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How International Banking Works

Reasons to Bank Internationally
Offshore banking isn't the only sketchy thing to happen in the Cayman Islands. Rene Heedegaard receives a Cayman crocodile that was recovered from thieves.
Offshore banking isn't the only sketchy thing to happen in the Cayman Islands. Rene Heedegaard receives a Cayman crocodile that was recovered from thieves.
Marit Hommedal/AFP/Getty Images

There’s a wealth of reasons for individuals and companies to bank internationally. Many people around the world use international banks to shelter their money from their home country's income and estate taxes. Hosts of banks are based in countries with low or no income and estate taxes, such as the Cayman Islands, Belize, Panama and the Isle of Man. But you can't just put your income in Belize and not pay taxes. Customers must report their income and work with their bank to make sure tax avoidance doesn't turn into tax evasion.

Some individuals use international banks to invest in the economies of booming countries and in developing countries, the same way they might invest in a domestic corporation or real estate venture.

A number of wealthy individuals keep their wealth in offshore banks and other entities to keep it safe from lawsuits. That doesn't mean these people are criminals; they simply want to avoid losing every penny to a sudden, unexpected or predatory lawsuit.

Since international banks lend and borrow on international markets, they’re less affected by domestic interest rate fluctuations. For example, when Mr. and Mrs. Platinum want to avoid sinking interest rates in their own country, one thing they might do is move their money into an international bank.

Also, some foreign banks might offer better interest rates than domestic banks, providing a money-making opportunity for customers.

International banks also make it easier for a company with an international presence to do business around the world.

For one, the company doesn't have to set up a million different bank accounts around the world, then wait to receive money while the banks deal with one another.

In addition, international banks offer many financial services to facilitate international trade. Besides offering payroll services for companies with employees and contractors in other countries, they offer letters of credit to ensure that companies in different countries pay one another for goods and services. They also offer financing services to support businesses facing the large costs of importing and exporting products.

The process of establishing an account at a reputable international bank will probably include the following:

  • The bank will confirm your identity and the identities of anyone who has an ownership interest in your money.
  • Like a good father, the bank will ask you about your intentions. Why do you need an international bank account? What does your business do?
  • The bank will inquire about the origin of your deposits, especially very large ones. Where'd you get that $756 million, son? Hopefully not from that big heist in downtown Rome.
  • The bank will ask for references. Are you a reputable individual or company?
  • The bank will analyze how risky a customer you would be. Can you or your company pay back loans?
  • [source: OCRA]

Next we'll take a look at the hazards of international banking.