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What are bank references?

A bank reference is one of the usual documents for KYC / Due Diligence purposes. Bank references are routinely asked from new clients at new bank account openings, including opening of the account for an offshore company. Bank references are required from all all individuals involved with the new account, including the beneficial owner of the underlying offshore company. Requesting bank references from new clients is standard procedure in practically all banks, including offshore banks. In some cases we may also ask new clients to provide a bank reference for our own Know Your Client purposes.

A bank reference is a fairly standard letter from Your “home” bank, stating You are their customer for a period of years (preferably, for at least 3 years). A bank reference should simply confirm that Your banking relationship has been acceptable, without any defaults from Your part. Ideally, the bank reference could also confirm Your address, as featuring in the records of the bank – if so, the bank reference can also serve as proof of address, so there is no need to provide a separate proof of address. A bank reference may be obtained in regards of Your personal account, as well as based on a business account (of a company), if You have signatory rights in that business account.

A bank reference is a standardized document, well known to all bankers, so they won`t be surprised when You ask for it. Every bank usually has its own, slightly different wording. That`s perfectly acceptable. Some banks may also include a disclaimer to the extent that the reference letter is for information purposes only and does not provide any representations or guarantees on banks? part. Such wording is also no problem, as the purpose of bank reference is not to guarantee anything – just provide a basic confirmation that they know a particular individual.

As a rule, bank reference does not reveal any confidential information! Bank reference does not have to state the account number, the amount of funds on the account, the outstanding loan or any other kind of personal financial information! If by some reason or misunderstanding the bank is purporting to include any more confidential details in the reference, like account number, You may request them to withold any such details. A bank reference should be nothing more than just an informative letter, stating that the bank knows You for certain period of time as a decent customer ? without going into any further detail.

For Due Diligence purposes, the logic and practical reason for the bank reference is to establish that the particular person is an ordinary, economically active member of the society (all of which would normally have some sort of bank account), and that his/her identity and address can be confirmed by an independent, reputable financial institution (the bank).

The preventive purpose for requesting the bank reference is to avoid fraudulent attempts to register an offshore company in the name of a “ghost”, a dead person, or in the name of a marginalized, destitute individual, who might just have sold his passport for a bottle of booze. It is quite improbable that any of such individuals would have a long-standing banking relationship. Therefore, appearance of such individuals as beneficial owners of a new international company would be a signal to look more closely into the overall circumstances of the registration order.

Privacy issues

Asking your high street account officer to to issue a bank reference letter specifically addressed to your new offshore bank completely defeats one of the principal aims of banking offshore — privacy. It would not be much of an overstatement to say that you might as well tell the world about your offshore account in a newspaper advertisement!

Many offshore banks nevertheless do insist that reference letters carry their details as the recipient, and many offshore providers continue to introduce unsophisticated clients to them, obscuring the real issue here with talk of their responsibilities in the war on money laundering.

Then there are those bankers who will accept reference letters addressed “To whom it may concern.” Of course, such documents are preferable — at least you are not giving the details of your new offshore bank away to your local bank, and so potentially to your onshore authorities. However, even “To whom it may concern” references give rise to a number of issues.

While non-specific reference letters have always been commonplace in everyday commerce, bankers have most recently been tutored in their possible use to “covertly” open offshore bank accounts. In our new upside-down world, a request for a non-specific bank reference letter may indeed raise a red flag.

Non-specific letters clearly give away the fact that you don’t want the issuing banker to know the addressee. This may raise undue suspicion (“what does he have to hide?”) and be a sufficient reason for your account officer to take a closer look at your affairs — or even file a Suspicious Activity Report.

Moreover, your offshore bank may well call the issuing bank to verify the reference — fakes are not unknown — if your account opening documents end up on the desk of some overly-diligent bank clerk. Of course, you will not be told if this happens — and if it does, you are far worse off than if you had asked for the reference to be addressed to your offshore bank to start with.

Your local banker, perhaps already suspicious of your need for a non-specific reference, will learn where his letter went (“offshore!”). What’s more, he might wonder why the offshore bank felt the need to verify it. Did they also think something was amiss? Your chances of being reported have suddenly increased quite dramatically — even though you’ve done nothing wrong.

One alternative is to use a professional fiduciary company to manage your offshore bank account. Of course, the fiduciary company itself must require no more than an introduction, or at most a non-banking reference, for this to count as a valid solution to the problem.

A more direct option is to simply give your business to a bank that does not need any reference letters from new clients. Despite what a surprising number of people think, reference free banking is still widely available — although not in common-law jurisdictions.

Civil law jurisdictions, on the other hand, as well as a number of hybrid common/civil law jurisdictions, typically do not require references.

The reason for this is historical and directly relates to the way that people are identified under the two different systems:

1. Under common law, people have traditionally enjoyed greater personal freedoms. Common law based countries have often lacked centralised registers of population and ID cards, and there has been no reliable way to confirm a person’s identity except to take his word for it. To minimise the possibility of deception, a system of using references developed — that is having another person confirm that you in fact are who you say you are.

2. In contrast, civil-law jurisdictions have always had much less need to rely on references (other people’s opinions) for reasons of identification. Instead, they developed centralised government registers of citizens, personal numbers and compulsory ID cards to refer to.

It must be noted here that the original reason for bank references — the need to confirm identity — is being slowly shifted. Under the guidelines set by the Paris-based Financial Action Task Force on Money Laundering (FATF), many bankers now view bank reference letters as a necessary confirmation of a prospective client’s suitability. As a result, a number of bankers in civil-law jurisdictions have followed their common-law colleagues lately and also insist that a reference or two be provided by all new clients.