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From the Managing Director's desk

The end of offshore: repeated ad nauseam


24/02/2014

László Váradi, managing director, LAVECO LtdNo, the end is not here. It’s still not here. No matter how much they’ve tried to scare us over the last 20 years, saying that this year will be the last, the end hasn’t arrived in the last 2 decades, and 2014 won’t bring about that change either. Of course, the end of one era is upon us; one thing is crystal clear, and that is that what we saw over the last 20 years definitely won’t be seen in the next 20: the era of financial freedom.

When I first became involved in the mystical world of company formation, times were completely different. At the beginning of the 90s in the last century we weren’t surrounded by the dreaded paranoia of money laundering. I remember the following call from a client in Moscow: “I need an offshore company. I’ll be there in the afternoon, so prepare the paperwork because I’ve got to sign a contract and be back in Moscow by this evening.” This was all early in the morning, with no internet and no mobile phones. The client dictated his name, passport number and date of birth using a public telephone at the airport. He chose a company from our list over the phone and boarded the plane bound for Budapest. By 11.30 he was here in our office, where the company documents were waiting for him. Just after 12 we took him to the CIB Bank branch in Váci Street, where the bank officers were waiting for him and within an hour he had also opened a bank account for the company. Returning to our office, he then faxed the company details to his partner. 10 minutes later he was signing the contract which they had faxed back to him, and which he in turn faxed back. He then received a faxed copy signed by his partner, happy in the knowledge that they trusted each other and would exchange originals later. From our office he went directly to the airport and from there back to Moscow.

Those were the days! Today, there is so much paperwork to complete and collect from the clients that it is not always possible to finish the client identification process in one working day, particularly if a more complicated structure is involved. And we can explain until we’re blue in the face that it wasn’t LAVECO that thought this up, but the international organisations, but it’s difficult to convince a client who remembers how things were 20 years ago. They openly mock me with jibes such as: “Oh come on László, don’t you recognise me? Will really bringing you a fresh electricity bill every 6 months make me a reliable client?” And he’s right: it won’t make him a better, more reliable person or businessman. But it does satisfy the conditions “recommended” (or rather “dictated”, if you ask me) to the financial world by the OECD.

And dictate it is, no matter how we look at it. And the first in the queue, who, in the interest of making a profit, accepted the terms of the dictate without further thought, were the banks. The changes in client identification rules introduced on an almost daily basis cause so many obstacles to the opening and maintenance of offshore bank accounts that even the most experienced players are unable to satisfy all the requirements. I often feel that they are not just trying to make life difficult, but are intentionally trying to drive away old clients as well. The process allows us to see the future quite clearly: it will not be difficult to establish a company in a country with an advantageous tax system, but it will be difficult to open a bank account for the company. Without an account, even a company with the most attractive tax advantages is worth next to nothing. The OECD knew full well how to make life impossible for offshore companies: if they place obstacles in the way of their financial transactions, then the whole thing becomes pointless. This process is set to continue in 2014, and the banks will rule the roost. It will become more and more difficult to open accounts, and more and more existing companies will find their accounts blocked or closed, maybe with an explanation, but just as likely without. I wrote in detail about the whys and wherefores of this in the Special Edition of the LAVECO Newsletter in December, 2013.

One of the most fundamental conditions imposed on companies by the OECD is transparency. In accordance with their recommendations, it is only possible to open bank accounts for companies whose structures and activities are transparent. In terms of structure, what they mean by transparency is when the true owners and directors of a company are registered in the official public records of the Company Registry, and any changes are also recorded. The most popular company formation jurisdictions in the world today, such as the British Virgin Islands, Belize, the Seychelles, Panama etc. do not meet this requirement. No matter how much these mini-states amend the local laws, they are never going to reach the levels expected by the OECD. A further disadvantage of the so-called IBC (International Business Company) jurisdictions is that companies registered are immediately labelled with the offshore status. The name itself, International Business Company, is like a brand. The experienced eye sees through it straightaway: this is a special type of company developed for foreigners, which only operates abroad, and not in the country of registration. How much better, for example, sounds the name of a company registered in the United Arab Emirates, with “Free Trade Zone Company” as its ending. The funny thing is that we’re actually talking about the same thing, just the Arabs were a bit smarter when it came to giving it a name and building an image.

The process has already begun. A number of Swiss banks have started, or are just starting, to close the bank accounts of “conspicuously offshore” and thus non-transparent offshore companies. Accounts will only remain active if the company satisfies the requirements on transparency. In the future, however, the transparency of the structure will no longer be sufficient. In accordance with the recommendations of the Swiss Bankers Association and in line with the “White Money Policy” introduced by the Swiss in the last couple of years, company activities will also have to be transparent. To this end, the ultimate beneficial owners must declare that any amounts transferred into Switzerland come from legitimate sources, and they must be able to back this up with suitable supporting documentation. They are also likely to insist that companies holding accounts there prepare annual financial statements and possibly even audited balance sheets. On top of all this, they require that the ultimate beneficial owners declare that they are fully aware of the related tax obligations in their own countries and will do what is necessary to meet them.

In the last couple of sentences words like “must”, “insist” and “require” are used. The regulations here do not offer options. The bank gets what the bank wants, and their power is now so great that the majority of financial freedom is now a thing of the past. And it really is like this. The end of an era. This is the end of an era which for decades saw clever money owners in the real world, when it was more than just an illusion, making the most of the advantages offered by the system. The OECD dictates to the European Central Bank, the European Central Bank dictates to the national banks of individual countries, the national banks to the commercial banks, the commercial banks to companies like LAVECO Ltd., who introduce clients into the financial system, and then it is poor little LAVECO Ltd. who has to pass all this on to the clients.

The system is likely to go through a transitional period, but nobody is able to say exactly how long this will last. This transitional period will probably be typified by the banks making the operation of accounts of non-transparent companies impossible, and sooner or later either the bank or the client – at the end of the day it doesn’t really matter which one it is – will close the account. In the best scenario the bank will state whether they want to work with offshore type companies at all, but in the worst case, it is down to the client to try and discover whether the bank is willing to cooperate or not. The situation is further complicated by the fact that the compliance departments have been given too much power, which they do not simply use, but abuse. The top management in the banks are happy to pass the regulation making process on to them without bothering to check the effect, usefulness, or even detrimental effect this might have on business. Since both the management and their subordinates in the compliance field quite clearly behave like bureaucratic petty officials, the easiest thing for them in the interest of avoiding all responsibility is to reject even the lowest risk clients. I sometimes get the impression, when I look at the activity of compliance departments, that clients, no matter how good, basically are just a problem, or rather they would much prefer it if there were no clients in the system at all. But that’s nonsense, isn’t it?

I’ve put a smiley there, but in reality I could cry. So great is the uncertainty and fickleness of the bankers in this question that it leaves me speechless. They are all so worried about their jobs and bonuses that they hardly ever take a clear stand on anything, and what they say one day – they never put it in writing! – is not necessarily so the next. Even within the banks there is a constant battle between the operational teams and the compliance, or rather legal departments.
So what sort of client should we take to the banks, I ask myself? Once, many years ago, one of the large Hungarian banks wanted to get rid of offshore companies. They defined the term offshore company as a company which is registered on an island. So, this means that a company registered in Belize is not offshore, as Belize is situated on a peninsula, whereas a company registered in the United Kingdom, which is an island, is an offshore company. After this, we probably need to define the term island as well, as a whole continent could actually be considered to be an island.

Please excuse my lengthy digression, I just wanted to demonstrate that it is not you, dear reader, who has gone mad, and nor is the problem with us, but the system itself, of which we are all a part. And it’s all thanks to the rash and incompetent “experts” in the banks, who, though they may have more qualifications than I’ve had hot dinners, are unable to say who they want to enter a business relationship with, if, that is, they want to at all. As a result, there are certain questions to which I too am unable to give exact responses. There are, however, a couple of points with regard to the future which are already clear, and I willtry an dsummarise those now:

1. In the future fewer and fewer banks will be willing to administer accounts for offshore-type companies. In Europe today there are only a few banks in a few countries. It is getting more difficult, but it is still possible to poena accounts in Switzerland, Liechtenstein and Austria. It is no longer possible in either Slovakia or Hungary, as in contrast with earlier practices, with one or two rare exceptions, banks here now only open accounts for local companies. In Malta they are extremely choosy about who they will deal with, and here too it is only possible to open accounts by going through a local company. Cyprus, despite last year’s crisis, is blooming, and welcomes new clients with open arms. The quality of service is very good, as are the prices, though it is important to know which banks it is worth dealing with. This is also the case in Latvia, where they are also willing to serve foreign clients irrespective of their country of origin. In the Far East Hong Kong and Singapore offer possibilities, though both handpick their clients. Small banks in the Caribbean also offer banking services, though levels of service and security are questionable. Dubai and the Emirates show promise in the field of offshore banking, but everything is slightly uncertain here.

2. The fees for banking services will continue to increase. As year by year there are fewer and fewer banks offering offshore possibilities, so those that remain, without pressure from competitors, are not afraid to raise their service fees.

3. Only the transparent jurisdictions will survive! This may sound harsh, but the system itself will discard those company formation jurisdictions which are unable to satisfy the requirements on transparency. In this way, it is likely that places like the United Kingdom, Malta, Cyprus, the United Arab Emirates, Hong Kong and Singapore will remain alive, as they meet the OECD’s transparency conditions. In the long run, therefore, it is worth considering the more stable jurisdictions, even if the costs are higher.

The reason for the higher costs is that the company administration has become more complicated in the light of the record keeping and accounting obligations, which are now requirements in just about all the offshore jurisdictions. However, if it becomes necessary to file accounts in both the British Virgin Islands, for example, and Hong Kong, then it would be worth choosing Hong Kong on account of its stability.

When I started all this with LAVECO back in 1991 the price of a company registered in the British Virgin Islands was approximately 6000 USD. Today it is about half that. More than 20 years have passed and several million offshore companies have been established around the world. Naturally, if it had not been worth it for the owners, they would not have formed so many companies all over the globe. The question is the same today: is it worth it? In my opinion, there will be those for who the answer is yes, and those for the answer is no. There are a number of questions which have to be taken in to consideration, from the taxation laws to the expenses attached to the complicated and seemingly bureaucratic administration. But at the end of the day, it is still better to win something, than to win nothing at all. Although 6000 dollars is exactly double 3000 dollars, the question is what do we achieve by paying the additional 3000 dollars? In my opinion, in numerous cases the answer is many times that amount! And one thing is certain: all the time it is still possible, the businessman who uses these companies astutely will always be a winner, even if it costs him a little bit more. If he can, he’ll probably just pass the additional expense on to the consumer, like the large monopolistic service providers. Believe me, there is nothing new under the sun, at most they are just trying to make you think that there is!

With warmest regards,

László Váradi
Managing Director
LAVECO Ltd.

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