Here is a scholarly research article to give you information that may help you make that decision. Some of the questions are: What is the best location to form a corporation to operate a new Forex business? Where should I get the license?
We should say up front that we assist clients in obtaining licenses, including Forex licenses. We have formed literally tens of thousands of corporations worldwide for our clients and have been in business since 1906. So, once you get the information the next step is to pick up the phone and call a representative.
That being said, we will list five separate categories of jurisdictions and label them A through E. We will consider how difficult it is to obtain a license as well as the costs and the hoops you must jump through to obtain and maintain a license. We consider if you need a physical presence, if you need employees, the reporting requirements, and the reputation of the jurisdiction.
Prior to delving in, we should set a framework for the questions that wise prospective Forex broker should ask prior to launching the enterprise. Here are some important considerations:
- In which country will you base your operations? Most people operate online brokerages. So, you can live in the US, Canada, EU, Australia but operate the brokerage out of Belize, for example. Doing so without a license in certain jurisdictions could result in some stiff fines and business closure, to say the least.
- How quickly do you want to start your Forex brokerage?
- How do you want to process transactions? (STP, ECN, Hybrid, Market
Maker) - How important is the jurisdiction to secure and maintain clients?
- Which bank will you use to establish the corporate bank account?
- How much cash do you have available?
The answers to above questions can help you decide which jurisdiction to choose.
Many jurisdictions have put in place regulations and governmental or private organizations to help protect the public from fraud in the Forex industry. The United States has the CFTC and the NFA. Japan has FSC Japan, for example. We refer to these as Level A jurisdictions.
Level A Forex Jurisdictions
The USA and Japan fall into this category. To secure a license, you will need to prove that you have $20 million of freely accessible capital, not including client funds. There are extremely strict reporting requirements and customer complaints to regulatory agencies may result in a strong reaction from the regulators. Reuters news agency reports on May 20, 2015 that banks were fined nearly $6 billion in Forex probes.
Level B Forex Jurisdictions
The jurisdictions of Great Britain (regulated by the FCA) and Australia (overseen by ASIC) are level B jurisdiction. They have less stringent reporting requirements and less capital is needed in order to launch the enterprise. Obtaining a license can cost around $35,00-$50,000. A physical office presence is required. $100,000 of capital is needed aside from client deposits.
If the Forex transactions are completed in-house rater than referring them to third parties, one needs about $1 million of liquid cash. If a third party is used for the transactions, only about $100,000 is needed.
Level C Forex Jurisdictions
These countries have regulators that offer a fair amount of protection for Forex brokerage clients. Level C jurisdictions include Cyprus (regulated by CySec), Malta (overseen by MFSA) and New Zealand (watched over by FSP).
A local office is required. There is a low level of reporting and the taxes are quite reasonable. Initially, only $30,000 is needed, which varies by license type. The price and time to obtain the license is about the same as the Level B locations. It is about $35,000-50,000 for legal services and takes about six months once the documentation is provided to the government before the license is granted.
When registering in these countries and interacting with EU clients, opening a bank account is easier than some of the jurisdictions below.
Level D Forex Jurisdictions
These jurisdictions include Vanuatu and BVI. Between the two, we have seen Vanuatu as the most favorable. These countries do have regulations and license requirements, so you will have a license to show prospective clients and post on your website to gives clients a level of comfort. Speed is a big benefit. The incorporation process takes just a few days the and licensing process takes about 3-4 months, on average, once you turn in all of the required documentation. The whole process is typically under $30,000. You will also need to deposit a minimum of $125,000 in your corporate account. This latter amount is not an expense, as you still have access to the money. A huge advantage is that once you have a license it is much easier to open a corporate bank account for your Forex brokerage. Without a license, we know of few banks that will open a bank account if they find out you are in the Forex brokerage business.
Level E Forex Jurisdictions
We will place the remainder of the world’s most popular Forex brokerage jurisdictions in this category. In these jurisdictions a Forex license is not required. Nevis, Seychelles and St. Vincent fall in to this group. In about a week and a few thousand dollars you are the proud owner of a new Forex company. The advantages are speed and low cost. The disadvantage is that, with out a license, it limits the number of banks that will open an account for your business if they are aware you are doing Forex. The reason why is that if a client for which you are offering Forex services to be a bad guy whose money is moving through that bank, the bank could be punished by the regulators. They could lose their license, lose the ability to transmit funds in US dollars or Euros, face huge fines, etc. Few banks are willing to take this risk for one account.
The good news is that there are still a number banks that will open accounts for an unlicensed forex company, especially if the company engages in other types of business than just forex. Boasting that you are in the Forex business or having the word “Forex” in the company name is not advisable. While still using full disclosure, emphasizing the other business purposes for your company such as “international diversification” or “to expand internationally” might be a in your favor. With our guidance, we have been able to successfully help people obtain bank accounts for their offshore brokerage business.
In this category, we might also place Latvia, and to lesser degrees, Estonia and Lithuania. The company registration process takes about two to three months. Opening a bank account is fairly easy, and may, or may not, require travel to the region. Because Latvia is part of the European Union, it has a greater degree of credibility than some of the other jurisdictions. Latvian registration is common among new brokers because it is easier to pull in clients from Europe and Russia.
What Do I Do Now?
Call the number above on this page and speak with a consultant. They can answer many of the questions you may have. Now, the lawyers insist that we say this, so here you go: We do not give legal or tax advice. That being said, we can offer support to you in a way to get you up and running.
After we establish your offshore company for you, we assist you in opening a bank account. The next step is for you to form an association with a bank or large forex broker. Our clients will either have funds that their customers want to exchange for other currencies wired into their offshore company accounts or paid directly to the broker. You keep the spread or your broker pays you a piece of the spread.
So, What Is the Conclusion?
- 94.2% of Forex companies start without licenses and operate places such as the Caribbean island of Nevis. (Seychelles and St. Vincent are also used but are less favorable in our experience.)
- It costs 5-10 times more, or much greater, to register in countries in levels A-C.
- Levels A-C require a local office presence and local taxes.
- It takes an average of 6 months to obtain a license in categories A-D.
In order to garner trust from the public, get a license. If you simply don’t have the resources to do so and want to get into the business, there are some good options. If there is anything but pure, honest intent, don’t bother. There is plenty of money to be made in the Forex business. It is one of the more profitable business on the planet compared to the low startup costs in categories D and E. So there is plenty of money to be made long-term for a credible broker with a longstanding reputation.
Here is an example of how you make money. Let’s say that for $10 US you can buy 8.7885 Euros from one of the big brokers or banks you have aligned yourself with. You have a customer who wants to give you $100,000 US in exchange for Euros. If you gave him or her $100,000 US worth of Euros, or 87,885 Euros you would not make any money. So, you charge a commission of, let’s say, $1000. Thus, you give him or her $99,000 US worth of Euros. At the exchange rate of $1 US for .87885 Euros, that $99,000 US amounts to 86,936.29 in Euros that you give your client. You have just earned a $1000 commission.
Most commonly, as Forex brokerages grow, they obtain licenses higher up in the chain in order to gain greater credibility. There are brokers we have established in Belize who have been in the business for quite some time.
In conclusion, if you want credibility, get a license. If you do not have the resources available to you to get a license and want to get into the Forex brokerage business, we can establish a company for you in Nevis along with a bank account. In addition, we offer nominee officers and directors for personal privacy and protection, and virtual office program with mail forwarding and telephone answering services. Again, honesty and integrity are essential factors for being in the Forex business. So, if you want to earn a healthy, honest living with your own Forex brokerage call and speak with a consultant.
THE ABOVE WRITING IS FOR INFORMATION PURPOSES ONLY
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