Today I will go through International Banking Acts (IBAs) and weigh some pros against some cons.

What are banking acts?

A normal banking act is a jurisdiction’s bank regulation or bank law, which governs a the banks of that jurisdiction.

It usually covers all banks and bank-like companies and financial institutions.

A banking act regulates how a bank should act, whose its directors and shareholders can be, customer information confidentiality (banking secrecy), permitted activities, and make references to other regulations that may govern for example liquidity, capital reserves, and so on.

What are IBAs?

IBAs are special banking acts that license banks under a separate regulation. Banks licenses under an IBA are almost always forbidden from taking deposits or doing business with resident persons (legal or natural) of that jurisdiction. IBAs often also forbid the usage of the jurisdiction’s own currency.

Effectively, IBAs create a separated, segregated banking system. While a bank group may hold both a normal banking license and an IBA license, the licenses must be held by separate legal entities which cannot interact with each other.

The reason for this is to create a banking environment that is attractive to offshore companies and trusts, without putting the domestic financial system at any risk.

IBAs are less stringent and rarely contain any noteworthy requirements on capital reserves. Confidentiality of customer details and transactions — banking secrecy — is usually much stronger than in the jurisdiction’s normal banking legislation. This ensures that the government can still keep reasonable access to its own residents’ banking information while at the same time attracting foreigners seeking privacy.

International Banking Acts started popping up in the Caribbean in the 1960s, where they still can be found.

The Good

Banks licensed under IBAs are generally far easier to deal with than other types of banks. Opening a bank account in the Caribbean is rarely much harder than making sure you spell your name correctly on the application forms.

Since IBAs operate outside of the jurisdiction’s own financial system, IBA banks might be unaffected by financial turmoil in the jurisdiction. They are also not limited to banking products favoured by the local population, which in many cases is quite narrow as a lot of IBA jurisdictions are relatively poor.

The very nature of an IBA bank is to attract foreigners, which means that IBAs are staffed with internationally-minded people. English is de facto standard language at an IBA bank and many hire speakers of other languages, which further facilitates banking.

The Bad

There is a flip-side to it.

Because IBAs are so easy-going, they have time and time again faced compliance issues due to — knowingly or not — involvement in criminal activities. This has led to some tightening of compliance in improved due diligence processes and customer screening, but it’s still a problem.

The compliance concerns are not limited to just to shady customers being let in through the door. The owners of the banks themselves are poorly vetted in many jurisdictions. There have been numerous banks in the Caribbean that have been run by criminal organizations. Most of them are shut down now, which caused financial problems to account holders at those banks.

A severe breach of compliance can cost the bank its license, correspondent accounts, or, card issuing and card processing (merchant accounts) licenses.

However, IBA jurisdictions have recognized the compliance holes and a lot of work has gone into ensuring that the International Banking Acts are in line with international standards. Most FIUs do a pretty good job at keeping their IBA license holders in check when it comes to compliance and financial crime.

The Ugly

The ugly truth is that because IBAs operate in a vacuum, the government of the jurisdiction does not care about you or even your money.

IBAs are not protected by deposit insurance, even in jurisdictions that have deposit insurance. Why? Because it’s a separate banking legislation entirely. A failing IBA bank offers its customers no security whatsoever. Most IBA banks do not publish public financial statements, making it impossible for account holders to have any sort of insight into the bank’s financial health.

If an IBA licensed bank shuts your account down for any reason, you can try to reach out to the FIU to take action against the bank. In reality, the FIU has no incentive to help you. Unless it’s a part of a larger problem, the FIU has nothing to gain from helping you.

Banking with an IBA bank is not necessarily risky in and of its own, but it is more risky than banking in a jurisdiction where you can seek different forms of legal and regulatory recourse; some might even have deposit insurance.