In order to form a new offshore bank in Puerto Rico, also referred to as an International Financial Entity (IFE), you will need to submit a number of documents to government regulators. Here’s a brief summary of the process to start a bank in Puerto Rico.
The process to start a bank in Puerto Rico can be broken down into 4 steps.
First, is the writing of a business plan.
In my experience, the most important step in securing and offshore banking license from Puerto Rico is a quality business plan. I suggest that drafting a quality business plan is 80% of the work that goes into an IFE application.
The introduction section of the business plan should match the Federal Reserve Bank of New York Business Plan guidelines. This is a summary of the business with financials and supporting information.
Then the business plan of an offshore bank in Puerto Rico should tell the story of the IFE. Who is building the bank, what market is it intended to serve, and what niche will it fill.
Writing the business plan can be a long and painful process. It just depends how long it takes me to learn your business and how many holes we need to fill in your plan and on your team. By the time the business plan is complete, all “risks” or areas of concern should have been dealt with and a solid image presented to government regulators.
To be honest, we look at the business plan for an IFE in Puerto Rico as a loss leader. Yes, we charge a flat fee to write the plan. But, the amount of effort that goes into most business plans far exceeds our hourly rate, thus we generally “lose” money on this stage of the project.
Second, file your permit to organize.
Once your business plan is complete, we prepare the application for a permit to organize (or preliminary license for an IFE). This submission will include the plan, financial reports on each shareholder, officer, and director, and police clearance reports from each shareholder, officer, and director.
Note that these police clearance reports can take time. If you’re from a foreign country, you’ll also need to have them notarized and apostilled (if from a treaty country). For information on US reports, see the FBI website.
Third, form your corporation or LLC, hire your employees and build out your bank.
A permit to organize is the authorization from government regulators to incorporate your banking entity and to set up an IFE on the island. You must have the permission to organize in hand before you can form a company that has the word “bank” in its name.
Now you need to build out your business. Set up an office, hire 5 people, buy and implement a core banking software and hardware system, contract with a correspondent banking partner, and do all of those things necessary to get ready to operate a bank from the island of Puerto Rico.
- The statute says you need 4 employees. I always recommend 5 in case you lose one.
Note that your IFE must operate from Puerto Rico to receive the 4% tax rate. Any income generated in the US is US source and taxable by the IRS. That is to say, only income generated from work performed on Puerto Rico is PR source and taxable at the discounted rate. For more on this topic, see: What is Puerto Rico Sourced Income for an Act 20 Business.
Fourth, we file your permit to operate and complete an audit with government regulators.
When you’re ready to go live, and you’ve run test transactions with your correspondent partner, you can file your permit to operate. Once filed, regulators will send a team to audit your computer systems and ensure they’re secure. If you’ve used US core banking software and traditional hardware, this should be relatively easy.
Note that you’re not required to set up your own IT system. You can outsource this, along with many KYC and AML processes, to an outside vendor. Most IFEs use one of Puerto Rico based IT platforms.
Your lawyers will also need to file a number of documents and sworn statements from the President / CEO. These basically confirm that you’ve hired the correct people and will abide by the KYC, AML, operational manuals, and compliance documents you’ve provided.
I hope you’ve found this article on the steps to build an offshore bank or IFE in Puerto Rico to be helpful. For more information, please contact me at email@example.com or call us at (619) 550-2743. We’ll be happy to assist you with an international financial entity in Puerto Rico.
Below is the process to negotiate a permit to organize from OCIF. You might also find my 300-page book on this topic to be helpful. See: Offshore Bank License Guide, available on Amazon Kindle.
Process for IFE permit to organize
Here is the process to negotiate a permit to organize with government regulators in Puerto Rico. This is a loose translation from the official Spanish version.
(1) The proposed articles of incorporation, partnership agreement or other written document establishing the international financial institution, or the certification required by § 3084 of this title;
(2) a nonrefundable application fee of five thousand dollars ($5,000) to defray the costs of the initial investigation, and
(3) such other documents as may be specified or required by the regulations of the Commissioner.
(a) Every application shall include:
(1) The identity and business history of the applicants;
(2) the city or town in Puerto Rico and the street and number or any other address where its principal place of business in Puerto Rico shall be maintained;
(3) the identity and business and credit history of any person who, directly or indirectly, possesses or controls or intends to possess or control ten percent (10%) or more in the capital of the proposed international financial institution;
(4) a statement of the assets and liabilities of any applicant and of any person who possesses or controls or intends to possess or control ten percent (10% ) or more of the interest in the capital of the international financial institution, or of the person of which the proposed international financial institution shall be a unit, for each of the three (3) years preceding the application;
(5) the identity and background of all proposed directors, and officials or persons who intend to act in a similar capacity in the international financial institution, and
(6) such additional information as may be required by the regulations of the Commissioner.
(b) Upon receipt of the sworn application, all the required documents, and the application fee, the Commissioner shall carry out any and all investigations of the applicants and the application, including a review of:
(1) The financial solvency, credit, banking experience and business integrity of the applicants, their directors and officers, or persons who intend to act in a similar capacity in the proposed international financial institution;
(2) the adequacy of the capital available for the operations of the proposed international financial institution;
(3) the adequacy of the articles of incorporation, partnership agreement or other written document belonging to any applicant and, when appropriate, of the articles of incorporation, partnership agreement or other written document establishing the proposed international financial institution, and
(4) the impact that the proposed international financial institution shall have on the economy of Puerto Rico.
(c) Expenses, in excess of the aforementioned five thousand dollars ($5,000), incurred by the Commissioner for the purpose of conducting the initial investigation, shall be defrayed by the applicants by means of a previous deposit made in accordance with the estimate. The Commissioner shall claim said investigation expenses from the applicants.
(d) Should the Commissioner determine that the results of his/her investigation are favorable, he/she may, at his/her sole and exclusive discretion, issue to the applicants a permit to organize an international financial institution, subject to such conditions as the Commissioner may establish.
(e) When the Commissioner issues a permit pursuant to the provisions of this section, the interested party shall file with the Department of State of Puerto Rico the articles of incorporation, partnership agreement, or other written document establishing the proposed international financial institution, or those of the person of which the international financial institution shall be a unit, as well as the certification provided for in § 3084(c) of this title in the case of a unit, and the permit issued by the Commissioner. The Department of State shall issue under its official seal a certification of the filing of the stipulated documents.