At our previous article We have explained the concept, operations and characteristics of Offshore Banks, the content of which is reproduced here.

After explaining the concept of Offshore BanksWe now address the topic of Offshore Banks domiciled in countries located in the Caribbean Sea, since they have traditionally been the destinations chosen by savers or corporations in our hemisphere. We also address a recent issue on what is involved and what to do in the event of bankruptcy or liquidation of Offshore Banks.

Background

To understand the normative context and regulatory environment of these institutions we must first make some history. In the second half of the 20th century, the overseas territories of England and France, as well as former colonies of these countries, declared their independence or it was granted by their former rulers, thus these new countries, in order to strengthen their economies, mostly dependent on tourism and agriculture, developed a regulatory framework that favored the influx of foreign capital.

These regulations created important offshore centers such as the Cayman Islands, The Bahamas, Antigua and Barbuda, Curaçao, British Virgin Islands and Barbados. among others. The common practice was to establish a very benevolent tax regime for foreign investments, where in most cases, they are exempt from paying income tax. They also explicitly regulated "banking secrecy" as an important icon of their financial system. 

This set of regulations favored the proliferation of the small island financial sector. which in turn acquired the denomination of "Offshore Financial Centers" such as the Cayman Islands, The Bahamas, Curacao, Antigua and Barbuda fundamentally. It should also be noted that there are also continental offshore financial centers such as Panama and Belize, and important islands such as Puerto Rico, so the offshore phenomenon is not exclusive to small islands.

Most of the offshore financial centers in the Caribbean are small islands.These jurisdictions, due to their small size, population and bureaucratic apparatus, lacked the training and specialization to be able to effectively regulate and control their financial sector. Thus, since the 1990s, a significant number of bank failures have been observed in these jurisdictions, either due to financial difficulties or non-compliance with international regulations on money laundering.

It must be recognized, however, that several legislations have made worthy attempts to strengthen both banking supervision and the prevention of money laundering, but in general terms, these jurisdictions still have a long way to go in these matters.

To mention only a few of the most renowned offshore bank failures, we can cite: Choice Bank and Atlantic International Bank, in Belize. Banca Privada de Andorra and ES Bank, in Panama. Stanford Bank and Meinl Bank, in Antigua and Barbuda. Banco de Maracaibo, Banco Latino and Banco del Orinoco (currently in bankruptcy proceedings) in Curaçao.

Some of these cases had important repercussions in Venezuela.A significant number of people lost their savings, and some are still in the process of recovering their assets. Therefore, this situation is neither strange nor obsolete for an important part of the Venezuelan population that had the possibility of converting their savings into foreign currency and placing them outside Venezuela.

As mentioned in our previous articleOffshore Banks are incorporated in a jurisdiction, but they can only attract as clients persons or companies that are not domiciled in that jurisdiction. The clients of these banks, who usually open their accounts through sales personnel or facilitators in the country in which they reside, are not aware that despite having carried out their opening procedures in person or electronically from their own country, they are de facto establishing as applicable jurisdiction for any controversy regarding its accounts, that of the country where the Offshore Bank is incorporated, and therefore subject not only to the regulations but also to the language of such country.

For this reason, at Aldana y Abogados we recommend that any person who has a banking relationship, existing or in the process of opening, should evaluate in detail the jurisdiction in which the Bank is incorporated, so that he/she knows in detail if there is a deposit guarantee scheme, what investments the Bank makes, what is its capital, and in general, what assets are backing his/her investment, as well as what steps should be taken in case there is any problem with his/her account.

We also recommend that, even though the entire process has been done remotely, the following be donethe client should plan, at least once a year, to visit the Bank's main office in order to have all his/her documents up to date and to be able to update his/her economic activity and banking movements profile with the Bank's Compliance Officer, thus avoiding account blockages due to changes in his/her transactional profile or economic activity. 

Declaration of intervention of offshore banks

Banking supervisory bodies usually request periodic reports (quarterly, semi-annually or annually) from supervised banks to evaluate the status of their assets and liabilities, as well as compliance with anti-money laundering regulations with their client portfolio and the transactions they process.

These agencies, in the event of irregularities observed in any of these areasIn this regard, the Bank's management and the Bank's management and the Bank's directors make observations and reports that are mandatory for the Banks, either to provide additional information or to correct certain practices or to comply with the applicable regulations.

In this order of ideas, when a Bank is intervened or is warned of additional measures The intervention measure is the last resort of the supervisory agency in the event of repeated noncompliance by the Bank with the instructions received from the supervisory agency. The intervention measure is the last resort of the supervisory agency in the event of repeated noncompliance by the Bank with the instructions received. 

Once the intervention or the imposition of extraordinary measures has been decreed The banking supervisory body or a Court (depending on the country where we are), designates the person or persons in charge of carrying out the intervention, and also confers upon them broad powers of administration and disposition over the Bank, so that they have sufficient powers to investigate in depth the irregularities attributed to the bank, and that they are also allowed to remedy the non-compliance with the instructions issued by the regulatory body.

It should be noted that during this process the Board of Directors of the intervened institutions is stripped of its powers.In some cases, the Bank's Directors are removed, and in their place the Comptroller is appointed.

Any of the following may occur at the end of the intervention period of the following possibilities: that the reorganization of the Bank be ordered, that it be returned to its former administrators, or that its liquidation or bankruptcy be decreed (if its assets are less than its liabilities). 

Having made these considerations, it is worth noting that the intervention of a Bank does not imply per se that it has solvency or liquidity problems, or that its savers are going to lose their money. On many occasions it is simply required the strengthening of some areas of the Bank, the implementation of policies or systems recommended by the supervisory body. It should be mentioned, however, that in order to reach the extreme of intervention, which is considered a sanction, there is an implicit misconduct on the part of the Bank's Administrators and Directors.

The intervention can be either "open door" or "closed door", This means that in the first case, the Bank's usual operations, such as receiving and sending funds, withdrawals, granting loans, etc., continue to be carried out. While in the case of a closed-door intervention, customers will not be able to carry out any transaction with the Bank, which in fact, has its offices closed to the public. Naturally, the application of one or the other regime will depend on the reasons for the intervention, which in turn must be fully explained to the institution's customers.

In the case of a closed-door intervention, clients can only wait for the intervention to be completed. to initiate any action against the Bank, if any, so at this stage, our recommendation is to seek legal advice and keep informed on official bulletins or information only, as press articles do not necessarily contain all the information, or make an accurate assessment of the situation.

Liquidation or failure of offshore banks

Once the financial controller completes the report with his findings and makes its recommendations, the supervisory body (depending on the legislation) decides whether to liquidate the Bank or file for bankruptcy (in some jurisdictions this competence lies with the Courts). 

In the case of liquidation it is possible that with the sale or monetization The Bank's assets are not sufficient to cover all its liabilities, which are mainly represented by the savings of its customers. This usually happens in cases where the liquidation is decreed due to repeated or serious non-compliance with the applicable regulations. It should be mentioned that there are also cases of liquidation where the reason for the sanction is the financial weakness of the Bank's balance sheet, which may result in creditors or depositors not recovering all of their assets.

The bankruptcy, however, unequivocally implies that the Bank's assets are (at market value), are not sufficient to cover their liabilities. In the area of Financial Institutions, this means that depositors will not be able to recover the total amount of their savings.

The liquidator's or receiver's job and duties consist of drawing up an inventory of the following of assets and liabilities. Liquidate the assets to obtain their equivalent value in cash, and distribute them proportionally among the creditors according to their privileges (employees, tax debts, secured claims or other privileges).

Both the bankruptcy and the liquidation may be challenged in court, and until there is a final judgment on the case, the declaration of bankruptcy or liquidation is not considered to be final. 

What to do when banks fail

For customers of a financial institution, whether it is in liquidation or bankruptcy, it is essential to and it is essential to contact the liquidator or trustee in bankruptcy to assert their rights. Failure to comply with this step implies that the liquidator or receiverIn this sense, the mere holding of an account in the Bank does not entitle its holder to receive the money in the liquidation or bankruptcy process, if he/she has not sufficiently justified, and to the satisfaction of the liquidator, to receive the money in the liquidation or bankruptcy process. In this sense, the mere holding of an account in the Bank does not entitle its holder to receive the money in the liquidation or bankruptcy process, if the holder has not sufficiently justified, and to the satisfaction of the liquidator or trustee, its claim against the Bank.

Taking into account that since it is an offshore bank, it is domiciled in a jurisdiction other than the jurisdiction of residence of the customers.In the event of liquidation or bankruptcy, they should avoid directing their concerns to their regular channels of communication with the Bank in their country of residence, as these lack the capacity to provide a response. At the time of liquidation or bankruptcy, new authorities are appointed in the Bank, so that none of its former members have the power or the legal capacity to assist clients, much less to support them in recovering their money.

In these circumstances, our recommendation is that the Bank's clients seek immediate advice, since, as we have indicated, a late claim can seriously undermine the chances of recovery. 

At Aldana y Abogados, we not only specialize in banking matters, but we also have a wide range of We also maintain important alliances with law firms in the Caribbean area that allow us to actively and effectively represent our clients in the jurisdictions where these events take place.

As previously stated, the liquidation or bankruptcy of a bank does not necessarily imply the partial or total loss of customers' assets. Therefore, it may be a serious mistake to consider such money as lost. As an example of this we have the case of the bankruptcy of Stanford International Bank in Antigua and Barbuda, in this case there was a group of customers who had securities held by the Bank that recovered all of their investments, so that in all cases there is always the possibility of recovering the savings or at least part of them.