International Financial Services Entities

Puerto Rico has been, since the early nineties, attracting investments for its growing International Financial Services Sector. Becoming licensed as an International Financial Entity in Puerto Rico, managing or finding products & services for these organizations is an elaborate process for any company or investment group. We know how. Ask us.

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International Financial Services Entities

Puerto Rico has been, since the early nineties, attracting investments for its growing International Financial Services Sector. Operating licenses to International Banking Entities (IBEs) were first given in 1989, and by 2011, 31 IBEs – with total assets of $44 billion were 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 early 2019, there were 52 licensed EFIs, and the rapid rate of licensing in 2014-6 created a complex situation for the government, regulators, banking experts, legal advisers, consultants, the Federal Reserve, and the financial entities in operation, which slowed down the applications and the licensing of new entities. OFIC, The Office of the Commissioner of Financial Institutions, approved 11 licenses in 2018, 3 in both 2019 and 2020, after a more thorough process, compared to the previous years. Some of them are not operational.

I have written this page with the help of my partners in Puerto Rico, Ms. Ana del Toro and Mr. Calixto E. Lanauze, 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. With our partners on the island, Mohr World helps IFEs with operational, banking, and technical advisory services and potential IFE applicants with their licensing applications.

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

n 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 here. 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.

  1. Any individual, incorporated or organized under the laws of Puerto Rico, the United States or any other country may apply for an IFE license
  2. 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)
  3. 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)
  4. US$300,000 of acceptable financial securities (a lesser number might be authorized)
  5. All US anti-money laundering statutes (Bank Secrecy Act, Patriot Act OFAC pronouncements) are applicable to IFEs.
  6. The Act does not require that the IFE maintains reserves over its deposits and does not establish lending limits for IFEs.
  7. 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).
  8. 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.
  9. The application process might take three to four months.





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.

IFEs & CRYPTOCURRENCIES

In May this year, Bloomberg reported in an article entitled “One of the Biggest Crypto Exchanges Is Heading to the Caribbean”1 in which it reported that Noble Bank International, an IFE based in San Juan, took over banking duties for Bitfinex last year. Bitfinex is one of the largest virtual-currency markets and went to Noble Bank after Wells Fargo close its accounts. This is important news for Tether, a digital currency traded on crypto exchanges worldwide that shares a management team with Bitfinex, including CEO Jan Ludovicus van der Velde. Tethers generally trade for around $1 because each coin is supposed to be backed by $1 of fiat money in a bank. The currency, which started trading in 2015, is described as a stable alternative to Bitcoin’s volatility and can act as a safe haven for crypto investors.

It is not the only crypto exchange that is been banked by IFEs. Crypto-Exchanges as well as other MSBs in the US and other countries in the world that are losing their bank accounts due to derisking – like money transmitter and FX firms, have found a banking partner with IFEs. Sadly, IFEs are having similar correspondent banking problems as other banks in the Caribbean and Latin America, due to their perceived reputational risks that bigger banks perceive.

The cash and equivalents held by International Financial Entities soared to $3.3 billion at the end of 2017 from $191 million a year earlier and it seems that Noble is almost entirely responsible for that increase, according to BitMex. In BitMex’s “Tether: Puerto Rico financial data quarterly update”2 there are graphs and more detailed information. It is important to understand that Noble Bank International doesn’t actually hold the money; it uses Bank of New York Mellon Corp. as its custodian.
It has been reported that the U.S. Commodity Futures Trading Commission is investigating Bitfinex3 and the company was subpoenaed back in December 2017. A Freedom of Information Act filed to unveil the information collected by the CFTC was denied and the results of the investigation are expected soon.
Check these links:

  1. https://bloom.bg/2LoEQfG
  2. http://bit.ly/2Lnz1z4
  3. http://bit.ly/2NK1taU