Q&A: Tackling financial crime in Latin America

February 2022  |  SPECIAL REPORT: CORPORATE FRAUD

Financier Worldwide Magazine

February 2022 Issue

FW discusses ways to tackle financial crime in Latin America with Fernando Peyretti at BDO, José Ignacio Hernández at Harvard Kennedy School and Andrés O’Farrell at Marval O’Farrell Mairal.

FW: How would you describe the level of financial crime across Latin America? How have criminal activities developed in recent years?

Peyretti: Latin America has a challenging financial crime environment. Prevalent illicit activities include drug trafficking, minerals smuggling and human trafficking. These activities generate illegal cashflows through money laundering (ML), trade-based money laundering (TBML), terrorism financing (TF) and corruption. In addition, companies doing business in Latin America have to evaluate the risk of occupational fraud, the three primary types of which are asset misappropriation, financial statement fraud, and corruption including bribery and extortion. In its annual ranking of ML and TF risks, the Basel Institute of Governance (BIG), a unit of the United Nations Criminal Justice Program, estimates that only half of Latin American countries have undergone a Financial Action Task Force (FATF) fourth-round evaluation. This limits comparability and, if the trend holds, makes it likely that more countries will drop down in the global rankings as they undergo new FATF evaluations. Currently, the region suffers from high levels of corruption and bribery, low levels of financial transparency, and weak public transparency and accountability.

O’Farrell: Although enforcement of financial crimes has seen sustained growth in recent years, the number of convictions for this type of crime is still small compared to other types of crimes. What is clear is that the number of investigations has been growing over the years. Many of these cases are still being handled before courts and in the near future we should begin to see the results of those trials. The various leaks of information from different offshore tax havens that occurred recently and cooperation between agencies from different countries have increased the number of investigations into financial crimes in Argentina. On the other hand, the context of strong exchange restrictions, high tax pressure and economic instability in Argentina have generated a culture in almost all sectors that generally accepts non-compliance with these regulations. Problems for criminals begin when a local authority takes a proactive role and initiates investigations, generally driven by information exchange or some other type of international cooperation.

Hernández: Illicit financial flows (IFF) have been a structural problem in Latin America due to state weakness and the inability to fulfil financial intelligence units (FIUs) tasks. In September 2021, the Economic Commission for Latin America and the Caribbean (ECLAC) calculated that tax evasion and illicit financial flows in Latin America and the Caribbean could be estimated at $325bn a year. Economic informality in the region – aggravated by the pandemic – is the main trigger of financial crime. Several countries have been considered jurisdictions of concern by the US Department of State. The BIG also includes Latin American countries as sources of ML and TF risks. Indexes like the Corruption Perceptions Index and the Global Illicit Trade Environment also help understand the level of weakness in preventing financial crimes.

FW: Have any recent, high-profile cases of financial crime caught your attention? What made these cases noteworthy and what do they tell us about the potential risks of conducting business in Latin America?

O’Farrell: In a recent case, a federal criminal court issued the first-ever conviction for using bitcoins to launder money. The court of the city of Bahía Blanca convicted seven defendants in connection with the largest cocaine seizure in Argentine history, in a case dubbed ‘the White Coils’. Six defendants were convicted for drug trafficking. However, the singularity of the case lies in the conviction of a cryptocurrency trader accused of using bitcoins to launder the criminal organisation’s money. The trader in question offered offline bitcoin-trading services that bypassed payment platforms and exchanges. Essentially, he either received cryptocurrency transfers abroad for which he paid cash in Argentina or received cash and subsequently transferred bitcoins to a foreign beneficiary. Federal authorities held that the trader had to have known the money was obtained illegally. Therefore, the operator had deliberately contributed to the laundering of criminal proceeds. The operator received a five-year sentence and a fine over £3.7m – equal to eight times the amount of the illicit operations.

Hernández: The collapse of the Venezuelan economy is creating regional risks in terms of financial crimes. This was one of the conclusions of the Permanent Council of the Organization of American States in its resolution dated 11 September 2019, based on article 6 of the Inter-American Treaty of Reciprocal Assistance (TIAR). Later, on 23 September 2019, the Meetings of Consultation of Ministers of Foreign Affairs decided to promote the international cooperation of FIUs, to investigate ML transactions, illegal drug trafficking, terrorism and its financing, and transnational organised crime practiced by individuals and entities linked to the illegitimate regime of Nicolás Maduro, president of Venezuela. The 23 September resolution proposed transnational mechanisms to tackle IFF from Venezuela through “an operational network, composed of financial intelligence and public security authorities and other competent authorities of the States Parties to the TIAR, for the purpose of stepping up legal, judicial and police cooperation”.

Peyretti: Among the most notable cases in recent years, the Pandora Papers stands out as the largest collaborative journalistic investigation in history. According to the International Consortium of Investigative Journalists (ICIJ), the expansive leak of tax haven files revealed the secret deals and hidden assets of more than 330 politicians and high-level public officials in more than 90 countries and territories, including 35 country leaders. This case provides an insight into the variety of financial crimes in operation worldwide, and in Latin America specifically. The details show the magnitude of financial crime in Latin America and how important it is for the public and private sectors to take effective measures to prevent, detect and respond to financial crime. According to Transparency International, the Pandora Papers demonstrate the need for beneficial ownership registers, a clear definition of ‘beneficial ownership’, independent verification of beneficial ownership data, and the closing of loopholes that allow anonymity.

FW: To what extent are you seeing increased regulation and stronger enforcement across Latin America, in an effort to fight financial crime? How would you characterise the effectiveness of current anti-money laundering (AML) and counter terrorism financing (CFT) mechanisms in the region?

Peyretti: According to the ‘Financial Crime in Latin America and the Caribbean’ report by Global Financial Integrity (GFI), in an interconnected global financial and trade system there are a multitude of locations and assets where illicit money can be hidden, integrated and reintegrated into the financial system. Because of this interconnected nature, the region is much like the rest of the world in that it acts as a source, transit and destination point for the placement, layering and integration stages of ML, with illicit money flowing within the region but also to and from Africa, Europe and Asia. There is significant variation across the region, demonstrating different institutional capacities to mitigate financial crime risks. The region needs to prioritise transparency in the market. Presently, for example, there are no beneficial ownership registries in Mexico or Colombia, Argentina has only one register related to Buenos Aires, and Brazil has a private registry which is only accessible to government authorities and organisations with AML reporting obligations. The main AML regulations in Latin America comprise a risk-based approach to ML and TF risk assessments. Several countries in the region have also signed a memorandum of understanding to share information critical to cross-border investigations.

Hernández: The main problem in Latin America is not related to the anti-money laundering (AML) and counter terrorism financing (CFT) framework but to failures in enforcing that framework. State weakness, pervasive inequality and economic informality create the perfect environment to facilitate IFF. According to the Financial Crimes Enforcement Network (FinCEN), Latin American countries with major AML/CFT problems are Nicaragua and Panama. Also, in 2019 FinCEN released an advisory warning against continued corrupt Venezuelan attempts to steal, hide or launder money. In those cases, the binding constraint to advance in AML/CFT is not the regulatory framework but the capability of the government and FIUs to enforce regulation. A valuable tool to address that weakness is the Financial Action Task Force of Latin America (GAFILAT).

O’Farrell: A culture of minimal compliance with regulations and minimal enforcement has been ingrained in Argentine society for several years. It is estimated that approximately 50 percent of the Argentine economy works in the irregular market. In this context, different governments have made efforts to combat financial crimes, generally targeting tax violations. Organisations with authority to combat ML usually lack sufficient resources to carry out their tasks or lack sufficient independence to conduct investigations. However, when authorities have the will to investigate and cooperate across borders, investigations usually advance quickly and reach a successful conclusion. The point is that Argentine regulations can be very effective, to the extent that authorities have the political will to undertake effective investigations.

FW: How are companies responding to evolving risks and changing regulatory demands? Are concerted efforts being made to adapt policies and procedures to drive greater awareness, heighten internal controls, encourage whistleblowing and generally improve prevention of financial crime?

Hernández: Companies face several challenges when implementing policies aimed at preventing financial crime. Economic informality and the devastation caused by the pandemic are creating an unparalleled socioeconomic crisis in the region that requires innovative approaches. In this scenario, companies have narrow scope to improve policies to prevent financial crime and, more broadly, to implement environmental, social and governance (ESG) standards. Multinational corporations have an advantage because they can implement global standards to prevent IFF. But at the same time, strong corporate governance standards may conflict with economic informality in Latin America.

O’Farrell: In 2011, the Argentine Criminal Code underwent significant modifications in connection with financial crimes. The amendment introduced new criminal definitions for previously unlegislated actions – most notably, insider trading and unauthorised financial intermediation – increased applicable penalties and, most importantly, extended criminal liability to legal entities. Argentine companies have undoubtedly reacted to these developments and have since taken important steps toward preventing financial crimes. This is especially evidenced by recent changes in internal corporate structures and by dynamics in the employment market. In this sense, companies are increasingly including a compliance unit with their legal department, or even as a standalone team. In parallel, demand for compliance, AML, anti-fraud and internal investigations experts has increased dramatically in recent years.

Peyretti: International anti-corruption regulation trends present an increasingly complex dynamic for companies. The anti-corruption regulations with the greatest impact on companies in Latin America are the US Foreign Corrupt Practice Act (FCPA), introduced in 1977, and the UK Bribery Act (UKBA), introduced in 2011. Companies that operate in Latin America, but are also listed on the US and UK markets, are required to comply with these laws, which penalise bribery of public officials abroad and, in the case of the UKBA, also extend to bribery between private parties. According to a survey of executives in Latin America, the main shortcomings leading to cases of fraud are deficiencies in internal controls, poor supervision by management, violation of internal controls, the absence of qualified personnel to supervise controls, collusion between internal personnel, lack of internal controls, failure of executives to inspire an ethical culture, and collusion with third parties. To manage fraud risk and develop an adequate compliance programme, Latin American companies should implement a code of ethics, audit and continuous monitoring, mandatory annual training on ethics and anti-fraud issues, anonymous reporting channels, an internal audit department, integrity due diligence, periodic evaluation of fraud risks, response protocols to investigate and preserve evidence, and indicators based on data analytics and artificial intelligence.

FW: In your opinion, do senior executives need to be more proactive when it comes to addressing the risks of financial crime? What more needs to be done to understand financial crime threats and formulate an effective response?

O’Farrell: Argentine companies are admittedly not allocating sufficient resources when it comes to addressing financial crime, with costs and time constraints listed as the main obstacles to proper action. However, senior management would in fact benefit from a more proactive approach, as taking action against financial crime at an earlier stage could actually result in a positive return on investment. Indeed, companies that are perceived as uncooperative are usually subject to more intrusive investigations by regulators and enforcement agencies. A company with comprehensive and updated internal controls is less likely to face intense government scrutiny and, therefore, is in a better position to avoid associated costs. Also, recent legislative trends in financial crime matters have included the possibility of more lenient treatment for compliant companies when infringements are committed by rogue employees who deliberately sidestepped internal controls. Therefore, a proactive approach against financial crime could significantly reduce applicable fines or even completely exonerate the company. Finally, in purely practical terms, internal investigations and corrective actions tend to be substantially cheaper if the company already has internal controls and procedures in place. Last minute actions usually cost much more, as a non-compliant company must start from scratch. For an effective response against financial crime, Argentine companies should move away from the prevailing ‘tick the box’ mentality. Instead, organisations should fully and effectively embed these principles into their daily activities and operations.

Peyretti: In our Global Fraud Study 2021, executives in Latin America confirmed that only 20 percent of companies in the region detected fraud cases during the previous year. Seventeen percent of corporate fraud cases in the region related to corruption, which includes bribery of public or private officials, economic extortion, unjustified billing, discounts and refunds, inappropriate gifts, illegal profits, forgery of signatures and documents, and unauthorised access to or misuse of confidential information. Additionally, 64 percent of companies in the region believe they are not fully prepared to prevent, detect and respond to financial crime. Accordingly, most companies lack adequate internal controls, which means employees with a level of seniority have a greater opportunity to execute fraud and expose the company to high-risk issues. Senior executives need to understand the business environment in Latin America from a financial crime perspective and develop a strong compliance programme that allows the companies to prevent, detect and respond to the various risks that could affect the performance of the business, and to keep the company in line with changing regulations and evolving methods of financial crime.

Hernández: Senior executives in Latin America need to understand the economic informality that creates particular risks in terms of IFF. Global corporate standards designed for developed countries may be inadequate given the institutional weakness in Latin America. A possible solution is to design public-private partnerships to promote collaboration in preventing financial crimes. The private sector can contribute to strengthening the capacity of Latin American governments to prevent IFF.

FW: If a report of suspected financial crime surfaces, what steps should a company take? What advice can you offer on responding to red flags and carrying out an internal investigation where necessary?

Hernández: The internal procedures of companies in Latin America to prevent financial crimes should be adjusted to the economic informality and institutional weakness of the region. In addition to cooperating with domestic authorities, it is also necessary to involve foreign authorities to advance constructive collaboration. Following the 2021 GFI report, ‘Financial Crime in Latin America and the Caribbean’, red flags should consider, in particular, ML, trade-based ML, TF and corruption.

Peyretti: When a red flag or an internal report of potential financial crime surfaces, companies should commence an internal investigation tailored to every jurisdiction that may be involved. They need to carefully follow procedures to uncover evidence that will be accepted by the judicial system in each relevant jurisdiction, including how digital evidence should be handled. This is critical when a case has local and international implications, as there could be differences in accepted procedures between jurisdictions. Internal investigations are a complex but necessary process, usually involving several departments within an organisation. They can affect a company’s image and reputation, as well as its legal responsibilities and relationships with third parties, when, for example, the case involves suppliers, clients or other business partners. As a result, companies need to establish protocols for the investigation, including allocating roles and responsibilities and setting out the various steps and procedures to follow throughout.

O’Farrell: It is important to act immediately. If misconduct comes to the attention of law enforcement authorities, the company will definitely lose all control over the situation. Never assume that the incident can be swept under the rug. Evaluate whether regulatory disclosure obligations apply, either in Argentina or in other relevant jurisdictions. Also, be mindful when defining the scope of the issue and appointing the team that will assess and eventually investigate the case. Always consider working under the guidance of in-house or external counsel, so as to ensure legal privilege over the product of the investigation. Companies should perform adequate damage control and assess whether the incident or misconduct permeated into other areas, sectors or processes. Consider using all tools available under labour laws, such as temporary suspension of one or more employees. Moreover, document every step of the investigation process, in case the situation warrants self-disclosure, or the company is otherwise required to defend itself in the context of a government investigation. Finally, communicate results. Whether dismissal of an employee, termination of a contract or self-reporting to law enforcement authorities, always communicate remedial actions internally. Employees must understand that fraud and bribery are investigated and that the company acts on the results of the investigation.

FW: What are your predictions for financial crime in Latin America in the years ahead? Do you expect to see continued efforts to stamp out criminal practices across the region, with growing success?

Peyretti: According to our Global Fraud Study 2021, over half of respondents expect the economic impact of fraud in Latin America over the next 12 months to remain the same or increase in comparison with the previous year. Due to the coronavirus (COVID-19) pandemic, over 80 percent of respondents expect the resources utilised by organisations to prevent, detect and respond to fraud to remain the same or increase. These figures indicate that companies understand that regulatory risks and financial crime risks continue to dynamically evolve, and a proactive approach is required to properly assess them. With regard to fighting fraud, a variety of techniques and technologies can be used to analyse data in order to identify red flags and control gaps that might indicate potential misconduct. The use of artificial intelligence and machine learning, for example, is expected to grow considerably over the next two years. Organisations expect to use several emerging technologies as part of their anti-fraud initiatives, including biometrics. However, budget and financial concerns are likely to remain a significant obstacle for many companies in the current market.

O’Farrell: Corruption is likely to remain the principal type of financial crime in Argentina, followed by, and closely associated with, money laundering. Indeed, corruption frequently occurs in the interaction between the public and the private sector, involving collusion, bribes and financial concealment of illicit funds. In this context, with many of the most notable financial crime investigations involving high-ranking government officials, it is legitimate to wonder whether there will be sufficient political will to effectively prosecute these crimes. The initiative against financial crime is likely to stem from the private sector. Indeed, even in the absence of meaningful government enforcement, private entities will likely take the lead in order to protect their earnings and their reputation. To this end, Argentine companies will probably invest in automated analysis tools. Most industries are becoming increasingly aware of the need for automated tools that provide real-time transaction analysis, third-party screening and data visualisation.

Hernández: The pandemic crisis and the Venezuelan collapse may erode the quality of the already fragile framework for preventing financial crime in Latin America. Therefore, an increase in financial crimes and IFF in the region could be expected in the years ahead. International institutions, such as the Inter-American Development Bank and the Organization of American States, particularly regarding the Inter-American Convention Against Corruption, will have a relevant role to play in strengthening the capacity of the government to prevent financial crimes. Also, it is possible to expect international cooperation, particularly with the US government, as part of the effort to tackle the causes of mass migration from the Northern Triangle.

Fernando Peyretti is leader of the fraud, investigations and disputes practice at BDO Argentina and regional co-leader of the forensic services practice for Latin America. He has more than 14 years of experience in business consulting, working on projects across corporate fraud, implementation of integrity programmes, anti-corruption, compliance, risk management, internal and external audit, and finance & business strategy – both at home and abroad. He can be contacted on +54 11 5814 0714 or by email: fpeyretti@bdoargentina.com.

José Ignacio Hernández is professor of administrative law at the Universidad Central de Venezuela and the Universidad Católica Andrés Bello, both in Venezuela. He also teaches economic constitutional law at the Universidad Católica Andrés Bello. He has been a professor of regulatory framework at the Instituto de Estudios Superiores de Administración (IESA), also in Venezuela. He can be contacted by email: jose_ignacio_hernandez_gonzalez@hks.harvard.edu.

Andrés O’Farrell joined Marval O’Farrell Mairal in 2010. He specialises in criminal law and criminal investigations, with special emphasis on the protection of intangible assets, trade secrets, frauds, scams and corporate disputes with criminal relevance, as well as tax and customs offences, and offences against the environment. He also advises local and foreign clients on internal investigations, collection and assurance of digital evidence, and on the development and implementation of corporate ethics and transparency policies. He can be contacted on +54 (11) 4310 0100 or by email: aof@marval.com.

© Financier Worldwide

THE PANELLISTS

Fernando Peyretti

BDO

José Ignacio Hernández

Harvard Kennedy School

Andrés O’Farrell

Marval O’Farrell Mairal

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