Over the years, I’ve seen my fair share of clients looking at investment opportunities abroad. Up until recently, clients in the US believed that foreign investments in Swiss banks, the Caribbean and other locales were effective ways to diversify their financial portfolios and keep their money safely tucked away. However, FBAR and the IRS whistle-blower program have successfully broken the back of Swiss bank privacy laws by prosecuting all foreign banks that do not comply with US IRS tax code requirements.

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In other words, an American citizen cannot claim immunity with any foreign bank, from the IRS. The heretofore sacred trust that Swiss banks built up with their clients is no longer. All banks are required to report the asset holdings of US citizens – regardless of where the US citizen is residing. We have seen a deluge of banks like HSBC, UBS AG, Deutsche Bank and scores of others complying with Foreign Bank and Financial Accounts Requirements, as well as the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department. Now, foreign investments and bank accounts abroad all come under the jurisdiction of the Treasury Department.

Of course, investing abroad can be especially lucrative if you know what you’re doing, and you do it correctly. That is why I have always urged caution with clients to conduct the requisite research before acting in a willy-nilly fashion. For example, your biggest challenge when investing abroad is not the IRS if you are a law-abiding citizen – it is overcoming the exchange rate problem. Unbeknownst to many newbie investors, the money that you lose when exchanging USD for GBP, JPY, EUR or ZAR is significant when you do it through banks and traditional financial institutions like the foreign-exchange departments of banks. Unfortunately, banks are notorious for tacking on many additional fees such as commissions, unfavourable exchange rates to clients, once-off charges and the like.

How can you avoid the financial ravages of banks when investing abroad?

I believe that all options should be explored when you are investing money abroad. It is foolhardy to simply stick with the status quo if that is not working with you. I often ask my clients the following question, ‘If your head hurts every time you bang it into the wall, why do you do it?’ Some people believe that there are certain costs that they have to bear, regardless of how it disadvantages them. But this is simply not true. FinTech advancement has upended convention with traditional banking and financial institutions. It is no longer necessary to submit to the will of big banks and financial corporations which are exploiting their customers with unfavourable exchange rates.

If you are looking to invest abroad, you need to gain maximum traction from your available investments by using as many USDs as possible to purchase foreign currency. Consider the following example: $150,000 is available for investment in the United Kingdom. At the current exchange rate of 1.31, that equates to £114,503. Banks will not give you that rate, because there are many additional fees, commissions, hidden charges and the like that they tack on to the official exchange rate. They may give you a less favourable rate such as 1.36 which equates to £110,294. That extra £4,300 is gone – as if it never existed to begin with. Every cent that you lose in an exchange rate translates into thousands lost overall. Before you invest any money abroad, consider your reporting requirements with the IRS and the Treasury Department, as well as the exchange rate that you are going to be working with.

Is there an alternative to expensive exchange rates from banks?

The health of your financial portfolio depends on how well you manage your overseas investments. Fortunately, there are many cheaper foreign exchange providers than banks and they are 100% reputable and transparent. The advantage they have over banks is well noted, and there are tens of thousands of clients who can attest to that. The best international money transfer services companies are not banks – they are companies like Currencies Direct, torfx, and WorldFirst. The minimum transfer amounts will vary from £100-£1,000, and each of these currency transfer providers supports dozens of currencies. With offices located all over the world, they do not charge fees and commissions, and the entire process can be conducted online. Banks are struggling to compete with these companies, and are even attempting to become more transparent in their pricing since they are losing business to non-bank Forex transfer service companies.

The typical fee for a bank is £25 per transfer, and while the security of funds is assured up to £75,000, the rates can range from 3% on standard pairs through 5% on exotic currency pairs. The rates with international payment companies range between 0.3% and 2.5% overall. This is a significant difference and it bodes well for clients to consider these international money transfer service companies. Whether you’re a small or a medium business, an individual client or an expatriate looking to send money to and fro, non-bank money transfer companies should be considered first. This is the advice I give all my clients, since the era of dominance with big banks in Forex transfer services is quickly coming to an end.