Are you thinking about putting your savings into an offshore account?

Maybe you live or are just about to move away from your home country, maybe you've heard that you can get higher interest rates offshore, maybe you think that you can avoid (evade) paying taxes on the interest, or maybe you want to "hide" some of your funds.

Here's a few things to consider about banking in the British offshore "tax havens" of the Channel Islands (Guernsey, Jersey) or the Isle of Man:

Independent Jurisdictions

It is important to understand that Guernsey, Jersey, and the Isle of Man are not part of the United Kingdom.  They are Crown Dependencies and each has their own independent government.

Nor are they part of the European Union (EU) or European Economic Area (EEA), and so are not subject to UK, EU, or EEA banking regulations or supervision;  each jurisdiction regulates and supervises itself.

This means that if your bank gets into difficulties you will be reliant on only the local jurisdiction for help, and not any other country.  The UK has explicit stated that they will not assist you or them.

"...the UK Government cannot provide cover for deposits held by British citizens in jurisdictions outside the direct control of the United Kingdom." UK Parliament Treasury Select Committee Report, s. 87-88, 31-Mar-09

Higher Interest Rates Offshore

Are you sure?  It's true that you can sometimes get better interest rates offshore but equally true that the best rates are often to be found onshore, so don't assume that just because it's offshore you'll necessarily get the best rates.  Look around and do your research.

However, don't be seduced by high interest rates alone.  An extra % or so won't make up for your potential loses if the bank goes under, although the level of interest offered is not necessarily an indication of risk in itself.

The offshore Icelandic banks were offering lower interest rates than the best onshore rates in the months before they went under, and the UK high street banks, such as RBS and HBOS, were offering quite mundane rates - and both of those would have collapsed had the UK government not bailed them out.

No Taxes Offshore

None of the Crown Dependencies levy taxes on the interest you receive directly for themselves, however you will be liable for paying taxes on that interest to your country of residence, and all three so called "tax havens" have entered or are entering into international agreements to make sure that you do.

European Union	European Union Savings Directive, the directive itself
Guernsey government	EU Savings Directive
Isle of Man government	Guide To The European Savings Tax Directive
Jersey government	EU Savings Directive
Wikipedia	European Union Savings Directive

Although not members of the EU themselves, all three jurisdictions have signed up to the European Union Savings Directive (EUSD).   This means that if you are resident in an European Union country (including the UK) you have the choice of:

• having 20% of your interest taken directly from your account (EUSD Retention Tax ¹), rising to 35% from 1st July 2011 OR
• receiving your interest gross, in which case your identity details and the amount of interest you've received will be reported to the tax authority of your country of residence.

From 1st July 2011 your identity details and interest will be reported to your country of residence, irrespective of whether you opt for the retention tax or gross interest.

All of the Crown Dependencies have also entered into additional Tax Information Exchange Agreements (TIEAs) with other countries (see left). These allow the tax authorities of those countries to find about the accounts and investments that their residents have in the Crown Dependencies, local banking privacy notwithstanding.

With the current global mood against tax havens and for banking transparency, the number and scope of TIEAs and other forced disclosure agreements is likely to increase.

Countries the Crown Dependencies have signed Tax Information Exchange Agreements with

Depositor Protection - are offshore accounts SAFE?

Interest rates and taxes aside, your overriding consideration will be the safety of your deposit. No amount of interest or tax advantages (indeed, if there are any at all) will make up for losing some, or all, of your savings, or for the shock when you go to your bank's website only to see a notice that it is in Administration or Liquidation or for the stress and worry while you wait months – if not years – to find out how much the Administrators or Liquidators will be able to recover for you.

Depositor Compensation Schemes

When people talk of depositor protection they are usually referring to a depositor compensation scheme (DCS) and you should certainly examine in detail the scheme in effect for the jurisdiction you are thinking on placing your savings into to decide if it will truly protect your savings, or is just a token scheme in place so that the jurisdiction can "tick the box" and say they've got one.

It's important to note that deposits in the Crown Dependencies are not covered by the UK Financial Services Compensation Scheme (FSCS), even if the bank is an offshore subsidiary of a British bank, nor included in the European Economic Area "passport" scheme.

You should also note that the amount covered depositor compensation schemes is per person, not for each account with a bank, and the cover is per licensed bank, not per banking "brand". ²

Parental Guarantees

Most banks in the Crown Dependencies promote a parental "guarantee" in their literature.  Indeed, the Guernsey Financial Services Commission (GFSC) recommends the wording the banks it regulates should use. ³  Banks in the Isle of Man and Jersey offer similar "guarantees".

A report commissioned by the GFSC expressed concern that their recommended wording did not properly inform savers of the scope and risks of the parental guarantees. ⁴  As one press report noted for all offshore banks, "...savers can no longer rely on the guarantees offered by financial groups to their offshore subsidiaries. If the parent group fails then the guarantee is virtually worthless." Telegraph 9-Apr-09

Parental "guarantees" are only as good as the parent, so you should check the financial strength of the parent group as well as that of the subsidiary. Indeed, both Kaupthing Singer & Friedlander Isle of Man (in Liquidation) and Landsbanki Guernsey (in Administration) had strong balance sheets themselves and were dragged down by the failures of their parents. Neither is expected to be able to honour their "guarantees".

Government Support

Recent events have demonstrated that the willingness of a government to act to protect depositors banking in its jurisdiction is far more important than any other factor.  For example:

• The UK government stepped in to guarantee 100% of retail customer deposits in Kaupthing Singer & Friedlander UK ("Kaupthing Edge"), Heritable, and Icesave UK, even though the UK DCS only covers £50,000 per depositor.
• The Icelandic government acted to guarantee 100% of local depositors' funds, even though the Icelandic DCS only covers 20,887 Euros per depositor.
• The UK effectively guaranteed all deposits in RBS, HBOS, Lloyds TSB, Bradford & Bingley, and Northern Rock, by either government bail out or nationalisation.

As for the Crown Dependencies, in the recent banking crises Guernsey has been unwilling to help savers in its jurisdiction, the Isle of Man has been willing but only to limited degree, and Jersey has stated that they will only help resident savers.

As well as the willingness of governments to act to protect your savings, you need to also consider their ability to do so.  All of the Crown Dependencies are geographically tiny jurisdictions with populations the size of a small town, a very limited tax base, and highly dependent on their status as "offshore financial centres".

So, where is a safe place to bank?

The recent financial crisis and bank crashes have been called a "once in a lifetime" event, but then how many people predicted that any banks, let alone so many, and including major high street names, could get into such deep trouble and, more importantly, how can anyone guarantee that it won't happen again, not even to just one?

As recent events have proved, it doesn't matter so much which bank you put your savings into, but where your account is held.

It is extremely unlikely that the government of any sizeable developed democracy would let depositors in its jurisdiction – where the vast majority of them are voters – lose any of their savings at all , even if the bank is not one of theirs.

Equally, it is unrealistic to expect the same political will from jurisdictions where the vast majority of deposits are held by people who are not voters, let alone where the amount of deposits in any bank far outstrips the resources available to the government.  These jurisdictions are likely to only "look after their own" (indeed, if that), and leave non-locals without cover, as did Jersey and Iceland in guaranteeing 100% of the savings of residents only.  Even if the will does exist, the Crown Dependencies just don't have the resources to cover 100% of savings in even a smaller bank, as shown in the KSF IoM case.

So, if you live in a sizeable developed democracy the safest place to bank is in your country of residence; banking offshore potentially puts your savings at risk, and for no significant advantage, if any at all.

If you are an expatriate, the banks in most countries (except the UK) allow non-resident nationals to have and keep bank accounts in their home country.  In the UK this is more problematic, as most banks insist on a UK address, although this may change as a result of recent pressure.

If your reason for considering banking offshore is that you are a UK expatriate who wants to keep your savings in £ sterling then (if you live in a sizeable developed democracy) you can try looking into opening a £ sterling currency account in your country of residence.

If you don't live in a sizeable developed democracy, or would just prefer to keep your savings in the UK, do your research carefully.  While most UK banks insist on a UK address, some do advertise that they accept "international" clients, but then shuffle you off to their offshore subsidiaries anyway, or make it all but impossible for you to actually open an onshore account, or have very large minimum deposit requirements.

At the time of writing, the Halifax and Investec were known to offer UK based accounts to non-residents (both with some restrictions) and, for the ultimate in safety, being backed by the UK government, so do National Savings & Investments.