Latin America Advisor

A Daily Publication of The Dialogue

How Well Are Countries Foiling Money Launderers?

Paraguay, Haiti and Bolivia are the highest-risk countries for money laundering in Latin America and the Caribbean, while Colombia has the region’s lowest risk for the crime, according to an Aug. 16 report by the Basel Institute on Governance. What are the main factors behind the prevalence of money laundering in the high-risk countries and for Colombia’s relatively low risk? How well have the governments of the countries above addressed money laundering, and what more should they be doing? Are banks in these countries doing enough to prevent the practice, and what additional safeguards, if any, should they put in place?

Earl Jarrett, chief executive officer of The Jamaica National Group: "The report by the Basel Institute on Governance reflects the efforts of countries in Latin America and the Caribbean to tackle the risk of money laundering. Colombia, along with Jamaica, Peru, Dominica, El Salvador and Chile, are classified among the countries in the region with a lower risk for money laundering. The Basel ranking is an outcome of the advances made by Colombia and other countries to eliminate the use of their territories by criminal organizations and tax evaders for the laundering of illegally gained funds. These counties have systematically implemented anti-money laundering ‘vaccines,’ such as the promulgation of laws that define and criminalize money laundering, and the establishment of state agencies such as financial intelligence units to monitor, investigate and prosecute those found practicing money laundering. A critical component in the fight against money laundering is the role of the banks and other financial institutions. For Colombia, banks are required to have robust and inflexible know your customer policies, and new customers must be assessed and classified according to their risk of being money launderers. Banks are also required to implement policies to insulate them from the risk of money laundering, including systems to monitor customer behavior against the assessment done at the time of onboarding the customer. Banks are also obliged to have their anti-money laundering processes audited by an independent auditor to ensure that the policies and procedures are being executed as designed. Colombia has benefited from its National Identity and Registration System, which requires each person to have a national identity card that includes biometric data. The identity card is required to conduct transactions with the government. The National Identity System, along with banks’ know your customer polices, provide a solid basis upon which financial transactions become transparent, which is a major disincentive to money launderers."

Mimi Yagoub, writer and investigator at InSight Crime in Medellín: "Each of the top countries in the Basel index have clear vulnerabilities when it comes to money laundering. Paraguay and Bolivia are both exposed to the flows of drug money. They are key marijuana and cocaine producers and transit nations in the heart of the Southern Cone, in which criminal networks have set up lucrative operations. And Haiti has been beset with political instability and has severe weaknesses in its judicial system, hindering its ability to identify and prosecute money-laundering activities (even the current president has been accused of laundering millions in state banks). However, as we have reported and as the Basel Institute also recognizes, this index is not intended to show how prominent money laundering is in each country. Probably for this reason, a country like Colombia, where a huge amount of criminal revenue is generated and inserted into the legal system, appears relatively low down the list. This is likely because its institutions have been built up to tackle the phenomenon in a more reliable manner. So countries scored better based on their capacity to respond to money laundering activities, rather than their prevalence."

Melissa Diaz and Marcela Blanco, associate attorneys at Diaz Reus & Targ: "Colombia’s status as the country in the region with the lowest risk of money laundering is explained by the strength of its anti-money laundering and counter-terrorist financing (AML/CFT) framework. An essential part of this framework is the Superintendency of Finance, which works closely with Colombia’s Unit for Financial Information and Analysis and provides guidance for AML controls and reporting. Paraguay, Bolivia, and Haiti still need to bring greater pressure on banks to improve their internal controls by, for example, requiring that financial beneficiaries be identified and requiring that bearer shares be converted into registered shares. Nevertheless, Bolivia and Haiti have made measurable progress on AML/CFT regulation. Bolivia, while still beset with corrupt institutions, has taken steps toward strengthening its AML/CFT framework by joining forces with United Nations Office on Drugs and Crime to combat organized crime, drug trafficking and corruption. The program aims to strengthen Bolivia’s ability to prevent crime and respond to threats of corruption. Haiti is a member of the Caribbean Financial Action Task Force (CFATF). Nevertheless, in 2015, Haiti was criticized for insufficient progress in addressing AML/CFT issues. Haiti has since reinforced its political commitment to reform and enacted a Law on the Organization and Functioning of the Central Unit of Financial Intelligence to help it build an effective AML system. To continue progressing, Haiti should initiate a program to report cross-border movements of currency and to identify and verify the identities of beneficial owners. Paraguay’s lack of resources dedicated to prosecuting financial crimes and corrupt legislature (which earlier this year rejected an effort to crack down on the use of laundered money in campaign financing and also blocked Paraguay’s AML secretary and comptroller general from being involved in campaign audits) are two driving factors behind the prevalence of money laundering in that country. Paraguay should devote resources to the investigation and prosecution of financial crimes and allow campaign audits to be carried out by its AML secretary and comptroller general to help keep dirty money out of the legislature."

Wally Swain, senior vice president for emerging markets at 451 Research in Bogotá: "The irony of Latin American legal systems is that we have all the laws we need, but they are poorly enforced. Napoleonic Code-based legal systems do not lack for laws. Since fundamentally, anything that is not permitted by law is forbidden, to avoid stasis, governments write lots of legislation. Since legislators are responsible (or at least they want to appear responsible), these laws are usually very well written, based on proven international models. However, well-written legislation is just a waste of paper if it is not adequately enforced. Unscrupulous legislators know this and take the ‘moral high ground’ by publicly supporting strong laws that they know in advance cannot or will not be applied rigorously. Colombia gets high marks for its work against money laundering, because it is strongly motivated to enforce the existing laws. Successive governments have wanted to move beyond the country’s one-time pariah reputation as a ‘narco-economy,’ especially with the United States, its principal trading partner. A strong banking system with international aspirations—and international players—motivates financial players to be perhaps more vigilant than legislation requires them to be. Being on the ‘Clinton List’ is fatal for a bank or major business group. Moves to improve the effective tax rate by closing loopholes in the financial system also help. Motivation to enforce is critical for making anti-money-laundering, or indeed any legislation, effective."

Jan Smith, partner at KoreFusion in Mexico City: "Colombia’s ability to rein in money laundering is a function of the size of and maturity of its banks’ core banking platforms and practices. Colombian banks have economies of scale and can afford to keep systems up-to-date and keep personnel well trained and supervised. Most banks in Paraguay, Haiti and Bolivia do not have the economy of scale, and hence the depth of resources, needed to easily stay current with anti-money laundering/know your customer (AML/KYC) practices. Incidentally, the same is true in the United States, where smaller financial institutions are ‘derisking’ operations with Latin America, as opposed to keeping up with investments. Local governments can help by updating regulations to allow the use of new technologies and protocols such as ISO 20022 messaging standards, and use of digital on-boarding practices like using GPS, blockchain and biometric solutions for KYC. Local governments, along with international donors, can also explore providing credits and rebates that facilitate investments that update core-banking platforms and AML compliance training, as well as support the use of multi-bank/collective platforms and investments for smaller banks."

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