If you want to hold funds overseas, for investment purposes or as a hedge against the ever-depreciating rand, an offshore bank account is the way to go - and you don't have to depart for foreign shores to open one.
An offshore bank account, like a gold Rolex watch or a Porsche, sounds like the preserve of the super-rich - but don't you believe it. The popularity of offshore bank accounts is growing. Barclays International Banking, the offshore arm of Barclays Bank, says it opens about 80 offshore accounts a week for South Africans.
The relaxation of foreign exchange controls in South Africa has resulted in taxpayers over the age of 18 being permitted to take an amount of R750 000 in total offshore, to invest any way they like. Of course, if you have been indulging in creative bookkeeping and the Receiver of Revenue has picked up on it, you may not be granted permission to take money offshore - a requirement for doing so is that you are in good standing with the taxman.
Alex Langen, the director of products and services at Standard Bank Offshore, says a common reason for South Africans wanting to open an offshore bank account is to create a vehicle from which to make offshore investments, and into which to deposit the proceeds from investments. Some clients open offshore bank accounts to hold cash in a foreign currency as a hedge against the ever-depreciating rand. South African exchange control regulations do not permit residents to hold foreign currency in South Africa.
Sean Hughes, the assistant general manager of business development at Barclays International Banking, says the majority of South Africans who do offshore business through Barclays just want a place to house their offshore money, and have no intention of using offshore accounts for day-to-day transactions.
Opening an offshore account is not as simple as walking into a bank overseas while you're on holiday and filling in a form, although Langen says it never ceases to amaze him how many people think you can do that.
In the United States, for instance, you are not allowed to have a bank account unless you are a resident of the country, and in most countries you are subject to non-resident's tax on any interest you earn. This is one of the strong arguments for establishing your offshore bank account in a tax haven.
But the bottom line is that you cannot escape tax completely, wherever you go. Under the new residence-based taxation system in South Africa, which was introduced on January 1 this year, you are taxed on all your income, wherever in the world it is earned.
Apart from the rand hedge advantage that offshore bank accounts offer, a major plus is that the account can be held by two people as a joint account, which is useful for estate planning purposes. In fact, Standard Bank Offshore allows you to hold an account in up to four names. South African law, by contrast, prevents bank accounts from being held in more than one name. While you can give your spouse or partner signing rights on your account, he or she does not enjoy the same rights that you do.
One fear many South Africans share is that they will not be able to easily access money held in offshore accounts. Langen says that such concerns are unfounded, since the internationalisation of banking has progressed so far that it's no more difficult to draw money from an offshore account than from a local account.
Through Standard Bank you can choose to hold your account in the Isle of Man or Jersey - both tax havens - and you will receive a Visa-branded debit card, which you can use at any Visa automatic teller machine (ATM) worldwide. You can also use the card to pay for all kinds of purchases wherever the Visa or Delta logo is displayed.
A bank can also organise guarantees from the offshore bank to the local bank should you hit a cash-flow crisis and wish to take out a loan. Instead of repatriating all or part of your funds from an offshore account when you need capital, you can use your offshore assets to leverage money via a loan in South Africa.
Hughes says you can access your money from anywhere in the world 24 hours a day, either through an ATM or via the internet. Bear in mind that, as in South Africa, some banks have daily limits on the amounts that you can withdraw. Barclays' daily limit is 300 pounds (about R4 200), for instance, while Citibank's limit is 4 000 dollars (about R39 520) a day.
Like Standard, most banks give you a choice of offshore jurisdictions in which to hold your account. For instance, Barclays will generally open the account for you on the Isle of Man, but you can choose Jersey or Guernsey instead. If you go with Citibank you can choose Jersey, the Channel Islands, Switzerland, Luxembourg or Monaco.
All banks have strict systems in place to guard against money laundering and so, while the application process may seem a bit tedious, it is certainly in your interests, as much as the banks', to be vigilant about preventing fraud.
We don't accept crooked money, and if millions suddenly appear in your account, we will ask for proof of where the money came from, Langen says.
When you apply for an offshore bank account, you will be asked for all the usual documents proving your identity and bona fides, including items such as a copy of a utility account to prove the authenticity of your address. Standard Bank will also ask you to give them an idea of how frequently money will be moving in and out of your account, and what the value of these transactions is likely to be.
Opening an offshore bank account takes about three working days at Standard Bank, but if you need it urgently, it can be opened in a few hours, as long as all the requirements are met. At Barclays, an offshore account takes about two days to open.
Most banks have minimum balance requirements. You need a minimum of 3 000 pounds, 5 000 euros or 5 000 dollars to open a Standard Optimum account. If your balance drops below this amount, you will not earn interest on your funds until you have restored the minimum balance. The minimum balance through First National Bank's Henry Ansbacher brand is 10 000 pounds, and Barclays requires 5000 pounds.
It's not really worth opening an account for amounts less than 5 000 pounds, but if your balance drops below this amount, we won't close it, Hughes says. HSBC Bank International requires a minimum balance of 1 000 pounds, 2 000 dollars or 2 000 euros.
At Citibank the minimum deposit is normally $100 000, but South Africans only need 33 000 dollars to begin with, and you have up to six months to build up your balance to this level.
Most offshore bank accounts allow you to hold your money in any of the major currencies. Barclays, for example, offers accounts in Euros, Sterling or US dollars. Bank charges vary enormously. Generally speaking, lower minimum deposits go hand-in-hand with higher charges. Citibank, with its high minimum deposit, doesn't charge a service fee or a fee for ATM transactions - it only passes on the fee charged by the bank that owns the ATM.
On the other hand, Standard Bank Offshore charges a fee of 2 pounds or 3 dollars for every withdrawal from an ATM. When you use your card for a cash withdrawal, or a payment in a currency other than the currency in your account, a foreign exchange conversion fee is payable. The exchange rate applied is generally wholesale rate plus an additional 2.5 percent to cover costs.
Barclays International Banking charges a monthly service fee of 7.50 pounds.
Since fees are charged in foreign currency, offshore banking can turn out to be an expensive business for South Africans.
So, as you should with any bank account you open, make sure that you understand exactly how the account works, what minimum deposit and balances are required, what the daily withdrawal limits are, and what charges might apply.
This article was first published in the 1st Quarter 2002 edition of Personal Finance magazine See what's in our latest issue