The difference between offshore and onshore banking is location; offshore banks were historically located in -- and regulated by -- another country. Many modern banks, however, are part of a global economic system that finds them doing business far from the shores where they were chartered. As banks branched out and grew, first between states and then to foreign countries, complex relationships between banks, their customers and governing bodies have evolved.
The historical reason for banking in a foreign country was to avoid taxes on income or investments. The secrecy of the Swiss banking system and lack of extradition treaties with certain Caribbean island nations made a variety of unsavory behaviors possible, from avoiding taxes on windfall profits to money laundering. Foreign banks in countries where regulation was lax or missing altogether provided tax havens for robber barons and money laundering opportunities for criminals. The United States has adopted laws requiring taxpayers to report income in offshore accounts, limiting many benefits of offshore banking except for corporations that do business overseas.
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Offshore Bank Limitations
As offshore banks began doing business in the U.S., they began reporting holdings by U.S. individuals and businesses as U.S. banks were required to do. Further, the federal government established treaties with countries such as Switzerland concerning reporting. Closer relations with foreign banks made accurate reporting of income on a Report of Foreign Bank and Financial Accounts an imperative. Until October 15, 2009, the Internal Revenue Service operated a Voluntary Disclosure Program that, while not guaranteeing immunity, offered individuals with existing offshore accounts to settle up with the IRS.
Onshore Bank Operations
Banks operating in the continental U.S. and Alaska and Hawaii interact with the Federal Reserve System and are regulated by rules made by states and the federal governments. Banks are chartered by states and by the federal government. Although state banks must operate within the boundaries of the states that charter them, "national banks" may establish branches across state lines. State and federal governments establish regulations concerning bank operations such as mortgages, loans, credit cards and securities. States and federal agencies regularly visit and examine bank records to ensure the bank's solvency and legitimate operation.
Banks and Insurance
Most consumers use onshore retail banks for their checking, savings, loans and mortgages, but wealthy families may patronize private banks to manage their trusts and portfolios. Business and corporate banks cater only to incorporated entities, although plenty of small businesses utilize the convenient services of their community retail banks. The Federal Deposit Insurance Corporation insures deposits in onshore banks and savings institutions chartered in the U.S. but does not cover products such as stocks, bonds, securities, mutual fund shares, annuities and insurance policies – typically offered by private and large commercial banks. As of 2014, individual accounts of $250,000 were covered. Offshore bank accounts may be insured by agencies in the country where they have been established. Accounts established with independent investment advisers located in onshore banks but not employed by them are not covered by FDIC insurance.