The world of international bank licenses has gone through major changes over the last three years. One jurisdiction has emerged as the clear favorite, while every other country is losing licenses. That is to say, every offshore banking license jurisdiction has seen contraction and consolidations except one.
International Bank License Jurisdictions
Most of these bank closings are due to the higher cost of compliance and the inability to maintain a USD correspondent account. It has become too costly to operate a small bank in all international bank license jurisdictions except one.
Cayman Islands
For example, the Cayman Islands was the gold standard in international bank licenses for decades. This is the first country that comes to mind when we talk about offshore accounts and is the jurisdiction most often featured in movies.
The Cayman Islands went from 400 international banks in 2001, to 207 in 2012, and had 123 international banks in Q1 of 2019. For more information, see the CIMA website. Note that Class A banks are local and domestic banks that serve the residents of the Cayman Islands. Class B banks are international banks that offer accounts to people outside of the Cayman Islands.
Per the CIMA, foreign assets in Cayman have fallen from $1.42 trillion USD to $650 billion. Once the world leader, the Cayman Islands is now ranked twelfth based on the value of cross-border assets.
The same has occurred in most other offshore bank license jurisdictions. Dominica currently has 14 licensed banks and revoked 8 licenses in 2016 and 2017. However, Dominica has zero operating international banks. None of the Class B banks licensed in this country have a correspondent partner at the time of this writing.
The only international banking jurisdiction that’s expanding is the US territory of Puerto Rico. This island has issued about 58 international bank licenses in the past 3 years and has at least 40 applications pending.
Demand is also intense when a bank license comes on the market. International bank licenses from Puerto Rico. are selling for $2 to 3 million (just the paper). Banks with a basic correspondent relationship sell for $3.5 to $5 million. Those with FedWire typically sell for $6 million and up. The largest sale was for $10 million.
The top 5 reasons Puerto Rico is so hot:
No CRS or FATCA reporting. The US territory the ONLY major jurisdiction with no FATCA or CRS requirement.
– FATCA doesn’t apply to the territory. Also, treaties, TIAs and information exchange agreements between US and foreign countries expressly exclude the territories. Puerto Rico is not permitted to sign on to CRS.
– Puerto Rico does not provide privacy for US persons. Puerto Rico is not a “foreign country,” and thus you do not need to file an FBAR or other FATCA forms such as 5471, etc.
Banks in Puerto Rico can join FedWire and SWIFT. However, FDIC insurance is not required nor is it available in Puerto Rico.
– As a result, an international bank licensed in Puerto Rico can use the Federal Reserve as it’s correspondent bank.
Approval is a long process, so you will start out with a traditional correspondent partner. Then you can move to a FedWire account for sending and receiving transfers and holding your bank’s US dollars.
The relative ease of securing USD correspondent accounts compared to competing jurisdictions. Note I wrote “relative ease” and not ease. Securing a quality correspondent still requires capital and a lot of work.
– Challenges in compliance (from AML, KYC, CRS, and FATCA) and in maintaining a USD correspondent account are the primary reasons the industry is contracting. Ask any offshore banker her three main concerns or business risks and she’ll say, correspondent banking, correspondent banking and correspondent banking.
The low capital requirement of $550,000 to begin the process and obtain a Permit to Organize. Most international bank license applicants plan to invest $2,500,000 or more during the first two years of operation. You should also have a plan to reach $5 million in share capital over time.
– Note that the above does not consider liquidity ratios which generally follow Fed or Basil II and III standards nor does it account for capital held by a correspondent. For more see: 12 CFR § 167.6, Risk-based capital credit risk-weight categories.
A 4% tax rate on ordinary income earned by the bank and a requirement to hire a minimum of 5 employees in Puerto Rico. US Federal income tax doesn’t apply in Puerto Rico. Dividends to non-US persons and companies are tax exempt and no withholding tax is taken.
With all of that said, Puerto Rico is not the right fit for everyone. If you want to minimize ties to the United States, then Puerto Rico is definitely not the offshore bank license jurisdiction for you. Of course, such a business mindset would also make it nearly impossible to get a USD correspondent account.
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