Foreign Currency Restrictions and AML Compliance: Can they coexist?

May 10, 2012

While the U.S. government is seeking, through the enactment of the Foreign Account Tax Compliance Act (FATCA) to uncover US citizens intent on evading taxes, in Latin America sidestepping tax obligations has long been a common motive for the purpose of safeguarding wealth from criminal organizations, currency volatility, and political instability. In the case of Venezuela, it’s considered an essential means to economic survival.

In 2010, when the Chavez government imposed restrictions on a valid and popular legal mechanism to exchange local Bolivars into more stable foreign currency known as the permuta or bond swap, they put a severe dent on capital outflow. But capital continues to leave the country, according to local bankers and real estate professionals, and the increased currency restrictions have pushed Venezuelans to look for other legal but creative ways to offshore their wealth from the government’s efforts to contain or confiscate it.

Financial transactions by Venezuelans living abroad now involve more third parties and multiple jurisdictions and continue to present challenges for U.S. financial institutions. From an anti-money laundering (AML) compliance perspective, financial institutions still must identify the true source, purpose and final destination of the funds, and who the ultimate beneficiary is, but this can be problematic. They must also determine if there is a legitimate business purpose for the transactions. AML compliance policies and procedures are tested given the nature and complexity of these transactions despite the good business opportunities and valid service that banks can provide these customers.

As always, banks should use a risk-based approach to AML compliance and the first and most important step involves expanding upon normal Know Your Customer (KYC) procedures to include a thorough, no-nonsense interview of the prospective client. It would be wise to advise them at the outset that this scrutiny is a necessary step in doing business with US financial institutions in a highly regulated banking environment, while also stressing that all communication will be confidential to appease any concerns they may have about privacy violations. In addition, banks should make every effort to visit the customer’s business operation (if logistically possible), obtain personal, business and banking references, conduct background screening, validate all information provided by the customer, and understand their business(s) and how they operate.

Once the customer has been on-boarded, the bank needs to perform periodic account reviews focused on any shifts in business activity, the customer’s transaction activity in comparison to previous periods, changes in suppliers and/or clients, and conducting business in other countries or regions not previously exposed to. Additionally, maintaining active communication with the customer will facilitate anticipating any change in business conduct, documenting the KYC file, and avoiding any surprises.

Conducting business with customers from currency-restrictive jurisdictions is not only possible but can also be profitable. The key is taking a risk-based, common sense approach: know your customers and their business; stay in contact with them; monitor all activity and properly analyze it and document it; and, do not take any undue risks to maintain the relationship. Such foreign nationals have serious concerns about their personal safety and need to protect their hard-earned wealth. The financial institution should equally protect their good name and reputation by taking initiatives to understand the customer’s legal landscape where they conduct business and ensure their activity is commensurate with their line of work and the legal framework. Performing these steps promotes a healthy and profitable relationship between the foreign national and the financial institution, and will help balance that delicate task of managing the customer’s needs while remaining fully compliant with AML regulations.

Javier Jaramillo contributed to this article.