Reputability is one of the most overlooked aspects when forming an offshore company and/or opening an offshore bank account.
What good is an offshore company if no bank accepts the jurisdiction? What good is an offshore bank account if all wires in and out of the bank are subject to severe scrutiny, or even refused?
There are number of factors to consider. But maybe we should start in the other end.
Why Reputability Matters
The reputability of a jurisdiction is important for both B2C (Business to Customer) and B2B (Business to Business) companies. It is of enormous importance when doing B2G (Business to Government).
Some countries, such as the Scandinavian nations, have special rules for invoices that come from offshore jurisdictions. These invoices are subject to further scrutiny and many companies shy away from doing business with offshore companies. To get around this, some entrepreneurs opt to incorporate an onshore invoicing entity owned by the offshore entity. This adds extra costs and complexity, which may be unwanted for smaller entrepreneurs, but it may be the only solution in some cases.
Reputability also affects how likely banks are to accept you as a customer. While there are banks out there that will open an account for anyone who can spell their name correctly on an application form, other banks – and this is a growing trend from what I have experienced – take a more cautious approach. Take for example jurisdictions like Nauru and Comoros, which have a terrible reputation worldwide for being lawless. It can be difficult to open a bank account for a company incorporated there.
On the flip-side, if you bank in a highly disreputable jurisdiction, transactions in and out and card purchases made by cards issued there may raise alerts. In some cases the wires can even be blocked due to sanctions.
Factors That Affect Reputability
When assessing a jurisdiction’s reputability, there are number of factors – or criteria, if you will – that you need to look at. These include:
- Common sense. What do you already know about the jurisdiction?
- Political stability. Is the government going to be around for the next 5, 10, 20, 50 years? Are there any significant international or internal conflicts?
- Geographical and geological stability. You wouldn’t want your bank to disappear in a flooding or earthquake, would you?
- Financial stability. You might not bank in the country; maybe you just have a company there, so a fiscal collapse won’t affect you, right? Wrong. While unlikely to happen to non-resident companies (such as IBCs), tax resident companies may suddenly become subject to capital controls. A financial collapse of the country of your company may impact the reputation of your company towards clients and business partners.
- Crime and corruption. This can bite you two ways. Either no one wants to do business with you or the local government might decide to buy the mafia a vacation to some paradise island using your money.
- Transparency. While you might seek high privacy or even anonymity, this has a significant impact on how you are perceived by others. Public records are good.
- Freedom. Is it a totalitarian state or is the population free? Somewhere in between? This impacts how the international community views the jurisdiction.
- Justice system. This relates to crime, corruption, and freedom. A country with flimsy courts and corrupt police does not look good to other countries.
Source of Information
Below I have listed some of my preferred sources of information when assessing a jurisdiction reputability.
- FATF, OECD, Moneyval, and other similar organizations’ reports on the country.
- Freedom House‘s annual Freedom in the World reports.
- The Heritage Foundation‘s annual Index of Economic Freedom rankings.
- Report Without Borders‘ annual Press Freedom Index.
- The Economist‘s Democracy Index.
- Transparency International‘s annual Corruption Perception Index.
- World Bank‘s annual Ease of Doing Business report.
- The Fund For Peace‘s annual Failed State Index.
- The Basel Institute’s AML Index.
Using these and researching the jurisdiction in newspapers, you should be able to get a clear picture of how the jurisdiction is perceived throughout the world.