Section 16

Types of Offshore Banks

There are all types of banks around the world and each country has their own laws that govern banking. Some countries' laws are more strict than others. In most countries, bank laws protect the public and provide a framework for bankers to do business. Banking is a specialized field requiring adequate knowledge, experience and capital. It is not the type of business that the average entrepreneur would rush into, even though for many, owning their own bank may be a dream. Banking is a fraternity, and the industry wishes to limit who is welcome. Strict banking laws and regulations not only protect the public, but they protect professionals in the business, the integrity of the banking industry and the nation's money supply.

Up to this point, any reference to offshore banking has meant banking outside of one's own country; more commonly though it is thought of as banking in a tax haven where the prevailing laws define the distinction between types of banks.

Banks are classified as onshore banks and offshore banks. Usually an onshore bank is identified as having a Class A banking license and an offshore bank as having a Class B license. The attitude of tax havens vary on banking. Most have a means for organizing an onshore bank and some permit offshore banking. But the fact is, not all tax havens allow all of the same types of banks as mentioned in this report.

An onshore or Class A bank is usually started by local bankers to perform banking services for local residents. It may also be allowed to transact business elsewhere. Frequently, large international banks like Barclays or Citibank will establish an onshore bank that services locals and an international clientele. They may be managed by local bankers or imported professionals. The requirements for these two types of institutions may differ, but both are well governed by the laws of the tax haven which always has concern for its residents.

The onshore bank is typical of a local, national or international bank in the United States, in the sense that each have a physical location, officers and tellers, and a local trade. Their physical presence creates an immediate impression of having achieved a certain level of integrity, service, trust, financial strength and stability.

But, an offshore bank or Class B bank is licensed to do business only outside of the host country, or the tax haven where it is chartered. It cannot transact banking business with local residents, other than maintain a resident agent and registered office. The fact that it is empowered to do business elsewhere however, is not license to do anything it wants, it must operate within the laws of other jurisdictions that have influence over its activities. It is possible that no other country's laws will have any bearing on the bank depending on how it is structured and how it operates.

The requirements to start this type of bank are considerably lax in comparison to an onshore bank in the same country. In recent years, this is becoming less true as tax havens tighten up their requirements of offshore banking and bank applicants in response to pressure concerning drug trafficking, money laundering and scandals such as BCCI (Bank of Credit and Commerce International).

Specifically, flagrant and illegal uses of the B bank, although having their advantages, has tarnished the offshore banking image as heightened by the media. In the past, the ability to obtain licensing with ease and minimal qualifications attracted novice bankers, offshore cowboys, drug lords and other scoundrels and scalawags. This is not to discredit offshore banks, but the opportunity for abuse, especially in the past, was there.

Sometimes B banks are sarcastically called "brass plate" or "paper" banks. The expression "brass plate" was coined because the bank's agent will often post a small brass plaque outside their office to identify it as the bank's registered office. Dozens of banks can be managed from a single office. "Paper" bank refers to the fact that its whole existence is the charter and license that grants it power to conduct banking. It does not actually have a physical existence.

It is always the onshore bank or local branch (Class A) that has the greatest legal and financial requirements to meet. Only with these banks will the offshore depositor want to do business, at least until experienced offshore. These are the financial institutions that provide the greatest safety and financial strength and are carefully regulated by the laws of their own countries. But the liquidity of the bank is most important to financial stability.

Only a sophisticated investor should consider the possibility of banking with a true offshore or Class B bank. The marginal minimums and regulations allow flexible practices that may be advantageous to their owners, but may be risky to depositors. If considering banking with a small offshore bank, do your homework. Read their financial statement, understand it, and be certain that all the information presented is accurate and verifiable. It is possible to receive more personalized service and have more privacy with a bank of this nature, but these banks are usually run primarily with the benefit and interests of their principals in mind.

If you would like to learn more about chartering and licensing your own commercial or offshore bank in a tax haven venue, consult our affiliate's website. Charters International, Ltd. at: http://www.banksoffshore.com or telephone (775) 841-7181 or fax (775) 883-2273.