An offshore banking licence is a form of banking authorisation granted by a jurisdiction — typically a small island territory or low-tax financial centre — that permits the licensed institution to conduct banking business exclusively with non-residents of that jurisdiction. In other words, an offshore bank holding such a licence is legally prohibited from taking deposits from or providing services to the local population; its entire business model is oriented toward serving foreign clients. Offshore banking licences exist in jurisdictions such as the Cayman Islands, the British Virgin Islands, Vanuatu, and historically in places such as Nauru and Antigua. Some offshore banking licences — particularly those issued with minimal regulatory oversight, low capitalisation requirements, and little or no on-site supervision — have historically been referred to as “shell bank” licences, and the institutions holding them as shell banks.
From an AML compliance perspective, offshore banking licences are a significant red flag and a subject of explicit regulatory concern. The EU’s 4th AMLD and FATF standards both prohibit obliged entities from establishing or maintaining correspondent banking relationships with shell banks — defined as banks incorporated in a jurisdiction where they have no physical presence and are not affiliated with a regulated financial group. The concern is that offshore-licensed institutions operating without meaningful supervision can be used as vehicles for moving illicit funds across borders with minimal scrutiny. Even entering into non-correspondent relationship with shell banks must be very carefully considered and such clients should always be treated as EDD entities.
