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The appeal of private ownership of licensed entities has widened in recent years. Although some are formed as actual commercial businesses, many more private banks and insurers serve their owners as sophisticated asset protection and privacy tools. A few simply buy the prestige.
Where do you stand?
Do you think that owning a private offshore bank or an insurance company is a far-fetched idea? Then you should note that the benefits are not limited to those who plan to operate a banking or insurance business. Did you know, for example, that an insurance company can protect your asset from lawsuits, or help to transfer funds offshore?
Or do you believe that getting an offshore banking or insurance licence is the magic remedy for all your headaches? Then think again. Going down this route is not always the best -- or easiest -- of options. Simpler offshore strategies often suffice.
Here is a short, incisive and candid overview of some of the issues surrounding:
Offshore Bank Licences
Offshore Insurance Licences
Protected Cell Companies
Decide for yourself if going beyond a simple offshore company is a step too far... or a step in the right direction.
A great many publications, including international magazines, newspapers, and even in-flight airline magazines contain advertisements that read "Offshore banking licences for sale".
Whatever the jurisdiction, whoever the promoter, whatever the class or cost, you will be told how owning an offshore bank is a one-step procedure that will dramatically alter your financial life for the better: total privacy and sky-high profits within reach!
The highest priest of this thinking is one Jerome Schneider -- a guy who has made a living out of publishing racy offshore books for the uninitiated and selling bank licences to all and sundry by promising them the earth.
The reality is somewhat different. If it's too good to be true, it probably is, and you ought to think carefully before taking such a major step as purchasing a bank.
Undoubtedly, there are very real benefits arising from the ownership of an offshore bank; it can be a very powerful business vehicle. However, it is not suited for everyone as the promoters of banking licences would have you think.
During the 1980's and early 1990's, it was possible to purchase a banking licence in places such as Montserrat for a few thousand dollars and with little or no regulatory control. Those days are gone.
Most recently Montenegro -- formerly a part of Yugoslavia -- tried to jump on the band wagon and started offering the same laissez-faire attitude and low cost (about $10,000) banking licences. It didn't last long.
Nowadays, you have to be ready to deal with all the regulatory hurdles that have been erected in recent years to discourage the widespread ownership of so-called "shell banks". You will also be expected to capitalise your bank with at least US$ 500,000.
If you are serious about ownership of an offshore bank, you -- or your nominees -- should also be prepared to wade through some serious red tape.
Amongst others, the following is needed:
Applications are considered on an individual basis and experience in the financial industry is almost always required.
It is questionable whether or not incorporating an offshore bank as a personal asset protection vehicle is still as viable as it once was. The author of this article has come across less than five cases over the past two years where he felt such strategy was justified; it involved very substantial assets in each case, as well as very particular objectives.
As far as cutting-edge asset protection is concerned, a privately-owned insurance or reinsurance company brings many of the advantages of a shell bank, whilst being a less-regulated and less-expensive option.
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| See also Uruguay and Brunei as profiled in our guide to alternative corporate tax havens. Both offer offshore banking licences. | | |
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On the other hand, do not be put off if you have serious intentions to run an offshore bank as a business enterprise; just remember that the formation of a bank calls for a fair degree of determination and patience on your part.
Let us leave this subject with the thought that all things are possible if you know how to approach them.
A common problem for owners of shell banks after incorporation is obtaining correspondent bank accounts, especially in US Dollars.
United States banks -- including US branches of foreign banks -- are under increasing pressure not to hold nostro accounts for smaller, privately-held offshore banks.
One of the initiatives worth noting is a February 2001 report entitled "Correspondent Banking: A Gateway for Money Laundering". The report was placed before the US Senate by Democrat Carl Levin; it argued that by providing correspondent accounts for offshore banks, US banks open the country's banking system to abuse by money launderers.
The emergence of the Euro has offered an alternative, as has the practice of private agreements between banks with existing nostro accounts providing services for shell banks.
The ownership of an offshore captive insurance company enables many businesses to substantially reduce their insurance spend, improve their cash-flow and even generate additional income.
But there are other, perhaps less obvious applications of an offshore insurer. Even though they are clearly not for everyone, offshore insurance companies are sometimes formed by individuals whose goals are asset protection, financial privacy or even effective transfer of funds to offshore havens.
By its very nature, the insurance business is a very flexible area.
Compared to onshore (domestic) insureres, offshore insurance companies are relatively affordable and easy to form. This brings them within the reach of smaller enterprises, and even groups of private professionals (legal, medical) seeking cost-effective liability cover.
Could your own offshore insurance company benefit your business? Judge for yourself:
Lower insurance spend. Insurance premiums brokered by a local intermediary often include up to 20 per cent in brokerage fees; by using an in-house offshore insurer, a business can approach the markets directly.
Cash-flow benefits. Premiums paid to reinsurers are normally subject to very generous payment terms by international markets; this presents cash-flow advantages and/or the possibility to generate additional investment income.
Offshore investment income. Profits arising from the investment of underwriting income are essential to the proper functioning of the world's insurance market. Through an offshore insurance company, income is acummulated and invested offshore -- free from taxation and free from any domestic investment restrictions and red tape.
Domestically-uninsurable risks. Certain types of businesses rely on their in-house offshore insurance companies to insure domestically-uninsurable risks.
Offshore insurance and reinsurance companies are also sought after by those who would in the past wish to incorporate their private offshore bank solely for the purpose of asset protection and financial confidentiality.
In contrast to offshore banks, offshore insurance companies are easier and cheaper to form. Depending on the proposed purpose of the insurance company, its paid-up capital and regulatory obstacles can be kept to a minimum. In addition, offshore insurance companies do not suffer from the same tainted reputation that offshore shelf banks have established in recent years.
At the same time, privately-owned insurance vehicles can and do provide the same rock-solid basis for asset protection. The capitalisation of an insurer is intended in the first instance to pay claims arising from underwriting liabilities; the assets are attached and other claimants are subordinate. If the insurer has underwritten so-called "long tail" risks, the chance of lawsuits succeeding is diminished substantially.
Naturally, offshore insurers provide a clear-cut method of transferring funds offshore.
As the traditional barriers between financial services are broken down, the insurance industry has also become more involved in financial activities that were previously the bankers' domain. A private offshore insurer can provide many banking-like services to the members of the general public when holding the necessary licence.
However, be aware that obtaining an offshore insurance licence -- for whatever reason -- is still a far more complex business than a straighforward purchase of a typical offshore company. Proper references and a professional business plan are always needed.
As with any offshore strategy, you have to judge objectively whether or not the advantages gained justify the cost and effort involved. Professional guidance in this regard is recommended.
A protected cell company (PCC) is a fairly new corporate form; the concept originated in Guernsey in 1997. Since then, protected cell companies have become available in a greater number of offshore jurisdictions.
In simple terms, a PCC is a company which -- in addition to its main, "core" level -- contains a number of segregated parts, or "cells". Each cell is legally independent and separate from the others, as well as from the "core" of the company.
The undertakings of one cell have no bearing on the other cells. Each cell is identified by a unique name, and the assets, liabilities and activities of each cell are ring-fenced from the others.
If one cell becomes insolvent, creditors only have recourse to the assets of that particular cell and not to any other.
Protected cell companies are a welcome arrival for businesses who would have previously chosen a rent-a-captive scheme over the (more costly) formation of an in-house captive insurance company for the purpose of self-insurance.
In traditional rent-a-captive schemes, unrelated businesses "rent" the same captive to insure their risks; consequently, there is no guarantee that funds provided by one participant will not be used to cover unjustified claims of another. In contrast, the structure of a protected cell company provides the necessary protection for each participant's assets.
Despite being a relative newcomer to the corporate world, the flexibility of PCC companies have caused their uses to diversify in recent years. Protected cell companies are used to securitize insurance risk against catastrophic losses, for example; their very structure also makes them an ideal entity for the cost-effective operation of umbrella mutual funds.
Aside from the above, the astute offshore practitioner can employ an offshore protected cell company as an effective asset protector and privacy enhancer.
With an offshore insurance corporation, it is market practice that provides tangible benefits; with the protected cell company, it is the structure of the entity itself -- think of a house with a locked front door, and rooms inside, each with a separate lock and key.
Protected Cell companies have -- in concert with other entities -- been used to construct what has been called "an impenetrable wall" against creditors and prying eyes. Whilst these claims can only be tested by time, this novel use of a PCC for asset protection and financial privacy is an interesting approach and a valuable piece of intellectual property.
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