Why does the bank need detailed information about your company?

This has been shaped by the sanctions imposed against numerous persons and business sectors in Russia as of 2014, money laundering scandals in Estonia and abroad, terrorist attacks in Europe, as well as fines imposed by supervisory authorities and the liquidation of financial institutions.

This has changed the relationships between companies and banks, including the possibilities of companies to open a current account and conduct payments. Payments have become the riskiest service in banking, and not all are willing to offer these services to everyone. In this article, you will find advice for a law-abiding company in order to avoid terminating the banking relationship.

Be open and cooperate with the bank
The legislation demands that the bank needs to know their client. The bank must understand, and if required, be able to explain where the assets of the client are from, how the client conducts their business, and who the main partners of the client are. In practice, the bank once and again comes into contact with clients who do not wish to provide any information to the bank. What is worse, if they do provide information, it may be insufficient, or even false information. At some point, all these clients will lose their opportunity to conduct settlements in the bank because the client does not give the bank the possibility to fully understand the business of the client. If the bank does not understand the business of the client, it is unable to comply with legislation or verify that the client complies with the risk appetite of the bank. Risk appetite means that the bank lays out the rules as to which risks, and to which extent, it is willing to take, and which risks to avoid.

Combating money laundering is impossible if the bank does not have comprehensive and high-quality information. The client is the main source of information for the bank. If the client is unwilling to cooperate, it is not possible to distinguish good clients from bad clients. Therefore, and unfortunately, even law-abiding companies may find themselves in a situation where they cannot be provided any services by the bank.

Know your partners
A company may lose the confidence of the bank due to their failure to examine the background of their partners or finding it irrelevant. It could be irredeemable for a company if international sanctions have been imposed against their main partner, if their partner is a politically exposed person in a foreign country, or if they are somehow related to published news of a negative effect.

The same applies to the persons in the management board, supervisory board, or owners of a company. For example, the relation of a small investor with an undesirable country may pose issues, especially if the investor is not prepared or unable to verify to the bank that this exact person or circumstance does not create a risk for the bank.

Be prepared to explain the source of your assets
Legislation demands that banks know and understand the source of the assets of their clients in order to avoid earning money illegally. If a client has a complex background, it means they pose a bigger risk for the bank.

The bank is obligated to understand how the client has earned their assets, and, in certain situations, the origin of the assets used in a specific transaction. Companies are most often frustrated when the bank asks questions when the company withdraws their own money from the bank in cash. The explanation is simple – the bank needs to receive information from the company in order to avoid the use of money for e.g. bribes. The bank is not seen merely as a barrier against money laundering; the bank is expected to prevent financial crime on a larger scale.

In practice, the most difficult situations for the bank are when the bank has to verify the source of assets for clients who have earned their money, for example, 20 years ago. This poses challenges for many investors from foreign countries. However, if the client is able to explain how, why, when, with whom and when the assets were transferred, this process should be relatively smooth.

Organise your control structure
Companies use complex ownership structures for various reasons. The more complex the structure is, the bigger the risk is for the bank that it is essentially unable to understand how the company is managed and who the actual beneficiaries are. When it comes to a complex structure, there is a risk that different banks will differently interpret who the actual beneficiary is. Considering the planned amendments to legislation, this may pose a problem where the Commercial Register has one set of data and the bank has another set of data. This may bring about issues for companies when communicating with the bank.

If the company has a complex structure, it is best to maintain your documents in order and be prepared for any explanations. When it comes to complex ownership structures, the main issue is that the company does not have its documents in order and it is unable to verify the structure created on paper to the bank.

No relationship with Estonia
In most banks operating in Estonia, it is not possible to create an account for a company or conduct any transactions if the business of the company is not solidly related to Estonia. It is insufficient if a foreign person has a company in Estonia. It may also be questionable if an Estonian has an Estonian company, but all the business is operated outside Estonia. This is because it is harder for the bank to inspect such businesses and it raises the question as to why the account of such a company is in Estonia, and whether the reasons therefor are understandable and acceptable for the bank. This circumstance has also been brought about by the fact that in different jurisdictions, accounts are also used, in addition to legal business, for covering tracks of illegal activities and hindering investigations.

Be aware of the risks related to you
Finally, we can suggest you one of the most important of all rules. If a company needs to convince a bank that it is law-abiding and meets the risk appetite of the bank, the company needs to place itself in the role of the bank and understand how the bank would view it. If the company is well aware of any and all circumstances that increase its risk for the bank and is able to convince the bank with proper documentation and professional behaviour that it is indeed law-abiding, even the more riskier of companies are able to conduct business with a flexible bank.

In addition to being aware of circumstances that increase the risk, it is useful to be aware of the circumstances mitigating the risk for the company. For example, this could constitute the existence of a large reliable partner, as this helps mitigate the risk of fake activities by the company.

In the end, you should not forget that the bank is really committed to creating a client relationship. It is just that the rules have become ever more strict and banks have been given absolutely no room for error.

Toomas Tuuling
Coop Pank AS
AML Compliance Manager