The risks involved with foreign banking

In a global environment where people and businesses buy products and obtain services anywhere, the financial sector plays an important role. Alongside the possibilities to transfer money in lightning speed across the globe, bank accounts can also be opened abroad. Many people mistakenly believe that holding a bank account in a different country instantly frees them of fiscal reporting and taxation. With the automatic exchange of (financial ) agreements between tax authorities, it is proposed that every tax subject pays its dues rightfully.

Retail banking is an important part of modern society. It allows ordinary citizens to finance their day to day activities. These include the standard receipt of income, the payment of their housing and spending for their leisure activities. Due to the importance of these transactions, the financial system must be safe and sound while it must be easy to operate and respected by the people. 

Whilst multinationals and internally operating small and medium sized enterprises often use different countries to manage their finances, most retail customers either reject this possibility or look for ways to join them. A crucial distinction must be acknowledged though. Personal income tax is something different than corporate income tax and therefore the personal bank account abroad must be declared in the home country of the account holder. 

Another interesting point to consider is the differences in banking law and financial regulation between them country of residence and the location of the bank account. Not only the financial back-up of financial institutions, but also the financial safety-net like bank deposit insurance is equally important. Some guidelines on the working of such a scheme is available for example at the scheme in Cyprus: deposit protection in Cyprus. This country has always been an interesting place for foreigners to open a bank account and conduct international transactions. 

The main risks involved in international banking are derived from the differences between home and host countries. In the beginning, retail banking is a local matter. This means that where retail consumers from a highly regulated and high tax jurisdiction wish to utilize the facilities in different lower regulated jurisdictions, may trigger some difficulties. One should realize that purchasing power parity and GBP are important determinants to understand the regular payment streams and that extraordinary transactions may place a heavy burden on the local system. 

A risk in banking and finance must be addressed prior to making a decision to engage in specific activities. Risk does not mean that transactions must be avoided. It merely describes some caution and allow consumers to impose strategies to hedge potential risk. It is therefore recommended to investigate the matter and decide upon the shared risk profile whether it is favorable to open a bank account abroad. Even when the financial institution is considered a Fintech firm, caution is advised because of the differences with traditional banking. A word to the wise is always to be informed.