The banking sector and banks have always been perceived by the public, and by the business world, as a symbol of wealth and economic power. The same applies also in the case of offshore banks.
Offshore Banks can still be advantageously formed in a number of leading offshore jurisdictions and financial centers, as well as in some new, up-and-coming banking hubs. In most jurisdictions, it is almost impossible for a new applicant who wants to offer banking services, to establish a bank company, unless the applicant is a renowned and respected international bank corporation.
The authorities protecting the tax sector from adverse impacts, which could put in doubt the stability of the bank sector or the goodwill of the country in question, have thought out a number of bureaucratic and financial obstacles.
These barriers-to-entry lead serious, but less capital-endowed applicants to be excluded from the possibility of applying for a bank license. A number of countries require the registered capital of a bank to be hundreds of millions of dollars, which must often be fully paid up before the issuing of the license. Some also focus their attention only on those entities that already have a bank license in another country.
Still, many entities, especially international corporate conglomerates, are interested in obtaining a bank license for providing bank services to fulfill the needs of their various corporate holdings. The bank license, which is referred to as 'internal' or 'captive' in many jurisdictions, can be obtained in a standard manner in many offshore locations at surprisingly advantageous prices and with favorable conditions.
A full or partially limited general or international bank license is more demanding, with respect to the minimum, required, registered capital amounts. Nonetheless there are locations where it is possible to get even this type of license under acceptable conditions.
Basic Types of Offshore Bank Licenses
In general terms it is possible to divide offshore bank licenses into two basic types of license's, which can have a number of further subtypes:
General Bank License
Understood in a majority of jurisdictions as a license for providing bank services, at the place of registration and internationally, direct to the general public. The bank acts as any other bank entity, it can accept deposits from the public and perform common bank services with residents or non-residents.
In an overwhelming majority of countries, however, the activity is limited to providing services to non-residents, i.e. offshore banking services only. This type of offshore bank is established in lieu of providing commercial bank services in an offshore regime.
Restrictive Bank License
Often referred to as the 'internal' license, is a license that:
- Limits territorial activities of the bank
- Limits the possibility of providing services in foreign currencies
- Limits the possibility of providing services to certain people
In a majority of cases, the bank cannot accept deposits from the public and it can provide its services only to those entities for which the bank license was issued. This bank is used as a so-called 'corporate bank' for active Cash Flow management.
An offshore bank company established in this way can become a high-quality tool for:
- Tax planning
- Increase in image of the financial group or holding
- Active cash flow management
- Issuing bonds and guarantees for tender proceeding purposes
- Easier access to bank information about business partners and competitors
- Easier access to financial markets
- More progressive financing of business activities of a holding or financial group
- Establishment of confidential and flexible bank accounts
- Providing loans and credit facilities
Why Set Up an Offshore Bank?
Most offshore banks are not subject to:
- Withholding taxes
- Stamp duties and fees
- Taxes for checks issued or accepted
- Other forms of direct and indirect taxes
Another significant factor for offshore banking is the strict anonymity and confidentiality, which many potential depositors look for.
These offshore banks are also fully respected entities in the wider international community, which is also displayed by the vast majority of them being domiciled in one of the tax havens, such as Bahamas, Cayman Islands, Jersey, Guernsey, Labuan, Isle of Man or Hong Kong.
Leading bank centers with very low or no taxes and a slightly more liberal environment are concentrated, to a significant extent, into three geographic areas:
The truth is that the laws of these foreign jurisdictions differ very much from one another. One jurisdiction may be, at a certain moment, far more attractive than another jurisdiction; therefore, it is necessary to perform an analysis before selecting a location.
The advantages of offshore banking, which are available to proprietors of private international banks, significantly prevail over the advantages offered by a majority of other investment or financial related entities, such as investment funds, mutual investment co-operatives, credit and loan co-operatives, investment societies, etc.
Financial activities, once exclusive to banks, are suddenly available to natural persons who are offshore bank owners, such as:
- Tools for direct access to international capital markets
- Inter-bank advantages in the form of wholesale borrowing
- Reduction of foreign exchange fees
Typical Bank Formation Requirements
The information and backgrounds required from the bank license applicant, in an overwhelming majority of jurisdictions, are as follows:
- Bank name and its legal form
- Applicant status (whether the matter concerns establishment of a branch office of a foreign bank or a new company)
- Names and curricula vitae of the bank directors
- Certificates of police clearance of applicants and directors
- Bank and business references
- Submission of information about economic management of the firms of the applicant(s)
- Identification of the bank shareholders
- Identification of the type of issued shares of the bank (registered shares, priority shares, shares without voting rights, etc.)
- Denomination of the issued shares of the bank and type of currency used
- Capital structure of the bank and capital security
- Capital reserves of the bank Information stating from what resources the bank will be invested
- Document of certifying that the registered capital has been paid up (if registered in the host country)
- Document certifying that all taxes, stamp duties and royalties have been settled
- Identification of the registered office in the host country
- Identification data of the registered agent or representative (if required)
- Identification data of the auditor and lawyer with a registered office in the host country
- Type of intended services which are to be provided
- Territorial operational range of the bank
- How the company will protect itself from fraudulent or criminal conduct
- Business plan of the bank (the authorities generally require a balance sheet from 3 to 10 years)
- Benefits for the host country resulting from the bank operation
- Signed and presented applications for the issue of the bank license
Challenges of Forming an Offshore Bank
All these jurisdictions will require a proper front office and at least two employees locally where the bank is licensed. Most offshore jurisdictions today are favoring a more restrictive approach that favors only existing banks or at least substantial financial companies, such as Swiss Trust Companies, which can prove they have been in existence for a while and have favorable balance sheets to back that up. Legislation is constantly being revised so it is an onerous task to keep up to date with all the information.
Most of the available jurisdictions have increased the amount of paid-in capital requirement for an unrestricted or Class A license to at least US$500,000. In addition, they require a minimum balance sheet of at least US$1M, which, more often than not, must be deposited with the Central or Government Bank, by way of a security deposit in the event the bank is wound-up.
In most cases now, at least US$2 to $3M or more is the preferable minimum amount to show for an assured approval, along with a strong business team with relevant banking or financial services experience. Also, as mentioned above, there is the requirement to set up a physical operation in the jurisdiction granting the license with at least two local people employed, one of whom must be of a managerial caliber appointed as director and will need to have hands-on, detailed knowledge of the bank’s operations.
Incorporating Banks in Panama
Why We Recommend Panama for Bank Incorporation
Here are our top 10 reasons why you should consider incorporating a bank in Panama:
- A well regulated and respected international banking centre - the largest in all of Latin America with only one bank failure since 1990 (no international depositors lost money).
- Although the USD$3M capitalization requirement for an international (offshore) license is higher then in some other less distinguished jurisdictions, only USD$250,000 of that actually has to be held by the government bank - the rest can stay with the bank as working capital. Most jurisdictions require a lot more, if not all of the minimum capitalization amount to be deposited - and frankly we don't know of any jurisdiction where much less then USD$2M will now obtain you a bank license even if the official minimum capitalization amount is still only USD$1M.
- Fast track (60 day) sponsored SWIFT membership. The banking superintendent department takes care of the application process for this most important bank facility and allows your bank to be a member without waiting the normal two year waiting period that will usually apply for new banks.
- Guaranteed sponsored correspondent account opening. Banks formed in most jurisdictions today have a very difficult time in obtaining bank correspondent accounts with major banks when they are just starting out.
- Strongest banking secrecy laws in the world. Since Panama has strong money laundering laws plus is a neutral country (think Panama canal), other than the U.S., most countries have largely left Panama alone and have not brought any pressure to bear for banking privacy laws to be amended.
- Decision guaranteed within 90 days - please note that the decision may be a request for further information or documentation, but that is never a bad sign. If the decision is positive a temporary licence will first be granted which will give a period of time (usually 6 months) to set up the operation and necessary infrastructure.
- Panama has the best business and technology infrastructure in the hemisphere south of the U.S. / Mexico border.
- Panama is a good communication hub compared to the majority of offshore jurisdictions which are much harder to get to for clientele wishing to visit.
- Panama provides you the opportunity to grow your bank in a zero tax environment with relatively little bureaucratic red tape.
- Due to recent local bank consolidation at the upper end (HSBC Panama buying Banistmo, Citibank Panama buying Banco Uno etc.), the Panama bank superintendent’s office is encouraging new bank licence applications at this time, therefore now is the time to take advantage of this window of opportunity.
The average cost to form a bank in Panama is about USD$50,000 in licencing and legal fees. It could be somewhat less or it could be a little more, depending on what professional services you provide yourself or whether you need turn key assistance in Panama with things like preparing the business plan and provision of a local senior bank director to serve as the bank's local officer.
Alternatives for Some Clients
Deposit-Taking Financial Institutions
There are several non-bank options that can be used for deposit-taking activities which do not require such exacting licensing protocols. The two most popular are the Swedish Credit Union and New Zealand Offshore Financial Company. Neither of these options require proof of capitalization.
In Panama, there is also the financiera option, which is a growth track many have used to becoming fully fledged banks. The financiera is a finance company authorized to accept loans (in reality 'deposits') from clients and then the funds are loaned out. This is nothing more than a classic 'savings and loan' type of operation.
The most common type of financieras in Panama are those offering consumer types of loans, but almost any type of lending can be approved on the application. The sum of USD$500,000 is required to be deposited into a local bank as proof of capitalization. The financiera would have to be a local operation with a properly staffed office.