When an Offshore Bank Fails

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 uncollateralized 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 amongst 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.