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Off-Shore Banking in Turkey

13 September, 2014

The turning point for regulating the market dates back to 2001 for Turkish banking industry after a major banking crisis in Turkey. The remediation efforts of government authorities have been supported by private banks and Turkey has had a new code on banking (Law No 5411) in 2005.

The Banking Law set out many provisions in depth however the offset banking was not promoted as it has never been a well regulated trading activity in Turkey. In this article you will find more about offshore banking in Turkey from legal perspective.

Before the Law No: 4389 abolished, offshore banking was much considered as it has provided some correlation between free trade zones and offshore banking. However the Law 4389 was not defining what offshore banking means and where it is applicable from Turkish law perspective. Pursuant to the Law No: 5411; the offshore banking refers to the banking activities performed outside the borders of Turkey or outside the coverage of the economic and financial legislation applied whereby the deposits and funds from the residents of the Turkey cannot be accepted. The Law No: 5411 requires that the details regarding the establishment of a bank to be engaged exclusively in offshore banking or the opening of a branch in Turkey by such banks established abroad for such purposes, and their fields of activity and financial reporting and audit procedures as well as the details regarding the temporary suspension or revocation of their activities shall be determined by Banking Regulation and Supervision Board decision.

Article 14 of the Law No: 5411 stipulates that; Banks established in Turkey may open branches or representative offices abroad, including off-shore banking zones, on the condition to set up undertakings or participate in existing undertakings comply with the corporate governance and protective provisions set forth herein and to comply with the principles to be established by the Banking Regulation and Supervision Board.

The free trade zones aims to increase foreign trade volume; to facilitate imports and exports, to accelerate technology transfers into the country in which the industrial and commercial activities are allowed.   Pursuant to the article 48 of The Regulation on Free Zones; Banks -excluding off-shore banks- and insurance companies located in a zone must operate in accordance with the general provisions. Banks in a zone give priority to extend loans to users in relation with their activities performed in the zone. This actually applies same to the insurance companies as these two field of activities requires permission from regulatory authorities as per the requirements of Turkish Commercial Code.

The said regulation also requires to form a special account that is opened at the Central Bank of the Republic of Turkey where revenues of Free Zones are collected and a fee amounting to 0,1% is collected on the revenues arising from the activities of banks without any classification. Moreover no special account fee is collected from banks which obtained an operating license after the 6th of February, 2004, and those which held a license other than production before this date but prolonged the duration of their operating license after the 6th of February, 2004.

Obstacles in offshore banking zones for local banks versus free zones advantages in Turkey for foreign banks

However the Regulation on Operations of Banks Subject to Permission and Indirect Shareholding (Published in Official Gazette Nr. 26333, dated November 1, 2006)   stands as the problem for banks operating in Turkey intending to open up overseas branches or representation offices, establishment of partnerships or participation in already established partnerships, as it refers to the offshore banking zones.

 Accordingly, the Banking Regulation and Supervision Board. may require the presence of a memorandum of understanding signed as per the law for cooperation and exchange of information with the competent authorities of the countries in connection with the requests concerning the off-shore banking zones so that auditing and supervision can be conducted effectively.

 This observed as an obstacle for Turkish banks to operate in offshore zone abroad however the existing the gap in law in setting out the rules of performing offshore banking activities, both the Law No:5411 and Law No:3218 do not restrict the performance of such activities in free zones providing the permission from Banking Regulation and Supervision Board for foreign banks.

As the Regulation on Operations of Banks Subject to Permission and Indirect Shareholding does not impose any extra liability for foreign banks to be operated in free zones of Turkey in contrary to the banks operating locally at the first glance the article 14 of the Law No:5411  might be construed as if there should be offshore banking zones to perform such activities in Turkey however even if the offshore banking zones are not set yet in Turkey,  such banking activities are seen possible in free zones as the Law No:3218 (Free Zones Law) allows to do so and the Regulation on Operations of Banks Subject to Permission and Indirect Shareholding directly refers the offshore banking zones abroad for effective supervision of banking.

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