Money Laundering in Latin America Continues to Grow

Latin America: Money Laundering Grows

Growing crime and weak enforcement boost money laundering in Latin America.

By Joachim Bamrud
First published Latinvex. November 24, 2014
Reprinted with permission.

Money laundering is growing in Latin America despite growing enforcement by both US and Latin American authorities, experts say.

“Money laundering has grown and will continue to grow in the region,” says Michael Diaz, Global Managing Partner of Diaz Reus.

“It grows every year,” says Martin Kenney, Managing Partner of Martin Kenney & Co. “The demand for money laundering services to conceal the fructus sceleris (the fruits of fraud or corruption) does not relax.”

Money laundering in Latin America has risen during the last year overall, says Annette C. Escobar, a partner at Astigarraga Davis. “Colombia, Panama, and Brazil continue to be hotbeds for money laundering notwithstanding efforts by at least Brazil and Colombia in this past year to reduce such activity,” she says.

Frank Holder, Chairman of FTI Consulting Iberoamerica, agrees that money laundering in Latin America is rising. “Due to its very nature, an accurate count of the number of money laundering transactions cannot be established for certain, and therefore it is difficult to really assess if there has or has not been an increase in money laundering in the region,” he says. “However, if you use media attention and changes in the legal system as a gauge, it can be inferred that it has indeed increased, as there have been more public cases in the media, increasingly stricter laws implemented, and a general increase in organized criminal activity. We know for sure that the number of uncovered cases has increased.”

Last year, UK-based HSBC reached an $1.9 billion agreement with the U.S. to resolve charges it enabled Latin American drug cartels to launder billions of dollars. HSBC was accused of failing to monitor more than $670 billion in wire transfers and more than $9.4 billion in purchases of U.S. currency from HSBC Mexico, allowing for money laundering, prosecutors said.

Money laundering and tax related investigations will be a key focus area for regulators across Latin America over the next three years, according to a recent Freshfields Bruckhaus Deringer survey of top lawyers from across the region. The firm questioned 17 leading law firms from countries across Latin America on what they expected to see top the regulatory investigations and enforcement agenda in the medium term. In countries like Argentina, Honduras, Mexico, Panama and Peru, they expected money laundering to be at the top of regulators’ focus.


Experts say the growing money laundering in Latin America is due to a combination of factors.

“The recession in 2008 and the subsequent, and continuing, recovery are in part to blame,” Escobar says. “As funds are tighter, jobs are more scarce, and people turn to other means to put food on the table, those alternative means all too often are illegal activity, the proceeds of which thereafter have to be cleaned through money laundering. Those activities did not stop as the recession subsided and, in fact, in some countries the recession did not even coincide exactly with that in the United States. Combined with lax or non-existent money laundering laws, the situation creates an attractive breeding ground for money laundering.”

Meanwhile, restrictions on funds imposed in some countries during this period also are conducive to money laundering and black market movement of funds, she says. “Venezuela is the ideal example, of course, but it is not alone,” Escobar says.

The key reasons for increased money laundering in Latin America, Diaz says, include currency exchange controls leading to more trade based money laundering schemes and unlicensed Money Services Business/foreign currency exchange activity as a result of devalued local currencies and a pent up demand for scarce legitimate U.S. dollars in the market; and expanding U.S. regulations and the extraterritorial application of U.S. laws including anti-corruption measures in the region, he says.

Countries with foreign exchange controls include Venezuela and Argentina, which both have seen demand for US dollars jump in recent years as high inflation has weakened the purchasing power of the local currencies.

Holder agrees. “Due to currency barriers in Venezuela, businesses have resorted to entering unregulated parallel currency markets,” he says. This has led to investigations on fraudulent trade base transactions, which could be used as mechanisms to launder U.S. dollars.”

Another key reason for the increase in money laundering is that Latin America as a whole has suffered an increase in violence and activities related to organized crime, Holder points out.

“This is not new,” he says. “However, other relevant issues have also emerged recently, which has both increased the perceived risk in the region, as well as the perception of and attention on money laundering issues.”

They include several high profile corruption scandals in Latin America this past year, resulting from the strengthening of internal policies within various countries. “While this is certainly positive, it has also led to very public investigations of the illicit enrichment on the part of public servants,” Holder says.

In Brazil, the biggest money laundering probe at the moment is focusing on bribes – not drug money – as its origin. Brazilian authorities in March started a probe – dubbed Operation Car Wash – into money laundering, which has led to the arrest of key former executives of Brazilian state oil producer Petrobras and executives at major construction firms – including Camargo Correa — implicated in paying bribes for contracts. The scheme raised as much as $3.9 billion.

Meanwhile, due to currency barriers in Venezuela, businesses have resorted to entering unregulated parallel currency markets. “This has led to investigations on fraudulent trade base transactions, which could be used as mechanisms to launder U.S. dollars,” Holder says.

And as a result of its lack of regulatory strength, Panama has been downgraded to an inclusion on the Financial Action Task Force (FATF) “Grey List”. Additionally, Panama is also at higher risk of money laundering due to its geographical position in the region, its “Free Zone”, and “Bearer Shares”, which offer anonymity to beneficial owners of “Sociedades Anómimas”, Holder points out.

Money laundering in Latin America has also been growing thanks to access to increased globalization and access to cross-border transactions and offshore financial centers, Kenney argues.

“It increases exponentially every year with expanded globalization, access to the anonymity of cross-border transactions and the products offered by offshore financial centers, the erosion of good business ethics globally, the availability of aggressive asset protection laws and legal and banking services, and with ever growing opportunities for fraud and corruption which flourish, regrettably, in rule of law challenged environments such as in many of the legal systems of Latin America,” he says.


Another key factor behind the growing money laundering is ineffective enforcement of money laundering laws locally.

«Enforcement measures are woefully selective, sparce and inadequate in a region awash with dirty money,” Diaz says. “There are simply not enough resources to make enforcement an effective means to combat this unlawful activity. Money laundering is here to stay.”

The United States has invested in AML programs and regulations in some Latin American countries, which has resulted in increased controls.

“In the past two years, several countries in the region have indeed made significant strides in improving their AML regime,” Holder says. “However, in order to really have an impact upon such activities, there must be a joint-effort and focus between the U.S. and Latin American countries on crime prevention and on the prevention of the penetration of organized crime in different countries of the region. Some countries in the region have the required laws but still do not fully cooperate when it comes to implement and enforce those laws.”

While various countries in the region have taken great lengths to improve their laws and regulations in order to meet the global standards of the Financial Action Task Force (FTAF), one pending issue is the implementation of these laws and strengthening the structure and personnel of regulatory and enforcement bodies, he points out.

“Another recommendation could include implementing more severe criminal sentences, which at the moment are often perceived to be too lenient,” Holder says.

Escobar says US money laundering laws have been effective to the extent that Latin American businesses seek to do business in or with the United States and thus subject themselves to its laws. “The extraterritorial application of US laws has been growing more and more limited and the practical effect on companies or individuals that do not directly touch the United States is limited except through tools such as the Foreign Corrupt Practices Act,” she says.

However, when it comes to Latin American laws, while they are “definitely improving [and] getting stronger,” there is a long way to go, Escobar argues.

“The problem … is one of insufficient means of enforcement and in some cases simply insufficient laws to curtail what some view as a very lucrative enterprise,” she says.
Kenney concurs. “In the US, US Bankruptcy Court Judges in Miami and New York are quick to recognize Latin American insolvency office holders’ powers of asset discovery and recovery under Chapter 15 of the US Bankruptcy Code when asked to do so,” he says. “And to allow some secret forms of concealed asset investigation to take place in America on foot of a cross-border Latin American fraud and asset recovery inquiry. On the public sector side of the house, unfortunately, investigations across national boundaries lumber along too slowly. And the system of criminal appeals in many Latin countries rewards and encourages economic criminals. More and more, victims have to turn to private civil and bankruptcy proceedings for access to meaningful economic justice.”

Meanwhile, Martin Kenney & Co has been successfully investigating a case in Brazil using judicially supervised secret discovery of bank payment and company ownership records.
“In Brazil, our team has been successful in importing the all-important tool of judicially supervised secret discovery of bank payment and company ownership records – where we can target all bank accounts and company records in a bankruptcy case in Brazil which are suspected to have links to a fraudster, and where we can do so in secrecy under anti-tip-off or gagging injunctions,” Kenny says. “This new judicially sanctioned extraordinary investigative tool in bankruptcy fraud investigations in Brazil, which is based on comparable remedies available under the English common law, has been tested twice by the TJSP (the Court of Appeals for the State of Sao Paulo) in two of our firm’s cases, and has held up to rigorous appellate scrutiny.”

There is some hope that international cooperation will grow and enable more significant cross-border anti-money-laundering actions. The Financial Action Task Force of Latin America, GAFILAT (formerly known as Financial Action Task Force of South America, or GAFISUD), of which the US is an observer, is working towards developing and implementing a comprehensive global strategy to combat money laundering and terrorist financing in Latin America, Escobar points out.


Mexico implemented its new anti-money laundering law in July last year. The law, known formally as Ley Federal para la Prevención e Identificación de Operaciones con Recursos de Procedencia Ilícita, imposes stringent duties on a broad array of Mexican companies or foreign companies transacting business in Mexico, Reed Smith points out in an analysis. Companies that effectuate certain cash transactions, engage in real estate ventures, or serve as financial institutions (among others) in Mexico may now be required to meet new identity verification, information gathering, and reporting requirement.

Possible sanctions for failure to comply include fines up to 100 percent of a transaction’s underlying value; revocation of permits and potential prison terms of up to 10 years.

“Whether or not the anti-money laundering law has resulted in the curtailment of illicit acts, it has undeniably influenced both domestic and foreign companies in Mexico to reexamine and reevaluate their own protocols to ensure compliance,” says Francisco Rivero, a partner at Reed Smith. “Much like the FCPA before it, Mexico’s anti-money laundering law has required the institution of new internal policies and heightened vigilance by companies transacting business in the country.”

However, the law has resulted in some negative side effects as well. “Clearly AML regulations in Mexico have had several negative effects and impact on various industries and created a lot of complexity and uncertainty due to vague and unclear regulation,” says Arturo Perez-Estrada, a shareholder in the Mexico City office of Greenberg Traurig.

For example, opening a Mexican subsidiary, a process which over the last few years had been simplified, in an effort to facilitate company creation and foreign investment, is now subject to obtaining additional information about the founding shareholders to identify who the «ultimate beneficiary» is.

“This requirement, is almost impossible to comply with if, for example the founding shareholders are foreign entities publicly traded or pension funds,” Perez-Estrada says. “AML compliance has also become an obstacle for financial inclusion as the incentives for providing banking or financial services to the unbanked population in Mexico are sometimes outweigh by the complexity, cost and paperwork required to fulfill AML regulation requirements.”

Meanwhile, Mexico’s real estate sector, auto dealers and pawn shops are complaining that the new law is hurting their sales, El Financiero reports. Martha Ramírez, president of Mexico’s Association of Real Estate Professionals (AMPI) told the newspaper that sales of new and used homes have dfallen 30 percent this year compared to last due to the new anti-money laundering law.

Perez-Estrada calls for a review of the impact of regulations against reliable data to measure its effectiveness versus other negative impacts associated with it. He also calls for revising and clarifying the current legal framework “which has created a lot of confusion, uncertainty and hassles for several industries.”

Meanwhile, the gap between US and Latin American laws also present challenges. “The difference between money laundering standards in Latin America and the United States and the restrictions that U.S. companies face, not faced by their Latin American counterparts, has had some negative effect on US business seeking to expand in Latin America ever since money laundering has been regulated and criminalized aggressively in the United States,” Escobar says. “While this is not ideal and in some situations may place the US company at somewhat of a disadvantage as compared to some of its less regulated counterparts, what is needed is greater regulation and enforcement in those other countries of those other countries. Conduct, such as money laundering, ultimately rips at the very underside of society and cannot be acceptable under any circumstances.”

Banks are also negatively impacted, experts say. “The chief problem with heightened law enforcement measures in the region is the cost of implementing expensive compliance and corporate governance programs for legitimate businesses and banks,” Diaz says. “Moving into the region is rife with risks let alone having to deal with the increased operating costs of compliance as result of prior enforcement actions which may very well deter businesses from investing at all.”

Holder agrees. “Pressure from banking regulators has caused tension among U.S. and U.S. based correspondent banks, which has led to the termination of many relations,” Holder says. “Every Latin American country needs to conduct U.S. dollar transactions; this termination therefore can really hinder the economy of the region. In order to avoid that, banks need to make client assessments and risk reviews on a case-by-case basis.”

Many U.S. companies now have to wait up to a month before an even minor wire transfer to a Latin American company is released due to the stricter anti-money laundering policies.
However, Kenney disagrees that there are negative effects of anti-money laundering efforts. “The enforcement of law and order and the fight against corruption, money laundering and fraud all are in aid of the development of a fair, just and efficient economy and social order,” he argues. “Any argument to the contrary is counter-intuitive and plainly fatuous.”


Experts say key solution to reducing money laundering includes a combination of tougher legislation and enforcement coupled with policies aimed at boosting legitimate wealth.
Escobar advocates for Latin American countries to pass legislation to control and criminalize money laundering that is commensurate to that existing in the United States and other countries with real teeth to sanction such conduct as well as regulations or other means of enforcement. “That is to say, the laws have to impose sufficiently severe sanctions as to have a real impact and they must be enforced after adoption,” she says. “Without enforcement, no progress can be made. This has too often been the case in the past.”

Kenney also calls for ousting corrupt judges in Latin America, who are helping weaken the fight against money laundering.

“The number one mission of all right thinking people in rule of law challenged jurisdictions like those which we find in Latin America is to ‘out’ apparently corrupt judges and magistrates,” he says. “Judgments which are irrational or ridiculous on their face should trigger an internal affairs investigation and scrutiny by the press. Judicial corruption must be attacked at every corner. Investigative journalists need to be supported and protected as do whistle blowers. The rule of law is dependent on the integrity of a country’s judges. If a judge takes a bribe, we all suffer a loss in the search for justice and peace. It is central to a life of freedom to stamp out bent judges.»

He also favors adopting the UNCITRAL Model Law on Cross Border Insolvency Cooperation by all Latin American jurisdictions. So far, Colombia and Mexico have done so, along with the United States, Canada, the UK and 14 other jurisdictions.

“This will encourage foreign courts to lend assistance to Latin American insolvency office holders who have to venture out abroad to vindicate creditor’s and victims’ rights in Latin America,” Kenney says.

Diaz points to need for governments to boost legal business and reduce corruption. “Regional economic incentives and investments with short term and immediate local impact and returns must be identified, funded and executed upon to create incentives and improved standards of living through lawful commercial activity,” he says. “It begins at the top, government coffers are not there to be raided but to be used for the benefit of the of the citizens of Latin America. Properly managing government resources, increasing the tax base and investing locally in the region stands a better chance at thwarting unlawful activities than selective enforcement.”

Escobar agrees. “In the long run, the countries in Latin America must strive to become more stable, the middle class increased, and greater opportunity given to all in society in order to curtail the level of criminal conduct that ultimately leads to the money laundering.”

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