Offshore banks are financial institutions registered in tax havens. Privacy of account holders is often guaranteed by the bank to the dissatisfaction of governments in the developed world. As a response, accounting regulation such as CRS/FATCA instructs participating central banks to share information on account holders with their local tax authorities. Also, an increasing number of jurisdictions requires its residents to declare their worldwide income, whilst the concealment of such is seen as a criminal offense.
The role of offshore banks in relation to tax havens and financial scandals gained altitude some decades ago. Only recently the Panama Papers and Paradise Papers disclosed the trickery of the rich and powerful and revealed their hidden activities. This resulted in a stricter regime against hidden bank accounts. Mainly to stop criminal funds from entering a local economy.
The US Dollar serves as the global reserve currency. This status allows the US Treasure Department to control the Dollar supply and the abuse of its currency. International transactions in US Dollars are cleared in the USA, even when the sender and receiver are outside the USA, and the relationship with the SWIFT payment system allows the US Treasury to scrutinize all transactions. The result is that the Financial Crimes Enforcement Network (FinCEN) can designate financial institutions all around the world as a Primary Institute of Money Laundering Concern and publish the intention to forbid the financial institution from further transacting in US Dollars. It is expected that the market responds to such an action and isolates the financial institution without further public intervention.
When a financial institution is designated a Primary Institute of Money Laundering Concern by FinCEN, the domestic regulator needs to act fast and prevent a bank run. To avoid that the proceeds of criminal activities and undesired conduct is blended with legitimate bank deposits, withdrawals are limited, paused or halted by the regulator. Private depositors and small business owners can experience severe difficulties and cash flow shortages due to this situation. Hence the reason that an orderly resolution is in the best interest of various stakeholders.
Financial institutions can also fail due to a more common lack of liquidity making them insolvent. When a sale of the business tool is unavailable, the financial institution gets liquidated. Such a liquidation process is straightforward but can drag on for a long time when there is a gap between (intangible) assets and liabilities. During a liquidation, the creditor hierarchy determines the priority position per creditor and allows stakeholders to calculate the expected pay-out percentages per position. Especially when the expected recovery leaves a difference with the account balance, effective actions are required to ensure improved payments.