The Challenges Of Banking In Nicaragua
A Deterrent To Some – An Opportunity For Others.
Nicaragua banking laws are always in flux and changes are common. This is due to the fact the Nicaragua banking system is dependent upon the USA banking systems providing clearing house and transaction forwarding services. Basically the US Federal Reserve dictates what Nicaraguan banks can and can not do. Although there are ongoing efforts to reduce this dependency, for the foreseeable future nothing is expected to change.
So what does this mean for an investor in Nicaragua real estate or an entrepreneur planning on doing business in the country?
Each case is different… However, a rule of thumb for all transactions is the need for a clear paper trail detailing where money is coming from, and where it is going to. Likewise, the purpose of the transaction has to be clearly spelled out. This is not a problem for retirees purchasing a home. Nor is it a problem for an investor purchasing a business. But for transactions that are not as simple as a straight out, single payment purchase, there can be some challenging hoops to jump through.
In most cases, someone buying a lot will agree on a price, transfer funds to a US bank escrow account or to a Nicaragua lawyer. When confirmation of funds are in hand the sale is completed. Then the purchaser’s lawyer then registers his or her lot. The challenge, if it’s going to manifest itself, will appear when the new property owner wishes to construct a home or other building on the property.
I’m not talking about red tape hurdles. They exist, but are dealt with in due course and are little more than a hindrance. The challenge can be in paying for the necessary architectural and survey work, the buying of building materials, and paying a contractor and/or subcontractors. Every transfer of funds over US$10,000 is flagged and must meet specific disclosure rules and regulations. A succession of transfers under US$10,000 is usually identified as suspicious and flagged as well. I strongly advise against trying this tactic as it will great further problems.
If possible, it is best to have a very exact construction estimate and transfer the entire amount at one time, placing it with a local bank or lawyer. Both have to adhere to the same requirements though, so only which option is more comfortable is the deciding factor. This transfer will require the same reams of documentation, but once the compliance department at whatever bank is receiving the funds is satisfied, the funds are made available. If for some reason a transaction is not deemed kosher, the transfer of funds is reversed and the cash returns to where ever it originated from.
The issue gets complicated for people buying a lot and intending to build as funds are available. A once popular investment strategy, it is now a lot of work to manage… even for Nicaraguans living and earning abroad, then applying their income to the construction of a home in Nicaragua.
The same situation can thwart an entrepreneur wanting to build up a business in Nicaragua. Actually, it has in the case of a client of mine. If a property is to be leased or purchased, that is one transaction. If money is needed to do renovations, alterations or construct premises, that is another transaction, perhaps numerous transactions. All will need to be reviewed by the transacting banks, both in the USA and in Nicaragua. My client had a tight deadline so abandon his efforts to develop a business in Nicaragua because of the difficulty the banking system presents. At least 30 full time jobs and millions in investment walked away with him.
The banking process obviously stymies money laundering, but it does more to stymie legal development. However, there are a couple of solutions…
The first solution is to have a foreign bank guarantee a domestic loan for their client, basically cosigning a locally managed line of credit. The investor can draw on the cash locally and the investor’s own bank abroad pays off the amount each month. Interest in Nicaragua runs between 9% and 25% per year, so paying debt off as quickly as possible is recommended… even if that means borrowing abroad to do so.
A second solution is something a client surprised me with. Through his credit card issuer he set up a massive line of credit, and instructed his bank to pay any amount off that came due. He took out significant cash withdrawals to pay contractors and suppliers, and used his credit card to buy locally any building supplies, fixtures, appliances and so on that were needed. The transaction fees were less than the international bank transfer fees, and he had no need to declare credit card purchases because each transaction was well documented. Large cash advances did require some documentation, but it was enough to bring in facturas (invoices) that had to be paid. The invoices were very detailed, included the local value added tax, known as IVA, and clearly identified the recipient of the funds. It was a very smooth, and virtually problem free process.
If you have a building project or business acquisition that you may require advice on, feel free to contact Nica Investments.