Corporate Accounts for Offshore Companies: Banks vs Payment Systems

A decade or two ago, the dilemma highlighted in the title was largely academic and of little practical importance. Offshore entities found it pretty easy to set up corporate bank accounts with European banks, often managing the process remotely. Moreover, companies registered in certain Caribbean or Asian tax havens didn’t have to worry much about checks or investigations.

However, it became clear over time that offshore companies were often used not for genuine business activities but for avoiding taxes, shifting profits elsewhere, and hiding the real owners. There were no strong laws in place to tackle the above issues. Because of this, not much changed for quite a while, although banks gradually began to enhance their scrutiny of potential corporate clients.

In 2024, the business climate is a far cry from what it was at the turn of the millennium:

• Even domestically registered companies engaged in legitimate operations face hurdles when opening bank accounts in Europe.
• Offshore companies are experiencing a severe lack of financial services. While opening an account is still somewhat feasible in their home jurisdictions or with less reputable international banks, this falls short of ideal.
• Practically all European banks have steered clear of offshore firms. There’s no official ban, but they demand documentary evidence of business operations in an EU country. Without this, the likelihood of opening an account is minimal, with a few exceptions. If an entity establishes substance (like an office, staff, and local business relationships), it no longer qualifies as an offshore company. This transition brings about tax liabilities that negate the benefits of being registered in a tax haven.

Deoffshorization and the fight against money laundering

The stringent approach banks have towards both potential and existing clients is a direct consequence of economic globalization. In earlier times, a company could be incorporated in one nation, managed from another, address tax issues in a third, and establish commercial relationships in a fourth. Yet, the push for de-offshorization that began around ten years ago has shown that these conventional methods are now either obsolete or carry significant risks.

European banks would ideally interact with offshore structures without paying close attention to their business models. However, financial regulators are quick to flag suspicious clients, which could lead to banks losing their licenses and suffering reputational damage. Faced with the choice between short-term profit from a client and a spotless record with regulators, banks invariably opt for the latter.

Take a look at the key factors in the global shift away from offshoring that have made it exceedingly difficult for a traditional offshore company to secure a bank account in Europe:

• Universal Automatic Information Sharing: This initiative has significantly increased financial transparency.
• Legislation Eliminating Anonymity: New laws mandate the revelation of actual owners, which diminishes the privacy once offered by offshore entities.
• Mandatory Anti-Money Laundering Compliance: Banks are required to rigorously implement AML protocols.
• Obligatory Client Due Diligence: Every new client must pass comprehensive background checks.
• Heavy Penalties for AML Regulation Breaches: Banks face substantial fines for failing to comply with AML laws, regardless of intent.
• Rigorous Know Your Customer Protocols: Banks must verify the origins of funds and the identity of account beneficiaries.
• Substance Requirement: Corporate clients are expected to show substantial economic activity in the EU.
• FinCEN’s Global Banking Regulation Efforts: This division of the U.S. Treasury is actively strengthening banking regulations worldwide.

Given these developments, the likelihood of a traditional offshore company successfully opening an account with a European bank is exceedingly slim. While there are rare exceptions, our general advice for those in need of such services is to consider alternatives like payment systems.

To underscore the current situation: banks are showing little interest in new non-resident clients, particularly if the company is incorporated in a foreign country (not exclusively offshore) and lacks substance in the bank’s jurisdiction. Basically, it means that it is the banks that are choosing their clients now, not the other way around. With this dynamic, even the smallest hint of doubt can tip the scales against a prospective client.

Overcoming hurdles in corporate account opening

While the challenges of opening a bank account can be daunting, we navigate these obstacles with our clients. Luckily, Q Wealth’s expertise lies in addressing such issues. However, when it comes to opening corporate accounts for offshore companies, we often recommend you consider alternatives like payment system accounts. These options tend to be more beneficial overall and carry fewer risks.

Admittedly, offshore companies may face significant obstacles in securing a European bank account:

• Inherent Challenges: Certain hurdles are insurmountable and cannot be modified or resolved.
• Lengthy Process: The account opening timeline may often stretch beyond three months.
• Heavy Documentation: A substantial amount of paperwork is necessary.
• Hidden Barriers: Potential clients are frequently unaware of informal criteria that may lead to application refusal.
• Substance Requirement: Companies must show significant economic activity in the bank’s country, which undermines the advantages of their offshore status.
• Unexpected Demands: Additional requirements may surface without warning during the initial stages.
• Intensive Company Review: The company’s business model and activities are subject to thorough scrutiny.
• Subjective Substance Interpretation: Banks may have differing views on what constitutes substance, complicating the prediction of what you may need to prove economic presence.

It’s important to understand that opening a bank account for an offshore company in Europe is indeed achievable. Q Wealth experts have successfully facilitated such openings. For this purpose, we use all tools at our disposal, including the submission of pre-approval applications to multiple banks. However, for clients who wish to avoid rejection, we offer alternative solutions that are often more favorable.

Corporate account in a payment system

In the past, if one required a corporate account, the only choice was to turn to traditional banking institutions. However, the advent of blockchain-based financial technologies and the broader digitization of the economy have given rise to new service providers. Initially appealing primarily to individual consumers, these services have increasingly begun to serve the corporate market as well.

For more information, click here: Banks and Payment Systems: Differences, Advantages, and Drawbacks.

Not every company will find a payment system account suitable as a replacement for traditional banking services, as it’s not a universal solution. Nevertheless, many businesses can effectively utilize such an account for day-to-day operations. Especially beneficial is the scenario where a payment system account is used alongside a bank account, which boosts the company’s flexibility.

Payment systems offer a host of advantages:

• Ease of Account Opening: As a rule, everything is done remotely, with video call-based identification and verification, which eliminates the need for physical document submission in most cases.
• Digital Efficiency: Payment systems use modern digital technologies more effectively than traditional banks.
• Quick Account Setup: Corporate accounts are usually operational within two weeks.
• Cost-Effectiveness: Fees are competitive.
• Speedy Transactions: Transaction processing is much faster.
• Flexible Economic Substance Requirements: Less stringent demands for economic substance, such as an office, employees, or local business connections. Although not all payment systems boast this, their economic substance requirements are still much milder than those of banks.
• Offshore Accessibility: Accounts for offshore companies are possible to open, with a lower risk of rejection compared to traditional banks.
• Payment Card Issuance: These systems issue payment cards that integrate with existing payment networks like PayPal.
• High-Risk Business Accounts: They provide options for high-risk businesses to open corporate accounts.
• Mobile Convenience: For your convenience, user-friendly mobile applications are available.
• Currency Diversity: Support for a broad range of currencies, with some transactions processed via an indirect IBAN.
• Sanctioned Country Directors: Accounts can be opened for companies with directors from sanctioned jurisdictions, subject to certain residency or citizenship requirements.

Summing up

So, should you decide in favor of a traditional bank or a modern payment system? The question may be misleading in a given context. Bank accounts are used to manage business transactions, and as such, they should align with the specific needs and circumstances of your company. Yet, in 2024, offshore companies often either have no choice at all or face limited options.

Is a particular payment system a good fit for your business? To answer the question, we should thoroughly analyze your specific situation, evaluating all factors involved as well as available alternatives. If you need further information on how to open a corporate account or are interested in selecting a payment system for an offshore company in the high-risk sector, go ahead and book an individual consultation with Q Wealth experts!