For decades, offshore banks thrived on a promise of privacy, flexibility, and cross-border efficiency. Wealth managers, family offices, and entrepreneurs used these banks to diversify holdings and access international markets. But in 2010, the U.S. government passed the Foreign Account Tax Compliance Act (FATCA)—a law that fundamentally reshaped the offshore banking industry and made life nearly impossible for small international banks.

Today, most traditional offshore centers struggle under FATCA’s heavy compliance burdens. Yet Puerto Rico, a U.S. territory with its own special international banking license, stands apart as a unique exception.

FATCA: The Law that Changed Offshore Banking

Enacted in 2010 and phased in beginning in 2014, FATCA requires foreign financial institutions (FFIs) to identify and report accounts held by U.S. taxpayers to the Internal Revenue Service (IRS). Non-compliance carries a severe penalty: a 30% withholding tax on U.S.-sourced payments.

This law had several immediate consequences:

• Skyrocketing compliance costs – Small offshore banks had to hire compliance officers, lawyers, and pay for new reporting systems.
• De-risking by correspondent banks – Major U.S. banks cut off smaller offshore banks to avoid FATCA risks.
• Erosion of privacy – The confidentiality once central to offshore banking ended for U.S. clients.

The Global Ripple Effect: CRS in Europe

Following the U.S., the OECD launched the Common Reporting Standard (CRS) in 2014. Over 100 countries adopted it, requiring automatic exchange of account information between tax authorities.

This compounded FATCA’s impact, creating a world where offshore banks faced overlapping reporting rules, rising compliance costs, and shrinking margins.

Puerto Rico: The Exception to the Rule

While FATCA and CRS reshaped offshore banking globally, Puerto Rico offers a rare alternative:

• FATCA does not apply – Puerto Rico banks are treated as U.S. domestic, not foreign, for FATCA purposes.
• CRS does not apply – The U.S. is not a CRS signatory, so Puerto Rico banks are outside its scope.
• Full U.S. legal standing – IFEs operate under U.S. federal banking law and OCIF supervision, giving credibility.
• Unique tax advantage – IFEs benefit from a 4% corporate tax rate and exempt dividend distributions.

Why This Matters for Entrepreneurs and Investors

FATCA’s arrival priced most small offshore banks out of existence. Compliance became too costly, and many lost their correspondent banking lifelines. Puerto Rico, however, preserves the core advantages of offshore banking—tax efficiency, global client access, and U.S. dollar clearing—without being crippled by FATCA or CRS.

Conclusion

FATCA and CRS ended the traditional offshore banking era. Where once dozens of jurisdictions offered light-touch banking licenses, most have vanished or operate under overwhelming compliance burdens. Puerto Rico is the exception. By combining U.S. oversight with offshore-style tax benefits—and being exempt from both FATCA and CRS—Puerto Rico has become one of the last viable gateways for building an international bank.