Consumers and corporations use the financial system as a conduit for life management purposes and commercial objectives. Trust and public confidence in the financial system is critical to maintain its position. The global financial system and its participants are closely connected. As such, international regulators seek to mitigate the risk of contagion, as experienced during the Global Financial Crisis. Several safeguards are implemented to protect the public interest and avoid tax payer input for rescue missions of rogue financial institutions. Additionally, domestic depositor protection provides qualifying creditors with a capped guarantee for their bank deposit.
The Basel Committee on Banking Supervision addresses market discipline as an important pillar to promote safety and soundness in banks and financial system. Yet, while market discipline relates to risk exposure and information provision, a strong capital position does not protect against misconduct and moral hazard. On the contrary, it is arguable that enhanced capital cushions, a strong liquidity position and deposit protection contribute to excessive risk taking at the side of the financial institution.
Deposit protection follows one of the following administration and calculation methods. Some jurisdictions use plain insurance for general bank deposits where an insured event is covered by the payment of risk based premiums by an individual financial institution. Other jurisdictions create a general pool for coverage for bank deposits at all the banks and branches of foreign financial institutions in the jurisdiction. It is important to realize that licensed Electronic Money Institutions that provide IBAN account numbers are not covered under similar standards for deposit protection.
The purpose of deposit protection is to avoid disruption of the financial system and, on a micro economic level to limit panic that potentially leads to a run on the liquidity of a bank. Definitions and terminology are decisive factors for bank depositors to determine risk. The assumption that a Deposit Guarantee Scheme (DGS) protects all bank deposits is incorrect. To fully understand the scope of such DGS coverage, bank depositors can find the applicable framework and procedures in the directives and regulation on depositor protection that applies to the designated financial institution and its respective regulator.
Most visitors of the website Offshore Bank Failure hold personal or corporate bank accounts with European financial institutions. Global financial regulation on deposit protection has, broadly speaking, similar frameworks. This includes the domestic schemes in offshore financial centers. The size, scope and nature of the European single market give rise to the formulation and codification of several directives and regulatory requirements that help to comprehend the working of depositor protection for creditors of failing financial institutions.
Origins of depositor protection are built on distinct pillars. Financial institutions that operate in the European Economic Area and whose licensing agreement requires them to participate in a Deposit Protection Scheme (DPS), are subject to several directives and regulation. These include council directive to the taking up and pursuit of ‘Business and Credit Institutions (89/646/EEC), the council directive on the prevention of the use of the financial system for the purpose of money laundering (91/308/EEC), the directive on Deposit Guarantee Schemes (94/19/EC), and its 2014 recast directive (2014/39/EU). These directives seek to establish an EU wide, harmonized and thus uniform framework for the stability of credit institutions and their customers and creditors.
Deposit Guarantee Schemes (94/19/EC)
The European single market ensures a uniform legal framework of harmonization for its residents, both individuals and legal persons. The elimination of restrictions and the freedom to provide services is part of this framework and applies credit institutions. It therewith ensures for an increased stability of the banking system and the protection of bank depositors. Directive 94/19/EC applies to all credit institutions within the EEA, its customers and creditors. The directive provides guidelines for implementation of deposit insurance by individual member states.
Following the directive, every credit institution acting within the EEA must join a DGS. Branches of foreign financial institutions may or may not be part of domestic deposit protection in the host state. The application depends on the rules imposed on branches by the domestic regulator. Deposit protection does not apply to every bank deposit held with a domestic credit institution, or a branch of a foreign financial institution. The scope and applicability of direct and indirect protection is defined by several related directives such as 2014/39/EU, 2009/14/EC, 91/308/EEC, 89/646/EEC, and 77/780/EEC.
Amendments to directive 94/19/EC gradually raised capital protection to the current standard of 100.000 euro per qualifying individual or legal person by December 2010. Although directives have no direct effect, they seek to ensure a guaranteed outcome throughout the union. The era of inception of directive 94/19/EC sought for minimum harmonization. Changes and adjustments in the financial industry and further globalization required a different approach towards deposit protection.
Recast DGS directive (2014/39/EU)
Growing importance of the global banking and finance, and consequently the rise in wealth postulates for flexibility and a constant amendment of bank regulation and creditor protection. The Recast directive for deposit guarantee schemes in the EEA is the currently applicable framework, known as directive 2014/39/EU. This most recent directive applies to bank failures that occurred at banks with substantial non-resident creditor- and offshore company clientele in Cyprus, Latvia and Malta. Creditors in these bank failures used the information outlined on this page to minimize risk and maximize repayment.
The recast DGS directive aligned and customized depositor protection through out the union to protect the internal market and increase the stability of the European financial system. It broadened and clarified the scope of coverage and ensured fast repayment periods whilst maintaining improved information and robust funding requirements. The directive clarified the meaning of identifiable creditors that have their deposits protected up to a maximum insured amount against the consequences of the insolvency of a credit institution. Alongside the protection of customer deposits, the recast DGS directive addresses the implementation of Institutional Protection Schemes to ensure the liquidity and solvency of credit institutions.
Although the term ‘deposit protection’ may assume a uniform treatment for all creditors of credit institutions, there are several exclusions for coverage. Preclusion applies to collateralized deposits, deposits that can be used for offsetting purposes against credits, and electronic money and alternative funds. In relation to the disqualification of creditors, public authorities, financial institutions and depositors whose direct or indirect activities include or are subject to money laundering, should be excluded from repayment by a Deposit Guarantee Scheme. Further eligibility of deposits is discussed in Article 5 of Directive 2014/49/EU.
The Financial System and AML (91/308/EEC)
The DGS recast directive refers to prior definitions established in the Official Journal of the European Communities. Important definitions relate to money laundering and credit or financial institutions. Article 1 of the council directive on prevention of the use of the financial system for the purpose of money laundering defines all money laundering, credit institutions and financial institutions. Therefore, bank customers can derive clarity on the eligibility for deposit protection from these definitions.
‘Credit institution’ means a credit institution, as defined as in the first indent of Article 1 of Directive 77/780/EEC, as last amended by Directive 89/646/EEC, and includes branches within the meaning of the third indent of that Article and located in the Community, of credit institutions having their head offices outside the Community. Directive 77/780/EEC refers to the term credit institution’ as an undertaking whose business is to receive deposits or other repayable funds from the public and to grant credits for its own account. This definition remained the same in Directive 89/646/EEC.
‘Financial institution’ means an undertaking other than a credit institution whose principal activity is to carry out one or more of the operations included in numbers 2 to 12 and number 14 of the list annexed j to Directive 89/646/EEC, or an insurance company duly authorized in accordance with Directive 79/267/EEC (3), as last amended by Directive 90/61 9/EEC (4), in so far as it carries out activities covered by that Directive; this definition includes branches located in the Community of financial institutions whose head offices are outside the Community. Due to its critical importance, the definition of a financial institution for the purpose of DGS protection is discussed below under the tab ‘The Business of Credit Institutions (89/646/EEC)’.
‘Money Laundering’ means the following conduct when committed intentionally:
- the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such activity to evade the legal consequences of his action;
- the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity;
- the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity;
- participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions mentioned in the foregoing paragraphs.
Knowledge, intent or purpose required as an element of the abovementioned activities may be inferred from objective factual circumstances. For the purpose of DGS exclusions, the definition of money laundering is amplified by Directive 2005/60/EC. Alongside the four points above, money laundering shall be regarded as such even where the activities which generated the property to be laundered were carried out in the territory of another Member State or in that of a third country.
The Business of Credit Institutions (89/646/EEC)
Comprehension of rules, regulation and its applicability is paramount for corporate creditors in (offshore) bank failure. Approval of a deposit guarantee claim depends on the creditor, business activities and the legitimacy of the deposit. To determine whether deposit protection applies, the second council directive on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (89/646/EEC) provides final clarity.
The directive lays the foundation for the definition of banks, credit institutions and financial institutions. Following the directive, a ‘financial institution’ shall mean an undertaking other than a credit institution the principal activity of which is to acquire holdings or to carry on one or more of the activities listed in points 2 to 12 in the Annex. These activities include:
- Acceptance of deposits and other repayable funds from the public.
- Lending, including consumer credit, mortgage credit, factoring, with or without recourse, and financing of commercial transactions (including forfaiting).
- Financial leasing.
- Money transmission services.
- Issuing and administering means of payment (e.g. credit cards, travellers’ cheques and bankers’ drafts).
- Guarantees and commitments.
- Trading for own account or for account of customers in:
- (a) money market instruments (cheques, bills, CDs, etc.);
(b) foreign exchange;
(c) financial futures and options;
(d) exchange and interest rate instruments;
(e) transferable securities.
- (a) money market instruments (cheques, bills, CDs, etc.);
- Participation in share issues and the provision of services related to such issues.
- Advice to undertakings on capital structure, industrial strategy and related questions and advice and services relating to mergers and the purchase of undertakings.
- Money broking.
- Portfolio management and advice.
- Safekeeping and administration of securities.
The repayment of insured bank deposits follows a strict procedure to avoid payments to incorrect or disqualified beneficiaries. Although repayment should be made within 7 to 20 days after the claim is filed, administrators of the fund may need longer to determine the feasibility of a claim. Administrators may request further information on the activities that led to the value and balance of the account.
Exclusions of DGS coverage
The ground rule in global deposit protection is that bank deposits held with regulated credit institutions are insured up to a pre-defined and capped maximum. Coverage depends on the beneficiary, business activities and source of fund of the claimant. The claimant must be known in the records of the bank. As revealed in the paragraphs above, not every bank deposit and creditor qualifies for deposit protection and creditors therefore should assess their coverage during the bank account opening procedures. When the account is already opened and active while a credit institution fails or is likely to fail, creditors should use the directives and guidelines to their advantage.
Over the years, European deposit guarantee schemes in Andorra, Belgium, Cyprus, Latvia and Malta paid out insured account balances to creditors. Many claimants saw their deposit guarantee claim approved while others were rejected. To avoid such rejections appropriate preparation is recommended and safeguards can be found in the correct application format.
Your Deposit Guarantee Claim
Deposit guarantee schemes must verify and confirm the legitimacy of a deposit guarantee claim and the identity of the claimant. As such the DGS administrator often requests the claimant to visit the premises of the administrator to verify the proof of debt and claim and sign the claim form. For non-resident depositors this may cause some organizational challenges. These difficulties are emphasized by administrative tasks and other burdens imposed on the claimant.
Failure to comply with the rules can result in rejection of the deposit guarantee claim. Accordingly, claimants must ensure that their claim form is substantiated by the appropriate documentation. Supporting evidence must be presented when control mechanisms allege that the beneficiary, company structure, and activities give rise to disqualification or DGS exclusion.
Non-resident creditors in offshore bank failure are often unaware of the exact procedures for administration, resolution and dissolution. As such they risk being disqualified to receive their insured deposit. Rejection of a deposit guarantee claim migrates the full deposit from a secured (but capped) and protected deposit into an unsecured claim in future liquidation procedures.
An analysis of risks and the reward of a successful deposit guarantee claim should refrain from uncertainty and thus maximize its potential. Therefore, Legal Floris LLC helps creditors in global (offshore) bank failure with Done with You, No Cure No Pay Recovery Services. Our objective is to use a domestic DGS to its full potential and your advantage. Even where a deposit guarantee claim is initially rejected or additional information is requested by the DGS committee, we strive for approval with an administrative second opinion. Creditors in (offshore) bank failure must understand that most decisions during the staged liquidation procedures are final and that second chances and case re-openings are exceptional. This is not something that creditors should rely on.
To clarify the no cure no pay recovery services for deposit guarantee claims we will help you to prepare with and complete the claim filing process and guide you through all the requirements for swift and easy claim approval and deposit repayment. Creditors only pay for this service upon completion when repayment of the insured amount is done and the creditor has access to the insured amount again. A deposit guarantee claim is one of the first substantial prepayment options in a total asset and fund recovery procedure. Future proceedings such as settlements, court orders and insolvency derive credibility from the approval or rejection of the deposit guarantee claim. As such, it is mission critical for asset and fund recovery to take reasonable care.
More information on the done with you, no cure no pay recovery services for deposit guarantee claims can be obtained by completing the contact form below. There is no obligation to retain our services, whilst the possibilities for asset and fund recovery will be discussed with you.