In Part 1 of this article last week, I posed the question, Why do Offshore Banks Ask So Many Questions?

The documentation requested by offshore banks (bank reference letters, proof of source of funds etc) when opening accounts for the first time can sometimes appear overwhelming. Panamanian banks, in particular, are extremely bureaucratic. But don’t be perturbed. Once you understand the logic behind it, it’s really quite straightforward.

You can basically break down the requirements into just three things that the bank wants to document before opening your new account:

• Who you are. This is almost exclusively demonstrated with your passport. A passport is definitely the preferred identification document internationally. Most people who want to open accounts or invest offshore will be in possession of a valid passport. In certain cases, banks may accept other documents like government-issued ID cards or driver’s licences, but as a general rule you will need your passport.

This step is easiest if you are meeting your offshore bank in person, since you just need to show your passport and allow the banker to take a copy. It’s a little more complicated if you are opening the bank account by mail, as the copy will normally need to be certified as a true copy. Requirements vary by bank, but notaries are almost universally accepted for the purpose of certifying copies. Lawyers, consulates and embassies, and offices of international banks may also be accepted as certifiers. If you are meeting a consultant or corporate service provider, they can usually arrange to certify your passport copy too.

• That you’re a good guy (or girl). For this, the best document is a letter of reference from your existing bankers. A bank bank refreference just says something like “Mr and Mrs Bloggs have been clients of our bank for five years and have always maintained their accounts in good standing.” That’s it – no big deal! Some banks also refer to reference letters as “certificates.”

My clients are sometimes worried that their banks won’t issue references – but it is very unusual to find a bank that won’t issue a reference. Even if you don’t know any one individual who works in your bank, it’s a standard document that the back office should be able to produce based on their records.

British banks are some of the most difficult to deal with, but even they will, according to the guidelines of the British Bankers’ Association, issue exactly the reference you require if you ask in the right way. In the UK the reference must be requested by a hard copy letter in the post. Banks in other countries like USA, Canada, Australia, Europe etc will usually write bank reference letters on request.

You need to check with both banks (the new one and the old one) about any specific requirements. For example, whether the reference can be addressed “to whom it may concern” or if it has to be addressed to a specific bank.

Some banks will accept references from professionals like accountants, lawyers, corporate service providers and the like. This can be useful if a “to whom it may concern” reference is not an option, and you don’t want the old bank to know where you are opening the new account.

Overall, you should not worry about references. They are not a problem. If you have any doubts, contact me for specific case-by-case advice.

• The final thing you need to prove, is the source of funds: where the money is coming from. The rationale behind this, of course, is for bankers to be sure that they are not accepting money that is being laundered or was acquired irregularly. They are not usually interested in tax matters. Typically documents people present to show source of funds are contracts for sale of real estate, documents showing you inherited money or received it from a family trust, documents demonstrating that you own a business from where the funds are being withdrawn, or a contract of employment showing your regular income.

Of course, the documents presented must match the amounts you are depositing. A document showing you earn $5000 a month net would be fine if your average balance will be under $20,000. But then if a million suddenly arrives in the account, the bank will freak! If you want to receive a million all you need to do is provide documents in advance, for example showing that you sold a million dollar house or that you sold out your business for cash… then the bank will roll out the red carpet for you.

So that’s it… those three things are all banks are really looking for. Some also want proof of your residential address. And obviously if you are opening a corporate account the bank will want to see documents linking you to the corporation – but it’s best to let your corporate service provider take care of that for you.

Remember: banks are in business to open accounts and accept deposits. So if you are in doubt about what documents are needed, or if there’s something they ask for that you can’t supply, just talk to them openly and explain the problem. Most likely, they will be able to suggest a common sense, mutually-acceptable solution. If not, then take your business elsewhere.

So all in all, the documentation is not as difficult to handle as it sounds. If you use an intermediary such as my firm, it’s even easier – we can dedicate more time to you as an individual than banks can afford to on all but the largest accounts. Often, with a short telephone call we can help you complete all required documentation and just provide you with the finished versions to sign. Services of my firm are available exclusively to Q Wealth Members.

A question that comes up frequently is why offshore account opening procedures require so much information. As an offshore banking consultant, I get to see the account opening processes of many different banks in different jurisdictions, and how widely they vary.

I can see both sides of the equation – the bank’s perspective, and the client’s… and my job is to act as intermediary and make sure both parties understand each other. I’ve become quite good at that over the years, if I say so myself.

So, how do you open an offshore bank account? You will typically need your passport, one or more bank reference letters, and proof of source of funds. More on the practical aspects of complying with these requirements in part 2 of this article that I will publish here on the Q Wealth blog next week. But first, let’s look at why all these questions are necessary…

I can fully understand that if clients are seeking privacy, they may not feel comfortable baring their financial souls to their bankers. But there are good reasons why banks need to collect so-called ‘Know Your Customer’ information. And there are steps you can take as a client to manage your banking and to protect the confidentiality of information you hand over.

• The first and foremost reason is because the law dictates it. In all reputable jurisdictions, banks are required to collect certain information. Failure to comply would have absolutely dire consequences that may include closure of the bank and/or prison for its managers. You are looking for security – and dealing with banks that are prepared to bend, break or flout laws is not the way you are going to find security. There are only a few places in the world left where you can still open accounts without ID and – trust me – you don’t want to be banking in those places!

• Secondly, banks also have to protect themselves and their reputations, in order to protect their honest clients. If they take on clients who bring heat to the bank, it is bad news for you. So you should really be happy to deal with a bank that is quite picky about the clients it takes on. For example, if it turns out later that you were involved in white collar crime like running a ponzi scheme or any kind of unlicensed offshore investment activity, the bank will almost certainly be on the receiving end of a lawsuit from people who lose money. Sometimes scammers are very good at hiding their activities, and they look like honest, respectable business people. If the bank has never met you before, they really need to check you out.

• Thirdly, many people compare offshore account opening procedures to opening an account in their home country. This should be obvious, but it’s not the same thing. One thing that might have escaped your attention, though, is the extent of Big Brother databases that exist in your home country. Banks will automatically run a credit report when you open an account, even if you are not applying for credit. They can check you out online. Offshore banks, however, cannot run online credit checks. To do so would leave an electronic footprint that would generally be a breach of confidentiality laws. That is why they have to ask new customers for a lot more paperwork. Of course, it’s more convenient for the customer that the bank can verify everything online and doesn’t have to ask the customer for so many documents. But such online checks completely nullify any expectation of privacy in the relationship.

• Finally, it’s just good business for banks to know their customers. If they know a bit about who they are and where you are coming from, they can give you better quality advice and they can respond more intelligently to your requests. They can be proactive in offering services you might need, that you might not even know existed. Having a good relationship with your private banker is absolutely beneficial. That banker will be more motivated to look after you. Try to be a ‘perfect client’ for the bank – that way, if for some reason you really need a special favour from the bank at some time in the future, you are much more likely to get it.

Banking secrecy, as I’ve often said, is far from dead, despite the propaganda that would have you believe otherwise. I even believe now that the tide has turned. Bank secrecy is a basic human right, and is more necessary than ever. What is rather passé is trying to use bank secrecy for illegal tax evasion, by holding undisclosed accounts. By taking good advice, choosing the right banks, using international asset protection structures, and carefully managing your residence and citizenship, always staying within the law, you can still keep your finances completely and utterly private. Nobody is saying it’s easy… but you can do it, and it’s worth it.

So, as one of my banker friends is fond of saying, if you unilaterally choose to waive some of the account opening requirements, you will just be causing delays for yourself. Clients who try to avoid complying with requirements will be viewed as suspicious right away. Then, trouble ahead is almost a self-fulfilling prophecy.

Bottom line? If privacy is a concern to you (and it should be) do your homework and choose a bank where you can be confident that your information will remain private. Do your due diligence on the bank first. You should only do business with people you feel 100% comfortable with, and this applies to banks and any other business relationships. Anything less than 100% and you won’t sleep soundly at night. The Practical Offshore Banking Guide 2010 can help you do this due diligence. Once a bank has passed your own due diligence smell test, then be prepared to give them the truth, the whole truth, and nothing but the truth.