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You have probably heard it before, but it may be worth repeating: the citizens of this world are quite enamored with, if not addicted to, credit. Peer into a fellow shopper's wallet at a point of sale and you might see a few credit cards representing financial institutions, gasoline retailers, furniture emporiums, computer stores, hardware superstores and more. According to Visa International and MasterCard International, in excess of US$2.5 trillion was spent using a combined base of almost 1.5 billion credit cards in 1998. The payment flexibility, convenience and spending power of credit cards have facilitated global trade, and in the process, encumbered people with an enormous amount of debt. Until a few years ago, the typical offshore investor did not have access to the payment convenience and flexibility associated with a credit card–at least not from the standpoint of accessing and spending the money he or she had safely placed offshore. Consider the predicament of yesterday's offshore investors seeking to access smaller amounts of money residing in their offshore bank accounts–say, under $10,000. If those individuals wanted to use offshore funds to make a purchase while living in North America or traveling abroad, they would have to personally withdraw funds from their offshore bank or have money wired to bank accounts where they lived. The former option involved some planning and expense and placed the investor at some risk during the process of transporting cash, for example, theft and customs restrictions with respect to amounts carried across international borders. The latter option, while technically feasible, could be accompanied by substantial time delays and erosions in personal privacy. It is no wonder that in the past, accessing funds held offshore was usually the provenance of those making very large purchases, where the purchaser instructed their offshore bank to transfer funds directly to the vendor. The advent of offshore credit cards has greatly facilitated the use of money held in offshore accounts. Offshore institution-branded Visa and MasterCard credit cards have ushered in a whole new realm of payment flexibility and convenience for today's offshore investor, but they are products that still require careful consideration and research. How do they work and what do they cost? How secure and private are they? What are the possible pitfalls and ramifications associated with using these cards? How they work Offshore credit cards (legitimate ones, that is) share many of the same characteristics as their domestic predecessors. They typically carry a Visa or MasterCard label, are accepted at more than 14 million locations worldwide and provide cash advances at several hundred thousand automatic teller machines and banking institutions around the world. They offer a wealth of travel and emergency services such as insurance, car rental benefits, card and cash replacement and long distance calling card privileges, among other things. These cards normally provide investors with a monthly statement and access to account information via the Internet, allow cardholders to carry balances forward to the next month, require monthly minimum payments (which can be made from an offshore account) and generally mimic domestic credit cards from a services perspective. Despite their similarities, a significant difference exists between domestic and offshore credit cards. The vast majority of reputable offshore credit cards are "secured" cards. They require offshore investors to provide a security deposit with their application for the card and therefore do not require offshore investors to go through credit checks. The amount of the security deposit varies between institutions, but normally ranges from 125% to 150% of the credit line requested (e.g. at 150%, a credit line of $20,000 requires a security deposit of $30,000), although some issuing institutions require security deposits as high as 200% of the credit line requested. To increase a credit line, investors simply need to increase the amount of their security deposit by the appropriate factor, either by sending a US dollar draft or by wiring funds to the card company. The requirement for a security deposit contrasts with a domestic credit card and effectively renders these products not credit cards per se. They are rather hybrid cards that access a line of credit that is fully secured with one's own money. Indeed, most of the card companies do not refer to their products as "credit cards" but either as "offshore cards" that provide the "benefits and acceptance of a Visa or MasterCard" or "offshore cards" that provide investors with access to "offshore collateral investment accounts." Minimum and maximum security deposit amounts are part of the offshore card landscape. For example, one of today's more popular secured card programs is Global Axxess MasterCard, offered by Bahamas-based Axxess International and Leadenhall Bank & Trust Co. Ltd. Their program includes three distinct cards: Liberti, Infiniti and Platinum. The Liberti product is particularly flexible, providing for a minimum security deposit of US$2,250 and a maximum security deposit of US$75,000, which translates into a minimum credit line of US$1,500 and a maximum of US$50,000. The Infiniti product has a minimum and maximum security deposit of US$6,750 and US$67,500 respectively (which translates into a minimum/maximum credit line of US$5,000/US$50,000). The Platinum card has a security deposit ranging from US$33,000 to US$135,000 respectively (which translates into a minimum/maximum credit line of US$25,000/US$100,000). Cost of offshore cards An important consideration for any investor securing an offshore card, line of credit or other offshore product is cost. Beyond the requirement to submit a security deposit with your application, you may be charged an initial administration fee to cover the efforts to arrange the card and facilitate the trust deposit. These charges can range from US$100 to more than US$3,000 in some questionable cases. These costs may, however, include the costs associated with an off-the-shelf IBC or other offshore structure. Normal annual credit card fees apply and will, in most cases, be similar to those charged domestically; in the range of US$100 to US$200 depending on the card. Once again, however, excessive annual fees of more than US$500 are charged by some. From a transaction perspective, charges for services like use of automatic teller machines can be fairly high, ranging from US$5 to US$10 per transaction or 2% to 3% of the transaction, whichever is greater. Additional charges may also apply. Beyond the various administrative and transactional costs, perhaps the biggest cost attached to offshore cards is the opportunity cost incurred as a result of the large security deposit. Offshore card companies, being licensed trust companies and banks, make their money in many different ways, including service fees, transaction charges, incentive fees (for mutual funds they manage) and their own investment activities. It is in this last area that opportunity costs are most apparent. Security deposits are usually held by these companies in a pooled and segregated trust fund and are primarily invested by fund managers in short-term US Government and US Government guaranteed securities, or other conservative instruments. For example, consider this extract from a recent card advertisement: "Cardholder deposits are treated as much more than collateral. Funds held for cardholders are invested by a team of administrators who enjoy years of experience, advanced technical skills in financial management and proven depth and ability. They are consistently rated in the 'top percentile' of all fund managers by Nelson's financial industry book." Reading this, offshore investors may expect their deposits to be treated like any other offshore investment, generating a comparable rate of return. Even with the most balanced or conservative approaches, offshore investments will achieve rates of return between 8% and 12%. However, a 10% rate of return is unheard of on offshore credit card security deposits. Typically, the return is 1% to 2% of the total deposit held in a trust account. These lower rates of return are not an indictment of the skills or ethics of card fund managers. They likely do generate this level of return on funds held in trust and do so in a manner that still preserves assets. Rather, the poor rates of return paid to offshore cardholders illustrate both the high cost of the cards and the significant profits that can be made by card providers. For example, an offshore investor seeking a card with a credit line of US$50,000 (routinely representing a US$67,500 security deposit) could normally expect a rate of return around 2% or US$1,350. If the card issuer can generate a conservative 10% rate of return on these pooled funds, it keeps the difference–in this case, the card company earns US$6,750 and pays out US$1,350, representing a US$5,400 net return. Additional opportunity costs may be incurred in instances where an investor cancels the offshore card. Companies often hold onto security deposits for about six months following a notice of cancellation. This gives the company time to properly liquidate its positions with the securities purchased. It also allows the company to ensure that all transactions made on the card have cleared. Convenience, indeed, comes at a cost. Who are cards right for? Despite their benefits, and perhaps because of their costs, offshore credit cards are not right for every investor. Alex Doulis, Canadian author of several best-selling books on the offshore experience, offers an interesting perspective on the value of offshore cards to investors, particularly in relation to those who have just gone offshore or are still in the process of transferring assets there. "I discourage my clients from acquiring credit and debit cards at the time of company formation except under special circumstances," says Doulis. "The reason is because in the first instance the objective of the client is to increase the amount of capital offshore. The various taxing authorities have thrown in the towel as far as the use of IBC's by tax avoiders and have now focused on diminishing their attractiveness by using money laundering rules to track offshore capital flows thus imposing de facto currency controls. My experience has shown that money offshore has a cost of about 15%. In other words, a dollar in a tax haven is worth $1.15. If the client has the option of using money for personal expenditures from his currency-controlled environment, then this should be his first choice." If an investor is still in the process of moving funds offshore, it is prudent to allow these assets to accumulate offshore in an appropriate structure, perhaps with some tax-deferral benefits, rather than erode them by making credit card purchases that could otherwise be made with funds held onshore. "The circumstance that I do encourage is when the client has all the capital he wants offshore and is in the process of enjoying the fruits of his labor," says Doulis. Process to obtain a card The process for obtaining a card varies between institutions, but a personal card generally requires a security deposit for a trust account, a completed application form and trust agreement with a personal security code, a notarized copy of photo ID (preferably a driver's licence with your address) or a copy of the picture page of your passport along with a recent utility bill to confirm your address, and a bank reference letter or a letter from your lawyer or accountant. Offshore cards can also be obtained for corporate entities and require, in addition to the above, a copy of the certificate of incorporation, a resolution of the board (authorizing the cardholder to hold a card in the name of the company) and the signature pages of the memorandum and articles of association, including a listing of the directors. Unsecured offshore credit cards Few things illustrate the more unseemly side of offshore investing better than the marketing of "unsecured offshore credit cards." Type this phrase into an Internet search engine and you are bound to get as many returns pitching "fully anonymous, 100% approved unsecured credit cards" as you are multi-level marketing (MLM) credit card schemes or links to discussion forums where those who have fallen victim to these "opportunities" are sounding the siren to other unwary offshore investors. Look through the sites and you will learn how for as little as a US$250 application fee, and with virtually no credit information supplied, you can receive an unsecured credit card with a US$5,000 to US$10,000 credit line. Some purveyors of these products also claim they can secure a card for you in a different name than your own and can further support your spending with the provision of additional pieces of fake identification. MLM-based offshore schemes boast low application fees, complete anonymity and the ability for participants to earn hundreds of dollars in referral fees. In the words of one MLM organization, which admits no cards have been issued through their program because they are in a "pre-launch" phase, unsecured offshore credit cards are commonplace because "offshore banks have the ability to lend out more than 100 times what has been deposited in the banking institution. They are therefore inclined to be much more liberal in their lending and/or financing policies." Promoters of unsecured credit cards are, by and large, an unsavory lot and could never meet the stringent requirements of Visa or MasterCard. Beatriz Lucki, vice-president and general manager of the Caribbean and Central American region of MasterCard says companies wishing to issue a secured or unsecured card "must be licensed as a trust company, bank or other financial institution in a recognized jurisdiction; provide audited financial statements for the last three years; and have a minimum of US$25 million in capital or alternatively, issue a letter of credit or supply other collateral which will be assessed according to a detailed risk formula." Most unsecured offshore credit schemes follow a similar pattern: you send in your application fee, you never receive your card and you kiss your money goodbye. American attorney Jay Adkisson is glib in his assessment of unsecured offshore credit cards. "We're still amazed people fall for this," he writes on his popular offshore scam website called quatloos.com. "Yes, they are a scam to get your initial membership or sign-up fee, whatever you want to call it," he writes Some schemers may even take the information you provide in your application and apply for cards in Canada and the US in your own name, forcing you to not only prove to the credit card companies that you didn't defraud them, but also to spend years clearing your credit rating. To be sure, reputable offshore institutions can offer unsecured credit cards, but do so in very rare circumstances and only to extremely well-known investors with substantial assets (even in these cases, some form of collateral is often required). Doreen Marsh of the Bank of Nova Scotia (Bahamas) Ltd. says their bank can offer unsecured credit cards to non-resident Bahamians on a case-by-case basis, subject to Central Bank approval and the investor's ability to pass the so-called five "C's of Credit" test: - appropriate
character
They must also meet various "know your customer" provisions. An offshore investor who is known to a bank for five years and has an asset base of US$5 million, may get an unsecured card, but may also be required to provide a small security deposit. For the most part, unsecured offshore credit cards are not attractive to offshore financial institutions due to the multi-jurisdictional nature of offshore investing and the privacy protections provided to investors, along with their general reticence to provide any credit details and other information needed to assess credit worthiness. Simply put, prudent offshore investors steer clear of unsecured offshore credit card pitches and resign themselves to entrusting their security deposits to legitimate offshore card issuers in exchange for an effective and real offshore card. The debit card option Debit cards provide investors with another option to access money held offshore. Pershing International, for example, offers a unique asset management service through investment dealers that combines all brokerage, cheque writing, money market fund and debit card activity in a cohesive package. Its ProCash Plus™ gives offshore investors instant access to cash in their brokerage accounts and also provides investors with the ability for investors to borrow against brokerage assets. The same care exercised when applying for an offshore "credit" card should be exercised when signing up for a debit card program. In exchange for a several hundred dollar application fee, some dubious programs offer a Cirrus/Maestro debit card linked to an unnamed Latvian Bank. Since a debit card is not worth the plastic it is printed on unless there is money in the account it accesses, it goes without saying that your Latvian bank debit card requires you to transfer money to the Latvian bank for "safekeeping." Most investors will recognize the difficulties in pursuing a cause of action in a far-away land. Do your due diligence The tremendous diversity of products available to help you access funds offshore–not to mention the vast array of issuing institutions that run the gamut from world-class organizations to brazen thieves–demands that every offshore investor conduct an ample amount of due diligence before committing to any product. When assessing any quasi-offshore credit card or debit card instrument, keep some of the following questions and considerations in mind. - Check out the institution issuing the card with local regulators thoroughly. Are they a licensed bank or trust company and if so, in what jurisdiction? How long have they been in business and how old is their card program? Do they have a track record of honest and ethical dealings and have they been the target of lawsuits or serious investigations? Be sure to contact MasterCard or Visa to obtain important information about the issuing institution. - What protection is provided to offshore investors for their security deposits? Will a reputable accounting firm conduct an independent audit and which firm will act as custodian for the financial instruments purchased with security deposits? - What protections does the card company provide to your personal and transaction data? Where is the card cleared? - When the offshore card company suggests that they invest security deposits "primarily" in US Government guaranteed securities, what exactly does this mean? What assurances, other than their word, can they give you that your security deposits will be invested conservatively and not exposed to undue risk or market volatility? In the event that their management of the pool of security deposits produces a significant net loss, is your security deposit at any risk? Will they share with you an audited statement in respect to the security deposit investment pool? This is important in determining both the returns they are getting on your money (and hence the discrepancy between what they are earning and paying out as interest) and the relative risk your money is exposed to. - Take the time to examine the financial model behind their program and compare it to other credit card programs. What are their upfront fees and on-going transaction costs? If you choose to hand back your offshore card, how long will it take for the company to return your security deposit? Offshore cards
have ushered in a new world of transactional convenience and simplicity.
Irrespective of the many benefits they provide, however, it is important
to conduct careful research to distinguish good programs from bad, as well
as to ensure that your security or account deposit does not fall victim
to unscrupulous operators who simply use the power of the global MasterCard
or Visa brand to lull you into a false sense of security. Like the
domestic market, the market for credit and debit cards is highly competitive,
so it pays to shop around.
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