Ever wonder about Swiss bank accounts—those secretive, overseas piggy banks where movie bad guys wire all that ransom booty?
Such accounts are housed in what's called a foreign capital depository (FCD), and one might be coming to a town nearby if you live in Montana—call them "Big Sky accounts."
An FCD is a chartered financial institution that can accept deposits only from foreign businesses and individuals for safekeeping, with a minimum deposit of $200,000. While FCDs—otherwise known as offshore banks—are plagued with a gangster reputation, Montana officials stress they are not encouraging funny money and criminal activity to come to the state. FCDs are legitimate financial institutions, they say, and Montana should capitalize on behalf of its taxpayers. "We're trying to find a niche in legitimate foreign flight capital," said state Sen. Mike Sprague, author of the original legislation. He estimated this market at $3 trillion, and getting even a small slice would allow the state to raise significant tax revenue from nonresidents.
There are about 25 offshore banking sites worldwide, including Zurich (Switzerland), the Grand Cayman Islands, the Bahamas, Bermuda, Antigua and Luxembourg. Two years ago, Montana passed legislation allowing the creation of FCDs within its borders—the first, and until very recently, the only state in the nation to do so. Montana officials are marketing the U.S.'s political and currency stability and the state's reputation for privacy as the perfect spot to protect legitimate foreign financial assets.
"I thought [an FCD] was a good fit with the philosophy of the area," Sprague said.
To date, despite considerable interest, no applications have been completed to establish an FCD in Montana. Sprague said there have been more than 500 inquiries from around the world, but most have been from potential depositors.
"Demand is not the problem, supply is," Sprague said, adding that being the first state to establish an FCD demanded a little entrepreneurialism by the state. Instead of sending out application forms and waiting for them to be completed and returned, "the bureaucracy should take an interested prospect by the hand and lead them through the process," Sprague said.
"Activity is not the same as results," he said. "The bottom line is no one is opening up the doors."
Montana Banking Commissioner Donald Hutchinson said there has been a handful of serious applicants, but there are some very real obstacles facing the start-up of Montana's first FCD. For instance, most U.S. banks lose interest when they find out that FCDs cannot participate in lending activities, Hutchinson said. Having no expertise in this financial niche, other potential depositories conclude their time and money is better spent elsewhere.
There are other factors that undermine Montana's competitive position in this market. FCDs must abide by a host of federal regulations intended to prevent money laundering, including the Bank Secrecy Act and the Money Laundering Control Act of 1986. FCD transactions must also comply with any information agreements outlined in international treaties.
Despite Montana's reputation for privacy, the state is required to keep tabs on day-to-day operations, and under certain conditions, even the Federal Reserve Bank of Minneapolis could become involved. Such a web of government oversight encourages potential depositors to look for greater financial privacy and security in other offshore markets, critics say.
Initiating an FCD in Montana also comes with a host of fees, including $25,000 nonrefundable application fee, $25,000 initial charter fee, 1.5 percent tax on all assets and annual $10,000 renewable fee. Montana does offer some tax breaks that offset some of these costs, but other offshore sites charge few or no fees.
Without an established FCD to silence its critics, Montana has had to bear its share of skeptics. Sprague said he once took some good-natured ribbing from conservative talk-show host Rush Limbaugh about Montana competing with high-profile offshore havens around the world. "I told Rush, 'We're about as offshore as you can get.'"
Limited options
Once established, an FCD has a limited number of options for what it can do with incoming deposits, according to an official with the Montana Department of Commerce. The FCD can act as an international mattress where "money can just sit there," the official said. The customer can also direct the depository to invest in precious metals—a potentially attractive option given Montana's precious metal reserves—or government securities.
The FCD can also act as a trust fund, whereby the depository manages the assets on behalf of the depositor, giving the FCD wide latitude in maximizing returns for the depositor, similar to an investment firm. But in each scenario, financial risk remains with the depositor, rather than on the depository—there is no deposit insurance.
The inability to make loans is one reason why banks are not beating down Montana's doors. An executive of a large bank, who preferred not to be identified, said the business of banking relies on managing loan risk. If Montana FCDs are prevented from lending out incoming deposits, it strips a bank of its core business activity.
"I can't see how [the bank] would benefit" by establishing an FCD in Montana, he said.
Nonetheless, officials believe there is a niche for Montana. But for the first year and a half, the state covered all planning, implementation and regulation activities for the new industry with existing staff. In hopes of finally attracting its first depository, late last year the state hired a consultant—a German national living in the United States with good financial connections in Europe—to help market the opportunity overseas. The consultant was able to quickly place some high-profile stories on Montana FCDs in Germany's financial media.
"The trap door opened," Hutchinson said, as several potential depositories have expressed interest, but have not yet completed the application process. The consultant's ultimate responsibility is to help close deals by guiding interested depositories through the application process—according to Hutchinson, "someone to answer questions and do status checks and cross-business applications."
Southerly competition
Despite the fact that Montana has yet to establish its first depository, a number of states are following its lead. Colorado passed enabling legislation this summer that "closely mirrors Montana's legislation," according to Richard Fulkerson, state bank commissioner for Colorado. Like in Montana, Colorado legislators saw FCDs as a potential revenue enhancer.
"It's certainly worth trying," Fulkerson said.
In a marketing tug-of-war with Montana, Fulkerson believed Colorado's "international sex appeal" and new airport would make it more attractive than its northern neighbor. But tapping this market is not an easy task. "There's not a wealth of information out there on FCDs," Fulkerson said. "There are no experts on this anywhere." Each country that allows offshore banking has its own set of regulations, and each FCD has different operating procedures and target markets. As such, there is no "FCD template" for newcomers to model.
Hawaii investigated the opportunity as well, and decided it was not worth the effort. A task force found that Hawaii would likely have "very limited success" in FCDs, incurring high marketing costs and facing hard-to-define regulatory and enforcement expenses. Given these challenges, along with a limited menu of products available to depositors, the task force recommended the state not pursue legislation because "local depositories would be at a competitive disadvantage." Despite many critics, Montana officials are still sold on the idea, and think it's time will come.
"I hope it hits," Hutchinson said. "I'll do anything to help Montana."
"Somebody's going to do it," Sprague said. "If not us, who?" Two years ago, advocates were touting potential tax windfalls of $1 billion. Having nothing to show but expenditures for their efforts, expectations have since been scaled back dramatically. Hutchinson said there is no sunset on the existing legislation, but added that he and other top government officials are "going to have to make a cutoff decision" if no FCDs materialize—probably by the end of next year, once the Euro has had a chance to settle in.
"Let's see what we get out of Europe," Hutchinson said. "That's where all the money is, the clean money."
Sprague said he's received many calls from potential depositors looking for advice on where to put their money. While Montana works to open its first FCD, Sprague said, "I tell them to use my garage."
—Ronald A. Wirtz
