OFF-SHORE BANKS: LEGITIMATE STATUS AND ORGANISATION MECHANISM
There are several types of off-shore banks. Several types of bank enterprises are united in this single term. Thus, in some jurisdictions they may have a resident (that is operating) office. However, it can offer services only on an off-shore basis only to foreign (for a given territory) natural and juridical persons. Cyprus off-shore banks occupy a special place in the off-shore world. A bank registered on Cyprus is not an independent daughter bank, but an off-shore Banking Unit (OBU) created by a parent bank. By status such banks are commercial banks with banking licenses. Such a license can be issued only to a bank with a recognised world reputation. According to the representatives of the Central Bank of Cyprus, in Russia, about 20 of the largest banks may receive such recognition. The main distinction between an off-shore bank and a non-off-shore bank on Cyprus is the clients. The clients of an off-shore bank are limited to non-residents. That is its only distinction from a common bank. An off-shore bank on Cyprus has an operating office and personnel.
Totally different are off-shore banks of ‘administered’ type (banks without personnel). Such banks operate on the basis of another bank with a special agreement. Its services are much broader than those of a secretarial company. It provides not only formal procedures but bank operations of an off-shore bank as well. Such banks are usually registered in jurisdictions like the Isle of Man, Guernsey, Jersey, Barbados, the Cayman Islands, Antigua etc. By their status and operating capabilities they rank between prestige resident banks and off-shore banks with limited licenses.
What is so special about these banks is that from the point of view of the third parties and the authorities they are quite respectable. The thing is that the status and the quality of bank management is partially guaranteed by the patron bank. The patron bank usually has a general license and enjoys a recognised world reputation. It is believed that such a bank indirectly controls operations of an off-shore bank. The minimum paid-in capital of an off-shore bank ‘without personnel’, as a rule, is $500,000. Conditions vary from jurisdiction to jurisdiction. The amount of the paid-in capital very often is determined during talks with the authorities and depends on the reputation of the party concerned, and its financial potential etc. It might seem somewhat too complicated, but it pays off. An off-shore bank with a sizeable capital and located in a ‘good’ banking jurisdiction has a lot of extra opportunities.
A bank with a limited banking license is a typical off-shore bank. Such banks do not have operating offices in the jurisdiction where they are registered. Only the shareholders and those mentioned in the license can be the clients of such banks. However, there are several corporate schemes which allow a considerable increase in the number of clients. This type of off-shore bank is the most popular. They are so-called ‘in-house’ banks. They can perform very important operations for their owners. This is a very effective financial tool. In due time an off-shore bank may be regarded as an independent banking enterprise with its own history and reputation. An off-shore bank can perpetrate into elite international banking markets and closed banking circles.
Not only large banks, but also medium-sized ones and even non-banking companies and private individuals can open an off-shore ‘in-house’ bank. A minimum paid-in capital is 100 to 200 thousand dollars. Required reserves are either minimal or not obligatory altogether. ‘In-house’ banks are registered in the majority of bank jurisdictions.
OFF-SHORE BANK JURISDICTIONS: GENERAL DESCRIPTION
The legislative and economic environment of off-shore jurisdictions vary considerably. The most prestige bank jurisdictions such as the Cayman Islands, the Isle of Man, or the Bermudas have the toughest requirements. The paid-in capital is more than one million dollars. Licenses are issued, as a rule, to world-class banks and companies. Many off-shore bank jurisdictions are closed for Russian business activities. For example, temporarily, the Bahamas is ‘closed’. Despite the fact that there are structures of two Russian banks operating there, the local government set up a moratorium on new banks from Russia. This proves once again that careful planning is essential before deciding to create an off-shore bank.
Serious consideration must be given to Barbados. It is neither a prestigious nor a liberal off-shore bank jurisdiction. The capital required is $500,000. This is much lower than in the Cayman Islands, or the Isle of Man, or the Cook Islands. Recommended jurisdictions are Nauru and Western Samoa (the Pacific Ocean islands). There is a possibility to open an off-shore bank in Cyprus, but, as mentioned above, this regards only to the largest concerns, and the largest Russian banks.
Lately Western Samoa has become prestigious. Several types of banking licenses are issued there. A convenient jurisdiction is Nauru. The minimum paid-in capital is only $100,000. An off-shore bank in Nauru can accept deposits from and open current accounts for its shareholders only. However, it has the right to perform all other banking and financial operations.
OFFSHORE BANK AS A BASIS OF INTERNATIONAL FINANCIAL OPERATIONS
What are the advantages of an off-shore bank? First of all, an off-shore bank can open correspondent accounts in Russia, the CIS countries and Baltic states. An off-shore bank that has got several years of successful experience may count on opening correspondent accounts in the largest clearing foreign banks. Correspondent accounts in Russia and the CIS give one the opportunity to operate in the Russian stock and financial markets. Off-shore banks are the basis for foreign-trade and investment in the RF and abroad. Letters of credit, ‘re-invoicing’ and many other services can be performed via an off-shore bank.
An off-shore bank yields the best results if it operates in accordance with the parent company strategy. It gives an off-shore bank a chance to open a correspondent account in an elite foreign bank (even though it is quite difficult). This elite bank must be familiar with the activities and structure of the off-shore bank. Thus, it is a good idea to concentrate your current accounts in that foreign bank with which you plan to establish correspondent relationships. Partnership with a good foreign bank gives you an opportunity to open correspondent accounts in other Western banks. There is also another advantage. An off-shore bank with a web of correspondent accounts is not simply a financial tool but a valuable independent enterprise.
The next step could be getting a license (with the help of the mighty strategy partner) in other prestigious jurisdictions, such as: Barbados, the Bahamas etc. This step-by-step strategy can be advised for those who plan to create a serious enterprise abroad.
An off-shore bank offers a large spectrum of services. Thus, those clients who wish to open an account abroad can do that via the off-shore structure of their Russian bank. The off-shore bank can operate via its offices in different countries. Off-shore banks are not included into agreements which avoid double taxation. Thus, the most favourable tax jurisdiction must be chosen. For example, the income interest of Dutch financial companies is tax exempt. In addition, the Netherlands signed a number of tax agreements including such agreement with Russia. This scheme - "a foreign bank, a financial company, a client in Russia" - is already employed by some financial structures.
To stimulate its operations an off-shore bank may use credit agents and financial brokers. In various countries off-shore banks receive payments from their middle people for the right to use their credit resources. A parent enter-prise can join, with the help of its off-shore bank, a prestigious world credit consortium and improve its strategic co-operation with large foreign banks.
As experience shows, the largest world holding, bank and industrial companies use their off-shore banks as their foreign payment and reserve centre. Very often they are created not only by large and medium companies but private individuals as well. An off-shore bank opens the way to the world interbank credits. Businessmen get an opportunity to fulfil their own strategy of investment.
It should be born in mind that an off-shore bank needs a corresponding infrastructure and business ties. Secretarial companies and a financial adviser will be of great help in creating effective schemes. To open an off-shore bank you would probably need a ‘bank operating day’. A good secretarial company will provide you with the needed ‘operating day’ at a reasonable price. For example, a special ‘micro bank’ program can be worked out. It is considerably lower in cost than standard ones. An operating centre of an off-shore bank can be equipped on a ‘turn-key’ basis by the modern managerial systems of bank activities and systems of financial conjuncture analysis. If a bank is to operate in the world stock and financial markets, it receives a special software program and a complex of consulting services.
It is not always easy to receive a bank license. Usually it is issued on certain terms after careful consideration of the documents of the applicant. If you are short of time but not short of cash, you can easily avoid these difficulties by purchasing an already existing bank. There is a drawback however. Such a bank is almost always a ‘dark horse’. It is safer to register a whole new bank, since, in this case, you avoid unpleasant misunderstandings. A typical thing that usually occurs when purchasing an existing bank is considerable debts or forged license.
In conclusion we do think we ought to mention the possibility of buying an ‘existing’ resident bank in a prestigious European country. The price of such deals in usually rather high, let us say as much as 3 million dollars. But those who have money, have the opportunity to buy formed business ties, qualified personnel and a reputation earned over a number of years.
