Introduction – What we are going to do is describe the legal and mechanical process relating to offshore bank failures. We will discuss what leads up to them, what happens if they fail, and how do the depositors get their money back. The terms and scenarios we depict are generally what happens in the world of offshore banking. In some jurisdictions the terminology and procedures may be slightly different but the general way things proceed will be in line with the scenarios depicted in this article.
Offshore Banks – A brief definition of this term is in order. These are banks that are located in various countries around the world many being in Caribbean Island Nations. These banks have a license that enables them to only do business with people and entities (trusts and corporations) that are not from that country. The offshore jurisdiction does not trust the offshore bank to accept deposits from its citizens or corporation filed in that country. This right away should tell a moderately astute investor that he or she is perhaps not exercising the correct amount of caution when it comes to selecting a bank and an offshore jurisdiction. So the first warning sign is be careful of offshore banking licenses. A bank can be in an offshore jurisdiction and not have an offshore banking license, instead be a regularly licensed bank. Offshore bank licenses can be had in some jurisdictions with as little as a $50,000 deposit with the country issuing the license. Usually this amount is never more than $500,000 and many countries require less. As a point of comparison a regular bank operating in Panama is required to post $10,000,000 cash deposit and the owners go through a rigorous background investigation.
Bank Failure – This is a term relating to the offshore bank being unable to fulfill the demand for funds from their depositors. This can occur for a number of reasons, some bad and some not so bad. The offshore bank may have been found to be below its protective ratios and the government bank auditors or financial ministry may decide to shut the bank down in terms of money going out for a limited period of time to see if the bank can return their ratios quickly to an acceptable level. In the event the ratios return to an acceptable level the bank operation resumes normally and the depositors may not even know anything occurred.
Complaints – The way offshore bank failures generally start is with complaints to the licensing authority of the country where the bank is located stating that requests to withdraw funds are not being met by the bank. To document this the account holder generally retains legal counsel in the country where the offshore bank is located and files a formal demand for the funds to bank with a very short deadline. When this demand is not met the law firm will file a formal complaint to the offshore bank licensing authority who will generally conduct an investigation. They may have their own auditors or hire an independent team of auditors to go through the offshore bank records. They will look to see if there are any loans on the books that do not meet the guidelines for lending such as writing not collateralized loans is usually considered an offense. Loans to the principals of the bank are another red flag. Real estate acquisitions like mansions on the island where the offshore bank is located for the bank executives to live in is another red flag as well. Usually without loans the bank would not fail to meet its ratios. When these loans go bad and there is no collateral to go after then the banks get into trouble. The complaint process is possibly the only way the government is going to know their offshore bank is in trouble and by then it may be too late, but it may not be too late. Remember we are talking about offshore banks here, not regularly licensed regular banks which are audited and watched way more closely by the government and usually by a different government agency than the agency supervising offshore banks. We as a Panama Law firm do not introduce clients to offshore banks which should tell you something.
Loss of Correspondent Bank – Sometimes the offshore bank has just lost one or more of its correspondent banks and can not execute wire transfers until it replaces the correspondent with another correspondent bank which may take several weeks. When the complaints hit the government they will investigate, see that the funds are in place and allow the offshore bank a reasonable period of time to secure another correspondent bank, checking with them for progress reports. This is a not so bad problem that will only serve to scare and inconvenience the depositors.
Offshore Bank Receivership – This is a process whereby the government agency that licenses the offshore bank takes over the offshore bank to control its operation with an eye towards saving the bank. Sometimes they are successful and well sometimes not. Often a team of professionals from a large auditing or accounting firm are brought in. Receivership practices can frequently mean that a percentage of your funds will be unavailable for withdrawal for sometime. This is to prevent a run on the offshore bank which would for sure topple it and thus cost the depositors substantial losses. You may be only able to take out say 25% of your funds. What can often happen is the depositors lose faith and take as much money out as they can and avoid putting in any more money. This usually results in the offshore bank failing totally and being shut down.
Suing the Offshore Bank – What often happens in these offshore bank receivership scenarios is some depositors get scared and act jumpy and sue the bank. The lawsuits generally involve having the court encumber or tie up an amount equal to their deposit. To accomplish this the depositors generally have to resort to deceit or twisting the truth minimally, to make the court think they were not ordinary depositors or the amount in question consisted of funds to be handled in a special exceptional manner. The way the depositors are playing their hand is get the court to hold my money before the bank goes down completely and then my funds get mixed in with all the depositors in the fracas. If one files such a lawsuit they are generally excluded from filing claims as regular creditors (depositors) of the bank in the event of a liquidation and if they lose their lawsuit (an expected occurrence if based on fraud or deceit) they can lose all. Usually several depositors will file such lawsuits if there is any official action taken against the offshore bank and this could push the offshore bank into greater difficulty and if there is a bank liquidation it will be a most complex one with a lot of depositors funds eaten up in legal fees.
Offshore Bank Liquidation – This is of course the sword of gloom in the world of offshore banking. For things to reach this level the government had to have felt that the offshore bank is not salvageable. Generally a bunch of depositors filing lawsuits and jamming up the court system of some island jurisdiction is going to encourage the government there to liquidate the offshore bank in hopes of freeing up their courts. Imagine an offshore tax haven island court system. A small building with one to three courtrooms and maybe three or four judges. These courts hear divorce, child custody, personal injury as in auto accidents, bankruptcy, collection cases, resident disputes with building contractors, traffic court cases, and criminal cases. The court is there to enable the island jurisdiction to function as an independent governing state. It is not going to jam up its courts increasing the wait times for its citizens that are trying to deal with vital matters like child custody where one of the parents is an abusive drunk hurting the children. When the offshore bank gets put into liquidation generally the court cases can be disposed of quickly or even by summary dismissal. The government knows that the people behind these lawsuits are trying to get more money than they would if they just waited for the liquidation to proceed and are not amused by their litigious behavior.
The Offshore Bank Liquidation Process – So now the bank is in liquidation. What does this mean? Basically a liquidator will be appointed to determine what assets the bank has, liquidate what can be profitably liquidated and then see how much money is left. The remaining money will be divided up among the depositors fairly depending on how much they had on deposit in the offshore bank. They will get a percentage of their deposit back. What would be a good return in a liquidation, 75%. What would be a bad return well there was a liquidation in Latvia a few years ago where the depositors got 2%. What is a typical return? There is no number but it should be 33% to 60% unless the bank has been really mismanaged.
The Offshore Bank Liquidator – This is generally a person with an accounting, legal or banking background. They can understand the books of the offshore bank and the laws pertaining to the offshore bank and the liquidation. If the offshore bank had secured loans that went bad (payments not be made according to written loan documents) they will analyze the worth of going after the collateral. If there was a farm in Argentina posted as collateral for a three million dollar loan he may order an appraisal of the farm to see if it really worth that much. If the value of the farm is more than the legal expense of securing and liquidating the asset the liquidator should go ahead and liquidate it. This process may take a year or longer. If a loan was made to a trucking company in Belgium for a fleet of trucks the same liquidation process may occur. This sort of liquidation may take even two or three years depending on what type of liquidation processes may need to be followed. The borrower may file bankruptcy making the liquidation of the secured assets difficult and time consuming in some countries. The bankruptcy court might let the borrower continue making payments and keep the asset which can make for a rather problematic liquidation because now the loan must be sold to reduce it to a net value. Generally such a loan is going to go for a deep discount at best. The liquidator may have to sell the banks real estate, computers, office equipment and furniture, cars, boats, planes etc. All this is time consuming and the assets should be sold at an auction to keep things fair avoiding accusations of selling under the market for kickbacks. There is an inherent conflict of interest in the liquidation process. The bank liquidator generally gets paid handsomely. Think perhaps $150 to $300 an hour or maybe $10,000 to $30,000 per month. It is in his best interest to keep things going for as long as possible. The lawyers the bank liquidator uses are also under this same conflict of interest. How honest and upright these people are going to be is something for which there is no rule but there is generally a control element in the form of a creditors committee. In an honest liquidation the liquidator may elect to distribute the readily available assets the offshore bank has right away. These assets would be the actual cash deposits. This is an encouraging sign to the creditors. Money would usually be held back to allow the liquidation to proceed further allowing for legal expenses etc. Then as real estate and other assets are sold further distributions would be made. Not all liquidations are done so directly.
The Ugly Side of Offshore Bank Liquidations – Sometimes the offshore bank assets are deposited by the liquidator in another bank. Whether or not this is in an interest bearing account is always a good question. If there is $12,000,000 in cash in a bank the interest at 4% a year is a serious amount of money that will tempt people. Legal fees can be padded and kickbacks made to the liquidator from the law firm located on the island jurisdiction the offshore bank is in. Some of these islands where these offshore banks are have less than 100,000 people living in the country. You are foreigners and don’t expect such honest treatment in these tourist island jurisdictions. They may view these offshore bank liquidations as a feast for the locals courtesy of all the rich foreigners. Excessive travel can be run up by the liquidator. He can travel abroad going first class all the way even bringing the lawyers along, all on the clock. The liquidator can reach crooked settlements with people who posted collateral for loans with the offshore bank. Depositors of the offshore bank can file lawsuits for special treatment and the liquidator can settle with them in a crooked manner for an illegal kickback and then they get all their back while you only get a fraction back. Real estate owned by the offshore bank can be sold under market value for a kickback to a friend or relative of the liquidator. Same can be done with cars, computers etc. The liquidator can elect to chase assets not worth chasing to continue his high paying job some years longer than it should require. Remember offshore bank liquidations do not come along every day and the liquidator has no idea where his next job is going to come from. There is a check and balance usually in the bank liquidation process which is described below.
Offshore Bank Liquidation Creditors Committee – A creditor of the offshore bank is generally a depositor but it could be the electric company or the phone company. Generally, the employees are considered priority creditors when it comes to their wages and they get paid off first and fast. The depositor is owed money by the offshore bank based on their deposits, thus he or she is a creditor as far as the offshore bank liquidation is concerned. An offshore bank liquidation is sort of like a bankruptcy proceeding. In an offshore bank liquidation a creditors committee is formed which is something done in many bankruptcy proceedings. The creditors committee could possibly have been formed before the liquidator came into office and they appoint the liquidator with or without the approval of the court, rules vary some depending on the offshore jurisdiction involved. The creditors committee generally is voted into existence by the creditors, the creditors with the most dollars on deposit having the most votes is one way to look at it. All creditors are generally not treated equal. The creditors committee members are all on the same side and that side is interested in getting as much money back as they can. Decisions as to how to spend money chasing assets or potential assets are usually made by the liquidator but the creditors committee can exert control over the liquidator even replacing the liquidator in extreme circumstances. Some bank liquidations have taken place without creditor committees in place. These are generally less than above board liquidations.
Creditor Claims in Offshore Bank Liquidations – When the liquidator is in office the depositors are generally required to file claims. The claims process involves filing identity documents with the liquidator and identifying your account and how much money was in it. Offshore bank liquidations are conducted in open court and these claims wind up as exhibits in the public domain. What I am saying is bank secrecy is not in place once the bank is in liquidation. What one can expect to see is a fair number of depositors failing to file claims because of various reasons often relating to bank secrecy. Of course this means a greater recovery for those who do file the claims while the other folks walk away with a total loss of their funds by choice.
What to do if you are in an Offshore Bank Liquidation – If you are already involved in a bank liquidation you made a mistake and you are going to get hurt. How badly hurt is the question so you should be trying to mitigate your damages. If a creditors committee is forming try to get involved actively, even try to sit on the committee. If the liquidator has not yet been appointed do get involved in that process. Try to find ways to meet other depositors. Call lawyers on the island and ask them to represent a group of creditors collectively. Rest assured other depositors will be calling lawyers on the island and the lawyer can be a contact point to form a creditors committee. The idea may not occur to a lot of these lawyers so help them out a bit. If you can get a creditors committee in place and have it appoint a liquidator you will probably have a honest liquidation, probably. That having been said one must still leave room for the offshore bank itself having been intrinsically dishonest and the bank owners have since ran away with the funds. When you read the offshore bank liquidation horror stories you see that the money trail goes from country to country, bank to bank and then it ends up with a large cash withdrawal which is usually the end of the trail. The offshore jurisdiction may fail to ever prosecute them or file charges which of course make one wonder what was going on. So the key here is to get involved actively. It is real important to open communications with other creditors and get organized.
How to Avoid Being in Offshore Bank Liquidations – The answer is of course simple, avoid offshore banks. Stick to banks with full banking licenses that can conduct banking business with the residents of the country as well as with entities not located in the country.
Offshore Bank Alternatives – The best alternative to these tax haven island offshore jurisdictions is Panama. Panama is a solid offshore tax haven jurisdiction that does not tax offshore derived income and has no capital gains tax or tax on stock market gains. Panama has fully anonymous bearer share corporations where the owners are not recorded in any registry or database. Panama has anonymous foundations which are able to have generally non-freezable bank accounts. Panama has no tax treaties with any country so fishing expeditions are not going to happen. Panama has the tightest bank secrecy laws in the world and when coupled with an anonymous bearer share corporation it becomes the most secure and private structure one could have in the world today. Panama has 400,000 corporations registered there as well as many of the merchant marine vessels and cruise ships in the world. Panama has about 150 banks many of which are large multi-billion dollar international conglomerates, yet the banking operation in Panama is a separate bank corporation operating under Panama bank secrecy laws. Panama has not had a bank failure in over five years. Panama has had only a few bank failures in its history whereas Switzerland had over 15 bank failures during the years 1999 to 2000. Panama tightly regulates its banks. Every Panama Bank must submit monthly auditing reports to Panama’s Banking Superintendent, which is under direct supervision by the Banco Nacional de Panama (BNP), the National Bank of Panama. A list of prominent international banks in Panama includes: Citibank, HSBC, Dresdner Bank, Bank of Tokyo, Bank of Boston, Banco Nacional de Paris, International Commercial Bank of China, Societe Generale, Banque Sudameris, BBVA, Banco Uno, Banco General, PriBanco, Banco del Istmo, Global Bank, MultiCredit Bank, PanaBank, ABN Amro, Banco Aliado, Banco Continental, BancoLat, BIPAN, Lloyds TLB Bank, and the Bank of Nova Scotia. Many of the Panama banks own office building skyscrapers 40+ stories tall with their name on the building. These are not grocery store sized banks found in the island jurisdictions. The Panama Stock Exchange has an average trading volume of $900,000,000.
Panama is free of hurricanes, volcanoes, tornadoes, and earthquakes which is why the Panama Canal was built there. Panama uses the US dollar as their national currency. Panama has modern telephones, cell phones and internet being a country having been built by the Americans which left Panama in 2000. Panama has a treaty with the USA calling for the USA to protect the Panama Canal if it was threatened. This means the peace and security of the Republic of Panama is protected by the USA which could have jet fighters there in minutes. Panama is the new Switzerland of the world.