Certificates of Deposit – What is it?

International CD (Offshore, Eurodollar), Domestic CD

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What are Certificates of Deposit (aka CD)? What is a domestic CD and what are the various options of International CDs? A look at the insurance on Offshore CDs and the Eurodollar CD?

Commonly referred to as a CD, a Certificate of Deposit can be used as a short or long term investment. Domestic banks offer FDIC (Federal Deposit Insurance Corporation) insured Certificates of Deposit with higher rates of return than other investment options. The bank retains money for a specified period of time with the promise to repay the principal and interest to the depositor at the conclusion of the investment term.
Depending on the amount of money you invest, and the particular terms of the bank you choose to invest with, you may choose to invest your money for a period as short as one month to six years. There is usually a penalty for withdrawing money from a CD prior to the maturity date. Banks will also require a minimum deposit to open a Certificate of Deposit.

Offshore Certificates of Deposit

International Certificates of Deposit vary slightly from domestic CDs. International Certificates of Deposit can also be referred to as Offshore Certificates of Deposit or Eurodollar Certificates of Deposit. When obtaining a Certificate of Deposit from an offshore bank, the investor signs an agreement with the bank in which the bank agrees to pay a fixed interest rate in exchange to use the money during the specified time period.
Similar to domestic banks, offshore banks will differ on the minimum amount required to use as a deposit for a CD. Often the amount required for an Offshore Certificate of Deposit will be much higher than what is traditionally required from domestic banks.
There are several advantages to having a Certificate of Deposit from an offshore bank. The advantages include:
  1. Higher interest rates. Unlike domestic banks, offshore banks are not government regulated and are free to compete against each other for better rates. Depending on the country you choose to bank in, interest rates can be as high as ten percent.
  2. Another advantage to having an Offshore Certificate of Deposit is the income tax benefits. If you choose to open a Certificate of Deposit in a recognized tax haven such as Panama, you will not be taxed on interest earned because that particular government does not impose interest on income taxes.
  3. A third major advantage to an Offshore Certificate of Deposit is the anonymity and confidentiality offered to protect your assets. Depending on the jurisdiction you choose to obtain your Certificate of Deposit, the bank may be forced to adhere to strict secrecy laws which protect your money from creditors and divorce. Also, since offshore banks are outside the jurisdiction of domestic courts those wishing to sequester your funds for whatever reason will be unable to do so.

Insurance on Offshore Bank Account CD

Unlike domestic banks, an offshore bank cannot offer Certificates of Deposit which are FDIC insured. Rather, these banks have their own methods of insuring investment money which guarantee that at any given time the bank has enough money in its reserves to cover all deposits made.
For example, in Panama all banks are required to report each month to the BNP (Banco Nacional do Panama) to ensure they have enough reserves to cover deposits made. Compliance officers are assigned to the banks to make sure depositor’s funds are not misappropriated. Additionally, offshore banks will often maintain large insurance policies to cover depositor’s funds for amounts over what is normally covered by the BNP.

Eurodollar Certificates of Deposit

Eurodollar Certificates of Deposit are issued in London according to the rates listed on the London Interbank Offered Rate (LIBOR). This interest rate is calculated on a daily basis by the British Banker’s Association. Several countries that rely on LIBOR for calculating the rates for Certificates of Deposit are England, the United States, Switzerland, and Canada. Eurodollar Certificates of Deposit, while being issued outside the United States, are still denominated in American currency.
When choosing to open an International Certificate of Deposit, it is important to consult with a financial advisor. Your advisor will be aware of minimum deposits required to open the account, any penalties for withdrawing money early, the stability of the bank you choose to invest with, and the denomination your money will be kept in. Your advisor will also help you choose the appropriate length of time to keep your money tied up in a CD to offer you the best return of investment.
Category: Financial Planning

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