STARTING AN INTERNATIONAL BANK
When a notorious bank robber was asked why he robbed banks, he reportedly replied, - "Because that's where the money is!". International investors have discovered for themselves that owning a bank can be even more lucrative than a career in bank robbery. Because running one's own bank dramatically demonstrates the benefits of offshore financial operations, it is the first case study of what can be accomplished once the investor breads free of domestic confines. Banking is not as exotic as it might seem at first glance. A bank is merely a company organised much like other companies. It is built upon trust and it flourishes, as all companies do, by keeping promises. The following material is of equal importance to the user as well as the organiser of any international business organisation.
History of Banking
Banks were originally warehouses that stored the gold and other valuable property of customers. These warehouses often were operated by goldsmiths who had to safeguard their own stock anyway and issued receipts for the stored valuables. If a buyer wanted to make a payment to a seller, the buyer might sign his warehouse receipt over to the seller or write an order (draft) to the goldsmith telling him to pay some of the buyer's gold to the seller. This was easier and safer than taking his gold out of the warehouse and personally delivering it to the seller. A short time after gold warehousing began, warehouse owners figured out that, gold being gold, they could lend out some of the gold and earn interest, keeping enough on hand to take care of day-to-day withdrawals. Thus fractional reserve banking was born.
Whether or not fractional reserve banking was begun with the knowledge of the depositors, it soon became the way most banks did business. Banks came to pay interest on deposits instead of charging storage fees. Today, depositors lend money to a bank and that bank in turn lends most of it to borrowers, acting as a loan broker.
Banks are more than that, though. In a real sense, banks make money. Their debts, their promises to pay, are money. A bank account balance, which is nothing more than a debt owed by a bank to a depositor, is treated as money by the depositor himself, by those people he makes payments to, and by the government that counts those bank balances in the monetary statistics. Money has become paper, and banks are able to create money in the course of their day-to-day operations. For example, let's say a deposit of US$1,000 is placed in Bank A. Assuming that banks are bound by a 20 percent reserve requirement, (which is higher that that percent normally required by regulators), then Bank A can loan out 80 percent of that money. Bank A thus loans US$800 to Mr. Butcher, who deposits the money in Bank B. Bank B lends US$640 of Mr. Butcher's money to Mr. Baker, who deposits it in Bank C. Bank C lends US$512 of Mr. Baker's money to Ms. Stickmaker, who deposits it in Bank D, and so on. Notice what has happened. The bank accounts of all of the parties still reflect the full balances that they have deposited, even though most of the money was lent out. As the original US$1,000 works its way through the system, it has multiplied to almost US$5,000. All of this new money was created by the banks involved.
Because banks have this unique power to create money, the right to start a bank frequently has been sought by financiers to benefit from their operations and jealously guarded by the entrenched financial establishment. It is more difficult to start a bank than to start perhaps any other business. Brains and money are not enough; political muscle is necessary to overcome the opposition of the established banks who enjoy their monopoly position and fight to preserve it. The bank regulators have established a close relationship with existing banks. Each side benefits from the status quo and no one wants to wee new competition shake things up. The banks will take money and loan it out but they resist letting their clients get into the game. The following pages explain how to start an offshore bank and gain the benefits of banking.
GETTING STARTED
Although it is difficult to start a bank in most of the large bureaucratic countries, there are many nations whose laws are not as strict. In fact, there are jurisdictions where people have been able to start banks just by incorporating a company with the word bank in its name. This has allowed a number of casual to damage the reputation of other banks. When this happens, the local government often restricts the issuance of new licenses and tries to clear the deadwood out from among the old licensed firms. Other jurisdictions, such as the Cayman Islands, have had reasonable bank regulations for some time and so have prospered as financial centres.
When just starting out in banking at a low level of capitalisation, the best strategy is to incorporate the bank in as good a banking environment as one can afford, then to build up enough of a reputation for keeping commitments to start doing business in a better location. Most of today's large banks started with one person or a small group of people who offered nothing but their promises and reputations.
Bank formation is a very political activity everywhere, so it's impossible to know what jurisdiction will be best by the time this introduction is printed. Once a site is selected, a local professional will help obtain the bank license. The local assistance of a registered agent will be needed, in any case, and a well - known local professional can open many doors during the organisation process. A travelling to selected locale to find one. The formation process itself can teach a great deal about how things are accomplished in the chosen haven and in the offshore world in general.
A short aside about preparation is in order here. It is important to learn as much as possible about investing before moving into the international investment community. Someone uncomfortable doing business with his local bank or broker will not enjoy overseas dealings. It is essential to put in the preparation time required by complex ventures, otherwise one may be better off accepting the services of an established international organisation.
One shortcut is to buy a bank that is already in existence. This saves a good deal of time and should end up costing about the same as doing it from scratch. There are companies that make their living by establishing banks and then selling them to interested buyers. These companies range from clean to shady and the normal rules apply about knowing what one is buying before paying. It is a good idea to contact the regulatory authorities in the country where the bank is located to check on the company's reputation. In addition, contact an independent local professional in the area to get an opinion on the legitimacy of the proposed sale.
Organizing the Bank
Bank organisation will be different for each jurisdiction entered. Many banks are incorporated in two tax havens to facilitate business continuity in case the laws (or the government) change in the primary county. The following decisions are common to most banks and are followed by a typical application process.
Capitalization
Capital requirements vary from virtually zero to several hundred thousand US dollars. The lower end applies to countries with no banking laws. The potential banker merely organises a regular corporation and calls it a bank. The more sophisticated tax havens, such as Cayman, The Bahamas, and St. Vincent, have reasonably high capital requirements. This capital need not be cash. Marketable securities, real estate, bonds, and even personal property may be used, provided their value can be proven to the authorities. When carefully structured, most of the money can be borrowed. The borrower must be able to honour the note, however.
In most cases, capitalisation must pass through at least one other bank in the tax haven to prove that it does exist. A country that requires the assets to remain there will not remain on anyone's list of desirable tax havens. A country such as Anguilla couldn't begin to absorb that much capital.
Naming the Bank
The selection of a good name is paramount to a bank's success. One's good reputation and financial strength will be associated with the bank's name, which will be difficult to change once business has commenced, both legally and in the minds of clients and correspondents. The bank can create money only if others accept its paper as money. this trust is dependent, in part, on the institution's name.
The name should be clean and distinctive. Avoid long, wordy, difficult to spell names. Consider selecting a name in another language to reflect transnational business dealings: Banco de Carib, Banco National de Columbia, or Bankhaus Caveat.
Other names create the impression that the bank is substantial, such as: Swiss International Bank Limited, European Pacific Bank Limited, and The First Bank of North America. European Overseas Bank was derived from European American Bank and California Overseas Bank, both multimillion dollar banks.
Still other bank names are directly associated with the owner. Some examples are: Kennedy International Bank and Trust Company, Alexander Bankcorp Limited, and Banque Peterson. The bank name may also describe the types of activities it conducts, such as EP International Trade Bank, Financial Guarantee Bank, and Caribbean Savings Bank.
The international trademarks of other firms must be avoided. Some corporations will sue anyone with names vaguely similar to theirs. Recently, City Bank, a multibillion dollar New-York-based bank, filed suit against 4 million dollar City Bank of San Francisco for having a similar name. While the small bank could win the suit, it might not be able to afford the legal fees. In addition, this type of harassment can affect acceptance of advertising by international periodicals.
Bank Directories
Bankers want to deal with other members of their club. There are thousands of banks in the world, so even major ones may not be familiar to everyone. Two recognised international bank publications looked to for information on the size and legitimacy of banks are the International Bankers Directory, (better known as the Banker's Blue Book), and the World Bank Directory, published by Thomsom Financial Publishing (P.O. Box 71690, Chicago, IL 60694-1690, USA, Price: US$330).
Entry in one or both of these listings is highly advisable if a bank wants to do business with organisations that aren't familiar with it or its associates. These publications are serious about maintaining the quality of their listings. At minimum, banks have to submit proof of incorporation. A new bank's incorporator can probably handle the listings.
Directors
The bank's directors are elected by the shareholders to direct company policy and appoint the officers of the bank. They are normally the largest shareholders or their close associates. In some cases, outside directors may be elected to advise on areas of expertise not available through the owners or management. Large customers or potential customers may be included both to add knowledge and cement business relationships. A bank directorship is a prestigious and profitable position. The directors know that there is at least one bank where they can get preferred treatment and they also receive a small annual fee.
The stockholders of a bank sometimes prefer to keep their investment confidential. For various reasons, they may not wish to appear to be associated with either the ownership or management of the operation. In most tax havens, the use of nominee directors will ensure this. These are appointed agents into whose names the bank stock is transferred by agreement. They are the owners of record but, per agreement, vote according to the instructions of the true owners. A nominee will generally charge about US$500 per year for this service.
Resident Representative or Office?
All tax havens have local accountants, attorneys, bankers, or quasi - governmental officers who act as local agents for banks or other businesses. These agents forward mail, answer inquiries, represent the bank to regulatory agencies, and perform any other necessary services. They normally charge a minimum fee for a basic package, plus additional time and expenses for extra services. The bank is expected to pay the direct cost of telephones, telexes, and postage. Annual costs for the agent's services vary greatly according to transaction and communication volumes. The representative is bound by the local bank secrecy and responsibility laws.
The establishment of an office offers many advantages over using a representative. For one, the staff is fully dedicated to the bank's needs. A trusted associate who already knows how the organisation operates can handle transactions on site. This reduces crucial communication time lags and lowers the legal exposure of conducting bank business in another jurisdiction.
The drawback is expense. The bank has to rent an office and hire staff. Office equipment, supplies, and furniture are surprisingly expensive in less developed tax havens. An expatriate manager has to be paid wages that are about equal to the home salary. As most tax havens do not encourage outsiders to enter their job market, expect difficulty in getting the necessary entry and work permits for a manager.
Lastly, remember that business in less developed countries runs more slowly and more inefficiently than in the industrialised world. Whether dealing through an agent or one's own office, patience an tolerance are necessary to successfully manage the bank.
Incorporation
It is possible for the owner to travel to a particular tax haven and follow through on the major items of bank incorporation. It's much the same as trying to act as one's own general contractor. Any money saved will probably not compensate for the time and aggravation expended. It is advisable to retain a well - connected professional experienced in dealing with the particular government and bank licensing. Bureaucracies like to deal with friends. Most tax havens have local attorneys or advisors who specialise in chartering offshore banks and corporations.
The incorporator advises the owner on the information required and the form of the documentation necessary, submits the application to the proper authorities, and follows is through the maze of local bureaucracy. Nominee directors are hired by him if necessary. The incorporator helps the owner decide whether to use a registered representative or to open an office. He also helps implement decisions. The incorporator can assist in defining the structure of the organisation, supply information about local conditions, provide marketing ideas, and contribute many more useful services to aid the profitable birth of the bank.
HOW TO PROFIT
As a profession, bankers enjoy high status and the trust of the business community, with a reputation for being conservative. However, the reader who has had many dealings with banks has probably been frustrated by their lack of imagination or, possibly, by incompetence. The fact that bankers consistently make money is an indication of how easy it is to be a banker. The innovative services that major banks cannot or will not offer. The remainder of this introduction covers various services that have been successfully offered by major international banks as will as tax haven banks.
Deposits
The key to conventional banking profitability is for the bank to borrow money at a low rate and lend it out at a higher rate. The least expensive source of money is deposits: non-interest demand, interest - paying savings, and time deposits. The broader the deposit base, the more stable the bank's money costs will be. The longer the terms of the deposits, the lower liquid reserves need be.
One St. Vincent bank was opened by a large US manufacturing company just to take advantage of the US - St. Vincent float. The firm estimates that opening a bank just to pay suppliers added US$500,000 to its profits. However, some debtors are hesitant to accept foreign checks and will not authorise credit until they clear. Since governments almost always accept these checks, they are an excellent means of paying tax liabilities.
Another selling tool is the numbered checking account where no signature is required, only the account number, although the secrecy regulations of most tax havens do not require banks to even respond to inquiries about depositors. Since each account has a number for accounting purposes anyway, this service requires no extra effort. This offers clients the ultimate in confidentiality but entails a heavy responsibility on the bank's part of protecting the identity of the account holder. The account holder can have all checks and statements retained at the bank or sent wherever requested. A post office box is recommended for all confidential correspondence.
Savings accounts are an offshore bank's most attractive deposit service. A tax haven bank is not required to report information on individual accounts to any governmental agency. If the bank's client chooses to evade taxes in his home country and deposit certain assets in his tax haven bank, he can considerably increase the investment yield on his savings account. This is the simplest use of a tax haven bank. It is a use over which the bank has no control.
This tax advantage means that the interest rate paid does not have to be much higher than major bank rates. For example, the authors know of offshore banks that paid 9 to 13 percent on US dollars while the Eurodollar rate was 10 to 11 percent. Interest rates vary with the amount and time period of the deposit.
As the offshore bank doesn't have a household name and isn't located in a major money centre, it does have to pay slightly higher interest than major banks and provide better, more innovative service. The offshore bank needs impressive documentation, professional advertising, and an articulate staff. It must present a substantial appearance so that people will trust it with their money.
Deposits are developed through business associates, family, friends and the public. When advertising, the bank must consider the banking law of each country in which it advertises. International publications with a multinational and sophisticated readership, such as the Economist and the International Herald Tribune, are good vehicles for attracting clients. These ads should not be too pointed, so as not to attract regulatory attention. Each inquiry is promptly followed up with brochure, rate sheets, and a signature card.
A mailing list is established with these names, for sending updated brochures and announcements of new services every few months. Potential customers are reassured by this proof of continuity. Actual deposits can arrive months or even years after the first contract.
The bank can accept deposits in any major currency. In these inflationary times, many people seek to protect their assets by investing their savings in a hard currency, such as Swiss francs or German marks. These countries have established a reputation for upholding the value of their currency and for avoiding depreciation by inflation. The bank converts the deposits into the bank's prime currency, figures interest on the original amount, and converts back when the account is drawn upon. The cost of this transaction increases if the currency deposited becomes more valuable than the prime currency, so the bank may cover a larger deposit with a currency futures contract. However, this complicates bookkeeping as a new account must be set up to record currency valuation losses or profits.
A classic banking strategy for increasing deposits is to require compensating balances for loans. A 12 percent loan with a 25 percent compensating balances requirement produces an effective interest rate of 16 percent. A 12 percent loan of US$100,000 for example, accrues US$12,000 annual interest. If the borrower only gets the use of US$75,000, the actual rate is US$12,000/US$75,000 or 16 percent. (Loan packages requiring a 100 percent compensating balance are discussed under lending.)
Imaginative packaging of services helps increase deposits. Trust administration requires that some money be kept in current accounts to pay for current obligations and new investments. When providing management services for other banks, insurance companies, or trading companies, the offshore bank enjoys, in turn, the deposits and clearing services of these organisations, as well as its management fees. Real estate administration and margin accounts also provide cash flow through the bank.
Lending
After the offshore bank has successfully attracted deposits, something must be done with them. Lending money at a higher rate than interest paid on it insures a profit, but only if the loan is repaid. Successful lending depends on good business sense, the ability to read people and balance sheets, knowledge of collateral, and negotiating ability. Spread the risk wide enough that one or two bad loans won't cripple the bank.
Most tax havens do not have usury laws, so the offshore bank can charge higher interest rates than are allowed in most countries. The bank can accept a percentage of ownership in a customer's organisation as part of the fee for a loan. When doing so, it tries to negotiate as high a compensating balance as it can to take advantage of a bank's right of offset. This means that if the bank is owed a past - due debt by the organisation, the bank can use any of the borrowing assets it controls to offset the debt. Therefore, any compensating balance is money that will not be lost, serving to lower risks and increase profits.
Some loans can be structured with 100 percent compensating balances. The loan is immediately transferred to a savings account in the bank. These back-to-back loans have a spread of 1 to 3 percent, the difference between the loan rate and the savings account rate. There are several reasons these loans can be useful.
A corporation may need to show a higher capitalisation on its books than it actually has at a particular point in time to enable it to get a loan form another lender or better terms from its suppliers. A principal in the company can borrow a sum from an offshore bank and use it to purchase a time deposit from the same bank. He then uses this certified deposit to purchase more stock in the company. As a result, the company's balance sheet shows increased paid - in capital and increased current assets. The principal's personal balance sheet reflects a higher level of debt and a higher asset value of investment in the company. The interest paid on the personal loan can be deducted, while the company pays taxes on interest received. Since the personal tax rate is normally higher than the corporate rate, the tax reduction can cover the bank's free.
An entity producing foreign income can do even better. It can set up a foreign trading company, for instance, to be managed by the bank. The trading company buys a product at production cost and sells it at a normal profit margin. The profit is then invested in a time deposit account. The amount of the deposit can be lent back to the parent company at a 1 to 3 percent spread over the Certificate of Deposit (CD) rate. Since the trading company is based in a tax haven, it pays no taxes on either the profit or the interest received. The parent company gets use of the profit and receives a tax deduction on the interest paid by the bank.
Starting a bank offshore is much faster and less expensive than the chartered onshore alternatives.
How Long Does It Take To Start Your Own Bank?
The legal organization of document preparation, recording and filing often takes 3 to 6 months to start your own bank, which is when your finance company and holding entity are place and ready for transactions. This lead time greatly depends on your level or preparedness for the information requirements.
The banking industry is regulated heavily by federal and state charter. New charter applications are screened and have to pass a rigorous government scrutinizing. Banking regulators will take an application, every senior officer and the business plan through a strict review in order to detect problems early. Most ill prepared applicants are turned down quickly. Everyone knows that banking is a lucrative and safe investment, security is built into the equation by the industry being so regulated, your investment is watched over for you. Everything is reviewed and tested from financial forecasts, backgrounds of the organizers and directors, fingerprinting, projections, bank policy statements, notarized signatures and a very detailed business plan. Several feet of paperwork is required to start your own bank. Applicants and the plan should be oriented towards the community and bring something of value, other than visions of profit. Starting your own bank should start with who is going to be served by it, you or the community?
Governing Financial Legislation
There are several legal acts that govern a finance company that you create to open your own bank. Most banks are chartered institutions that are regulated and governed by Central Bank Regulation, when you start your own through a finance company, you are governed by legislative Acts.
BILLS OF EXCHANGE ACT 1908
Cheques Act 1960
Companies Act 1993
Consumer Guarantees Act 1993
Credit Contracts and Consumer Finance Act 2003
Electronic Transactions Act 2002
Fair Trading Act 1986
Financial Transactions Reporting Act 1996
Investment Advisers (Disclosure) Act 1996
Personal Property Securities Act 1999
Proceeds of Crime Act 1991
Property Law Act 1952
Reserve Bank Act 1989
Securities Act 1978
Unclaimed Money Act 1969
That sounds like a lot of work a very expensive process... and it is.
Thankfully, our group can manage the entire process.
Inquire to my email... russ@mvgbs.com
