Six Key Factors to Consider When Opening Your Own Offshore Bank

If you would like to open an offshore (international) bank, you have to prepare for the move carefully. Below we discuss several key factors that you have to take into account when deliberating opening your own bank.

If you have an offshore bank, you can gain a number of important benefits. You can boost your business, lower the operational costs, and gain access to some valuable resources. Registering a bank is a good chance to achieve success in the international business arena and get recognition from the major players in the market.

However, you must understand that the task of setting up your own bank cannot be simple. The banking sphere is one of the most regulated and controlled business areas in the world. Newbies entering the field are scrutinized with an extreme zeal. The competition is tough in the banking sphere, the world economy is unstable, and many new banks fail or have a hard time trying to make ends meet.

Factor №1 Develop a business plan before opening an offshore bank

Whatever country you choose to set up a bank, you are going to need a banking license in all cases. Banking licenses are issued by the Central Bank of the country. If you want the Central Bank to consider your application for a license, you have to take the matter of developing a business plan seriously.

The contents of your business plan will have a direct bearing on the Central Bank’s decision to give you a banking license. Besides, the document will serve future business planning, performing banking operations in a proper manner, and minimizing risks.

Your business plan has to contain the following elements, among others:

• A detailed description of the intended types of activities;
• Risk assessment in words and numbers;
• Information about your personal wealth (or corporate wealth if a holding is opening a bank);
• Work plan and expected profits and losses for the nearest 3 to 5 years;
• Descriptions of the business spheres you are planning to be involved in;
• The minimum level of the bank’s liquidity;
• Characteristics of prospective clients, and other items.

In addition to that, you have to inform the national Central Bank how you are going to provide for security of banking operations. What software are you going to use? How experienced are the bank officers going to be?

If you have a nice and tidy business plan, you can apply for a banking license. If you don’t have one, you should hire an expert or a group of experts who are familiar with the requirements applied to banks in the jurisdiction that you have chosen and have them draw up a business plan for you. 

Factor №2 The role of the banking license

Acquiring a banking license means acquiring approval from the local financial regulator for your intended banking activities. All banks need licenses regardless of their type and country of domiciliation.

Banking licenses are granted in two steps: first, you will acquire a preliminary license and then an operational license. The preliminary license is granted if your business plan is approved. It allows registering a company that has the word ‘Bank’ in its name. Now you can start preparing for providing banking services.

Banking licenses can be domestic and international. If you would like to start a small private bank in an offshore jurisdiction, obtaining a domestic banking license is not going to be too difficult. If you would like to work with clients from all over the world, you would need an international license. You certainly need professional assistance in this matter because obtaining an international banking license can be a challenging task.

Obtaining the banking license is only the first step

Whether you are opening a small bank or a large one, you need a license. However, this is only the first step on the long road to success. Here’s what you should remember about banking licenses:

• You cannot simply buy a banking license by bringing cash. Every application for a banking license is scrutinized by the Central Bank officers. They have to approve the application if you are to obtain a license.
• The license is not a magic wand; it’s only an approval from the local financial regulator. You’ll have to solve a great number of issues on your way to success in the banking world. In addition to handling tough competition in the banking sector, you’ll have to conform to all the AML and CTF requirements. Besides, you’ll have to play by the KYC rules. In addition, there are liquidity requirements, security requirements, transaction requirements, and many other sorts of requirements that you’ll have to meet.
• You need a banking license even if you would like to buy an existing bank instead of opening a new one. Depending on the jurisdiction, the banking company may be able to continue operations while it is changing hands. But in any case, your application for a license needs to be approved and this takes time. Besides, it takes money, too!
• Having a banking license from a foreign country is highly desirable when starting an offshore bank. If you have a European banking license, opening a bank in Panama or Dominica is going to be much simpler.

Factor №3 Minimum capitalization requirements 

Depending on how much money you are planning to invest in starting an offshore bank, your choice of jurisdictions can be wider or narrower. The capitalization requirements differ greatly from one country to another.

The level of you bank’s capitalization will reflect on its reputation and the geography of its clients

1. The required capitalization can be as low as 1 million dollars as is the case in Dominica, for example. However, a bank with capitalization as low as that is going to have a hard time finding correspondent banks willing to provide international banking services.  
2. 3 to 5 million dollars can make your banking dreams much more realistic. Quite a number of offshore jurisdictions will be happy with this level of capitalization. You can open a bank in Belize, for instance. 
3. 10 million dollars will give you access to the Caribbean and Central American countries. Puerto Rico may be of particular interest to you. It is an independent territory associated with the USA and its banking system is integrated with the US banking system. 
4. If you would like to start a bank in North America, you’ll have to invest 25 million dollars, which will enable you to register a banking company in Mexico. Many Asian and European jurisdictions will also be happy with this level of capitalization, including Switzerland, for example.

The higher the level of the bank’s capitalization, the higher the trust on the part of correspondent banks. However, this is not the only factor that determines how credible your bank is going to be in the eyes of international partners. 

As a side note, we would like to mention the opportunity to open a captive bank in a foreign country. A captive bank provides services only to a fixed group of people. No outsider can use it. In case you start a captive bank, the level of its capitalization doesn’t matter. A captive bank will often be part of a family office. Establishing one can also give you an idea of what the banking business looks like. Thus, a captive bank can be a bridge to the big banking business for you.

Other factors affecting the total cost of setting up an offshore bank

The license fee and the required capitalization amount are not the only costs involved in opening an offshore bank. There are additional factors that will affect the total amount of investment that you’d have to make. These include the following ones:

• The applicant for a banking license has to have experience in the banking sphere because the license is not going to be issued otherwise. That means that you have to have qualified personnel.
• If there is a bilateral agreement on double taxation avoidance between your home country and the country where you are opening a bank, it’s going to positively affect the required investment amount (that is, it’s going to be lower). If there is no such agreement, the total cost may increase.
• The license category also matters. Many offshore jurisdictions issue Category A licenses to large international banks with vast experience and Category B licenses to newbies and small banks. Their prices are different. As far as online banks are concerned, they need sophisticated software and its cost needs to be taken into account.

Factor №4 Banking software

Banks seldom use paper documents these days. All the client information, their accounts and transactions are stored in the computer.

IT-systems have the clients’ profiles, make banking transactions, provide for online banking opportunities, help conduct due diligence checks, and put the information in storage.

The banking software also costs a pretty penny. Depending on its complexity, it may cost anywhere between US$ 100,000 and a few million.

It is also important to realize that software testing takes considerable time. Forward-looking entrepreneurs will start solving the banking software issue long before they apply for a banking license.

Factor №5 Banking security issues

All banks in the modern world have to comply with strict rules and conduct serious due diligence procedures. The international financial regulators fight against money laundering and tax evasion with all their might. You have to take the matter seriously because if you fail to comply with a security requirement, you may have to pay a huge fine and even lose your banking license.

In particular, if you want to service clients from the USA, you will have to apply for a Global International Intermediary Number to the IRS in the United States in compliance with the FATCA requirements. If a transaction that your bank makes does not comply with the FATCA requirements, the fine is going to be 35% or 50% or 100% of the amount of the transaction.

Factor №6 Correspondent banks and correspondent accounts

Banks need clients and clients need to have an opportunity to put money in the bank and to withdraw money. If the bank is located far away and if it makes and accepts payments only in East Caribbean dollars, it can hardly be attractive for many people or companies from other parts of the world.

However, the bank can open correspondent accounts in foreign banks and make it possible for the clients to pay in US dollars, euros, British pounds, and Swiss francs. Lack of correspondent accounts will make banking almost senseless.

If you would like to make transactions in US dollars, you need to have a correspondent bank that works with dollars. The best thing to do would be to find a correspondent bank located in the United States but this is not absolutely necessary. Many banks located in other jurisdictions also make dollar transactions.

The same goes for euro, yen, pound, franc, etc. transactions.

The cost of acquiring a correspondent bank may well be a serious obstacle on your way to international banking. The banking license fee in the Camorra Islands, for example, costs 500,000 dollars. At the same time, you may have to pay as much as 10 million dollars to sign a correspondence agreement with a foreign bank. And you can sign such an agreement only if the foreign bank agrees to establish partnership relationships with your bank.

What is more, the risk of losing a correspondent account is great. Violate a small rule, attract the attention of the regulator, scare your correspondent bank by an abrupt gesture and there you go: your correspondent account disappears.

This is the reason why banks always try to find several correspondent partner banks. In this way, they lessen their level of dependence on a single partner and minimize risks.

Banking is a profitable but tough business

Banks of all kinds – international, private, online, etc. – make profits by using their clients’ money. Banks accept funds from clients and pay them interests on the deposits. They also give out loans to clients and now the client has to pay an interest on the loan.

The difference between the interest that the bank pays and the interest that it charges is called interest spread. The bank will pay a lower interest on the deposit than it will charge on a loan. This is basically how banks make money. They have other sources of income too. These include administrative fees, commissions, pension accounts, insurance services, and so on.

Having your own bank can be a profitable business but opening an offshore bank requires a lot of planning, hard work, and preparation. Without doubt, it also requires substantial investments. It isn’t impossible, however, and we will gladly assist you in the matter if opening an offshore bank is on your mind.