Banking Across Borders for Minimultinationals

This episode of the Friday Edition is about the intersection of tax planning and the real world. We help entrepreneurs who do business across borders. We are seeing them have increasing problems with banking.I offer no solution here; this is mostly a plea for help. :-)

• If you know good international bankers, please let me know.
• If you know where I can go to learn about the constraints (KYC, AML, etc.) that affect a bank's ability to work with customers, please tell me about them.

Be Prepared for Hard Work

There are a couple of warnings I have for you, based on what my life is like right now:

• Be prepared to spend a lot of time on the "open bank accounts where you need them" job.
• A corporate structure that is optimized for smooth business operations, cash flows, or tax efficiency may be unbankable.

All of these problems can be solved with money, of course. If you are a big enough customer, the world is your oyster. Or something like that. Those of us who are in the real world are not big enough. :-)

Bankers Under Pressure

As near as I can tell, the problem is regulation. The government has told banks to be the financial police to protect society against Bad People. Mistakes are expensive: bank regulators can force a bank out of business, at the extreme.It has always been so. We have had a succession of bogeymen during my lifetime. Communists. Organized crime. Drug traffickers. Terrorists. And always, the evil tax evader. These are the supposed targets of bank (anti)-secrecy rules.

Side note: any time there is a convenient scapegoat -- "Oooh, look at the scary terrorist!", look around. You will find a politician bleating some variation of the "Won't somebody think of the children?" plea. Watch your personal freedom erode before your eyes. Here, goodbye to your freedom to engage in boring, normal commerce.

This makes cross-border banking customers expensive. It is easier to reject a prospective banking customer than it is to take on the extra work, expense, and risk to deal with the government regulations.

What We See

U.S.-owned companies seeking business banking abroad can have a hard time opening bank accounts. U.S. citizens seeking personal banking, too, can have issues.But I want to talk about U.S. domestic banking here. This is where I have personal experience (and frustration). If any of you have hints on how to do this better, it would be much appreciated.

100% U.S. Citizen Shareholders Make a Foreign-Owned Company

Take the situation of U.S. shareholders owning 100% of a business. For a variety of business and tax reasons, they set up a foreign holding company that owns the shares of a U.S. subsidiary. Then they look for a bank to handle the finances of that U.S. subsidiary.

Sidenote. This type of structure is important for tax reasons to prevent future problems with corporate inversions. When a business goes from domestic to foreign, the U.S. tax system comes down with a mighty hammer. I like to start off life -- for the right kinds of businesses -- as already inverted. There are other tax benefits for such a structure as well.

I have had this business relationship rejected. "Oh, that's a foreign-owned business". (Wait. What? U.S. citizen humans own 100% of the enterprise). This bank is on my Wall of Shame now.

The Bitcoin/Prepaid Visa Excuse

I have also had banking relationships rejected "because you would take Bitcoin and customers can pay with prepaid Visa cards". (Wait what? Stripe clears our payments, taking a variety of payments from customers, including Bitcoin and gift cards. We never see that transaction. Stripe just sends U.S. dollars net of their fees to our bank account.)There must be a reason why this objection comes up. I do not understand the problem. Here I must follow G.K. Chesterton's admonition about fences:

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.

Before mocking the banker here, I would be wise to fully understand why he turned me down. (In truth, he professed to not know the answer himself; he received a negative response from the Wizard of Oz inside his bank. This bank, too, is on my Wall of Shame).

Where Are You Sending Money?

Even a tentative green light for opening a bank account can be stymied by "Oh, wait. You're wiring money overseas on a regular basis?" Money may come into account cleanly. But where is it going? Money-laundering and terrorism, of course, right?These outbound flows seem (to me, the neophyte in this World of Banking) to be the real crux of the matter. My experience is weird here. Sometimes the banker says "You are wiring money again? Why?" ("Payroll, dammit! Those pesky employees want to get paid again this month"). Again and again. Same question, same answer.On the other hand I must say that the bank we use for our law firm has been stellar with wire transfers of very large amounts of money into and out of the USA. And this bank is currently on my Wall of Shame. :-) So . . . .

The Internet Offers a Solution, But . . .

I have seen corporate formation companies in U.S. jurisdictions offer to open U.S. bank accounts for nonresidents, including without travel to the United States. I'm thinking of a company that offers to do this for $800, with a moneyback guarantee if it fails.No links to websites. Sorry. You will have to do your own Google-fu, because I am not sure these services are legit.This is something I have seen in two different states. The bank has been the same bank both times, in two different states. You would recognize the bank instantly.I do not know how these services work, but it smells funny to me. I do not see how a domestic bank will open a local account without a personal visit to the bank. I question whether remote account entry is sufficient satisfy U.S. bank regulators. How can the bank know that the paperwork applies to an actual person -- and the one who is identified in the paperwork? The bank cannot know.

Sidenote: Way back when I started being a lawyer I remember a bank account (huge bank and you'd recognize the name instantly) that existed where a gentleman I knew had complete signature authority over the account. A real corporation. Filed real tax returns and did real business. Nonexistent humans as officers. A real person (my client, in fact) signed the checks as one of those nonexistent humans. That can't happen now. But if people can open accounts from abroad without ever setting foot in the bank . . . .And yes, that got cleaned up promptly, on the "Life is too short to f____ around" theory.

It's Not All Doom and Gloom

I am currently working with two domestic banks that are good -- they take the time to understand the business. So please don't take this as a blanket whine about banking in general.And yes. As time goes by I will be happy to share contact details for competent, friendly bankers who have demonstrated that they like and can handle minimultinational business banking.

That's It For Now

In case you can't tell, there has been a slight change of focus for the Friday Edition.I'm leaving the technical tax and legal discussions for our other newsletters. The Friday Edition (every other Friday) is for more meta topics. It's a chance to talk about the real-world stuff that we -- and our clients -- face, day-to-day. This is where I talk about the judgment calls you need to make in cross-border business and investing.See you in a couple of weeks.Phil.