What exactly is offshore bank failure?

Legal Floris LLC

The offshore financial industry provides for a substantial framework for international corporate services. Most of these services require effectuation via bank and IBAN transactions. Professionals using the services of offshore financial centers may use the local financial infrastructure to fulfil their banking needs but can also choose to utilize financial institutions in well known locations. Since the industry is subject to distinct rules that often differ from other jurisdictions, abuse may occur. When the global financial system is at risk, and tax payer input may be required for rescue missions of financial institutions, the offshore financial sector is treated in a different and often isolated way. Offshore bank failure and the failure of business units in financial institutions that deal with offshore jurisdictions, is therefore often handled in a vacuum where bank liquidation is a realistic option.

Depending on the underlying reasons for offshore bank failure, the designated financial institution can be rescued. Resolution planning can strengthen the capital position of the bank, relinquish the underperforming and loss-making business units of the bank, or restructure the internal organization to ensure regulatory compliance and avoid misconduct. Although there are financial institutions that successfully restart their operations after regulatory intervention, most offshore bank failures end up in bank liquidation.

In general, bank failure means that a financial institution is unable to meet its contractual obligations towards their creditors. This can be the result of a mismatch between assets and liabilities. The balance sheet of the financial institution then requires mitigation. Assets can be sold, business units restructured, and further needed capital raised. Offshore bank failure often has a different cause. Regulatory violations and infringements of Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF) policy has deeper grounds. Some financial institutions are able to turn the organization around, while others are so deep into wrongdoing that closure and liquidation is justified.

Offshore bank failure is mostly a matter of domestic law. The resolution may be complemented by global guidelines to maintain the functioning of the financial system. Bank liquidation therefore often starts with an international harmonized and recognizable procedure which is followed by critical and designated parts of local company and insolvency law. Creditors of failing financial institutions should therefore prepare for maximum outcome during the fund recovery procedures. A thorough understanding of the applicable rules and regulation is paramount to achieve such success and avoid a heavy devaluation of assets.

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