Are compliance protocols failing when it comes to Venezuela?
About one month ago one of the largest U.S. banks was reported to have closed the U.S. dollar accounts it held for a number of Venezuelan government agencies, including the central bank. We learnt of this development, because of an angry outburst by Venezuelan President Mr Nicolas Maduro, in one of his televised «revolutionary» rants. President Maduro might have been surprised by the U.S. bank’s action, which he labelled a “blockade”. But what I found surprising was that, in the compliance-fixated world that bankers inhabit these days, it took this bank so long to close the accounts in question, or that other banks have not followed suit. Banks of all nationalities operate in an increasingly interconnected global financial system, which is governed by widely accepted international rules. A critical element of the system’s infrastructure is its governance, which include the increasingly standardized and universally applied compliance protocols that protect it from being exploited by criminals. Of course, we are not talking about a rogue state, subject to international sanctions, so there cannot be comprehensive closures of all Venezuelan government accounts. But surely there is more than enough material adverse information in the public domain, to make even the most indulgent compliance officer wince before putting his or her name and signature onto the approval of a new (or renewal of an existing) Venezuelan government-related account. There is not enough space within the scope of this note to cover anything but the bare minimum of information which one would find in a search of the internet – even a sloppy one. •
We are talking about a country deemed by the United States (according to an executive order signed by President Barak Obama last year) as being a «national security threat». An executive order which also imposed sanctions on a number of Venezuelan government officials. The latest chapter of this particular saga was the indictment of two of these government officials by a U.S. federal court on drug trafficking charges and the immediate (i.e. next day) promotion of one of them to the position of government minister…
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We are talking about a country whose President has two nephews (both related to his wife) in custody in the U.S. and undergoing trial for allegedly attempting to smuggle 800 kilograms of cocaine into the country. A country which the U.S. state department recently labelled one of the main transit routes for illegal drugs smuggling from South America.
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We are talking about a country where corruption is (according to Transparency International) worse than almost anywhere else on the planet; and where to be a «testaferro» (man of straw) is such a bona-fides occupation, that even folk politically aligned with the opposition partake in the scams, even though they know that ultimately they benefit the very same Chavista government officials they despise.
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We are talking about a country where a former Planning and Economy Minister of Hugo Chavez (his economic guru, Jorge Giordani) recently alleged that in the 2012-13 period $15$20 billion could have been funnelled to fake companies… from one scheme alone!
There are so many red flags that it would be impossible to pick which are the more alarming ones. But from the Panama Papers and the Swiss banks Leaks, to the Andorran banks scandals and countless other examples… Venezuelans (and Venezuelan corporations) have figured prominently in all of the major offshore-banking scandals of recent times. The following article gives a glimpse of the difficulties banks face (in terms of staying on the honest side of the line) when doing business with the current Venezuelan government and its web of «enchufados» (as folk «plugged» into the government for opportunistic reasons are colloquially known) http://www.reuters.com/article/us-venezuela-pdvsa-contract-specialreporidUSKCN1061U9; while the recent decision of the Swiss Supreme Court to open the way for U.S. prosecutors to access the records of some 18 banks (in relation to investigations into alleged money laundering and corruption in connection with the Venezuelan national oil company) illustrate the reputational and other risks to which banks are exposing themselves… Talk about self-flagellation! I am no expert on the subject but I find it hard to understand how compliance departments of banks which operate within the orthodox global banking system can continue to approve (or renew) Venezuelan government-related bank accounts (and those of Venezuelans connected to the corrupt regime). At the very least, I would imagine they are exposing their banks to considerable reputational risks and circumventing (deliberately or unintentionally) the protocols that have been put in place to protect the financial system. Know Your Customer (KYC), Enhanced Due Diligence (EDD) and Politically Exposed Persons (PEPs) are some of the indispensable concepts of the global AML and anti-corruption rulebooks. PEP definitions have surely been widened sufficiently to catch many of the «men of straw» who abuse the global financial system for the benefit of corrupt government officials. But even if a KYC analyst is unable to establish that an individual is a PEP (in the broadest sense)… he or she will still apply EDD when it comes to Venezuelan accounts, because of the perceived increased risk. In essence, EDD should make the analyst dig deep to establish the source of funds and in my humble opinion… a few basic questions should suffice to distinguish most legitimate Venezuelan individuals and businesses from dubious ones, or at least to raise a few flags. However, as shown by countless examples of former Venezuelan government officials (and folk «plugged» into the government) retiring to the U.S. (and other countries) with small fortunes, buying properties and setting up businesses, often after fleeting careers «serving the people» of Venezuela… the protocols are not working. This is no trivial matter, because a flock of dishonest Chavistas fleeing Venezuela once they have «filled their boots» will bring with them, not only their ill-gotten fortunes but also their lack of values, corrupt morals and contempt for the rules of law and common decency – hence contaminating the ecosystem of the host country. Is it not time for us to re-think and strengthen our compliance protocols?