The offshore bank account – requirements, procedures, risks
The need for a bank account
Opening a corporate bank account and maintaining healthy relationships with the selected financial institution demands a comprehensive bank account opening strategy. Simply said, it should be accepted to spend more time and money on the bank account opening than for the setup of your offshore company.
In previous years it was common practice to open a bank account as a routine for each and every seriously offshore company. At that time, the account opening process had been easily manageable within a short period of time, the compliance requirements of the banks provided a small hurdle and the scope of banks available had been opulent. These golden times are gone forever, not only for the offshore investor but for the banks as well.
The investor should be aware that high compliance standards make offshore banking a very costly venture. Therefore, the banks
- either have to charge high banking fees,
- have to find ways and means to limit or neglect compliance requirements or
- have to look for other ways and means to profit from the offshore banking account.
If the bank is merely used as a pass-through entity, it has to charge premium transaction fees. If it is used as a long-term savings bank, a cash-only account may not be accepted, or the business relationship might have some kind of Hotel California style.
As a consequence, nowadays it makes sense to carefully evaluate whether an offshore company really needs a bank account. Given the small equity requirements in offshore jurisdictions, there is no need to open and fund a bank account before registration. The painful process to select an appropriate bank, to curl through a stop-and-go compliance due diligence and finally to accept high banking fees and the risk to be whistle-blowed to tax authorities and the yellow press is not for everyone.
At the end of the day, a corporate bank account might not be necessary when the offshore company
- has non-financial assets only,
- is currently dormant or quasi-dormant, or
- can utilize banking without banks through digital currencies (Bitcoin), non-banking financial services (Western Union, etc.) or online payment systems (PayPal).
It is always a temptation to use the private bank accounts of the company‘s shareholders and directors. Any payment of an invoice of the company might be simply booked as a capital contribution, and each out-payment might be booked as a withdrawal if this is in-line with the requirements under local corporate laws.
Such hijacking of a private bank account for corporate purposes might result in a violation of banking laws and regulations and might even trigger certain civil and criminal liability implications. More important, the purpose of the offshore company as tax shelter might be compromised. Under the worldwide income taxation doctrine, the shareholders and/or directors might have a direct and immediate tax liability for each payment in their home company. You have been warned.
In the grand scale of things, there are still good or even compulsive reasons to combine an active offshore company with substantial business activities with a high-performance bank account. There is a high demand to manage the privacy and the business confidentiality of corporate owners and wealthy families willing to reduce their public exposure for security purposes.
How to select the most favorable banking jurisdiction
The bank account of an offshore company can be opened in the same offshore jurisdiction. This would possibly result in a direct information exchange between the corporate entity, the bank, and the offshore government. It might be more advisable to separate company legislation and banking legislation to keep things more confidential. The combination of business seat and bank account in the same jurisdiction might trigger taxes, even in an offshore jurisdiction. And an offshore company can decide to open its bank account in a high-regulated OECD onshore legislation as well.
Current experience shows that this first decision is already heavily influenced by the restrictions and limitations of the banking industry. The bank may not be willing to serve non-resident companies, they may blacklist certain jurisdictions, and they may have additional legal or policy requirements for specific countries like the USA.
In a nutshell, there are three classes of offshore bank accounts:
- Traditional Swiss or Chinese banks with a compliance department bigger than the credit department,
- banks in a European jurisdiction like Cyprus, Malta, Latvia or Estonia with a doubtful political climate and/or over-flexible legal viewpoints, or
- banks on an exotic island like St. Kitts and Nevis where the bank may consist just in a glossy website and can vanish into thin air without early warning.
In our current practice, all but one jurisdictions strictly deny bank accounts for problematic industries like
- adult entertainment,
- pharmaceutical sales,
- cryptocurrencies, digital asset businesses, and ICOs
- arms trade, blood diamonds, and similar politically exposed industries,
Other jurisdictions draw a (thinner or thicker) red line for PEPs (personally exposed persons), embargoed countries and have other more exotic criteria.
Other criteria are the existence and enforcement of information exchange agreements, mutual legal assistance treaties or any similar official agreements. The (remaining) level of banking secrecy, the enforcement of penalties in case of illegal disclosure of bank information, general professional behavior and work ethics of the bank, the overall legal and regulatory framework, but also language barriers, time zones, and visa requirements are other typical criteria.
However, to successfully accomplish the bank opening procedure, it is not sufficient just to decide for the right jurisdiction. The next opponent is the individual bank itself. To avoid a clear denial or a long-lasting process which ends in a rejection, the offshore company has not only
- to provide certain documents and to give certain information but, also,
- to act intelligent enough to outsmart the compliance department of the bank.
How to prepare the required documents for the bankers
The various documents requested can be categorized into four core data, additional identification data and supporting documents. There might be the requirement for simple copies, for a certification, a notarization or even for an Apostille.
The banking customer should be aware that the documents can be used against him. In this banking puzzle, each part must fit so that the overall picture is complete. If the papers allow conclusions about the applicant’s lifestyle, his financial burdens, and his overall situation, no contradictions and weaknesses should be revealed. Often, it is beneficial not to show certain documents, because they disclose some insights too much.
In these days the heart of the bank is no longer the credit office but the compliance department. Qualified compliance officers, accredited by the local banking supervisory authority, might have a higher income than the top management.
The compliance department typically has sophisticated accumulated data material, procedures, and protocols. Their intention is to prepare documentation for each banking customer and each bank account that gives the impression that they had understood the business model of the customer. The compliance check requires much more insights than just the precise identification of the offshore company and its shareholders, directors, and officers. Whatever documents, data, and explanation the applicant provides, it is never ever enough or satisfying in the first attempt. Otherwise, the compliance department would make itself obsolete. Their business appetite seems to be low, but they are still hungry like wolves.
Cross-border value chains are highly complex and the compliance officer in an offshore jurisdiction has typically neither the knowledge nor the education to understand this. To get the deal done it is a smart strategy not to overcomplicate things. A straightforward story with thoughtful details will speed up the procedure and satisfy the intellectual curiosity more than long-winded explanations of each and every particularity.
How to avoid risky shortcuts and black sheep
On first sight, it may look promising to agree on a package deal where the offshore provider offers „a total offshore company formation package which includes the formation of a guaranteed bank account“ and to start a turn-key offshore business. However, this is frequently just a marketing trick to promote costly and risky third-tier offshore banks. If the offshore company does not fulfill the expectations of the banks concerning deposit amount, turn-over or business purposes, the established banking connection will be terminated within a short period of time.
Offers to open bank accounts on the fast-track without the need for the beneficiary to travel and all the work being completed by the offshore provider on behalf of his customers, should be taken with more than a grain of salt. The Know-Your-Customer requirements simply do not allow such procedure and, therefore, such behavior opens a gray area of risks and costs.
“A bank that does not require the customer to show up at the bank’s counter hall for opening a bank account might fear that the client nevertheless might come and realizes that the financial institution does not have a real-world counter hall, but just a glossy website.”
How to avoid a bank account termination
Nothing is forever. A bank account, secured only after laborious negotiations, might be terminated by the bank overnight and out of the blue.
“Please be informed that following an internal review of your bank account and after careful consideration, the bank decided to terminate our banking relationship. We will close your account on … Regular payments from your account will not be possible from that date onwards. Please withdraw the remaining balance till … We will issue a bank cheque with the closing balance on … Please contact anyone making regular payments into your account and provide them with alternative banking details. We will try to return to the relevant sender payments received after your account is closed, but we cannot guarantee that this will be possible. “
The termination might be the result of the bank customer‘s misbehavior:
- He might carry out fewer transactions than promised, the account balance might be lower than expected or the type of investments might not be financially attractive enough for the bank.
- The data and information provided by the customer during the compliance due diligence might turn out to be wrong.
- The business of the client might develop in a direction that is not acceptable for the bank.
- The communication between bank and customer is from the bank‘s point of view unsatisfactory.
The reason for the termination might solely be in the business sphere of the bank:
- They might be forced to terminate because of legal or regulatory changes.
- They might simply change their strategy, policy, risk appetite or have other administrative reasons.
A stampede of bank accounting terminations can be expected for U.S. owned companies, BVI corporations, and other perfectly legal structures, which had been very warmly welcomed just a few months or years ago.
The termination of the bank relationship usually allows the withdrawal of the balance amount within a short period of some weeks only. Other bank transfers are not possible anymore. If the money is not withdrawn within the given period, the bank will send a bank cheque for the balance amount. Such bankers cheque may be addressed to the beneficial owner, not the corporation as the bank customer. This might be qualified as a forced dividend distribution which might for various reasons not only inconvenient but highly disadvantageous for the investor.
And no bank will ever explain why a bank account is refused or allow a second attempt after the first account opening has been refused. They might even red-flag the corporation for the whole banking community which might be an economic death sentence for this particular entity.
Offshore location independent legal services, tax advice, and transaction support
PUGNATORIUS Ltd. is the Bangkok-based specialist provider of transactional legal and tax advice on foreign investments in Thailand. Flag theory for the nomad capitalist: Go where you’re treated best.
The law firm has a long tradition and particular know-how to assist and advice offshore investors and cross-border transactions involving offshore jurisdictions on these seven offshore solutions:
- Offshore legal and tax advice
- Offshore company
- Offshore bank account
- Offshore investment and disinvestment
- Offshore nominee services
- Offshore FinTech
- Offshore search and rescue services
The scope of professional services is further explained at pugnatorius.com/offshore.