Why you should consider trust accounts when expanding abroad

3 January 2019
One of the most frequently overlooked challenges of international expansion is opening a bank account. As with any area of international expansion, the time and costs involved will vary depending on the nature of your activities, target-country regulations and other factors.

Far more often than not, however, our clients are surprised by how difficult and time-consuming it is to establish a bank account in another country. Unfortunately, related delays can have serious consequences, since establishing a bank account in a target country may be a prerequisite for establishing a local legal entity, running a payroll and paying corporate taxes there.

KYC and other burdens associated with opening a bank account

There are good reasons why establishing a bank account takes time. To begin with, most countries have strict banking regulations to combat money laundering, bribery and terrorism. Often called know your customer (KYC) regulations, these laws require a bank to verify its customers’ identities and their business relationships. Not only are these kinds of regulations widespread, they’ve been in place for years.

Given that KYC requirements are nothing new, it may come as a surprise that the process of opening a bank account is in many countries becoming more, not less, burdensome. A recent article in Forbes discusses a survey that found US KYC laws contributed to a 22 percent annual increase in the time it took to onboard corporate clients in 2016, and that banks expected an increase of another 18 percent in 2017.

That survey addresses the time it takes for banks to conduct the KYC process — it says nothing about the considerable client burdens associated with fulfilling KYC requirements. We’re in the business of helping facilitate this process, and in recent years it’s become increasingly difficult to get a bank account set up in a client’s own name, with banks often requiring myriad details on every shareholder in the company.

In addition, KYC requirements are not uniform across borders or even at banks within the same country. This means that when a business painstakingly fulfills KYC requirements in one country, it must repeat the process when it opens an account in another country (or even at another bank in the same country).

There are moreover many country-specific laws related to banking that have nothing to do with KYC regulations. These laws will determine what kinds of payments need to be made from where and by whom. For example, France’s new withholding tax law — which went into effect January 1, 2019 and requires employers to make income tax deductions from their employees’ pay checks — requires some employers to remit these withholdings to local authorities from a French bank account.

There are other considerations, such as finding a trustworthy bank that can meet your needs — from paying local vendors to reimbursing employee expenses to making cross-border transactions. Keeping track of it all can be confusing and costly.

The trust account solution

A trust account can in many situations be used instead of a foreign bank account (or multiple bank accounts) when operating internationally. In this context, a trust account is an account established by a third party — such as an international expansion provider — to make payments on behalf of a client.

In the right situation, a trust account offers a simple, cost-effective solution to making payments. Here’s how it works: Your international expansion provider will have established accounts in various currencies at its bank. (We, for example, have 28 currency accounts with a certain UK bank for the purposes of creating and managing trust accounts for our clients.) Each currency account holds money in a particular currency, such as the US dollar, euro, pound sterling, etc.

The provider will fund each of these currency accounts with money from its clients, in individual trust accounts that effectively make up each of the currency accounts. The process is outlined below, but you can think of trust accounts almost like sub-accounts or subfolders — each in a client’s name — that make up the larger currency accounts owned by the provider.

The provider will of course keep track of how much money each client has in their respective trust accounts. We for example use a secure virtual accounting platform to segregate each client’s trust-account funds within each of our 28 currency accounts.

The process

Once your provider establishes a trust account (or multiple trust accounts) in your name, each month it will calculate the funds you’ll need to make payroll, remit withholdings to local authorities, pay vendors and fulfill other obligations in each of your countries of operation. The provider will send you these payment details in a funds request. You will then make one wire payment to your provider, typically in your home currency (e.g., US dollars), to cover the costs outlined in the monthly fund request.

The provider then does the rest, settling your liabilities in all your countries of operation through your trust account(s), at the right time and in the right currencies. At the end of the month, your provider will send you information detailing how and when your funds were dispersed.

A typical scenario

Here’s a typical scenario showing how the trust-account process works. Let’s say you’re a US-based company expanding into the UK and Hong Kong. You contract with an international expansion provider to establish legal entities, run payrolls, keep the accounting books, and remit taxes in the two target countries. You want to use trust accounts to make payments in each country, rather than going through the burdensome process of establishing local bank accounts.

The provider, which has a relationship with a UK bank, sets up three trust accounts in your name in three separate currency accounts — a US dollar account, a pound sterling account and a Hong Kong dollar account. The provider will use your US dollar trust account to accept your wire payments and disburse funds to your pound sterling trust account and to your HK dollar trust account. The provider will use the last two trust accounts to make payments on your behalf in the UK and Hong Kong respectively.

Some advantages and limitations of trust accounts

In many cases, using trust accounts to fund your global operations eliminates the need to complete multiple KYC processes. Once you’ve completed the initial KYC process with your international expansion service provider, you’ll never have to complete it again, provided trust accounts can be used in all your countries of operation to make all payments. Given the ever-increasing burdens of the KYC process, this is a significant benefit of using trust accounts over bank accounts.

Trust accounts save time in other ways. A trust account can be established in a matter of days, in some cases on the same day it’s requested. As we’ve seen, the timeline for opening a bank account in another country is typically much than longer than that. Depending on the country and other factors, establishing a corporate bank account can take weeks or even months. Delays can lead to missed payrolls, an inability to pay local tax authorities and other problems.

Because trust accounts are typically established by a single provider at a single bank on behalf of many clients, you may receive other benefits. For example, given the large volume of clients and foreign exchange traded, you may benefit from exchange rates that you would not have been able to obtain as a standalone entity. In addition, an experienced international expansion service provider that manages trust accounts will understand the payment laws and accounting principles of your countries of operation, which may be unfamiliar to you. This experience alone can significantly lower your administrative burdens and compliance risks.

It should be emphasized that trust accounts won’t solve every international banking need. As I mentioned, some country-specific regulations will require you to set up a local bank account in order to establish a legal entity, make tax payments to local authorities and/or perform other functions.

In some cases, you may not be able to use your trust account to make direct debit payments, which can be the preferred payment method of insurance providers, utility companies, pension organizations and other suppliers. (That said, trust accounts can be used to make direct debit payments in some common situations.)

Not surprisingly, there is typically a set-up fee for opening a trust account. This fee, however, is usually immaterial and in any case must be considered in light of the time and costs of setting up and maintaining a bank account abroad. As we’ve mentioned, the burdens associated with bank accounts include fulfilling KYC obligations, often more than once. You will likely also have to maintain a local signatory responsible for the bank account and pay maintenance fees, neither of which is required when using trust accounts. You’ll also want to consider the favorable exchange rates you’ll enjoy with trust accounts.

In short, if you’re expanding internationally, your due diligence process should include looking at the possibility of trust accounts to meet your global payment needs. In many cases, the benefits of using trust accounts over bank accounts will make your decision an easy one.