International Financial Entities (Puerto Rico)

Hugo Cuevas-Mohr
Founding Partner

I have written this page to provide you with more information about this development program instituted by the Government of Puerto Rico which I think provides a very interesting possibility for companies in the International Money Transfer & Cross-Border Payments Industry – as well as other companies that require financial services which are difficult to provide through Banking Partners in the United States.

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. IFEs can file for a connection to the FRDNY (Federal Reserve Bank of New York) but theis process is also elaborate and in need of professionals that can help you you make sure that your plans are solid and well structured. Helping you explore if an IFE is needed, desirable or possible for you or your company, is our first objective in publishing this page.

Please read this information and contact me so we can analyze your case. There is no cost for an initial call (in either English, Spanish, French or Portuguese).

After our initial talk we can set up a call with our legal partners in Puerto Rico, if needed, to go into more detail about the legalities and the licensing process.

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.

Financial Institutions such as Small Banks, Fintech firms, Money Transmitters, Payment Institutions, Foreign Exchange Companies or IFEs providing services to these types of entities, who have been struggling to find Bank partners in a world dominated by derisking and anticompetitive frameworks, ACT 273 can be, if well managed, a ray of light.

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.

On June 5th & 6th, Mohr World in cooperation with the Government of Puerto Rico, OCIF and legal firms such as Antonetti Montalvo & Ramírez-Coll (AMRC) in Puerto Rico and & Fuerst Ittleman David & Joseph, PL in Miami, will be presenting the IMTC Forum San Juan. Join us!

Act No. 273 of September 2012 also offers tax incentives to IFEs in Puerto Rico. This license, already held by close to 50 entities, can be the solution to your company’s needs in order to expand and grow.

These solutions for the industry have been gaining ground in other jurisdictions as well: the Bank of England has extended direct access its RTGS accounts to non-bank payment service providers, 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. 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. 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.

“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

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.