some hurdles for them." In essence, that means your friend from college who moved to Panama to "find herself" after graduation–– but also needed a checking account there to buy drinks served inside of coconuts and pay rent––is an example of someone not-sketchy who might have an offshore account.

There's one other reason that is "practical" but not necessarily illegal, like hiding money anonymously so that if you get sued in civil court, no one can take it from you. You might argue that if you're anticipating doing something that gets you sued you're involved in something on morally shaky ground, but some sites that specialize in offshore banking market their services to physicians, the logic being that they are often subject to frivolous malpractice claims. And in fact, a Harvard study from 2006 found that 40 percent of malpractice suits are groundless.

J.F. Morrow, an expert banking trial witness whose former clients including Bank of America and Fannie Mae, told me that you can report your offshore account to the IRS while having it shielded from suits if there isn't a reciprocal relationship between your home country and whatever country you're banking in. In other words, you can pay taxes on the account without danger of having it seized by the US, as long as American courts don't have jurisdiction over your money.

To see how easy it would be to set up an offshore account, I called Offshore Company for a consultation and spoke to a man named Tom, who offered to set one up for $750 [€660]. However, setting up an offshore account is borderline pointless if you don't also set up a shell company to go with it; Tom described it as a "second layer of protection." With that in mind, he offered to set up a corporation, an office program to receive mail and calls, as well as a bank account for a grand total of $4,745 [€4,165]. When I asked where all of this would be located, Tom told me "Dominica" but was quick to make sure I knew he meant "not the Dominican Republic." When I asked where that was, he laughed heartily. I'm still not really sure where that is, but I do know I don't have $4,745.

To do some comparison shopping, I visited the website of Harbor Financial Services. After filling out a ten-question survey about why I wanted to set up the account, if I wanted a debit card as well as online banking, and how quickly I needed it, I was given a quote of $2,850 [€2,500]. My account would be at Loyal Bank in St. Vincent, with a corporation formed in Belize and a trust located in the Bahamas. It would only cost $1,000 [€880] per year to renew, and my name wouldn't be attached to it at all. It was remarkably simple, and it took about four minutes to submit my request.

The second offer was quite the deal; after all, three grand isn't very much to a fictional doctor looking for protection against malpractice suits, and the upfront cost would provide more benefits than just privacy in case of a lawsuit, according to Jay Dahya, an economics and finance professor at Baruch College I spoke to. We imagined my fictional physician opened a shell company in Belize and then had that company invest in a practice in the United States. Dividends would be paid out to the "company" that invested (but is really just an account controlled by the doctor), and taxes on those dividends would be less than taxes he or she would have to pay in the US by double-digit percentage points.

"There is also the issue that wealthy people don't want to attract attention," Dahya added. "One one way to do this is to hold income in overseas entrepôts. It's well-known that high-profile investment bankers have offshore accounts so that their colleagues can't figure out how much they received in bonuses."

So offshoring can hide you from lawsuits, help turn your money into more money, and conceal your wealth from your "friends" in finance. All that is legal, but is any of it ethically dubious?

In The Con Men: Hustling in New York City, authors Terry Williams and Trevor B. Milton argue that swindlers often justify their actions by claiming that their marks are bad people who don't deserve their money––in other words, by taking on an air of moral superiority. By the same token, a website called SovereignMan says anyone not taking advantage of offshoring is a fool, and even suggests that people who have the means to do are inherently better than people who are poor. "Some say this is unethical and cheating, but not surprisingly, those who say this are most often not the same people as those who create value in society," the site reads. "If you've found your way to this page, chances are strong that you're a value creator and want to keep more of the money you get back as a result of creating value."

Randy Cohen, former ethicist of the New York Times Magazine, says that this instinct to hold on to the money you make isn't necessarily moral, even if your methods are legal.

"Every member of a community has a duty to contribute his or her share to the needs of that community, and the wealthiest members of a community have an even greater obligation, not just because they can shoulder such a burden, but because it is the resources of the community that made them wealthy: schools to educate workers, highways to carry goods, air that's clean enough to breathe," he said. "What's more, it is the wealthiest members of a community who have the most influence in shaping the very laws they now use to justify their contemptible behavior."

Getting an offshore account is a matter of pure economics; the arguments against are a little more complicated. There's a reason tax loopholes are looked down upon, and it's the same reason being named in the Panama Papers forced Iceland's prime minister to step down and British PM David Cameron is facing protests over his links to an offshore account. Moving your money out of the country, even when it's legal, seems to represent an abandonment of your homeland and its laws; it puts a barrier between you and ordinary people and aligns you with everyone else who has a reason to hide their money.

As Cohen put it, "It's pretty simple stuff, something our parents taught us: Do your share. Even when you can weasel out of it."

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