The end of the offshore era

20.08.2019 | Corporate

The phrase "offshore company" is lately often in the newspaper columns in relation to money laundering scandals. Using an offshore company in medium-sized and large corporate structures is not new, says Georgi Džaniašvili, a partner at the law firm of Magilex, in newspaper Delovyje Vedomosti. But why don't banks and notaries like them?


Understanding the meaning of an "offshore company" becomes easier by looking at the benefits of such an enterprise:

  • it is easy to register a new company;
  • low or no tax rates;
  • the possibility of maintaining the anonymity of the business owner;
  • independence from the political system of third countries (i.e. the country where the substantive business is conducted).

Why is the administration of an offshore company currently difficult?

Five to six years ago, banks were happy to open accounts for company, provided they kept their money with them. What have we seen in the last few years? Banks close accounts even for local businesses without explaining the reasons or citing the fact that the customer is too risky. It is strange to hear how the bank has been working with the company for many years, but suddenly customer relationships are no longer appropriate and too burdensome.

The wave of account opening problems started with the money laundering scandals of banks - in Estonia, of course, it is primarily related to the Danske Bank branch. All scandal-related schemes have links to offshore companies, where it is not clear who is the person behind the companies who are the real beneficiaries and who are trying to 'launder' money. The main problem is that the banks did not carry out the necessary checks on transactions, customers and their structures in a timely manner.

Indeed, even five to six years ago, banks and other institutions had to check their customers and, if necessary, request additional transaction information. But thoroughly, they did not begin to do so until after the scandals. Unfortunately, many actually loyal customers are now being denied because banks are reluctant to invest in their background checks. They say it's too expensive for them.

The problems are not confined to the banking sector. For example, notaries are already more cautious in transactions where foreign companies want to buy shares in Estonian companies. This is particularly the case in jurisdictions that do not have a formal register and cannot obtain reliable documents to identify the business owner and beneficial owner. Recent changes to anti-money laundering and anti-terrorist financing regulations require the identification of who is the real beneficiary of the business. In the past, it was sufficient for the notary to be presented with valid company documents and to prove his right of representation.

So what do local banks want?

The time for dubious and complex business models is over. The more transparent the structure and the business, the easier it is for the company to operate. Banks want to control the reality, which makes life difficult for companies that provide services, for example.

While the supply or production of goods is easily proven by the presentation of relevant documents (invoices, CMRs, photographs, etc.), it is much more difficult for a consultancy company, for example, to prove that the services were worth between EUR 50 000 and EUR 100 000.

In this case, the company may use, for example, an existing real estate office and / or employees (whose salaries should not be significantly lower than the average salary for the position in question) to prove the provision of services.

What can be said as conclusion?

It is sad to see that proper business ventures lose the ability to settle normally with their partners and customers, thereby incurring real financial losses.

The longer companies hold offshore companies in their structure, the harder it becomes to make their business more transparent later, not to mention the privilege of having a bank account.

The article is published in Delovyje Vedomosti

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