Family offices create intergenerational wealth but often ignore the primary principles of protecting it and growing it. We have already talked about the five steps strategy of creating a Family Office in our article about our forever free package. However, there is a sixth step which was created by the world’s most famous family office founder and banker: Baron Rothschild. What is it? The establishment of your own family office bank.

There are many reasons why a family office should consider creating its own bank; even if a family office does not wish to be the sole shareholder, several Family Offices can combine their wealth to create a multi-family office bank. The price of creating a bank is surprisingly affordable, and the advantages for the growth of the family office are many. 

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Why your family office should establish a bank

There are numerous reasons which could fill a book, but here are some of them:

Safety: The hunt for family wealth has become a game where bankers also participate; a suspicious activity report generated internally without evidence can create the legal foundation for the bank to freeze your family office’s money. What is worse: according to current AML legislation, there is no time within which the bank has to unfreeze the money and indeed, no real legal processes available. In the meantime, the bank is perfectly entitled to place the frozen money in markets, issue guarantees, and even play on Forex. This has given rise to the term “banksters “ which literally means that bankers, as a group, are entitled to steal your family money without repercussions. 

A further threat is that banks are allowed to use your money to lend or invest, and under current international insolvency laws, the deposit in the bank becomes the creditors’ money and not yours. Therefore, putting your family’s money in a bank is probably the least safe thing you can do. If you add to this the cycle of global crises with bankruptcies of some of the biggest banks and the coronavirus pandemic which will eclipse everything else, you have the perfect storm. Having your own bank avoids all these risks completely and allows you to define where and how you will invest your hard-earned family money.

Flexibility: A banking license allows you to carry out all financial activities, including Forex, derivatives, crypto trading, stocks, and bonds purchases, without the need to hire outside firms. This saves you money on commissions and also allows you to build your own team of advisers to invest in funds. Thus, rather than paying for the privilege of investing money, you can also generate fees by investing the funds of other family offices, friends, or clients without further issues. You can also lend to your subsidiaries and projects and take profits through interests via your bank. A further advantage is that a bank is not subject to the same AML checks and balances as a private investment structure and, thus, investing in various international projects becomes easier. 

Potential income: Banking is one of the best businesses on earth if properly handled. Having your own bank allows you to generate income from your clients in multiple revenue streams, including wealth management, debit card programs, financing investment projects, and allows you to use your clients’ funds for projects and investments or co-investments. 

Privacy: The CRS reporting aspects of a bank are unique and the bank is considered a special operating vehicle whose UBOs are not reported and whose income is also not reported to outside agencies. This is especially true in the jurisdiction we discuss here, Puerto Rico. Why? Because, as part of the U.S., Puerto Rico is not subscribed to the CRS, this means your family’s money is segregated and fully private. The same protection can, to an extent, be achieved through family funds. However, a bank offers an extra level of protection. 

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Where should your family office’s bank be located?

There is only one jurisdiction where the banking business is rapidly growing and is considered the best jurisdiction to establish a bank right now in the world. We’re talking about Puerto Rico. Let’s tell you why Puerto Rico is the best place to establish a bank: 

-Puerto Rico is a U.S. Commonwealth, which means it is part of the U.S. but it’s self-governed. This means the banking business is more flexible than in the rest of the U.S. In fact, class B banks are allowed to conduct offshore banking activities with low tax rates.

-A second advantage is that after two years, the bank can apply to connect to the Fed, which means there’s no need for correspondent accounts. This increases the possibilities to obtain enhanced credit facilities from the Fed.

-Puerto Rico has a low tax rate of only 4% for banking, so your business carries low taxes, and you can structure the rest of your holdings via loans so that money flows to your bank, where it will be tax-optimized. 

-Puerto Rico is not part of the CRS. Your clients and family funds are not reported to any country, which carries optimum protection.

-The costs to open a bank in Puerto Rico in terms of capital, establishment and running costs are surprisingly some of the lowest in the world. 

Banks are synonymous with keeping money safe, long-term plans, and financing opportunities for individuals. Yet, for the rest of us who are in the financial and investment world, banks mean much more. For us, banks are not only institutions where you go when you want to deposit some money or borrow it; for us, banks mean tax and investment advice, financial assistance, funds, and wealth management.

But we also understand that banks can go further than the services they provide to their clients because a bank is a business opportunity for family offices. In particular, it’s one that you must consider after studying the conditions of a territory, how the legal situation there benefits the financial sector, how stable it is politically, and how hard -or easy- it is to establish a bank in that territory. In some jurisdictions, opening a bank is nearly impossible or reserved for nationals or billionaires. Yet, some countries allow you to establish your own bank if you are a mid-level family office or financial investor.

One of these countries is Puerto Rico. We, at Mundo, want to introduce you to this Caribbean paradise because it sets up great conditions for opening an offshore bank.

Puerto Rico has much more to offer than marvelous beaches and amazing landscapes. When you think of financial paradises in the Caribbean, you immediately think of British dependencies or former colonies, but Puerto Rico is an exception.

Since 1952 Puerto Rico has existed as a United States Commonwealth. This status means Puerto Rican banks are incorporated into the US financial system, yet they have some leeway because Puerto Rico has its own rules to establish banks, tax them, and handle their operations.

Following this, the trend of development has come with financing opportunities and access to capital solutions. There are no better institutions to count on providing that kind of services and products, safely and appropriately, than banks. For many years, banks have acted beyond their role of keeping money safe and have served as platforms to create and establish industrial and business sectors, thanks to their financing power.

Nowadays, the more a banking sector is consolidated in a territory, the better are the chances for that territory to become a prosperous one, giving the fact that low-interest rates, long terms loans, advisory services on investment, financing on real estate construction, and even academic loans, more than products and services, are opportunities for both the bank and their potential clients.

With the previous information in mind, we guess that you are wondering what kind of financial institutions can be established in “La Isla del Encanto” and how hard -or easy- it is to do so.

The most popular financial license in Puerto Rico is the “international bank license”. It allows foreign capital to operate in Puerto Rico, especially International Financial Entities, with benefits that can get even to an unbelievable tax rate of 4% for net profits. For foreigners and Puerto Rico residents, dividends are tax-free. 

In many offshore jurisdictions, small banks are dying, and not many are trying to establish new banks. Puerto Rico generally has over 30 applications to open new banking institutions. Why? There are many reasons.

When you open a financial institution in “La perla”, as long as your income does not originate in the US, you are free from federal and state taxes. You can even join the US financial system like any other institution based on the mainland.

According to Act 273, which established this license, any foreigner can apply for the international bank license by complying with a list of requirements that initially starts with an application fee of $5,000 and those requirements established in the “Bank Secrecy Act”.

In addition, the capital required to establish a bank, or any other IFE (International Financial Entity), can start as low as $550,000 while, in other jurisdictions, to establish an offshore bank you have a minimum capital between $1 million and $5 million. This turns Puerto Rico into one of the locations with the lowest cost to obtain an offshore banking license.

Other requirements are: 

-Having a physical office on the island.

-Employing at least 4 people in that office. 

-Acquiring a banking system.

-Applying for a FedWire account.

-Having a website and marketing collateral. 

-Applying for a swift code. 

After this, your IFE will pass through an audit that, depending on its approval, will determine if you can operate as a bank in Puerto Rico or not.

Following that whole process can take two years, but the bank can start operating just in one year with a preliminary license. You must also send the following documents to apply for the license:

-Passports and CVs of the ultimate beneficiaries and directors.

-Detailed business plan.

-Financial analysis for the following five years.

-Copies of other financial licenses you might have.

-Proof of the necessary funds and their legitimacy.

-A letter that states the intention of obtaining a financial license. 

-KYC and AML policies. 

There are many other financial institutions for which you can apply for a license in Puerto Rico, such as investment advisors, insurance companies, hedge fund managers, and others.

But, on the other hand, if you want to save time and put your efforts into an institution whose reputation and team have been already built, purchasing an existing bank might be an option for you. Due to the rise of interest in financial sector investments on the island, several banks have been put on sale, facilitating the way into finances in “La perla” to foreign investors, since the capital needed to acquire any of these already existing, legal, and licensed banks, rounds an average of $5-6 million. The price for the bank itself can rise to a maximum of $3.5 million, and the rest will depend on the assets that the institution owns and the amount needed to capitalize the bank.

Also, the process for purchasing an existing bank consists of a series of easy steps which are mostly related to the private negotiations done between you, as a buyer, and the seller. This includes auditing the bank and its books, building a new board of directors, signing a letter of intent; and other matters related to the governmental entities. For example, submitting an application for the change of control to the banking commission, negotiating license terms with the Commissioner, receiving the change of control permits from regulators, and meeting the regulators to present the new business plan, vision, and team.

Do you have any questions?

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Do you want to know why else you should open your bank or other financial entity in Puerto Rico?

What are you looking for when establishing a family office bank? Firstly, the legal and financial framework in the country, which is quite advanced in Puerto Rico. Secondly, you want to look at taxes, and an offshore bank can operate tax-free in Puerto Rico as long as it does not receive Puerto Rican sourced income.

Thirdly, you might want to consider the country´s background; and Puerto Rico has a strong history of offshore banking and it’s the place where many of the biggest worldwide financial investors want to establish an IFE. Finally, what else does this jurisdiction offer? Well, Puerto Rico offers access to the American banking system. That should do it.

Also, “La isla del encanto” is one of the few territories where the offshore banking sector has been constantly growing and strengthening. Since Puerto Rico is a self-governed territory within the US, it is not part of the Common Reporting Standard, so the financial entities don’t have an obligation to automatically share the financial information of their clients with other territories´ authorities. This protects banking secrecy. 

Additionally, since IFEs in Puerto Rico have the status of a state-licensed bank in the United States, they can apply for the FedWire services, making the Federal Reserve their correspondent bank. This also allows PR IFEs to set up EFT systems for funds going to American banks, instead of doing so via wire transfers.

And, in case you are wondering if other financial institutions can apply for the IFE license and open offshore banks in Puerto Rico...

The answer is yes, other financial institutions can apply for an IFE license, for example; a Family Office can apply for this license to establish a bank in “La perla” as long as it complies with all of the documents and necessary requirements to do so. It is important to consider that one of the first requirements to apply for the license is to be a company organized under the laws of Puerto Rico, the United States, or any other country. 

Freedom is a value that´s hard to get and maintain, and needs to be appreciated; at Mundo, we are conscious about the value of freedom and we want to serve you as a tool to reach and preserve your freedom to live, work, and do business. For more than two decades we have offered advice to those who are interested in investing as a way to secure their freedom for their present and future. 

Puerto Rico has become a fruitful land for investment and an open way for the financial sector due to the advantages given to acquire offshore banking licenses or purchasing banks. For that reason, our experts are more than ready to guide and escort your way into banking on the island; with close and comprehensive advice.

What Mundo team can do for you

At Mundo, we have teamed up with one of the top banking experts specializing in establishing Puerto Rican banks. Our expert has established five banks in Puerto Rico for Chinese, US, and Middle East clients by taking them from the initial business and documentary stage to obtaining complete class B licenses.

He is a US tax and banking attorney who has spent the last ten years working with Puerto Rico financial services and has now joined the Mundo team of experts. Apart from his particular niche expertise of opening Puerto Rican banks, he also has a network of contacts on this island to source the sale and purchase of such banks at surprisingly affordable prices. 

However, not only can our Mundo team help you establish a class B bank, but we can also do the following:

1. We can help create a white label debit card program for your bank so you can issue Visa and Mastercards with a specially crafted loyalty program. Our expert has established over 40 such programs for Caribbean banks and other institutions.

2. We can establish a white label brokerage service for your bank including, if needed, sourcing board members who are former bankers and financial advisers to operate the bank and the investments.

3. Through our network, we can help establish correspondent accounts in other banking institutions.

4. We can establish one of the world's top facial recognition AML software for your bank. 

5. We can help your bank create a gold storage and lending program.

If you want to start investing in the banking sector the time is now, and Puerto Rico is the place to do it. With great opportunities and a well-prepared group of Mundo experts waiting for you, this jurisdiction´s advantages get more interesting by the day.

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