Why Bank Accounts Belonging To African Startups Were Frozen By US Bank Mercury
In an email to an African startup incorporated in the US state of Delaware (name withheld on confidential grounds), US-based bank Mercury wanted to know the startup’s core business, the list of all US investors that have ever invested in it, and explanatory notes (attaching all relevant documentary evidence in support) about all transactions that had ever taken place on the account. The email followed a related one, late February, that Mercury’s compliance team had flagged the startup’s account for review as a result of which a temporary restriction had been placed on the account.
Initially at cross-roads (considering that staff salaries were due for payment), the confused founder of the startup sought to know why everything was happening now, instead of the dates the transactions occurred. The founder groaned that the bank could have demanded clarification on the occasion of each of the several transactions the startup had conducted.
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This is one out of many of such restrictions reported last week across Africa by founders whose bank accounts with Mercury were restricted.
Mercury is a neobank that partners with Evolve Bank & Trust, which claims it is a global leader in the payments industry. Founded in 2019, Mercury describes itself as a bank for startups. That same year, the startup raised $20m Series A funding round led by CRV with support from Andreessen Horowitz, the VC that had earlier led the startup’s $6 million seed round.
Why The Restriction?
It is not surprising that the founder of the African startup earlier mentioned had received the email blocking the startup’s Mercury bank account on Monday February 28, the same day the Biden administration announced additional sanctions against Russia’s central bank, effectively prohibiting Americans from doing business with the bank and freezing its assets in the US.
It is not also surprising that Mercury bank had demanded a list of all US investors in the startup, pointing to the possibility of closer scrutiny on the identities of the general partners behind the venture capital firms that invested in it.
Previously, the neobank’s selling point has been to help U.S. companies founded by people from all over the world.
“You can open your account right from your laptop without needing to visit the U.S.,’’ the neobank says.
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Despite the fact that it accepts founders from all over the world, it also states that there is a limit to how far it can go.
“We can’t currently open accounts for founders living in the following countries: Albania, Belarus, Bosnia, Burundi, Central African Republic, Croatia, Cuba, Cyprus, Democratic Republic of the Congo, Iran, Iraq, Lebanon, Liberia, Libya, Macedonia, Montenegro, Nicaragua, North Korea, Russia, Serbia, Slovenia, Somalia, South Sudan, Sudan, Syria, Ukraine, Venezuela, Yemen, and Zimbabwe,” Mercury notes.
What is not clear, however, is when the list was updated. Previously before Russia invaded Ukraine on February 24, the list included, among others, Ukraine/Russia (Crimea), and nothing more.
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It should also be noted that the list of sanctioned countries in the United States varies from time to time, in accordance with the US Treasury Department’s Sanctions Programs and Country Information.
In any case, the affected African startups were qualified to be hosted by Mercury in the first place. Mercury notes that it can accept most U.S. companies that aren’t money service businesses or involved with adult entertainment, marijuana or internet gambling.
“Our product is geared towards tech companies, so it might not be the best fit for some other businesses, especially ones that frequently deal with physical cash. We also can’t open accounts for sole proprietors or trusts,” Mercury adds.
Therefore, it seems that African startups with accounts in Mercury may have been caught in the cross fire in the war between the US-backed Ukraine and Russia.
Why Do African Startups Incorporate And Domicile Bank Accounts Abroad In The First Place?
One thing has always been clear since the start of the startup bubble in Africa: a lot of local startups are increasingly being registered in offshore territories. Additionally, they are maintaining their bank accounts there.
The reasons are not far-fetched. A recent report from African Venture Capital and Private Equity Association says that foreign-registered companies significantly shape the continent’s early stage startups funding landscape.
The report notes specifically that about one fifth (21%) of the total number of VC deals between 2014 and 2019 went to startup companies headquartered outside of Africa. Of these companies, the majority (53%) are based in the United States.
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Therefore, foreign-based investors in African startups, in most cases, demand that investments be made only through foreign-domiciled bank accounts. Usually, the demands are based on concerns about political, fiscal, economic (particularly tax), social, or cyber-security dangers linked with direct investments in certain African countries.
What Happens To African Startups With The Frozen Accounts?
While the deed had been done, it is critical that African startups who wish to keep their bank accounts in the United States and related jurisdictions conduct extensive due diligence on their business partners and investors in the future, and screen them against the US Treasury Department’s Sanctions Programs and Country Information, as well as other similar sanctions lists.
It’s also a good idea to ramp up compliance checks on overseas transactions in general.
In the mean time, the impacted founders may have to establish beyond a reasonable doubt that transactions made on their frozen accounts are not subject to any compliance issues.
If they fail to do so, the affected accounts may be blocked for an extended period of time.
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Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer