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Correspondent Banking Powered by Machine Learning and Using Blockchain

19 June, 2017

A new breed of correspondent banks are emerging with technology capable of handling the compliance needs of offshore banks. These new correspondent banks are powered by machine learning technology and some are using blockchain to transmit payments over ledgers outside the traditional wire system.

Securing a correspondent relationship has become the most difficult aspect of setting up a new offshore bank or operating a bank from a "tax haven" jurisdiction. The reasons for this are:

  1. Governments have moved the risk of loss (in the form of fines) from the offshore bank to the correspondent bank. No one wants to make an "error" that will result in a $2 million dollar fine on an account that brings in $100,000 in fees per year.
  2. Large banks don't make enough money on their correspondent relationships to hire enough humans to manage the compliance process, so they've cut all the high risk accounts.
  3. Correspondent banks are now required to provide AML, KYC, and KYCC (know your customer's customer).
  4. The emerging technology to handle these compliance requirements efficiently is based on machine learning and blockchain that only top FinTech companies currently have access to.

To fill the void left by the big players, new FinTech banks have begun offering correspondent services to offshore banks. They have specialized compliance systems that track and manage your BSA, KYC, KYCC, and AML issues and file reports on your behalf as necessary.

And these FinTech firms are having great success both in raising capital and in making money (boarding quality offshore banks). On the money raising side, FinTech banks with unique machine learning or blockchain technology are seeing their valuations go up by 2, 3, 4 or 5x over traditional providers.

A startup with a tech solution to AML and KYC might be valued at $50 million. If that same FinTech is using machine learning or blockchain, what everyone sees is the future, their valuation can jump as high as $250 million. Add the ability to offer KYCC and the value can increase even further.

This FinTech space has become so hot that venture funds have been created specifically for this niche. For example, Motive opened up in January of this year seeking to raise $1 billion to fund banking and banking service providers.

Blockchain technology is also having a major impact in the domicile and jurisdiction of offshore banks and in the services they can provide.

Up until now, offshore banks had only one line of business - money management.

Because of the relatively high cost of transmitting funds over legacy systems, smaller offshore banks couldn't handle any high volume businesses. No one will spend $100 to send $1,000. So, the offshore banks couldn't compete with local banks on remittances and volume transfers.

Blockchain is set to change all of this… and open up the world to offshore banks no matter their size or jurisdiction.

Technologies like Ripple and BitFury allow banks to send secure transfers over blockchain and outside of the current legacy systems. These transfers cost a few pennies and will thus allow offshore banks to compete with domestic banks on wire transfers and cross border remittances.

This technology is just making its way into the US banking system but has been the foundation of several FinTech IPOs in China. For example, BTCC's Mobi card can handle both Bitcoin and FIAT transactions.

FinTech companies in China offer applications that store FIAT currency and transmit pier to pier outside of the banking system. China Rapid Finance, Chinese Peer-to-Peer Lender (valued at $1 billion) and Qiandaibo (acquired by Meituan & Dianpiang on August 2016) are examples.

All these FinTech companies need to begin providing international banking services is 1) an offshore banking license, 2) a correspondent banking partner, and 3) a robust compliance program.

The most active "offshore" banking jurisdiction this year is the US territory of Puerto Rico. Most larger players set up in Puerto Rico because of its proximity to US banks and US correspondents, the ability to join the Fed system and operate without a correspondent, and the tax and cost efficiencies found on the island.

The tax rate for offshore banks in Puerto Rico is 4% and the capital required is $550,000. For more, see: Lowest Cost Offshore Bank License is Puerto Rico.

For those who want to avoid US KYC and AML, the most popular jurisdiction is Dominica. Here, the license requires $1 million in capital, but you'll need much more than this to get a correspondent partner.

For more on international bank licences, here are the Top 5 Offshore Bank Licenses in 2017.


I hope you've found this article on the future of correspondent banking to be helpful. For more information, or for assistance in securing a correspondent partner or an offshore banking license, please contact me at info@premieroffshore.com or call (619) 550-2743. We'll be happy to assist you to structure and operate an offshore bank.

About the Author


Premier Offshore Tax & Corporate, Inc. is a leader in international consulting, planning and incorporation services for offshore investors, entrepreneurs, asset protection, and U.S. retirement accounts. We are the only international incorporator that offers U.S. tax compliance. Premier has served thousands of business people, attorneys, accountants, physicians and expats. premieroffshore.com


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