You might be trying to get a mortgage or perhaps a credit card from a different bank – not the one you use for your current account. You might as well try to open an offshore company and target some of the benefits associated with incorporating a business abroad. Maybe you are just trying to rent a house or get credit for a new car. In any of these situations, you will be asked for a plethora of documents. Most of them are easy to get – you may already have them, such as your ID or a utility bill. Some others are more difficult to get.
You may need to print a few documents or perhaps go to specific institutions in person and request them. Sooner or later, someone will inevitably ask you for a bank reference letter. You have never heard of it. You can figure out it has something to do with your bank, but what does it actually mean? What is it supposed to include? Why are you asked for one and is it a legal requirement? This guide will give you all the details you need about a bank reference letter.
Understanding what a bank reference letter is.A bank reference letter is given by the bank you have a current account with. The letter includes some details about yourself, but most importantly, it proves that you are a customer of that bank. You probably ask yourself – if you have a card that you can show, what is the point of getting a letter then? The letter tells whoever asks for it that you are a customer of that bank for a particular period of time.
It will also give some details about your commitment to the bank, as well as the relationship with the respective bank. It will tell the requesting part that you are an acceptable or a good customer. It will tell them whether or not you have defaulted, as well as some details regarding your payments. The bank will provide details about how well you have managed to cover your credit payments and loans. The document is pretty standard and most banks have it prewritten.
Since it is pretty popular these days, most bankers will not act surprised if you ask for one. They will give it to you in no time. However, the bank is also supposed to protect its customers' personal details. Therefore, the information given is pretty general. There are no private details like your date of birth or specific expenses, but just potential details about credit deals or loans – such as how well you have managed to handle them.
A bank reference letter is less likely to be required by yourself or your bank. Instead, third parties may demand such information when they need to comply with KYC (Know Your Customer) rules or due diligence issues. Practically, this letter aims to prove that you are an economically active individual with no crime related activities and good commitments. The letter also proves your identity and address – practically, it is proof of address from a solid financial bank.
What you need a bank reference letter for
No one will ask you for a bank reference letter just to get to know you better. No one really cares about your financial situation out of nowhere. Instead, some third parties may need these details when they are about to take a financial risk with you. For instance, you may need to borrow money to get a new car – this is a risk for the lender. You may also look for a mortgage or perhaps a new house to rent – a risk for the landlord.
These third parties want a reference and a few details about your financial capabilities. They want to determine whether your bank history is positive or negative. They want to know that you can commit to the financial agreement that you propose or ask for. It is mostly a double check that your history is clean and you are less likely to default.
There are two common situations when you might need a bank reference letter. First, you may want to start an offshore company and protect your assets or perhaps pay less tax. Your new bank may want to know a bit more about yourself and ensure you do not open this company in order to commit crime or get engaged into sketchy activities. It is also a KYC requirement. While privacy is key, a bit of information adds to overall peace of mind.
Second, landlords are more likely to request this letter in order to ensure they would not have to kick you out after a few months should you fail to pay rent. They want a longterm commitment, rather than headache. Sometimes, landlords and letting agencies can also request such letters themselves, but they will have to pay fees and the process might last more than just a few minutes.
Bottom line, a bank reference letter is likely to be requested when about to make a financial commitment. You get a new agreement and an institution takes a risk with you. Therefore, the respective institution tries to get some hints about your past. If it looks clean and you do not have any defaults or regularly missed payments, chances are your agreement will be accepted right away.
Now, you are being asked for a bank reference letter – most commonly associated with offshore companies. Most landlords and letting agencies will perform a credit check, get in touch with your workplace or current landlord for more information. But offshore banks are less likely to do that, so they are very likely to require this letter. At this point, you may ask yourself – how can I get a bank reference letter?
How to get a bank reference letter
The process is fairly simple and straightforward. Third parties can ask for such letters by getting in touch with your bank. They can also get a letter by getting in touch with their own banks. However, they will usually require your written permission. In order to prevent the trouble and pay some extra fees, they may ask you to get the letter yourself. If you do it yourself, chances are you will not be charged anything – different banks work in different ways though.
When requested by the third party, you will usually get a standard letter that you need to sign or complete – you practically give your consent. The letter is then taken by the third party and given to your bank.
It is important to know that generally speaking, most banks will require the account holder to request a bank reference letter. They do not want any trouble by disclosing private information about yourself. However, if you give your consent and sign it, they may also try to get the letter themselves. Either way, your permission is always required.
So, you know that the bank reference letter will provide some details about your banking situation, but what kind of details are mentioned there more precisely? Again, banks are restricted in terms of details they can give out. The wording is general and not always easy to understand – an expert may read it in a different way and consider the meaning of specific words in order to discover the actual evaluation of your situation.
What kind of information your bank reference letter may contain
A reference letter will include specific words that banks must carefully choose. Reading between lines is quite difficult. Each bank must protect you – the customer. But then, the bank cannot lie about your economical situation or it may face a lawsuit. The bank will get a negative reputation for misrepresentation, not to mention negligence. Simply put, your situation is correctly defined, but with carefully picked words to keep your integrity unaffected.
Some of the words and expressions used by banks may include:
- Good for your figures
- Figures higher than expected
- Respectable member of the society
All in all, here are some of the details given in the letter:
- Your name
- Your full address
- Details regarding the signature
- Number of years since you are a customer
- Type of account you have
- Repayment history
- Loans you might have received
- Credit you might have received
Whether you go for Panama, Hong Kong, Belize, Switzerland or any other jurisdiction, the bank reference letter is among the most popular requirements. Sure, you will need an ID, some details about your business and so on, but when it comes to more specific documents, offshore banks and brokerage institutions will want to know more about your economical habits and situation.
Bank reference letters and their connection to offshore banks
This is often a requirement based on the law. Banks must complete due diligence files on you. They also need to comply with the KYC rules and regulations. However, this is not always a legal requirement, yet some banks and institutions still ask for this letter. It makes no difference what you open this account for. Moreover, it makes no difference why you need it – it could be a for a personal account or perhaps a corporate account. The simple fact that you are a foreigner will entitle banks to ask for this letter.
Now, from a completely different point of view, a bank reference letter could also be considered a threat to your personal privacy. Why do you open an offshore account, after all? You want some privacy. You want to protect your assets, which can only be done by staying secret. Your finances represent your personal particularities – no one else is entitled to look into them and make decisions regarding your situation.
Concerns will kick in from more directions. Your onshore banking situation is exposed. If there are exchange agreements between the two countries, tax information may also be revealed and so on. In other words, the whole purpose of offshore banking becomes completely null. Why would you go for it if privacy is compromised or at risk anyway?
Bank reference letters are most commonly associated with offshore activities. The American government is trying its best to prevent such activities, meaning such requests may be reported to local authorities. Requesting a bank reference letter in the USA could be seen as a suspicious activity. Banks will then have to file a suspicion report based on this request, which is time consuming and draws multiple investigations. Therefore, some of them would rather not provide such letters at all.
Why try to ditch the bank reference letter when opening an offshore account
Now, on another note, more and more institutions and other third parties request bank reference letters. For example, you might be interested in purchasing an expensive property – you will probably have to come up with one of these letters. It must prove the fact that your money is clean – no criminal records attached to it. Therefore, these requests keep gaining popularity – without necessarily having anything to do with offshore activities.
Now, different countries have different rules. Even different banks from the same country may have different rules. For example, you might be rejected if you ask for a bank reference letter addressed to whom it may concern in the UK. Some banks do it, but others will want to know why you need this letter.
At this point, a different question will inevitably pop into your head – can you open an offshore account without a bank reference letter? Are there any ways to overcome this issue and get over it while still maintaining your privacy?
The truth is most offshore bank accounts – including both personal and corporate accounts – will need some sort of reference letters. This is because the offshore banking system has been associated with a few major scandals – mostly because they involved large organizations, corporations or famous people. Plus, offshore banks are also associated with hiding and stashing money from criminal activities, yet this is not really the case – regular bank accounts are more popular.
Providing a commercial reference letter instead
This is why reference letters are needed – they prove that your funds are clean and not involved in criminal activities. A bank reference letter is ideal for most banks overseas, yet each bank has its own different rules. Some of them will only require a reference letter – it does not have to come from your bank. A commercial reference letter could be just as attractive and helpful. In other words, the letter is a recommendation provided by a client, business associate or vendor.
You cannot just provide a commercial reference letter when asked for a bank reference letter though. Instead, make sure you can find a bank that accepts different types of documents for verification – this way, you get a few extra options.
Again, you cannot bring in a different type of reference letter when asked for a bank related one, but go through a bank's requirements in terms of references and you may find a flexible one that takes other types of documents too. At this point, a bit of information regarding your personal reputation can get the job done and help you register your offshore bank account.
Providing reference letters from other professionals
At this stage, you can ask the bank what kind of letters are accepted. For example, some banks may do with a reference letter from a lawyer who you have worked with. The letter will not provide too much information about your specific needs for a lawyer, but it will come as a solid recommendation from a certified professional. Some other banks can also accept letters from accountants, which are quite similar to bank letters.
An accountant will mention how stable your financial situation is and provide a few details about the clean profile of your funds. Such a letter is more credible if it comes from an accounting firm, rather than an in house accountant hired by your company.
Offshore banks will not necessarily compromise. They will not sacrifice their reputation, license or KYC ratings in order to gain more customers. They know that they represent a solid and attractive option for foreigners, so they will not risk their reputation. When it comes to reference letters, they are usually mandatory for those who need to open an account. But then, many banks from more countries provide exceptions as well. At this point, it is up to you to assess more banks and go through their requirements in order to find these exceptions.
Providing bank statements instead of a bank reference letter
However, these banks will still have to get to know you better. You will still have to provide an alternative. You must prove that funds are clean and you actually have an acceptable source of income, rather than just money to stash abroad. From this point of view, it is worth noting that some banks may take bank statements instead of a bank reference letter. Even if you get paperless statements, you can log on to your bank and download all of your statements.
Some offshore banks are quite mild in requirements and will require statements over the past three months. Some others may require half a year worth of statements, while others may ask for more than a year. All in all, these statements represent a more private option than a classic bank reference letter, especially if the respective institution will ask more details about what you need it for.
A bank reference letter is often required for a corporate bank account abroad. Some banks are more secure and will ask for a letter even if you open a personal current account, but this is not a general rule. It is relatively simple to find an offshore bank that will provide access to current accounts without proof of funds. After all, you might as well use that account for holidays in the respective country or perhaps to make an investment there.
Switching accounts to ditch the bank reference letter
Now, if you manage to open a current account or you already have one, there are a few different options.
First, you can bank at a personal level for a while – it could be a year or two. Simply keep that account and use it every now and then. If you can get a loan or some credit too, even better. Then, when interested in a corporate bank account, you can get a reference from your personal bank. Practically, this bank is also offshore, so your government has no clue what goes on in there. Even if you are asked why you need the letter, such information will not be passed to your government, so your privacy will not be affected.
The second option implies opening a corporate bank account with the same bank. Basically, you will upgrade your account. It is like getting credit from your regular bank – you use it for a basic personal account to gain some reputation and build your credibility. You could be rejected if you ask for credit straight away, but accepted after a few months of banking because your reputation is better. The same rule applies to offshore banks.
You start with a personal account that does not require a bank reference letter, then use the same bank to open a corporate account. Your personal account is likely to act as a reference, so you do not have to contact your home bank and ruin your privacy.
If you are new to offshore banks, most of the information you have may come from the press. Basically, you are aware of all those scandals involving banks, celebrities and large corporations registered in financial heavens, like Panama or Hong Kong.
Are offshore bank accounts legal?
The truth is there is nothing illegal about offshore bank accounts. There is nothing illegal about trying to pay less tax or using the law in your favor. Sure, there are people out there who associate offshore banks with illegal activities, such as tax evasion. But if you are not interested in such activities, offshore accounts are perfectly legal.
Now, when you register an account with a home bank, you might be asked for a few papers – such as your ID, a proof of address and so on. An offshore bank may ask for more than that and the bank reference letter is one of the most obvious demands. So, why do offshore banks ask so many questions? Why do they need so many documents?
It is one thing to register a bank account in your own country, where you work and run a business. Banks can check your credit score and find out more about you. When it comes to offshore banks, they will find it more difficult to get such details about yourself. While they do ask for more documents than regular banks, these documents are usually easy to get and will not really delay your application. So, why do banks want to know all these things?
Why offshore banks ask so many questions
Most importantly, this is a legal requirement. The law asks for it. Unless you want to establish an offshore account in an unstable developing country, chances are a reputable jurisdiction will most likely demand some type of referencing. Banks must follow the law and collect particular details about you. Failing to get these details may lead to severe lawsuits, fines and even bank closure.
On the other hand, you also want some security when choosing a bank account for your corporation or personal needs. Dealing with a bank that is willing to break the law will not really give you too much security. For instance, there are a few countries in the world where you can get an account without even requiring an ID – you do not want to end up banking in those countries.
Banks also have a reputation to look after. It is a matter of protection too. For example, a bank with a terrible reputation will not get too many customers and will eventually fall into pieces. A solid self protection will also guarantee for your own protection. A bank that takes sketchy clients or clients with criminal activities is not really good news for your finances.
For example, if you are involved with crime or a random ponzi scheme, the bank will most likely end up in a costly lawsuit. People who lost money will also go against the bank and no one really wants that. The truth is criminals are not that obvious though. They often look decent and respectable, but they could be professional scammers. A bank must get to know you and perform some checks if you are totally new to it.
Now, it is perfectly normal to end up with a different procedure when it comes to an offshore account. Opening an offshore account is not difficult, but it is different from opening an account in your own country. For instance, there are many big brother databases keeping an eye on your finances and banking situation in your home country.
Different rules and procedures
Your name will be taken through a credit report even if you do not ask for credit or a loan. Simply opening an account will bring in a search. Your bank can check all the details about your situation over the Internet.
Now, offshore banks cannot really do that. There is no such thing as an international credit check. If banks try to do that, they will most likely fail because getting more details about your situation would break confidentiality rules. This is the main reason wherefore new customers are asked for way more documents and paperwork.
Obviously, if you are not into criminal activities, it is more convenient for the bank to perform this search itself, rather than ask you to bring documents. But then, such a check would ruin the whole privacy experience in your relationship with the bank.
Last, but not least, banks want to know you first. It is good business for them to be aware of who their customers are. They need to know where you come from, what kind of business you do and what your needs are. From this point of view, they can handle your requests in a more appropriate manner and they can advise you accordingly.
Getting to know you
A bank that knows you can provide services tailored to your personal needs – the type of services that you may not even be aware of. Having a solid relationship with the bank will be beneficial in the long run because the institution will value you and look after you.
Simply put, if you try to become the ideal customer, you are more likely to get positive answers when looking for some special favors in the future.
As a short final conclusion, the bank reference letter becomes more and more popular these days. Plenty of institutions – and not just banks – ask for such letters. While they are harmless when it comes to basic activities, going offshore for lower taxes or extra privacy may expose you if you request such a letter. You could face rejection or you could end up dealing with an unnecessary investigation – even if you have nothing to hide. The good news is there are a few ways to bypass such things, yet they require a little education and research.