Dumped by U.S. counterparts, Latin American banks tighten AML controls

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MEXICO CITY — Latin American banks are scrambling to strengthen anti-money-laundering and know-your-customer processes as a corruption scandal in Brazil adds to the reasons U.S. lenders are severing correspondent lines across the region.

The picture was already bleak. Major U.S. banks had been cutting ties in Mexico and other major countries in the Americas for several years in response to regulatory and other pressures. In the U.S. State Department's latest survey of the world's 88 worst laundering countries, 37 are in Latin America — up from 20 in 2016, according to the consultancy In-Sight crime.

Recently a Brazilian company called Odebrecht has been accused of paying bribes to the state oil giant Petrobras to win lucrative infrastructure-construction contracts. Prominent officials — including one-third of Brazil’s Congress and some of President Michel Temer’s key Cabinet members — have been linked to the matter, and some are accused of money laundering and other illicit activities.

U.S. banks could slash their Brazilian correspondent lines 40% this year — much more than in 2016, when Latin America’s largest economy suffered its worst decline — as the scandal raises doubt about Brazil’s ability to stamp out political corruption and money laundering, said Fabio Leiri, the compliance manager at Banco ABC in Sao Paulo.

Banco ABC has spent $300,000 to streamline risk management since 2014 and is set to strengthen relationship-manager and other front- and back-office training to cut ties with politically exposed persons, Leiri said. He expects rivals to take similar steps.

Improvements in its controls in recent years have persuaded U.S. institutions not to slash Banco ABC’s correspondent lines, though they could do so this year, Leiri said.

“Politically exposed persons are Brazil’s biggest problem right now,” he said. “We need to identify these relationships better, learn about them and make our relationship managers more aware about the risk of doing business with these types of people.”

The episode accentuates rising concerns U.S. banks have about balancing the appeal of lucrative Latin American markets with the hidden risks their regulators have less and less tolerance for.

Mexican banks
Mexican lenders are also moving to improve relationships with U.S. counterparts, particularly as President Donald Trump’s protectionist policies threaten to push Mexico into recession while the country continues to funnel an estimated $80 billion of illegal funds annually into the U.S.

Banorte, Mexico’s third-largest bank, has strengthened online monitoring systems and updated its Society for Worldwide Interbank Financial Telecommunication, or Swift, payments platform, said Rodrigo Colorado, Banorte's vice president for correspondent banking.

It has also stepped up investment in compliance equipment and doubled its risk management staff to oversee more Mexican regions in the past five years, according to Colorado. Banorte also has toughened compliance-officer training through a new and harder annual certification exam and now requires all of its 18,000 employees to take similar tests, he said.

“It’s not just the risk manager and its team that need to be aware of this — it’s all of our employees,” Colorado said.

Top U.S. banks quiet
Citigroup, Bank of America, Wells Fargo, Bank of New York Mellon and JPMorgan Chase have cut correspondent lines to Mexico by 20% to 30% since 2013, when U.S. financial regulators toughened anti-laundering and Bank Secrecy Act provisions, a wide range of bankers said. In Europe, HSBC, Standard Chartered and Deutsche Bank have largely joined them, they added.

The same U.S. banks have cut correspondent lines around 50% across Latin America, leaving many peers and businesses starving for cash, said Mauricio Horvilleur, foreign exchange director at the Nicaraguan bank Banpro, owned by the Central American banking group Promerica.

The move has had a counterproductive effect in some of the region’s poorest areas, notably Central America and the Caribbean, where banks have felt pressure to funnel money for drug cartels and terrorists to obtain much-needed liquidity, experts said.

Wells Fargo and Bank of America declined to comment, while officials at many other big banks did not return messages. Several small or midsize Latin American banks also refused to comment, showing how delicate the issue has become for some institutions.

‘Doing more’
Horvilleur said Banpro and Promerica have invested $3 million to implement new risk management software and compliance systems and to hire 10 more risk officers to meet the U.S. Office of Foreign Assets Control’s stricter anti-money-laundering requirements.

“We are doing more than the U.S. banks are asking us for, such as requiring more documentary evidence to know who an international transfer’s sender and beneficiary are,” said Horvilleur, who is also one of Promerica’s longest-serving bankers.

In trade finance, “we ask our importer client to give us a bill of landing and have attached a new format to our invoicing documentation that requires customers to tell us the nature of the relationship between them and trading partners,” he said.

Since OFAC seized Honduras’ Banco Continental for international narcotics trafficking under the Kingpin Act in 2015, Central American lenders have “taken laundering prevention very seriously and have improved controls,” Horvilleur said. Guatemala, Honduras and Panama have made the most progress, he said.

“This is a very serious issue because it threatens the economic stability and reputation of our countries,” Horvilleur said. “However, you can have the best controls, and a client who seems to have all things legal, and then they still end up being crooked.”

Peru is also making reforms in risk management, said a Lima bank’s compliance director.

He said his bank, which has less than 1 million customers, has closed accounts with high-risk entities such as currency exchange houses, casinos or car dealerships, as have other Peruvian banks in order to meet U.S. counterparty requirements.

Wire transfers in the South American country’s mining industry have also been curtailed to include only top firms such as Santa Ana Mine or Minsur, the compliance director said.

The Lima bank is also adding new Swift capabilities to restrict payments for high-risk economic sectors, the banker said, adding that the firm will raise compliance investment 10% this year.

“OFAC doesn’t want transfers from risky sectors to pass through U.S. banks, so we are updating our systems so that these transactions get automatically restricted and flagged,” the banker said.

Striking right balance
Efforts to tighten compliance come as the U.S. added 17 Latin American countries to its 2017 International Narcotics Control Strategy Report, highlighting Cuba, Ecuador, Peru, Bolivia and Trinidad and Tobago for particularly lax controls and urging them to step up oversight of terrorism and narcotics financing.

"I would like to think it's gotten harder to launder money in Latin America, but things are spinning out of control," said Heather Lowe, legal counsel at the anti-money-laundering consultancy Global Financial Integrity.

She also echoed views that the U.S.'s tougher regulations have strangled banks operating in Latin America, forcing many to cut their presence amid soaring compliance costs and fines.

Alex Sanchez, counsel at the Florida Bankers Association, said he hopes President Trump will bring new, pro-business leadership to the Financial Crimes Enforcement Network. He said Fincen has forced banks to act as law enforcers rather than businesses.

The regulations have "put a cold blanket on trade and internationalism," hurting Florida banks with close ties to South American business, he said.

Still, banks must push their Latin American partners to upgrade their anti-money-laundering capabilities with the latest financial intelligence software that many regional banks lack, a risk manager for a Miami bank said.

“Their systems have to be able to flag commercial transactions with OFAC-banned countries or politically exposed persons,” he said, requesting anonymity because he is not allowed to speak to the news media.

Uruguay and Chile have the strongest controls as those countries have tougher anti-money-laundering legislation, the Miami banker added. The picture is hazier in Brazil, where big banks such as Banco Itau have “very solid risk management and staff training” but others lag in risk management.

“The trend is to meet the U.S. regulations, but compliance generally weakens in the poorer countries,” such as Bolivia, El Salvador and Belize, the Miami banker said. “But no bank wants to face sanctions, so due diligence has become much stronger than five years ago.”

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AML De-risking Compliance Commercial banking Bank of America Citigroup Wells Fargo JPMorgan Chase BNY Mellon HSBC Standard Chartered Deutsche Bank Brazil Mexico