Dubai: Talk about offshore banking and exotic locales spring to mind. Just to name a few: Bermuda, Cayman Islands, Channel Islands, Isle of Man, Liechtenstein, Luxembourg, Malta and Mauritius. Less exotic, Switzerland is among the most well-known offshore destinations, though it has catered more to private banking for more than 150 years.
Recently, however, such destinations have been in the news for all the wrong reasons: they have been targeted by governments as secret hideouts where money earned illegally is stashed away, or as havens to avoid taxes.
But offshore accounts are not just about tax avoidance and parking ill-gotten wealth. And it is not necessarily that only the wealthy can afford to open such an account.
You may probably benefit from an offshore account if you live outside your home country, or frequently move between countries, are planning to buy a property or thinking of retiring abroad, or need to make international payments (for example, if you have children being educated in a foreign country), or have accounts in different currencies.
Whether or not a customer should open an offshore account depends upon their individual circumstances. Richard Hextall, head of personal banking, Lloyds Bank Middle East reckons: "Offshore bank accounts are particularly useful to expats and individuals who are internationally mobile as they allow them to manage their affairs easily should they wish to relocate again, repatriate or send money abroad, without having to go through the onerous process of setting up foreign accounts."
However circumstances peculiar to the region that has Sharia as its legal basis also adds as one more reason to open an offshore bank account.
Anyone wanting a joint account with his wife or a business partner would be well advised to hold that account outside of the Sharia law, which generally means an offshore account, said Steve Gregory, managing partner at Holborn Assets. They assist clients to open accounts in the Isle of Man with the major international banks. In fact among the most popular destinations for banks are Isle of Man, Jersey, Guernsey, different cities in Switzerland, including Zurich and Geneva.
"If you have a car accident and are arrested for injuries to someone, if you work for a company and become responsible for damages, if you default on credit agreements, if you lose your employment, or if you die it's likely that your UAE bank account will be frozen and inaccessible to yourself and your family. If this could happen to you, your family needs the safety of an offshore account," he said.
Sense of security
Sarah Lord, wealth planning director, Killik & Co. added: "Many expats feel more comfortable holding their accounts in jurisdictions such as Jersey and Isle of Man where they understand the banking regulation and rules. They feel that there is greater security to their money held in that institution when it is held offshore rather than here in the UAE."
For example, she said, Isle of Man bank accounts are protected by the Isle of Man Compensation of Depositor Regulations 2008.
This however does not mean that you can do away with an UAE bank account. In any case, opening a local account is mandatory for salary transfers when you live and work in the UAE. In fact, having a UAE bank account is useful for domestic reasons, such as making local payments, local cash withdrawals and retail services, said Claude-Henri Chavanon, head of marketing at National Bank of Abu Dhabi (NBAD), the private banking subsidiary of the Abu Dhabi bank.
"We recommend having a combination of local and offshore accounts to ensure diversification across a customer's accounts. This also ensures their banking arrangements meets the needs not only, for instance of having a place to receive a salary, but also in the future, for example remitting funds abroad or moving to a different country. This also enables them to better diversify their portfolio of savings and investments," Hextall of Lloyd's Bank added.
Experts cite a number of advantages of offshore accounts.
Shekhar Krishnamurthy, head of retail assets and liabilities, Emirates NBD, lists confidentiality, easy international access, potential tax efficiencies and non-restrictive banking options among the positives that work in favour of offshore accounts.
Tailor-made investment solutions and expert asset management which allow clients access to diversified investments throughout the world, protection against any political and financial risks in their own country, strong regulations, and low rate of taxation are the other advantages, pointed out Chavanon.
Also, it's no different from the local bank facilities. You can open a wide variety of accounts, which include various currencies, checking accounts, savings accounts, debit and credit card facilities, fixed term deposits and instant access deposits, Gregory added.
But offshore account is not for the middle income earners, according to some bankers. They treat it more as part of private banking and wealth management, a segment which caters to affluent and high net worth individuals.
As Chavanon said: "Such accounts are not for everybody. Most banks set a minimum account size, due to the costs of human time involved in providing the top level service, so these are not suitable for smaller sized accounts and more aimed at those on higher income."
And in most cases, the minimum deposit is in the range of $25,000 (Dh91,800) or £25,000 (Dh147,648). Some even have annual charges for such an account, as in case of National Bank of Abu Dhabi which starts at 500 Swiss francs (Dh1,907) and go upwards depending on the kind of platform the client chooses.
To qualify for an account at Lloyd's Bank there is a minimum annual gross income of £50,000 or equivalent currency or as an alternative deposit £25,000 within three months of the new account being opened.
Another issue is the low interest rates the account carries, though this might vary.
"Typically interest rates on sterling accounts are from 0.6 per cent to 2 per cent on dollar sterling and euro instant access accounts and about 0.5 per cent more for fixed-term deposits. Not very exciting, but safe."
Interest rates on offshore savings accounts and UK savings accounts in sterling are relatively similar, pointed out Hextall.
Also, some offshore jurisdictions offer no investor protection, although the majority do, said Gregory.
"Be aware that for joint accounts not held by institutions the limit of compensation is £100,000 per account per bank, and for individual accounts it is £50,000 [or equivalent in other currencies] per account per bank, which may mean you need more than one bank to spread your risk," he said.
The risks of opening an offshore account are primarily linked to the risks of the chosen country. "When selecting an offshore centre it is important to ensure that stability and legal framework is well developed," said Chavanon. Also, among the concerns for potential clients is how they interact with a bank physically so remote from their own location.
This is in some cases not an issue, said Chavanon, because private bankers often travel and visit clients. And for example, banks such HSBC International have representative offices in Dubai, Hong Kong and South Africa.
Hextall also points out that the risks of opening an offshore account are similar to opening a local one. One should always look at the credit risk rating of the institution to get an indication of the financial stability of the bank.
"Customers should also be aware of changes in exchange rates which will affect the value of savings relative to any other currency at a given point in time," Hextall added.
With the ongoing scrutiny and crackdown of offshore accounts by different governments, bankers and independent financial advisers advise the clients to declare their accounts voluntarily.
"We actively remind and advise our customers that it is always up to them to seek independent tax advice and ensure that tax liability in relation to funds deposited is accounted for by them to the appropriate tax authorities," Hextall said.
For those eligible, in most cases, it is easier to open an offshore account than many might think. The documentation required includes filling up an account opening application, a copy of one's passport, proof of address, and Know Your Customer (KYC) confirmation (as one bank has pointed out) which is the due diligence (mandated by law) done by the bank on the customer's financial history that will determine source of wealth and source of funds.
- Minimum balance: £25,000
- Monthly service fee: £15
- If balance falls below £25,000: £10 underfunding fee in addition to the monthly fee
- Minimum balance: £60,000
- No monthly fee
- If balance falls below £60,000: £35 underfunding fee will apply for the month where it falls
- Available currencies: 15, including sterling, euro and US dollar
- The accounts are based in the Jersey and the Isle of Man in Channel Islands
Lloyd's Bank Middle East
Premier International Account
- Minimum Gross Income: £50,000 or equivalent per annum or alternately a deposit of £25,000 within three months of opening an account
- Minimum balance: £2,500/$3,500/€2,500
- No monthly fee
- If balance falls below the minimum balance during the month: £20/€20/$30 is payable in that month
- Additional costs for: overdrafts, transfer or receive money when abroad. These vary depending on the method of payment.
- Available currencies: Sterling, euro and US dollar
- The account is based in the Isle of man in the Channel Islands
Jersey Offshore Deposits
- Minimum deposit: £25,000/$25,000/€25,000 or DH100,000
- Available currencies: Sterling, euro, US dollar and UAE dirham
- The account is based in the Jersey in the Channel Islands
Tips: Get the best out of your offshore accounts
1. It is important to understand clearly what you are looking for, be it international investment diversification, the bank's specialist investment advice, a safe haven for investments, wealth structuring, etc.2. Customers should maintain a close relationship with their bank and maintain an open dialogue with their relationship managers in order to ensure that their banking arrangements are always in tune with their personal needs and circumstances.3. As a general rule, customers should keep a nest egg of six month's salary for any unforeseen events that may crop up. 4. As with all accounts, customers should manage their inflows and outflows carefully to keep on top of any overdrafts, hence minimising the costs they incur.5. Regularly review the interest rate that the customers are receving on the account to ensure that it remains competitive.6. Regularly check the cost of banking in the UAE and offshore, so you don't get unexpected shocks. Banking costs money. 7. It is recommended that those who need to declare their offshore accounts must do it.
check list: Lenders providing options in the region