Going Offshore Primer Part 1–Remember, This Is Not Illegal
Going offshore can be a big, scary idea. In fact, thanks to the well-publicized stories of criminals who have indeed taken their ill-gotten gains offshore, many people think that “going offshore” is illegal. This is not true, of course.
For the record, there is nothing at all illegal about taking whatever you’ve got and placing it or investing it in another country, even (at least not yet) if you’re an American. Although, if you’re a U.S. person, going offshore does come with a long and growing list of compliance factors and restrictions.
The truth is that, not only is going offshore not illegal, it is also, in today’s world, the most important agenda item for all of us, a practical necessity of our age.
To understand why diversifying in this way is so important given the world we live in, consider Argentina. Over the last century, Argentina’s economy has been a roller coaster, with wild ups and downs to do with inflation, currency restrictions, price freezes, and other economic woes and complications. A friend, an Argentine, helped to put Argentina’s situation into perspective when he told me once, “In my lifetime, 13 zeros have been knocked off my country’s currency.”
“You are an American,” he continued. “You haven’t had to live through the experience of watching your currency be devalued like this.
“Yet.”
Thanks to this long experience with economic and political instability, any Argentine with any excess cash sends that cash to another country. He takes it offshore.
Holding at least some of your cash in a bank in another country is a more and more sensible idea all the time no matter who you are or what country’s passport you carry. Argentines have this understanding bred into them. Cypriots acquired it the hard way a few weeks ago. Most Americans think this is a lesson they don’t need to learn. Americans tend to take for granted that the government will continue to bail out banks to keep the U.S. economy from collapsing. Meantime, the government itself is on a long-term path to bankruptcy, reports out today heralding reductions of the deficit and the debt notwithstanding.
For some reason, the U.S. government thinks that it’s okay to continue to increase its debt as long as the output of the country is growing faster than that debt. Maybe I missed that in my Econ101 class as a strategy for long-term stability.
The telling part of the report released today is that by 2030 the revenue of the U.S. government will be barely enough to cover the interest on the country’s debt and the main entitlement programs. In other words, there won’t be any money to actually run the country.
Recognizing the reality of the current fiscal state of the U.S. government, where would the money come from to bail out U.S. banks from another crisis? More to the point, why would you, as an investor, as a citizen, choose to sit around to find out the answer to that question?
Whether you believe it’s possible the U.S. government could implement a “one-time tax” as they are doing in Cyprus or not… whether you think the liquidity ratio of your banking system is adequate or not (it likely isn’t)… whether you’re worried about currency controls or not… you should have some of your money, at least part of your nest egg sitting in another jurisdiction.
That is to say, the first, easiest, and most pragmatic step everyone should take for going offshore is to open a bank account.
For us Americans, thanks to FATCA and the related new IRS rules for foreign banks to comply with FATCA, it is getting harder and harder to take this simple step. The unfortunate reality right now is that many banks around the world won’t open an account for a U.S. citizen. Some will, and I suspect that more will accept U.S. clients again after they have had a chance to sift through the FATCA mess.
Meantime, again, despite everything that is going on right now, it is not illegal for an American to have a bank account offshore.
However, as an American with a bank account offshore, you end up with reporting requirements. At a minimum, you have to indicate on Schedule B of your Form 1040 that you have an account offshore. If you have more than US$10,000 in aggregate in financial accounts offshore, you’ll also have to complete the Foreign Bank Account Report. If you live in the United States and have more than US$50,000 (US$100k if you file a joint return) in foreign financial assets (which includes bank accounts), then you’ll also have to complete Form 8938.
That all may seem complicated, but it isn’t. It’s not difficult. It’s paperwork. And, as intimidating as it can seem at first, I beg you:
If you’re an American, don’t let the growing compliance concerns and expanding restrictions scare you away from opening the offshore bank account you probably should have. The downside risk is too great and growing. Whether it’s the U.S. economy, the collapse of the dollar, another U.S. banking crisis, or some other right now maybe un-namable calamity, you need to diversify. It is the only way to take control of your future and to protect yourself and your family long term.
A bank account is the first step, but there are others you can consider.
Tomorrow, Part 2 in this Going Offshore primer. I’ll walk you through how diversifying offshore can help you to better protect your assets, whatever they are.
Lief Simon
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