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Why an Overseas Bank Account Isn’t a Good Idea

Many individual clients with excess cash diligently hunt for the highest yields. They might come up with the idea of depositing money with a bank overseas. They might even joke about “stashing it.” There are many reasons this is not a good idea.

Nov 21st 2019
President Perceptive Business Solutions Inc.
Columnist
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wealthy clients
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There are many reasons why companies doing business internationally would maintain overseas bank accounts. Ditto for individuals who own overseas property generating local bills. Many individual clients with excess cash diligently hunt for the highest yields. They might come up with the idea of depositing money with a bank overseas. They might even joke about “stashing it.” There are many reasons this is not a good idea.

As their accountant, you often need to protect clients from themselves, like a parent would protect a child who wants to poke a tiger at the zoo with a stick. A lot can go wrong. Your client isn’t seeking to hide money in a tax haven or avoid taxes. They are honest. Let’s assume your client came up with this idea because the interest rate was “too good to be true.” Here are several reasons you should quash it:

1. When a bank isn’t a bank: As US citizens, we’ve been brought up with FDIC deposit insurance. Titles have changed slightly but the idea is the same. You put money in a bank. If something goes wrong, your money is safe, up to certain thresholds. Banks in other countries aren’t covered by the FDIC. You took your money out of the country; now it’s your problem. This can be an issue, especially when the bank has an official sounding name.

2. Fraud: Your client has done an electronic transfer to an official sounding bank in the Caribbean. They get online statements.  The interest rate is great. One day, rumors start. There’s a run on the bank. It turns out their bank was a Ponzi scheme. Living at a distance, having deposited their money in a foreign jurisdiction, they have little recourse. 

3. Taxes in a Foreign Country: Your client isn’t looking at a bogus bank. It’s a real multinational. Your client is satisfied with insurance protection in the country. They deposit a lot of money. They may pass the threshold where the host country wants to collect taxes on the interest earned. You will likely need an accountant in that country to file appropriate tax returns. Meanwhile, the US government might feel entitled to its share too. Fortunately, foreign tax credits should help in this situation.

4. Currency Exchange Rate Risk: According to a July 2019 article quoting IMF figures, Mexican banks are paying 6.15 percent. Your client says: “I’ll take some of that.” However, the deposit is probably denominated in the Mexican Peso. They are subject to currency fluctuation and possibly conversion fees. FYI, as of 10/22/19, the Peso to USD exchange rate was down 2.79 percent YTD.

5. Tax Reporting: Generally speaking, people don’t want to create more work for their accountants if they are paying by the hour. Overseas interest earned complicates their tax reporting. Accountants having faced this situation before know about filing FINCEN Form 114, the Report of Foreign Bank and Financial Accounts.

6. Attracting Attention: The IRS believes in red flags. Having a client with significant overseas deposits might attract unwanted attention.

7. Currency Controls: Greece still has limits on money transfers abroad. Other countries, especially outside the European Union make it difficult to move funds out of the country. These rules were put in place because of money laundering and capital flight concerns, but your client might still be caught up.

8. Forget About It: Here’s the greatest risk: Let's say it’s an older client, and they die. Their recordkeeping isn’t the best, so the deposit might remain overlooked for years, possibly forever, because there isn’t an obvious paper trail. It’s the “forgotten gold in the safety deposit box” story.

How much of a better interest rate are they going to get? Are they subject to currency conversion costs and exchange rate risk? Is it worth the trouble? Probably not.

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