Why Opening A Corporate Bank Account Is A Test Of Legal Structure, Ownership And Commercial Substance

An international company can be incorporated within days, with a registered address, constitutional documents and a certificate confirming its legal existence. Opening a corporate bank account, meanwhile, can prove to be significantly more challenging. Financial institutions are now asking not only who owns a company, but why it was incorporated in a specific jurisdiction, where the funds will come from, how the business will operate and whether its transactions conform to its commercial purpose.

 

For international investors, entrepreneurs and groups of corporate entities, banking is becoming an integral element of legal structuring, not an administrative step to be taken after incorporation. A company may meet all requirements imposed by the relevant company registrar but still be denied a bank account. The difference between the two lies in the fact that state entities are concerned with facilitating corporate formation and legal existence, while financial institutions worry about money laundering, regulatory compliance and the very customers they deal with.

 

The shift has particularly impacted businesses operating networks of companies across the Gulf, Europe, Asia and other financial centres. Holding companies, special purpose vehicles, trading groups and family office structures can all benefit from being organised across multiple jurisdictions. At the same time, interlinked corporate groups with complex ownership structures, large volumes of cross-border transactions and significant intercompany receivables/payables may find themselves questioned by banks about their economic substance.

 

Incorporation Does Not Guarantee Banking Access

 

Company formation and bank account authorisation are two separate processes. A corporate registry can grant incorporation approval upon submission and payment of the required documentation, while a financial institution will review and analyse all matters pertaining to the company before granting access to its services. The latter may examine the company’s line of business, owners, directors, physical and virtual location, projected revenues, customers and the countries where transactions will take place.

 

Company licensing and incorporation certification confirm certain aspects of a business’s existence but say little about its banking needs and ability to satisfy them. A newly incorporated consultancy firm with a business licence and headquarters may have no employees, contracts or operations to report at the time of account opening. Similarly, a holding company with no operational staff may be entirely legitimate if it exists to facilitate equity transfers, share dividends and other corporate finance matters. In either case, the documentation may be sufficient, but the evidence of operations and commercial substance may be required.

 

In addition, banking institutions tend to make commercial judgments within their areas of responsibility. They operate under different guidelines depending on the country, sector and products, and therefore vary in their risk appetites and willingness to comply with specific customer segments. One bank may be comfortable with facilitating international trade finance, while another may be hesitant to engage with the same transaction due to its complexity and costs. At the same time, a positive response from a company registrar does not obligate a bank to accept an application. Companies should be aware that banking considerations should inform their international corporate structuring decisions at the earliest stages. The choice of jurisdiction, for example, is not merely a matter of cost or speed but of the bank’s ability to understand and accommodate its customers’ needs.

 

Know Your Customer And The Ownership Chain

 

Know your customer (KYC) requirements are the cornerstone of account opening. As the name implies, banks aim to understand the corporate entity they intend to deal with, reviewing its legal structure, directors, signatories and beneficial owners in the process. Some of this information is standard across all entities, but others are down to the company’s organisational choices.

 

The most common concern that arises during KYC checks is the identity of ultimate beneficial owners and their ownership structures. A company can be owned by another, which can be held indirectly by a trust, foundation or special purpose vehicle. Each structure is entirely legitimate and common across jurisdictions, but the chain of ownership must be reviewed and documented for banking purposes.

 

Ultimately, a bank must be able to demonstrate a direct link between an individual and the shares, assets or voting rights they possess in the company. It may request ownership documentation, share certificates, company constitutions, shareholder registers, trust deeds or any other relevant information. It may also seek clarification on who exercises control over the customer, even if they do not hold the majority of shares, by examining voting rights, appointment rules or any other factors.

 

Several discrepancies can arise during this stage, as one would expect from the differences between corporate registry requirements and those of financial institutions. A shareholder may not be registered against the same company in the same capacity as per corporate filings, while a company’s ownership register may indicate a significantly different level of ownership. It is not uncommon for the registered owner to be different from the one nominated in a trust, nor for a family member to hold entitlements to shares indirectly.

 

While such circumstances are not necessarily fraudulent, they may require additional clarification and even correction of the records. International groups in particular should review the consistency of their accounting, tax, ownership and banking documentation, as variations between the levels of detail or filing requirements are common across jurisdictions. One country’s filing rules do not necessarily apply to another, and beneficial ownership rules can differ for corporate entities in different jurisdictions. Therefore, a company should be aware that meeting the requirements of one banking regulator does not oblige it to comply with another.

 

Source Of Wealth And Source Of Funds

 

Source of wealth and source of funds are frequently conflated, but the two terms describe significantly different concepts. Simply put, source of wealth refers to how a customer acquired their wealth, while source of funds describes the origin of the money being deposited by them. The two are often intertwined, but the distinction is significant in certain scenarios.

 

Wealth can come in many forms, such as the sale of an asset, business or even skills, and the supporting documentation will depend on the method. An individual who has sold their interest in a company, for example, may be asked to provide relevant sale documentation, while a shareholder redeploying their earnings into a new venture will be expected to demonstrate their ownership of said gains.

 

At the same time, funds are received from a source, which may also have varied from the ones from which the customer has acquired their wealth. The deposits can be made directly by the owner/investor or by another entity on their behalf, particularly in the case of international transfers. Documentation will therefore be required outlining the source, as well as supporting evidence such as bank statements, audited accounts, tax computations, dividend certificates, sale agreements and others depending on the situation.

 

It is rare for a single document to suffice, as the bank must be satisfied that the customer’s wealth equals or exceeds the value of the proposed transactions. Similarly, the funds deposited with the bank must be demonstrably linked to the customer’s wealth. Where deposits do not originate from the customer themselves, the bank must be able to verify that the instructions provided are legitimate.

 

Particularly with international transfers, the chain of custody must be established using the relevant documents, ensuring that the money is reaching its intended destination. Multiple accounts may be used across jurisdictions to complete the transfer, with local currency conversion and other factors impacting the final deposit amount. A completed transaction should therefore be able to demonstrate the parties involved and the purpose of the movement of funds, which may require an explanation of the circumstances.

 

Business Substance And The Purpose Of The Structure

 

Economic substance has become a popular topic in relation to international companies, although it is one of those grey areas that can be difficult to define. Its requirements vary significantly between jurisdictions, and its compliance procedures have been challenged in court on more than one occasion. At the same time, economic substance should not be mistaken for an absolute requirement to operate from a specific region with employees on payroll.

 

A company’s operations are dictated by its purpose, which in turn defines its substance. A company can operate with minimal staff if its purpose is to hold and distribute dividends, as is the case with many holding companies. A special purpose vehicle (SPV) exists to finance a specific project and may have only one asset to its name. In contrast, a trading company must have more extensive operations in order to justify its expenditures, including staff, suppliers, logistics and more.

 

Banks will typically consider a company’s stated purpose when reviewing applications, as well as determining whether its operations align with it. They may ask to review the company’s management structure, where contracts are negotiated, where documentation is stored, where the company’s revenue is derived, and why the company is organised the way it is. The location of a registered office is informative but rarely sufficient. Similarly, tax residency, licensing requirements, local company law, and substance regulations in the relevant jurisdictions may dictate additional requirements.

 

A company should therefore understand the requirements of all relevant jurisdictions, which may differ significantly. Just because a bank will accept certain documentation does not mean that a local tax authority will view it as sufficient. Likewise, a bank’s requirement to review local presence documentation should not be mistaken for a formal statutory requirement by an international company law regulator. The challenge for international groups is to ensure that their legal, tax and banking documentation supports the purpose of the entity, outlining its operations and the rationale behind them.

 

Anti-Money Laundering And Transaction Monitoring

 

Anti-money laundering (AML) requirements go far beyond account opening, but they can certainly impact it. AML compliance measures are designed to prevent illicit activities such as money laundering and terrorist financing. They entail additional transaction monitoring procedures, which may flag suspicious movements for additional review. These can relate to the value and frequency of payments, counterparty risk, geographic risk, and other factors.

 

A company that has recently been incorporated and only reports minimal local activity but receives substantial payments from overseas may be subjected to enhanced scrutiny. Similarly, a business that does not report significant local revenue but regularly transfers money overseas may also be viewed as unusual. It is also relevant whether payments are being made to or from third parties with whom the company has no reported dealings.

 

A change in the transaction profile, including the volume of payments sent or received, can also raise concerns. This goes hand-in-hand with the company’s expectations, which should be realistic given the company’s status and operations. A newly incorporated entity may see an increase in its transaction volumes over time, while an international company may benefit from higher revenues due to its expanded operations.

 

It is important to note that changes in a company’s circumstances do not necessarily indicate fraudulent intent. New customers, contracts, suppliers and other factors can affect an entity’s transaction profile, particularly at the early stages of its operations. In any case, updated documentation should always be prepared to review and explain the situation, particularly where the bank has raised questions. It can also be a good idea to update the bank on a regular basis, particularly where the company anticipates an increase in activity.

 

Banks can also take additional steps if a suspicious transaction is identified, including halting payments, restricting specific services or terminating the relationship, depending on the severity and the bank’s internal policies. In some cases, the bank may be obliged to report the suspicious activity to local AML authorities. Suspending or terminating a customer is likely to have serious consequences, but in many cases, either option is preferable to becoming a party to illegal activities. A company is unlikely to be notified of a suspicious activity report, as such information is often confidential due to legal protection.

 

Corporate customers should always remember that transaction monitoring is an ongoing process and not a one-time procedure. Changes in ownership, operations, turnover, customers, jurisdictions, and sources of wealth and funds may impact transaction monitoring rules. Keeping documentation up to date and engaging proactively with banks can prevent unnecessary complications, although no company should overestimate their ability to predict what a bank will do in a specific scenario.

 

Cross-Border Structures And Jurisdictional Risk

 

Many international companies operate across borders, using the jurisdictions of their choice to their advantage. Holding companies, family offices and project-specific SPVs frequently utilise multiple financial centres to complete their objectives. A parent company may be incorporated in one jurisdiction, have subsidiaries in another and be serviced by a third, while a family investment vehicle may hold tangible and intangible assets in several.

 

Each additional jurisdiction added to a corporate structure brings additional considerations, as does the complexity of the choice itself. In particular, a bank will review the risk profile of the countries involved, reviewing whether they are subject to sanctions, money laundering rules, restrictions and other factors relevant to the transaction. It can also evaluate whether the company’s operations, counterparties and the movement of funds comply with the relevant regulations and the bank’s own risk appetite. All documentation must therefore include information about each jurisdiction involved, outlining the rationale for the decision.

 

It is important to remember that the evaluation of a company’s legal, tax and banking risks will be undertaken on a jurisdictional basis. A company that is incorporated in a renowned international financial centre is not automatically exempt from scrutiny, while one registered in a lesser-known location is not necessarily illegitimate. The focus should be on documentation, transparency, the nature of the company’s activity, the source and destination of funds, and the bank’s ability to review them all.

 

International groups should also be mindful of the difference between regulatory requirements and those imposed by a specific bank. A financial institution can request additional documentation beyond the ones explicitly required by the local company law. Another bank may have different requirements, which may vary significantly from one institution to another. If an application is rejected, it is always useful to review the reasons, if they are available, to understand whether the problem can be resolved by updating the documentation or choosing a different bank.

 

Building Banking Readiness Into Corporate Planning

 

Founders and investors should think about banking requirements alongside incorporation, licensing, tax and governance considerations. Before establishing a company, they should therefore be aware of the requirements they will need to satisfy, including preparing a comprehensive view of beneficial ownership, outlining the source of initial deposits, and projecting turnover and expenses with relevant transaction forecasts.

 

The supporting documents should be informative and relevant to the purpose of the company, as the bank will always scrutinise them for signs of legitimacy. A trading company, for example, will need to provide evidence of its contracts, suppliers and logistics, while a project company will need to provide documentation regarding its financing and the relevant transactions. Documents should be recent and relevant to the needs of the bank, with all information being verifiable upon request. Professional advisers can help companies satisfy the expectations of financial institutions, but neither a corporate service provider nor a lawyer can force a bank to open an account.

 

A company should choose its corporate structure based on its own commercial needs, rather than what it thinks a bank may find appealing. In that vein, it does not make sense for a company to revise its ownership structure or operations if the changes will not bring tangible benefits to its operations. At the end of the day, the ability to satisfy a bank’s requirements always comes down to a company’s ability to explain its activities. The company must be able to demonstrate why it was created, how it operates and what it intends to do in the future.

 

As international regulation becomes stricter, banking access is set to become a test of corporate transparency. An international company’s account is unlikely to be the end of its incorporation but the start of an ongoing relationship, which must be nurtured with care. Cross-border entities must be mindful of the questions they will be asked and the documentation they will need to provide.

 

Dr. Sunil Ambalavelil is the Global Executive Chairman of Kaden Boriss, an international law firm specialising in franchise and business agreements. A seasoned legal adviser, he has advised and supported the international growth of numerous global brands, helping them navigate the legal complexities of cross-border expansion.
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