The relationship between a bank and its customer is based on the contractual agreement that underpins bank secrecy. This bank secrecy has elements of trust, loyalty, and privacy, and therefore results in a duty of care. The confidential nature of the relationship restricts disclosure of information to third parties, while advanced GDPR regulation restores the playing field from a different angle to maintain fundamental rights of privacy. Yet, exceptions allow financial institutions to deviate from their responsibilities towards confidentiality. Restrictions on undue influence and the prevalence of professional duty of care are still paramount in the relationship, though.
Offshore companies also benefit from bank secrecy and potentially create ambiguity. Therefore, regulators call for enhanced transparency to understand company structures and reveal beneficial ownership of offshore companies. Financial institutions such as banks and FinTech firms are designated to police the financial system and detect illicit behavior of their clients. Where suspicious activities are uncovered, currency transaction (CTR) and activities reports (SAR) must be filed with the local Financial Intelligence Units (FIU).
Following the compulsory position of financial institutions, scrutiny of bank customers helps to protect the financial system. The scope, nature, and location of offshore companies can attract illicit actors. In an effort to avoid abuse of the financial system, banks need to ensure they are dealing with legitimate customers. The result is that offshore companies and their beneficiaries are requested to provide yearly updates on their customer profile, identification, and legal standing of their offshore company.
Recently, several financial institutions in Europe and abroad were forcefully closed for lax measures to prevent money laundering and terrorism financing. Especially where the United States department of the Treasury and its Financial Crimes Enforcement Network (FinCEN) designates a bank a financial institution of primary money laundering concern, resolution mechanisms can impose a (temporary) closure of the bank.
When a bank is placed under external administration by a Central Bank or other regulator, the contractual agreement between the bank and its customer does not end. The relationship between the customer and the bank does end by mutual consent, when the customer dies or becomes insolvent, or in case of the liquidation of the bank or the (corporate) customer. This means that the reactivation of an offshore company must comply with the rules of termination of the contract between the bank and its customer in order to assure acknowledgement of entitlement to funds by a settler or liquidator in case of bankruptcy or winding up of the financial institution. During the winding up procedures, bank customers need to take the creditor hierarchy into consideration to prepare for their position and manage their future prospects.