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By Bob Lyddon, General Secretary, IBOS Association, London, UK

Governments have shown themselves keen on Foreign Direct Investment (President Obama declaring that America is “open for business”). The EU recently held another summit on how to fuel economic growth, and they – and the UK government individually – repeatedly point to the SME sector as the engine for job creation.

These statements are all well and good, but the unrecognised factor is that SMEs will begin to become part of global supply chains at an early stage: they will seek export markets, and seek to source from wherever the best supplier is. That means foreign trading, where in many cases they need a bank account to trade in a country, and a bank to run it for them.

A combination of factors – directly and indirectly linked to regulation – are causing increasing problems to SMEs in getting the bank accounts they need. The problems come down to:

  • Size – the revenue the bank can make off the customer.
  • Regulations  – Know Your Customer (KYC)/Anti-Money Laundering (AML) – the increasing cost and difficulty for the bank of onboarding the customer in the first place.

Individual banks are shrinking thanks to the strictures of Basel III and the obligation laid upon them by government to focus on “home markets”, and also by fines and losses. This interrupts the historical proposition to the commercial customer – “I can offer you all the financial services you need at one point-of-entry”, the offering will be not be global in scope any longer. In fact it may just be domestic.

The flip side of a bank concentrating more on “home markets” like this and not helping their domestic customers globally is that the bank will also be less interested in foreign business coming to them i.e. foreign customers or customers with foreign owners who want to enter that “home market” and trade there.

The issue will not be felt by the large multinationals – because of size. They are in the target market of the global banks and their subsidiaries are at least at the top end of Medium Enterprises when looked at individually. For example, a Citibank branch in Mexico will be perfectly happy to bank the Mexican subsidiary of Daimler-Benz referred to them by Citibank Frankfurt, because the local Mexican business is sufficient to keep the lights on.

Three market segments do not have the luxury

  • SMEs who need a bank account in a foreign country in their own name (a non-resident account)
  • Larger corporates with foreign subsidiaries (resident accounts, which rank as SMEs in the foreign country concerned)
  • Corporates with Ultimate Beneficial Ownership structures that are (a) complex; (b) distributed over several countries; (c) concentrating ownership of over 25% on individual names; (d) concentrating ownership of over 10% on individual names where the corporate itself is categorized by the bank concerned as meriting more in-depth investigation, known as “Enhanced Due Diligence”.

Proponents of the EU Single Market combined with the Single Euro Payments Area would deny this as being a problem in the EU, where corporates are free to choose their country of incorporation and should not, thanks to SEPA, need national level bank accounts. This may be fine for small SMEs or SMEs whose trading is distributed over many EU countries and remains small in each, but it is not fine for:

  • SMEs that generate considerable sales in one EU member state.
  • SMEs that trade with counterparties (like governments) who resist making cross-border payments.
  • SMEs in certain industry sectors known for distance selling.
  • SMEs invoicing in currencies other than EUR.

This is a global problem, including in the EU.

The barriers to opening bank accounts have been characterised as Size and Regulation: let’s now look at them individually as example bank policies. The devil in this area is that a bank may effectively close itself for business by adopting several measures – perhaps out of different departments – in an uncoordinated manner and not realise what they add up to for the customer.


  • We only accept customers with sales over EUR1 million per annum in this country into our International Department/Commercial Banking, where we speak English.
  • If it is smaller than that it has to go into Retail division and no-one speaks English there, and they only have an eBanking system available in Spanish/German/French/.
  • Retail’s platform doesn’t support the transmission of MT940 account statements or the processing of payment orders via MT101.
  • We can open an account for any resident, but, where they fall below the limit and they have to go into Retail, the customer must present themselves in person to a branch, including foreign signatories and Ultimate Beneficial Owners above the threshold (10%/25%).
  • For non-residents we have a specialist branch and the customer cannot pay in cheques or cash to an account there through our branch counters.
  • There are explicit fees for the customer to pay to the bank just to get an account opened or to cover certain costs of the regulatory process.


  • It is a foreign customer so it is automatically classified as High Risk and the Ultimate Beneficial Owners must be identified down to a level of 10% ownership.
  • Our bank has no branch in the customer’s country so there is no-one in our bank whose job it is to do that identification work OR we do have a branch in that country but it has stopped doing that work.
  • Our bank’s policy is to only accept proof of Beneficial Ownership when it comes from an official source – and there isn’t one in the country of incorporation of the customer or the intermediate owners.
  • Politically Exposed Persons involved with the customer and Ultimate Beneficial Owners must be identified at a branch of our bank, or at a notary in their own country: the notary’s document must be translated and apostilled.
  • Our bank does accept attestations from a lawyer or accountant, but only if they are in EU Whitelist countries.
  • Our bank requires all background documents to be in our local language or English.
  • Our bank sends the pack of KYC documents to an external lawyer in the case of non-residents, and the lawyer’s fee must be paid by the customer.

This is not an exhaustive list and there is an interplay of Size and Regulation: banks are reluctant to go through the huge KYC effort for a customer that may deliver EUR300 per annum of revenue. Note also how Basel III and fines/losses in the banking sector have increased the revenue-per-client targets, and will continue to do so: when the EU Banking Pact creates a lifeboat fund for the banks to pay into to make sure that future bank failures are not done at taxpayers’ expense, where do the banks get the money from? Customers – who are frequently taxpayers.

This revenue-per-client target will only go up, and be compared to the servicing cost, where any foreign connection will bring with it additional KYC costs. Banks will be reluctant to start the process if they doubt whether it can satisfactorily completed. These doubts will surface in particular where:

  1. Verifications will need to be carried out in countries that are not in the “magic circle” of EU/EEA countries and ones on the EU “white list”.
  2. Ultimate Beneficial Owners are all foreign to the bank, whether the local account is owned by a resident or non-resident, and most if not all of the principals and the signatories are foreign.

To point (1), the latest Anti-Money Laundering regulations – the FATF 2012 Recommendations and their implementation as the 4th EU Anti-Money Laundering Directive – state that proving documents must come from an official source or else be endorsed as authentic by a Trusted Third Party:

  • There may be no “official source” of information in the country concerned.
  • Banks are not permitted to place reliance on Trusted Third Parties if they are not in “magic circle” countries i.e. a lawyer from Chile is not “trusted” a priori.

Example: a customer from Uruguay wants an account in the UK. Documents from the trade register in Montevideo will be in Spanish and may not provide all details required under UK rules. How does the bank know that the documents come from an official trade register anyway? Would the bank not require an endorsement of some kind? Who from? The company’s accountant or lawyer? But the company’s accountant or lawyer is not from the “magic circle”, they are a locally established partnership even if they are affiliated to a PwC or a Linklaters.

Solution: if a PwC or a Linklaters has an affiliate in the country concerned and is willing to have the local certification endorsed towards the bank by one of their offices inside the “magic circle”. Both the bank, and the endorsing PwC or a Linklaters office will themselves insist on the original documents being translated, and probably notarised and apostilled, so that they can (a) read and understand them; (b) be confident they are authentic.

To point 2, Ultimate Beneficial Owners, this problem is an exacerbation of the first one:

  • Because the applicant is foreign, the Ultimate Beneficial Ownership threshold may go down to 10% causing an exponential rise in the number of parties to be examined, and the depth of the examination
  • Each one has to be identified by the bank directly or by a Trusted Third Party within the “magic circle”, as per point (1)

The rules can make it very difficult and time-consuming for certain customers to get an account in a given country, and may make it impossible for others.

Then we have the defects, not at all deliberate, in many documents that are generically requested for KYC purposes e.g.:

  • Passports do not have an address on them;
  • Annual utility bills that, if issued in January for the previous year, are only good as KYC documents until the end of March or June;
  • The trend towards eBilling for utilities where no paper bill is sent at all.

Drawing interim conclusions, then, we have the direct and indirect consequences of the financial crisis and losses/fines on banks:

  • AML regulations that are more onerous across the board, and in particular where foreign parties are involved.
  • Banks shrinking, and returning to “home markets”, and becoming less open to foreign business.
  • Banks needing to earn more, against the rising cost of capital and compliance.
  • The banks are the big banks in each country, the ones whose policies really do move the pointer on measures like availability of credit, access to bank accounts, rates of interest charged and so on.

And then on the other hand we have governments trying to generate Foreign Direct Investment.  There is a clear conflict here between government economic policy and the restrictions under which the major banks are operating, caused in large part by the measures introduced by governments to avoid a repetition of losses and fines.

This becomes a political issue for the country concerned as it inhibits Foreign Direct Investment and slows economic growth and the spin-off tax revenues. Major banks are caught in the firing line as it really is not an option for a major domestic bank to shut up shop to foreign business and thereby inhibit Foreign Direct Investment into their country.

But the real losers are the foreign companies who want to trade but cannot get the necessary banking facilities, because they are foreign or foreign-owned, and are too small in their own right to warrant a global bank courting them; this is the foreign-owned SME, the new unbanked.