Below is a list of services an International Financial Entity may provide from Puerto Rico to persons and companies outside of Puerto Rico. This is a complete list of possible services taken from Section 12 of Act 273.
An offshore bank licensed in Puerto Rico can provide any and all banking services listed in its license. The only limitation imposed on an International Financial Entity in Puerto Rico is that it cannot do business with persons and companies in the Territory. That is to say, an international bank in Puerto Rico can do business with anyone in the world except those based in Puerto Rico.
However, an IFE can only provide those services authorized in its license. Unlike other jurisdictions, Puerto Rico issues a specific use license. If a particular service below is not included in the license, you can’t provide it.
With that said, here are the services and business lines for an offshore bank licensed in Puerto Rico:
(1) Upon authorization of the Commissioner, accept deposits from foreign persons in checking accounts, as well as demand or term deposits, including interbank demand deposits and fund deposits, or otherwise borrow money from international financial institutions and from any foreign person pursuant to the Regulations of the Commissioner. Every international financial institution may borrow money on loan, provided, that said transactions are not tantamount to the acceptance of deposits.
(2) Upon authorization of the Commissioner, accept properly collateralized deposits or otherwise borrow duly secured money from the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico.
(3) Make or place deposits in, and otherwise give money on loan to, the Government Development Bank for Puerto Rico, the Economic Development Bank for Puerto Rico, any international financial institution, or any bank, including banks organized under the laws of Puerto Rico, and branches in Puerto Rico of banks that are foreign persons.
(4) Make, procure, place, guarantee, or service loans; none of such loans may be granted to a domestic person, except as provided with regard to the activities described in paragraphs (3), (7), (18), (19), (20), and (21) of subsection (a) of this Section, and in the cases of financial securities for debt issue transactions in Puerto Rico, subject to the approval of the Commissioner.
(5) (A) Issue, confirm, give notice, negotiate, or refinance letters of credit; provided, that the client and the beneficiary requesting the letter of credit is not a domestic person, or
(B) issue, confirm, give notice, negotiate, or refinance letters of credit in transactions for the financing of exports, even if the beneficiary is a domestic person.
(6) Discount, rediscount, deal or otherwise trade in money orders, bills of exchange, and similar instruments; provided, that the drawer and the original debtor is not a domestic person.
(7) Invest in securities, stocks, notes, and bonds of the Government of Puerto Rico exempt from the payment of taxes in Puerto Rico.
(8) Carry out any banking transactions allowed by this Act in the currency of any country, or gold or silver, and participate in foreign currency trade.
(9) Underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts, and bills of exchange issued by a foreign person for final purchase outside of Puerto Rico.
(10) Engage in trade financing of import, export, barter and exchange of raw materials and finished products activities with domestic persons, when the Commissioner has determined through regulations, administrative determination, or order that the international aspects of the underlying transaction override any involvement of the local financial and business community, and that such activities would be appropriate for the international financial institution; those transactions allowed by exception shall not enjoy the exemption granted under Sections 21 and 22 of this Act, or from the preferential tax rate established in subsection 6(a) of this Act.
(11) Engage in any activity of a financial nature outside of Puerto Rico which would be allowed to be done, directly or indirectly, by a bank holding company or by a foreign office or subsidiary of a United States bank under applicable United States law.
(12) After obtaining a special permit from the Commissioner, act as fiduciary, executor, administrator, registrar of stocks and bonds, property custodian, assignee, trustee, attorney-in-fact, agent ,or in any other fiduciary capacity; provided, that such fiduciary services shall not be offered to, nor inure to the benefit of domestic persons.
(13) Acquire and lease personal property at the request of a lessee who is a foreign person, pursuant to a financial lease agreement that complies with the Regulations of the Commissioner.
(14) Buy and sell securities outside of Puerto Rico, on the order of, or at its discretion, for foreign persons and provide investment advice in relation to such transactions or separate therefrom, to such persons.
(15) Act as a clearinghouse in relation to financial contracts or instruments of foreign persons, as authorized by regulations adopted by the Commissioner.
(16) Organize, manage, and provide management services to international financial institutions, and other types of financial entities located outside of Puerto Rico, such as investment companies and mutual funds, provided, that the stock or participation in the capital of such companies is not distributed directly by the international financial institution to domestic persons.
(17) Engage in such other activities as are expressly authorized by the regulations or order of the Commissioner, or are incidental to the execution of the services authorized by this Act and the Regulations of the Commissioner, except those expressly prohibited by this Act.
(18) Participate in the granting and/or securing of loans that originate and/or are secured by the Government Development Bank for Puerto Rico and the Economic Development Bank for Puerto Rico.
(19) Upon approval of the Commissioner, participate in the granting and/or securing of loans originated and/or secured by any bank considered a domestic person, excluding transactions between any bank considered a domestic person and an affiliated entity. These transactions shall only be authorized for the remainder of the calendar year in which this Act is approved and the five (5) calendar years thereafter.
(20) Upon authorization of the Commissioner, acquire classified or bad loans, as well as any personal or real property (tangible and intangible) that serves as collateral for such loans, from any bank considered a domestic person or from any branch of a foreign bank in Puerto Rico. This includes the execution of the collateral related to the aforementioned loans and the sale of property serving as collateral for said loans. The acquisition of these loans shall be authorized for the remainder of the calendar year in which this Act is approved and the six (6) calendar years thereafter, that is, until December 31, 2018. The execution of related collateral or the sale of property serving as collateral may be carried out within a period that reasonably meets industry standards, or the original term of the acquired loan, whichever is greater.
(21) (A) Finance, through loans or financial securities, projects in areas of priority for the Government of Puerto Rico in those cases designated as extraordinary by the Secretary of the Treasury and the Commissioner.
(B) In all cases, the prior authorization of such loans by the Secretary of the Treasury and the Commissioner shall be required.
(22) (A) Establish, upon authorization of the Commissioner, branches outside of Puerto Rico, in the continental United States and its possessions, or other foreign countries; provided, that said branches do not accept any kind of deposit. The Commissioner is hereby empowered to prescribe, by regulations, the procedure to obtain said authorization, and the amount payable for application investigation expenses and annual quota fees for each one of said branches.
(B) The Commissioner is hereby empowered to authorize an international financial institution to establish a service unit or office in Puerto Rico, in which only specific operations related to the services of the international financial institutions shall be conducted, in the manner and form prescribed by regulations, but, by no means, shall said service unit or office constitute a branch.
(23) Upon authorization of the Commissioner, provide to other international financial institutions or to foreign persons outside of Puerto Rico, those services of a financial nature, as these are defined and generally accepted in the banking industry of the United States and Puerto Rico and which are not listed in this Section.
(24) Engage in rendering of the following services: (i) asset management; (ii) alternative investment management; (iii) management of private capital investment activities; (iv) management of hedging funds or high risk funds; (v) pools of capital management; (vi) administration of trusts that serve to convert different groups of assets into securities; and (vii) escrow accounts administration services; provided, that such services are offered to foreign persons.
The international financial institution shall not:
(1) accept deposits nor borrow money from domestic persons, except from the Government Development Bank for Puerto Rico, the Economic Development Bank for Puerto Rico, and international financial institutions;
(2) make, procure, place, secure, or service loans, unless all loan proceeds are to be used outside of Puerto Rico, except for the cases permitted in paragraphs (3), (7), (18), (19), (20), and (21) of subsection (a) of this Section, and as provided by the Commissioner in accordance with paragraph (19) of subsection (a) of this Section;
(3) issue, confirm, or give notice of letters of credit, unless all proceeds of the letter of credit are to be used outside of Puerto Rico, and that both the issuer and the beneficiary are foreign persons, except for export financing transactions in which the beneficiary is a domestic person;
(4) discount bills of exchange, unless all the proceeds of the bills of exchange are to be used outside of Puerto Rico and that both, the drawer and the beneficiary, are foreign persons;
(5) purchase or hold any of its own capital stock, or the capital stock of or the interest in the capital of the person of which it is a unit, except when previously authorized by the Commissioner;
(6) grant any kind of financing or credit to any of its directors, officers, employees or stockholders, except when previously authorized in writing by the Commissioner; and
(7) directly or indirectly place, underwrite, insure, or reinsure risks or objects that reside, are located, or will be executed in Puerto Rico, or participate in reciprocity or retrocession arrangements or agreements covering or relating to such risks or objects, or assign insurance to, or assume reinsurance from any insurer authorized to do or who is doing insurance business in Puerto Rico.
An international financial institution that is a unit of another person shall segregate and keep separated all transactions made or conducted by such unit, from every other transaction made or conducted by the person of which an international financial institution is a unit.
Section 24 above is commonly used by family offices. The clause “dedicated to” means you may only engage in these activities and will thereby be subject to reduced compliance.
Each service above must be expressly approved by OCEF. Only IFE’s approved to accept deposits may use the term “bank” in their name.
Note that an International Financial Entity in Puerto Rico is prohibited from doing business with persons or businesses in Puerto Rico. Therefore, all of the above are limited to persons outside of Puerto Rico. An Act 273 IFE may do business with Puerto Rico’s Development Bank and its Economic Development Bank.