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Setting up a Swiss Crypto Exchange or Fintech Business

Setting up a Swiss Crypto Exchange or Fintech Business

In this post, I’ll look at setting up a Swiss Crypto Exchange or fintech business using a fintech license or as a Qualified Intermediary. It is also possible to operate as a full bank in this capacity, but this is beyond the scope of this article. 


Operating a cryptocurrency exchange in Switzerland involves dealing with financial transactions and requires a thorough understanding of the Swiss regulatory environment.

Here are some considerations about licensing:

  1. Banking License: If your exchange operates in a way that it accepts public deposits (which may occur if you hold customers’ fiat currencies or cryptocurrencies), you might need a banking license from the Swiss Financial Market Supervisory Authority (FINMA). However, obtaining a full banking license can be a lengthy and expensive process.
  2. FinTech License: To cater to the needs of the growing fintech industry, including cryptocurrency businesses, FINMA introduced a new regulatory category in 2019 called the “FinTech” license, or “banking license light”. This license allows institutions to accept public deposits of up to CHF 100 million, provided they do not invest these deposits and do not pay any interest on them.
  3. Securities Dealer License: If your exchange is dealing with security tokens, it might need a securities dealer license.
  4. AML Regulations: Independent of the license type, any cryptocurrency exchange operating in Switzerland is required to comply with the Anti-Money Laundering (AML) Act. They must either join a self-regulatory organization (SRO) for AML purposes or be directly supervised by FINMA.

However, the specific licenses required can vary depending on the exact nature of your business, including the types of assets you’re dealing with (cryptocurrencies, security tokens, etc.), the services you offer, and the way your business operates. Furthermore, Switzerland has a highly decentralized political system, and there may be additional cantonal requirements to consider.

Setting up a Crypto Exchange in Switzerland

Here are the general steps you’d need to follow to open a cryptocurrency exchange in Switzerland. These steps may change over time as legislation evolves, so always consult with a local legal expert for the most up-to-date information.

1. Set Up a Swiss Company: In general, a crypto exchange must be registered as a Swiss company, which typically takes the form of a public limited company (AG) or a limited liability company (GmbH). The company must have a registered office in Switzerland. See Aged Swiss Trust below.

2. Membership in a Self-Regulatory Organization (SRO): Switzerland operates a dual system of financial market regulation, composed of federal regulation by the Swiss Financial Market Supervisory Authority (FINMA) and self-regulation by SROs. Depending on the type of financial service offered, crypto businesses must either become members of an SRO or be directly supervised by FINMA.

3. Apply for Necessary Licenses: If the exchange intends to accept public deposits, it will usually need a banking license. Additionally, if the exchange also operates as a securities dealer, it will need a securities dealer’s license. These licenses are granted by FINMA. Crypto exchange businesses might also be subject to the Swiss Anti-Money Laundering (AML) Act, which would require a FINMA license under the AML Act.

Switzerland has introduced a new licensing category called the “FinTech” license, or “banking license light”. This new regulatory category allows institutions to accept public deposits of up to CHF 100 million, provided they do not invest these deposits and do not pay any interest on them. These new FinTech licenses are less expensive and less complicated to obtain than a full banking license.

The requirements for the FinTech license are:

  • Having the necessary organization, qualified staff, and appropriate infrastructure.
  • Complying with the Anti-Money Laundering Act.
  • Keeping customer deposits fully segregated from the business’s operating capital.
  • Ensuring a minimum capital of 3% of the accepted public funds, but no less than CHF 300,000.
  • Compliance with Local Laws: Compliance with local laws and regulations is essential, especially regarding money laundering and securities regulations. Companies may also need to comply with other rules related to taxation, data protection, and consumer protection.

4. Secure Necessary Funding: Operating a crypto exchange can be capital-intensive. Aside from regulatory capital requirements, businesses will need enough funding to build their platform, employ staff, and cover operational costs.

5. Build Relationships with Banks: Crypto exchanges typically need relationships with banks to handle customer deposits and withdrawals. In Switzerland, finding a bank that will work with a crypto business can sometimes be a challenge.

6. Build and Test Your Platform: Before launching, you’ll need to build and thoroughly test your exchange platform. This typically involves software development and cybersecurity considerations.

7. Launch and Market Your Exchange: Once all legal and technical requirements have been met, you can launch your exchange. Ongoing marketing will likely be necessary to attract users to your platform.

Qualified Financial Intermediaries

As per the Anti-Money Laundering Act (AMLA) of Switzerland, a Qualified Financial Intermediary (QFI) is a financial intermediary that either is directly supervised by the Swiss Financial Market Supervisory Authority (FINMA), or is a member of a self-regulatory organization (SRO) recognized by FINMA for the purpose of money laundering supervision.

The term “financial intermediaries” is broadly defined and can include not only banks, insurance institutions, and securities dealers, but also entities such as asset managers, collective investment schemes, and even certain types of fintech companies. These intermediaries need to comply with the Swiss AMLA.

As per Paragraph 2, Section 3 of the AMLA, a financial intermediary is obliged to join a self-regulatory organization (SRO) or to submit to direct supervision by FINMA.

In practical terms, financial intermediaries supervised under AMLA have to comply with duties such as:

  1. Due diligence obligations: They are obliged to verify the identity of their contracting party and, where necessary, establish the identity of the beneficial owner.
  2. Record-keeping: They have to keep records that fully reflect all transactions in such a way that third parties can understand them within a reasonable period of time.
  3. Clarification obligations: In the case of business relationships or transactions which appear unusual or in the case of suspicions of money laundering, a financial intermediary must clarify the economic background and the purpose of these transactions or relationships and document the results.

The licenses are used to enable financial intermediaries to conduct their business within the legal framework of Switzerland. Once a company is classified as a QFI, it is authorized to perform activities like accepting and holding deposits, lending, securities dealing, asset management, and more, depending on the specifics of the license. However, the company is obliged to comply with AMLA and other relevant regulations.

Using an Aged Swiss Trust for a Crypto Exchange or Fintech Business

Establishing a cryptocurrency exchange or a fintech business under an aged Swiss trust or “shelf corporation” can have several advantages:

  1. Established History: An aged corporation is a company that has been around for a while, which can make it appear more credible to customers, business partners, and banks. This is particularly beneficial in the fintech and crypto space, where trust is crucial.
  2. Business Relationships: Existing corporations may already have established relationships with banks, suppliers, and other business partners. These relationships can be leveraged when launching new services, like a crypto exchange.
  3. Speed of Setup: Aged corporations are already registered and have fulfilled all necessary legal requirements, so they can be faster to set up compared to starting a new company from scratch. This can help your business get to market more quickly.
  4. Easier Access to Credit and Investment: Some banks and investors see older corporations as less risky, which can make it easier to obtain credit or attract investment.
  5. Regulatory Approval: Regulatory bodies may view older corporations more favorably, which could potentially facilitate the process of obtaining necessary licenses.
  6. Corporate Image: As you mentioned, the age of a company can help improve the business’s image with customers and with business partners, systems providers, and correspondent banking partners. It can provide a sense of stability and reliability.

However, it’s important to keep in mind that there are also potential drawbacks to using an aged corporation. For example, you may inherit liabilities from the previous operation of the company, or there may be additional due diligence required to ensure the company’s previous operations were in good standing. Additionally, an aged corporation may be more expensive to purchase than setting up a new corporation.

Moreover, regardless of the age of the company, compliance with local regulations, including obtaining the necessary licenses and ensuring adherence to anti-money laundering (AML) regulations, is still required.


In conclusion, setting up a cryptocurrency exchange in Switzerland can be a complex process that requires thorough preparation and a deep understanding of the regulatory landscape. However, with the right approach and guidance, it’s possible to navigate this process and establish a successful business.

It’s strongly recommended to seek advice from legal experts and professionals who are familiar with Swiss fintech regulations and the process of setting up a business in Switzerland. This way, you can ensure that your business is fully compliant with all relevant laws and regulations, and set up for success in the long term.

For more information on acquiring an aged Swiss Trust and building an exchange or fintech in Switzerland, please contact us at info@premieroffshore.com 

Selling Bitcoin for Cash in Canada

Selling Bitcoin for Cash in Canada

In this post, I will look at selling Bitcoin for cash in Canada. The bottom line is that it’s legal to sell Bitcoin for cash in Canada so long as you watch out for cash buyers with illegal businesses looking to launder their drug proceeds (for example). We don’t want to get involved with any buyer that could be a target of law enforcement.


There is no law in Canada that specifically prohibits the sale of Bitcoin for cash. However, there are some laws that could apply to this activity. For example, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) require businesses that deal in cash to report suspicious transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). This means that if you sell a large amount of Bitcoin for cash, you may be required to report the transaction to FINTRAC.

Cash Transactions Over the Limit

In addition to the PCMLTFA, there are also some provincial and territorial laws that restrict cash transactions. For example, in Ontario, cash transactions over $10,000 are required to be reported to the Ministry of Finance. In British Columbia, cash transactions over $5,000 are required to be reported to the Financial Institutions Commission of British Columbia.

What to Do If You Are Selling Bitcoin for Cash

If you are selling Bitcoin for cash, it is important to be aware of the laws that apply to this activity. You should also be prepared to report any suspicious transactions to FINTRAC. If you are unsure about the laws that apply to your situation, you should consult with an attorney.

Here are some tips for staying compliant with the law when selling Bitcoin for cash:

  • Keep good records of all cash transactions. This includes the date, time, amount, and identity of the person who sold you the Bitcoin.
  • Report any suspicious transactions to FINTRAC. This includes transactions that are large, unusual, or appear to be related to criminal activity.
  • Be aware of the provincial and territorial laws that restrict cash transactions.
  • Consult with an attorney if you have any questions about the laws that apply to your situation.

By following these tips, you can help to ensure that you are staying compliant with the law when selling Bitcoin for cash.


As the world becomes more digitally inclined, Bitcoin and other cryptocurrencies have grown in popularity and usage. This shift has resulted in governments worldwide, including Canada, taking steps to regulate this emerging financial landscape. In this article, we will explore the legal nuances around selling Bitcoin for cash and the implications of cash transactions that exceed established limits in Canada.

Regulations Around Selling Bitcoin for Cash

Selling Bitcoin for cash is legal in Canada. However, certain regulations govern this process to ensure transparency, prevent fraud, and curb money laundering. Bitcoin is generally considered a commodity by the Canadian government and is thus subject to the barter transaction rules under the Income Tax Act.

Those involved in Bitcoin transactions are also subject to regulations stipulated by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). As part of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA), businesses dealing with cryptocurrencies, including Bitcoin, must register with FINTRAC. This registration requires the implementation of certain protocols, such as verifying the identities of those involved in transactions, maintaining detailed transaction records, and reporting any suspicious transactions to the authorities.

Cash Transaction Limits

Cash transaction limits are another crucial factor in the legal landscape surrounding Bitcoin sales for cash. In Canada, any business that receives $10,000 or more in cash in a single transaction, or two or more transactions that total $10,000 or more within a 24-hour period, is legally obligated to report such transactions to FINTRAC. This rule applies to both Bitcoin-cash exchanges and traditional cash transactions.

These businesses must also keep detailed records of cash transactions exceeding this threshold. The information usually includes the identities of those involved, details of the transaction, and any suspicious activities. Non-compliance with these requirements can lead to severe penalties, including hefty fines and criminal charges.

Implications and Considerations

While the regulatory framework in Canada allows for Bitcoin transactions and sales, it is crucial to understand that this landscape can be complex. The government has clear guidelines to prevent illicit activities such as money laundering and fraud. For individuals or businesses involved in selling Bitcoin for cash, it is advisable to keep abreast of the latest developments in the law and maintain transparency in all dealings.

Additionally, as Bitcoin transactions fall under the umbrella of barter transactions, they are subject to taxation. Thus, all Bitcoin transactions should be duly reported in income tax filings.

It’s important to note that legal regulations and guidelines may have changed beyond this information, last updated in September 2021. Therefore, it’s recommended to seek professional financial or legal advice for the most accurate and current information.

In conclusion, the sale of Bitcoin for cash in Canada is generally permissible, provided that all transactions adhere to the country’s legal and financial regulations. Complying with these rules helps maintain a transparent and robust financial system that can leverage the potential of cryptocurrencies like Bitcoin while mitigating associated risks.

where to do business in Mexico

Where to do Business in Mexico as a Fintech, Financial Services, or Crypto Company

In this post, I’ll explain why I believe Tijuana is the best business city in Mexico in which to set up a fintech, financial services, or crypto business. I’ve traveled and done business throughout Mexico for over 20 years and can say without a doubt that Tijuana is the most efficient option for setting up a fintech business. Here’s why. 

Mexico’s burgeoning FinTech landscape is diverse, innovative, and geographically rich, with Tijuana emerging as the city of choice for setting up a FinTech business. Here, a confluence of strategic location, global business acceptance, linguistic proficiency, cost efficiency, and regulatory allowances merge to create an environment that is uniquely supportive of FinTech growth. Let’s dissect why Tijuana is the best city in Mexico for FinTech enterprises.

Proximity to the U.S. Borde

Tijuana’s strategic location, sitting just across the border from the United States, renders it a natural nexus between two significant economies. This proximity is not just geographical but also deeply intertwined within the fabric of business and culture in the region, offering enormous benefits to the FinTech sector.

Being adjacent to the United States, Tijuana is ideal for businesses targeting a cross-border audience. With easy access to the U.S. market, FinTech companies in Tijuana can exploit the advantages of both countries, navigating market trends, consumer behaviors, and regulatory landscapes with ease. Furthermore, the proximity enables a seamless flow of knowledge, technology, and talent between the two nations, thereby fostering innovation and growth.

Accepting of International Businesses and Investors

Tijuana’s open-door policy towards international businesses makes it a hotbed for globalization. The city’s economic policies are geared towards attracting foreign investment, boosting its global competitiveness, and enhancing its status as a cosmopolitan city. For FinTech businesses, this translates into a supportive, innovation-driven environment that fosters both domestic and international success.

Moreover, Tijuana is home to numerous international tech conferences and events, encouraging networking and collaboration. Such gatherings generate opportunities for FinTech startups to forge partnerships, secure investments, and enhance their global visibility.

Ease of Finding English-Speaking Workers

With a large percentage of its population bilingual in English and Spanish, Tijuana offers a considerable advantage for FinTech companies. English proficiency is a critical factor in the global FinTech landscape, and having access to a skilled, English-speaking workforce is crucial for businesses that wish to operate on an international level.

Why are there so many English speakers in Tijuana compared to other large cities in Mexico? First, many of the people deported from the Western United States end up in Tijuana. They need jobs and have excellent English skills. Second, many in Tijuana middle class have US visas and families in America. They learned English from a young age and travel to San Diego frequently. 

Cost of Labor Compared to the U.S.

Labor costs in Tijuana are significantly lower than in the United States, even though the level of skills and expertise can be comparable. This cost advantage makes Tijuana an attractive location for FinTech startups looking to operate lean while maintaining high-quality services. By reducing the labor cost burden, companies can invest more in product development, marketing, and other critical areas to boost their competitiveness and growth.

Ability to set up a SOFOM (Sociedad Financiera de Objeto Múltiple)

In Mexico, FinTech companies have the option to establish themselves as a SOFOM – a non-bank financial entity that can operate in Baja and the rest of Mexico. This legal entity, dedicated to providing loans and credit, offers the opportunity to conduct financial operations without the need for a traditional banking license.

Setting up a SOFOM in Tijuana means your FinTech business can operate across Baja California and Mexico as a whole, delivering financial services and innovative solutions to a broad and diverse market. Additionally, the ability to set up a SOFOM underscores the flexibility and supportiveness of Mexico’s regulatory landscape towards the FinTech sector.

About Tijuana

Tijuana, an eclectic border city that melds Mexican culture with a dynamic international influence, is a bustling metropolis that attracts people from across the globe. Known for its vibrant cultural scene and burgeoning economic potential, Tijuana is a fascinating city that holds promise for the future. Here’s an overview of Tijuana’s size, population, and demographics.

Size and Location

Tijuana is situated in the Baja California Peninsula, the second-longest peninsula in the world, right at Mexico’s border with the United States. It is the largest city in the state of Baja California and covers an area of around 637 square kilometers.

The city’s strategic location on the U.S.-Mexico border plays a significant role in shaping its economic, cultural, and demographic makeup. Its proximity to San Diego, with which it forms an international metropolitan area, gives it a unique cross-border characteristic.


As of 2023, the estimated population of Tijuana is over 1.8 million people, making it the sixth-largest city in Mexico. The population has seen substantial growth over the past few decades, largely fueled by internal migration from other parts of Mexico and an influx of international immigrants, particularly from the U.S., China, and the rest of Latin America.

The city has a high population density due to its role as a regional hub for employment, culture, and commerce. It also serves as a magnet for individuals and families seeking opportunities in the bustling border economy.


Tijuana boasts a diverse demographic makeup, contributing to its rich cultural fabric. The majority of Tijuana’s inhabitants are of Mexican descent, but there’s a significant presence of residents with international roots, primarily from the United States, China, and other Latin American countries.

The age distribution of Tijuana tends to skew younger, aligning with the general trend in Mexico. The city’s median age is in the late twenties, a testament to the youthful energy that drives Tijuana’s economic and cultural dynamism. This young demographic is critical to the city’s labor force and its potential for innovation and growth.

Given its border location, a significant proportion of Tijuana’s population is bilingual, with proficiency in both Spanish and English. This linguistic capability is a valuable asset, particularly in the business and service sectors, fostering cross-border commerce and cultural exchange.

In terms of socioeconomic status, Tijuana exhibits a broad spectrum. The city houses affluent neighborhoods with high-income households, alongside areas characterized by lower income levels. Over the years, economic development efforts have been aimed at addressing these disparities and promoting inclusive growth.

The Bottom Line

Tijuana’s unique blend of size, population, and demographics creates a lively and dynamic city that serves as a nexus of cultures, economies, and opportunities. With its strategic border location, youthful population, and rich cultural diversity, Tijuana offers a vibrant environment ripe for economic growth and international collaboration. As Mexico continues to progress, the city of Tijuana is poised to play a significant role in the nation’s journey toward a prosperous future.


Tijuana’s strategic location, supportive environment for international business, English-speaking talent, competitive labor costs, and legal flexibility make it an ideal setting for a thriving FinTech business. By harnessing these attributes, FinTech entrepreneurs in Tijuana are well-positioned to drive innovation, foster growth, and pave the way for a robust, future-proof financial landscape in Mexico.

I hope you’ve found this article helpful. For more on setting up a fintech, financial services business, or crypto company in Tijuana, or on incorporating a SOFOM, please contact me at info@banklicense.pro

dominican republic

A Review of the Political History of the Dominican Republic

The purpose of this post is to guide investors and business owners looking to do business in the Dominican Republic. Thus, it is written from a business perspective. I strongly recommend the Dominican Republic as a jurisdiction for a fintech business or as a domestic and international banking center. 

The history of the Dominican Republic is rich and complex, with its political landscape marked by periods of dictatorship, civil unrest, democratic progress, and economic development. Here’s a more comprehensive historical overview:

Pre-Columbian and Early Colonial Period: The island, which the Dominican Republic shares with Haiti, was originally inhabited by the Taíno people. In 1492, Christopher Columbus arrived, marking the beginning of heavy Spanish influence. The capital, Santo Domingo, was established in 1496, becoming the oldest continuously inhabited European settlement in the Americas.

Late Colonial Period: The 17th century saw the decline of Spanish influence, and by the late 18th century, the French controlled the western part of the island (modern-day Haiti). The eastern part (the present Dominican Republic) was returned to Spanish rule.

Early 19th Century: In 1821, the eastern part of the island declared independence from Spain, but it was quickly taken over by Haiti. For 22 years, the entire island was unified under Haitian control.

1844: The Dominican Republic declared independence from Haiti, marking the beginning of the Dominican Republic as a separate entity. The early years were marked by political instability, with frequent changes in leadership and government structure.

Late 19th Century: The country faced economic problems and political instability, which led to brief annexation by Spain in 1861-1865. The rest of the century was marked by periods of civil war and political instability.

1930-1961: The Dominican Republic fell under the dictatorship of Rafael Trujillo. His rule, marked by repression and human rights abuses, was one of the longest and bloodiest in Latin American history. Trujillo was assassinated in 1961.

1960s: The post-Trujillo period was marked by political instability. In 1963, democratically elected president Juan Bosch was overthrown by a military coup, leading to a civil war in 1965. U.S. troops intervened, citing the risk of a communist takeover similar to that in Cuba.

1966-1996: Joaquín Balaguer, a political ally of Trujillo, was elected president in 1966. Balaguer’s rule was marked by repression of political opposition, but also by stability and economic development. Balaguer served as president for most of the period from 1966 to 1996.

1996-Present: Since 1996, the Dominican Republic has seen a series of peaceful transitions of power, marking progress towards democratic consolidation. The country has faced various challenges, including corruption, drug trafficking, and social inequality. However, it has also made significant economic progress, particularly in industries like tourism and telecommunications.

This is a broad overview of the Dominican Republic’s political history, and it doesn’t cover all the complexities and nuances. The purpose of this article is to give some political context to those interested in purchasing a bank in the country. 

Dominican Republic Relationships 

The Dominican Republic’s strategic location in the Caribbean and its growing economy have led it to foster various international relationships, making it an active participant in several regional and international organizations. Here’s a brief look at some of its key international relationships and memberships as follows:

China: The Dominican Republic established diplomatic relations with the People’s Republic of China in 2018, severing its official ties with Taiwan. This move was seen as a significant shift in the country’s foreign policy, recognizing China’s “One-China” policy. The Dominican Republic’s relationship with China focuses on economic cooperation, trade, investment, and infrastructure development. China has become an important trading partner and source of foreign direct investment for the Dominican Republic.

Central American Integration System (SICA): The Dominican Republic is an associate member of SICA, a regional bloc aiming to promote economic integration and political cooperation among Central American nations. As part of SICA, the Dominican Republic has an opportunity to increase regional trade, strengthen political ties, and collaborate on issues such as security, human rights, and environmental protection.

Caribbean Forum (CARIFORUM): The Dominican Republic is a member of CARIFORUM, which consists of the Caribbean Community (CARICOM) member states and the Dominican Republic. CARIFORUM’s main function is to manage and coordinate relations between the Caribbean states and the European Union, particularly regarding economic cooperation and trade agreements.

Association of Caribbean States (ACS): As a member of the ACS, the Dominican Republic works with other Caribbean and Latin American nations to promote consultation, cooperation, and concerted action among all the countries of the Caribbean. The organization’s main areas of interest include trade, transport, sustainable tourism, and natural disaster risk reduction.

The Dominican Republic’s participation in these organizations reflects its commitment to regional integration, cooperation, and economic development. It also shows the country’s strategic approach to forging alliances and partnerships that can bolster its economic growth and political influence. However, like any country, the Dominican Republic must balance its international relationships with its national interests, a task that can sometimes be challenging.

Dominican Republic Currency and Central Bank

The currency of the Dominican Republic is the Dominican Peso, denoted by the symbol “RD$” or the code “DOP”. It is subdivided into 100 centavos. The Central Bank of the Dominican Republic (Banco Central de la República Dominicana, in Spanish) is responsible for issuing and managing the country’s currency.

The DOP is a free-floating currency, not a pegged currency. This means its exchange rate with other currencies, including the United States Dollar (USD), is determined by the foreign exchange market based on supply and demand factors, rather than being fixed to the value of another currency like the Eastern Caribbean (EC) Dollar is to the USD.

Over the years, the exchange rate between the Dominican Peso and the US Dollar has generally seen a gradual depreciation of the DOP. This means it takes more Dominican Pesos to buy one US Dollar over time. However, the rate of depreciation and the exact rates can fluctuate based on a variety of factors, including economic conditions in the Dominican Republic and the United States, monetary policy decisions by the respective central banks, and global economic factors.

While the Central Bank of the Dominican Republic doesn’t peg the DOP to the USD, it may intervene in the foreign exchange market to prevent excessive volatility in the DOP/USD exchange rate. This intervention can involve buying or selling US Dollars or other actions to influence the supply and demand for the two currencies.

The Central Bank plays a crucial role in the Dominican Republic’s economy, performing several essential functions:

  1. Monetary Policy: The Central Bank is responsible for formulating and implementing the country’s monetary policy with the goal of maintaining price stability. This typically involves managing interest rates and controlling the money supply to manage inflation and stabilize the economy.
  2. Currency Issuance: The Central Bank has the exclusive right to issue currency in the Dominican Republic. It is responsible for ensuring there is sufficient currency in circulation to meet the demands of the economy, while also managing the risk of inflation.
  3. Financial Stability: The Central Bank works to maintain the stability of the country’s financial system. This can involve acting as a lender of last resort to banks facing liquidity problems, overseeing payment systems, and monitoring economic indicators to identify potential threats to financial stability.
  4. Foreign Exchange Management: The Central Bank manages the country’s foreign exchange reserves and regulates the foreign exchange market. This can involve intervening in the foreign exchange market to stabilize the exchange rate of the Dominican Peso.
  5. Economic Research and Statistics: The Central Bank conducts economic research and publishes a range of economic and financial statistics. This information helps inform decision-making by government, businesses, and investors.

In summary, the Central Bank of the Dominican Republic plays a vital role in maintaining the stability of the country’s economy and financial system. Its actions can have significant impacts on issues such as inflation, economic growth, and the stability of the Dominican Peso.

Santo Domingo, Dominican Republic 

Santo Domingo, the capital of the Dominican Republic, is not only the largest city in the country but also one of the largest cities in the Caribbean region. The estimated population of Santo Domingo was around 3 million in the city proper, with over 4 million in the larger metropolitan area.

Santo Domingo plays a vital role in the Dominican Republic’s economy, contributing significantly to its GDP. The city is a hub of economic activity, with several key industries driving its economic growth:

Tourism: Santo Domingo is rich in historical and cultural sites, including the Zona Colonial (Colonial Zone), a UNESCO World Heritage site with buildings dating back to the 16th century. The city’s hotels, resorts, restaurants, and historical sites draw tourists from around the world, making tourism a significant contributor to the city’s economy.

Services Sector: The services sector, including finance, real estate, health care, and education, is a key economic driver. Santo Domingo hosts the headquarters of many banks and financial institutions. The city is also home to some of the country’s most important educational institutions and hospitals.

Trade and Commerce: Santo Domingo is a central hub for both domestic and international trade. Its location and infrastructure, including the Port of Haina, one of the busiest ports in the Caribbean, facilitate imports, exports, and commerce. Retail is also a significant part of the city’s economy.

Manufacturing and Industry: Santo Domingo and its surrounding areas host several industrial free zones, where goods are produced for export. Industries include textiles, pharmaceuticals, tobacco, and food processing.

Telecommunications and IT: The city is a center for telecommunications and information technology services in the Dominican Republic. Various national and international telecom and IT companies have their operations based in the city.

Construction and Real Estate: The real estate and construction sectors have seen significant growth, with numerous residential and commercial developments in recent years.

Given its role as the capital and its diverse economy, Santo Domingo plays a significant part in the Dominican Republic’s economic stability and growth. However, the city also faces challenges, such as traffic congestion, pollution, and social inequality.

Credit Card Issing and Fintech Transaction Rules

Credit Card Issing and Fintech Transaction Rules

In this post, I will consider why card issuers and certain fintech businesses have compliance requirements and how those KYC and AML rules translate to transaction monitoring rules within the core system or compliance system. The focus of this post is on anti-money laundering and related transaction rules. 

Know Your Customer (KYC) and Anti-Money Laundering (AML) rules are important components of regulatory compliance for financial institutions, including those issuing virtual prepaid credit cards. Here is some sample transaction rules a company might use to meet KYC and AML obligations:

  1. Customer Identification Program (CIP): Every customer must be properly identified before a virtual prepaid card is issued. This requires collecting, at minimum, the customer’s full legal name, birth date, address, and identification number (like a Social Security number or passport number).
  2. Identity Verification: After collecting this information, it must be verified through reliable means. This can include checking the provided information against databases or asking for additional documentation like a scanned passport or utility bill.
  3. Risk-Based Verification: Customers who are likely to pose a higher risk of money laundering or terrorist financing may require enhanced due diligence, which can involve collecting more detailed information about their personal background, sources of funds, and intended use of the prepaid card.
  4. Ongoing Monitoring: After a card has been issued, its usage must be monitored for suspicious activity. This can include transactions that are unusually large, frequent, or inconsistent with the customer’s normal behavior.
  5. Transaction Limits: To reduce the risk of money laundering, virtual prepaid card issuers may set limits on the amount that can be loaded onto a card at any one time, or the total amount that can be transacted within a certain period.
  6. Reporting Suspicious Activity: If suspicious activity is detected, the card issuer has a duty to report this to the relevant authorities in a timely manner. This typically involves filing a Suspicious Activity Report (SAR).
  7. Record Keeping: Detailed records of all customer information, transactions, and any actions taken in response to suspicious activity must be kept for a certain period, usually five years.
  8. Sanctions Screening: The issuer must ensure that neither the customer nor the recipients of any funds from the card are on any government sanctions lists.
  9. Privacy and Data Security: All collected customer information must be stored securely to protect against data breaches. There should be policies in place to ensure that customer data is only used for the purposes it was collected for and is shared only with authorized entities.
  10. Regular Audits: Internal or external audits should be conducted periodically to ensure that all KYC and AML procedures are being followed, and to identify any areas where improvements can be made.

Please note that these are just samples and the actual rules may differ depending on the jurisdiction the company is operating in, as well as other factors. Always consult with a legal expert or a compliance officer when designing or updating your KYC and AML policies. You can reach us at info@premieroffshore.com 

Criminals can use credit cards in several ways to launder money:

  1. Credit Card Factoring: A common method involves setting up a shell company (a company that exists only on paper and has no office and no employees) and using it to process credit card transactions for non-existent goods and services. The shell company can then pass off these transactions as legitimate business income.
  2. Cash Withdrawals: Criminals can use credit cards to withdraw cash at ATMs, especially in foreign jurisdictions, to obscure the origin of the funds.
  3. Purchase and Resale: Individuals may use a credit card to purchase high-value items (like electronics, jewelry, etc.) and then sell these items to generate “clean” cash. This method allows the laundering of money through legitimate commercial transactions.
  4. Overpayment Fraud: This method involves the criminal intentionally overpaying on the credit card, then requesting a refund from the credit card company. The refund is then returned as a check, which can be deposited into a bank account, effectively converting illicit cash into seemingly legitimate funds.
  5. Gift Cards and Prepaid Cards: Criminals can purchase gift cards or prepaid cards using a credit card. These cards can then be sold for cash or used to purchase goods, thus obfuscating the source of the funds.
  6. Balance Transfers: By continuously transferring balances between different credit cards owned by the same individual or different individuals, money launderers can make it difficult for authorities to track the source of funds.
  7. Collusion with a Merchant: Criminals can also collude with corrupt merchants to carry out fraudulent transactions. The merchant will charge the credit card for non-existent goods or services, and after deducting a commission, transfer the rest of the funds back to the criminal.

These methods are illegal and can lead to severe penalties for the card issuer or fintech that allows the transaction through. Credit card companies and financial institutions must have systems in place to identify and prevent such activities, such as transaction monitoring systems, KYC procedures, and real-time fraud detection algorithms.

Money laundering involves making illegally-gained proceeds appear legal, a process typically accomplished through a three-step process: Placement, Layering, and Integration. Criminals have developed various methods to launder money using credit cards. Here’s how it could happen:

  1. Placement: The initial stage of money laundering where illicit money is introduced into the financial system. With credit cards, this can happen in a few ways:
    • A criminal could use a stolen or counterfeit credit card to purchase goods and then resell them for cash.
    • Fraudulently obtained credit cards could also be used to purchase other forms of monetary instruments, such as gift cards or prepaid cards, which can later be sold or used without leaving a direct link back to the criminal.
  2. Layering: This is the process of creating complex layers of financial transactions to disguise the audit trail and provide anonymity. In the context of credit cards:
    • The criminal might use the card to make numerous small purchases or cash withdrawals across different locations and businesses to obscure the source of funds.
    • They might also use the card to purchase items online, further complicating the trail because these transactions could involve multiple jurisdictions.
  3. Integration: This is the final stage where the ‘cleaned’ money is mixed with legally obtained money. With credit cards:
    • The criminal might operate a fake business and process false transactions using the credit card, making the money appear as legitimate earnings.
    • They might also use a legitimate business to charge the credit card for non-existent goods or services, then present this as legitimate income.

It’s important to note that financial institutions, card issuers, and fintech’s are well aware of these tactics, and have measures in place to detect and prevent such activities. These include monitoring for suspicious transaction patterns, implementing strong KYC and AML procedures, and reporting suspicious activities to the authorities.

Credit card transaction rules are guidelines or protocols established by credit card companies to detect and prevent fraudulent transactions, ensure regulatory compliance, and enhance customer security. Here are some common credit card transaction rules:

  1. Daily Spending Limit: To prevent fraudulent transactions, a daily spending limit is often set. If transactions exceed this limit, they may be denied until the cardholder confirms the transactions are genuine.
  2. Geographical Restrictions: Transactions made in unfamiliar locations or foreign countries may be flagged or blocked, especially if the cardholder hasn’t notified the card issuer about their travel plans.
  3. Frequency of Transactions: If there’s a sudden increase in the frequency of transactions, it could indicate fraudulent activity. The card issuer may block further transactions until they can confirm the activity with the cardholder.
  4. Unusual Purchase Patterns: If a transaction or series of transactions deviate significantly from the cardholder’s typical spending habits, they might be flagged as potentially fraudulent.
  5. Online and Card-Not-Present Transactions: These types of transactions can be riskier than in-person transactions, and may be subject to additional security measures, like requiring the cardholder to enter a CVV number.
  6. Incorrect Personal Information: If a transaction is attempted with incorrect personal information (e.g., wrong billing address or zip code), the transaction may be declined.
  7. Large Purchases: Large purchases may be flagged or blocked, especially if they’re inconsistent with the cardholder’s typical spending behavior.
  8. Suspicious Merchant Categories: Transactions with certain types of merchants (e.g., gambling websites or cryptocurrency exchanges) may be flagged or blocked due to the higher risk of fraud or regulatory compliance issues.
  9. Multiple Declined Transactions: If multiple transactions are declined in a short period of time, the card may be temporarily blocked to prevent potential fraud.

These rules help credit card issuers manage risk and protect customers from fraud. However, they’re not foolproof, and cardholders should always monitor their accounts for suspicious activity.

Transaction Rules for Credit Card Issuers and Fintech Companies:

  1. Account Opened, Maxed, and Closed: This rule will alert when the cardholder loads and uses the card up to the balance and then closes the account quickly. There should be a min value such as $5,000.  
  2. High-Risk Jurisdiction Transactions: This rule will alert any transactions that are conducted with high-risk jurisdictions, including those known for high levels of corruption, organized crime, or terrorist activity.
  3. Frequent Small Transactions: This rule will alert when there are frequent small transactions that, collectively, account for a substantial sum. This could be an indication of “structuring” or “smurfing,” techniques often used to evade reporting requirements.
  4. Rapid Movement of Funds: This rule alerts when there is rapid movement of funds from one account to another, or across multiple accounts. This could be indicative of layering, a money laundering technique.
  5. Transactions Just Below Reporting Threshold: This rule will alert transactions that are just below the reporting threshold set by the regulatory bodies. This could be an attempt to evade detection.
  6. Inconsistent Transaction Activity: This rule alerts when the transaction pattern significantly deviates from a customer’s usual behavior or expected transaction pattern.
  7. Round Dollar Transactions: This rule alerts when transactions are made in round numbers (e.g., $1000, $5000), especially when they occur frequently. Criminals often use round numbers for simplicity.
  8. Transactions Matching Sanctioned Lists: This rule will alert any transactions associated with individuals, organizations, or countries that appear on national and international sanctions lists.
  9. Cash Advances: This rule will alert frequent or large cash advances, which could indicate an attempt to obtain cash for illicit purposes.
  10. Multiple Cards to the Same Address: This rule alerts when multiple cards are issued to the same address. This could be a sign of a fraud or identity theft operation.
  11. Transactions with High-Risk Businesses: This rule will alert transactions with businesses known to be high-risk for money laundering, such as casinos, pawn shops, or shell companies.
  12. Non-Resident Transactions: This rule will alert when transactions occur frequently from non-residents, especially from high-risk jurisdictions.
  13. High Number of Declined Transactions: This rule will alert when a customer has a high number of declined transactions, which could indicate fraudulent activity.
  14. Unusual E-commerce Transactions: This rule alerts when there are unusual e-commerce transactions, such as frequent purchases from a single online vendor, which could be indicative of fraudulent activity.
  15. Inconsistent Shipping Information: This rule alerts when the shipping address frequently changes or doesn’t match the customer’s known address. This could be a sign of fraud.
  16. Sudden Increase in Credit Card Usage: This rule will alert when there is a sudden spike in credit card usage, which could indicate that the card has been compromised.
  17. Transactions at Odd Hours: This rule will alert when transactions are conducted at odd hours, inconsistent with the cardholder’s known behavior.
  18. Large Purchases or Withdrawals: This rule will alert any large purchases or cash withdrawals that are unusual based on the customer’s profile and transaction history.
  19. Transactions Involving Cryptocurrency Exchanges: This rule will alert when transactions are made to or from cryptocurrency exchanges, as these can sometimes be used to launder money.
  20. Use of the Card After a Long Period of Inactivity: This rule will alert when a card that hasn’t been used for a long period suddenly becomes active. This could indicate that the card has been compromised.
  21. Frequent Address Changes: This rule alerts when there are frequent changes to the cardholder’s registered address, which could be indicative of identity theft or fraud.
  22. Sequential Card Numbers: This rule will alert when multiple cards are issued with sequential numbers, which could indicate a mass production of fake cards.
  23. Card Not Present Transactions: This rule alerts when there are frequent or large ‘card not present’ transactions, which could suggest fraudulent online or phone purchases.
  24. Multiple Transactions at One Vendor: This rule will alert when there are multiple transactions at one vendor in a short amount of time, which may suggest either a system error or a fraudulent activity.
  25. Overseas Transactions: This rule alerts when a card is used in a foreign country, especially if the cardholder has not reported traveling.
  26. ATM Withdrawals in Multiple Locations: This rule alerts when frequent ATM withdrawals are made in different locations in a short time period, which could indicate the card is cloned.
  27. Multiple Declined Authorization Attempts: This rule will alert when there are multiple declined authorization attempts, which may suggest either a stolen card or a testing of a cloned card.
  28. High-Risk MCC Codes: This rule alerts when there are transactions associated with Merchant Category Codes (MCC) known to be high-risk for fraud or money laundering.
  29. Transaction Volume and Frequency: This rule will alert when a card’s transaction volume or frequency significantly deviates from its usual patterns.
  30. Out-of-pattern Transactions: This rule alerts when transactions are inconsistent with the customer’s established patterns, such as purchases from vendors they haven’t used before.
  31. Multiple Cards Associated with the Same Identity: This rule will alert when multiple cards are issued to the same person, which could be indicative of identity theft.
  32. Same Card Used with Different Merchants Simultaneously: This rule will alert when the same card is used simultaneously at different merchant locations.
  33. Credit Refunds: This rule will alert when there are frequent or large credit refunds to a card, which could indicate return fraud or ‘overpayment’ scams.
  34. Inactivity Followed by High Activity: This rule will alert when a period of card inactivity is followed by a surge of high-value transactions.
  35. Purchases of Gift Cards or Other Monetary Instruments: This rule alerts when the card is used frequently to purchase other cash-like monetary instruments, which could be a money laundering technique.
  36. Unusual Payments to Government Entities: This rule alerts when there are unusual payments to government entities, which could suggest an attempt to hide illicit funds.
  37. Transactions from Unrecognized Devices or IP addresses: This rule will alert when transactions are made from devices or IP addresses that are not recognized or commonly used by the customer.
  38. Duplicate Transactions: This rule alerts when two or more transactions have the same amount, date, and merchant, which could indicate a system error or fraud.
  39. Transactions in Non-Customer’s Regular Geo-Location: This rule alerts when the card is used in a location that is not part of the customer’s regular geographical pattern.
  40. Mismatch between Shipping and Billing Address: This rule alerts when the shipping address for a purchase does not match the billing address of the cardholder.
  41. Multiple Credit Cards Used on a Single Device/IP: This rule alerts when multiple cards are used on a single device or IP address, which could suggest card testing or fraudulent activity.

Again, these rules should be adapted and refined based on the specific requirements of the institution, local regulations, and the evolving risk environment. You can reach us at info@premieroffshore.com if you are interested in hiring us to build your compliance program and system. 

building a fintech crypto card issuing business

Building a Compliance Program for a Fintech, Crypto, or Credit Card Issuing Business

In this post, I will review how to build a compliance program for a new or startup fintech, crypto, or credit card issuing business. Most startups focus on tech, testing, and finding customers in the early days. But, a complete compliance program should be the first thing a fintech, crypto, or credit card issuing business should build because this governs onboarding and nearly all aspects of the business. 

Also, your compliance program and documents are the keys to maintaining good relations with your bank, brokerage, exchange, processor, or issuer. Many providers will open an account with minimal documents. But, once you begin transacting, they will ask all kinds of questions. If you don’t have a compliance program in place, your fintech, crypto, or credit card issuing business will be paused or closed until you can build a proper compliance program. 

Building the Program – First Steps

Building a compliance program for a credit card issuing company requires adherence to various regulatory requirements, including those from payment networks like MasterCard and Visa, as well as complying with Know Your Customer (KYC) and Anti-Money Laundering (AML) policies. Here is an overview of the process:

  1. Understand MasterCard and Visa requirements: Both MasterCard and Visa have their own set of rules and regulations for credit card issuers. These may include guidelines on transaction processing, chargeback management, fraud prevention, data security, and reporting. Review the MasterCard Rules and the Visa Core Rules and Visa Product and Service Rules to familiarize yourself with their requirements.
  2. Develop internal policies and procedures: Create comprehensive internal policies and procedures that adhere to MasterCard and Visa requirements, as well as applicable federal and state laws and regulations. This may include policies for card issuance, underwriting, account management, billing, dispute resolution, and fraud management.
  3. Implement a KYC program: A robust KYC program should include customer identification procedures, risk-based customer due diligence, and ongoing monitoring of customer transactions. Ensure that your program aligns with applicable KYC regulations and industry best practices.
  4. Implement an AML program: Develop an AML program that includes risk-based customer due diligence, transaction monitoring, suspicious activity reporting, record-keeping, and employee training. Ensure that your program complies with applicable AML regulations, such as the Bank Secrecy Act (BSA) and the USA PATRIOT Act.
  5. Establish a Compliance Management System (CMS): A CMS is a formalized system for managing compliance within the organization. It should include components like compliance policies and procedures, a compliance officer, employee training, and monitoring and corrective action processes.
  6. Develop a data security program: Implement a data security program that complies with the Payment Card Industry Data Security Standard (PCI DSS) and any applicable data privacy regulations, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA).
  7. Train employees: Train employees on your compliance program, policies, and procedures. Regularly update training materials to ensure that employees stay informed about regulatory changes and industry best practices.
  8. Monitor and audit: Regularly monitor and audit your compliance program to identify any gaps or areas for improvement. Implement corrective actions as necessary to maintain compliance with all applicable regulations and requirements.

Creating a compliance program for a credit card issuer is similar to creating a compliance program for a bank in several ways:

  • Both require adherence to federal and state regulations, as well as KYC and AML policies.
  • Both need to establish a CMS to manage compliance within the organization.
  • Both require employee training to ensure understanding of and adherence to the compliance program.
  • Both need to conduct regular monitoring and audits to maintain compliance with applicable regulations and requirements.

However, credit card issuers must also comply with the specific rules and regulations set forth by payment networks like MasterCard and Visa, as well as adhere to the PCI DSS for data security.

Building a Program – Toolbox

A robust compliance program for a credit card issuer should include various tools and resources to ensure adherence to regulatory requirements and mitigate risks. Some common and popular compliance tools include:

  1. Compliance Management System (CMS): A CMS is a centralized platform to manage, track, and report on all aspects of the organization’s compliance program. It can help automate and streamline processes, such as policy management, risk assessment, training, and reporting.
  2. Risk Assessment Tools: Risk assessment tools can help identify, assess, and prioritize risks associated with credit card issuing activities. These tools may include questionnaires, checklists, or software solutions designed to assess risks in areas like fraud, AML, and data security.
  3. Policy Management Software: Policy management software can be used to create, maintain, and distribute internal policies and procedures related to credit card issuing operations. This software typically includes version control, approval workflows, and audit trails to ensure consistency and compliance with regulations.
  4. Transaction Monitoring System: A transaction monitoring system can be used to detect suspicious activities, potential fraud, and other risks related to credit card transactions. This may involve rule-based systems or machine learning algorithms to analyze transaction data and generate alerts for further investigation.
  5. Fraud Detection Tools: Fraud detection tools, such as artificial intelligence (AI) and machine learning algorithms, can help identify patterns indicative of fraudulent activities. They may be used to analyze transaction data, monitor user behavior, and identify potential risks in real time.
  6. Know Your Customer (KYC) and Customer Due Diligence (CDD) Solutions: KYC and CDD solutions can help automate customer identification, verification, and risk assessment processes. These tools may include identity verification services, watchlist screening, and ongoing customer monitoring.
  7. Anti-Money Laundering (AML) Software: AML software can help automate the process of monitoring transactions for suspicious activity, filing suspicious activity reports (SARs), and maintaining compliance with AML regulations. This may include rule-based systems or more advanced AI-driven solutions.
  8. Data Security Solutions: Data security solutions, such as encryption tools, firewalls, and intrusion detection systems, can help protect sensitive customer and transaction data, ensuring compliance with data privacy and security regulations like the Payment Card Industry Data Security Standard (PCI DSS).
  9. Training and Learning Management Systems (LMS): An LMS can help manage and track employee training related to compliance, including course content, attendance, assessment, and reporting. This can be especially useful for organizations that must regularly train employees on AML, KYC, and other compliance topics.
  10. Regulatory Reporting Tools: Reporting tools can help streamline the process of generating, submitting, and tracking regulatory reports, such as SARs or periodic financial statements. These tools may include templates, automated data aggregation, and tracking capabilities.

While these tools can help support a comprehensive compliance program for a credit card issuer, it is important to remember that the specific tools needed will depend on the organization’s size, risk profile, and regulatory environment. Tools will also depend on the jurisdiction of your customers, of which I was uncertainly reviewing your website. 

Building a Program – Bank Secrecy Act

The Bank Secrecy Act (BSA) does apply to credit card issuers. The BSA, also known as the Currency and Foreign Transactions Reporting Act, was enacted to combat money laundering and other financial crimes. It requires financial institutions, including credit card issuers, to maintain certain records, file reports, and implement anti-money laundering (AML) programs.

Credit card issuers and fintech companies are considered financial institutions under the BSA, as they offer various types of financial products and services. Therefore, they are subject to the same AML rules and regulations as banks and other financial institutions. These rules and regulations include Know Your Customer (KYC) policies, Currency Transaction Reports (CTRs), Suspicious Activity Reports (SARs), and other due diligence requirements.

Compliance with the BSA helps credit card issuers mitigate risks associated with money laundering, terrorism financing, and other financial crimes. Non-compliance can lead to substantial fines and penalties, as well as reputational damage.

Building a Program – US Sanctions for Card Issuers

U.S. sanctions are relevant to U.S. credit card issuers and fintech companies because they impose restrictions on transactions and dealings with specific individuals, entities, or countries. They are required to comply with these sanctions to prevent financial crimes, such as money laundering and terrorism financing. Non-compliance can lead to significant penalties and reputational damage.

Here’s how U.S. sanctions are relevant to U.S. credit card issuers and fintech companies:

  1. Restricted transactions: Sanctions prohibit U.S. credit card issuers from engaging in transactions with individuals, entities, or countries designated by the Office of Foreign Assets Control (OFAC), a division of the U.S. Department of the Treasury. This includes processing payments, providing services, or extending credit to sanctioned parties.
  2. Compliance programs: Credit card issuers must implement comprehensive compliance programs to identify and block transactions involving sanctioned parties. These programs should include policies and procedures, employee training, and transaction monitoring systems to ensure compliance with OFAC regulations.
  3. Due diligence: Credit card issuers are required to conduct due diligence on their customers, merchants, and business partners to ensure they are not engaging in transactions with sanctioned parties. This involves screening customers against OFAC’s Specially Designated Nationals (SDN) list and other restricted party lists.
  4. Reporting requirements: U.S. credit card issuers must report any blocked or rejected transactions involving sanctioned parties to OFAC within a specified timeframe. Failure to report such transactions can lead to penalties and enforcement actions.
  5. Penalties for non-compliance: Non-compliance with U.S. sanctions can result in substantial fines, penalties, and reputational damage for credit card issuers. In some cases, individuals involved in non-compliance may also face criminal prosecution.

U.S. credit card issuers and fintech companies must stay informed of updates and changes to U.S. sanctions programs and ensure their compliance programs are up-to-date and effective. This helps protect the issuer from potential financial and reputational risks associated with non-compliance.

Building a Program – AML & BSA Risk Assessment 

An Anti-Money Laundering (AML) and Bank Secrecy Act (BSA) risk assessment is a comprehensive evaluation of an organization’s exposure to money laundering, terrorism financing, and other financial crime risks. A risk assessment typically includes factors such as geographical risk, market risk, product risk, customer risk, and distribution channel risk. By assigning scores to these factors, an organization can better understand its risk exposure and implement appropriate controls to mitigate those risks.

Here is a description of an AML/BSA risk assessment that incorporates a scoring system based on various risk factors:

  1. Geographical risk: Assess the countries and regions where the organization operates or conducts business with customers. Assign a score based on the level of risk associated with each location, considering factors such as political stability, corruption levels, the presence of organized crime or terrorist groups, and AML/CTF regulatory framework effectiveness.
  2. Market risk: Evaluate the organization’s exposure to market risks, such as fluctuations in interest rates, currency exchange rates, or stock market prices. Assign scores based on the level of market volatility and the organization’s susceptibility to these risks.
  3. Product risk: Assess the organization’s products and services, focusing on their vulnerability to money laundering and terrorism financing. Assign a score to each product or service based on factors such as the level of anonymity, transaction size, ease of transferability, and complexity of the product or service.
  4. Customer risk: Evaluate the organization’s customer base, considering factors such as customer type (individual, corporate, or government), occupation, source of funds, and expected transaction patterns. Assign a score based on the level of risk associated with each customer segment.
  5. Distribution channel risk: Assess the organization’s distribution channels, such as branches, agents, digital platforms, or correspondent banking relationships. Assign a score based on factors such as the level of oversight, transparency, and the risk of money laundering or terrorism financing associated with each channel.
  6. Internal controls and compliance risk: Evaluate the effectiveness of the organization’s internal controls and compliance program, including policies, procedures, employee training, and monitoring systems. Assign a score based on the level of risk mitigation provided by these controls.

Once the scores are assigned, the organization can aggregate the scores to create an overall risk score for each category. This process helps identify areas of higher risk that require enhanced due diligence and monitoring.

The results of the risk assessment should be used to develop and enhance the organization’s AML/BSA compliance program, ensuring that resources are allocated effectively to mitigate identified risks. Regularly reviewing and updating the risk assessment is essential to maintain its effectiveness and ensure the organization’s compliance with evolving regulatory requirements.

Building a Program – Miscellaneous Policies 

Here’s an overview of a few key policies and their relevance to credit card issuers which I haven’t covered above:

  1. Suspicious Activity Reports (SARs) Policy: Under the Bank Secrecy Act (BSA), credit card issuers are required to file SARs for any transaction that may involve money laundering, terrorist financing, or other suspicious activities. This policy should establish guidelines for identifying, investigating, and reporting suspicious transactions, as well as maintaining proper documentation.
  2. USA PATRIOT Act Policy (Section 314 reporting): Section 314(a) of the USA PATRIOT Act allows financial institutions, including credit card issuers, to share information with law enforcement agencies to identify and report potential money laundering or terrorist financing activities. The policy should outline procedures for responding to 314(a) requests, safeguarding customer information, and maintaining records of information sharing.
  3. FinCEN Policy: The Financial Crimes Enforcement Network (FinCEN) is responsible for implementing and enforcing the BSA and AML regulations. A credit card issuer’s FinCEN policy should detail the company’s compliance with FinCEN’s regulations, including Customer Identification Program (CIP), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and recordkeeping requirements.
  4. OFAC Policy: The Office of Foreign Assets Control (OFAC) enforces economic and trade sanctions against certain individuals, entities, and countries. Credit card issuers must have a policy in place to ensure compliance with OFAC regulations, including screening customers, transactions, and business partners against OFAC’s Specially Designated Nationals (SDN) list and other restricted parties lists, as well as blocking or rejecting prohibited transactions.
  5. FBAR Policy: The Report of Foreign Bank and Financial Accounts (FBAR) is a reporting requirement for U.S. persons with foreign financial accounts. While this requirement may not directly apply to credit card issuers, they should have policies in place to ensure compliance with FBAR regulations if they hold or have signature authority over foreign financial accounts.
  6. Identity Theft Policy: The Fair and Accurate Credit Transactions Act (FACTA) requires financial institutions, including credit card issuers, to establish an Identity Theft Prevention Program (ITPP) to detect, prevent, and mitigate identity theft. The policy should include procedures for identifying and addressing red flags, verifying customer identity, maintaining customer information security, and responding to identity theft incidents.

By developing and implementing these policies, credit card issuers or fintech companies in the United States can demonstrate compliance with relevant regulations, mitigate risks associated with financial crimes, and protect their customers and business from potential harm. Regularly reviewing and updating these policies is essential to ensure ongoing compliance and effectiveness.

Building Program – Why is this Relevant 

Credit cards and fintech systems can be used in various ways to facilitate money laundering. Money laundering is the process of making illegally-gained proceeds appear legitimate by disguising their origins. Here are some ways that credit cards can be used in money laundering schemes:

  1. Overpayment and refunds: A criminal may make a large overpayment on their credit card account using illicit funds and then request a refund. This creates the appearance of a legitimate transaction and allows the launderer to receive “clean” money from the credit card issuer.
  2. “Credit card factoring” or “credit card laundering”: This involves a criminal using a shell or front company to process fraudulent credit card transactions. They use stolen or fake credit card information to create transactions, which are then processed through the merchant account of the shell company. The company receives the funds from the credit card processor, less any fees, and transfers the laundered money to the criminal’s account.
  3. Collusion with merchants: Criminals may collude with complicit merchants who allow them to use their credit cards to make purchases or pay for services with illegal funds. The merchant then refunds the transaction, providing the criminal with laundered money from the merchant’s account.
  4. Buying and selling goods: Criminals may use illicit funds to purchase high-value goods or services using credit cards, and then sell those goods or services to convert them back into cash. This process can help disguise the origins of the illegal funds.
  5. Multiple small transactions: Criminals can use credit cards to make multiple small transactions (structuring) to avoid detection or reporting thresholds. These transactions may be spread across several accounts, cards, or merchants to further reduce the risk of detection.
  6. Prepaid credit cards: Prepaid credit cards can be used to launder money, as they can be bought and reloaded with cash. Criminals can use these cards for purchases, ATM withdrawals, or online transactions without revealing their true identity. In some cases, they may also use prepaid cards to transfer money between different countries.

Financial institutions, including credit card issuers and Fintech companies, are required to implement robust anti-money laundering (AML) programs to detect and prevent such activities. This includes Know Your Customer (KYC) policies, transaction monitoring systems, and Suspicious Activity Reports (SARs) to identify and report any suspicious activities.

Building a Program – Transaction Flow for a Credit Card Provider

The typical transaction flow for a credit card issuer involves multiple parties and several steps. This section is specific to card issuers as fintech companies have structures that are to diverse to cover in an article, Here is an overview of the process when a cardholder makes a purchase using a credit card:

  1. Cardholder initiates a purchase: The cardholder presents their credit card to the merchant for payment.
  2. Merchant processes the transaction: The merchant uses a point-of-sale (POS) terminal, payment gateway, or other payment processing system to capture the card details and submit the transaction for authorization.
  3. Transaction is sent to the acquiring bank: The merchant’s acquiring bank (or payment processor) receives the transaction details and forwards the information to the card network (e.g., Visa or MasterCard).
  4. Card network routes the transaction: The card network routes the transaction to the issuing bank (the bank that issued the credit card to the cardholder) for authorization.
  5. Issuing bank authorizes the transaction: The issuing bank checks the cardholder’s account for available credit, verifies that the card is valid and not flagged for fraudulent activity, and either approves or declines the transaction. The response is sent back through the card network and the acquiring bank to the merchant.
  6. Merchant receives authorization response: The merchant receives the response and completes the sale if the transaction is approved. The approved transaction is then stored in a batch for later settlement.
  7. Merchant submits the batch for settlement: At the end of the business day or another predetermined time, the merchant submits the batch of approved transactions to the acquiring bank for settlement.
  8. Acquiring bank requests funds: The acquiring bank sends the batched transaction details to the card network, which then forwards the information to the respective issuing banks.
  9. Issuing banks transfer funds: The issuing banks transfer the funds for the settled transactions, minus interchange fees, to the card network.
  10. Card network transfers funds to the acquiring bank: The card network consolidates the funds from the issuing banks and transfers the net amount, minus network fees, to the acquiring bank.
  11. Acquiring bank deposits funds to the merchant’s account: The acquiring bank deposits the funds, minus any applicable fees, into the merchant’s account.
  12. Cardholder is billed: The issuing bank adds the transaction amount to the cardholder’s account balance. The cardholder will be responsible for paying the balance according to their credit card agreement.

This transaction flow represents a simplified version of the process. In practice, there may be variations depending on the specific payment infrastructure, card network, and additional services or features offered by the involved parties.

SOP for a Credit Card Processor and Fintech Company

Creating a comprehensive compliance Standard Operating Procedure (SOP) for a credit card issuer and a fintech company requires addressing multiple areas of regulatory and operational compliance. While the exact SOP will depend on your specific circumstances, the following components should generally be included:

  1. Compliance Management System (CMS): Develop a formalized system for managing compliance within the organization, including the appointment of a dedicated compliance officer, clear reporting lines, and regular communication with senior management.
  2. Regulatory Compliance: Ensure adherence to all applicable federal, state, and local regulations, as well as payment network rules (e.g., MasterCard and Visa). This may include consumer protection laws, fair lending practices, data privacy, and security requirements.
  3. Know Your Customer (KYC): Establish a robust KYC program that includes customer identification, risk-based due diligence, and ongoing monitoring of customer transactions. Ensure that the program complies with all applicable KYC regulations.
  4. Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF): Implement a comprehensive AML/CTF program, including risk-based customer due diligence, transaction monitoring, suspicious activity reporting, record-keeping, and employee training.
  5. Third-Party Risk Management: Develop a process for assessing, monitoring, and managing risks associated with third-party service providers, such as payment processors, technology vendors, and collection agencies.
  6. Fraud Prevention and Detection: Implement a fraud management program that includes transaction monitoring, fraud detection tools, chargeback management, and customer education on fraud prevention.
  7. Data Security and Privacy: Establish a data security program that complies with the Payment Card Industry Data Security Standard (PCI DSS) and any applicable data privacy regulations, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA).
  8. Internal Policies and Procedures: Develop and maintain comprehensive internal policies and procedures that cover all aspects of the credit card issuer’s operations, including card issuance, underwriting, account management, billing, dispute resolution, and fraud management.
  9. Employee Training and Awareness: Provide regular training to employees on compliance requirements, internal policies, and procedures. Ensure that training materials are updated to reflect regulatory changes and industry best practices.
  10. Monitoring, Auditing, and Reporting: Establish a process for regularly monitoring and auditing the credit card issuer’s compliance program to identify gaps, areas for improvement, and potential violations. Implement corrective actions as needed and report any significant compliance issues to senior management and, if required, to regulatory authorities.
  11. Record-Keeping: Maintain accurate and complete records of all compliance-related activities, including risk assessments, audits, training, and reporting, as required by applicable regulations.

The million-dollar issue: Do all credit card issuers and Fintech companies take possession of client funds? As a result, do all credit card issuers require a money services license?

Credit card issuers and Fintechs generally do not take possession of client funds in the same way as banks, which hold deposits in customer accounts. Credit card issuers extend a line of credit to cardholders, allowing them to make purchases or obtain cash advances up to a specified limit. Cardholders are then required to repay the borrowed amount, typically with interest, according to their credit card agreement.

As a result, credit card issuers usually do not fall under the category of money services businesses (MSBs) and may not require a money services license. MSBs typically include entities involved in money transmission, currency exchange, check cashing, and other financial services that involve the handling of client funds.

For more on this topic, you might also read through Structuring a Fintech or Card Issuer without an MSB License

Process to Apply for a Money Service Business License

In the United States, money transmission licensing is regulated at the state level. Each state has its own requirements and procedures for obtaining a money transmission license, which means that if you plan to operate in multiple states, you may need to obtain a license in each state where you conduct business. Here is a general outline of the process:

  1. Research state-specific requirements: Begin by researching the specific licensing requirements for each state in which you plan to operate. You can usually find this information on the state’s financial regulatory agency website or by consulting with a legal professional.
  2. Prepare your application: Each state has its own application form and supporting documentation requirements. Commonly required documents may include a business plan, financial statements, policies and procedures, AML program documentation, background checks, and fingerprints for key personnel, as well as information about the company’s organizational structure and management.
  3. Obtain a surety bond: Most states require money transmitters to obtain a surety bond as part of the licensing process. The bond amount varies by state and is designed to protect consumers in case the licensee fails to meet its obligations.
  4. Pay application fees: Each state typically requires payment of a non-refundable application fee and, if applicable, a licensing fee upon approval.
  5. Submit your application: Once you have prepared all the required documents, submit your application to the appropriate state agency for review. The review process can take several weeks to several months, depending on the state and the complexity of your application.
  6. Respond to any inquiries or requests for additional information: During the review process, the state agency may request additional information or clarification. Respond promptly to these requests to avoid delays in the licensing process.
  7. Obtain your license: If your application is approved, the state agency will issue your money transmission license. You may need to pay an initial licensing fee or meet additional requirements, such as providing proof of a surety bond, before your license becomes active.
  8. Maintain compliance: Once licensed, you must maintain compliance with state-specific regulations, including periodic reporting, financial statement submissions, and maintaining a surety bond. You may also be subject to periodic examinations by the state agency to ensure ongoing compliance.
  9. Renew your license: Money transmission licenses typically have expiration dates and must be renewed periodically. Each state has its own renewal process and fees, so be sure to stay aware of the requirements and timelines to avoid any lapses in your license.

Bond Requirements (CA and TX as examples)

Money Services Businesses (MSBs) are required to obtain surety bonds as part of the licensing process. These bonds help protect consumers from potential financial loss resulting from the MSB’s failure to comply with state regulations or unethical business practices.

Here are the bond requirements for MSBs in California and Texas:

  1. California: Money transmitters in California are required to obtain a surety bond under the California Money Transmission Act. The bond amount varies based on the volume of the money transmitter’s business. The minimum bond amount is $250,000, and the maximum bond amount is $7,000,000. However, if the money transmitter also conducts business in receiving money for obligations, the maximum bond amount may be increased to $10,000,000.
  2. Texas: In Texas, MSBs that are engaged in money transmission or currency exchange must obtain a surety bond under the Texas Finance Code. The bond amount is determined by the Texas Department of Banking based on the MSB’s business activity and volume. The minimum bond amount is $300,000, and the maximum bond amount is $2,000,000. In addition to the state-level bond requirement, certain cities in Texas, such as Austin and Houston, may also require MSBs to obtain a separate bond at the local level.

Note that bond requirements may vary based on the specific type of MSB (e.g., money transmitter, check casher, currency exchanger) and other factors, such as the volume of transactions processed. The above is just an example.

Given the complexity and state-specific nature of money transmission licensing, this is a very complex matter. We are capable of applying for licenses in multiple states if that is what’s required. My quotation below does NOT include the cost of applying for an MSB license(s).

Consulting Services

We can create a compliance program that covers all essential aspects, including regulatory compliance, risk assessment, transaction monitoring, fraud detection, data security, and employee training as described above. Our team of experienced compliance professionals will work closely with you to ensure the program is tailored to your organization’s unique needs and requirements.

We can assist in all aspects of a fintech, crypto, or credit card issuing business compliance program. For more information and pricing, please contact us at info@premieroffshore.com. For information on this topic for banks, see my other website www.banklicense.pro 

What is a Mexican SOFOM

What is a Mexican SOFOM?

In this post, I’ll consider the question, “What is a Mexican SOFOM?” A Mexican SOFOM is a complex entity used for many purposes and the most powerful financial entity or structure in Mexico after a full banking license. In fact, a SOFOM is often the most efficient path to a banking license in Mexico

Mexico is a prime destination for American investors looking to grow their portfolios. Its proximity to the United States, secure banking laws, English speaking professionals, and the strength of the dollar of the country are all factors why American investors are doing business south of the border. 

One of the most powerful entities that you can use for your advantage is called a Sociedad Financiera de Objeto Multiple or SOFOM. There are a number of activities that you can do with a SOFOM such as financing, factoring, making loans, issuing credit, etc. The Mexican SOFOM is also used for cryptocurrency exchanges and money transmission businesses. 

Mexico is currently in the beginning of a new era as its President has promised a wave of reforms that will change many laws, one of the many reforms that have gone through is the way SOFOMs operate in the country. 

You do not need any special authorization to start operating as a SOFOM. Any person with proper Mexican identification can open a SOFOM. That is to say, the director and person responsible for the SOFOM must be a Mexican person. 

The Mexican federal government does not have to be involved at all in the process, so long as you register your financial institution as a non-regulated SOFOM, no license or special permission is required.

Establishing a SOFOM in Mexico works just like opening any other business in the country. Your company must be formed and authorized by a Notario. Do not get confused, a Notario’s role in Mexico is very different from the United States. A notary in Mexico is a very important person, where anyone can be a notary in the US.

Your Notario will create the bylaws of the SOFOM which will feature how the principal purposes of the entity will take place. It is important for you to have a business plan that explains in detail how your financial entity will work under a SOFOM. 

As part of one of its functions a SOFOM has the ability to act as a fiduciary in a guaranty trust that is formed to guarantee the credits that it issues, it should also be noted that trusts in Mexico do not work the same way as in the United States. 

One activity that cannot be done with a SOFOM receives deposits from clients as those are reserved for banks and financial institutions in the country. A partnership with a bank in Mexico is required. 

Partnering with a bank as a SOFOM is a great way to operate as a financial entity without an international bank license. The SOFOM structure allows you to hold client funds in your corporate bank account and transact as described above. 

There are two types of SOFOMs available, the regulated SOFOM and the unregulated SOFOM. If you will set up a regulated entity, within the bylaws of a the SOFOM you must include the phrase “financial entity with multiple purposes, a regulated entity”. 

Meaning that in your bylaws your SOFOM needs to be identified by the abbreviation S.O.F.O.M, E.N.R. Regulated SOFOMs are those that have business activities involving financial holding companies and credit institutions. 

Most regulated SOFOMs are owned or controlled by financial institutions and have a number of shareholders. This is because the SOFOM structure is often the most efficient path to an international banking license in Mexico.  

Unregulated SOFOMs work a little different than regulated ones. Unregulated SOFOMs are not overseen or are subject to any relevant banking or tax laws in a country such as the CNBV and SHCP.

Capital in unregulated SOFOMs is independent and does not include the participation of third party credit institutions and holding companies. You cannot use the word “bank” in the bylaws of an unregulated SOFOM. Also, an unregulated SOFOM does not have any minimum capital requirements. 

If you are establishing your SOFOM as an unregulated entity you must disclose to clients and possible investors that you are not subject to the supervision of Mexican Banking Laws or institutions such as the CNBV. 

The only government institutions that have the power to regulate unregulated SOFOMs are the Secretaria de Hacienda y Crédito Público (SHCP), CONDUSEF, and any other applicable anti-terrorism and money laundering laws. 

The bottom line is that the Mexican SOFOM is the most powerful structure to start a financial services business, mortgage or payday lender, to raise capital, or to operate a cryptocurrency exchange in Latin America. 

The setup process to start an unregulated SOFOM is burdensome and takes 3 to 4 months depending on the time of year. We will be happy to assist you throughout the process, including local representation, banking, and operational support. 

I hope you’ve found this article on what is a SOFOM to be helpful. For more information, or for assistance in establishing a SOFOM on Mexico contact us at info@banklicense.pro or call us at (619) 483-1708

For more up to date information on offshore bank licenses and financial services structures, see www.banklicense.pro

US Expats and Retained Earnings in Foreign Corporations for 2018

US Expats and Retained Earnings in Foreign Corporations for 2018

The days of retained earnings in offshore corporations are officially over. No longer can those of us living and working abroad hold profits in excess of the Foreign Earned Income Exclusion inside of our corporations tax-deferred. Here’s what you need to know about US expats and retained earnings in foreign corporations for 2018.

Please note that this article is focused on offshore corporations owned by US persons in 2018. A US person is a US citizen or green card holder no matter where they live or a US resident. For a more detailed and code focused article on this topic, see: Bloomberg on Controlled Foreign Corporations.

Also, there’s some speculation in this post and things are subject to change. The IRS has not issued guidance on how Trump’s tax plan affects US expats and retained earnings in foreign corporations in 2018. Though, every expert I’ve spoken with agrees that the days of retained earnings in excess of the FEIE are over.

A few short months ago, we expat entrepreneurs were all excited about Trump’s tax plan. He was going to eliminate worldwide taxation and move the United States to a territorial tax system. The US is the only major country on earth that taxes its citizens abroad, so this sounded great.

Well, the final bill fell far short of President Trump’s campaign promises. While multinationals were converted to a territorial tax system, and no longer pay US tax on foreign-sourced profits of their international divisions, the small to medium sized expat entrepreneur got the shaft.

If you’re an American expat operating a business abroad, you’ll want to sit down before reading this post. My buddy Gary said it best, “Trump has cut the legs out from under the American expat in favor of the Apples and Googles of the world.”

Let me start by defining a few terms.

For my purposes here, an American expat is a US citizen or green card holder living outside of the United States. They qualify for the Foreign Earned Income Exclusion by being out of the US for 330 out of 365 days or by becoming a legal resident of a foreign country over a calendar year. A resident of a foreign country might spend a couple of months in the US, but never more than 183 days in a year.

Those who qualify for the FEIE in 2018 get to exclude up to $104,100 in ordinary income from their US tax return. That means they get up to $104,100 in salary or business income tax-free because they’re living abroad. All capital gains and salary in excess of the FEIE is taxable in the United States (I’ll leave the Foreign Tax Credit for another day).

US expat business owners have traditionally held profits in excess of the FEIE inside their foreign corporations as retained earnings. This allowed them to defer US tax on these profits until they took them out as dividends. For more on this, see my 2013 article, How to Manage Retained Earnings in an Offshore Corporation.

Then Trump’s tax plan came along and smashed American expat entrepreneurs. As with any tax overhaul, there are winners and losers. We expats apparently didn’t donate as much as the multinationals, so we’re the big losers.

The Tax Cuts and Jobs Act introduced major changes to the international tax provisions of the United States Internal Revenue Code of 1986, as amended, which generally govern the tax consequences to US persons with foreign corporations.  Some of these changes may have an impact on the tax structure of US expats.  

As a result of the new international tax provisions, the US owners of a foreign corporation, which are controlled by US persons, may be subject to (i) a “toll tax”, (ii) a tax on deemed “global intangible low-taxed income” (GILTI) and a minimum base erosion and anti-abuse tax (BEAT) in the United States, and thus US tax deferral on the income earned abroad in excess of the FEIE may be lost.

To put that into English, The Tax Cuts and Jobs Act hits expats on two fronts:

  1. We must repatriate foreign retained earnings from prior years and pay US tax at 15.5% on those profits. This tax can be spread over 8 years.
  2. The ability of expats to retain profits in a foreign corporation is eliminated. We must now pay US tax on our profits in excess of the Foreign Earned Income Exclusion. A business owner can earn $104,100 tax-free, or a husband and wife both working in the business can take out a combined $208,200 in 2018 free of Federal income tax.

So, an American expat that nets $1 million a year in his or her business will pay US tax on about $897,000, no matter where they live. The ONLY exception and the only place on the planet where Trump’s tax plan can’t reach is the US territory of Puerto Rico. More on that below,

The new tax law eliminated retained earnings in offshore corporations with a very small change to the law. It put just about every income category under the Subpart F of the tax code. Interestingly, oil revenue was the only item removed from Subpart F… I wonder how that happened.

Subpart F income in an offshore corporation is not eligible to be retained tax-deferred. It must be passed through to the shareholders and taxed. Shareholders pay tax on Subpart F income whether or not they actually receive it, much like income in a US LLC.

As a result, if your foreign corporation is a CFC, ordinary business income is now Subpart F income and taxable in the United States as earned.

For an article on the previous definition of Subpart F in a CFC, see: Subpart F Income Defined. If you’re a glutton for punishment, or just nostalgic for the good old days of 2017, see: How to Eliminate Subpart F Foreign Base Company Service Income.

I should also note here that US tax breaks for “pass-through entities,” such as domestic LLCs and S-Corporations are not available to expats. We got all of the bad and none of the good from Trump’s tax plan.

If you’re an American living and working abroad, you have a few options in dealing with Trump’s tax plan and the burden it puts on expats.

The most practical step is to form a US C corporation and start over with a new offshore corporation. Pay the repatriation tax on previous years in your old corporation and start fresh with a structure designed for 2018.

Building out a new structure that includes a US corporation might cut your US corporate tax by 50%. The current US rate is 21% and this can be reduced to 10.5% with a 50% credit in certain situations. In 2026 and beyond, the rate rises to 13.1%. For a detailed article from Harvard, see: Tax Reform Implications for U.S. Businesses and Foreign Investments and scroll down to the section on Low-Taxed Intangibles Income.

This US corporate strategy is much more complex than it sounds. Expat entrepreneurs need to watch out for double taxation. When you take out retained earnings from your US corporation as a divided, you’ll usually pay US tax on the distribution (on your personal return). Careful planning should go into building this structure and a long-term tax plan that minimizes double taxation must be developed.

Another option for businesses with partners abroad is to change their CFC status. The tax laws described here generally apply to Controlled Foreign Corporations. A CFC is a foreign corporation owned by US persons (residents, citizens and green card holders). If US persons own or control more than 50% of the business, it’s a CFC.

If you’re working with non-US persons abroad, you might restructure your business so it’s not a CFC. For example, a US company and a foreign company are working together on deals as separate entities. They might decide to join together in one corporation with each party owning 50% of the shares and having 50% control over the business.

Another option is to buy a second passport from a country like St. Lucia and renounce your US citizenship. Note that it’s not sufficient to buy a second passport to avoid US taxation. You must also renounce your US citizenship and go through the expatriation process. This will take many months and can have a tax cost (exit tax).

In my opinion, every US expat entrepreneur that wants to maintain their citizenship, and is netting $500,000 to $1 million a year in a portable business, should move to the US territory of Puerto Rico. Puerto Rico is the only safe haven on earth not affected by Trump’s tax plan.

If you’re willing to move to Puerto Rico, and spend 183 days a year on the island, you’ll cut your corporate tax rate to 4%. If that’s not enough, you’ll also cut your capital gains rate on assets acquired after you become a resident to 0% (yes, that’s zero, nada, nothing). This zero percent tax rate also applies to dividends from Act 20 companies. ‘

For information on Puerto Rico’s Act 20 and 22, see: Changes to Puerto Rico’s Act 20 and Act 22.

As you read through the many articles on my website about Puerto Rico, note the following changes for 2018:

  1. Act 20 no longer requires you hire 5 employees. You can move to Puerto Rico and be the only employee of your business.
  2. Just like offshore corporations, Puerto Rican corporations can no longer retain earnings. This means that US shareholders of Act 20 companies who are living in the US no longer get tax deferral. To put in another way, after Trump’s tax changes, Puerto Rico’s Act 20 is only available to US citizens and green card holders willing to relocate to the island and spend 183 days a year there.

For an article that compares Puerto Rico’s tax incentives to the FEIE, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

I suggest that Puerto Rico is best for portable businesses netting $500,000 to $1 million a year. I get to this number because of the fact that you, the business owner, must pay yourself a fair market salary. This salary is taxed at ordinary income rates in Puerto Rico. Then your corporate profits, which are net business income after you pay yourself a “reasonable” salary, are taxed at 4%.

You then distribute these profits to yourself as a tax-free dividend. Even if you move back to the United States, you’ll never pay personal income tax on the dividend. To see this is the US tax code, go to IRC Section 933.

So, Puerto Rico’s tax deal is basically the inverse of the FEIE. With the Exclusion, you get $100,000 tax-free and pay US tax on any excess. With Puerto Rico, you pay tax on your first $100,000 in salary and 4% on any excess.

If you don’t move to Puerto Rico, and remain offshore, your international businesses should be operated through a foreign corporation in a low or zero tax country. Operating your business without a structure or through a US corporation means you’ll also be stuck paying Self Employment tax at 15%. No matter your tax situation, an offshore corporation will almost always reduce your net IRS payment.

All expat business owners should be operating inside an offshore corporation to eliminate Self Employment tax and to maximize the value of the Foreign Earned Income Exclusion. You then report your salary from this company on IRS Form 2555 attached to your personal return, Form 1040.

I hope you’ve found this article on US expats and retained earnings in foreign corporations for 2018 to be helpful. This is sure to be a very hectic and confusing tax year. It’s in your best interest to seek planning advice from an international expert early in the year to minimize the impact of Trump’s tax plan on your bottom line.

For more information on restructuring your business, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We’ll be happy to work with you to build a new and compliant international structure.

tax free as an affiliate marketer

How to live tax free as an affiliate marketer in 5 steps

Here’s how to live and work as an affiliate marketer and pay zero in US taxes. If you market other people’s products online, you can easily structure your business to be tax free and fully compliant with US laws. If you’re living and working outside of the United States, this post on how to live tax free as an affiliate marketer in 5 steps is a must read.

This article is specifically tailored to affiliate marketers – those who market other people’s products or services online. You might use PPC, PPA, SEO, or whatever… the point is that you are marketing other people’s products and not selling a physical good into the United States.

If you’re white labeling products, or selling your own products online, the tax analysis is much more complex. If you’re selling other people’s products, the tax picture is simple. It’s easy to live tax free as an affiliate marketer if you know the rules.

And these same techniques can be used by anyone selling a service online. At the end of the day, affiliate marketing is categorized as a service by the IRS. You’re performing the service of marketing. And services are taxable wherever the work is performed. So, affiliate marketing performed outside of the United States is foreign source income.

The same goes for any other service business or business where labor / work is what generates the money. If you’re writing blog posts, selling subscriptions, putting on conferences outside of the US, or marketing other people’s products or services, you’re in the service business.

The difference with a physical product sold into the US market is that products create some level of US source income. Some value must be assigned to the product itself, and that value is taxable in the United States no matter where the work is done to create, pack, ship, support, and market the product.

I should also point out that I’m focused on internet businesses and affiliate marketing in this article. If you are providing a professional service, one that requires you to go to the client’s location to work, more complex rules apply. For more on professional service income, see How to Eliminate Subpart F Foreign Base Company Service Income.

With all of that backstory, here’s how to live tax free as an affiliate marketer in 5 steps.

  1. Setup an offshore corporation and run your business through that entity,
  2. Open an offshore bank account and have your clients pay into that account,
  3. If you must have a US corporation and account, move your income out of the US and over to the offshore company each month or quarter,
  4. Live outside of the United States and qualify for the Foreign Earned Income Exclusion, and
  5. Hold profits in excess of the FEIE in the offshore corporation as retained earnings.

The first step in living tax free as an affiliate marketer is to setup your offshore company. The most efficient structure is usually a corporation formed in a zero tax jurisdiction. We’ve found Belize, Nevis, Cook Islands and Panama are the best options for internet businesses.

If you want an added layer of asset protection, you can setup an offshore trust or Panama foundation as the holding company. This will provide maximum protection from future civil creditors. For more, see: Panama Foundation vs Cook Island Trust.

One word of caution on Panama. The officers and directors of Panama corporations are public record and listed in a searchable database. The same goes for founders (settlors) and council members (trustees) of a Panama foundation.

Affiliate marketers often want privacy to minimize the probability of a lawsuit. So, you might add an LLC from Belize or Nevis to the mix. You are the owner of the LLC and the LLC is the officer, director, or founder of your structure. In this way, only you and your banker know who the ultimate beneficial owner of the business is. For more information see: The Bearer Share Company Hack.

The second step is to open an offshore bank account (and possibly a merchant account) for your internet business. Your clients or affiliate networks should be paying by wire transfer into this account.

Clients often look to St. Vincent, Belize, Cook Islands or Panama for this account. The most popular offshore jurisdiction with affiliate networks are Panama and Hong Kong. The problem with this is that both of these jurisdictions now require you have legal residency before opening a business bank account.

If you can’t get paid into an offshore bank account, then you’ll need a US corporation. You want this company to bill the customer and then transfer the profit to your offshore account. The US company bills the client and you bill the US company such that it breaks even at the end of the year.

Note that this is only permitted if you’re living abroad, qualify for the Foreign Earned Income Exclusion, and have no employees or other business ties to the United States. Basically, all profits must be foreign sourced and not taxable to your US corporation.

That’s all pretty simple. The next part is the hard one… the one that takes real commitment if you want to keep Uncle Sam out of your pocket and live tax free as an affiliate marketer. You must live abroad and qualify for the Foreign Earned Income Exclusion (FEIE).

In order to qualify for the FEIE, you must be a legal resident of another country for a calendar year or out of the United States for 330 days during any 12 month period. The legal residency option is referred to as the residency test and the 330 days option is referred to as the physical presence test.

If you qualify for the FEIE, you can exclude up to $102,100 in salary from your internet business in 2017. That is to say, you can take a salary of up to this amount from your offshore corporation and pay zero Federal income tax on the amount. If both a husband and wife are working in the business, you can take out just over $200,000 tax free.

The physical presence test is easy enough to understand. Simply be out of the United States for 330 out of 365 days and you’re golden.

The problem with this test is that everyone tries to push the boundaries. They plan to spend exactly 36 days in the United States, but something always goes wrong. Maybe a delayed flight, extra business meeting, or family emergency. Many people who attempt to use the FEIE physical presence test get it wrong or incorrectly report their days, which is why the IRS loves to audit Americans who claim the FEIE using the 330 day rule.

If you do lose the Exclusion, you lose it entirely. If you spend 37 days in the US because a flight was delayed, you loose the entire exclusion for that tax year. This means that 100% of your income earned abroad will be taxable in the US. One missed flight could cost you $40,000… if it’s a husband and wife both living and working abroad, the bill might be $80,000.

The residency test is easier to qualify for but harder to setup. You first need to become a legal resident in the country you want to call your home base. Then you need to file taxes in that country, move there with the intention of making it your home for the foreseeable future, and break as many ties with the US as possible.

The physical presence test is fact based while the residency test looks to your intentions and your legal status in a country.  But, if you can jump through all these hoops, you can spend 3 or 4 months a year in the United States (never more than 183 days a year), and stop worrying about losing the exclusion.

In order to use the residency test, you must become a legal resident of your home base country. Finding a country that will grant you legal residency can be hard. Finding a tax haven that will give you residency is darned near impossible these days.

For example, Hong Kong requires an investment in a business of about $850,000. To become a resident of Singapore, you must invest $2.5 million in a business. BVI expects you to setup a business and issues only 25 residency visas a year.

The lowest cost tax haven is Panama. If you’re from a top 50 country, you can get residency in Panama by investing in their reforestation program. Invest $20,000 in a licensed teak plantation and you’ll become a resident of Panama. For more information, see: Best Panama Residency by Investment Program.

The final step is living tax free as an affiliate marketer is to plan for your success. If you earn more than $100,000 (single) to $200,000 (joint) in the business, you need to hold the excess in the corporation. If you take a salary in excess of the FEIE, you will pay US tax on the amount over the exclusion. If you leave that money in the corporation, you only pay US tax on it when you take it out as a distribution.

If you’re business will net $500,000+, and you can benefit from 5 employees, you might think about setting up in Puerto Rico. This island has a unique tax deal which is basically the inverse of the FEIE. For more see: Panama vs. Puerto Rico, which is right for my business.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

I hope you’ve found this article on how to live tax free as an affiliate marketer to be helpful. For assistance in forming the offshore company and planning the business please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to set up the structure business and keep it in compliance.

tax free income the legal way

Pay Zero Income Tax the Legal Way

The internet is filled with Idiots selling scam programs that will teach you how to pay zero income tax. They’re all full of BS and infuriate those of us who try to write about legal ways to protect your assets and minimize your income taxes. In this article I’ll talk about the only legal ways to pay zero income tax on your business and capital gains offshore.

This post is meant for US citizens or green card holders willing to do what it takes to reduce or eliminate their US taxes.

I’ll tell you upfront that paying zero income tax the legal way is VERY difficult. It takes a lot of work and commitment on your part. There are no tricks or easy solutions. To pay zero income tax requires moving you and your business out of your comfort zone… not necessarily out of the United States… but, I’ll get to that in a bit.

And I’m not talking about retirement accounts or other US methods for reducing or deferring US tax. I’ll assume you’re making too much money to benefit from those accounts or that you already have your IRA and 401-k plans setup.

As I said, the web is filled with scam artists pitching all kinds of ways avoid US taxes. Tax lawyers call these guys tax protestors (and morons) and they refer to themselves as sovereign citizens. They’re using straw man companies and sham trusts to claim they earn no “income.”

I won’t get into these bogus arguments because they’ve been debunked time and time again. At this point, tax protestors are just a sad commentary on how gullible some people are. These cases are so cut and dry that lawyers can be sanctioned for wasting the court’s time.

Another issue to watch out for when searching the web are claims that you can operate tax free in a foreign country. These are true statements by providers in the country where you will incorporate… but meaningless to US citizens.

For example, you call a lawyer in Panama to set up a corporation there. You ask them if your structure will pay any tax… and they say no, it does not. It’s totally tax free! They’re talking about the tax laws of Panama. That’s great but, as a US citizen, you’re focused on US tax laws because that’s your real risk.

The provider in Panama is not trying to mislead you. He’s simply telling you the law of his country. He’s an expert in Panamanian law, thus his comments are limited to that country. This is why you always need a quarterback in the US who can show you how US tax laws interact with those of the foreign jurisdictions you’re setting up in.

There are basically four legal ways to eliminate US tax by going offshore. They are:

  1. Offshore captive insurance,
  2. Offshore life insurance,
  3. Set up a division of your business offshore, and
  4. Move to Puerto Rico to eliminate capital gains tax.

Offshore Captive Insurance Company

An offshore captive insurance company allows you to provide insurance to your active business. You form an offshore captive insurance company in Bermuda, Cayman or Belize, and insure against risks not covered by your traditional policies.

As of 2017, the US IRS will allow you to deduct up to $2.2 million of insurance premiums paid to an offshore captive insurance company owned by you. For previous years, the amount was $1.2 million.

By insuring against risks with a low probability of occurring, you effectively move $2.2 million of pre-tax income off of your corporate books in the US and onto an offshore captive insurance company. These transfers then accumulate offshore tax deferred until you close down the structure.

For more, see: The Mini Offshore Captive Insurance Company. This article was written before the deductible amount was increased from $1.2 to $2.2 million.

Offshore Life Insurance

Offshore life insurance, typically offshore private placement life insurance basically allows you to create an “offshore ROTH” without any of the contribution limits or distribution requirements.

You can put as much after tax money into an offshore life policy as you like and it will remain in the plan tax deferred. That is to say, you will pay zero tax on capital gains inside the life policy so long as the plan is active.

If you decide to shut it down and take a distribution, you will pay US tax on the increase in value. If you leave the policy in place until your death, the value will pass to your heirs tax free. Neither you nor they will ever pay US tax on the gains because of the step-up in basis they receive.

You also have the choice of borrowing against the policy. If you need access to the cash, you can take out a loan.

The minimum investment for these offshore life policies is usually between $1.2 to $2.5 million depending on the provider and other factors. For more, see: Benefits of Private Placement Life Insurance.

Offshore Business

If you move you and your business offshore, you can earn up to $200,000 a year tax free. If you move a division of your business offshore, you can get tax deferral on any foreign sourced profits that business generates.

If you move abroad and qualify for the Foreign Earned Income Exclusion, you can earn $102,100 per year free of Federal income tax from your offshore business. If a husband and wife are both working in the business, and both qualify for the Exclusion, you can take out over $200,000 combined.

To qualify for the Exclusion, you need to 1) be a resident of a foreign country and out of the US for about 5 months a year, or 2) out of the US for 330 out of 365 days. It’s much easier to qualify for the FEIE as a resident, so I strongly recommend you consider one of the easy and low cost second residency programs.

For example, you can become a resident of Panama with an investment of $20,000 and Nicaragua for $35,000. Panama is the easiest because this one doesn’t have a physical presence requirement. For more, see: Best Panama Residency by Investment Program.

If you’re not ready to move you and your family offshore, but can setup a division of your business offshore, then you can defer US tax on income attributable to that division.

Assuming your offshore team can operate independently, income they generate should be eligible to be held in the offshore corporation tax deferred. When you take it out as a dividend, either personally or as a transfer to the parent company in the US, you will pay US tax. For more, see: Step by Step Guide to Taking Your Business Offshore

Move to Puerto Rico

Even if you go offshore, you’re still going to pay US tax on your capital gains. So long as you hold a US passport, the IRS wants it’s cut of your investment profits. The only exceptions are investments inside a US compliant life insurance policy (described above) and capital gains for residents of Puerto Rico.

When an American moves to a foreign country, they’re subject to US Federal Income Tax laws. All US citizens and green card holders must pay unto the IRS.

The only individuals exempted from this rule are residents of the US territory of Puerto Rico. US Tax Code Section 933 excludes residents of Puerto Rico from US Federal tax laws.  This means that Puerto Rico is free to create it’s own tax system, which it has done.

If you set up a service business in Puerto Rico, one with at least 5 employees on the island, you can qualify for a 4% tax rate on your Puerto Rico sourced income. To see how this compares to the FEIE, see: Panama vs Puerto Rico.

EDITORS NOTE: On July 11, 2017, the government of Puerto Rico did away with the requirement to hire 5 employees to qualify for Act 20. You can now set up an Act 20 company with only 1 employee (you, the business owner). For more information, see: Puerto Rico Eliminates 5 Employee Requirement

Even better, if you move to Puerto Rico, spend a minimum of 183 days a year on the island, and otherwise qualify for their Act 22, you’ll pay zero tax on your capital gains. That’s right, without any of the costs or limitations associated with a private placement life insurance policy, those willing to live in an island paradise can pay zero income tax on their capital gains.

For more on how to pay zero tax in Puerto Rico, see: How to stop paying capital gains tax.


I hope you’ve found this article on how to pay zero income tax legally to be helpful. For more information, and a consultation, please contact us at info@premieroffshore.com or call (619) 483-1708. We’ll be happy to assist you to structure your affairs offshore in a tax compliant manner.

Foreign Base Company Income

Foreign Base Company Income

When a foreign company is owned by a US person or persons, it’s a Controlled Foreign Corporation (CFC) for US tax purposes. Even if a CFC is operated abroad, some types of income will be taxable in the US as earned. The most common category of taxable income in a CFC is Foreign Base Company Income.

A company with Foreign Base Company Income is owned by “US persons” if residents, green card holders, or citizens of the United States own more than 50% of the company. US persons also includes domestic partnerships, domestic corporations, and certain estates and trusts (IRC § 951).

For purposes of determining who is a US shareholder and CFC status, stock owned directly, indirectly, and constructively is taken into account (IRC § 957). These are called the “look through” rules and prevent you from avoiding CFC status by giving shares to family or putting them in offshore structures and trusts.

Being a CFC means that your foreign company needs to consider Subpart F of the US tax code. As a result, certain types of income of this corporation may be taxable as earned in the United States. Conversely, most income that is not Subpart F income can be retained tax deferred in the corporation.

The most common type of Subpart F income is referred to as Foreign Base Company Income. This category includes 4 subcategories:

  1. Foreign personal holding company income;
  2. Foreign Base company sales income;
  3. Foreign base company service income;
  4. Foreign base company oil-related income.

Foreign base company taxable income consists of the sum of these 4 types of profits earned in a foreign corporation which is owned or controlled by US persons.

I will consider foreign personal holding company income and foreign base company services income here, as those are the categories relevant to my clients. For sales income, you might review IRC § 954(a)(2). For oil-related income, see IRC § 954(a)(5) or contact Secretary of State Rex Tillerson, ℅ US State Department.

Foreign Personal Holding Company Income

Foreign personal holding company income is basically your net passive income earned in a CFC. It’s “net” after foreign taxes paid (subject to treaties), your basis, and allowed expenses. Foreign personal holding company income typically includes the following:

  1. Dividends, interest, royalties, rents, and annuities;
  2. Net gains from certain property transactions;
  3. Net gains from certain commodities transactions;
  4. Certain foreign currency gains;
  5. Income equivalent to interest;
  6. Income from notional principal contracts;
  7. Certain payments in lieu of dividends; and
  8. Amounts received under certain personal service contracts.

The  purpose of the personal holding company income rules as to prevent US persons from deferring tax on passive income on portfolio type investments. An active business can defer foreign source income, but an individual can’t typically structure their passive investments offshore and receive the same benefit.

Foreign Base Company Service Income

Foreign base company service rules target service income earned abroad from related companies in the United States. This is usually income earned from the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or other services.

Income earned by a CFC is considered foreign base company service income only if it meets all three of the following criteria:

  1. The income is earned in connection with the performance by the CFC of certain specified services;
  2. The services are performed by the CFC for, or on behalf of, a related person; and
  3. The services are performed outside of the country in which the CFC is incorporated.

This all means that, when a CFC performs services for a related party through a branch established outside of its country of incorporation, it may incur “foreign base company services income” that may be currently included in its US shareholder’s gross income under Section 951.

Services will be considered performed wherever the worker performs their duties. If you’re a consultant flying from country to country performing a technical task, you probably have foreign base company service income.

Likewise, if you’re a technical professional working in Mexico and operating your business through a Panama corporation to save on Mexican taxes, you probably have foreign base company service income issues.

The solution to this for those who do not travel is to incorporate in the country where you’re working. If you want the benefits of a low tax country such as Panama, you need to be living in and working from Panama.

If you do travel, or don’t wish to incorporate in your country of operation, then a foreign corporation owned by US persons may only provide services to unrelated persons. That is, the company should be performing services for customers on behalf of itself and enter into contracts with those customers directly, not through a related party.

As stated above, only services performed for related parties, and services performed outside of your country of incorporation, generates foreign base company service income. Services are performed for or on behalf of a related party in the following situations:

  1. The related person pays the controlled foreign corporation for the services;
  2. The related person is or was obligated to perform the services performed by the controlled foreign corporation,
  3. The performance of the services that were performed by the controlled foreign corporation was a condition or material term of a sale of property by a related person, or
  4. The related person contributed “substantial assistance” in the performance of the services by the controlled foreign corporation.

If you wish to retain earnings offshore, you must avoid Subpart F, the foreign base company service income and foreign personal holding company issues. The key to a successful offshore plan is to maximize tax deferral in a compliant manner.

I will end by pointing out that foreign base company service income issues are not a concern for small businesses, only those looking to hold retained income offshore. If you’re a small business owner, you live and work abroad, net $100,000 or less, and qualify for the Foreign Earned Income Exclusion, then you don’t need to worry about Base Company isuses.

This is because a small business owner can take out up to $102,100 as salary tax free using the Foreign Earned Income Exclusion. You never want to retain earnings when you can distribute them as earned tax free using the FEIE.

I hope this article on foreign base company income has been helpful. For more information on structuring an active business abroad, please contact us at info@premieroffshore.com or call us at (619) 483-1708. 

offshore bitcoin license

Low Cost Offshore Bitcoin License

The best low cost offshore Bitcoin license is from Panama. Specifically, the Panama Financial Services License is the best offshore Bitcoin license available. Here’s why Panama is the best.

When selecting an offshore Bitcoin license, you want to be in a country with a solid banking system which doesn’t regulate Bitcoin companies. You don’t want to be classified as a brokerage or a bank because of the high costs of compliance. Very few, if any, Bitcoin startups can withstand that level of overhead and scrutiny.

There are many countries that don’t regulate Bitcoin. For example, Costa Rica, Belize, Colombia, St. Kitts and Nevis, etc. Only the United States and Mexico (since 2015) in the region have called Bitcoin a “currency” and required licensing.

So, why does Panama offer the best low cost offshore Bitcoin license? Because you can operate a licensed but unregulated offshore Bitcoin brokerage in Panama. You can get a license from the government and not need to provide audited financials, compliance, or any of the other headaches associated with being regulated.

Bitcoin operators will find the right to say they are licensed as a plus in marketing campaigns. For example, the Panama Financial Services License allows you to make the following claim on your website: Bitcoin Capital Corp is a financial institution licensed by Ministerio de Comercio e Industrias – Republic of Panamá (MICI) in Panama as a Financial Institution and a member of the SWIFT/BIC Network Code: BTCAPAP1

  • Bitcoin Capital Corp is a fictional company for illustrative purposes only.

It’s important to note that you can’t say you’re regulated by MICI. You may only claim to be licensed by this agency.

So, you can’t use the word regulated in your marketing campaign. In addition, you can’t use the terms bank, brokerage, securities, savings and loan, trust (as in trust company, fiduciary or trustee), cash transfer, or money transfer. Each of these requires a different license… and are fully regulated.

That is to say, 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.
  • Any type of banking activity
  • Credit Union (cooperativas)
  • Savings and Loan (financiera)
  • Fiduciary (trust company) services
  • Cash transmittal services or currency exchange (e.g. bureau de change)

If you have a bank license from another jurisdiction, a Panama Financial Services Company can provide services to that bank. It may not offer services to the clients of the bank, only to the bank.

Above I said that an offshore bitcoin broker in Panama is not regulated, which is true. There is no audit requirement or government oversight. Of course, your banking and brokerage partners will impose rules. Also, the laws of Panama apply to you, just as they do to all businesses operating in the country.

This means your firm will need to follow the Anti Money Laundering, Know Your Client and Suspicious Activity laws. Also, your banking partner will demand you keep records to maintain a correspondent account.  

It also means that FinTech firms without correspondent bank accounts will have reduced compliance requirements compared to traditional brokerages. For example, a Bitcoin operator sending transfers across the network, outside of the banking system, will have lower compliance costs. Those who deploy an open, neutral protocol (Interledger Protocol or ILP) to send payments across different ledgers and networks will see added efficiency operating through a licensed but unregulated entity.

Another benefit of Panama is that an offshore Bitcoin licensed Financial Services Company has no minimum capital requirements. You can form your Bitcoin brokerage with any amount of capital you choose.

Of course, your transnational partners and correspondent banks will have account minimums. It would be a challenge for a company incorporated with $5,000 in capital to get the accounts and relationships it needs. The point here is that a Panama Financial Services Company operating as an offshore Bitcoin firm is free to set its capital as it feels appropriate without interference from a government regulator.

The average cost for a licensed offshore Bitcoin firm in Panama is $35,500. This includes opening a business account, assisting you to find office space or a virtual office, and 12 months of tax and business consulting to ensure the structure operates as intended. Annual fees are about $1,500 per year thereafter.

The time to form an offshore Bitcoin company is usually 7 days to setup the corporation and 15 days to receive the license after all of the documents are received by the governments and all of their questions are answered.

I hope you’ve found this article on the best offshore Bitcoin license to be helpful. For more information, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

operate an investment fund tax free from Puerto Rico

How to operate an investment fund tax free from Puerto Rico

The best tax deal available to hedge fund traders and investment fund managers is Puerto Rico. There’s no tax holiday available anywhere in the world that can compete with the offer from Puerto Rico. Here’s how to setup and operate an investment fund tax free from Puerto Rico.

First, let me explain why Puerto Rico can make an offer to US hedge fund managers that no one can match. It’s because Puerto Rico is a US territory with its own tax code. Any US citizen that becomes a resident of Puerto Rico, and operates a business from the island, is exempted from Federal tax laws and pays only tax in Puerto Rico.

The same is not true when you move abroad or setup an offshore company. Federal tax laws apply to any business owned by a US citizen or green card holder… unless that business is in the US territory of Puerto Rico.

The fact that Puerto Rico is exempted from Federal tax laws is codified in US Code Section 933. It states, in part:

“In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a deduction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions), or any credit, properly allocable to or chargeable against amounts excluded from gross income under this paragraph.” (26 U.S. Code § 933 – Income from sources within Puerto Rico)

So, if you’re living and operating your investment fund from Puerto Rico, you’ll pay only Puerto Rico tax. A resident of Puerto Rico is someone who spends at least 183 days a year on the island and otherwise qualifies for Act 22. In addition, Puerto Rico should be your home base and the center of your financial activity.

Your fund will need to be licensed under Act 73, the Economic Incentives for the Development of Puerto Rico Act. Act 73 offers a tax holiday to any investment fund providing services from Puerto Rico to individuals and companies outside of Puerto Rico. Eligible services include investment banking or other financial services including but not limited to:

  • Asset management,
  • Alternative investment management,
  • Management of private capital investment activities,
  • Management of hedging funds or high risk funds,
  • Pools of capital management,
  • Administration of trust that serve to coovert different groups of assets into securities, and
  • Escrow account administration services.

Note that Act 73 requires you provide services from Puerto Rico to persons or businesses outside of Puerto Rico. You don’t incorporate your fund in Puerto Rico… you operate it from Puerto Rico to qualify for Act 73. Operate as a standard offshore master feeder fund in Cayman or another tax free jurisdiction. Basically, the service of operating the fund is being exported from Puerto Rico to Cayman.

Your feeder funds should be organized based on where your clients are domiciled. For example, a Delaware LLP for US investors and an offshore feeder for foreign and tax exempt investors (such as US IRAs and pension funds). You, the general partner and manager would be a resident of Puerto Rico.

Under Act 73, your profits in the fund are taxed at 4%. When those profits are transferred to you, the fund owner/manager resident in Puerto Rico, they will be tax exempt dividends. Thus, your total tax burden is 4% on your profits.

Remember that, as a resident of Puerto Rico, Federal taxes do not apply to you. Thus, you will never pay US tax on these profits. This is not tax deferral as you see offshore… this is a tax rate of 4%, plain and simple.

I should point out that these tax benefits are not meant for your US resident investors. They get their K-1s just as they normally would from your domestic feeder. These tax incentives are meant for the owners of the fund who are resident in Puerto Rico.

  • Nonresident shareholders of the fund can achieve tax deferral on Puerto Rico sourced income while resident shareholders can take distributions tax free.

Also, the 4% rate applies to Puerto Rico sourced income. It does not apply to any US effectively connected income or US source income. Funds and REITS may have US taxable income from lending or any number of other activities in the States.

Structuring and operating a fund from Puerto Rico will dramatically decrease your US taxes. It will also reduce the complexity of your tax planning. So long as you meet the requirements of Act 73, you’re clean in the eyes of the IRS.

Act 73 is only one of several tax incentives available in Puerto Rico. For example, Act 20 allows any service business relocated to the island to receive this same 4% tax rate. For more, see: Puerto Rico is the Top Jurisdiction for US Businesses.

Large funds might decide to enter Puerto Rico using the offshore banking statute, Act 273. For more on this, see: Lowest Cost Offshore Bank License is Puerto Rico. This article is focused on deposit taking banks. There is a section of 273 for International Financial Entities that is used by some investment managers.

I hope this article on how to operate a fund or investment business tax free from Puerto Rico has been helpful. For more information, or to setup a business under Act 20 or 273, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to assist you to negotiate a tax holiday with the government of Puerto Rico.

how to report foreign salary

How to report a foreign salary or international business income

Here’s how to report a foreign salary or international business income. If you earn money from working as an employee or independent contractor, you need to report it on your US tax return. Here’s how to report income paid by a foreign company.

I’ll briefly comment on income earned from abroad while living in the United States. Then I’ll focus on how to report a foreign salary or other income while living abroad and qualifying for the Foreign Earned Income Exclusion.

If you’re living in the United States and are paid by a foreign company, you have self employment income. This must be reported on Schedule C and self employment tax will apply.

Being self employed means you can deduct any expenses you had, such as travel, equipment, etc. It also means you’ll pay self employment tax in addition to ordinary income tax on your net profits. SE tax is 15%.

Anyone who does not qualify for the Foreign Earned Income Exclusion should report income from abroad on Schedule C. Even if you did the work outside of the United States, if you were a US resident during the tax year, you have US source self employment income that goes on Schedule C.

For example, you’re a US citizen living in California throughout 2017. You travel to Taiwan for 2 months on a special project earning $30,000. All of the work on this project is performed while you are in Taiwan.

This income is taxable in the United States and self employment tax applies. If you paid any taxes in Taiwan, you can use the Foreign Tax Credit to eliminate double taxation.

Same facts as above, but you’re in Taiwan for all of 2017 and earn $100,000. You’re out of the US for 330 out of 365 days and therefore qualify for the Foreign Earned Income Exclusion using the physical presence test for 2017.

If you’re an employee of a Taiwanese company, your US taxes are relatively simple. You file Form 2555 with your personal return (Form 1040), claiming the FEIE and reporting your salary from a foreign employer. Because you earned less than $102,300, you will pay zero US tax on your income.

If you had earned $200,000, and paid tax in Taiwan, you would use the FEIE on your first $100,000 and the foreign tax credit on the second $100,000.

Salary is taxable at 18% in Taiwan and your US rate is probably about 30%. So, you’ll pay 18% on $200,000 to Taiwan and 12% to the United States (30% – 18%) on the second $100,000 which was over the FEIE amount.

If you’d been working in a country that didn’t tax your salary, you would have paid zero tax on your first $100,000 using the FEIE. For example, you could have lived tax free in Panama while working remotely for a Taiwanese company.

If you’re not an employee of a foreign corporation, then you have income from self employment. SE income will be reported on Schedule C which will link to Form 2555 and apply the FEIE.

For example, you’re an independent contractor working in Panama for a company in Taiwan. You earn $100,000, which is paid into your personal bank account. You will pay zero income tax because you qualify for the FEIE. However, you will pay 15% in self employment tax. SE tax is not reduced by the FEIE.

For more on self employment tax for those living and working abroad, see How self employment tax works when you’re offshore

You can eliminate self employment tax by forming an offshore corporation and having your employer (the Taiwanese corporation in this example) pay into that account. You then draw a salary reported on Form 2555 and not Schedule C.

Your offshore corporation will file Form 5471. In most cases, this will be attached to your 1040 behind Form 2555.

Keep in mind that Form 2555 can be used with any foreign corporation. It doesn’t matter if you’re an employee of an offshore corporation that you own or an employee of someone else. So long as your salary comes from a foreign company, and you qualify for the FEIE, you can avoid self employment tax and Schedule C.

An offshore corporation can also help to defer US tax on income over and above the FEIE. For example, you’re living in Panama, qualify for the FEIE, earn $200,000 from work, and are paid into your Panama corporation.

You can take out $100,000 and report that as your salary on Form 2555. You leave the balance in the corporation as retained earnings. You will only pay US tax on this money when you take it out of the foreign corporation, usually as a dividend.

I hope you’ve found this article on how to report a foreign salary or business income to be helpful. For help preparing your US returns, or to setup an offshore corporation in a tax free country, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

self employment tax

How self employment tax works when you’re offshore

If you’re living abroad and paid by a US company, you’ll pay self employment tax on your earnings. If you’re living offshore and operating a business without an offshore company or LLC, you’ll pay self employment tax on your profits. Here’s how self employment tax works when you’re offshore and how to avoid it.

All Americans that are self employed or who business owners are responsible for paying self employment tax in one form or another. It doesn’t matter where you live or work… if you’re self employed and hold a blue passport, you must pay SE taxes.

Self employment taxes are assessed as 15.3% of your net profits. The Social Security portion has a limit on how much of your income is taxed, whereas the Medicare portion does not.

The Social Security component of self employment tax is 12.4% and applies to the first $127,200 of SE income in 2017. The Medicare component is 29% and applies to all SE income.

I generally summarize it to say that an American earning $100,000 offshore will pay about $15,000 in SE tax. This is an oversimplification, but makes the math easier. I will also round off some numbers in this article, such as how to calculate payroll taxes.

Common types of income that are subject to self-employment taxes include:

    • Income from home-based businesses
    • Income from freelance work
    • Income from work as an independent contractor
    • Income from a business operated in the United States that has not been subjected to payroll taxes (reported on a W-2)
    • Income paid to an expat from a US corporation
    • Income paid to an expat that goes into her personal bank account rather than into an offshore corporation
    • Any income from work you do while abroad that’s not a salary from a foreign corporation reported on IRS Form 2555.

Self employment tax is meant to target income from work that’s not otherwise subject to payroll taxes. As an employee of a US corporation working in the US, you pay about 7.5% in payroll taxes, which is matched by your employer. Thus, total payroll taxes are around 15%. When payroll taxes don’t apply, the worker gets to pay the full 15% as self employment taxes.

Note that the Foreign Earned Income Exclusion does not apply to self employment tax. The FEIE allows you to exclude your first $102,100 in wage or business income from Federal income tax. Self employment tax is not an income tax and not covered by the FEIE.

So, an American who spends 330 days abroad, earns $100,000 in salary, and is paid by a US corporation, won’t pay any income tax. However, they will get the joy of contributing $15,000 to our social welfare system.

Here’s how to eliminate self employment tax as an expat.

In this section, I’ll assume you’re an American citizen living abroad and that you qualify for the Foreign Earned Income Exclusion. This means you’re out of the country for 330 out of 365 days or a legal resident of a foreign country and don’t spend more than 3 or 4 months a year in the US.

This article doesn’t apply to Americans working abroad for the US Government or those working for foreign affiliates of US companies that have entered into a voluntary payroll tax agreement.  For more information, see: Social Security Tax Consequences of Working Abroad

Self employment taxes apply to income paid to you from a US corporation or money that goes into your personal bank account. It doesn’t matter where that account is located… if money from labor goes directly into a personal account, it’s subject to US self employment tax.

Self employment tax does not apply to income paid to you as salary from a corporation formed outside of the United States. This company can be incorporated anywhere in the world… a high tax country like France or a zero tax country like Panama are equal in the eyes of the IRS for purposes of SE tax mitigation.

So, if your employer pays you a salary as an employee of his non-US corporation, SE tax doesn’t apply.

Likewise, if your clients pay into an offshore corporation owned by you, and you draw a salary from the net profits, this salary is not subject to self employment taxes. It doesn’t matter that you own 100% of the business.

The compliance key to eliminating SE tax is to report your salary on IRS Form 2555. On Part 1, section 5, you must be able to check box A for foreign entity or box D for a foreign affiliate of a US corporation. Box D is applicable so long as your employer hasn’t entered into a payroll tax agreement with the IRS, which is very rare.

The bottom line is that you should always form an offshore corporation to operate an international business.

You never want to use an offshore LLC treated as a disregarded entity.

Nor should you deposit business income into a partnership, trust, Panama foundation, or a personal bank account. B

Business income and expenses should be processed through a foreign corporation, with your salary moving from the corporation to your personal account each month. This salary is then reported on Form 2555.

If your US clients don’t want to pay into an offshore corporation, you might be able to form a US billing entity. Clients would pay the US corporation and the offshore corporation would bill the US company. This can effectively move taxable income out of the US corp and into the offshore corp with no US taxes due.

A US billing entity is only advisable for those with no US employees, no US offices, and no US source income.

I hope you’ve found this article on how self employment tax works when you’re offshore to be helpful. For more information, and to form an offshore business structure, please contact us at info@premieroffshore.com or call us at (619) 483-1708. We will be happy to set up your US compliant foreign corporation. 

PFIC investment

What is a PFIC Investment – Passive Foreign Investment Company

In this article, I’ll review the rules around PFIC investments and the Passive Foreign Investment Company statutes. Here’s everything you need to know about passive income in an offshore corporation.  

First let me define a few terms around PFIC.

Passive Income: Income from interest, dividends, annuities, capital gains, and most rents and royalties.

Passive Foreign Investment Company: An offshore company used primarily to hold passive investments rather than to operate an active business. The two tests to determine if a corporation or LLC is a Passive Foreign Investment Company are:

  1. Any foreign company where 75% of it’s is passive is a PFIC, and  
  2. Any foreign company where 50% or more of its assets are assets that produce passive income is a PFIC

PFIC Investment: A passive investment within a Passive Foreign Investment Company. Also, any investment in a foreign mutual fund, or in a corporation treated as a PFIC is a PFIC investment. Buying stock in company generating passive income, and not operating an active business, can be a PFIC investment.

Second, here are the consequences of investing in a PFIC.

I’ll start with a little commentary in saying that these punitive PFIC rules are a form of capital control imposed on Americans who want to invest offshore. The IRS is charging you a penalty for investing offshore. And, god forbid you make a mistake in reporting your offshore account. The penalties will be swift and severe.

These PFIC penalties where the brainchild of the U.S. mutual fund industry… not a political conspiracy. The industry didn’t want to compete with the better products available abroad, so they paid lobbyists and Congress to invent the PFIC. But, the result is the same as if the Illuminati were imposing capital control on average Americans.

As for the reporting, the IRS estimates it taxes up to 30 hours of work to complete Form 8621, which must be filed each year for each PFIC investment. Add to this forms for the corporation, foreign asset statement, FBAR, and maybe a trust, and you’re over 200 hours to report your offshore investment.

And most of these forms are required no matter the size of your investment and regardless of whether you made a profit. Having a single PFIC investment of $100 inside of an offshore corporation will trigger multiple filing obligations and cost a couple thousand in tax prep should you decide to hire a professional.

This, and the fact that the penalty for getting it wrong on that $100 investment is over $10,000 per year, and you see that average American’s can afford to go offshore. This effectively locks them and their cash in the United States.

All of this negativity and I haven’t even gotten to the PFIC penalties yet. Here they are:

Penalty 1: When you receive a dividend or sell a PFIC share, you must prorate the investment over your holding period and pay an interest charge in addition to the tax.

That’s right, where passive investments in the United States are taxed when sold, those same investments offshore pay tax for each year they are held plus an interest penalty. The purpose of the interest charge is to treat the gain as if it were earned and taxed each year over the holding period.

For example, let’s say you buy a PFIC investment in 2017. You hold it for 3 years and sell it for a gain of $300,000 in 2019. When you file your 2019 return, you’ll need to split the investment over the holding period and pay tax on it as if ⅓ was sold in 2017, ⅓ in 2018 and ⅓ in 2019. That is to say, report $100,000 in gains for each year, plus pay interest on the gains made in 2017 and 2018 (because you reported them “late.”)

Penalty 2: Capital gains from PFIC investments are taxed at the highest ordinary income rate plus the interest charge. Long term capital gains rates are NOT available.

While long term capital gains are taxed by the Feds at 20% to 23.8% (including Obamacare taxes as applicable), the top ordinary income rate is 39.6%. When you add up penalties 1 and 2, the tax and interest penalties for investing offshore can eat up 70% or more of your gain.

Penalty 3: Capital losses on PFIC investments can’t be used to offset capital gains on domestic investments.

While U.S. passive gains and losses offset each other, you can’t reduce your U.S. capital gains with offshore capital losses from PFIC investments. This means your offshore investments MUST turn a profit, or the penalties for going offshore will be severe.

Here are a few exceptions to the PFIC investment penalties…

You can opt out of the PFIC Investment rules with an LLC. If you form an offshore LLC and then make an election to be classified as a disregarded entity or partnership, you will not be considered a PFIC. Only a foreign entity with the ability to retain earnings, such as a corporation or an LLC treated as a corporation, is classified as a PFIC.

In most cases, the PFIC rules do not apply to investments of less than $25,000 (single) or $50,000 (joint).

  • My example above of a $100 investment was inside a corporation, which must always be reported no matter the size.

You can opt out of the PFIC investment rules by making a QEF Election. If a PFIC meets certain accounting and reporting requirements, and is FATCA compliant, you can avoid the PFIC penalties by treating the investment as a Qualified Electing Fund (QEF).

But a QEF election is very complex and difficult to use unless your offshore investment or fund is set up for QEF reporting. In my experience, only the very largest offshore funds have the ability to provide QEF reports that allow you to use the QEF election. This is because:

  1. You must report and pay tax on your share the ordinary gains and passive income of the PFIC investment each year. Your investment might not be able to provide (or willing to provide) such an annual report.
  2. You can elect to report but pay no tax on the QEF elected gains in a PFIC. In this case, you will pay interest on untaxed gains when the investment is sold. You are effectively “carrying over” your gains and losses year to year and paying the tax plus interest when the sale is made. This is best if the returns are uncertain or you have gains in some years and losses in others.
  3. If you don’t make the QEF election in the first year, it becomes difficult to make it later. You need to report a “deemed sale” and then begin with the QEF from that year.

The bottom line is that Passive Foreign Investment Company rules are complex and punitive. They’re a form of capital controls being imposed on Americans by the Internal Revenue Service.

And I haven’t even covered the more esoteric areas of PFIC investing, such as 1291 funds, or the mark-to-market election for stock under the PFIC and section 1296.

For this reason, it’s important to hire a U.S. expert to form ANY offshore structure. Whether you use it to buy real estate, invest in stocks, hold a bank account, or operate a business, a U.S. expert should be the one to quarterback your offshore adventure.

I hope you’ve found this article on the joys of PFIC investments and the Passive Foreign Investment Company Rules helpful. For more information on structuring your investments offshore, please contact me at info@premieroffshore.com or call us at (619) 483-1708. 

stop paying payroll tax

How to Stop Paying Payroll Tax

During the election,Trump claimed he’s paid “hundreds of millions of dollars” in taxes over the years. Yet, he probably didn’t pay any personal income taxes since 1995 because of a $916 million loss carryforward. How can both of these statements be true? Because most Americans pay more in payroll taxes than income tax!

In this article, I will explore how you can opt out of the US payroll tax and self employment tax systems by going offshore. How to stop paying into Social Security and other government programs that might not be there when you need them. How to create your own security blanket offshore that’s under your control.

Federal payroll tax is about 15%, with half being paid by your employer and half being deducted from your check. In addition, most states charge a payroll tax of 1.5% to 7.5%, again with half coming from the employee and half from the employer.

Self employment tax is basically payroll tax for small business. If you operate without a corporation, and report your income and expenses on Schedule C of your personal return, you will pay 15% of self employment tax. This is intended to match up with the 7.5% paid by an employer and the 7.5% withheld from every paycheck.

  • I’m using round numbers to keep it simple. For the precise cost of hiring an employee in California, see this great infographic.
  • For purposes of this article, I’ll use the terms self employment tax and payroll tax interchangeably.

When the Donald says he’s paid hundreds of millions in taxes, he’s probably counting employment taxes paid by his many companies, plus payroll and other taxes he’s paid personally. Assuming a payroll tax cost of 10% for each employee, the numbers add up quickly and his boast is probably correct… even if he paid zero in personal income taxes.  

About 66% percent of households will pay more in payroll taxes than they will in income tax. Only one in five households will pay more in income taxes than employment taxes. Those who do pay more income taxes than payroll taxes are at the very top of the wage scale. Middle income and low income taxpayers are paying far more in payroll than income tax.

Only 18% of US households pay neither payroll nor income tax. Of these, half are retirees living on their Social Security and have no other taxable income. The rest have no jobs and not much income.  (source: T16-0129 – Distribution of Federal Payroll and Income Taxes by Expanded Cash Income Percentile, 2016, Tax Policy Center)

If you’re a business owner or an independent contractor, here’s how to stop paying payroll taxes… and income tax on your first $102,100 of salary in 2017.

Live outside of the United States, qualify for the Foreign Earned Income Exclusion, operate your business through an offshore corporation in a zero tax jurisdiction, and you will pay no payroll taxes of any kind.

In order to qualify for the Foreign Earned Income Exclusion, you must be out of the United States for 330 out of 365 days or be a legal resident of a foreign country and out of the US for 7 or 8 months a year. Any income earned while in the US will be taxable here.

As a legal resident, your new country should be your home base for the foreseeable future. If you move somewhere for a short term job, you’re not a resident for purposes of the FEIE. You need to move to a foreign country with the intent to live there indefinitely.

If you don’t want to go through the hassle of getting a residency visa, you need to be out of the US for 330 out of 365 days. While this version of the test doesn’t give you much time with friends and family in America, it’s far easier to prove should the IRS challenge your tax return.

If you live abroad and qualify for the FEIE, but don’t operate your business through an offshore corporation, you will still pay payroll taxes! You will eliminate income tax on your first $102,100 in 2017, but self employment tax will apply at 15%. So, a business that net’s $100,000 is basically paying a penalty of $15,000 for failing to incorporate offshore. A husband and wife who net $200,000, could pay a $30,000 penalty.

  • If you run your foreign business through a US corporation, you will pay payroll taxes. If you don’t have any corporate structure, you will pay self employment tax.

What happens if you make more than $100,000 (single) or $200,000 (both spouses work in the business)? Any excess salary you take out of the business will be taxed at about 32% by the IRS. Still, no payroll or self employment taxes will apply.

If you’re operating through an offshore corporation, you may be eligible to hold those profits in the company and not pay tax on them until they are distributed. That is to say, you can hold income over the FEIE amount as retained earnings in your offshore corporation.  

These retained earnings will basically create a giant retirement account or security blanket. Like money contributed to an IRA, this cash is untaxed until you take it out of the corporation. Unlike an IRA, there are no rules or age requirements forcing distributions.

So, if you want to stop paying payroll taxes and self employment taxes, move out of the United States, qualify for the FEIE, and operate your business through an offshore corporation.

For help on setting up a tax compliant structure, please contact me at info@premieroffshore.com or call us at (619) 483-1708. I will be happy to assist you to set up offshore.

money management accept client funds

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

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.

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.

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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


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.

Offshore Asset Protection for Affiliate Marketers

Affiliate marketers face unique asset protection, privacy, and tax planning challenges. This article will review your options and point out some of the pitfalls to watch out for. We’re specialists in offshore asset protection for affiliate marketers and can help you to grow your online business in an efficient and compliant manner.

At the end of the day, www.premieroffshore.com, and our lifestyle site www.escapeartist.com, are internet based businesses. I write SEO optimized posts like this one to drive traffic and bring in leads. We’re a remote business with our publishing group based in San Diego and fulfillment in Belize and Panama City.

As the editor and chief marketing guy, I spend my days on the road, tapping away on my laptop. Our in-house attorneys are chained to their desks, but I made sure the marketing team was portable.

We’ve been providing offshore asset protection to affiliate marketers via the web since 2003 and understand the unique needs of your business model. We’re the only firm that provides offshore structures and U.S. tax compliance… at least, the only one in the middle of the market. Our price points are a bit lower than Deloitte, PwC, and E & Y.

  • Our offshore protection structures are positioned in the middle of the market. Less than big name CPA firms and higher than offshore incorporation mills that provide no guidance or support.

This post will focus on asset protection for affiliate marketers. As I said above, we also provide tax planning for offshore businesses, as well as for those in the U.S. territory of Puerto Rico. For more on Puerto Rico, see: Puerto Rico is the Top Offshore Jurisdiction for Americans.

To summarize Puerto Rico, if you move your business to the island, and hire 5 employees, you’ll cut your U.S. tax rate to 4%. To compare that tax deal to moving offshore, see: Puerto Rico Tax Deal vs Foreign Earned Income Exclusion.

The remainder of this article will focus on offshore asset protection. Offshore asset protection for affiliate marketers is generally tax neutral – it should not increase nor decrease your U.S. taxes. It’s meant to keep your transactions private and your cash safe from future civil creditors.

You can combine offshore asset protection with an office or division offshore that helps to manage your worldwide tax obligations. But, your asset protection plan is independent of your international tax plan. Thus, you might start with an offshore asset protection plan for your affiliate marketing business and grow it into a business tax savings plan.

Issues in Asset Protection for Affiliate Marketers

When planning an offshore asset protection structure, affiliate marketers face a number of interesting challenges. For example, the need for privacy and the ability to diversify with  subsidiaries are more urgent than with other business models.

Affiliate marketers value their privacy. For this reason, we created the Panama max privacy structure. We use a Belize LLC as the founder of a Panama foundation and a Panama corporation under the foundation to run the business. We can add corporations from other jurisdictions, as active business subsidiaries of the foundation, where necessary.

For more on our max privacy structure, see: The Bearer Share Company Hack

The Panama foundation provides estate planning and asset protection for your business units… and acts as a holding company to bring them together under one umbrella.

Panama offers great asset protection and banking facilities. The problem is that they have a public registry of ownership. That means the founder of a foundation, along with the shareholders and directors of corporations, are public record. We work around this with a Belize LLC because Belize doesn’t maintain a registry and Panama allows the founder to be a person or a foreign company.

That’s all a fancy way of saying that the Belize LLC maximizes privacy by acting as the founder of your Panama Foundation. When someone searches the Panama registry, all they find is the name of your Belize company.

I believe you’ll find that the Panama foundation is the best choice when planning an asset protection structure for your affiliate marketing business. It’s primary competitor, the offshore trust, is a great tool, but not recommended for managing an active business.

An offshore asset protection trust is the solution for someone who wants to build a nest egg offshore out of the reach of future civil creditors. You can add money managers as trustees and maximize protection with a “protector” in case you (the settlor) come under duress.

That is to say, an international trust is perfect for someone who wants to put cash away for the future. A trust is not the structure to hold an active business where you want to maintain control and maximize privacy.

Many of our clients move a portion of their after tax net profits out of the Panama structure and into an offshore trust. You can combine both for the best of both worlds while diversifying your holdings.

Offshore Merchant Accounts

Specializing in offshore asset protection for affiliate marketers means working with many banks and acquirers around the world. We’re experienced in merchant account issues as described here: How to Get an Offshore Merchant Account.

For example, many of our clients run multiple MIDs and require subsidiaries from a variety of jurisdictions to hold those accounts.  This allows them to maximize privacy, diversify risk, and build systems that spread chargebacks among their portfolio.

To support this requirement from affiliate marketers, we’ve built a network of agents around the world. We can incorporate subsidiaries in a different countries quickly and at a reasonable cost.

We also understand that subsidiaries must be formed in countries which are acceptable to your processor. For this reason, we have U.K., Hong  Kong, E.U., Caribbean, and Panama solutions. We also advise on U.S. accounts for companies in Puerto Rico.

  • A comapny incorporated in the U.S. territory of Puerto Rico can open bank accounts at just about any U.S. bank.

Another option for a business with no office or employees in the United States, is to form a subsidiary in the U.S. That subsidiary will hold only bank and merchant accounts and pass profits to the parent company.

This solution is recommended for entities with no U.S. source income. You will likely need a U.S. person to open the account… it’s become difficult for foreign persons to open U.S. accounts… and nearly impossible for non-U.S. persons without U.S. credit scores to get a low cost merchant account.

Why Hire a U.S. Provider?

Internet marketers know how to outsource. How to leverage low cost labor around the world to get things done. Why should you pay U.S. prices for your international tax or offshore asset protection plan?

Simple: only a U.S. expert can build an offshore asset protection structure that’s U.S. compliant.

When you outsource  your offshore structure, you will get answers to your questions and solutions based solely on the laws of that country. For example, contact an offshore trust promoter in Cook Islands and they’ll answer inquires based on Cook Island law.

But, when you’re a U.S. citizen, your compliance risk and liability from lawsuits is in the United States. Thus, the focus should be on how the laws of your asset protection jurisdiction interact with those of your home country.

Since this is a post on asset protection for affiliate marketers, here’s a tech example…

You, the IT professional, can outsource website design because you’re an expert in website design. You know exactly what you want to accomplish and how to get there. You write the text and manage the process from start to finish.

What if you weren’t an expert in design or SEO issues? Should you hire someone to quarterback the project or should you outsource? Knowing what you know now, would you have gone it alone or hired someone to guide you in those early days?

You’d hire a quarterback because you don’t know what you don’t know. As an an expert, you understand how complex a major design or redesign can be. You know that a layperson will likely screw it up terribly, putting the entire project at risk.

This knowledge has come over years in the industry. Through trial and error, you know where the pitfalls are. You know how to drive traffic and optimize your sites. You know what works and what doesn’t.

I have a friend who’s new to the online world. He was tasked to redesign a 10 year old website with 15,000 pages and a solid Google reputation. The owners of the site didn’t want to spend any money, so he was on his own and outsourced design.

While updating the site, he thought it would be a good idea to restructure the URLs. To create a few different categories and make the permalinks more descriptive.  Yeh, he decided to change the URL structure and break the thousands of inbound links for an authoritative site… the links that gave the domain much of its “reputation.”

As an internet professional, you know what a bad idea it is to change the URL structure of an authoritative website with years of history. But my friend had no idea what he didn’t know. Had he hired a quarterback, the expert would have stopped him from falling in this obvious trap.

It’s the same when planning an offshore asset protection structure. You need someone to manage the process and keep you in compliance. Outsource and the promoter will tell you what you want to hear (sure, we can restructure your URLs). Hire an expert and they will tell you “no,” when you need to hear it!

For example, when you want to use a nominee singor on your offshore bank account, you need to hear no. When you, a U.S. resident with no employees offshore, want to setup a company to hold foreign profits and only pay U.S. tax when you bring the money into the U.S., you need to hear hell no!

As with internet marketing, there are many risks in going it alone. Unlike online risks, the penalties for getting out of compliance or using an offshore structure incorrectly can cost you hundreds of thousands of dollars in penalties or even land you in jail. The U.S. government has become extremely hostile to non-compliant offshore structures and you must have an expert in your corner to keep you from becoming a target.

The world of offshore is ever changing, complex, and fraught with risks you can’t see. We can guide you the maze and quarterback your offshore structure, all with a focus on your internet based business.

I hope you’ve found this article on asset protection for affiliate marketers to be helpful. For more information, please contact me at info@premieroffshore.com or call (619) 483-1708 for a confidential consultation.