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featuring Ambassador Joel Nagel

Establishing Your Own Offshore Bank Versus Making a Strategic Investment into an Existing Bank

written by Joel Nagel March 8, 2018

Dear Ambassador Nagel,

I’m working with a group of investors looking at establishing a start-up bank in St. Lucia or Dominica and would like to know your thoughts on creating a bank in one of those jurisdictions, as well as what we should be considering as we set up a bank.

Thank you in advance for your comments.

Sincerely,

Larry from New Jersey

Dear Larry,

Thanks for your very detailed letter, the pertinent part of which I have published above as your central inquiry. It is a very good question for me to lay out my general thoughts for any investor or investment group considering establishing their own bank.

If I were advising you, I’d start by asking the simple question, “Why do you want a bank license?”

Some folks really want to operate a bank and have a solid plan as to how they intend to make money by operating a bank. Others want a bank license to facilitate a certain aspect of their other businesses which generally involve large volumes of banking transactions, but don’t necessarily require you to have your own bank.

In the former case of needing your own bank, we’d help you to identify the best jurisdiction for operating the type of bank you want to operate. We’d also be clear about the regulatory aspects of the jurisdiction. Sometimes it makes sense to look for a jurisdiction with little or no regulatory oversight, however‎, with banks, such a position might be counterproductive in this era when it comes to securing international correspondent banking relationships as well as conducting business on the global scale. That is why I ask clients and potential clients whether they have a solid correspondent banking relationship in place.

If you do, a fairly easy and low-cost jurisdiction such as St. Lucia and/or Dominica might make sense for your banking needs. These are certainly jurisdictions which have low capital requirements and inexpensive start-up costs. If you do not, however, have solid correspondent banking ties already, whatever you think you’ve saved in set-up fees by using low-cost jurisdictions such as these will go out the window in the costs associated with the type of compliance AML/KYC protocols, personnel, hardware, and software you’ll need in order to get any correspondent bank to even consider doing business with you.

If you can set up a bank and then jump through all the myriad of hoops and hurdles from an international banking perspective to satisfy your correspondent bank partners, then you’ll still need sufficient capital as well as customers and deposits to make it financially worthwhile for a correspondent to take you on as a client. The international correspondent will look to make sure you have the internal capabilities to function at the necessary level to meet their standards, but then the overall business relationship needs to make sense for them as well. No correspondent will risk the relationship it has with its own bank regulators just to earn a few dollars in processing your bank’s international wires if there are any doubts about your bank’s customers or compliance protocols.

The notion that $1 million in capital is enough to start a bank is completely outdated in today’s world regardless of what the individual jurisdictions’ Central Banking authorities require. $5 million is a more realistic minimum, and more frequently we are being asked to prove that a retail banking customer can maintain  $10, $20, even $50 million in capital or deposits (or both) with the correspondent bank in order to do business with some global correspondent banks.

If, on the other hand, you just want a bank in order to facilitate your business’ financial needs, then the next question is, “What is that business?” We get inquiries every week from legal marijuana producers, bitcoin/blockchain companies, hedge and mutual fund operators, real estate investment trusts (REITs), and all types of multinational corporations all looking to establish their own bank.

But do they really need a bank? If they don’t, then a smarter use of their time, energy, and capital is to make a strategic investment into an existing bank which has similar goals and objectives and can absorb the potential investor’s intended business operations within their existing bank business model. In exchange, the outside investor may get preferred stock with a guaranteed return, special access to the bank’s correspondent relationships or they may get a board seat on the bank in which they invest. More importantly, this type of strategic investor/bank/business relationship can be set up and launched in days or weeks, rather than in the months and years that it takes to start a bank.

These types of strategic outside investments into banks have become more common since the advent of FATCA and the current “de-risking” environment which requires ever higher levels of capitalization, more personnel, better compliance software and hardware, etc., on a never-ending basis. It’s generally a win-win for both the investor looking to achieve their business goals and objectives in the shortest period of time and also for the bank wanting more capital with which to operate.

At the ‎same time that de-risking and global financial compliance is increasing exponentially in terms of man hours and driving operational costs upwards for retail banks, correspondents are also requiring higher fees and greater minimum transaction volumes from those same institutions. Banks find themselves in the difficult environment of trying to actually earn a profitable spread between their deposits and their loan portfolio and on their other investment and cash holdings. For start-up banks, this is a huge hurdle to overcome. Money sitting in the international correspondent bank’s account generally attracts a fee, rather than any overnight interest income the way it did for retail banks even 5 or 7 years ago. This means banks need to continually get bigger (with shrinking margins) in order to generate overall bottom line net profits. For these reasons, many banks will entertain your business model and help you facilitate your business goals and objectives in exchange for a combination of a seven or eight figure investment and/or deposit.

I hope these observations are helpful to you. The global banking landscape is rapidly changing for retail banks, institutional correspondent banks, as well as for the retail customer. Keeping your finger on the pulse of what is happening and where to turn within the banking sector to achieve your goals and objectives is exactly the role my firm plays in working with banks all around the world.

We’d be happy to help you work through the process of first determining why you want a bank. Then, assuming you do need and want a bank, we could assist further in locating a suitable jurisdiction for you to conduct your banking business. Alternatively, we’d be happy to look around the world for a partner bank in a suitable jurisdiction which is already in a position to facilitate your particular needs, so as to affect the desired business outcome.

Thank you again, Larry, for your very good question, and ‎I look forward to hearing from you on the points I have raised at your earliest convenience.

Sincerely yours,

Joel Nagel

Joel M. Nagel is an international lawyer and entrepreneur focusing his practice in the area of asset protection, cross-border transactions, and global investment. He speaks all over the world on the topics of asset protection, global banking and investment, and international legal compliance.

Joel has written articles and has been quoted by Forbes, Fortune, Live and Invest Overseas, Hemispheres Publishing, Stansberry Research, Oxford Club, Pirate Investor, True Wealth, Islands magazine, Business Times, Physician’s Money Digest, and the Simon Letter. Joel can be reached at Nagellaw@aol.com or +1-412-749-0500.  Follow him on Twitter at @Nagellaw.

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