Anti-money laundering in Latin America

February 2012 | TALKINGPOINT | FRAUD & CORRUPTION

financierworldwide.com

FW moderates a discussion focusing on the prevention of money laundering in Latin America between Michael Diaz, Jr. at Diaz Reus and José Luis Rojas at Grant Thornton.

FW: What steps have been taken to crack down on money laundering activities in Latin America over the last 12-18 months?

Rojas: Since the visit of the Financial Action Task Force (FAFT) to some Latin American countries, we have seen that our regulatory framework is evolving toward a tighter and more controlled environment. In Mexico’s case, there has been a great effort focused on regularising entities that were not previously monitored properly. Also, there are plans to enact a law to make non-financial sectors comply with anti-money laundering programs.

Diaz: While many Latin American countries are working to enforce their anti-money laundering rules and regulations, they are encountering difficulties. Mexico, for example, is struggling to deal with the rampant money laundering problems occurring in its country due to large and powerful drug cartels, as well as corruption within the government and regulatory bodies. To improve its odds of success, Mexico has turned to the US for help. Undercover Drug Enforcement Agency officers are working with Mexico to identify the sources and destination of illegally-laundered criminal proceeds, as well as the methods by which such funds are laundered. The goal of this cooperation is two-fold: to identify weaknesses in the financial sector that new legislation can correct and to identify the principal leaders of powerful drug cartels. Mexico has also implemented legislation similar to Argentina’s financial laws, which limit the exchange of pesos for dollars. Mexico’s Ministry of Finance estimates that $10bn is laundered in the country every year. The new legislation aims to significantly reduce that amount. Argentina is likewise working to improve its anti-money laundering track record and working to strengthen laws governing its financial sector.

FW: Are governments in Central and South America taking steps to implement tighter anti-money laundering regulations?

Diaz: While governments throughout Latin America are taking steps to implement anti-money laundering rules and regulations, there is still the question of enforcement. In many cases, governments are taking the initiative to enact laws that will help fight money laundering and terrorist financing. But this begs the question: Are those laws being enforced? Consider the recent case of Argentina. The FATF threatened to put Argentina – a country that is already dealing with the financial black eye of having defaulted on billions of dollars of sovereign debt – on its Grey List. To stop this severe sanction, Argentina promised to enact key legislation and implement corresponding regulations to counter money laundering activities. But that is only a threshold, albeit important, step. Now, Argentina must also demonstrate that it is prepared to enforce these laws. But that requires additional resources, including training for investigators and prosecutors, and an understanding of the dangers posed by money laundering. This is the ‘micro’ aspect of legislation that is often overlooked. It is simply not enough to point to laws that have been enacted. Real reform requires enforcement.

Rojas: Governments nowadays are recognising the great consequences that money laundering has for their economic policy and society. Governments are trying to instil compliance behaviour, especially in the financial sector, without forgetting other high risk sectors. Governments in Central and South America are paying special attention to regulatory bodies, trying to raise the expertise level of the persons who supervise these entities. Also, they are trying to create better channels of communication between obligated entities, supervisors and financial intelligence units in order to react in a more efficient way when a high risk situation occurs. The best example is Colombia, where the government, in 2006, started to implement the System for the Administration of Money Laundering and Financing to Terrorism Risks (SARLAFT), which has since become a gold standard worldwide.

FW: To what extent are criminals in Latin America devising more sophisticated techniques to bypass the tools, processes and technology being used to clamp down on money laundering?

Rojas: Criminal action, most of the time, is one step ahead of our capability to detect money laundering schemes. Increasingly we see situations involving many companies and people with no apparent relation. These forms of money laundering are designed by very well trained people who know exactly what information and documentation the entities request, and the due diligence process they should follow in order to accept a customer, or to monitor the customer profile. This kind of situation makes criminal activity very difficult to detect and react to.

Diaz: Criminals are constantly developing new methods to circumvent ever-restrictive laws, but recent reports have suggested that money laundering typologies aren’t necessarily becoming more complex. While interest in hedge funds, mutual funds, and non-bank financial institutions are still attractive options for money launderers, due to limited financial oversight in these areas, criminals are also focusing on hard goods and e-commerce to introduce their criminal proceeds into the financial market. Criminal proceeds are being invested in gold and jewellery, while online gambling sites and e-cash are also increasing in popularity. Governments throughout Latin America will always have to act proactively and aggressively in anticipating money laundering trends, and constantly analyse and restructure their criminal laws.

FW: What differences exist between Latin American jurisdictions and other parts of the world, in terms of enforcing AML legislation? How does extraterritorial reach affect issues such as international cooperation, cross-border investigations and asset recovery?

Diaz: Many Latin American countries are considered emerging economies. As such, regulation and government oversight is not as developed in these countries as it is in other parts of the world. The FATF has reported that larger, more developed economies, like Brazil, have been able to implement successful laws and regulations to deal with financial crimes. However, countries with smaller, less developed economies, such as Bolivia, have been identified as having inadequate regulations and laws to deal with financial crimes. Since larger, more developed economies have been successful at combating financial crime through international cooperation, emerging economies should follow their lead. Emerging economies should turn to mutual legal assistance treaties to establish working relationships with other countries in combating money laundering and other financial crimes. As emerging economies reach out for help, enforcement of anti-money laundering laws will dramatically improve.

Rojas: There have been cases in which the obligated entities presented a suspicious activity report and did not receive any response from the authorities. This situation discourages some companies because they believe they are spending a lot of money on controls and the authorities are not making use of the information they provide. Then the authorities complain because the reports the entities present are not useful to them, so there is a big gap in communication. This is one difference in Latin America compared to other countries that are more advanced on this front. There is indeed a need for an international treaty when it comes to organised crime and money laundering. If the crime is classified as international, then it would be for an international body to pursue it, regardless of the frontiers. That would give us the edge in combating such crime.

FW: Have there been any high profile penalties imposed on financial institutions by regulators in Central and South America, due to non-compliance with anti-money laundering regulations?

Rojas: In Mexico, around August 2011, the supervisor imposed a penalty of 10m Mexican pesos – around US$750,000 – to a brokerage entity. The reason for this penalty was that the company failed to monitor and report suspicious activities. The company did not have an automated system to help monitor the transactions of its customers for significant variations or suspicious activity. Therefore, they would not have been alerted to such a situation, if it arose.

Diaz: There have been some penalties imposed on financial institutions due to non-compliance with anti-money laundering regulations. Argentina is one example. In its 2010 report to the Congress of Argentina, the Unidad de Información Financiera – Financial Information Unit – reported that the unit had imposed penalties totaling AR$115,501,272.48 on three different banks, BBVA Banco Francés, Banco de Galicia, and Banco Mas Ventas, for failing to comply with the country’s financial regulations. However, there is also a noticeable lack of penalties in Latin America in general. The FATF’s Mutual Legal Evaluations for both Brazil and Argentina in 2010 have pointed out that these countries lack enforcement of their financial crimes laws. Latin American regulators need to be more active in enforcing these laws in order to see a significant improvement in stemming money laundering activities in their countries.

FW: As other parts of the world move towards Know Your Customer (KYC) and Customer Due Diligence (CDD), to ensure financial institutions understand a customer’s business and transactions, is Latin America moving in the same direction?

Diaz: Latin American countries are beginning to take significant steps in combating financial crimes, but there is no indication that Latin America’s financial institutions are seriously implementing KYC or CDD rules. Countries like Argentina have rapidly developed their financial crimes laws, and have also taken the significant step of setting up government agencies designed to oversee the implementation and enforcement of these laws. As more countries respond to international pressure like Argentina has, KYC and CDD rules will surely become part of these countries’ laws and procedures.

Rojas: Entities are paying more attention to their surroundings, and are more aware of situations that can present a high risk to their companies. They are trying to convince their personnel that money launderers can be anywhere and educate them about the consequences that may incur if they get involved in high risk situations. All these elements influence policies and processes, focusing extra attention on customer identification and monitoring.

FW: In your opinion, should financial institutions in Central and South America proactively review and amend their anti-money laundering practices? What advice would you give on establishing appropriate internal controls and processes?

Rojas: I believe we are going in the right direction. Of course we need to review our practices and controls in order to minimise the risk of our companies being used in money laundering schemes. We also need to be more creative so that it is not easy for criminals to use our companies. First, management must implement a control environment, they must convince all the members of the organisation of the importance of applying anti-money laundering programs and that these programs are implemented so that the company can better function; and for their own protection – not to just comply with established regulations. If the organisation recognises and really believes in its compliance programs, there will be a better atmosphere.

Diaz: Financial institutions in Latin America should proactively review and amend their anti-money laundering practices for two reasons: first, criminals are constantly developing and changing the way they introduce criminal proceeds into the financial markets, requiring government officials and regulators to constantly adapt to evolving criminal methods; and second, if Latin American countries consistently wait to change until they are forced to do so, the international community will view these countries as being behind the times, and emerging economies will face serious difficulties in extending their territorial reach and influence. To stem the tide of financial crime, more Latin American countries should enter into mutual legal assistance treaties with countries outside Latin America, especially the US, and work to implement new legislation that will serve as a check on corruption while increasing regulation in the financial sector.

Michael Diaz, Jr. is the managing partner at Diaz, Reus & Targ, LLP. He is an international business transactions lawyer and noted litigator, focusing on helping corporate and individual victims of international financial fraud recoup assets from Ponzi schemes, pyramid schemes, money laundering and RICO litigation. Mr Diaz represents clients on cross-border transactions and in sensitive regulatory, civil and international criminal matters. He was designated in the ‘Most Effective Lawyers’, International Law Category, 2011 by the South Florida Daily Business Review, and selected in the 2011, 100 Latinos Miami. Mr Diaz can be contacted on +1 305 375 9220 or by email: mdiaz@diazreus.com.

José Luis Rojas de la Cruz is a managing partner for Business Risk Services at Grant Thornton Mexico. He is a specialist in the prevention, detection and reporting of money laundering and frauds, external and internal audit, risk management, design and implementation of internal controls. From 1998 to 2008, he was the leading partner of the Money Laundering Prevention practice for Deloitte Mexico. From 2000 to 2005 he was the managing partner for Internal Audit and Risk Management Services for Latin America and the Caribbean at Deloitte. Mr Rojas can be contacted on +52 (55) 5424 6500 (ext 1260) or by email: jose.l.rojas@mx.gt.com.

THE PANELLISTS

Michael Diaz, Jr.

Diaz Reus

José Luis Rojas

Grant Thornton