The international banking for non-resident customers has recently become a permanent source of news. While some of that news appear to be predictable (especially to those who in some way or other has enjoyed the services of foreign financial institutions in recent years), the others still demand time to get accustomed to.
Where formerly banks used to compete for a potential customer offering better conditions, and the customers could allow themselves to choose between a multitude of options, nowadays banks do thoroughly select an “eligible” customer considering a number of different circumstances – from a company’s jurisdiction to business biography of its beneficiary and legality of source of his funds. The non-resident banking services industry faces constant “tightening screws” under the pressure of international organizations and national banking regulators.
Nevertheless, foreign bank account still remains an essential tool in international business, and account opening is an inevitable task for almost all who register business abroad or expand its geography. In view of this we will consider things step by step below.
Why you may need a foreign bank account?
A corporate account opened with a foreign bank helps to facilitate a company’s settlements with its business partners (customers, suppliers), accumulate monetary assets, pay taxes and duties, run payroll programs, use corporate bank cards etc. Such account may be opened in the country of the company’s incorporation or in other country or countries.
Private individuals may need a personal bank account in case of employment or obtaining a residency permit abroad, ownership of foreign immovable property and in many other cases. Furthermore, many clients just decide to keep and/or invest their money abroad in order to save or augment their personal or family wealth. Only some limited groups (such as senior government officials) may be statutorily prohibited from opening foreign accounts or using foreign financial instruments.
Some countries with tight currency regulations impose restrictions on using personal foreign bank accounts by their residents. Certain types of cross-border transactions via such accounts may be considered unlawful and entail substantial fines.
Types of accounts
Foreign banks usually offer settlement (current) and/or savings accounts.
Settlement accounts are designed for regular transactions that involve frequent depositing and withdrawal of funds, which is necessary when a company conducts ordinary operational activities (trade in goods, supply of services, etc.). Some accounts may work in a settlement mode, but require either maintaining a permanent minimum balance or placing an investment portfolio.
Savings (investment) accounts are opened for the purpose of safekeeping and/or investment of clients’ funds and as a rule cannot be used for current transactions.
How to choose a foreign bank?
Currently choice of a bank to open an account for a foreign (especially offshore) company becomes more and more complicated. It depends on a number of factors – from structure of company ownership and type of its activity to specifics of national banking regulator’s policy.
Below are some questions that should be given an answer when choosing a foreign bank:
- Does this bank accept non-resident companies (including incorporated in offshore jurisdictions) and non-resident individuals?
- Does the bank offer settlement accounts (i.e. the accounts for frequent incoming and outgoing payments)?
- Will the bank accept the customer with this particular activity, with the given beneficiaries, business partners and payment destinations?
- What currencies are available to proceed payments (it depends on the relevant network of correspondent banks) and whether the currencies you need are among them?
- What are the bank’s fees?
- What are the bank’s rankings, reputation, financial results and prospects?
- and many other issues.
That is why when choosing a foreign bank for opening a corporate or personal account we recommend to apply only to those specialists (professional intermediaries and bank agents) who are fully aware of the current (and constantly fluctuating!) situation in the field of opening accounts and can fairly estimate chances to open an account considering all circumstances inherent to the given client and to the bank.
What country to open account in?
For the purposes of opening corporate accounts for foreign (including offshore) companies the banks may be divided into three main groups:
1. European banks. Generally, (except Switzerland, Liechtenstein and Montenegro) these are banks of the European Union Member States, that are governed by the pan-EU regulator – the European Central Bank. The following banks may be distinguished inside this group:
- banks of the Baltic states (Latvia, Lithuania, Estonia);
- banks of Cyprus;
- banks of Central Europe (Poland, Hungary, Czech Republic, etc.);
- banks of Western Europe (Austria, Liechtenstein, Luxembourg, Switzerland);
- other banks (Montenegro, etc.).
The said banks remain to be in demand when opening corporate bank accounts for foreign companies.
However most of them (as well as any others by now) have more and more long processing of applications for opening an account, request more additional information from an applicant, and (especially for West-European banks) have rather high bank fees. And, most importantly, banks of most of these countries today have ceased to open and service accounts of offshore companies (for example, it is now impossible to open an account in a Latvian bank for an offshore company or for a partnership like LP or LLP formed of offshore companies).
Only some banks despite generally negative attitude to offshore jurisdictions continue considering opening investment accounts for offshore companies on the terms favorable to bank (namely – investment to bank’s products and maintaining a considerable minimum required balance), provided that the client meets all other requirements.
2. Asian banks (Hong Kong, Singapore).
Asian banks are generally focused on businesses operating in the Asian region or with partners from it. They are also following general deoffshorization trend and strengthening due diligence procedures.
To open an account in Hong Kong you will have to pass a personal face-to-face interview with a bank manager in English or Chinese without interpreter (in Hong Kong). The banks consider only the companies that have a real office in Hong Kong (it should be noted that such companies are taxable in Hong Kong).
Opening an account in Singapore banks is now available for Singapore companies only, moreover, their directors and shareholders must be resident in Singapore. The director must exercise real management powers in the company and have an exclusive access to its bank account.
Another relative disadvantage of Asian banks is less convenient communication between the bank and the client due to significant difference in time zones (which is relevant for European customers).
3. Offshore banks (Saint Lucia, Mauritius, Seychelles, Saint Vincent and the Grenadines and others).
Offshore banks are based in offshore jurisdictions and have traditionally specialized in servicing non-resident customers. However, today such banks besides the lack of any considerable advantages over onshore banks, lose in comparison with the latter – firstly because of offshore image and extremely limited opportunities of settlements with certain countries and in certain currencies.
The fact is that most developed countries negatively treat offshore banks, which complicates establishment of correspondent relations with them and hinders processing of payments. In particular, for this reason offshore banks (with the exception to banks of Mauritius) have recently faced difficulties with settlements in US dollars. Therefore, if you need to pay in USD, as well as to make settlements with American or European partners, opening an account with an offshore bank will be unadvisable.
On the other hand, the procedure of opening account in an offshore bank today is virtually the same as in other banks. As anywhere, a client is required to submit a set of personal and / or corporate documents within due diligence and know-your-customer procedures. Account opening application may be considered a long time. An offshore bank, like any other one, will reject account opening in case if a potential client does not comply with the bank’s policy or is categorized as high-risk. In the course of settlement service an offshore bank may request supporting documents related to current transactions of a client with the same frequency as ordinary banks.
Procedure of opening account in a foreign bank
In order to open an account in a foreign bank you need to:
- Choose a foreign bank.
- Visit the bank’s office abroad personally or meet the bank’s representative or apply to the bank’s authorized partners in your country. A number of banks (in particular, banks of Latvia, Cyprus, Switzerland, Mauritius, St. Lucia) allow remote opening of accounts (without visiting the bank). In other cases, a personal visit to the bank is required (typical for banks of Poland, Hungary, Hong Kong, Singapore and others).
- Fill in the bank forms and submit the complete set of the documents required by the bank. Provide any other required documents and explanations where necessary.
- Wait for the bank’s decision.
Every bank has its own requirements to form and contents of such documents of a client. Generally speaking, a client (who opens a corporate bank account) has to provide the following:
First, a set of corporate documents (originals or certified copies – depending on requirements of a specific bank).
Second, information on the client’s business, that includes:
- description of business of the company that is going to be the account holder (often – copies of contracts and invoices confirming the declared activities);
- information on counterparties on incoming and outgoing payments;
- estimated figures of the account (annual turnover, number and frequency of transactions etc.).
The client company’s business within one account must be understandable by the bank, lawful and reasonably invariable (preferably, one account – one activity). The declared activity must be comparable to existing resident business of the company’s beneficiary.
Third, the client provides the bank with the information on beneficial (i.e. actual, ultimate) owners of the company. This information includes:
- personal identification documents;
- proof of resident address;
- information on sources of income (any documents confirming legal sources of funds, reference from an employer, employment contract, information on business, savings and others);
- bank references and bank account statements;
- reference letters from major business partners;
- names and activities of existing resident companies of the client (including their websites, other materials);
- CVs with information on education and carrier (as mentioned above, it is important for beneficiary to have a relevant work/business experience in the field that was declared as a principal activity of the company for which the account is being opened).
Recently, banks have begun to pay special attention not only to information on the client (the applicant) and his beneficiary, but also to his business partners, who should be as clear and transparent to the bank as the future client himself. For example, if your counterparty is a British partnership (LLP, LP), the bank may inquire who and what stands behind it, up to clarifying the nature of resident business of beneficiaries of such a partnership. Furthermore, if your counterparty is listed in any sanctions lists or just has any contacts with third parties from such lists, you may be denied opening an account.
Processing of application for opening an account may take around 2 months or more. No accelerated procedures for passing applications are available. Moreover, there are no guarantees that the account will be anyway opened.
If the application is approved, the customer is assigned an account number, receives means of access to online account management system, bank cards (where necessary).
Compliance. Due Diligence. Know-Your-Customer
These words are well known to everyone who have had to open foreign bank accounts and fill out bank forms.
Bank compliance means the internal procedures of the bank for identifying and assessing compliance of the customer, based both on information provided by the potential customer and obtained from other sources available to the bank. A bank collects and analyzes this information implementing know-your-customer principle, and, in a broader context, the principle of due diligence, applicable not only in banking, but also in any other business.
Observing these principles is not a bank’s discretion: it is caused by the obligation to fulfill the requirements of the national (and for the EU countries also the supranational) regulator and the rules aimed at combating money laundering and financing of terrorism (AML/CFT). Banks always carried out this work in some or other way, however, in the last decade the rules of “the game” have changed dramatically towards tightening. For example, failure to provide the bank with the required documents confirming the origin of the funds received to the account, or a sharp deviation of the grounds (nature) of payments from those that were announced at the opening of the account, may well lead to its closure.
A relatively recent innovation is the requirement to indicate in the banking forms the place of tax residency of the company and its beneficial owners (as well as their tax identification numbers and information about active or passive nature of the company’s business) for the purpose of implementing automatic information exchange under the CRS standard.
Given that the banks’ approach to assessing customers’ compliance has ceased to be merely technical matter long ago, when opening a foreign account, you should be ready to communicate to the bank not only the standard information about the applicant company, but also:
- the details of your existing resident business;
- identification and biographical data of beneficial owners of the company (including detailed work experience);
- exhaustive information on source of funds; and
- other information required by the bank.
That is why adaptation to the new rules implies careful and timely documenting of the operations of both foreign and resident businesses, personal income, welfare sources, paid taxes. All of these must be in place not only when operating a foreign account, but also during several years preceding the moment when the need to open the account emerged.
The main trends in opening accounts
To conclude, the choice of reliable foreign banks that are ready to service accounts of non-resident (especially offshore) companies is currently very limited and continues to narrow. Why? Here are some reasons:
- Refusal of offshore companies. Foreign banks reduce the share of offshore companies in their client portfolio or refuse to service them at all (the criterion is not only the offshore jurisdiction of the company, but also the lack of real economic content – such companies are called shell companies). Somewhere this will happen at once, somewhere – on a step-by-step basis. For example, in the light of well-known events related to voluntary liquidation of the Latvian ABLV bank in spring 2018, many other banks have intensified cleansing their portfolios from “undesirable” customers. In Latvia, the decision to stop servicing shell companies’ accounts was made at the legislative level. In the nearest future, other countries may follow this lead (first of all – Cyprus, where introduction of the new requirements for banks is expected in summer 2018).
- Reality of business. Preference is given to the companies whose country of incorporation coincides with the country of the bank, or to the companies that have real economic presence in their country (office, assets, personnel), who file financial statements and pay taxes therein, as well as having any connection with the country of the bank, in which the account is opened.
- Clarity and transparency of client. Banks tend to accept clients with a fully understandable business, a transparent source of income and nature of cash flows, as well as with fully acceptable (by a number of features) beneficiaries and counterparties.
- Tightening due diligence requirements. Such requirements continue to be strengthened both for applicants and existing clients of foreign banks (in particular those aimed at identification of beneficiaries and documentary confirmation of transactions).
- Close to zero chances to open account have start-ups (unable to prove the relevant experience and specify counterparties), as well as companies representing high-risk categories of business (e.g. blockchain and cryptocurrencies, non-licensed forex, payment systems, gambling, dual-use items, precious metals etc.). Banks remain traditionally loyal (provided that all other conditions are met) to international trade, shipping, forwarding and logistics, understandable IT-projects, EU licensed financial services.
- US dollars. The situation with transfers in US dollars has deteriorated sharply (for example, the banks of Latvia, as well as a number of offshore banks have completely refused to open accounts in that currency).
- Sanctions. The attention of banks to various sanctions lists and relevant categories of individuals and companies has increased. The presence of persons under sanctions among the declared beneficiaries or counterparties (or any connection with them) will result in refusal to open an account.
- Automatic exchange. In September 2018, the countries of the “second phase”, including Switzerland, Austria and many classical offshore jurisdictions, will enter into the practical phase of automatic exchange of financial account information under the CRS standard. It is prematurely to predict its results, however, if automatic exchange is fully implemented, the world will move to a completely different level of transparency of tax information.