Tag Archive for: international bank license

future of offshore banking
Christian Reeves

Blockchain and cryptocurrency are the future of offshore banking

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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:

  1. The ability to transmit FIAT and cryptocurrency via blockchain outside of the high cost legacy systems like SWIFT and Fedwire.
  2. The ability to transact without the oversight and compliance costs of a correspondent bank.
  3. 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. 

Offshore Bank for the Marijuana Industry
Christian Reeves

How to Setup an Offshore Bank for the Marijuana Industry

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Everyone is trying to figure out how to process transactions for pot distributors. How to work around the Federal laws and operate an offshore bank that solves cash and credit cards dilemma for marijuana shops. Here’s how to setup an offshore bank for the marijuana industry.

The marijuana business is growing fast in the United States. In fact, the legal weed market is growing as fast as broadband internet in the 2000s. Take a minute to let that sink in…

As published in Business Insider, “The North American marijuana market posted $6.7 billion in revenue in 2016, up 30% from the year before, according to a new report from Arcview Market Research, a leading publisher of cannabis market research.”

Arcview projects sales will grow at a compound annual rate of 25% through 2021, when the North American market is expected to top $20.2 billion.

The only industries in recent history that hit $5 billion in sales and then continued to grow at anywhere near this rate is cable television (19%) in the 1990s and the broadband internet (29%) in the 2000s.

So, the legal marijuana industry is huge and growing fast. Even with all this cash flying around, pot is unbankable in the United States and it looks to remain so throughout President Trump’s reign.

Before I get to how to setup an offshore bank for the marijuana industry, let’s identify the banking problems. Pot shops bring in a ton of cash. But, they can’t deposit it into any banks because these institutions refuse to do business with the marijuana industry.

The reason for these banking and business problems is well known. The Federal government labeled marijuana a Class 1 drug years back, making it illegal. When the States passed medical and recreational statutes, nothing changed on the Federal level. That is to say, marijuana is legal in many states and illegal under Federal law.

Under President Obama, local growers and sellers were left alone. However, it seems the new US Attorney General Jeff Sessions is going to change that. He appears ready to target recreational marijuana shops, if not medical marijuana distributors.

No US licensed bank wants to test these political waters. They could face fines or worse.

Likewise, it’s impossible to get a merchant account for a marijuana shop. There’s no way MasterCard and Visa will risk the wrath of the Federal government.

Even if you could get a bank to accept your deposits, processing all that cash will cause all kinds of tax and legal problems. For example, each time you deposit more than $10,000, a US bank must file a Currency Transaction Report (CTR) with the Feds.

If you regularly deposit less than $10,000, the bank is going to file a Suspicious Activity Report (SAR). This tells the Feds that you’re probably structuring your deposits to avoid the CTR, which is a crime. For more on structuring, see: Structuring Cash Transactions Under $10,000 is Criminal!

Here are the choke points that the Sessions lead government will target when attacking the marijuana industry:

  1. Ensuring Federal banks won’t do business with anyone associated with pot.
  2. Taking down a few credit unions or state chartered banks to send a message to the little guys.
  3. Continuing to block access to MasterCard and Visa.
  4. Use the CTR and SAR rules to hit big players in the industry.
  5. Block access to wire transfers and SWIFT should a the industry seek help from an offshore bank.
  6. Likewise, block access to USD correspondent banking should the industry go offshore.

Some have suggested that cryptocurrencies will become the focus of offshore banking. For example, Bitcoin is often touted as the savior of international banks that want out of the US dollar and out of FATCA reporting and correspondent banking issues.

I believe the solution lies with remittances over blockchain / pier to pier, but will require a much more robust solution than provided by Bitcoin alone. For a good discussion of Bitcoin and offshore banking, see: Will Crypto Become The New Offshore Banking Option?

A universally accepted offshore solution for the pot industry will require combining a variety of technologies to sidestep the US banking system, transmit funds abroad in a cost effective manner and allow for payments into traditional US bank accounts for vendors and customers.

I believe an offshore bank for the US marijuana industry will need to have the following characteristics:

  1. A bank which is not licensed in the United States,
  2. operates online with a digital currency to eliminate physical cash,
  3. uses a crypto currency such as Bitcoin and a FIAT currency transmitted via blockchain, (thereby avoiding the Federal wire system), and
  4. issues its own payment cards so that all transactions are handled online over a pier to pier network and not through the MasterCard or Visa networks.
    1. This also avoids MasterCard and Visa rules governing card present vs e-commerce transactions, chargebacks, FX fees, and a whole host of problems that would arise should the industry look to these providers.
    2. Using a pier to pier system would eliminate the costs associated with international wires, making the bank location irrelevant.

To build this payment processing system would require bringing together a number of payers and technology providers. For example, instant access to every shop and most users could be secured through an agreement with WeedMaps or by building a new mapping and advertising platform.

As for technology, there are a number of players in China with blockchain based solutions that could provide all of the capabilities above. For example, BTCC’s Mobi card can handle both Bitcoin and FIAT transactions. The problem is that it operates over the Visa network.

FinTech companies in China offer applications that store FIAT currency and transmit pier to pier outside of the banking industry. For example, China Rapid Finance, Chinese Peer-to-Peer Lender (valued at $1billion) and Qiandaibo (acquired by Meituan & Dianpiang on August 2016) are examples.

Examples of pier to pier banking systems include Ripple and BitFury in the United States.

BitFury (bitfury.com) develops and delivers both the software and the hardware solutions securely move an asset across the Blockchain.

Ripple Technology (https://ripple.com/) builds distributed financial technology which enables banks to send real-time international payments across networks without touching the US network or SWIFT.

This is to say, Bitcoin is not the complete answer to this problem. Bitcoin is volatile and not universally accepted. Also, marijuana shops must be able to pay vendors and users will want to hold FIAT currency.

By combining an offshore banking license with a blockchain based money transmission service, one could solve the banking dilemma faced by the marijuana industry. Such a system could operate away from US regulators. Sending remittances pier to pier would make doing business offshore cost effective (by avoiding the costs of international wires).

Such pier to pier transaction and small dollar high volume transmittals are done best by Chinese game top up companies. They handle billions of dollars in transfers at little or no cost over blockchain.

I hope you’ve found this article on how to setup an offshore bank for the marijuana industry to be helpful. My other recent articles on the topic of licensing an offshore bank include:

Tax Planning for an International Bank License
Christian Reeves

Tax Planning for an International Bank License

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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:

  1. Maximizing the value attributable to workers in the country that granted your international banking license, and
  2. 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.