International Financial Services in Puerto Rico

Hugo Cuevas-Mohr
Founding Partner

Puerto Rico has been, since the early nineties, attracting investments for its growing International Financial Services Sector (IFS sector). Operating licenses to International Banking Entities (IBEs) where first given in 1989 and by 2011, 31 IBEs – with total assets of $44 billion where operating. In 2012, the Government of Puerto Rico instituted a number of development programs, like the IFE Act of 2012 that created the International Financial Entities (IFEs) replacing the IBE Act, in order to increase investment in the IFS sector.

By 2016, there were 61 total EBIs and EFIs and the rapid rate of growth has created a complex situation for the government, regulators, banking experts, legal advisers, consultants, the Federal Reserve and the financial entities in operation, the recently licensed struggling to begin as well as the ones in the process of applying.

I have written this page to provide you with more information about the IFS sector and the IFE development program instituted by the Government of Puerto Rico as you consider the possibility to invest or seek services provided in Puerto Rico.

Becoming licensed as an International Financial Entity in Puerto Rico is an elaborate process for any company or investment group and the OCIF (Office of the Commissioner of Financial Institutions) goes through a very detailed vetting path to make sure the IFEs authorized are up-to-par with any top-notch financial institution in the world. The licensing process has changed recently to address past issues and the evolution will certainly put more constraints and requirements in place.

IFEs can file for a connection to the FRDNY (Federal Reserve Bank of New York) but this process is also elaborate, time consuming and very slow. IFEs may wait for the connection but most seek banking correspondents to provide connection to the banking system, and correspondent banking is becoming increasingly difficult. Accuity revealed in its research** published last year that between 2009 and 2016, correspondent banking relationships have reduced globally by 25% hitting specially developing economies.

Is important to note that while banks in developing economies have increased their locations by 31% since 2014 and non-bank entities & fintechs have been outpacing bank growth, the number of USD correspondent relationships have declined by 15%. Although Euro correspondent banking relationships shave declined by 23%, access to banking channels by Payment Institutions, part of the EU reforms, will certainly redress the situation in Europe. While USD correspondent relationships retrench, the number of Chinese Renminbi (RMB) have increased in the same period by 8%.

Remember: our first objective in publishing this informative page is helping you decide whether working with the IFS sector in Puerto Rico, or investing in the sector, is a possible solution for you and your company or institution. Contact us if you need more information. After our initial talk we can either provide you with some potential solutions and introduce you to our corporate partners in the US or Puerto Rico, so you can go into more detail about your particular needs. If you are a non-bank financial services entity needing banking partners, we can explore solutions in the US, Europe or other jurisdictions that are more “MSB Friendly”.

**Derisking and the demise of correspondent banking relationships – Accuty Research – you can fill this form and get an instant copy of the report: http://bit.ly/2HTMZDU

“I am opinionated, sorry. If I ask you: “Do you want a piece of advice?”, it is a mere formality. It doesn’t matter if you answer yes or no. You’re going to get it anyway.

― Form a quote by Erma Louise Bombeck, American Humorist

In Act No. 273 of September 2012, Puerto Rico created the International Financial Entities (IFEs or EFIs in Spanish) to bring much needed investment & jobs to the island. It might be one of the most effective licenses for Financial Institutions that could set-up a Small International Bank and provide Financial Services Companies, bank products & services.

International Financial Entities in Puerto Rico must be organized with expert advice and may offer international banking, investment management, brokerage and a large variety of financial services to clients outside of Puerto Rico with the careful supervision of the island’s Office of the Commissioner of Financial Institutions (OFIC) who is examining the business plans of the applicants to make sure they are set-up properly to offer the services & products a modern, compliant and solid institution must have. Dully organized IFEs may apply for the opening of Bank Accounts with the Federal Reserve Bank of New York but do not think that the process is easy or fast. It may take lots of paperwork and it may take years.

Act No. 273 of September 2012 also offers tax incentives to IFEs in Puerto Rico. This license, already held by close to 50 entities, was thought to be the solution to the needs of many smaller international financial services entities needing an access to US Banking Rails. But this potential solution has been encountering many obstacles.

Is important to note, that these type of solutions, access to banking rails by smaller financial services entities, bank and non-bank, are being explored in many jurisdictions around the world and might change the dynamic in the US and, possibly Puerto Rico, as entities look for other regions or markets, a loss for the US and mainly, Puerto Rico.

I will give you some examples. The widening access to the UK’s payment system such as Faster Payments, Bacs, CHAPS, LINK, Visa, and, once live, the new digital cheque imaging system is already taking place: See B of E note. In Lithuania, the government is promoting the country as a fintech paradise where help, advise, expedite licensing and access to banking channels is being offered by Invest Lithuania. Gibraltar is also opening its financial services sector. We are not talking about Tax Heavens or loose Off-Shore centers of the past; these efforts are an evolution of the Financial Services Industry in the fintech environment of today.

Check all this information and contact us.so we can analyze your case.

  • Any individual, incorporated or organized under the laws of Puerto Rico, the United States or any other country may apply for an IFE license
  • The entity needs to set up a business office space in Puerto Rico and have at least four full-time employees (a lesser number might be authorized)
  • An authorized capital stock of US$5 million or more with a minimum of US$250,000 of paid-in-capital (at the time the license is granted)
  • US$300,000 of acceptable financial securities (a lesser number might be authorized)
  • All US anti-money laundering statutes (Bank Secrecy Act, Patriot Act OFAC pronouncements) are applicable to IFEs.
  • The Act does not require that the IFE maintains reserves over its deposits and does not establish lending limits for IFEs.
  • The Act provides that all information submitted to OFIC will be treated as confidential (unless a court order or an order from a governmental agency is issued).
  • The Federal Reserve Bank of New York is opening banking accounts to IFEs. A separate application must be submitted after the IFE license is granted.
  • The application process might take three to four months.

It is important to understand that the authorized activities of the IFE must only be performed to entities outside of Puerto Rico (with very few exceptions). Also, OCIF will request a very clear business plan with the specific services & products that the IFE will offer, demonstrating not only expertise but that the proper tools (policies, procedures, technology) are available. A summary of the main authorized IFE activities is here:

  • To provide financial services and accept deposits from foreign entities
  • To participate in foreign currency trade
  • To accept properly collateralize deposits
  • To establish branches outside of Puerto Rico (with OFICs prior approval) and to engage in any financial activity outside of Puerto Rico
  • To trade securities
  • To act as a clearinghouse in relation to financial contracts or instruments
  • To carry out any permitted transaction in the currency of any country, or in gold or silver

Note: Current list of Approved EFIs is here

  • To make, procure, place, guarantee or provide loan servicing to foreign persons (with some exceptions)
  • To issue, confirm, give notice, negotiate or refinance letters of credit
  • To discount, rediscount, deal or otherwise trade in money orders, bills of exchange and similar instruments
  • To invest in securities, stocks, notes and bonds of the Government of Puerto Rico;
  • To underwrite, distribute, and otherwise trade in securities, notes, debt instruments, drafts and bills of exchange
  • To act as fiduciary (executor, administrator, etc.) after obtaining a special permit from OFIC
  • To acquire and lease personal property at the request of a lessee who is a foreign person
  • To organize, manage and provide management services to financial entities such as investment companies and mutual funds,
  • To provide asset management, management of investment alternatives, of activities related to private capital investment, of coverage funds or high-risk funds, of pools of capital, trust management that serves to convert different groups of assets into securities, and escrow accounts management services.

Note: Current list of Approved EFIs is here

There are major tax exemptions for IFEs such as:

  • A 4% fixed income tax rate;
  • A 100% exclusion of interest, financing charges or participation in partnerships benefits
  • A 6% fixed income tax rate on dividends and pro-rate share of benefits for shareholders or partners of an IFE that are residents of Puerto Rico;
  • A 100% tax exemption on all real and personal property belonging to the IFE
  • A 100% tax exemption on the payment of municipal license taxes.

It is important to note that 7.5% of the funds collected from an IFE’s income tax will be deposited in the Special Fund for the Development of Export and Promoter Services of the Department of Economic Development and Commerce.

When approved, we will submit a copy of the license to the Secretary of the Department of Economic Development and Commerce of Puerto Rico, and request issuance of a tax decree that provides full detail of tax rates and conditions mandated by the Act. The decree is effective for a period of 15 years but two extensions of 15 years each may be available.

The possibility for the ACT to attract fintechs in Puerto Rico is very real, especially if the island wants to foster the young entrepreneurs in the island to bring investment and develop the start-ups that can transform the island in an innovation hub. None of this is easy but a fintech choosing to become an International Financial Entity is a real possibility and I was told that there are some already in the works. Of course, the possibility of an online connection to the Fed and fast payments is one major attraction for fintechs.

Jason Martell, an entrepreneurial leader in the tech industry writes in his blog entitled The Role FinTech Can Play in Recovery Efforts in Puerto Rico makes a clear case for the island: “It was clear long before the hurricanes struck that Puerto Rico needed a fresh economic outlet, and financial technology (FinTech) could provide a key solution to the island’s pressing issues.”

He continues: “Puerto Rico’s Act 20 and 22 tax incentives also strengthen its case for FinTech investment. Investors who reside in Puerto Rico enjoy lower tax rates, an incentive which has already paid dividends. Since implementing Acts 20 and 22, San Juan has garnered burgeoning technology and banking sectors, and FinTech startups that relocate to Puerto Rico also stand to reap the benefits of decreased business tax rates.[…] If Puerto Rico is to ensure its long-term prosperity, Puerto Rican entrepreneurs shouldn’t ignore the value of FinTech’s innovations and unconventionality.”

The question here is why is this not happening? Lack of communication? Lack of understanding? A better effort by Puerto Rico’s Development Agencies to grasp the potential of IFEs & Fintech? The difficulties IFEs are experiencing getting online connections to the Fed? There are probably more questions than answers at this point.

Read Jason’s article here: http://jasonmartell.info/the-role-fintech-can-play-in-recovery-efforts-in-puerto-rico/ 

Check also: Why Entrepreneurs Should Move to Puerto Rico – Inc. Magazine: http://on.inc.com/2HGxQo2

INTERNATIONAL BANKING ENTITIES

The “International Banking Center Regulatory Act of August 11, 1989, was enacted as a vehicle to transform Puerto Rico into an important international banking center. Various types of financial services decrees, such as Act No. 73- 2008, known as the “Economic Incentives Act for the Development of Puerto Rico” were also instituted. As of June 30, 2011, thirty-one (31) international banking entities, with total assets worth nearly $43.6 billion and only five (5) entities holding tax exemption decrees to render financial services to foreign markets, were operating in Puerto Rico. Promoting Puerto Rico as a more attractive international financial center, so that the desired exposure and development level could be achieved, was the reason to create the IFE Act of 2012.

As of January 2018, 30 IBEs were listed at OCIF – http://www.ocif.gobierno.pr/documents/cons/EBI.pdf – some licensed as early as 1994 like BNC INTERNATIONAL BANKING CORPORATION and as late as 2015 like STATETRUST INTERNATIONAL BANK & TRUST who was given licensed # 71. Some IBEs belong to large banking corporations such as Citigroup, Scotiabank, Bank of Nova Scotia, Banco Popular, Bancolombia, etc.

what we can do for you
  • Management & Coordination: Mohr World will coordinate the formation, licensing and the full set-up process of the IFE by either advising your own team and walking it through the steps required to have an efficient and well managed process, avoiding costly mistakes, or you can use the team we have created with you top qualified companies & individuals that have the experience and know how to do a cost-effective and successful undertaking. We can also let your team manage certain modules if their expertise can be utilized to save time & money.
  • IFE licensing: Our partners in Puerto Rico will handle the complete licensing process, from drafting & filing the corporate documents, review & revise the application forms, all through the assistance with the negotiations with the Office of the Commissioner of Financial Institutions, meetings, additional requirements, etc. until we see the process trough. See more here
  • Documentation: The main part of the Documentation presented with the Application Forms is the Business Plan & Financial Projections and the Compliance Information (Manual, Officers, Policies). See in tab below. We can assist you or build them for you.
  • Fed Membership: The Application to the Federal Reserve is another step in the process and our partners in Miami that will handle the complete application process, from drafting & filing the corporate documents, review & revise the application forms, all through the assistance with the negotiations with the Federal Reserve Bank of New York, meetings, additional requirements, etc. until we see the process trough. See more here
  • Other Consulting & Advisory Services:
    • Software Consultancy: If you foresee the need for software products to set up your IFE operation we will be there to help. Our Technology Consultant will look at your needs and your budget and will make sure you make the best decision with the IT providers we will introduce to you.
    • Company Structuring in Puerto Rico: We provide a set of services to make sure you are up and running with the required Puerto Rico operation.
    • Do you nee a Compliance Officer? We can provide you with a Compliance Officer that will guide you through the licensing process – and submits his/her name and once the licensing process is finalized, will train the person in charge of that job once in operation.
  • Draft organizational documents: Organize the entity that will file for a license either as a limited liability company, corporation, partnership or other legal entity and provide an official address for the entity.
  • Draft the articles of incorporation, partnership agreements and/or operating agreements. They must include the specific limitation of its operations to those services authorized for IFEs. In this phase the articles might be brief and can be finalized when the license is obtained.
  • Create the name of the entity that clearly states the international nature of the entity, using words such as International or Transnational (some licensed entities have not met this requirement and have been approved).
  • File organizational documents at the Puerto Rico Department of State
  • Collect and provide the detailed information of owners, shareholders and any person that owns or controls (directly or indirectly) 10% or more of the capital of the entity. All owners will be investigated for financial solvency, credit and business integrity as well as experience in financial services.
  • Collect and provide the detailed information of the directors and officers of the entity and an organizational chart with the positions and the number of proposed employees
  • Review and revise the Application Forms
  • Review and revise lease agreement for office space.
  • EIN: Apply for Employer Identification Number at the Internal Revenue Service
  • Register with all other Puerto Rico government entities (ie., Treasury Department, municipality, etc.)
  • Assist in Bonding: Assist in the preparation of documents for the bond or trust account related to the unencumbered assets
  • Draft documents related to the paid-in capital requirements
  • Payment of a nonrefundable application fee to the with the Office of the Commissioner of Financial Institutions of US$5,000.
  • Collect and provide any other documents that OFIC deems important as it analyzes the application.
  • Assist in meetings and negotiations with the OFIC and follow-up with any requirements or more detailed information as needed until license is granted.
  • Application and negotiation of tax grant process

Development of the Business Plan

The roadmap that outlines goals and details how the entity plans to achieve those goals. We first lay out the business concept (the industry you will be serving, the business structure), then the marketplace section (potential customers and the strategy to acquire them, the competition) followed by the organizational structure (operations, management, human resources, technology implementation) and finally the financial section (income, cash flow, break-even analysis).

Structure:

  • Description of Business
  • Marketing Plan
    • Product Strategy
    • Market Analysis
    • Economic Component
    • Competitive Analysis
  • Management Plan
    • Directors and Officers
  • Financial Management Plan
    • Capital and Earnings
    • Liquidity and Funds Management
    • Sensitivity to Market Risk
    • Credit Risk
  • Financial Condition and Projections

PART I

  1. Introduction
    1. Firm’s Compliance Culture
  2. Firm’s Compliance Organization
    1. Firm’s Compliance Responsibilities
    2. Organizational Chart
    3. Compliance Responsibilities of Firm Executives
    4. Chief Compliance Officer’s Role
    5. Compliance Consultants
    6. Outside Counsel
  3. Supervisory Policies and Procedures
    1. Compliance Supervision
    2. Supervision of Personnel
    3. Hiring
    4. Periodic Personnel Review
    5. Disciplinary Actions
    6. Compliance Training
  4. Records Policies and Procedures
  5. Regulatory Exams
    1. Regulator Access to Offices and Materials
    2. Consultations with Compliance Consultants
    3. Consultations with Outside Counsel
    4. Liaison with Regulators
    5. Employee Interactions with Regulators
  6. Compliance Manual Violations
    1. Reporting
    2. Sanctions
  7. Registration and Licensing
    1. Firm Registration and Filings
  8. Disclosure Requirements

Part II

  1. Compliance in Advertising and Marketing
  2. Client Accounts and Documents
  3. Operational Practices
  4. Privacy Policy
    1. Privacy of Client Information
    2. Permissible Sharing of Information
    3. Safeguarding of Client Records and Information
    4. Security Standards
    5. Privacy Notice
    6. Identity Theft Red Flags
  5. Compliance by Third parties
  6. Anti-Money Laundering
    1. Policy
    2. Due Diligence
    3. Employee Awareness and Training
    4. KYC
    5. AML Compliance Officer
    6. AML Reporting
      • Suspicious Activity Reporting (SARs)
      • Currency Transaction Reporting (CTRs)
      • Currency or Monetary Instrument Transport Reporting (CMIR)
    7. Compliance with Office of Foreign Assets Control Regulations
  7. Disaster Recovery and Contingency Planning
    1. Business Continuity Plan
    2. Employee Training
    3. Procedures for Complying with the Business Continuity Plan

Appendices

  • Appendix A                Acknowledgement of Compliance Manual Receipt, Understanding and Compliance
  • Appendix B                 Code of Ethics
Once the License is Procured
  • Submit the application to the Federal Reserve of New York and ensure the ability of the IFE to access the US Banking System. This step is taking longer than initially forecasted. Other bank partnerships or payment processor agreements might be also procured.
  • Locate an Office Space in Puerto Rico to use as the entity’s address where the business will be conducted, and all records and documents are stored as well as helping the IFE to hire the personnel needed to start operations
  • Structure the authorized or proposed capital and the Bank Account where those funds will be held
  • Finalize the partnership agreements and/or operating agreements, if needed as well as provide legal, compliance, technological and business advice to set the IFE up and running with no delays.