Cyprus: A Lesson in Safe Banking Practices

Consider Cyprus. A member of the European Union, Cyprus had long been a popular offshore center for Russian business. The two countries share an Orthodox Christian heritage, and Cypriot banks had become well versed in the services their Russian clientele required. Membership in the EU offered some assurance of political and — arguably — economic stability.

With a population just over one million, Cyprus is not the smallest country on the planet, and its annual output of roughly $23.5 billion is respectable for a nation its size. Yet the bailout Cyprus sought from the European Union approached $7 billion — nearly a third of its entire annual output. By any measure Cyprus was in real financial trouble, and its citizens were unwilling to rescue the banking sector without help from the EU or Russia.

The firm is keenly aware of the risks clients face when banking in offshore jurisdictions. As difficult as Cyprus’s position was, its population is some thirty times larger than that of the typical jurisdiction used for asset-protection planning. Most asset-protective jurisdictions are not members of the European Union, and a rescue from a much larger neighbor is highly unlikely in the event of a bank failure in a small Caribbean or Pacific island jurisdiction.

The lesson is to conduct one’s banking somewhere other than where one conducts business and estate planning. Sometimes a small offshore jurisdiction is the right place to bank — when asset protection is paramount — but even then there are asset-protective, financially stable centers capable of world-class service. World-class banking jurisdictions such as Hong Kong and Singapore can custody the assets of a structure that relies for its protection on the laws of an offshore jurisdiction with no measurable banking sector of its own. The planning jurisdiction and the banking jurisdiction need not — and often should not — be the same.