What Agencies Regulate Offshore Banks and How They Do It

When you are planning to open an offshore bank account, you have to find out how the prospective bank is regulated. You certainly do not want to find yourself in a situation when a sudden change of banking-related legislation affects your financial interests.

Offshore banks are regulated at three levels

Offshore banks are regulated at the following three levels:

• Local;
• Regional;
• International. 

First of all, an offshore bank is regulated by the laws of the country or territory where the bank is located. Every jurisdiction has its own legislation governing all banking operations carried out by local banks. Among other things, the laws of the country set the tax rates and prescribe certain measures to combat tax evasion and money laundering.   

Secondly, there are regional regulators such as the Caribbean Financial Action Task Force, for example (we discuss this organization in more detail below). The Caribbean offshore banks have to follow the requirements issued by the regional regulator.

Thirdly, there are global regulators such as the international Financial Action Task Force, for example (more on it below). Global regulators set their own rules for banks in all countries of the world.

We must note at this point that some offshore banks are subject to regulation on all three levels – the local, the regional, and the international ones – while other banks are regulated locally and internationally. In some parts of the world, there are no regional organizations that would monitor the work of banks.

In any case, however, you have to realize that all banks are under supervision and all of them have to follow some extremely tough requirements. Before opening an offshore bank account, you have to develop an understanding of how the particular bank is regulated. This may have a direct bearing on the level of its reliability and, consequently, on your decision to set up an account there.

International organizations supervising banking operations

We will start with international regulators because their scope of authority is wider than the regional regulators’ scope of authority and their role in monitoring offshore banks is more prominent. There are several international organizations that directly or indirectly affect the operations carried out by offshore banks. We list these organizations below. 

• Financial Action Task Force (FATF). It is an intergovernmental agency that sets the anti-money laundering (AML) and counter-terrorism financing (CTF) rules. It assesses the AML/CTF mechanisms that banks all around the world employ. The FATF regularly compiles black and gray lists of countries that fail to comply with its requirements or do not follow the rules to the letter. To be on the FATF black or gray list is the last thing any country wants.
• Organization for Economic Co-operation and Development (OECD). This international organization has 38 member states. It sets the standards of transparency for tax systems and conducts expert assessment of national fiscal systems.
• Basel Committee on Banking Supervision (BCBS). This is a group of Central Bank heads and heads of national institutions fulfilling the role of central banks. It sets the global standards of banking regulation. Among other things, it defines the concepts of capital sufficiency and risk management.  
• International Monetary Fund (IMF). This global organization facilitates international cooperation in currency exchange. It takes effort to keep the exchange rates stable. The IMF offers technical assistance in strengthening the financial systems of its member states.
• World Bank. The World Bank is a global organization that provides financial and technical assistance to developing countries. It helps improve the financial systems of these countries.
• Economic and Financial Affairs Council (ECOFIN). This is one of the oldest divisions of the Council of the European Union. It is composed of the ministers of economy and finance of the 27 EU member states. One of the responsibilities that the group has is compiling the lists of uncooperative countries (for tax matters).

These are the most prominent international organizations that supervise the activities carried out by offshore banks. At the same time, their head offices are far away from a particular offshore bank. The immediate monitoring of its activities is performed at the local level, in the jurisdiction where the bank is stationed. 

Please find out how to register an offshore company and comply with the rules and recommendations put forward by international regulators.

Regional organizations supervising banking operations

In some parts of the world, there are regional organizations that also regulate offshore banks. They monitor the banks’ activities and put forward requirements or recommendations that the banks located in the region have to follow. These organizations are listed below.

• Caribbean Financial Action Task Force (CFATF). This regional organization sets the AML/CTF standards for Caribbean financial institutions. It also ensures that the banks in the 24 member states meet these standards.
• Financial Action Task Force on Money Laundering in South America (GAFILAT). This is the South American analogue of the CFATF. The organization has 18 member states in the region.  
• Asia Pacific Group on Money Laundering (APG). The functions of this regional regulator are similar to the functions of the two organizations mentioned above. It monitors the activities of the banks located in 41 countries in the Asia-Pacific region.  
• European Banking Authority (EBA). This is an EU institution responsible for efficient and consistent regulation of European banks. It promotes transparency of banking operations as well as stability and trust in the banking sector. It also creates AML/CTF guidelines for the banks located in the region.
• Middle East and North Africa Financial Action Task Force (MENAFATF). This organization has 21 member states in the region. Its functions are similar to the functions of analogous organizations in other regions of the world (see above).  

As you can see, the regional regulators can be thought of as regional divisions of the global FATF. Their main objective is the development and implementation of an efficient regulatory and legal frameworks for offshore banking operations.

Main instruments of offshore banking regulation

International and regional regulators have a wide array of instruments that they can use to affect the activities of offshore banks. The main instruments include the following ones:

• They set the standards and the guiding principles. The regulators set the rules of the game for offshore banks. Their requirements mostly concern AML and CTF measures. They also impose obligations on offshore banks related to due diligence procedures, transactions monitoring, and reporting suspicious financial activities.
• They conduct assessments and inspections. Some international organizations appraise offshore banks and determine if they meet the international standards in providing banking services and employ state-of-the-art instruments. In the course of an inspection, their experts can visit the bank office, interview the local regulating agencies, talk to some of the bank’s clients, and review the local legislation governing banking activities.
• They provide technical assistance to the banks. International regulators do not only impose requirements on offshore banks: they also help the banks comply with these requirements. Their assistance includes advice on strengthening the local regulatory and legal frameworks, training programs for local regulators and other stakeholders, development of new legal acts, and support in implementing the AML/CTF tasks.
• They facilitate cooperation and exchange of information between offshore banks as well as regulating authorities and other stakeholders. This helps improve the efficiency of the AML/CTF measures and reduce the risks associated with offshore banking services.

International organizations do not regulate the activities of a particular offshore bank in a direct way. They set the standards, they put forward recommendations, and they produce guidelines. This is the task of the local official bodies to make sure that the banks follow the rules, recommendations, and guidelines.

What happens if an offshore bank fails to comply with the regulators’ requirements?

If offshore banks do not comply with the requirements put forward by the international and regional regulators, they may face various unpleasant consequences. The punishment will depend on the type of misconduct and the jurisdiction where the bank is located. Below we provide several types of punishment that an noncompliant bank may face:  

• Fines and penalties. The regulating organizations can impose fines and penalties on the banks that break the rules. The amounts of the fines and penalties can be significant. If the bank fails to remedy the violation with time, the amount of the fine will become greater.
• Banking license revocation. The regulating organizations can terminate the banking license if the bank has been violating the rules for a long time without trying to remedy the situation. This means that the bank has to cease to exist.
• Criminal prosecution. In most severe cases, violation of the rules can lead to criminal prosecution. If the bank has been found guilty of contributing to money laundering or other fraudulent activities, its CEO as well as its beneficiaries can go to jail.
• Reputation impairment. If an offshore bank violates certain regulations, attracts the attention of the regulators who will then start sending auditors and inspectors there on a regular basis, the bank’s reputation will suffer. It may find it hard to keep the existing clients and attract new ones, which will obviously bring serious problems and threaten the bank’s existence.

As far as local regulators are concerned, they are present in all offshore jurisdiction without any doubt. Any offshore bank has to have a license to be able to provide banking services to customers and the Central Bank of the country usually issues banking licenses. Thus, the Central bank of the offshore jurisdiction where the bank is registered acts as its principal regulator.

Local banking regulations are different from one offshore jurisdiction to another. They are tougher in some countries and more relaxed in some other countries. The regulators are more aggressive in some places and less so in others. In any case, however, all banks, including offshore banks, have to play by the rules set by the global organizations supervising banking activities. They pressure incompliant offshore banks and apply sanctions to them.

It is crucially important to keep track of all the changes that are taking place in the banking industry in all parts of the world. And the fact that serious changes are happening there is beyond dispute. Thus, if you would like to open an offshore bank account, you will be well-advised to seek professional advice from the experts of the International Wealth portal. We are closely monitoring all the ongoing changes in the offshore industry and we can help you avoid various traps and pitfalls on your way to registering a foreign company or opening an offshore bank account. Please contact us info@offshore-pro.info and request our professional assistance.