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The lack of professionalism and hypocrisy of much of the traditional offshore industry is nowhere more evident than in the intrusive levels of scrutiny clients are subjected to before being allowed to incorporate a tax haven company or open an offshore bank account.
Many in the offshore industry will now ask for a copy of your passport, together with two reference letters attesting to your good character. Some will go as far as to seek to confirm your actual residential address and ask to see a household utility bill in your name. Why? To fulfil due diligence procedures, they claim, and yet anyone determined and cunning enough can easily circumvent such requirements.
So-called due diligence procedures do not deter the determined wrongdoer -- but they do infringe on our privacy.
Those offshore incorporators that cite intrusive documentary requirements as a precondition for doing business are acting in the nervous hope of not offending their new masters. They hope that their procedures will not be found wanting when judged against the insatiable desire for data, as promoted by supra-national organisations such as the FATF and the OECD. They hope to satisfy the casual inquisitiveness of their local regulators who may wish to drop by to review the files.
In short, they hope to save their businesses by dancing to the will of the tax-cartel governments. Due diligence has little to do with it.
The actions of the incorporators mirrors the activity of most common law banking jurisdictions where banks will not even entertain the prospect of you as a client without references from other reputable banks, plus a whole range of additional supporting documents.
A brief glance at some of the corporate brochures soliciting for offshore business reveals the challenges awaiting those wishing to bank offshore today.
To illustrate the dramatic changes in attitude, below is an actual example -- from a Panama-based offshore incorporator:
Panama recognises its responsibilities in support of the international concerns in this new century regarding drug trafficking, money laundering and other illicit funds activity. Stringent monitoring and vetting procedures have been introduced and ... we are required to comply ... Accordingly, the following information and documentation should be given...
-Clear copy of the beneficial owner/s passport/s. (Photograph, signature, personal information and used visa pages). The same information will be required for any signatories added to the bank account.
-Two bank reference letters for each beneficial owner and account signatory which should confirm the satisfactory conduct of the accounts and that the relationships have been of at least two years duration. Depending on the choice of bank reference letters may need to be addressed to the local bank where the new bank account is to be opened.
-Brief details of the applicant/s business. This is reviewed by every local bank's Compliance Officer who is required to vet all new account applications in accordance with the monitoring procedures laid down.
The information needed is:
-The nature/line of the company's business, or intended business, and the approximate annual volume of business which the company does or will do.
-The location/s of the business.
-The origin / source of funds to be deposited in the new bank account.
-The reason for opening the bank account in Panama.
-The approximate annual volume of funds which will pass through the new bank account.
In some cases, additional information / documentation may be required, but we will always use our best endeavours and attempt to have the new account opened as quickly as possible.
They stop short of asking your mother's maiden name and the ethnic origin of your grandparents, but only just!
While seen as insulting by many would-be offshore clients, similar diatribes of threats and challenges are now commonplace -- they serve to "prove" that the incorporator and jurisdiction in question is in tune with the latest "international concerns" and is therefore responsible.
Intrusive questions will not stop a dedicated, professional money laundering operation. There already exists a growing trade in illicit banking passports that are provided together with apparently respectable bank reference letters from major institutions in the Far East. (Ironically, Panama itself is the home of the instant second passport, with prices starting at a mere $25,000.) Money launders are experts at providing plausible explanations and documentation relating to the source of funds -- the extra scrutiny creates little hindrance for them.
The only people possibly deterred by these "monitoring procedures" are amateur crooks and private individuals who might wish to use the offshore environment for asset protection and privacy.
The latter group are the bread and butter of any offshore jurisdiction -- and they now have to either accept intrusion (which, as intended, strips the last vestiges of privacy from their offshore activities), or take their business to more welcoming jurisdictions and providers.
Asking your high street account officer to to issue a bank reference letter specifically addressed to your new offshore bank completely defeats one of the principal aims of banking offshore -- privacy. It would not be much of an overstatement to say that you might as well tell the world about your offshore account in a newspaper advertisement!
Many offshore banks nevertheless do insist that reference letters carry their details as the recipient, and many offshore providers continue to introduce unsophisticated clients to them, obscuring the real issue here with talk of their responsibilities in the war on money laundering.
Then there are those bankers who will accept reference letters addressed "To whom it may concern." Of course, such documents are preferable -- at least you are not giving the details of your new offshore bank away to your local bank, and so potentially to your onshore authorities. However, even "To whom it may concern" references give rise to a number of issues.
 | | | While commonplace in everyday commerce, even non-specific bank reference letters give rise to a number of issues today. |
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While non-specific reference letters have always been commonplace in everyday commerce, bankers have most recently been tutored in their possible use to "covertly" open offshore bank accounts. In our new upside-down world, a request for a non-specific bank reference letter may indeed raise a red flag.
Non-specific letters clearly give away the fact that you don't want the issuing banker to know the addressee. This may raise undue suspicion ("what does he have to hide?") and be a sufficient reason for your account officer to take a closer look at your affairs -- or even file a Suspicious Activity Report.
Moreover, your offshore bank may well call the issuing bank to verify the reference -- fakes are not unknown -- if your account opening documents end up on the desk of some overly-diligent bank clerk. Of course, you will not be told if this happens -- and if it does, you are far worse off than if you had asked for the reference to be addressed to your offshore bank to start with.
Your local banker, perhaps already suspicious of your need for a non-specific reference, will learn where his letter went ("offshore!"). What's more, he might wonder why the offshore bank felt the need to verify it. Did they also think something was amiss? Your chances of being reported have suddenly increased quite dramatically -- even though you've done nothing wrong.
So how do you deal with the issue of bank reference letters?
One alternative is to use a professional fiduciary company to manage your offshore bank account. Of course, the fiduciary company itself must require no more than an introduction, or at most a non-banking reference, for this to count as a valid solution to the problem.
| | | Civil law jurisdictions, as well as a number of hybrid common / civil law jurisdictions, typically do not require references. |
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A more direct option is to simply give your business to a bank that does not need any reference letters from new clients. Despite what a surprising number of people think, reference free banking is still widely available -- although not in common-law jurisdictions.
Civil law jurisdictions, on the other hand, as well as a number of hybrid common/civil law jurisdictions, typically do not require references.
The reason for this is historical and directly relates to the way that people are identified under the two different systems:
1. Under common law, people have traditionally enjoyed greater personal freedoms. Common law based countries have often lacked centralised registers of population and ID cards, and there has been no reliable way to confirm a person's identity except to take his word for it. To minimise the possibility of deception, a system of using references developed -- that is having another person confirm that you in fact are who you say you are.
2. In contrast, civil-law jurisdictions have always had much less need to rely on references (other people's opinions) for reasons of identification. Instead, they developed centralised government registers of citizens, personal numbers and compulsory ID cards to refer to.
This key difference between the two systems has formed accepted practices in all areas of life, banking included. As a result, many bankers in civil law jurisdictions do not even understand the concept of -- let alone the need for -- bank reference letters. As far as they are concerned, an official document confirming your identity (such as an identity card or a passport) is all that's needed to get an account opened.
While there are still many places to go for reference free banking, it must be noted here that the original reason for bank references -- the need to confirm identity -- is being slowly shifted. Under the guidelines set by the Paris-based Financial Action Task Force on Money Laundering (FATF), many bankers now view bank reference letters as a necessary confirmation of a prospective client's suitability. As a result, a number of bankers in civil-law jurisdictions have followed their common-law colleagues lately and also insist that a reference or two be provided by all new clients.
Staying within the norms of locally accepted practice is always the best way to approach any financial transaction. Choosing the right jurisdiction, the right bank, and the most appropriate type of account is important. For example, there are circumstances where you might be better off with a large retail bank and not one that exclusively offers private banking services -- particularly if keeping a low profile appeals to you more than facing intrusive questions in a one-to-one meeting with your private banker.
These and other issues require an almost encyclopaedic knowledge of local financial customs, and it is best to seek professional advice from a source that shares your concerns, ideally in the jurisdiction that you wish to utilise.
Bank references are not the only paperwork you've got to get ready in order to open an offshore bank account. Utility bills -- such as gas or electricity bills in your name -- are routinely requested as a positive confirmation of your actual residential address.
And again, the practice has its roots in common law. To a Frenchman, the idea of providing a gas bill to open a bank account may seem absurd -- but not so for his English cousin across the Channel.
Where civil law jurisdictions typically maintain centralised population registers -- and in many it is an offence not to inform the bureaucrats of your change of address -- common law administrations seem to be less concerned about their citizens' whereabouts. As a result, banks in, say the UK, cannot refer to any "official" database to confirm the address of new account holders. And just as they rely on references to compensate for the lack of any reliable mechanisms to confirm identity, they rely on utility bills to confirm residential address -- the thinking being that if you are paying electricity bills at a given address, you are probably living there.
It is easy to understand why this practice spilled over to a substantial number of offshore banking havens, particularly those in the Caribbean: many are English-speaking, common-law based ex-colonies of the United Kingdom.
If you live in a common law country, you probably think nothing of letting your local bank have one of your utility bills -- you have probably done it at least once. But you may not be so happy about doing the same to open a private offshore bank account.
And you would be right.
Producing a utility bill for your offshore bank raises a number of privacy-related issues. Offshore banking, if it is to be successful, should be confidential -- and addresses do present several problems in terms of privacy.
To start with, having your offshore bank mail your statements to your house is just not smart.
The postal service has long been used by government snoops to keep an eye on their citizens. As early as between 1968 and 1971, the IRS identified over 50,000 suspected tax evaders by photocopying envelopes in a New York City post office that had been sent from Switzerland. This snooping produced no results back in the early seventies as the Swiss resolutely refused to cooperate. Today, things are not as certain.
While most proper offshore banks send their mail out in plain envelopes with no more than a non-descript sender's address on the back, professional snoopers can obtain much information from that innocent-looking line "If undelivered, return to P.O.Box 1234, Antigua, British West Indies". Often a quick check against a database reveals the name of the bank that owns the P.O. Box. This is assuming that they act within the law and do not actually open one of your letters.
A partial solution to the problem is to instruct your offshore bank to mail all correspondence to an address other than your place of residence. The majority of offshore banks will comply, but of course you will have to make arrangements with a mailing service provider (maildrop) beforehand.
Most offshore banks will also hold all your mail, never sending anything out. You would be expected to collect your correspondence personally from time to time, or ask them to forward it in bulk once in a while.
While this is a favourite approach of many, it is still not perfect. Keeping track of your finances becomes more complicated without regular statements to refer to and may involve frequent telephone calls and faxes. You will not be surprised to learn that telephone records are a gold mine for anyone interested in your financial affairs -- simple precautions in this regard are common sense.
But while the problems regarding the receipt of mail from your offshore bank can always be overcome somehow -- even if this causes some inconvenience -- there are other reasons why your offshore bank shouldn't know your actual residential address.
Banks worldwide are being pressurised by the FATF to clearly establish the actual residential address at which the account holder and/or director of an offshore corporation lives. Addresses are of great importance to those seeking to establish who has private offshore holdings; addresses make cross-referencing with tax files and other databases possible.
| | | Addresses are of great importance to those seeking to establish who has private offshore holdings; addresses make cross-referencing with tax files and other databases possible. |
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The FATF realise that while offshore banks will stop short of giving out the confidential details of their account holders, there are many other ways in which at least some of the data can slip out into the public domain. The leakage of your private information can occur whenever your offshore bank interacts with third parties -- be they banks or other financial institutions -- on your behalf. And this happens more often than you think.
Making a wire-transfer will typically involve one or more correspondent banks. If you order a payment in US dollars, funds will be routed via the United States -- along with your name as the sender, as well as your address. Where your name alone would probably not be enough to successfully identify you, your residential address provides the extra piece of information necessary to lead onshore authorities right to your door.
But it's not only wire-transfers that can compromise your confidentiality.
One of the attractions of an offshore environment is the availability of a wide range of investment products, and most offshore banks will gladly help you meet your investment goals. Where some of the investments on offer will be private, in-house products, virtually every offshore bank will also let you access an array of third-party investment vehicles such as funds, bonds and other financial instruments.
But putting your money in your favourite fund may well be the end of your offshore secrecy if the fund is based in a tax-cartel friendly jurisdiction. Again, your offshore bank may well (or may have to) give out your personal details -- and if it includes your private residential address, you may be giving the bureaucrats back in your home country enough data to identify you.
Naturally, caution is advisable with respect to investment vehicles managed from the United States or the European Union. Remember that Luxembourg, a home to many popular investment funds, is part of the European Union -- and although it still enjoys a degree of autonomy regarding bank secrecy, this is unlikely to be the case for long. Even more traditional offshore havens are surrendering their fiscal sovereignty nowadays -- you might think it safe to invest in a Bermuda-based fund, but you might not know that Bermuda was first to sign up to the OECD's information sharing protocols with a capitulatory letter of commitment.
There are a handful of privacy-minded offshore banks that are aware of the danger that third-party investments pose to their clients' confidentiality. To prevent the leakage of client information, they will hold all third-party investment products in their bank's name rather than in the name of the client. Often, however, this is only applicable to numbered accounts.
Asking your offshore bank to issue you with a credit card is pretty much a sure way of having both your name and address given out to one of the large onshore credit card companies. Where many offshore banks do take a variety of technical steps to protect the confidentiality of their clients when it comes to credit cards, no solution has yet been found bullet-proof.
In 2000, tax authorities in the United States (IRS) were granted access by a Miami court to thousands of Mastercard and American Express credit card accounts held by U.S. taxpayers in three offshore banking havens. The IRS claimed that they were looking for high-value purchases, airline tickets and so on, in order to establish who was living beyond their means.
| | | Near-anonymous credit cards are possible but only where your offshore bank simply does not have the information that could enable onshore authorities to successfully identify you. |
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If you tell your offshore bank your actual residential address, forget about asking for a credit card. Never mind assurances about "confidential offshore payment clearing systems" and so on -- whatever protections your offshore bank puts in place, the fact remains that your credit card is going to be a part of one of the big global payment networks if it's to be of any use to you. Consequently, it can never be totally private.
Near-anonymous credit cards are possible but only where your offshore bank simply does not have the information that could enable onshore authorities to successfully identify you.
Near-anonymous credit cards are often arranged through the use of a nominee-administered offshore company and a bank that needs no more than a name and a signature for corporate cardholders. Note, however, that where the cardholder is also the actual beneficial owner of the underlying offshore company -- and mostly he is -- such a structure must be formed so as to successfully resist the leakage of personal information under any beneficial owner disclosure legislation.
You should also know that in at least one country widely touted for private offshore banking services, banks have a legal requirement to pass personal details (names and addresses) together with bank balances to the local tax office. There are no legal protections which oblige the local tax officer to keep this "non-resident" account information private.
There are many other circumstances where your name and address can find its way from your offshore bank into the hands of your home authorities -- and you might not even know it's happened.
Remember that to have an actual residential address attached to an account holder's name is simply invaluable to the bureaucrat who is willing to patiently wait until the supposedly private data leaks out from your offshore bank. Protect yourself accordingly, and be aware that you are under no legislative obligation to tell your offshore bank where you live. Those banks that do ask for utility bills or other proofs of residence are either ignorant to issues of customer confidentiality, or -- even worse -- are showing themselves to be well versed in FATF paranoia.
In the not too distant past, opening an offshore bank account and moving your assets beyond reach of those who might wish to lay claim over them was often a straightforward process.
However, doing the same today -- and keeping your offshore assets confidential in particular -- requires some advance planning and knowledge of what you are up against. Cutting corners or making the wrong decisions at the beginning of the process can compromise your privacy in the future.
Choose your offshore incorporator with care and remember: they are there to serve you, and not to scrutinise you. Similarly, many bankers are still businessmen who understand your need for privacy -- even though most are under pressure to turn into the agents of a fledgling global financial police force. Today, finesse and a little insight into your banker's mind will serve you well enough.
Consider how your financial privacy might be compromised, and take steps to prevent the location of your offshore assets in the long term. This ranges from the most obvious steps -- such as not telling anyone -- to awareness of the uses to which discarded refuse and telephone bills might be put.
Most importantly, don't allow the recent anti-offshore, anti-privacy measures to take you by surprise. Remember that the measures were designed to obtain information and not to thwart complex money laundering operations -- everyday folks like you are the intended target.
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