Due Diligence on Offshore Bank Account Applications: No More Mystery

Although opening a foreign account is a vital necessity for many global enterprises, the process itself is neither easy nor quick. It involves banking due diligence, which is a rigorous and complex procedure that evaluates the identity, background, and risk profile of the prospective client. Very few novice customers can pass it with flying colors.

True, your offshore banking alternatives might be many but the times when users had the upper hand and banks competed for them are over. Now, financial institutions use various tools to cherry-pick their clients. This makes the application process longer and more complicated, often lasting more than a month.

Preliminary approval from bankers is not a final confirmation that an account will be opened. Ultimately, the permission for you to open an account depends on the bank’s Compliance department. The latter has to verify the identity, background, and risk profile of the applicant through Know Your Customer (KYC) and due diligence procedures.

What is banking due diligence and why is it important for offshore account setup?

Customer Due Diligence (CDD) is a vital procedure in Financial Crime Compliance (FCC). It involves collecting relevant information about the applicant, analyzing it, and systematically identifying potential risks. The bank examines various factors in this process:

• beneficiary’s identity
• existence of any sanctions against the potential clients, their relatives, and business associates
• risk profile of the business sector and the customer’s incorporation jurisdiction
• partners and founders associated with the company.

Comprehensive reliability screening is a key part of the Know Your Customer (KYC) standards that differ from country to country and from market to market.

Customer due diligence and its significance in the banking industry

It is for various purposes that financial institutions use banking due diligence:

• complying with the laws and regulations of the regions or markets where they operate 
• verifying the buyer’s identity
• preventing fraud and deception, e.g., fake or stolen personal data or identities.

Risk-oriented approach

International KYC standards often require banking institutions to use a risk-based approach. This means that applicants who have a higher risk profile have to go through more thorough and detailed Customer Due Diligence (CDD) checks. Which level will be chosen for the analysis depends on the applicant’s relationship with the bank as well as their risk profile.

These are the risks that banking due diligence aims to prevent:

• money laundering
• terrorism financing
• fraud
• violation of sanctions.

Due diligence on each and every client

Due diligence is a continuous process that never ends. Existing clients with active accounts and financial ties are regularly evaluated for their activities and risks. The practice is important because the actions and behaviors of both companies and individuals may change, affecting their risk profile.

As part of a continuous and thorough Customer Due Diligence (CDD) process, financial institutions also monitor and analyze customer transactions.

Bright sides of due diligence 

Banking due diligence is a best practice that consists of these steps:

• verifying the identity of applicants through the Customer Identification Program (CIP)
• establishing the client’s ownership structure and documenting the relevant information about the beneficial owners of the account, if applicable
• understanding the account uses and creating the profile of expected account activity
• identifying the initial source of funds or assets for the account.

Ripple effect of due diligence on business operations

Due diligence affects other aspects of the bank’s Anti-Money Laundering (AML) program as well. Here belongs investigation, submission of Suspicious Activity Reports (SAR), and Enhanced Due Diligence (EDD).

Given the escalating costs of regulatory compliance, Customer Due Diligence (CDD) information is vital for account opening. Missing or inaccessible information can lead to regulatory violations and service denial, which will harm business and professional relationships in the long run.

Strategies for notification management and investigation

Checking both new and existing clients of the bank helps to detect profile activity and reduce the number of alerts for them.

For example, if the initial due diligence indicates large volumes of expected account transactions, the above information may be used to configure the profile from the start. This way, actions that may seem unusual or suspicious at first will not trigger any alerts. However, simply knowing the transaction volume alone is not enough. Many AML applications let the bank set threshold values for transactions. So, the bank needs to know the expected transaction volume to set reasonable alert parameters.

How to deal with money laundering blacklist issues when opening a bank account in the EU

The European Commission maintains and updates a list of states with weak Anti-Money Laundering (AML) and counter-terrorism financing systems. The Commission advises banks to increase scrutiny of clients and businesses from the blacklisted countries, based on a thorough analysis that uses tighter criteria from the Fifth Anti-Money Laundering Directive (5AMLD). 

To prevent money laundering risks, the European Commission assessed each country on its threat level, legal framework, and control measures. The Commission also considered the Financial Action Task Force (FATF)’s efforts.

FYI: For customers from EU blacklisted states, for whom EU bank accounts are inaccessible, a foreign residence permit or a different tax residency jurisdiction may be a suitable wayout.

For any financial issues you might experience, you are welcome to contact Q Wealth experts for a consultation.