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Blockchain and cryptocurrency are the future of offshore banking

07/27/2017/0 Comments/in Articles, Banking Offshore, International Business, Offshore Bank License, Puerto Rico Tax Incentives/by Christian Reeves

As I watch the offshore banking industry fight it’s way back to respectability and profitability, I expect blockchain and cryptocurrencies to play a major role in the comeback. Small offshore banks are down, but far from out. Blockchain and cryptocurrency will bring with them a paradigm shift in costs, allowing offshore banks to compete with their larger counterparts in top tier jurisdictions.

Note that I’m talking about the systems and technologies behind blockchain and cryptocurrencies in this article. About the value of blockchain in the offshore banking industry. So, let me get the volatility issue out of the way up front.

Yes, Ethereum, Bitcoin, and the rest are volatile. Ethereum lost about 50% of it’s value recently, and Bitcoin 25% before making a comeback on a deal to prevent the “fork.” And some believe the Ethereum market is a major bubble because of ICOs.

Such assets don’t fit well onto the balance sheets of certain offshore banks because of the regulatory policies of Central Banks.

For example, Belize is not the jurisdiction for an offshore bank that holds cryptocurrency. Their basic capital requirement is 20% and goes higher the more volatile the asset. Want to hold $1 of pink sheet stock? You need $1 of cash on your books.

But there are offshore jurisdictions that are working to attract Crypto banks. For example, the US territory of Puerto Rico just issued a license for a Cryptocurrency International Financial Entity (their version of a banking license). Dominica is also active in the issuance of quality offshore banking licenses and makes allowances for cryptocurrency.

And a number of open-sourced groups have been formed to increase the availability of blockchain technology for offshore banks. For example, the Enterprise Ethereum Alliance became the world’s largest open-source blockchain initiative on July 18, 2017. With members like MasterCard, Cisco and Scotiabank, I have high hopes for this team.

Scotiabank makes EEA interesting as as association offshore banks. Scotia holds a banking license in Puerto Rico, and licenses throughout the Caribbean, but no US license. Scotia is closely tied to Bank of America, and has offices in the United States, but no US charter.

With that said, the value of blockchain and cryptocurrency for offshore banks is in the following three areas:

The ability to transmit FIAT and cryptocurrency via blockchain outside of the high cost legacy systems like SWIFT and Fedwire.
The ability to transact without the oversight and compliance costs of a correspondent bank.
The ability to finance through ICOs and act as a platform for international ICOs for your clients.

Operational Efficiency

I believe that, because of it’s ability to transmit efficiently, blockchain will revolutionize the offshore banking industry. Offshore banks are being crushed by the high costs of compliance and by the outdated systems they’re forced to use.

When a small international bank wants to send a wire, they need to ask their correspondent for permission. Then the correspondent charges a fee, an agent takes a cut (if it’s a nested account), SWIFT charges a fee, and so on. Many banks are forced to charge $100+ to send a wire and net $15 per transfer.

As a result, the only service an offshore bank can offer is wealth management and cash management / retained earnings. You can’t run most business accounts through an offshore bank because the wire fees will eat you alive. Likewise, you can’t easily make payments to vendors or make small transfers in any currency. And, finally, very few clients want to go through the hassle of sending an international wire.

An offshore bank operating over blockchain, or network like Ripple, can send FIAT or crypto ledger to ledger, thereby bypassing high cost wire systems. This will allow them to transmit money across borders at little or no cost.

Once these blockchain systems become available on a wider scale, offshore banks will be able to compete with larger correspondent banks who currently have a monopoly on money transmissions.

I don’t think we’ll need to wait long for blockchain to dominate the offshore banking industry. I have clients setting up in Puerto Rico now under Act 273 that will transfer multiple FIAT currencies over blockchain.

Offshore Bank Compliance Issues and Blockchain

Then there’s the ability to control your compliance costs by reducing or eliminating your exposure to correspondent banking partners. The bane of any offshore bank is correspondent banking. Ask any international banker what they worry about and they’ll say correspondent banking, compliance risks from corresponding partners, and how to keep their correspondent accounts open.

All quality banks will need to deal with AML and KYC. No matter how you transact, you must protect your bank from money launderers and criminals. On the other hand, FATCA and KYC (or even KYCC, Know Your Customer’s Customer), are out of control. The United States and the EU can fine an offshore bank out of existence for an honest mistake and everyone is running scared. Most of these compliance requirements are being pushed upon offshore banks by their correspondent partners.

Reducing the number of transactions processed through your correspondent bank reduces costs, reduces compliance, and allows you to do business on your terms, not those imposed by a global bank.

Someday, you might be able to eliminate the the correspondent parter all together which will change the game. For more, see: How to Setup a Bank for the Marijuana Industry.

Initial Coin Offerings and Offshore Banks

Finally, there’s the ICO market. For many reasons, these offerings are best facilitated by an offshore bank. The bank is best suited to perform the due diligence, secure the transaction, issue the tokens, hedge that token, and providing the FIAT currency against the Crypto that comes in.

ICOs have allowed startups around the world to raise hundreds of millions of dollars by issuing digital tokens. Over half a billion dollars has been raised through these Initial Coin Offerings in the first 6 months of 2017. Amazing growth considering the ICO didn’t even exist 2 years ago.

And the speed of these ICOs is incredible. Genosis raised $12 million in 10 minutes back in April while Brave took in $35 million in less than 30 seconds. Demand for ICOs is strong and the opportunity for offshore banks is significant.

Running these ICOs through an offshore bank will maximize the privacy of the investors and may reduce SEC and other regulations. Operating outside of the purview of US regulators is sure to unlock capital and allow investors to place their capital more efficiently.

And there are plenty of reasons people prefer to hold their crypto offshore. For example, privacy, asset protection, etc. Also, the US IRS is in the process of auditing most crypto accounts at CoinBase. They can do this because of a John Doe summons issued to the brokerage last year.

While there are ICOs which are open to all US persons, the SEC just issued guidance saying that ICOs are regulated transactions (Reg D, Reg S, accredited investor standards, etc). The government hasn’t prosecuted anyone yet, but we all expect they will… and when that happens, some heads will roll. The SEC issued its first statement on ICOs July 25, 2017. See: Using a blockchain doesn’t exempt you from securities regulations.

It also appears that US brokerages will be subject to the money transmission laws of each state. See: Washington’s New Cryptocurrency Exchange Rules Are Now in Effect.

If an offshore business were to run an ICO through an offshore bank, they should avoid these regulations. Of course, you can’t market the offering in the United States without registering and must follow the KYC and AML rules of your jurisdiction. But, the use of an offshore bank for an offshore ICO is sure to reduce costs and streamline the process.

I’m also looking forward to the first ICO by an offshore bank. A high tech international bank focused on privacy and blockchain is a perfect candidate for a big dollar ICO. For more, see: How to Raise Money for an International Bank.

Conclusion

I hope you’ve found this article on why I believe blockchain and cryptocurrencies are the future of offshore banking to be helpful. If you’re considering forming an offshore bank, you might also read through Tax Planning for an International Bank License.

For more information on setting up an offshore bank, or for assistance in opening a correspondent account, please contact us at info@premieroffshore.com or call us at (619) 483-1708.

Tax Planning for an International Bank License

06/25/2017/0 Comments/in Articles, Offshore Bank License, Puerto Rico Tax Incentives, Taxation/by Christian Reeves

Tax planning for an international bank license is the most overlooked issue in startup banks. Sure, most offshore jurisdictions don’t tax your profits, but other countries will be looking for their cut if you set up an office or hire employees outside of your licensing jurisdiction. Here’s what you need to know about tax planning for an international bank license.

This article is focused on international bank licensed entities, sometimes referred to as Class B banks. An international bank is usually setup in a low or no tax offshore jurisdiction. As a condition of the license, these banks are prohibited from doing business with locals but can offer all manner of international banking services.

Countries either charge a large annual fee to allow an international bank to operate in the country, or a small tax on your earnings and profits. For example, the Cayman Islands Monetary Authority charges about $87,000 a year, plus other fees, to maintain an international license. Cayman won’t tax your business and makes their money on the annual fees.

I don’t consider Panama here because this country doesn’t issue international banking licenses to startup banks. You must have an existing license from a major jurisdiction to get an international license in Panama.

Smaller countries like Belize charge an annual fee of $15,000 and Dominica $10,000. Puerto Rico charges 4% tax on the net profits of the bank and a $5,000 annual fee.

So, the tax rate on income earned by an international bank will be 0% to 4% depending on the jurisdiction you select. That’s all fine and good… so, why does and international bank need “tax planning?” Taxes are very low no matter where you set up.

Here’s the catch: These 0% to 4% tax rates apply to income earned by the bank in its country of licensure.

If you license an international bank in Dominica, all your employees are in Dominica, and all work to generate the earnings of the bank are performed in Dominica, then 100% of the profits of the bank are Dominican sourced income and zero tax will be paid in Dominica.

But, what if you have an international banking license in Dominica, a small office with 2 employees on the island and 30 employees in the UK? The vast majority of the income of the bank will be allocated to the UK and taxed at 19%.

Do you also have a trading desk in Hong Kong? Then some of the profits will need to be allocated to that country and taxable at 16.5%. How about a sales office in the United States? Then income allocatable to that office will be taxed at 35%.

The bottom line is that income is sourced to the country where the work is performed to generate those profits. An international banking license gets you 0% to 4% on income earned in the country where you are licensed. All income earned abroad will be taxed where your employees are located.

Thus, tax planning for an international banking license includes two main components:

Maximizing the value attributable to workers in the country that granted your international banking license, and
Allocating income between your country of license and your foreign offices. This is a form a transfer pricing.

How much tax planning your international bank will need will depend on your business model. If you require 5 employees for a high dollar low volume business, then Dominica and Cayman will be fine. If you need 20 employees to start and plan to grow to over 100, then you should focus on Puerto Rico are a more advanced global tax strategy.

The simplest form of tax planning for an international bank is where all work is performed in your country of licensure. This is difficult in Belize with its population of 350,000 and nearly impossible in n Dominica with only 72,000 residents. While there is an abundance of professionals in Cayman, the costs of living and doing business on this island are very high.

The exception is the US territory of Puerto Rico. With a population of 3.5 million, and lower costs of doing business than any State in the Union, Puerto Rico is the most efficient jurisdiction for an international bank that will require a large number of employees. In fact, Puerto Rico is probably the only choice for a high volume transactional international bank if you want to keep your corporate tax rate below 15%.

There are international banks with over 400 employees in Puerto Rico and startups projecting 180 coming online. Puerto Rico is the only offshore jurisdiction that can support these numbers.

Yes, Puerto Rico is relatively large compared to other offshore banking jurisdictions, but that’s just part of the puzzle. Any US citizen can move to Puerto Rico and begin working… no visa, residency permit, work permit, or other red tape.

This means that an international bank licensed in Puerto Rico can move anyone it likes from the United States to the island. This gives you a virtually unlimited employment pool if you have the cash to entice them to move.

For these reasons, the fastest growing international banking center is Puerto Rico. The Island has 63 international banks operating now and 12 are in process. These banks will launch in 2 to 6 months.

This compares to 6 international banks in Belize, 15 in Dominica and 147 in Cayman (who has a 20 year head start on Puerto Rico). I expect Puerto Rico to surpass Cayman in the next 2 or years.

I hope you’ve found this article on tax planning for an international bank license to be helpful. For more on negotiating a bank license from Dominica, see: How to get an Offshore Bank License in Dominica.

For more on international bank licenses, see:

For more on Puerto Rico see:

For assistance in setting up a new international bank, or to negotiate a new correspondent account, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

How to Raise Money for an International Bank

06/21/2017/0 Comments/in Articles, Banking Offshore, International Business, Offshore Bank License/by Christian Reeves

Blockchain and cryptocurrencies are the future of offshore banking. Ledger based protocols allow offshore banks to compete with legacy banks by reducing wire transfer and remittance costs. Now, cryptocurrency has become the best way to raise money for an international bank.

Here’s how to raise money for an international bank with zero filing requirements, no Securities and Exchange Commission rules, no quarterly reporting, and no required public disclosures. Here’s how to fund an offshore bank with an ICO (Initial Cryptocurrency Offering).

The problem for an offshore bank in selling shares directly are obvious. Shareholders have zero liquidity. Their only exit is to hope the bank is acquired or some random person comes along to buy their shares at a premium.

Don’t even think of an IPO in a major market with an international banking license. Even if you could get listed, the regulation would kill your business. That leaves you to pink sheets or small exchanges like Panama or the Eastern Caribbean Securities Exchange… and we’re back to zero liquidity.

Cryptocurrency can solve this problem. Offshore and international banks can now raise money and provide liquidity to their shareholders through cryptocurrency. No matter where you’re licensed, Dominica, Cayman Islands, Cook Islands, Puerto Rico, Gibraltar, Luxembourg, and anywhere inbetween, you can now issue “cryptoshares” which are 100% liquid.

A company called Bancor has developed a protocol that allows anyone to issue their own digital “smart tokens.” These tokens are linked to a cryptocurrency and can be converted at any time by the owner. This provides liquidity and a market price from day one. Click here for a whitepaper by Bancor.

And we’re talking about real money here. Bancor used it’s token protocol to raise nearly $150 million in 3 hours!

Bancor issued its own tokens and raised about 390,000 Ethers (a crypto-currency that competes with Bitcoin) in its initial coin offering. That’s $147 million spread over 11,000 buyers. According to Bancor’s website, this is the second-largest fundraising campaign in the blockchain industry.

Bancor will hold 20% of its tokens in reserve to ensure liquidity. They’ll convert what they need to dollars to use it as any startup does, for operating costs and to grow the business. The investor hopes the value of the business, and thus the value of their tokens, will increase.

Of course, the investors are taking a risk that Ethers will go down in value. But, that’s the crypto game. Also, the tokens can be revalued and linked to any crypto or FIAT currency the investor chooses, providing the buyer a hedge or FX option not available in other investments.

Bancor is new and not yet available to the public. There are operating ICO platforms in China and one ready to launch in the United States. However, the US market will require SEC and Reg D compliance. Click here for an article from Wired on the topic.

Here’s why an ICO is the perfect way to capitalize an international bank: In an ICO, investors don’t get equity in the venture, nor do they lend money… they speculate on the future value of the tokens they buy.

So, in theory, the transaction doesn’t need to be reported to the bank’s regulators. No due diligence from the regulator, no background check, and none of the headaches associated with selling equity in an internationally licensed bank.

In order to minimize your disclosure requirements, I would add two caveats:

Have your international banking license, or at least your preliminary offshore banking license / permit to organize, in hand before announcing any intention to issue an ICO.
Form a holding company that owns the cryptoshares of the bank and sell tokens from that entity. This corporation might be registered in a jurisdiction different from where the bank is licensed and modeled after a US bank holding company.

In most jurisdictions, you’ll receive a preliminary international banking license before you’re allowed to go live. The costs to secure this license are relatively low. Once it’s issued you can go out and raise capital.

For example, you’ll get a permit to organize from Dominica with $1 million in capital and about $100,000 spent on a business plan and legal services. You’ll get a preliminary license from the US territory of Puerto Rico at about the same cost, but don’t need to put up the corporate capital ($550,000) until you’re ready to launch.

The permit to organize is a preliminary license from the government that indicates their willingness to issue a full license once you comply with certain requirements. A permit to organize allows you to incorporate your company, hire employees, lease space, set up your IT, and raise capital using the word “Bank” in your company’s name.

Moving from the permit to the full license is a mechanical process because the government has already approved your people and your business model. Securing the permit before you raise money eliminates much of the risk for the investors.

Because of the liquidity and privacy afforded investors, and the relative ease and reduced costs for the bank, I believe an ICO is the most efficient method for international banks to raise capital.

And cryptocurrency and blockchain are natural extensions of the modern offshore bank. From correspondent banking to the transfer of FIAT currency, blockchain is where it’s at for offshore banks.

See, for example: Correspondent Banking Powered By Machine Learning And Using Blockchain

I hope you’ve found this article on how to raise capital for an offshore bank helpful. For more on setting up an international bank or raising capital, please contact me at info@premieroffshore.com or call (619) 483-1708.

The 8 Components of an Offshore Bank License

05/23/2017/0 Comments/in Articles, Banking Offshore, Offshore Bank License, Offshore Banking/by Christian Reeves

When building a new offshore bank, you need the following 8 components: The business plan, the capital, the people (board of directors, management, and employees), the computer systems, the compliance system, the license, a correspondent account, and a tax plan. These are the 8 components to negotiate an offshore bank license and set up a new international bank.

These 8 components are somewhat unique to offshore banking. Because you’re entering a licensed and highly regulated industry, building a new offshore bank requires you develop each of these areas to the satisfaction of your licensing board.

A new offshore bank obviously needs all the same things any startup would, such as a solid business strategy, sales, money, experienced people, etc. This article is on the 8 components an offshore bank required which are different from a standard business.

The Business Plan

An offshore bank requires a very detailed business plan. The business plan is the heart of the license application and should include audited financials from the parent company or accounting and tax records from the beneficial owners.

The plan should also include 3 to 5 years of projections broken down by business unit. These projections should cover use of funds, risk and liquidity ratios, reserves, break-even analysis, etc. across all divisions of the bank.

The bottom line is that the business plan must convince the regulator that the applicant is of fine character, has the requisite experience, has a well thought out and funded plan, and understand the risks and compliance requirements of operating an offshore bank.

Each of the next 7 components of a startup offshore bank must be described in great detail in the business plan. Again, remember that the business plan must convince the regulators, auditors, and licensing board that you and your team are qualified to operate a bank and won’t cause trouble for the jurisdiction.

The Capital

All offshore bank licensed require a minimum amount of capital to comply with the statute. In Dominica, the required capital is $1 million on deposit in the government bank. In Puerto Rico it’s $250,000 of paid in capital plus $300,000 on deposit with the government.

Those two jurisdictions typically issue licenses with the minimum amount of capital under the law. Other countries require much more cash. For example, Belize law allows for a license with $1 million, but experience tells me that you’ll need $3 million to $5 million to get an offshore banking license.

Then there are the larger jurisdictions that negotiate capital on a case by case basis. For example, a subsidiary of a bank from a major jurisdiction can get an offshore license in Panama with around $5 million in capital. If you don’t have a major license already, then you’ll need a Class A license from Panama and about $25 million in capital.

When selecting the best jurisdiction, you should first consider the capital required. This will usually narrow down your search significantly. But, as you can see, knowing the capital requires experience and not just a review of the law as written.

The People

Your business plan should include the resumes of your key personnel and your board of directors. Both of these groups must have extensive experience in banking. Presumably your management and employees will be locals (residents of the country where you get your license).

It’s also important that your board of directors include one or two locals. The licensing authority will look upon your team more favorably if it includes professionals with a solid track record in your country of license. These board members should have experience in banking law and/or compliance.

At a minimum, you’ll want to handle account openings, KYC and AML, correspondent banking, and compliance in the same country that issued your license. Many banks in small jurisdictions put support and trading / investment management in larger countries such as Switzerland or Panama.

Thus, your country of license should be large enough provide a sufficient number of quality employees. While Dominica and St. Vincent might be fine for banks with 4 or 5 employees, there’s no way to build a staff of 200 there.

Puerto Rico is a country of 3 million and any US citizen can move to the island and work legally. No matter the size of the business, you’ll find quality employees on the island… and, if you can’t find them, you can import them.

The largest offshore bank on the island has over 400 employees and the next has about 180. The banks in Puerto Rico are larger than all of the competitors in the Caribbean combined excluding Cayman. I expect Puerto Rico to surpass Cayman in two years.

Where your staff is located will play a major role in determining the tax costs of your bank. See Tax Considerations below.

The Computer Systems

The foundation of your operation will be the computer system. The IT system for an offshore bank will handle KYC and AML, compliance, background checks, account openings, transfer, document management, etc. All of these modules will be looked at carefully by the government regulators before they allow you to “go live” with the business.

The core system and compliance modules are typically the largest startup cost for a new offshore bank. Most clients spend $100,000 to $1 million on their IT system. The largest quote I’ve seen in 2017 was from Terminos for $3.5 million.

A typical IT implementation will take 3 to 6 months. Once the provisional license is granted, the IT system will be what will delays your launch. Get to work on this while you’re building your business plan and you’ll get to market much quicker.

The Compliance Systems

The compliance system will be built around your IT system. From there, you can build an in-house team or outsource compliance monitoring to a local law firm.

Basically, all the operational risk of an offshore bank comes from a possible failure of your compliance program. If you run afoul of the money laundering rules, know your client requirements, or FATCA / OCEF reporting, you’ll be fined and shut down faster than you can blink. Either your licensing board will get you or your correspondent partner will kick you out of the system.

No matter your jurisdiction, government regulators will watch your compliance program very carefully. Any error will be dealt with swiftly and without a second chance.

The reason regulators monitor compliance so carefully is that a major error by one bank can bring down the entire country’s banking system. For example, back in 2015, Bank of Belize was shut down by US regulators. As a result, all of the banks in Belize lost their correspondent partners because none of these banks wanted anything to do with Belize. The entire system was tainted by one allegation against one offshore bank.

It took months for these banks caught in the crossfire to get new banking partners. To this day, it’s very difficult for a Belize bank to find a correspondent partner. See: Belize Banks Under Attack by US Government.

For these reasons, your business plan must explain your compliance program and procedures in great detail. Also, your employees and board of directors must have significant compliance experience.

Once your preliminary license is granted, building a solid compliance program will be your first priority. All processes and procedures must be in place, and everyone trained in the IT system, before you board even one client.

The License

Regardless of what their law says, very few counties will grant international banking licenses to startup banks. For example, Panama and Cayman will only issue offshore licenses to banks that already have a license from a major jurisdiction.

If you have a license from the US or Germany, you can easily get a license in Cayman Islands. Cayman’s reasoning is that your bank is already highly regulated in your home country, so their regulators don’t need to worry about you too much.

If you have an existing license, you can get an offshore license from Panama with $5 million. If you want to start a new bank in Panama, you can form a Class A bank with $25 million in capital.

The most active jurisdictions for offshore bank licenses are Puerto Rico and Dominica. For a comparison of these two options, see: Best Offshore Bank License Jurisdictions in 2017

Of course, there are others in Europe and less active jurisdictions in the Caribbean. I would avoid African nations and Vanuatu. You’ll never get a correspondent account from those countries.

Once you’ve selected your jurisdiction and prepared your business plan, you can apply for your preliminary license.

Preliminary Offshore Bank License: The preliminary license, sometimes referred to as your “permit to organize,” allows you to incorporate a company using the word “Bank” in the name. It also allows you you to hire employees, buy your IT system, and do all of those things necessary to begin to operate the business.

Once your systems and people are in place, you send notice to the regulator that you’re ready to launch. The government will audit your systems and procedures. If they pass, you’ll receive your offshore bank license or permit to operate.

Offshore Bank License: The second step in the licensing process is to take the bank live and begin to board on clients. The operational license will require you provide audited statements to the regulator each quarter. Now is the time to hire an outside auditor.

The Correspondent Account

The life blood of an offshore bank is its correspondent account. The correspondent account allows you to hold money and transact through the facilities of a larger bank. Ask any experienced offshore banker what’s the most important component of their business and every one will answer, “the correspondent account, obviously!”

For example, if a bank in Dominica want’s to hold accounts in US dollars, they need a US correspondent banking partner. The US partner has US Fedwire capabilities and is authorized to transact in US dollars.

Likewise, if you want to hold accounts in Swiss Francs, you need a Swiss correspondent bank. An offshore bank will need a separate correspondent account for each currency it wishes to hold.

And its the correspondent account that will require the most capital. While you can negotiate a license from Dominica with $1 million, no USD correspondent will open an account with that small of a deposit. I doubt you can get a correspondent account with less than $5 million… and $12 million is the preferred size.

These accounts are also the bane of the offshore banking industry. Any slip in compliance, or attention from the US government, can mean the loss of your correspondent account. When that happens, your bank is basically out of business and unable to send and receive funds.

The exception to the correspondent account dilemma is a license from Puerto Rico. As a bank licensed in a US territory, a bank in Puerto Rico has an easier time setting up and maintaining a US correspondent partner.

Also, if the bank so desires, it can apply to the Federal Reserve for a primary account. In that case, a Puerto Rico bank would eliminate the need for a USD correspondent account. In fact, such a bank structured in Puerto Rico could offer correspondent services to other offshore banks.

I’m not saying Puerto Rico is always the best solution. If you don’t mind being subject to US anti-money laundering rules, Puerto Rico is great. If you want to do business without US oversight, then Dominica or elsewhere might be better.

I caution you from jumping to conclusions in this regard. Always remember that your US correspondent bank will require you to comply with all US regulations. If you want to be completely free of US compliance costs, you must get a license from a very small offshore jurisdiction and not hold US dollars or transact n US dollars. Only then will you avoid US correspondent banking issues.

Tax Considerations

Most offshore banking jurisdictions won’t tax the your corporate profits. Instead, they charge a large annual license fee. For example, Cayman charges $85,000 per year to maintain an international banking license.

In contrast, Puerto Rico charges a 4% rate on corporate profits and a $5,000 annual fee.

The tax benefits of operating an offshore bank are substantial. But you’ll need a solid tax plan to maximize the value of these tax deals.

Let’s say you set up a bank in Dominica and hire 3 people on the island. Then you open office in the UK and hire 23 people. Obviously, most of the work to generate customers and income is coming from the UK while Dominica is just the licensing jurisdiction with a few people doing menial tasks.

In that case, the UK will want to tax the majority of your income at 21%, leaving only a small fraction tax free in Dominica.

The same goes for Puerto Rico. Let’s say you have 5 employees on the island, which is the minimum allowed under the law. Then you open an office in Florida with 50 employees.

The US government will want to tax the income generated by the Florida workers at 35%, leaving a small bit left over for Puerto Rico to tax at 4%.

Your global tax plan is important during the startup phase because you want to maximize income in the low tax jurisdiction and minimize income in high tax countries. Thus, when you select your country of licensure, it must be one large enough to provide a sufficient number of quality employees and allow for growth in coming years.

If you all you require is 5 to 10 employees, and don’t plan to grow much past this number, a license from Dominica, St. Vincent, St. Lucia, or elsewhere is fine. If you’ll need 50 employees, you’ll need to look to a larger jurisdiction such as Puerto Rico.

If you do incorporate in Dominica, you might also consider a Panama Financial Services License. This will allow you to hire employees to manage your bank remotely and maintain your tax free status.

Conclusion

I hope you’ve found this article on the 8 components of an offshore bank license to be helpful. For assistance in licensing and building an offshore bank in Dominica, Puerto Rico, or elsewhere, or in negotiating a correspondent account for an existing bank, please contact me at info@premieroffshore.com or call us at (619) 483-1708. Our team has over 100 combined years of experience in offshore banking and we’ll be happy to help you structure your bank.

international financial entities in puerto rico

International Financial Entities Licenses in Puerto Rico

04/14/2017/0 Comments/in Articles, Banking Offshore, International Business, Offshore Bank License, Puerto Rico Tax Incentives/by Christian Reeves

An International Financial Entities licensed in Puerto Rico under Act 273 is one of the most powerful international banking and financial services structures available. As the rules continue to tighten around offshore transactions, offshore tax benefits are reduced under President Trump, and the US increases FATCA and other regulations, expect more financial services companies to move to an International Financial Entities license in Puerto Rico.

This International Financial Entities in Puerto Rico can offer all manner of international banking, brokerage, investment management, and financial services from Puerto Rico to clients outside of Puerto Rico. Below I will detail all of the services which may be provided by this structure.

In order to qualify as an IFE in Puerto Rico under Act 273, you must hire 4 employees on the island (I usually advise clients hire 5). Then you set up an office, submit a very detailed business plan to the banking regulator, and negotiate the terms of your license.

Once approved, you will be eligible for a 20 year tax holiday on all income earned by your International Financial Entity in Puerto Rico. You will pay a 4% tax rate on all corporate profits earned by the business.

That is to say, the corporate tax rate on Puerto Rico sourced income in your IFE will be 4%.

You will also get full property and municipal licenses tax exemptions and a 6% income tax rate on distributions to PR residents. Dividends to non-PR residents will be tax free. Likewise, dividends paid to residents of Puerto Rico who qualify under Act 22 are tax free to the IFE and to the receiving party.

An IFE in Puerto Rico must be capitalized with a minimum of $550,000. Of this, $300,000 is placed on deposit with a local bank as a surety. The balance of $250,000 is your minimum corporate capital. Total authorized shares of your International Financial Entities in Puerto Rico must be $5 million (but only $250,000 of this is paid-in).

The largest firms structured under Act 273 as a International Financial Entities in Puerto Rico are international banks. For an article on this topic, see: Lowest Cost Offshore Bank License is Puerto Rico

The IFE license not limited to international banks. Family offices, insurance companies, investment advisors, hedge fund operators, currency traders, and others all operate under Act 273 as an International Financial Entities in Puerto Rico. For this reason, Act 273 is the most powerful financial services license available today.

Here’s a list of the services an Act 273 International Financial Entity licensed in Puerto Rico can offer:

Accept deposits, including demand deposits and interbank deposits (or otherwise borrow from banks outside of PR and other IFEs)

Place deposits with banks outside of PR and other IFEs.

Make, procure, place, guarantee, syndicate, or service loans.

Issue, confirm, give notice, negotiate or refinance letters of credit provided both the client and the beneficiary requesting the letter of credit are not residents of Puerto Rico.

Discount, rediscount, deal or otherwise trade in money orders, bills of exchange, and similar instruments, provided that neither side of the transaction is a resident of Puerto Rico.

Engage in any banking transaction permitted by Act 273 in the currency of any country, or in gold or silver, and participate in foreign currency trades.

Underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts and bills of exchange issued by a firm outside of Puerto Rico and purchased by a client of the IFE who is not a PR resident.

Engage in any activity of a financial nature outside of Puerto Rico which would be permissible for a bank licensed in the United States.

If the International Financial Entity licensed in Puerto Rico gets an additional license, it may act as a fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney-in-fact, agent, or in any other fiduciary capacity.

Acquire and lease personal property.

Buy and sell securities outside of Puerto Rico.

Provide investment advice to persons outside of Puerto Rico.

Act as a clearinghouse in relation to financial contracts or instruments of persons who are not residents of Puerto Rico.

Organize, manage, and provide management services to international financial entities such as investment companies and mutual funds. This is the section of the law used by hedge funds to manage master / feeder structures set up in Cayman with feeders in the US and Cayman.

Dedicate itself to provide the following Services:

Asset management,
Management of activities related to the investment of private capital,
Management of hedge funds and high-risk funds,
Management of pools of capital,
Administration of trusts utilized for converting different types of assets into securities (such as REITs),
Management of Escrowed fund for persons who are not residents of Puerto Rico.

Engage in any other activities approved by the Commissioner.

With the Commissioner’s prior approval, establish branches outside of Puerto Rico. This includes the United States and foreign countries.

Section 15 above is commonly used by family offices. The clause “dedicated to” means you may only engage in these activities and will thereby be subject to reduced compliance.

For more on operating an investment fund from Puerto Rico, see: How to operate an investment fund tax free from Puerto Rico

Note that an International Financial Entities in Puerto Rico is prohibited from doing business with persons or businesses in Puerto Rico. Therefore, all of the above are limited to persons outside of Puerto Rico. An Act 273 IFE can do business with Puerto Rico’s Development Bank and its Economic Development Bank.

I hope you’ve found this article on the International Financial Entities of Puerto Rico licensed under Act 273 to be helpful. For more information on setting up an IFE in Puerto Rico, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

You might also find my articles Puerto Rico’s Act 20 to be helpful, as well as a comparison between offshore tax planning and Act 20.

For more on Puerto Rico’s Act 273 vs a traditional offshore banking license, see: Top 5 Offshore Bank License Jurisdictions for 2017. For my post on the offshore FinTech, see: Offshore FinTech Bank License.

For more of my articles on the offshore bank licensing and operations, see:

Top 5 Offshore Bank Licenses for 2017
Lowest Cost Offshore Bank License is Puerto Rico
Offshore Bank Advertising Rules (a review of Reg. S)
Offshore Banking Licenses (on lowtax.net)
Capital Reserve Requirements (on lowtax.net)
Correspondent Accounts for Offshore Banks (on escapeartist.com)
Best Offshore Banking Jurisdictions

International Tax Planning for Payday Lenders

03/29/2017/0 Comments/in Articles, Banking Offshore, International Business, Offshore Bank License, Offshore Company Taxation, Puerto Rico Tax Incentives/by Christian Reeves

The US tax costs for Payday lenders in the United States is harsh. The interest component of your income is taxed where the borrower is located. This means you get to file returns is every state and deal with a web of complex tax laws.

Then, the portion of your income which is not considered interest, is taxable where you and your business is located. This must be in the United States, so you’re paying 35% corporate tax plus up to 12% in state tax on net profits.

What if I tell you that you can operate in the United States and pay only 4% on the majority of your net profits? That you can get a banking license and operate the business through this entity while still maintaining your 4% corporate tax rate?

That’s exactly what I’m saying. You can setup a fully licensed credit union in US territory Puerto Rico and make loans throughout the United States. Then you structure an Act 20 company in Puerto Rico to service the loans, which is taxed at 4%. The credit union breaks-even or makes a small profit for its members, but the bulk of the income moves to the Act 20 company.

This structure will allow a large payday lender to exchange their 40% US tax rate on corporate profits for a 4% tax rate in Puerto Rico.

Puerto Rico is the ONLY jurisdiction such a tax deal can be had. If you set up offshore, US Federal tax laws apply to your US owned business. Plus, it’s nearly impossible to make loans into the United States from abroad.

Puerto Rico is unique. It’s a US territory, so US Federal laws apply. This means that forming a payday loan company in Puerto Rico is equivalent to forming the company in any US state… with one major exception… taxes.

Section 933 of the US tax code exempts any income earned in Puerto Rico from US taxes. A business operating from Puerto Rico pays only Puerto Rican taxes, not US Federal income taxes.

For this reason, Puerto Rico can offer payday lenders a deal. Setup your company here, negotiate an Act 20 business license, hire at least 5 employees on the island, and your Puerto Rico sourced income will be taxed at 4%.

To clarify: You will still pay US income tax on the interest component. It’s the business component of your corporate profits that are taxable in Puerto Rico at 4%. To qualify for this 4% rate, the work to generate those corporate profits must be done from Puerto Rico.

Here’s how you might allocate income between interest income / US source income and corporate income / Puerto Rico sourced income taxable at 4%:

Some tax experts take the position that the interest component of payday loans should be about the same as that of a junk bond. That’s a rate of around 6% to 10% per year.

However, payday loans often have an effective cost to the borrower of 200% to 600% per year. The average cost of a payday loan that rolls over a few times is 400%.

Thus it can be argued that US source income taxable where the borrower is located is 10% while the balance, 390% is Puerto Rico sourced income.

In very rough numbers, a payday lender might be able to move 98% of their income out of the Federal tax system and into the more favorable Puerto Rico tax regime. This will reduce your tax rate from 40% to 4% on any Puerto Rico sourced income.

Now for the kicker: if you’re willing to move to Puerto Rico, and qualify under Act 22, you can withdraw the profits of your Act 20 company tax free.

Also, any capital gains earned on personal investments you make after becoming a resident of Puerto Rico are taxed at zero. That’s right, your personal income tax rate on capital gains is 0% as a resident of Puerto Rico.

To be considered a resident of Puerto Rico, you must spend at least 183 days a year on the island and buy a home there. Basically, you must give up your home base in the United States and move your life to Puerto Rico.

I’ll conclude with a quick note on Act 273 banks.

Those who follow my blog know that I’m a big proponent of Puerto Rico’s offshore bank license, referred to as an Act 273 bank license. This is an excellent option for those looking to setup an offshore bank that doesn’t accept US clients or doesn’t make loans.

The reason Act 273 doesn’t fit the payday loan model is because such a bank would require FDIC insurance and all manner of Federal regulations would apply. Any US bank, even a 273 bank in Puerto Rico, that takes deposits, makes loans, and accepts US clients, must apply for FDIC. This is impossible for most payday lending banks.

A credit union in Puerto Rico is not obligated to apply for FDIC. This is why I recommend the credit union combined with an Act 20 management company for a payday lender looking to redomicile their business to a low tax jurisdiction.

I hope you’ve found this post on international tax planning for payday lenders to be helpful. For more information, please contact us at info@premieroffshore.com or call us at (619) 483-17083.

You might also find this article interesting: How to operate an investment fund tax free from Puerto Rico

The above is a very general summation of complex tax issue and the related sourcing rules. Each payday loan company will have a different taxable rate. I strongly recommend you research this matter carefully and secure an opinion letter from a top firm before making any decisions.

Panama Financial Services License

01/04/2017/0 Comments/in Articles, International Business/by Christian Reeves

A Panama Financial Services Company is a licensed but unregulated financial entity which allows you to hold and manage client funds in Panama. The Panama financial services license is issued by the Panamanian Ministry of Commerce (Ministerio de Comercio and Industrias). It’s much easier to keep in compliance than a license issued by the banking authority (Superintendencia de Bancos de Panamá).

Here’s a summary of the benefits of a Panama financial services license:

These licensed Panama corporations are most commonly used by offshore financial services companies and international banks that handle third-party funds. For example, cash management and investment services for an offshore bank licensed in another jurisdiction or for providing electronic payments services, credit and debit cards, or other similar payment processing activities.
If you will manage client money, you must have a of license. The lowest cost and most efficient licensed but unregulated entity is the The Panama Financial Services Company.
These financial services companies can work effectively with other foreign structures – for example, to outsource services for tax efficiency (because Panama won’t tax foreign sourced profits) and/or to set up a trading desk in a more reputable jurisdiction than your country of licensure.

A Panama financial services license allows you to conduct the following types of transactions on behalf of your financial institution (in addition to the normal business functions of the company):

Open corporate bank accounts and accept client funds, usually on behalf of a licensed and regulated entity operating in another jurisdiction.
Operate as a basic correspondent account managing and transferring funds on behalf of clients of a bank licensed in a separate jurisdiction.
Act as a payment Intermediary.
Currency / FX and Bitcoin accounts.
Conduct precious metal trading (gold, silver, platinum, etc.).
Factoring.
Leasing.

Capital and Office Requirements

In most cases, a Panama Financial Services Company will not have a capital requirement (a minimum amount of paid in capital). The only major exception is leasing services, which requires special permission and capital of $100,000.

While it’s not required, I recommend clients contribute as much capital as possible if they’re going to operate as a correspondent bank account. Starting with $100,000 to $250,000 paid-in shows prospective banks your commitment to your Panama Financial Services Company.

I also recommend correspondent banking desks open an office in Panama with one or more employees. Turn your offshore corporation into a domestic operating company. It’s not required under the law, but it will improve your chances of success.

A local presence will give you access to a wider range of banks in Panama. Many banks will only do business with local companies. Having an office and an employee will help you throughout the process and gives you someone on the ground to deal with issues as they arise.

You can get this done at a low cost by setting up a small executive suite and paying an employee for half of his or her time. For example, Regus has 6 office buildings in Panama City and provides excellent services. Click here to find a Regus office.

Remember what’s important here is what a local bank / correspondent partner wants to see, not the minimum requirements listed in the law.

Limitations of a Panama Financial Services Company

The Panama financial services license does not allow the Panama company to engage regulated activities such as:

Securities trading or broker-dealer activities including investment funds, managed trading etc.
Credit Union (cooperativas)
Savings and Loan (financiera)
Fiduciary (trust company) services
Cash transmittal services or currency exchange (e.g. bureau de change)

These services are regulated differently by the Panamanian government and all require their own license with minimum capital and audit requirements.

It’s also prohibited for the Panama Financial Services Company to offer any banking services. To be clear regarding “correspondent banking,” a Panama Financial Services Company may offer services to a licensed and regulated bank in another jurisdiction. It may not offer services to the clients of the bank, only to the bank.

Conclusion

The setup costs for a Panama Financial Services Company are $35,500 and the annual fees are about $1,250 depending on nominee directors and other factors. This does not include a registered or virtual office.

In most cases, a Panama Financial Services Company can be completed in about 15 days once all of the documents are submitted.

I hope you’ve found this article on the Panama Financial Services Company company to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

Top 5 Offshore Bank License Jurisdictions for 2017

12/19/2016/0 Comments/in Articles, Banking Offshore, Offshore Bank License, Offshore Banking/by Christian Reeves

There have been big time changes in the offshore bank license industry over the last year. If you’re looking to form an international bank, here are the top 5 offshore bank license jurisdictions for 2017.

In this post, I’m talking about countries where you can get a license… countries that will issue a license to a startup bank. This is not a list of the largest or most respected banking jurisdictions. It’s a list of countries where you will be approved if you have a solid business plan, an experienced board of directors, and the requisite capital.

My list of the top 5 offshore bank license jurisdictions for 2017 is focused on offshore options where you will get a license and a correspondent account from a reputable institution. Sure, you can buy a cheap license from Africa or elsewhere, but good luck using it.

1. Dominica

The best “pure” offshore bank license is from the Caribbean nation of Dominica. The Commonwealth of Dominica is a sovereign island country and part of the Windward islands in the Lesser Antilles archipelago of the Caribbean Sea. It’s current population is about 75,000 and it’s a member of the Eastern Caribbean group of countries and the ECC banking system.

Dominica is a leader in the offshore banking and second passport industries. Many who establish a bank on the island also buy a passport from Dominica. For more on second passports, see A Second Passport from Dominica.

The reason I have Dominica at the top of my list is that this island is actively seeking new candidates, has a reasonably efficient application process, has a relatively low capital requirement, and banks from Dominica are able to find correspondent banking partners.

The capital required to secure a license on Dominica is only $1 million. That’s the lowest of any reputable offshore jurisdiction.

I should point out that, once you have your license, you will probably need more capital to get a correspondent banking account. It will be difficult to find a partner bank to take on a client with only $1 million in cash. The costs and compliance overhead on correspondent accounts make small clients unattractive.

For more on a bank license from Dominica, see: How to get an Offshore Bank License in Dominica.

2. Puerto Rico

Above, I wrote that the best “pure” offshore license is from Dominica. The best hybrid bank license, and possibly the best overall depending on your objectives, is from the U.S. territory of Puerto Rico.

Capital required is only $550,000. Of this, $200,000 should be paid-in capital to your corporation and $350,000 on deposit with the government.

The costs of formation, licensure and operation in Puerto Rico will be a fraction of the other options on this list. For this reason, the lowest cost offshore bank license is Puerto Rico. For example, the annual license fee in Cayman is about $85,000 compared to $8,000 in Dominica and only $5,000 in Puerto Rico.

Finally, there are no FATCA or U.S. reporting for the bank or the customers of the bank. U.S. citizens can go offshore to Puerto Rico with zero IRS reporting headaches. This is a major competitive advantage and cost savings for an international bank licensed in Puerto Rico.

I’ve listed all the positives as to why you should consider an offshore bank license from Puerto Rico.

The negatives are that your bank will be tied to U.S, government oversight, SEC and other rules, U.S. immigration considerations, and your bank must have a minimum of 5 employees in Puerto Rico.

This low license fee is balanced against your tax costs. If you have 5 employees in Puerto Rico, and qualify under Act 273, your tax rate will be 4%. If you do not meet these requirements, your tax rate will be about 35%.

Immigration can be an issue for some. All employees must be U.S. citizens and you must meet Federal immigration criteria to move to Puerto Rico. If you buy a passport from Dominica you can become a citizen in about 90 days. It’s not so easy to immigrate to the United States.

If you want to run a bank without U.S. oversight, Puerto Rico is not for you. If you want a bank with a solid reputation based on a rigorous compliance and regulatory environment, then give Puerto Rico a chance as a low cost high value hybrid license.

3. Cayman Islands

Puerto Rico is the second largest offshore banking jurisdiction after Cayman Islands. Cayman is the most reputable and highest cost “pure” offshore banking jurisdiction. There are about 70,000 companies registered in Cayman, along with 350 banks and 700 insurance companies. There’s over US $1 Trillion in assets in Cayman banks.

The cost of a banking license in Cayman Island (the fees paid to the government upon issuance) are quite high. They range from $160,000 to $600,000 for a Class A license. Add on to this about $500,000 in legal fees, not to mention auditors and other required professionals, and the startup costs add up quickly.

Also, the vetting process will take over 12 months and a Cayman banking license is notoriously difficult to negotiate. For more on the costs and process, see the Cayman Islands Monetary Authority website.

If you can make it through the gauntlet, you’ll come out the other end with a world class offshore banking license.

4. Belize

The banking law in Belize says an international license requires $1 million in capital and a full license required $3 million in capital. In practice, be prepared to deposit $5 million for the international license. No one bothers with the full license any longer (which allows you to sell to Belizeans).

If you’d like to do some market research, annual and quarterly reports for all Belize banks are available on the Central Bank’s website. This is a great resource if you’re considering a bank license from Belize.

The due diligence process in Belize will be a minimum of 12 months (compared to 3 to 4 months in Puerto Rico). Some offshore bank licenses have taken as long as 18 months to complete.

If you are planning to setup an investment management bank, Belize has some of the highest capital ratios in the world (20% in many cases). For this reason, Belize banks are considered safe by depositors.

5. Panama

Panama is a top tier banking jurisdiction with many billion dollar institutions and a well developed regulatory system. If I were to describe Panama in one sentence, it would be “the best offshore bank license when cost / capital is no issue.”

Like Belize, Panama has an international license and a full license. The problem is that Panama won’t issue an international license unless you already have a full license from your home country. For example, if you have a U.S. license, you can get a subsidiary bank license in Panama.

This means that a startup bank will need to open under the full license which is likely to require $24 million in capital. The law says $10 million for a general license and $3 million for an international license, but these values will increase significantly when negotiations begin with the Central Bank.

I should point out that Panama has many different financial services licenses. For example, a bank in Dominica or Belize, that wants to manage client funds in Panama, might apply for a Financial Services license. This would allow you to operate a trading desk and open a correspondent account in Panama without a local license.

Another option in Panama is to set up a Credit Union. Similar to U.S. cooperatives, Panama’s credit unions are savings and loans where each depositor is a shareholder. Known as “Cooperativas”, Panamanian credit unions are licensed as financial co-op institutions. They are regulated under Law 17 of 1997 which granted them non-profit tax free standing.

There are hundreds of credit unions in Panama, but most are for employees of one industry or another. For an example of a public cooperativa, see Cooptavanza.

Depending on your business model, it might be possible to set up in Panama with capital of $1 to $3 million as a credit union. The IPACOOP “Instituto Panameno Autonomo Cooperativo regulates all of Panama’s credit unions. For more informaiton, see: www.ipacoop.gob.pa

For more how to accept deposits from clients, and alternatives to an offshore banking license, take a read through Offshore Money Management Business: How to Accept Client Funds and Deposits.

To delve deeper into offshore bank licensing and operation, please review my articles on offshore bank licensing and operation. I’ve been working in offshore banking for over a decade. My recent articles on the topic are:

Lowest Cost Offshore Bank License is Puerto Rico
Offshore Bank Advertising Rules (a review of Reg. S)
Offshore Banking Licenses (on lowtax.net)
Capital Reserve Requirements (on lowtax.net)
Correspondent Accounts for Offshore Banks (on escapeartist.com)
Best Offshore Banking Jurisdictions

If you’re considering forming an offshore bank or filing for an offshore banking license, you need to be ready for a lot of red tape, a significant vetting process, and to maintain a sizable deposit with the central bank (your corporate capital).

Countries are cautious when issuing offshore banking licenses. If any bank fails in a small country, it can result in a loss of confidence in the entire system. And, of course, no country wants to risk upsetting the mighty U.S. of A, as Belize did. This little spat shut down their banks for about 6 months.

If you want to enter the offshore banking market today, you need a solid business plan, an experienced board of directors, and an agent to quarterback your application.

I hope you’ve found this review of the top 5 offshore bank license jurisdictions to be helpful. If you’d like more information, please contact me for a consultation at info@premieroffshore.com or call (619) 483-1708

Offshore Money Management Business: How to Accept Client Funds and Deposits

11/20/2016/0 Comments/in Articles, International Business, Offshore Banking, Offshore Company/by Christian Reeves

If you want to receive client funds into your offshore account, you must have a license or set up a specially designed offshore structure. Whether you’re raising money or managing money, if you’re not the owner of the cash in your offshore bank account, you will need an offshore money management license. In this article, I will describe how to accept client funds and deposits offshore.

First, let me explain what I mean by client funds. It’s money that doesn’t belong to you, the owner of the offshore company. The most common examples of “other people’s money” in offshore accounts are brokerage firms, FX or Bitcoin exchanges, and anyone who manages or invests money for other people.

This does not include income from selling a product or a service. Nor does it include money invested by shareholders of the offshore company. So long as those shareholders are disclosed and provide due diligence documents to the bank, and you’re operating a business, not an investment pool, the account will be in compliance.

I should point out that most offshore banks will limit the number of shareholders… not for legal reasons, but for practical ones. No bank will want to put in the time and effort to research 50 shareholders investing $5,000 each. That doesn’t make economic sense for a bank. In most cases, you will be limited to 2 to 5 shareholders per offshore company.

Also, even if all of your shareholders are approved, no offshore bank will allow you to operate a money management business without a license. You can’t combine client money into a pool and invest it for their benefit, even if they’re all shareholders of the corporation.

With that in mind, here’s how to accept client money as an offshore investment advisor.

Power of Attorney Model

In my opinion, the most efficient offshore solution for private wealth managers is the Power of Attorney model. I’ve seen the POA model work well for investment advisors with over 2,500 clients, all with managed accounts in Switzerland, and for smaller firms with accounts in Asia and the Caribbean.

You simply form an offshore company for each and every client. That offshore company is in the name of the owner (your client) and opens an account at the bank you wish to trade through. Then the client gives you (the investment advisor) a Power of Attorney over his or her company’s bank account.

With that Power of Attorney, you can invest the client’s funds per your agreement. You have full control without the need to be licensed as a broker or as a brokerage in the country where you’re trading.

The POA model completely eliminates licensing and regulation issues. It also allows you to bring client money together in an omnibus account or into a hedge fund. When combined with a white label trading platform, available from major international banks, you will present a solid image and back office to your clients.

The limitation of the POA model for managing client funds is obvious – the cost. You will need to form a separate LLC or corporation for every client and go through the account opening process at your trading bank for each.

Depending on your jurisdiction, an offshore company might cost $2,000 to $3,500 to setup and $850 per year to maintain. This cost is typically borne by the trader, so this model only makes sense for those managing larger accounts.

Bottom line: if you want to open accounts at major banks in Europe without setting up a fully licensed brokerage, the POA model is the way to go.

Bank License

Let’s jump from the easiest and most efficient option to manage client money offshore to the most complex and burdensome. If you want to go big into offshore, consider forming a fully licensed and regulated offshore bank.

An offshore banking license from a country like Dominica, St. Lucia, or Belize might cost $70,000 to $300,000+ and require capital of $1 million to $5 million. In addition, you will need a solid board of directors, 5 year business plan, an office with employees on the island, and licensing will take 6 to 16 months to complete.

Once you have your bank license, you will need a correspondent bank account. As no bank will bother to open a correspondent account for a bank with only $1 million in its coffers, you will need significantly more capital at this stage.

There’s one interesting hybrid license available to U.S. investment managers. You can form an “offshore” bank in the U.S. territory of Puerto Rico with only $550,000 in capital. U.S. Federal laws apply on Puerto Rico, but U.S. tax laws do not. This allows you to operate a bank from the island and pay only 4% in corporate income tax.

For more on Puerto Rico’s offshore banking statute, checkout: Lowest Cost Offshore Bank License is Puerto Rico.

For more information on offshore bank licenses in general, please review my articles below.

Best Offshore Banking Jurisdictions
Offshore Bank Advertising Rules (a review of Reg. S)
Offshore Banking Licenses (on lowtax.net)
Capital Reserve Requirements (on lowtax.net)
Correspondent Accounts for Offshore Banks (on escapeartist.com)

Brokerage License

Brokerage licenses are available from a number of jurisdictions. The lowest cost and capital requirements are in Belize, Anguilla, St. Lucia, Nevis, Seychelles and St. Vincent. The top offshore jurisdictions are Panama, Cayman and BVI.

We do not offer licenses from Comoros or any African nations. For my thoughts on a similar topic, see: Gambia Bank Licenses are a Scam

The cost to secure a brokerage license in Belize is around $35,000 and the capital required is $50,000 to $150,000 depending on a number of factors.

Licenses from the countries above do not require you pass an exam or receive a personal license (like a Series 7). The corporate brokerage license will require you demonstrate proficiency and standing in the industry, but not in your country of licensure.

Before selecting a jurisdiction for an offshore brokerage, a review of local rules should be undertaken to ensure your client base is compatible with FATCA and other island requirements.

Fund License

The next level down from a brokerage license would be a licensed or registered hedge fund. The best jurisdictions for a fund are Cayman and BVI, but licenses are also available from Nevis and Belize.

There are four options for an offshore fund in Cayman:

You can form a licensed fund, involving a rigorous investigation by the Monetary Authority of the fund documentation and promoters. These are rare (about 10% of Cayman funds) and allow you to accept investments of any size.
You can form a registered fund, which requires only a form setting out the particulars of the fund, together with a copy of the offering document and consent letters from the Cayman licensed auditor and Cayman licensed administrator. This is available to funds that require a minimum initial investment per investor of US$100,000. The majority of funds in the Cayman Islands are registered funds.
You can form an administered fund if you will have 15 or more investors. To be approved as an administered fund, you must have a Cayman fund administrator providing your principal office. The regulatory responsibility (and, thus the risk and liability) for the administered fund, which has more than 15 investors and which is not licensed or registered, is placed largely in the hands of a Cayman licensed fund administrator.
You can form a non reported fund in Cayman if you have 14 or fewer investors. Cayman will allow you to form a company and launch a fund without much regulation or oversight. Once you reach 14 investors (call it a proof of concept), you’ll need to step up to an administered, registered or licensed fund.

To set up a Cayman licensed or regulated fund, one would first form a Cayman company, then open a Cayman office or have a local registered office, and then file an application with the government. In order to be approved, the manager must have a net worth of at least US$500,000 and the manager and prove himself competent as a based on past work experience. The application process can take 3 to 6 months.

Most of the funds we set up are master / feeder structures for U.S. and international investors. Note that tax preferred investors, such as offshore IRA LLCs, come in through the offshore feeder.

For more on master / feeder funds, please contact me at info@premieroffshore.com for a confidential consultation.

Licensed but not Regulated Offshore Entities

In addition to funds, the Cayman Islands offers a licensed but not regulated option for FX and BitCoin firms. If you’re in the currency exchange or money transmission business, you might find Cayman one of the most marketable options… a jurisdictions that your clients will be comfortable with.

For a licensed Forex Brokerage operating in the Cayman Islands, see: Xenia.ky

For a licensed and regulated brokerage firm in the Cayman Islands, see: OneTRADEx.com

Note that, if you’re going to run a full-service brokerage, you must be a regulated entity. The licensed but unregulated option is available to FX and Bitcoin operators.

Another licensed but unregulated entity is a Panama Financial Services Company. This structure can be used to hold third-party funds or to operate an FX or Bitcoin business.

These structures are popular for holding client funds on behalf of a regulated entity from another jurisdiction. For example, you want to manage client money in Panama on behalf of your bank or brokerage licensed in Dominica. This is a way to outsource your investment management activities to a low-cost jurisdiction like Panama without setting up a full brokerage.

A Panama Financial Services Company is a cost-effective structure to accept client funds as an offshore money manager. Compliance is light because Bitcoin and FX are regulated by the Ministry of Commerce and Industry and not the Banking Commission.

The following activities require a banking or brokerage license in Panama, and thus may not be offered through a Panama Financial Services Company:

Securities broker-dealer activities including investment funds, managed trading etc.
Savings and Loan (financiera)
Fiduciary (trust company) services
Any banking services including credit and debit cards
Cash money transmittal services or money exchange (e.g. bureau de change)

For an example of a BitCoin exchange operating in Panama under this license, see: Crypto Capital

Belize Licensing Options

You can generally expect Belize to be the lowest cost reputable jurisdiction for licensed businesses. Licenses available in Belize include:

International money lending license
Money brokering services
Money transmission services
Money exchange services
Mutual and hedge funds
International insurance services
Brokerage, consultancy, and advisory services
Foreign exchange services
Payment processing services
International safe custody services
International banking license
Captive banking license
General banking license

For a list of applicable legislation, see: International Financial Services Commission, Belize

Conclusion

I hope you have found this article on how to accept client funds and deposits in an offshore money management business to be helpful. For more information on how to setup an offshore investment management firm, please contact me at info@premieroffshore.com or call us at (619) 483-1708.

How to get an Offshore Bank License in Dominica

11/14/2016/0 Comments/in Articles, Banking Offshore, International Business, Offshore Banking/by Christian Reeves

The most active low cost offshore bank license jurisdiction is Dominica. If you’re in the process of selecting a country to incorporate and license an offshore bank, give the Caribbean Island of Dominica a look.

You’ll find that the capital required for a bank license in Dominica is a fraction of it’s competitors. You will also find that the government and regulators want you to succeed… that they’ll work with you to build your brand and your bank… the opposite of what you’ll experience in competing financial centers like Belize, Panama and Cayman.

This article is about Dominica, one of the Windward Islands, the southern group of the Lesser Antilles in the West Indies, and a leader in the financial services industry. Please don’t confuse Dominica with the Dominican Republic.

An offshore bank license from Dominica will allow you to offer all manner of banking services. This includes deposit taking, wealth management, lending, credit cards, secured cards, debit cards, certificates of deposits, tax and business planning, currency exchange, and correspondent banking services.

The only limitation on an offshore bank licensed in Dominica is that it’s prohibited from offering services to locals. You may not sell banking services to residents or citizens of Dominica.

An offshore bank in Dominica might also offer company formation, asset protection structures, business and tax planning, tax efficient loans for corporations holding retained earnings in your bank, and wealth management. By maximizing the tax and privacy benefits of Dominica, you might leverage an offshore bank license several fold.

As an enticement to bring jobs and grow the financial sector, you (the owner of an offshore bank in Dominica) may qualify for a second passport or citizenship in the country. Shareholder can apply for immediate citizenship and a second passport. In most cases, the cost will be $130,000 to $180,000 for a single applicant.

An offshore banking license from Dominica has the lowest capital requirement of any offshore jurisdiction. While Belize and others are demanding $5 million, Dominica will allow you to license a bank with only $1 million in capital.

With $1 million in capital, you will get your bank license. You’ll then need to search out a correspondent banking partner. It will be challenging to find such a partner for a small bank with minimal capitalization. Thus, many apply for the license with $1 million and then raise more money after the provisional license is granted.

Technically, the lowest capital requirement is the U.S. territory of Puerto Rico. That bank license can be had with $550,000 in capital. While Puerto Rico is “offshore” for tax purposes, it’s “onshore” for other Federal agencies.

Dominica is also the lowest cost license to procure. In fact, the cost of Dominica is a fraction of competitors such as Cayman and Belize. Assuming you have a business plan and a board of directors in place, a bank license from Dominica should cost around $100,000, including government and legal fees.

This estimate does not include due diligence fees on shareholders and directors. These will vary greatly depending on your country of citizenship. The typical range is $3,000 to $10,000 per person. The average is $7,500 for the primary applicant.

This would compare to $300,000+ in the Cayman Islands. The annual license fee alone in Cayman is about $85,000 compared to only $8,000 in Dominica and $5,000 in Puerto Rico.

In Cayman and Dominica, licensed banks are exempt from tax on their net income. The tax rate in Puerto Rico is 4% if you have at least 5 employees in the territory. If you don’t qualify for the Puerto Rico tax holiday, income will be taxed at about 35%.

Your offshore bank in Dominica will require an office, registered agent, and employees on the island. Compliance (FATCA, OECD, DAC, AML, etc.), account openings, information technology and security, and some basic services should be provided in Dominica.

It will be possible to manage bank assets outside of Dominica. For example, you might form a Financial Services Company in Panama as the management agent. This will allow you to work around some of the correspondent banking issues and manage client capital in a larger jurisdiction.

The typical annual fee for a registered agent in Dominica is $10,000. They will be your liaison to the government, agent for service, and local representative of the bank on the island.

In addition to the agent, employees, and office overhead, you will need to retain an audit and accounting firm to prepare quarterly reports to the government. The average cost of these services is $20,000, though fees vary widely from provider to provider.

The final major expense will be your banking software. We recommend Mobile Earth and
Temenos T24 Retail Banking Software Systems for Dominica. I won’t estimate prices here because of the variety of configurations available. Feel free to contact them directly for a quote.

Because of our long history and relationships on Dominica, we offer a turn-key offshore bank license in this jurisdiction. Everything required to be up and running in 3 to 6 months: government negotiations, board of directors, business plan, financial projections, office space, employees, etc.

If you’re considering forming an offshore bank, I suggest you take a look at Dominica. It’s the lowest cost and most efficient jurisdiction actively issuing licenses.

I hope you’ve found this article on how to get an offshore bank license in Dominica to be helpful. Please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation on incorporating an international bank.

For more information on offshore banking licenses, please review my articles below.

Lowest Cost Offshore Bank License is Puerto Rico
Best Offshore Banking Jurisdictions
Offshore Bank Advertising Rules (a review of Reg. S)
Offshore Banking Licenses (on lowtax.net)
Capital Reserve Requirements (on lowtax.net)
Correspondent Accounts for Offshore Banks (on escapeartist.com)
Bank Licenses from Gambia are a Scam (on escapeartist.com)

Lowest Cost Offshore Bank License is Puerto Rico

05/13/2016/0 Comments/in Articles, Banking Offshore, International Business, Offshore Banking, Puerto Rico Tax Incentives/by Christian Reeves

Want to setup an offshore bank? Looking for an international banking license? Obtaining an offshore bank license and negotiating offshore correspondent accounts have become extremely difficult in every jurisdiction except one. The lowest cost offshore bank license is Puerto Rico. Yes, the US territory of Puerto Rico is the best island in the Caribbean to negotiate an offshore bank license.

Puerto Rico is the lowest cost offshore bank license available anywhere in the world. And, it comes with the ability to get US correspondent banking relationships more efficiently than other offshore bank licensing jurisdictions.

Let me first clarify two terms.

When I write about an offshore bank license, I mean a banking license that allows you to do all types of international banking business. The only limitation is that you can’t accept clients from the issuing jurisdiction. So, an offshore bank licensed in Puerto Rico can accept clients from anywhere in the world (including the United States) except Puerto Rico. Likewise, an offshore bank licensed in Panama can accept clients from anywhere but Panama.

And, when I say Puerto Rico is the lowest cost offshore bank license jurisdiction, I mean the lowest set up, capital, and operating cost by a long shot. I mean that an offshore bank license in Puerto Rico can be had for a fraction of the cost and capital of any other jurisdiction.

To give you an idea of the cost difference, it would require 10 times the capital of Puerto Rico to set up in the country of Belize. The cost of operating in Cayman would be 17 times higher than the cost of operating in Puerto Rico.

The annual fee for the international banking license in PR is $5,000. This compares to $85,365.85 in Cayman. The cost of labor and all other services are dramatically higher in Cayman than Puerto Rico.

Puerto Rico has been aggressive in courting financial service, hedge fund, and banking companies since 2013. Their Act 20 which any US business to move to Puerto Rico and pay only 4% in tax. They also approved Act 22 which cuts the capital gains rate to zero for any American who moves to Puerto Rico and spends at least 183 days per year on the island (becoming a legal and tax resident of Puerto Rico).

An offshore bank licensed in Puerto Rico under Act 273 receives the same 4% tax rate. This tax holiday is guaranteed for 15 years. Also, full property and municipal license tax exemptions, 6% income tax rate on distributions to PR resident shareholders and a 0% tax rate on distributions to non-PR resident shareholders, are available to offshore banks licensed in Puerto Rico.

This article focuses on Act 273 and not Act 20 and 22. When doing your research, note the distinction between 273 for banks and 20 / 22. For example, Act 273 guarantees you a 4% rate for 15 years where Act 20 guarantees you the same for 20 years. Act 273 requires 4 employees where the latest version of Act 20 requires 5 employees.

Here’s a summary of the offshore bank license options in Puerto Rico:

Puerto Rico Full International Banking License – Requires capital of at least $300,000 to held by the central bank or in a bond (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). Authorized shares are to be at least $5 million. Of this, only $250,000 must be paid-in.

Puerto Rico Restricted International Banking License – Capital held by the central bank or in a bond of $300,000 (as stated in the Act: $300,000 financial guarantees acceptable to OCFI). The authorized capital stock or the proposed capital, as the case may be, shall not be less than $500,000, out of which at least $50,000 shall be paid in full at the time the license is issued. This can also be referred to as a captive license.

In most cases, a full international banking license is required. Of the many banks licensed in Puerto Rico, only 1 has a restricted license.

A full international license in Puerto Rico allows you to provide financial services to other international financial institutions or to persons outside of Puerto Rico. “Financial services” are any service which is generally accepted in the banking industry of the United States and Puerto Rico including:

Accept deposits and borrow money from non-residents of PR.
Accept deposits and borrow money from certain government institutions
Place deposits in any PR bank and foreign banks organized in PR.
Make loans to non-residents of PR. Issue letters of credit to non-residents or PR.
Issue letters of credit for export activities to both PR resident and non-residents.
Discount money orders and bills of exchange to non-PR residents.
Invest in securities and stocks as well as PR government bonds exempt from tax
Carry transactions in any currency and gold or silver and foreign currency trade.
Underwrite and trade notes and debt instruments issued by a non-PR residents
Engage in trade financing of import and export of raw materials and finished goods.
Act as a fiduciary, executor, administrator, registrar of stocks and bonds, custodian, trustee, agent and any other fiduciary capacity with non-residents of PR after obtaining a special permit from the government.
Acquire and lease personal property on behalf of non-PR residents.
Buy and sell security outside of PR on behalf of non-PR residents.
Act as a clearinghouse of instruments of foreign persons
Organize and manage international financial entities not related to residents of PR.
Lend or guarantee loans originated in some governmental institutions.
Purchase sub-standards non-performing loans from a PR bank.
Establish branches outside PR in the continental USA or in other foreign country.
Provide the following services:
- Asset management.
- Management of alternative investments.
- Management of private capital.
- Management of hedge funds
- Management of pools of capital
- Administration of trusts
- Management of escrow funds for non-residents of PR.

An offshore bank licensed in Puerto Rico gives you access to the US market and a wide range of corresponding banks. In addition to the usual suspects, corresponding bank options include:

Scotiabank *
FirstBank Puerto Rico
Banco Popular de Puerto Rico
Banco Popular North America (US Bank at https://www.popularcommunitybank.com/)
Centennial Bank (a US bank in FL https://www.my100bank.com/)

* Scotia has a partnership deal with Bank of America that can be leveraged.

Puerto Rico is the second largest offshore banking jurisdiction in the Caribbean after Cayman Islands. The Cayman Island has decades more history, 40 of the top 50 banks in the world, and a total of 196 banks licensed as of the end of June 2015.

This compares to about 50 offshore banks operating from Puerto Rico. That’s more than all of the other Caribbean islands combined… not counting Cayman, of course.

So, next time you hear about offshore banking jurisdiction “hotbed” like Belize with 6 banks, all combined holding less capital than one bank in Puerto Rico, you will have some sense of scale.

Here is a partial list of the active banks in PR.

Pfizer International Bank – Int. License
Santander Overseas Bank – Int Lic.
Bank of Nova Scotia – General
Chase Manhattan – Int Lic
Citibank – General, but operate as an international bank
Popular Bank – General & Int. Lic ( publicly traded, operated in PR for 120 years, 52 yrs in US)
Puerto Rico International – Int. Lic
Metro America Int – Int Lic
Amtrade International Bank of Georgia – General
Charles Schwab Bank – General
BNC International – Int Lic
FirstBank International – Int Lic
Santander Overseas – Int Lic
WesternBank – Int Lic
OBT International – Int Lic
SB Pharmco (owned by Glaxo) – Int Lic
Bank of Southeast Europe – Int. Lic.
First Bankcorp – Int Lic
Oriental Bank – This is one of the larger local banks
VS International – Int Lic
Face Bank – Int Lic
BST – Int Lic
BBO Private – Int Lic
Paramount International – Int Lic
Bancredito Int – Int Lic
Italbank – Int Lic
Activo – Int Lic
ARCA – Int Lic
Nodus – Int Lic
Andcapital – Int Lic
Elite International – Inc Lic

For more information, please review my articles on offshore bank licensing and operation. I’ve been working in offshore banking for over a decade, so there are a few older posts floating around the web. My recent articles on the topic are:

Best Offshore Banking Jurisdictions
Offshore Bank Advertising Rules (a review of Reg. S)
Offshore Banking Licenses (on lowtax.net)
Capital Reserve Requirements (on lowtax.net)
Correspondent Accounts for Offshore Banks (on escapeartist.com)

I hope you have found this review of offshore bank licenses in Puerto Rico helpful. If you would like to setup a licensed bank in Puerto Rico, please contact me for a confidential consultation at info@premieroffshore.com or call (619) 483-1708.

Anti Money Laundering Guide for India

10/21/2015/in Articles, Banking Offshore/by Christian Reeves

Here is a link to a 97 page report on Money Laundering in India. We are providing this downloadable PDF for two reasons:

1. Money laundering is commonly misunderstood and misused term. It has come to be a catch-all in the United States for any movement of currency that the government can’t track or control. This report gives you the history and proper definition of money laundering, along with some food for though.

2. We have a number of international business clients based in India. The second half of this report will detail the issues you face in business, banking, finance, and money transfer.

Money Laundering Guide for India

This report was prepared by Priyanka Ghosh, LLM. She is an attorney licensed to practice law in India working out of our offices in San Diego, California. She specializes in assisting clients from India setup offshore and negotiate residency / second passports from a variety of jurisdictions.

You can reach Priyanka directly at pghosh@premieroffshore.com.

Offshore Bank Advertising Rules – Why Opening an Account is Difficult

04/26/2015/in Articles/by Christian Reeves

Opening an offshore bank account can be hell for Americans. It’s 10 times more difficult for the offshore bank trying to navigate the ever changing environment. I’ve written posts on the impact of FATCA and how the US has turned foreign bankers in to unpaid IRS agents. Here’s the rest of the story on offshore bank advertising and why opening an account is so difficult.

Not only must offshore banks report most transactions involving US persons, they’re prohibited from marketing to us gringos. You won’t see a commercial for a Panamanian bank on ESPN any time soon. Nor will brokerages in Cayman advertise in the Wall Street Journal. The US has made sure our banks aren’t forced to compete on a worldwide playing field.

Advertising by foreign banks is prohibited by the Securities Act of 1933. Regulation S specifically covers international banks, brokerages, exchanges, and securities offers. It essentially prohibits all forms of solicitation of people in the United States.

Offshore banks that offer investments must also comply with the advertising rules of Section 15 of the Exchange Act and statutes enforced by a myriad of other agencies that are beyond the scope of this article. This post is focused on banking and will barely scratch the surface of foreign securities offerings.

So, a bank in Singapore can’t advertise in the US nor cold call prospects to sell securities or banking services. If a US resident approaches the offshore bank, that’s fine. We are talking here about the bank’s ability to market to US residents.

Note that HSBC and a few others offer their offshore services to Americans online and in print. This is allowed because HSBC has a US banking license. An offshore bank is one without offices in the United States.

Because foreign banks don’t want to deal with the SEC, many have decided to avoid the issue altogether by refusing accounts to Americans. Because of Reg S and FATCA, the majority of offshore banks, along with their highest returning investment options, are closed to US citizens.

Banks that do accept Americas with our scarlet letter A are careful not to solicit our business. TV and print ads are obviously out. The internet is a more interesting medium.

The most recent guidance by the SEC on internet advertising is from 1998, 5 years before Facebook and when Compuserve and AOL were cool. These rulings are more recent than the 1933 SEC code but still way out of touch with today’s online world. See: SEC International Series Release No. 1125 (March 23, 1998).

Advertising by Offshore Banks

Here’s what offshore banks need to do to avoid the SEC’s wrath.

Offshore banks are considered to be “offering” and “selling” an offshore bank account, much like an offshore brokerage sells you an international security. To qualify under Regulation S, the offer and sale (account opening) must both occur outside of the United States.

Let’s first consider the offer. An offer is made to a person in the States when someone located in America views an advertisement or any other message from the bank meant to “condition the US market.”

On the internet, this means the bank’s website may not “push” advertisements to Americans. Pushing includes advertising in outbound email campaigns and pay-per-click where you can control the region / country where the ad is displayed. For example, Google’s PPC system allows you to determine where your advertisements will be seen. Online ads may not be displayed to anyone located in America. In my opinion, affiliate marketing also falls in to this category and is prohibited.

Push ads vary from “pull” lead generation or organic search optimization in that pull is passive content applicable to anyone anywhere. Most agree that blogs and other SEO tools for organic placement are acceptable so long as content does not directly target US investors. An American actively searching for information is seen as being different from a US person who sees and ad and is thereby motivated (coerced) to view an offer.

Active push campaigns may constitute an offer where pull posts might not… unless the website allows the customer to open an account online. In general internet terms, a “sale” occurs online wherever the server is located. It seems logical that a Belize bank could allow customers to open an account online through their server located in Belize. Not so sayeth the SEC. The ability to complete the transaction online while physically present in the US means the bank is making an offer to US persons, which is prohibited. It’s the location of the buyer and not the server that controls here.

So, how do you find the best offshore bank if they can’t push out advertisements? Some have invested in SEO and content based pull systems. Otherwise, firms like mine can qualify and introduce clients to offshore banks that accept Americans. An offshore bank will always be more comfortable with a referral than someone off the street, especially if you hold a blue passport. Also, if the referrer offers US tax compliance, all the better because the bank knows the client won’t get them in to trouble.

Regulation S for Offshore Banks

Regulation S, rules 903 and 904, and a variety of other sections govern advertising to US persons by offshore banks. Under Reg. S:

An offer or sale must be made in an offshore transaction; and
No “direct selling efforts” may be made by the issuer, a distributor, or any of their respective affiliates, or any person acting on their behalf.

An offshore transaction is one where:

No offer is made to a person in the United States; and
At the time the buy order is originated or the account opening initiated, the buyer or client is (or is reasonably believed to be by the bank) physically outside of the United States.
1. The customer is outside of the US if he is physically located out of the country. It is not sufficient for her agent to be offshore. She must be out of the country.
2. If the buyer or account holder is a corporation, then the company’s authorized representative must be out of the country. The authorized representative is the account signatory.

Offshore banks and brokerages are prohibited from advertising in publications with a “general circulation” in the United States. This applies to newspapers and magazines with circulations of more than 15,000. If less than 20% of a publication’s circulation is in the US, offshore banks may advertise but are required to include all kinds of disclaimers telling Americans to stay away. Whether these limitations will apply to online marketing is unknown.

Offshore banks are also prohibited from mailing printed marketing materials to US prospects, conducting promotional seminars in the United States, and any other activity that is meant to “condition the US market.”

Offshore Bank Marketing – Making the Sale

As a result of the above, offshore banks have limited their internet marketing efforts to pull campaigns and SEO content creation.

When it comes time to make the sale, most foreign banks require new accounts to travel to their offices to open the account. They take a copy of your passport and your entry stamp for their files to prove you were in country when the application was submitted.

There are a few notable exceptions to this travel requirement. For example, Belize and Cook Islands allow you to open an account by courier. Their forms included statements about where you were when the board meeting authorizing the account opening took place and they expect you to enter a foreign country in these pages.

Whether these forms are sufficient for the bank to “reasonably believe” you are out of the US is up for debate. They are more likely the result of a need for these smaller jurisdictions to offer an easier path to account opening for competitive reasons rather than a solid legal solution to a complex problem. Hopefully the fact that they are “off the radar” of US regulators will cover for their willingness to take a risk in exchange for a competitive advantage.

Other form based workarounds include banks that require new accounts to sign a statement that they didn’t view the bank’s website before opening an account. Many offshore banks refuse to respond to email inquires from US persons.

Finally, some offshore banks and brokerages that refuse accounts to US individuals will accept offshore corporations held by Americans. The thought here is that the corporation is the client and not the individual. Of course, such banks will report transactions by the beneficial owner to the IRS under FATCA. The corporation might work for the SEC but does not affect tax reporting requirements to the IRS.

Offshore corporations provide excellent privacy and protection. They can manage either investments or active businesses efficiently offshore. My only word of caution is to avoid structures with nominee directors where you are required to give up control of the assets. Even when nominees are used, you must be the only signor on the offshore account.

I hope you’ve found this post on the trials and tribulations of offshore bank advertising interesting. Offshore banks must overcome a number of hurdles to continue offering services to Americans. This explains why they charge higher fees than their US counterparts who don’t need to follow any of these rules. Their operating and compliance costs per account are significant.

If you have any comments or questions on offshore banking, please send them to christian@premieroffshore.com.

Offshore Bank Internet Marketing Best Practices

Here are my suggestions to anyone responsible for advertising an offshore bank. It’s intended as a guide for bankers who already have a handle on Reg. S, FATCA, et al.

Host your website outside of the United States. All of the bank’s emails, data, and website content must be hosted outside of the United States. This should be obvious for security reasons and don’t let the less expensive and faster US based services convince you otherwise. While a US website does not constitute a US presence for tax or licensing purposes, it is one of the factors the SEC might use against you in a Reg S or marketing case.

Only advertise on websites hosted outside of the US. Potential advertising partners should have no US presence, office or mailing address, and a significant portion of their traffic should be from international readers. A good example of such a site is www.lowtax.net

No PPC targeted to the United States. If you push advertisements on the internet, you must avoid US users. Any type of PPC campaign targeting the US is sure to make you a target.

Be smart with your SEO posts. Don’t affirmatively target US persons. Write about internet banking, offshore privacy, and related matters without discussing US centric issues. When writing on FATCA, do so from the bank’s perspective (compliance) and not from the client’s point of view.

All SEO and internet work should be done outside of the United States. The last thing you need is your US SEO team to be subpoenaed and telling a court they were instructed to target US customers.

Outbound email ads are only recommended for to lists with 20% or fewer US names. A US name is a person living or present in the US. Most Americans abroad, except for active military, are fair game.

I don’t believe the maximum list size of 15,000 subscribers for print mediums will hold up in email campaigns. Any email campaign where you don’t know the demographics of the list is high risk.

Place any offerings of securities behind a password protected page accessible only after the user agrees they are not US person or that they are an accredited investor. How to confirm identity and accredited status are complex matters for internet marketers and beyond the scope of this post.

Your client should be out of the US when they sign and submit the account opening request. Forms may be submitted in person or by courier. If by courier, the city of origination on the waybill should be outside of the United States and you must put this form in the client’s file.

Here are a few options to regarding the requirement the contract be entered into abroad:

Maybe you use a form like Belize and hope for the best.
Maybe you require the customer to travel to your bank. Certain countries, such as Panama, have laws requiring an in-person visit.
Maybe you set up an unlicenced office in a city Americans can access easily.
- For east coast clients, Nassau, Bahamas offers the most direct flights from the US in the Caribbean.
- For west coast clients, it appears Los Cabos, Mexico is the most efficient option with non-stop flights from 40 US cities. Mexico City has the most flights, but that’s a much longer journey and a tough place to navigate.
- Of course, you will be prohibited from marketing to persons in the country where you have this unlicensed office.
- It doesn’t matter where the clients complete the paperwork so long as they are outside of the United States. A single office in a centrally located city could service multiple foreign banks.

The bank may only present at or sponsor conferences held outside of the US. Any display of your logo at a US event may be considered conditioning the US market. No form of advertising, including investment tombstones, are permitted in the United States.

You might work with unrelated websites to post positive articles about your offshore bank but avoid traceable affiliate programs. You may not own or control the website posting articles about your bank.

First, I’ve been writing about offshore banking for over a decade. My most recent (2015) articles on the topic are:

If you have questions on forming an offshore bank, please send them to christian@premieroffshore.com.

International Money Lending License

02/15/2015/in Articles, Banking Offshore/by Christian Reeves

The international money lending license came into its own in 2010 when the US began pushing out payday and other lenders of last resort. A number of offshore jurisdictions welcomed them with open arms and the battle with American regulators was on.

By 2012, many of these lenders moved from offshore licenses to those issued by US Indian tribes. For example, Integrity Payday Loans got in trouble with a few US states operating as a Nevis company. They became “ a tribal lending entity wholly owned by the Flandreau Santee Sioux Tribe, a federally recognized Indian tribe that operates and makes loans within the Tribe’s reservation. All loans are subject exclusively to the laws and jurisdiction of the Flandreau Santee Sioux Tribe.”

With high risk lenders fleeing for greener pastures, offshore lending, like offshore banking post FATCA, has gone mainstream. These licenses are now used by everyone from multinationals to green energy companies, such as solar loan and lease providers to fund operations and manage their worldwide tax obligations. Where payday lenders were looking to hide, the new trend is towards those looking to operate more efficiently, make use of their offshore retained earnings, bring in foreign investors, and comply with US tax reporting obligations.

Offshore Licensing Options

There are only a few ways to accomplish these goals. You can form an international bank, a captive bank, a Panama financial services company, or operate under an international money lending license.

A international money lending license is also an alternative to a fulling licensed bank. An offshore banking license is a major undertaking requiring significant capital and backend compliance. A Panama financial services company has it’s uses, but it may not offer loans. An offshore lending license is the most efficient option for a company looking to make loans within a group of companies, or to the general public (excluding residents of its issuing country), but not offer other traditional banking services (deposit taking, investments, etc.)

A money lender can be setup in a matters of weeks and at a fraction of the cost of an offshore bank. Also, corporate capital, costs of operation, and government oversight are significantly reduced.

For more information on a fully licensed bank, see my 2015 post: Best Offshore Banking License Jurisdictions.

There are several countries offering international money lending licenses. I will focus Belize below, but a proper analysis of your needs, number of investors, number and size of your loans, and your business model, should be undertaken before selecting a jurisdiction.

Belize International Money Lending License

Licenses available in Belize include:

International money lending license
Money brokering services
Money transmission services
Money exchange services
Mutual and hedge funds
International insurance services
Brokerage, consultancy, and advisory services
Foreign exchange services
Payment processing services
International safe custody services
International banking license
Captive banking license
General banking license

For a list of applicable legislation, see: International Financial Services Commission, Belize

A company operating under an international lending license in Belize may lend up to $5,000 per transaction and was originally written by politicians for payday lenders. Loans by an international money lender must have an initial repayment period of less than one year and shall not be secured by title to real property, a motor vehicle, tangible personal property, or any other type of collateral other than the Loan Agreement and ACH authorization agreement. Also, loans made under this license shall be made to consumers for household purposes and personal expenses only (and not for commercial purposes).

In other words, you may offer short term unsecured loans of less than $5,000 to individuals, but not businesses.

A Belize international money lending license require capital of $50,000. This amount may be increased by the IFSC depending on your business model and history. Capital reserve ratios and applicable discounts apply. The application process runs about 3 months. A complete business plan with financial projections and a proven track record in your market niche are required.

A Belize money brokering license might be a workaround to the maximum amount and term of the international money lending license. If the money being lent is coming from shareholders / partners in the business, rather than outside investors, Belize might allow you to broker the loans from your partners to your clients.

I say “might” because there are no businesses currently operating in this manner under the money brokering license. In fact, there is only one license currently active in Belize. I suggest such an application should be from a more “traditional” business, such as solar panel loans, rather than a higher risk category like payday advances.

Another, more common use of the money brokering license is to broker loans from Belize banks to your clients, earning a commission on each.

Other Offshore Licensing Jurisdictions

Another alternative to the Belize international money lending license is the British Virgin Islands Financing and Money Services License. This allows you to conduct any size lending business with persons resident in BVI and abroad. There is no maximum loan amount in the BVI statute.

For more information, see: British Virgin Islands Financing and Money Services License

Note that any regulated lending business will need to follow strict capital reserve and ratio requirements. Audited financial statements are due annually, and some jurisdictions require quarterly reporting.

The above describes international lending licenses. I suggest that the best license for an offshore leasing company is the Panama Financial Services License, which I will cover in another post.

Raising Money for an Offshore Lending Business

If you wish to raise capital for your offshore lending business, you will need a master-feeder offshore fund or similar structure. This is because your lending license does not allow you to take deposits from people other than partners in the business. Nor does it allow you to solicit investors.

With an offshore master-feeder fund, accredited or super accredited investors (as defined by the US SEC) may invest in your US entity and non-US persons and US tax exempt investors (IRAs, etc.) may invest in your foreign entity. Both of these feed into the master fund, which in turn invests in to your offshore lending company.

By linking a master-feeder fund to an international lending license, you can raise unlimited amounts of capital while minimizing compliance costs and regulatory oversight. You might find it advantageous to operate a fund in a jurisdiction separate from the lending company. For example, the fund could be in Cayman or Belize with the lender domiciled in BVI.

Raising capital through a fund allows you to earn a commission on the appreciation in the fund and from the primary lending business. Typical master-feeder funds earn 2% of the money under management and 20% of the appreciation after a hurdle rate ( LIBOR+2 or some similar published rate).

Conclusion

In 2015, the world of offshore licensed entities is as complex as it is diverse. Careful consideration of the available licenses and your business model must be undertaken before selecting a jurisdiction. Each country and license type is intended for a specific use and capital ratios and regulations vary widely.

Add to this FATCA, IRS reporting, tax compliance, SEC issues, and anti-money laundering statutes, and you will find that going offshore with a licensed lending company requires the support of a professional experienced in both US and international regulations.

I hope this article has beens helpful. For more information on an international money lending license, an international banking license, or an offshore master-feeder fund, please phone me at (619) 483-1708 or email Christian Reeves at info@premieroffshore.com.

Best Offshore Bank License Jurisdictions

02/11/2015/0 Comments/in Articles, Banking Offshore/by Christian Reeves

The offshore banking license industry was knocked down by FATCA, but it’s back on its feet and carrying on. Below are my best offshore banking license jurisdictions for 2015. You might also like to read my 5 Best Offshore Bank Licenses for 2017.

Please let me start with a little history.

International Banking is Still Alive

From 2012 through 2014, the offshore banking license industry was on life support. To be honest, I pronounced it dead in mid 2012 in an article titled Offshore Bank Licenses Go the Way of the Dodo. Fortunately I was wrong and international banking making a comeback.

Beginning in 2012, the US IRS declared war on offshore banks, shutting the small ones down and extracting millions in tribute from those large enough to pay.

Fines are still being levied on those with unreported US accounts. For example, the US and UK authorities announced plans to hit HSBC Switzerland in February of 2015.

Piling on, the US Congress passed the Foreign Account and Tax Compliance Act (FATCA) that requires all international banks to report US account holders each year. Basically, this law turned offshore bankers in to unpaid IRS agents.

Well, FATCA was delayed for years and no one had any idea how it would be implemented. This uncertainty made it nearly impossible to acquire a new offshore banking license and, if one was granted, you had little chance of getting a correspondent account.

Bottom line, no one was willing to take a chance on a new bank. They were busy cleaning up (or hiding) past sins and did not want to deal with a startup.

Now, in 2015, the war is over, the smoke has cleared, and the bodies of those unable to pay the ransom have been removed from the battlefield. The IRS came out victorious and just about every bank in the world has signed on to FATCA.

With uncertainty behind us, new formations are beginning to pick up. Of course, these new banks will find it a very different world… one where they must be responsible global citizens.

Note: This article is from 2015. You might also like to read my 5 Best Offshore Bank Licenses for 2017.

Best Offshore Banking License Jurisdictions

In my experience, the best offshore banking license jurisdictions are:

Andorra
Anguilla
Bahamas
Barbados
Bermuda
Belize
Cayman
Dominica
Lebanon
Luxembourg
Montserrat
Seychelles
St. Kitts & Nevis
St. Vincent & the Grenadines
Vanuatu (Republic of)

Each of these countries specializes in a different form of international banking license… is focused on a specific target market. Here are a few tips on selecting the best offshore banking jurisdiction.

When I analyze a jurisdiction, and compare it with a client’s objectives, I often start with the reserve capital. Some statutes require $500,000 to $3 million for a captive bank license and $1 million to $7 million in capital is standard for a small international bank. Jurisdictions like Panama and Luxembourg may require $30 million for a general license .

To further narrow down your choices, here are a few things to consider:

Andorra and Luxembourg issue licenses to large private banks.
The Cayman Islands prefers investment advisory and captive banks.
Vanuatu is a common jurisdiction for captives with on European parent companies.
St. Kitts and Dominica licenses link the bank in to the Eastern Caribbean region, which means they operate under a regional central bank.
Belize might be the preferred jurisdiction for a deposit taking bank, but it’s high capital ratios need to be accounted for.
Many international banks are domiciled in Panama because of the lower labor costs, top tier connectivity, availability of executive visas, and the world class reputation.

Types of Offshore Banking Licenses

Captive Bank: A bank with a captive license may only do business with those named in the license. So, each client / owner of the bank must be approved by the central bank. Captive offshore banks are typically used by large family offices, groups of wealthy individuals (say 10 to 15 partners), or multinational corporations, to manage their lending and worldwide tax obligations. A captive bank may not market its services to the general public.

International Bank: The license we most commonly associated with the offshore industry is the international banking license. This allows you to conduct all types of banking business with cutomers outside of your country of issuance. For example, if you operate an international bank in Belize, you may do business with anyone except Belize citizens and residents.

General Bank: A general license allows you to conduct business with both local and international clients. Of course, central banks want to protect their citizens first, thus capital requirements and regulation of generally licensed banks are tighter than international banks.

Purchase of an Existing Offshore Banking License

From time to time, captive and international banking licenses become available. Usually licenses are sold by operators who went through the process and lost their funding somewhere along the way.

I would like to point out that each owner of a bank must be approved by the regulatory authority. That is to say, you don’t just take over a license and begin operating. The new ownership group will need to go through an extensive background check, a new business plan approved, and personal financial statements must be provided. Expect this process to take several months.

To account for this delay and potential risk, you need to run the purchase of an existing offshore banking license through an escrow agent. Condition a portion of the purchase price (usually 25% to 50%) on the approval of the central bank

Services Offered

Note that the usual formation and licensing costs for an international bank are $175,000 to $650,000 depending on the jurisdiction, the quality of your business plan, whether you already have a license from another jurisdiction, and the bonafides of the partners..

To apply, a detailed business plan, KYC and anti money laundering docs, and a well qualified board of directors will be required… all of which we can assist with.

I hope you have found this post on international banking licenses helpful. If you would like assistance in identifying a jurisdiction, searching for a new license, negotiating the takeover of an operating bank, or forming a new offshore bank, please phone me at (619) 483-1708 or send an email to Christian Reeves at info@premieroffshore.com.

My other recent articles on the topic are:

Top 5 Offshore Bank Licenses for 2017
Lowest Cost Offshore Bank License is Puerto Rico
Offshore Bank Advertising Rules (a review of Reg. S)
Offshore Banking Licenses (on lowtax.net)
Capital Reserve Requirements (on lowtax.net)
Correspondent Accounts for Offshore Banks (on escapeartist.com)
Best Offshore Banking Jurisdictions

Offshore Bank Licenses go the way of the Dodo

11/03/2012/0 Comments/in Articles, Offshore Banking/by Christian Reeves

Offshore Bank Licenses go the Way of the Dodo

The issuance of offshore banking licenses to anyone willing to put up some cash is a thing of the past. Back in the day, if you wanted to get in to the financial services industry, all you needed to do was find a small Caribbean island somewhere, put $50,000 to $500,000, and open a bank.

Offshore Bank: A bank that can only do business with foreigners. An offshore bank costs much less to open and operate, when compared to a fully licensed bank. These are sometimes referred to as Class B banks.

Fully Licensed Bank: This is a bank with an offshore bank license that can do business with anyone…be they residents or citizens of the country of licensure or foreigners. A country always strives to protect its own, so the barriers to forming a fully licensed bank are traditionally much higher than for an international license. These are usually referred to as Class A banks.

Editor’s Note: Please click here to read a more recent and detailed article on Offshore Bank Licenses by Mr. Reeves (2014 update).
Editor’s Note: 2015 Post: Offshore Banking License Jurisdictions

An offshore bank might offer its CDs and investment products over the internet, through brokers in the U.S., and bolster their image by forming non-bank entities in more respected jurisdictions to act as marketing divisions. Even brokerages in the U.S. have created offshore banks and offered high risk / high returns through these entities.

Shockingly, a few of these offshore bank licenses were granted to poorly regulated institutions that became breeding grounds for fraud. One example I am very familiar with is Millennium Bank of St. Vincent. This bank was formed by a Swiss banker and operated under a Swiss Trust Company.

Why a Swiss Trust? When the bank was newly formed, they found it hard to get clients and purchased a 75 year old Swiss Trust Company to bolster their image.
The bank marketed 5 to 20 year CDs at outrageously high interest rates. If you wanted your money back before the maturity date, there were severe penalties. In 2009, Millennium Bank was shut down and charged with operating a $68 million Ponzi scheme.
For more information, see: www.sec.gov/news/press/2009/2009-68.htm

A case that garnered much more attention in the United States was that of R. Allen Stanford. Mr. Stanford formed Stanford Bank in Antigua and began selling investment products in the U.S. around 1992.
It was shown at trial that he repeatedly paid off the Antiguan regulators to hide a $7 billion Ponzi scheme. He was convicted in March of 2012 and sentenced to 110 years in prison.

I would like to note that Stanford also operated a bank in Panama with a full service offshore bank license. In this country, the regulators took their business seriously. When the bank collapsed, everyone with accounts received 100% of their money back. I have U.S. clients today who are still hoping and trying to get some money out of the U.S. brokerage firm and the bank in Antigua.

For more information, see: www.nytimes.com/2012/06/15/business/stanford-sentenced-to-110-years-in-jail-in-fraud-case.html?pagewanted=all

Of course, this is a situation where a few bad apples spoiled things for everyone. Most offshore bank licenses were given to banks offering legitimate and interesting investment products and were quite stable. However, they were bastions of privacy, and the governments of the world took this opportunity to force many of them out of business.

Cases like Stanford and Millennium reflect poorly on a small countries economy and banking sector. When investors perceive risk in a particular country or in the offshore sector in general, they want a higher return on their investment. When traditional banks are forced to increase interest rates paid to clients, their margins decline significantly.

Also, when banks with offshore bank licenses are perceived as higher risk by the major countries, these countries impose more due diligence and limitations on the offshore bank and its correspondent accounts. When the rigors of due diligence increase, the cost of compliance skyrockets and the bank must choose to play along or lose its ability to do business in U.S. dollars, Euros, Pounds, etc.

As a result of the changes to the industry, the only new offshore licenses being issued are to banks with full service charters from a major jurisdiction. For example, if you want an offshore banking license in Panama, you must already have a fully licensed bank in the United States, United Kingdom, etc.

Internet Scams: There are several websites offering to sell offshore bank licenses. Watch out! Most countries require an existing license be “reviewed” when it is transferred. Upon review, corporate capital may be increased, or other barriers may arise, making operation impossible.

So, what is an entrepreneurial international financial services company to do? One can always get a full offshore bank license in an international jurisdiction, such as Panama. If you don’t have the $10m to $20m in corporate capital required, I suggest you consider simpler options for setting up deposit taking entities, offering investment services, providing for Forex trading, etc. Some possibilities are the Swedish Credit Union, a Panama Offshore Financial Company, a Swedish Trust Company, a New Zealand Offshore Financial Company, a master/feeder fund in Cayman or BVI, or a Swiss Trust Company (yes, these are still available, even considering the cautionary tale of Millennium Bank).

The Panama Offshore Financial Company is a relatively new financial entity designed for businesses registered in Panama that wish to offer services such as payment processing, credit card management, the trading of metals, leasing, factoring, etc. These companies can’t take deposits or operate like a bank.

A New Zealand Offshore Financial Company can provide “Bank” type services for individuals and corporations worldwide without limitations on the number of clients, deposit amounts or currency. A NZOFC may engage in the following businesses, but may not use the word “Bank” in its name. It is the entity most similar to an offshore bank license.

-Deposit taking & lending

-Debit and credit services

-Issuing of financial guarantees and instruments

-Cash Management

-Current Accounts

-Term Deposits

-Issuing of CDs

-Wire transfer services

-Fund management

-Marketing of investments

Of course, today’s regulatory environment makes transaction processing, opening and maintaining correspondent (client) accounts, and reporting, a significant challenge. Even with an unregulated entity, such as those described above, owners and operators of companies in the international financial industry must take care and keep up with the many requirements of doing business.

When you combine the changes to the offshore banking industry with the challenges by U.S. and E.U. tax authorities, engaging in any type of international business is certain to become more difficult as time goes on. With legitimate banks forced out of business, privacy and security being lost at every turn, and a mad dash for tax revenues from any and all sources, you take your life in your hands when you operate an international banking or financial services company and, god help you if you stand in the way of the tax man.

In my experience, attacks on international banks and financial service providers are a precursor to assaults on individual liberties. Just take a look at the attack on Switzerland of a few years ago and how that led to persecution of everyday Americans.

We truly live in interesting times. As goes the financial sector goes personal privacy and security. Watch this industry carefully and follow the money!

If you would like additional information on offshore bank licenses and related entities, please contact us at (619) 483-1708 or email info@premieroffshore.com.

Editor’s Note: Please click here to read a more recent and detailed article on Offshore Bank Licenses by Mr. Reeves.