Opening an account for a "high risk" business

A lot of companies with foreign structure face with the problem of ensuring the receipt of funds and payments. After hard compliance procedures, you may receive a rejection letter from the bank with the following sense: "After careful consideration of our Compliance Department has come to a conclusion to reject your account opening application. We are sorry we cannot disclose our internal Compliance procedures and steps taken during the checks…."


What is a high-risk business in the opinion of bank managers and what points should you pay attention to when creating a legal structure?

First of all, high-risk activity is an activity aimed at electronic commerce, sales of non-physical goods or services, the provision of which is difficult to prove, as well as services of an immoral nature, for example:
• casino, gambling;
• IP telephony / tele marketing;
• affiliate marketing, PPC marketing;
• pharmaceuticals;
• all products or services related to adult content or activities;
• hotels / accommodation booking;
• dating service;
• essay writing;
• news subscriptions;
• e-cigarettes;
• software without registered copyright;
• financial / investment services.

However, some banks are considering such activities, but they charge high payment commissions and maintenance fees. Positive feedback on the onboarding of clients with high-risk activities may be possible but, on the condition, that the rest of the "red flag" criteria are not met.


Red flag criteria include:

• coincidence of the residence of the business owner and trading address of the company business;
• coincidence of residence of counterparties, key employees and the selected country of registration;
• availability of a real office;
• coincidence of bank and the company country of residence;
• registration of a company in a presentable jurisdiction with an adequate tax burden;
• simple and straightforward legal structure of the company;
• absence of negative rating and feedbacks about the company;
• good reputation of the director and business owner;
• availability of the company's audit reports and tax returns.

This is a list of the main factors that are important for the bank when onboarding a client with risky activities if all or most of the factors from the list are unsatisfactory, it is better to forget about opening an account, let's consider each of the factors separately.


Coincidence of the residence of the business owner and trading address of the company business

Highly important that the country of living or at least tax residence of the business owner coincides with the country of registration of the business. This factor shows a direct link between the interests of the founder and the business, also it may be considered as evidence which proofs absence of the motivation for choosing the country of registration for tax evasion or other fraud financial nature.


Coincidence of residence of counterparties, key employees and the selected country of registration

Every business should prove to the bank the operational necessity of registering a business, the center of business interests and the country of registration must coincide, otherwise, there is a suspicion of money laundering or tax evasion.

Another factor is the business substance requirement, which means that the company must have real employees and an office in the territory of business formation. Recently, a number of legislative requirements have appeared for the presence of a real office even on island offshores such as the BVI.


Coincidence of bank and the company country of residence

Most banks refuse to open an account for foreign companies, especially if the company does not have business interests (clients, contractors, employees) in the country of the bank's registration. Even if the company has a business interest, it is rather difficult to prove it, because the key factor is a high percentage (40% and more) of incoming or outgoing transactions in the territory of the bank's registration. This red flag doesn't concern premium banks, but this is a key factor for banks which oriented on small or medium-sized businesses.


Registration of a company in a presentable jurisdiction with an adequate tax burden

Governments created global money laundering and terrorist financing watchdog, every watchdog has blacklists of jurisdictions for business operations such as FATF, OECD, EU Black List. The above lists of countries are publicly available and can be easily found on the Internet. Depending on the jurisdiction and partners, banks are guided by one or another list indicated above. If your company is registered in a jurisdiction from the FATF, OECD, EU Black List, this is an automatic refusal to open any bank account. As a rule, such countries include offshore companies (Panama, Belize), countries with a bad political reputation and military conflicts (Iran, Iraq), unrecognized autonomous republics (Kosovo, Crimea). Be careful when choosing the country of registration, familiarize yourself with the blacklists of banks, choose banks in advance, before registering a company.


Simple and straightforward legal structure of the company

Most banks do not consider companies with difficult legal structures and trust declarations, the founder of the company must be open in the legal structure (like a shareholder of the holding company). There should be no intermediary company between your subsidiary and parent company, closed and unclear legal structure seems suspicious.


Absence of negative rating and feedbacks about the company in the public domain

Every successful long existing business has negative feedback from the clients, sometimes negative ratings may be created by competitors or former employees, such problem mostly arises for IT or E-commerce business. Nevertheless, banks make a detailed review of feedbacks and ratings of websites and products of their potential clients. High quantity of negative feedbacks may be the reason for bank refusal on bank account opening. It is important to monitor your company's rating on the internet and to know explanations for every negative feedback on your product.


Good reputation of the director and business owner

These are the key factors in the compliance check for AML officer of the bank. You should prepare all necessary documentation fro company's director and founder, these documents should confirm relevant business experience, proof of wealth for initial business investments (tax declarations and bank statements of the business owner. UBO and director shouldn't be politically exposed persons or persons with scandal reputation in public media.


Availability of the company's audit reports and tax returns

All company's financial information such as accounting records and management returns should be prepared before the bank onboarding process, especially if your company does not require an annual audit of financial statements and the tax return is not submitted yet because of the terms of deadline. The bank always requests audited financial statements because completion of the audit is official proof of the transparent and fair practice of the business entity.