Dear Ambassador Nagel,
I understand that it is becoming more and more difficult to set up an international bank and, especially, to access correspondent banking services. Is it still possible to establish a bank from inception and to have it operational for a global clientele…or have the big banks crowded out the small banks and startups?
If so, what does it cost to establish and how much capital is required to open up an international (offshore) bank?
Thank you for your excellent questions, regarding banking. My law firm has been very active in this space for 28 years and has represented banks and banking groups, and I have served on bank boards all over the world. There is no doubt that it has become more difficult, more expensive, and takes longer to obtain a bank license now than at the beginning of my career, but it is certainly still possible for serious individuals and investment groups who have a real business plan and strategy to obtain bank licenses and open up a new bank.
Personally, I am not a big fan of brokers who say they can “sell” you a bank license. Some of the brokers out there are legitimate and will deliver a license to you, while others are outright internet fraudsters who just want your money. But, even the legitimate brokers selling licenses cannot guarantee the buyer what they really want, which is to own and operate an international bank. This is because the license is just step-one in the process, and although critically important in setting up a bank, the license by itself is not the same as operating a bank. The license represents the regulatory approval of the country where the bank is established and is absolutely necessary to have in order to open a new bank.
The problem, however, is twofold. First, the license is very specific to the person or group who gets the license. They will have to be “vetted” by the Central Bank authority that they meet the conditions for the licensee. If a broker comes along and “sells” you an existing license, you will still need to go through the regulatory agency’s approval process. In many cases the transfer process can take equally as long as the initial approval process, so you may gain very little from a time perspective while incurring substantially more costs in acquiring someone else’s existing license.
Secondly, the license itself is not magic fairy dust, but rather only the approval from the regulatory agency. Then, you must still deal with the marketplace and its requirements for profit, anti-money laundering (AML), and know your customer (KYC), capitalization, transaction volumes, etc., etc.
Generally, we represent investor groups who want to either start their own bank, buy an existing operational bank, or make strategic investments into an existing bank for their own business purposes. In this week’s column, I’m really only talking about starting a bank from inception, but frequently in talking to clients it becomes clear that they really don’t want to own and operate a bank themselves – but rather are looking for a specific result in their other business (requiring substantial banking services). This can frequently be achieved by making a strategic investment into an existing bank. Finding a strategic partner is often a far easier and faster way to achieve your goals and objectives.
For those looking to purchase an existing bank that is already operational, you’ll still need to deal with regulatory approvals of your ownership, but generally, the bank can continue operating without pause while this occurs. In that case, you’ll expect to pay a hefty premium of three to five times the book value of the company, depending on a wide range of factors that go beyond the scope of this article.
Starting a bank from inception can take anywhere from six months to about two years, depending on the jurisdiction. Dominica is one of the shortest time frames and lowest capital requirements (six months and $1 million) in the industry.
At the same time, having such low capital makes it very difficult for Dominica startups to find an international correspondent bank willing to provide bank-to-bank services to them. So unless the investor/ownership group has their own access to an international bank for correspondent services already (and many clients do from other business relationships), then the lowest capital doesn’t always give the client what they really want.
$3-5 million is a better low-end figure to consider for startup bank capitalization. This figure opens up many of the less expensive jurisdictions available for consideration, such as Belize. With $10 million of capitalization, you basically have all the Caribbean and Central America countries that offer international banking (including Puerto Rico, which is frequently interesting to some clients because of its U.S. territory status, making it easier to access U.S. correspondent banks, credit card/merchant card services, etc.). At the top of the Caribbean is Mexico, at just over $25 million, and at that level of capitalization you can also look at some quality European and Asian jurisdictions as well, including Switzerland.
Here are some of the other non-monetary issues we discuss and explore with clients looking to establish their own bank. The cost to establish the bank will vary widely depending on who actually undertakes the work related to these issues:
To set up or buy a bank, one consideration is the investor group’s “banking experience.” If they have little or no experience, we either need to find people who will serve as officers and board directors for the application process (as well as ongoing operations) or look towards jurisdictions that aren’t as stringent about the ownership group’s banking background. I should also mention that things like the nationality of the investor group members, their source of funds (which must be substantiated), and background checks come into play here with some jurisdictions being more stringent than others. Double tax treaties can also influence the decision as to where to incorporate the bank to maximise tax efficiency. Puerto Rico, for example, has some incentives that can reduce the taxation of bank income to around 4 percent, making it very attractive compared to tax haven jurisdictions.
The next issue which must be addressed has to do with the business plan. If the investor group has a business plan that is of high quality and can be submitted to a Central Bank for review, that saves a lot of time, energy, and money. If not, a firm such as mine will need to take whatever the client has, interview them about their business goals and objectives, and then draft the business plan for them to meet the local regulatory requirements. Obviously, the need to have your attorney or an outside service provider draft your business plan will substantially increase the costs to establish the bank.
Separately, you will need to draft anti-money laundering (AML) policies and procedures, as well as know your customer (KYC) guidelines using the current best practices for the industry. This is especially important in obtaining international correspondent bank relationships. We have excellent relationships with correspondent banks and have a good feel for what they want to see from an AML and KYC perspective. Presently, those industry standards are codified in the Interbank Basel Accords, which need to be the basis of any bank policies.
If the bank plans to permit U.S. customers, then they will need to apply for a Global Intermediary Identification Number (GIIN) with the United States IRS to be compliant with FATCA. If the bank will not provide services to U.S. persons, then they will need to do the appropriate paperwork under FATCA to ensure that the bank’s transactions do not come under the “backup withholding” rules. These FATCA rules are essentially a 35 percent tax on non-compliant banks of the gross amount of the wire transaction passing through a U.S. Federal Reserve or other FATCA compliant bank outside the U.S.
Basically, the international bank needs to certify that they will not be handling any U.S. customers at the bank if they wish to avoid ongoing regulation and compliance with the IRS.
Once the jurisdiction has been selected, the ownership group must incorporate the bank and submit the formal bank license application, including the materials outlined above. Then the bank will need to follow up and answer any questions the regulators have and lobby the application through to its conclusion. Once the license is in hand, you can open local bank accounts for the bank where the capital must usually be deposited and begin the process of obtaining an international correspondent relationship.
Frequently, lawyers or service providers also get involved in establishing relationships with credit card operators, brokers, gold storage facilities, SWIFT, blockchain (cryptocurrency) interface, or any other type of service that the bank wants to offer.
From an operational perspective, the bank applicant will need to supply personnel which can operate the bank in a fashion acceptable to the regulators before they can commence operations. Depending on the clients’ real goals and business, this type of business can, in some circumstances, also be done with outsourced third party providers. This is most common, however, with Class B banks (Private or Captive Banks) than Class A banks that are open to the public. You may also need to hire outside directors who have the necessary banking experience if your ownership group does not have sufficient expertise on their own.
I hope this overview is helpful and that you can see why it’s difficult to quote a “one size fits all price.” The total price of a bank will largely depend on what the client wants and expects to have included in the price. Getting someone a “bank license” in Dominica, for example, might cost them $150,000. But what do they do with that license? Some might find my law firm and we can build up the requirements, outlined above, on top of having the license, assuming they have sufficient capital to pay for services and are attractive financially to an international correspondent bank.
Other folks will only ever play around with their “bank license” for some period of time before they realize they’ll never get anywhere, because they don’t have sufficient capital or the expertise to really play the banking game – and then they end up seeing their license expire worthlessly. That is sad, but I see it happen all the time.
Frequently, I get a call from someone as their license is about to expire asking me whether I or my clients would like to “buy” their license. Unfortunately, to transfer a license, the country’s central bank must approve the transaction, and they have no incentive to allow a non-operational license to be transferred when they can charge a new license fee to a new applicant group. So, the person in that scenario generally ends up with nothing.
Realistically, if you want to set up a real international (offshore) bank, then some ballpark figures would be for the client to have a setup and pre-opening budget of at least $750,000 to a million dollars, of which approximately $250,000 would be legal/structural fees in nature. The rest would go to hardware, software, audit, staff, etc. Capital on top of the startup expenses should be at least $5 million for a Class A bank, and the investor group needs to be prepared to put in more funds to offset operational losses in the first 2-3 years (which they will undoubtedly need to do) as they build up their business.
Could the client do it for less? Sure, in some jurisdictions, especially with outsourcing, you might cut the overall budget by 30-50 percent. For a Class B license, you may even cut your overall budget by 70 percent. But at the same time, if you want to set up your bank in a jurisdiction like Switzerland, then the pre-opening budget needs to be probably 50 percent higher or more.
That’s why it is difficult to give out standardized
quotes to folks on this type of work. I hope the ballpark figures that I have provided, however, are useful for your planning purposes.
If you want to let me know more details about what you really want and provide me with your budget parameters, I can try and provide a more specific outline for you with a couple of options in specific jurisdictions for you to consider. We have vast experience creating both Class A and Class B banks in jurisdictions all over the world and would be very pleased to assist you in any way you desire. However you proceed with your bank aspirations, I wish you every success in your venture.
Ambassador Joel Nagel
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