In this article, we’ll look at how to set up an offshore bank in 2022. The landscape of the offshore bank industry has changed quite a bit in the last few years. So, here’s the latest on setting up an offshore bank in 2022.
First, let me define what I mean by an “offshore” bank. There are two types of banking licenses, the general banking license, and the international banking license. The target markets of these licenses are very different.
The general license allows you to do business with local people and companies. For example, a general license from the State of California allows you to do business in California. Likewise, a general license from the US Federal government allows you to do business in the United States. Finally, a general license from St. Lucia, allows you to do business with people in St. Lucia.
The limitation of general banking licenses is that they usually don’t allow you to do business with people outside of your country or your state. For example, a bank licensed in the United States could not open accounts only for people living in mainland China… and here is where international bank licenses come in.
International banking licenses, or offshore banking licenses, allow you to take only international clients. You can’t compete with general banks for local business, but you can take on clients from anywhere else in the world. For example, an international bank license or offshore bank license from Puerto Rico allows you to do business with anyone outside of Puerto Rico, including clients from the United States.
Some countries also offer a third type of banking license referred to as a captive bank license. This license allows you to do business only with persons and companies listed in your permit and preapproved by the regulator. This bank is quite rare and used by corporate groups and related companies. It is beyond the scope of this article.
Then there are some countries that do not offer an international license but have several types of general licenses. In the Dominican Republic, the top-tier general banking license allows you to take on both domestic and international banking clients. This charter is called a Banco Multiple License because it allows you to do multiple types of business.
All of that is to say that a bank with an offshore bank license is not allowed to do business with persons or companies within their country or region… they can’t compete with general banks. Offshore banks can take clients from anywhere else in the world.
Of course, depending on your regulator, there may be limits to where your clients can be from. For example, most regulators will not allow you to take clients from sanctioned countries or any individual on a sanctioned list.
An offshore bank set up in the US territory of Puerto Rico will need to follow the US rules in this regard. Likewise, any bank with a US correspondent account (which is nearly all of them) must follow the US rules or risk losing their correspondent bank.
How to Set Up an Offshore Bank in 2022
If you’ve decided to set up an international bank, here’s how to set up an offshore bank in 2022. Note that the steps to purchase an offshore bank are nearly identical to setting up an offshore bank… they are just much more condensed. You can purchase a bank in about 60 days where it will take you well over a year to get a license and set up an offshore bank from scratch in 2022.
In order to set up an offshore bank in 2022, you will need to convince regulators that you’re qualified to operate a bank. This is done by preparing a very detailed offshore bank business plan which is written specifically for bank regulators. For a detailed article on this topic, click the link in the previous sentence.
Next, you’ll need to get a background check done by an independent company such as Berkely Research. These reports look for criminal and civil histories in your country or countries and also conduct multiple interviews. The cost for these reports ranges from $6,500 to $15,000 per person depending on the number of countries involved.
Note that every person connected with the project and named in the business plan will need a background report. This will include all investors, shareholders, directors, and key personnel. Because of the high cost, I suggest you bring in a minimum number of shareholders during the application stage of the project.
Next, everyone connected with the offshore bank will need to provide 3 years of personal audited financial statements. In addition, if an active business is applying for the license, that business needs to provide 3 years of GAAP audited financial statements. Yes, both the company and the individuals need to provide these statements.
The objective of these financial statements is two-fold: 1) to show regulators that you can afford to build and operate the bank, even in an economic downturn, 2) show regulators how you have made your money. What’s the source of the money going into the bank?
For this reason, you generally can’t use borrowed funds to start a bank. If you were to do this, regulators would need to look at the lender. Also, the debt on the books would create additional risk to the bank should things go poorly.
I suggest that a new bank license applicant will need to have a minimum of $2.5m to $5 million available to invest in the bank. This is the minimum amount regulators will accept in 2022. Your financial statements should prove that you have this cash ready to go and that it will be deposited into your bank’s operating account the day you get your license. For more on capital requirements, see: Puerto Rico Bank Capital Requirements
Once you have your business plan, your financial statements, and your background reports, you’re ready to file your application to set up an offshore bank. Once submitted, be prepared to wait about 12 months to receive your license or permit to organize.
If you’re approved for the license, now it’s time to build out your offshore bank. You do this by hiring the required number of employees, installing your core system, connecting with a correspondent bank, etc., etc. For more on this for Puerto Rico, see: Start a Bank in Puerto Rico in 10 Steps. You might also find Sample Operating Expenses for an Offshore Bank in Puerto Rico to be helpful.
Buying an Offshore Bank in 2022
If you can’t wait to set up an offshore bank in 2022, then you might consider purchasing one. This can be a simple analysis: How do you value about 24 months’ time to market? It will take about 12 months to get the bank license and then another 12 months to build out the bank.
An international banking license in a low-level jurisdiction such as Dominica (not to be confused with the Dominican Republic) will sell for about $2 million. A basic bank license in Puerto Rico will sell for about $5.5 to $6 million. This is an operating bank with no clients and 90% of the value is based on the license and time to market.
An operating bank with clients and a Fedwire account, but which is not profitable, will sell for about $15 million in Puerto Rico and $5 million in St. Lucia. A bank that is profitable in Puerto Rico will go for much higher. For more, see US Bank For Sale in Puerto Rico (IBE not IFE).
Again, this is a very simple determination. How do you value time to market? If it’s in line with prices in your desired jurisdiction, then go after purchase. If not, then focus on setting up a new offshore bank in 2022.
I should point out that high demand and the large number of pending applications in Puerto Rico are pushing up the costs on that island. Likewise, demand in St. Lucia and Dominica, and St. Lucia is down or flat over the last three years. The market in the Cayman Islands has completely collapsed as banks either close or attempt to move to Puerto Rico.
For more on the different jurisdictions, see International Bank License Jurisdictions. But, the bottom line, is that Puerto Rico is dominating the offshore bank industry. Only those who can’t withstand US regulation, or wish to bring in clients that the US will not allow, open up in countries such as Dominica.
I hope you have found this article on how to set up an offshore bank in 2022 to be helpful. For more information, please contact me at firstname.lastname@example.org. I will be happy to personally write your business plan and build out your project in any number of jurisdictions.