The Inter-American Development Bank noted that money laundering in the Latin American region was ”possibly the highest in the world…somewhere between 2.5 and 6.3 percent of the regional gross domestic product. [1]” Regulatory authorities including the U.S. Department of State [2], the Financial Action Task Force (FATF), the Office of Foreign Assets Control (OFAC), and the Financial Crimes Enforcement Network (FinCEN) have over the past decade called out Bolivia, Colombia, Guatemala, Paraguay, Ecuador, Peru and Venezuela as posing a high risk for money laundering and/or terrorist financing.
Factors such as failure to criminalize money laundering, legal uncertainty among government agencies and the prevalence of illegal operations appear to be at the heart of the problem. Additionally, risk is enhanced by the presence of many less regulated Casa de Cambios and Money Service Businesses (MSBs). Combined, this presents a formidable challenge for financial institutions (FIs) seeking to establish secure banking relations in Latin America.
Despite these risks, FIs can establish healthy and prosperous banking relations if they undertake a robust risk assessment. The starting point for such a risk assessment involves an analysis of the risk attributes and the corresponding characteristics of particular customer types in relation to the products and services to be offered within the geographies in which they reside and/or intend to conduct business.
This analysis, along with a process for enhanced due diligence (EDD), will enable FIs to better evaluate the risks associated with Latin American customers and will allow for a more in-depth understanding of the customer base and the associated risk elements. If undertaken carefully, the risk assessment combined with EDD will facilitate the Know Your Customer (KYC) compliance imperative essential to safer banking operations related to anti-money laundering (AML).
An EDD program is especially important for prospective and current customers classified as higher risk [3]. Two important components of an effective EDD program include the determination of the types of information to be collected and the amount of information necessary.
Determining the level and type of EDD information to collect
Basic EDD categories for Latin American customers might include:
- Customer-specific information
- Geographic information
- Beneficial ownership information
- Screening and negative media search results
- Banking relationship details (such as duration of relationship, source of referral, current status
- Financial information
- Account-specific information and expected activity and for institutional clients
- Information relating to the customer’s AML program and controls
By collecting this information, FIs will be able to more accurately assess the risks of prospective and current clients.
When developing the requirements to be collected, EDD may include gathering detailed information in areas such as banking references, site visitations, nature of business, geographic exposure (such as target market of the customer), owners and controlling parties and source of wealth. The processes used to collect this information may vary; however, the identification and documentation of appropriate questions and due diligence requirements are important beginning steps. Collection may involve contacting the customer directly, obtaining information internally from bank systems or using third-party tools [4].
EDD by entity type
For non-individual clients, the legal structure of the customer and the business in which they are engaged is a further determinant of what information to collect. For FI customers in particular, whether a MSB, casino, bank or non-bank financial institution (insurance, brokerage, hedge funds, etc), the EDD process should be tailored to address the risks specifically associated with not only the institution itself but also the institution’s clients. (Concepts of knowing one’s customer’s customer can become very important in assessing the level of risk posed.)
For example, for MSBs, it may be helpful to obtain a sense of the following: whether the MSB is registered or operating with a license, the avenue for which the MSB is providing services (i.e., internet or physical location) or whether the MSB is acting in the “agent” capacity for other MSBs. For banks, appropriate measures could include obtaining a copy of the banking license and USA PATRIOT Act Certificate, conducting enhanced reputational screening such as Section 311 checks, determining whether the bank provides nested accounts or downstream correspondent banking services, requesting a copy of the AML policy or crafting a detailed AML questionnaire that targets the AML practices, policies and procedures of the customer.
Takeaway
Although Latin American customers may pose higher risks to FIs, there are steps that can help minimize these risks. FIs need to be proactive. This involves identifying and understanding the risks, building a strong customer profile and aligning their EDD practices with the customer’s known attributes via customizing the information to be collected.
[1] Chong, A. & López-de-Silanes, F. (2007). Money Laundering and its Regulation. Inter-American Development Bank Research Department, Working Paper #590, 8. Retrieved October 5, 2011, from http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=1161502
[2] International Narcotics Control Strategy Report (“INCRS”)
[3] For additional information on designing such programs see “Enhanced due diligence program for correspondent banking: minimizing the risk of money laundering and drug trafficking, Thomson Reuters Complinet, (August 2011), Estreich, Sloan.”
[4] This might include subscription-based external research tools such as Lexis Nexis, Banker’s Almanac, Hoovers or other platforms.
