In a recent webinar hosted by the International Trade Council, Viktoria Soltesz from PSP Angels shared her insights on the complex issues surrounding shell companies, nominee directors, and offshore setups.
With a background in payment and banking consultancy, Viktoria outlined the common but often misunderstood risks associated with using offshore structures, especially as they relate to banking and compliance.
The issue
A recurring theme in the session was the misconception many businesses have when they consider offshore setups as simple ways to minimize taxes or increase flexibility. While offshore companies and nominee directors can be legally utilized for specific purposes, banks and financial providers often view them as high-risk.
This perception arises because these setups can sometimes appear to mask financial activities, leading to a heightened compliance burden for banks and payment providers tasked with managing international flows. Financial institutions must tread carefully to avoid facilitating tax evasion or money laundering.
As a result, they frequently categorize offshore structures as higher risk, subjecting these businesses to higher fees, limited access to financial products, and even restricted banking relationships.
The difference between tax optimization and tax avoidance
Tax optimization, while legal, involves structuring business operations to operate within the most favorable jurisdictions. In contrast, tax avoidance crosses legal boundaries, relying on shell companies without real operational substance, intended solely to evade taxes. The webinar emphasized that banks are alert to these nuances.
Banks and payment service providers assess whether an offshore entity has genuine management and operations in the declared jurisdiction or is merely set up for tax purposes. Compliance departments actively scrutinize nominee directors, shell structures, and the legitimacy of an entity's operational base. Banks and financial providers may even resort to physical verification or require proof of substance, like utility bills or office photos, to confirm that a business’s declared jurisdiction matches its true operational base.
Nominee directors and shareholders
Nominee directors and shareholders are sometimes employed to provide a layer of anonymity or to meet local regulatory requirements. However, from a compliance perspective, nominee directors introduce risks as they create a disconnect between the true decision-makers and the nominal management. If a nominee director has associations with multiple companies flagged for non-compliance or fraud, these associations can lead to their entire portfolio, including otherwise compliant companies, being scrutinized or rejected by banks.
Global impact
Reliance on offshore structures could lead to a global impact.
When businesses engage in aggressive tax avoidance or set up companies solely for financial benefits without substantive operations, it strains the banking system and increases compliance costs. In turn, these costs are passed down to legitimate, tax-abiding entities, making financial transactions more cumbersome and costly for everyone.
Offshore setups may seem advantageous in the short term, but the long-term risks include frozen funds, reputational damage, and restricted access to the financial system.
Future
Financial landscape becomes increasingly transparent, with international cooperation on tax information sharing, the traditional idea of “safe” offshore tax havens is quickly eroding. Modern regulatory environments push banks to monitor clients vigilantly, enforcing compliance by reporting suspicious activities, ensuring tax compliance, and preventing fraud.
The days of anonymous offshore accounts are fading, and businesses today must weigh the reputational and regulatory risks against any potential benefits of offshore structures.
This webinar underscored the importance of adopting a well-rounded banking and payment strategy, one that doesn’t rely on shortcuts or opaque structures but builds on transparent and compliant practices. The session concluded with Viktoria stressing that businesses need to plan their operations around banking and payment requirements from the outset, rather than considering them as afterthoughts.
You can re-watch the webinar here: https://www.youtube.com/watch?v=nIoJIzoUDfY