Your Own Offshore Bank: The 7 Essential Elements
Contributed by Kevelex
15 June, 2018
Are you ready to set up your own offshore bank? Work through this 7-point checklist from Kevelex Corp, the experts in offshore bank licensing and correspondent account opening.
Everybody would like their own offshore bank, right? Owning your own bank implies wealth, prestige, and access to unique business opportunities. Kevelex can make the process relatively easy, but remember you are entering a licensed and highly regulated industry, so please do not make the mistake of underestimating the work involved!
Also remember, your new private offshore bank obviously needs all the same things as any startup company, such as a robust business strategy, access to clients, capital, human talent, etc. This article focuses on the 7 key components a private offshore bank needs which are different from a standard business.
Here are the 7 key things you need to start your own offshore bank:
1. BUSINESS PLAN
The most important document is a very detailed business plan. Your business plan is the basis of the entire license application process.
Your business plan should ideally include financial statements from the holding company. If there is no holding company, personal financial statements from the beneficial owners should suffice.
The offshore bank business plan also needs to contain 3 to 5 years of projections broken down in detail by business area. These projections might cover use of initial capital, risk and liquidity ratios, reserves, an analysis of when you will break even, etc. all about your offshore licensed bank or financial institution.
At the end of the day your offshore bank's business plan must convince the authorities that the applicant is of good character, has the necessary qualifications and experience, has a well thought out business plan, sufficient capital, and that the management of the new offshore bank perfectly understand the risks and compliance requirements of operating an offshore licensed financial institution.
Every one of the following components of a newly-licensed offshore bank must be described in great detail in the business plan. Again, remember that the business plan must convince the regulators, auditors, and compliance committee that you (as the primary banker) and your team are qualified to operate a bank and won't draw the regulators and the jurisdiction into unwanted negative publicity for scams etc.
If this is already looking difficult, there is good news: Kevelex, as part of their offshore bank licensing and correspondent account opening service, can help you with all aspects of preparing the business plan. Of course, as the business owner, you are ultimately responsible for the business plan and if you want your offshore bank to succeed, you must have a clear idea of where you are going. But if you experience any difficulty putting it down on paper, do not worry as our staff have many years of experience of this and can help you prepare the business plan that is necessary for your offshore banking licence application.
2. MINIMUM CAPITAL
Here, the key thing you need to know is that what is written in the law and what happens in practise are not necessarily the same.
Every offshore bank licensing jurisdiction has a fixed minimum capital that is required to comply with the law. In the Commonwealth of Dominica or the island of St Lucia, for example, the minimum capital is $1 million that must be placed on deposit. In the Comoros the minimum capital is $500,000, but a bank guarantee is sufficient so the capital does not have to be deposited in cash. This means you can put the capital to use in your new offshore banking business without having it tied up unnecessarily.
The good news is that these three jurisdictions (two in the Caribbean and one in the Indian Ocean) typically will issue licenses with the minimum amount of capital under the statutes.
Other countries, however, will demand much larger amounts of cash up front. Let's consider Belize as an example: the law technically says you can apply for an offshore bank license in Belize with a minimum capital of $1 million. However, talk to any professional with experience with Belize offshore bank licenses and they will tell you that in practice the regulator will insist on minimum $3 million and probably closer to $5 million in paid up capital, deposited in the Central Bank of Belize, to get your offshore banking license. It is more than seven years since Belize last issued an offshore banking license, and you have to wonder why!
Then there are other jurisdictions that negotiate capital on a case by case basis. For example, the offshore subsidiary of a bank from a decent jurisdiction can get probably expect to get an offshore license in Panama with around $5 million in capital. But, if you don't have such a license already, then Panama will not even give you the time of day - in this case your only option is to request a Class A license from Panama (a local rather than an offshore bank license) which will set you back at least $25 million in capital.
When choosing the best offshore bank licensing jurisdiction, unless you are starting out with unlimited funds, consider the capital required. This will help you to narrow down your search. But, as you can see, knowing the capital that you really need involves talking to an expert with experience, and not just a review of the law as written.
Kevelex typically works with clients like you, who are not trying to create a major international offshore bank, but rather want to set up a relatively small and private commercial banking or private wealth management operation. We typically therefore channel the majority of our bank license applications through Dominica, St Lucia and Comoros. We have excellent relationships with the regulators in these jurisdictions and in many cases we can fast track applications for a small additional fee.
3. KEY EMPLOYEES
When preparing the business plan for your offshore licensed bank, you must include the CVs of your key managers and your supervisory board of directors if any. Both of these groups must have extensive experience in banking. Typically, your management and employees will be a combination locals (residents of the country where you get your license) and expats sent from your home country. The good news is Kevelex can help you with this.
It's also important that your board of directors include one or two locals. The licensing authority will look upon your team more favorably if it includes professionals with a solid track record in your country of license. These board members should have experience in banking law and/or compliance. Don't worry though as Kevelex can provide these services, especially in our preferred offshore bank licensing jurisdictions of Comoros, Dominica and Saint Lucia. We know the right politically-connected lawyers and compliance officers who will agree to serve on the board of your offshore bank and therefore ensure that the application sails through unhindered.
Of course, if you choose to license your offshore bank in Dominica, St Lucia or Comoros it is unlikely you will find all the staff you need in the licensing jurisdiction. Therefore, it is important that you have a separate back office in a larger jurisdiction. Clients often choose Switzerland for quality and prestige, Panama as a major banking center for the Americas and Caribbean, or Eastern Europe for low costs and hard working employees in technical, IT and call center roles. We particularly recommend Serbia and Montenegro as good banking back office centers.
Remember your bottom line: where your staff is located will play a major role in determining the operational costs of your bank.
4. CORE BANKING SYSTEM
The basis of your offshore banking operation will be the so-called core banking system: the software that crunches the numbers on every transaction carried out by account holders of your bank.
Additionally, the core banking system for an offshore bank will normally handle KYC and AML/CFT, compliance with databases for sanctions screening such as World Check, background checks, account openings, transfer, document upload management, etc. All of these modules will be reviewed carefully by the government regulators before they give you the go ahead to start onboarding account holders.
The core system and compliance modules are typically the largest startup cost for a new offshore bank. Many clients spend $100,000 to $1 million on their IT system. The largest quote I've seen this year was from Swiss-based supplier Temenos for $3.8 million.
A typical offshore core banking implementation will take 3 to 6 months. Once the provisional license is granted, the IT system will be what is stopping your from launching straight away. HInt: Figure out your core banking software early on in the planning stages so you can launch much faster once the regulatory hurdles are cleared.
The good news is that Kevelex have partnered with two of the best providers of core banking software for offshore banks.
One is an e-wallet style system, that supports not just multi-currency banking and correspondent accounts, but also pre-paid card loads, crypto currency exchanges and more. It is a neat, light piece of software, ideal for the small, modern offshore bank that does not want a lot of technological baggage. The typical installation licensing cost is under $10,000.
The other core banking software provider we have partnered with offers a more sophisticated core banking system that would typically be needed where the bank will have more than 1,000 clients. It is a more traditional platform based on core banking, and notably does not support blockchain or cryptocurrency transactions. However, it is a very robust platform designed for handling thousands of SWIFT transfers per day. The cost of this offshore core banking platform starts at $50,000. The factor to consider is that if you expect this kind of volume, it is best to plan for it and buy the right software at the start, since changing platforms halfway through the game is naturally very difficult!
Feel free to discuss with us what is the best solution depending on your proposed offshore bank license business. We can consult with you on the differences between the above two platforms. Despite our strategic partnerships with these core banking software providers for offshore licensed banks, we will not hesitate to recommend other solutions available in the international market place if we think they would be better for your situation.
5. COMPLIANCE SYSTEMS
In any offshore licensed private bank, the compliance system will be built around the IT infrastructure of your chosen core banking system. From here, you can build an in-house compliance team or outsource compliance monitoring to a specialist compliance contractor.
Please consider that the main operational risk of an offshore bank comes from a possible failure of its compliance program. If you run afoul of the money laundering rules, know your client requirements, or FATCA / CRS reporting, you will lose your correspondent accounts immediately, and you will be subject to large fines. You could even be subject to jail time in Comoros, Dominica or St Lucia, and you do not want to go down that road. Your compliance program is therefore one of the most important aspects of your offshore bank license.
No matter your jurisdiction, you can be sure that government regulators will watch your compliance program very carefully. Any error will be dealt with swiftly and without a second chance.
The reason regulators monitor compliance is simply reputational risk for their jurisdiction: a failure by one bank can bring down the entire country's banking system. For example, in 2015, Belize Bank had their offshore correspondent accounts shut down by US regulators.
As a result, all of the other banks in Belize lost their correspondent accounts virtually overnight, because none of the major banks wanted anything to do with Belize. The entire system was tainted by one allegation against one offshore bank. This problem was only solved months later, when London-based Crown Agents Bank came in and cornered the market. This in turn, however, leaves Belize very vulnerable once again: if Crown Agents decides to withdraw from the Belize offshore banking market tomorrow, then Belize offshore banks will once again be left high and dry without correspondent banking services.
When drawing up your business plan, you must explain your compliance program and procedures in great detail. Also, your employees and board of directors must have significant compliance experience.
Once your preliminary license is granted, building a solid compliance program will be your first priority. All processes and procedures must be in place, and everyone trained in the IT system, before you board even one client.
Don't worry, though, because again you can call on Kevelex to help you through this process. We have partnered with a Panama-based outsourced compliance contractor which has experience providing compliance facilities to banks in all three of our preferred jurisdictions for offshore bank licences: Comoros, Dominica and St Lucia. It is simply a matter of contracting this service, and you can outsource and forget compliance headaches. Kevelex has your offshore bank covered from a compliance point of view.
The stages and fees for contracting this outsourced compliance service usually involves:
- Set-up fee - includes developing all necessary manuals, procedures, risk matrix etc that will be necessary as part of your licensing application (1-3 weeks)
- Annual retainer (includes quarterly or annual compliance certification for your regulator) (annual ongoing service)
- Per client onboarding fee - this is a one-time fee you pay for each client onboarded that includes all necessary background checks. Typically 50-100 new clients per year are included in the annual retainer, then you pay extra for additional applications
- High risk client monitoring fee - this is an ongoing fee that you will pay for ongoing due diligence if you choose to board high risk clients such as PEPS Politically Exposed Persons
Of course, you can do any of this compliance work in house, but do not worry, as the service is available outsourced if you need it. Generally for smaller offshore licensed banks, outsourcing works out cheaper than hiring a dedicated qualified compliance officer.
6. YOUR OFFSHORE BANK LICENSE
Remember, regardless of what their law says, very few counties will grant international banking licenses to startup banks. For example, Panama and Cayman will only issue offshore licenses to banks that already have a license from a major jurisdiction.
If you have a license from say Luxembourg or Cyprus, you can easily get a license in Cayman Islands or Panama. Their thought process is that your bank is already highly regulated in its home jurisdiction, so the offshore banking regulators don't need to worry about you too much!
As we pointed out earlier, if you have an existing license, you can apply for and receive an offshore banking license from Panama with $5 million capital. If you want to start a new bank in Panama, you can form a locally licensed Class A bank with $25 million in capital. Even then, in the best case scenario, the process will take at least 1-2 years in Panama. In normal circumstances, if you do not appoint a lawyer with a good relationship with the Superintendent of Banks in Panama, 3-4 years is the norm or you might even be rejected.
Compare this to the trio of Kevelex preferred offshore bank license jurisdictions: Comoros, Dominica and St Lucia. In Comoros, the process takes as little as one month from start to finish. Because we know the regulators well and have all the compliance and software outsourcing ready to go, we can get clients set up in under one month in urgent cases. Typically the process takes 2-3 months.
In the Caribbean jurisdictions of Dominica and St Lucia the process takes slightly longer but can still be completed within 6 months, which is reasonable especially if you are using a custom software, business plan or compliance program.
Of course, there are other offshore banking jurisdictions in Europe (for example Montenegro) and less active jurisdictions in the Caribbean, especially St Vincent and the Grenadines which is home base to a number of offshore licensed banks. In Africa there is also The Gambia but we have yet to see an offshore bank from The Gambia that has been able to open a correspondent account, especially in US Dollars which is the most difficult currency in which to open a correspondent account for an offshore bank. In contrast, the Comoros, Dominica and St Lucia are all relatively well known jurisdictions that permit more routine opening of correspondent bank accounts, all depending of course on how well the Business Plan is prepared.
The good news is that you have access to the consultants at Kevelex Corp who can set you up with a turnkey offshore bank including business plan, compliance program and correspondent bank at other African, French, Turkish or Arab banks.
Based on all the information in this report, and on your detailed consultation with Kevelex Corp, you will be able to select your jurisdiction and submit your ready-prepared business plan, so you can apply immediately for your preliminary license.
What is a Preliminary Offshore Bank License? The preliminary license, also referred to in St Lucia as a "permit to organize", allows you to incorporate a company using the word "Bank" in the name. With this company you can contract employees, buy your IT system, and do all of those things necessary to begin to operate the business.
Once your systems and people are in place, you simply inform to the regulator that you're ready to launch. They will send somebody to check up on your systems and procedures. Once you pass this preliminary compliance audit, within a few days you will receive by courier your offshore bank license and permit to operate.
Offshore Bank License: With this stage complete, you are ready to do a soft launch and begin to onboard clients. The operational license will require you provide audited statements to the regulator each quarter. Now is the time to hire an outside auditor.
Do not worry, however, since once again Kevelex has you covered as part of our turnkey solutions. You can choose to outsource as much or as little as you like of your bank book-keeping, internal audit and accounting. The external audit must, by its nature, be done by a third party auditor. We at Kevelex know the right people and will make sure the accounting and audit for your offshore bank is ready before you even launch. We have exactly the right auditors in place in our preferred jurisdictions: Comoros, Dominica and St Lucia. For smaller offshore banks we have negotiated special fixed fee package deals for our clients.
7. CORRESPONDENT ACCOUNT
Besides the core banking system, the lifeblood of an offshore bank is its correspondent account. The correspondent account allows you to hold money and transact through the facilities of a larger bank, usually onshore. Ask any experienced offshore banker what's the most important component of their business and every one will answer, "the correspondent account, obviously!"
For example, if a bank in Dominica want's to hold accounts in US dollars, they need a US dollar correspondent banking partner. This correspondent does not necessarily have to be in the USA, but it is generally better and faster to use correspondent banks in the same country as the operating currency. The US partner has US Fedwire capabilities and is authorized to transact in US dollars.
Likewise, if you want to hold accounts in Swiss Francs, you need a Swiss Franc correspondent bank. An offshore bank will need a separate correspondent account for each currency it wishes to hold.
Today, it is the correspondent account that will require the most capital. While you can negotiate a license from Comoros with a bank guarantee of $500,000 and no need to come up with the cash, it is unlikely that a USD correspondent will open an account with that small a deposit. US banks typically demand an average balance for a correspondent account of $10 million... and that is if they agree to deal with you.
These accounts are also the bane of the offshore banking industry. Any slight failure or even perceived failure in compliance, or attention from a foreign government, can mean the loss of your correspondent account. When that happens, your bank is basically out of business and unable to send and receive funds. For this reason, your compliance personnel or contractors are of the utmost importance.
Fortunately, Kevelex Corp is always on top of current developments on the correspondent banking scene. We are undisputed experts at getting correspondent accounts open, both for new offshore banks and existing ones. We know which doors to knock on and can virtually guarantee that if we accept you as a client, we will get you one or more correspondent accounts. It is always good to have redundancy (multiple back up options) for correspondent accounts in all major currencies for smaller offshore banks from jurisdictions such as Comoros, Dominica and St Lucia.
HOW TO ORDER A BANK LICENSE FROM KEVELEX CORP
If you wish to go ahead with the preliminary formation of a banking company you need to meet certain due diligence.
The initial package will be as follows:
- Original completed application form which you obtain by email from Kevelex.
- Notarized or otherwise certified copies of operative pages of passport for all persons such as directors, shareholders or ultimate beneficial owners.
- Current bank reference: Ideally the reference should reflect a satisfactory relationship for all persons or companies involved.
- Proof of Address: copy of recent utility bill or recent bank statement or major credit card bill for all persons, alternatively rental contract or title documents.
- Reference from a lawyer or accountant for all persons.
- The IBC applying for a license should have a minimum capital of EUR 500 000. This capital requirement can usually be satisfied with a financial guarantee.
- Business plan.
- Send us all required documents by email that we can carry out preliminary background checks and agree the terms of contract with you. (2-3 days).
- We will issue an invoice (alternatively if you wish to use an escrow agreement this is possible, there will be an extra fee for this service, usually 5% of total invoice value).
- When we receive the payment or the escrow confirmation we will send the data to the due diligence agency for detailed background checks (2-6 weeks).
- You provide the necessary capital (cash to account of notary, or promissory note, bank guarantee etc for formation of the Bank company) (2-3 days).
- On receipt of clearance we will incorporate the company with the name "Bank" (1 week).
- We confirm and co-ordinate all additional services you ordered like Core Banking Software, Business Plan, Compliance Program and Audit Agreement etc. (1-3 weeks).
- Preliminary approval for Correspondent Account (1 week).
- Application is formally submitted (1-6 weeks).
- Preliminary license received.
- Pre-approved Correspondent Account Opened (1-2 weeks).
- Bank starts onboarding clients.
Note: Due diligence fees are not included in set up fees. They depend on number of involved persons and entities.
We look forward to working with you and welcoming you as a Kevelex client.
To get the process started, please speak to a Kevelex representative, please see our contact us page for details.
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