Money laundering is a huge challenge for our institutions and our societies

The US government’s recent fingering of one of Honduras’ powerful business groups for money laundering is hopefully a wake-up call for Nicaragua and the rest of the region. If any of Central America’s even more powerful business groups are caught in the same imprudent activity, the consequences will be devastating both for them and for all our societies.

Alejandro Aguilar

The US government’s recent addition of the owners of Honduras’ Continental Group to its Office of Foreign Assets Control (OFAC) list for laundering the money of drug trafficking groups through their Banco Continental set off an alarm all over Central America. And well it should have.

Honduras’ government
was caught off guard

The Rosenthal family, with its 80-year tradition in Honduras, had developed very close ties with a drug-trafficking cartel. It seems the cartel not only deposited all its money in the Rosenthals’ bank, but also received money from it to conduct its business, in a definite two-way flow. The Honduran authorities themselves should have sanctioned this illicit activity some time ago, as they surely were aware of what was going on, but they opted to turn a blind eye since it was being conducted by a powerful economic group with important political influence. After the United States took that measure, the Honduran authorities acted hastily and clumsily, as if it didn’t know what to do. In my opinion, they did so because they really were surprised, only realizing what was coming days or even hours beforehand. Or perhaps they only found out through the media.

We all know impunity is the coin of the realm in our countries and that very powerful people usually go unpunished. So the bottom line is that Honduras did nothing and it was the United States that finally made the move. The immediate consequence of including the names of Jaime Rosenthal, his son Yani and his nephew Yankel on the OFAC list is that financial entities around the world are blocking both the bank and the group’s other businesses because having links with anyone on that list means problems with the US government.

Although Banco Continental was a corporate bank that concentrated mainly on financing companies, and only had some US$500 million in assets, it had around 200,000 clients and a major presence in Honduran companies. Now there will be a long, drawn-out legal process in which those indicted will have to demonstrate their innocence.

What should the
government have done?

The immediate problem affects the whole country, as it’s about how a country with such weak institutions, much like ours in Nicaragua, is supposed to react correctly to a problem as complex as this. Any State needs to develop proper mechanisms to respond to a crisis like the one that has exploded in Honduras, because it could happen anywhere..

The Honduran government took control of a huge number of companies belonging to the Rosenthals without having a clue what to do with either them or the thousands of employees left jobless because of its disorderly, bumbling response. It should have thought ahead of time that being owned by drug traffickers isn’t reason enough to shut a company down if it’s actually involved in legal activity. Imagine, for example, that drug traffickers buy a coffee farm or cattle ranch to move some of the money from their drug running, then deposit their earnings from selling the coffee or cattle into the financial circuit. The workers on those farms live from their work and have no responsibility for the owners’ illicit businesses, because criminal responsibility is always personal, individual, never collective. In such a case, the State needs to put the company up for auction, selling it to another businessperson who will make it produce and keep it in the economy’s licit circuit

No major ripples in the
rest of the region… so far

Although the Continental Group’s crisis in Honduras may end up having ripple effects throughout Central America, so far indications of that have been minimal. It must be said, however, that these things move very discreetly. In Nicaragua we only have one bank with Honduran capital and it doesn’t seem as if it will be affected.

At the same time, however, we do know that what happened in Honduras caused great concern in the region. To try to mitigate any risks they might have to deal with, all the banks in Central America immediately called their top-level executives and units involved in preventing money laundering to find out whether they had any sort of relation with Banco Continental, the Rosenthals or any of the companies in that economic group. There will very probably be some sanctions that we’ll never find out about because they’ll be kept under wraps to avoid creating panic and a run on the banks involved. So far the situation seems under control.

Central America’s economies are very small. Just by way of reference, the budget of Mexico’s National Autonomous University is about the same size as the Nicaraguan government’s. The region’s largest economic groups concentrate an important amount of economic power and have no space to develop it within their own countries. So the probability of co-investments among the region’s economic groups, seeking to expand their presence beyond their national borders, is a given.

I wouldn’t be surprised to learn of situations in other parts of Central America like the one that broke in Honduras with the Rosenthals. Drug trafficking is very much alive in Central America and money laundering is a reality in economies everywhere in the world.

What does laundering money mean?

Money laundering, also called laundering assets or legitimizing capital or assets, is any economic operation through which someone who has obtained money or assets illicitly or by committing illegal acts, manages to introduce them into an economy’s legal circuits, especially its banking or financial ones. Since illicit money can’t be justified as having been earned cleanly by the person possessing it, a laundering operation makes it appear as if it really had been. The term “laundering” comes from Al Capone’s alleged purchase of laundromats to mix his mob’s illegal profits from prostitution and bootlegged liquor sales with the legitimate ones from the laundromats to obscure the former’s illegal origins.

Such an operation requires creativity and intelligence to design mechanisms to justify the acquisition of the questioned amount of money or goods to judicial, banking and financial authorities. Anyone who manages to fool all those systems, introducing money from the dirty, underground economy into legal or licit economic circuits without getting caught has successfully “laundered” it.

Different people participate in money-laundering operations, each with their own role and responsibilities. There are always collaborators engaged in different commitments to facilitate the legalizing of the money, all the way up to the money’s owner, the one who committed the original crime. That person and his or her whole chain of collaborators share responsibility for the money-laundering operation.

The net of guilt is cast wide

It’s very easy to get involved in an operation such as this and then later say, “I didn’t know; I never imagined; I have no responsibility because it seemed legal to me …” To prevent those who collaborate in one way or other from claiming ignorance and getting off unscathed, criminal penalties sanction not only the person who launders the money and those who knew of its illicit origins, but even those who should have known. If it were easy to say “I didn’t know,” everybody could end up excluded except for the money’s owner. So the only way to be sure people are diligent in avoiding money launderers or in exposing them is to make banking legislation increasingly harsh, extending the responsibility to all those who should have learned about the money’s illicit origin.

If you go to the house of someone who says he wants to talk to you about some deal and he takes several briefcases out of the closet containing half a million dollars, the least that can be expected is that you’ll be surprised and suspicious that something strange is going on, because nobody keeps that much money in their closet. It’s important to be alert to operations of that nature. The warning system I just mentioned teaches us that the one who knows isn’t the only one responsible, but also the one who should have known, should have suspected. I’m not talking here about a modest person with a small responsibility, because such a person may not be judged responsible, but the assigning of responsibility has become very stringent regarding those whose livelihood is managing money in banks, finance companies, insurance companies, credit and savings cooperatives, etc. In other words, anyone who moves in the financial world, because they are professionals and are assumed to be capable of detecting strange and unusual operations that don’t correspond to the ordinary turnaround of a person’s businesses.

Beware of people selling ideas

Money launderers move through the world trying to break down people’s will power with a wide array of bait. They play the role of a big investor and visit people with a proposal for some get-rich-quick business idea or a sale. They hook a lot of people who don’t know them, have no idea where they or their money comes from or what they’re going to do with that business. We have to keep in mind that money can’t be laundered without creating legal entities such as a business. And creating a business requires selling ideas… Likewise, nobody in a civil organization should accept money from any donor they don’t know sufficiently well and without being sure the money comes from a legitimate source.

For example, I know of a company that exports small quantities of a delicate agricultural product to eight European capitals on a daily basis. Given that the product goes bad within a week and a half, it has to be sold refrigerated and exported by plane to arrive in Paris or London within 15 hours. Now, there are also ships carrying containers supposedly loaded with the same product from a country in this region, which take 40 days to get to those destinations. So what are those containers really carrying…? If it is indeed that product, it will arrive ruined. But someone in Europe is financing that business and is willing to lose money doing so, because money launderers wins by losing. With the real goal being to successfully legitimize illicitly obtained money, the person could care less if the agricultural product goes bad. In such circumstances, no legitimate company can compete with the business of money launderers because they’re willing to lose in order to win.

Financial entities now have a series of obligations to detect money laundering that aren’t applied to ordinary people. I could sell my house to a drug trafficker without realizing it and could probably even be paid in cash without being branded as responsible. It’s the person’s bank that’s held responsible. Nonetheless, while there’s a scale of responsibilities and we ordinary people are on its lowest rung, we still need to make sure we know who we’re doing business with and the origin of the money for the deals we’re being offered…

In reality no bank can truly say it’s never received any money from drug trafficking. The prevention mechanisms aren’t good enough to keep illicitly acquired money from slipping through. All banks are exposed and the important thing is for the States to have adequate systems not only to prevent money laundering but also to sanction it when it’s discovered.

The history of the concept

The concept of money laundering has been under construction for some time, and now has an international penal definition. It was originally related strictly to drug trafficking. The international war on drugs—and I’m not going to get into its successes or failures here or how it could be addressed better—started in the early 20th century. The first international convention was established in 1912 for the fight against opium. That was followed by marihuana, then extended to other drugs in the sixties.

Concern arose in the United States that same decade when authorities began to observe that relatively small income from the street sale of drugs could be easily deposited in a bank account without the bank doing anything to avoid it going into their vaults right alongside legally-earned money. Considering that inadmissible, mechanisms were created obliging US banks to behave diligently with their clients. This meant the bank couldn’t accept money it suspected came from an illicit source. And that in turn meant the bank must know its clients well. The measures for that purpose are known as due diligence toward clients.

Due diligence obligations and bank secrecy

Banks are obliged to have detailed knowledge of their clients’ economic operations and the economic activity they’re engaged in so they can tell if that $100,000 a client deposits every week or the $500,000 deposited annually responds to a normal business operation. Given that people may receive an inheritance or sell a valuable piece of property and make an unusually large but not illegal deposit, the bank has the right to call the depositor and ask for proof of its origin.

What the bank is doing in that case is fulfilling its due diligence obligations, which are also linked to bank secrecy. The more information a bank has about each person, the greater its duty to protect and take care of that information.

The first regulation to prevent money laundering—the Bank Secrecy Act—appeared in the United States in 1970. But as time went on, the reality became increasingly complex as it was clear that the war on drugs, first proposed by President Kennedy then escalated and defined more punitively by Nixon, was failing. Not only had the trafficking not stopped, it was in fact expanding and increasing, in part due to all the Vietnam veterans who came home addicted. The original small groups of drug dealers that came and went in the 1960s were being replaced by major cartels.

Eighteen years after the Bank Secrecy Act, a new regulation was established, this one international. To intensify the struggle against international drug trafficking, the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances was adopted at a conference in Vienna in December 1988. With that, the initiative that started in the United States quickly began to spread to the entire world banking system.

The need to work backward
toward prevention

Within a few more years an international structure to prevent money laundering was created. Those engaged in the debate of those years had woken up to the fact that it’s not enough to work only on sanctioning money laundering. Rather it’s necessary to work backward along the chain. More attention had to be paid to detection, which implied improving the investigation mechanisms, and that in turn required training the world’s financial system, committing all banks to the struggle against money laundering. The objective is to put barriers further and further back along the chain that contributes to it.

It must be said that even these more sophisticated measures haven’t halted money laundering, but they have made the task harder. Today virtually all grave crimes that are so harmful to human coexistence—trafficking in drugs, weapons, human beings and organs, as well as both public and private organized crime and corruption—are viewed and treated from the same perspective as money laundering.

The terrorist attack on the Twin Towers in 2001 was a moment of inflection when everything became more rigorous internationally and the major nations also began paying more attention to the issue. The internationalizing of prevention was a child of the G7 countries, which grouped together the world’s seven largest economies at the time: Canada, United States, Great Britain, France, Germany, Italy and Japan. Today money laundering is regulated by several international conventions. Basically, in addition to the 1988 Convention, there’s the UN Convention against Trans¬national Organized Crime, signed in Palermo, Italy, in December 2000; the UN Convention against Corruption, signed in Mérida, Mexico, in December 2003, and a number of other related international agreements, including numerous ones more specifically dealing with terrorism itself. All of them have been signed and ratified by Nicaragua and all other Central American countries, committing them to the fight against money laundering.

Nicaragua’s work on this issue

Nicaragua began to work very timidly on preventing money laundering as recently as the mid-1990s and the country’s banking sector only began to work on the issue with any determination in 2002, when the first norm appeared, obliging the banks to due diligence with their clients and to policies and practices to prevent money laundering within the circuits of their economic activity. Although the previous year had marked the point of inflection that had begun to intensify the struggle against money laundering all over the world, no bill was presented to Nicaragua’s National Assembly on the issue until 2004, and even then the legislators didn’t approve or even debate it. Either Nicaragua’s political class didn’t get the problem or it made a conscious decision not to regulate anything.

On and off the “gray list”

Finally, in June 2011 a plenary of the intergovernmental Financial Action Task Force on Money Laundering (FATF) held in Mexico put Nicaragua on its “gray list” of countries being audited by it and found to have deficiencies in preventing money laundering and more importantly weren’t doing enough to change that. In other words, a country that wasn’t on the list might be laundering even more money than one on it, but was believed to be on the right road to preventing it.

Immediately after being included on the gray list, we presented a report to Nicaraguan society, and the National Assembly representatives decided to deal with the bill that had been blocked in 2004. The Financial Analysis Unit (UAF) was created to coordinate everything related to money laundering in the country. The government’s decision to head that institution with former army and police officers earned it strong criticism. We counseled against it, proposing instead that the UAF be entirely civilian and directed by experts on financial operations because preventing money laundering isn’t a military or police issue, but rather a financial one, making financial experts best qualified to run such operations. But that recommendation was ignored and the UAF began to work. Fortunately, its authorities seem to be on a good path, because they got Nicaragua off the gray list this March, at the most recent FATF plenary. That indicates that Nicaragua has improved its mechanism to prevent both money laundering and the financing of terrorism.

Supposedly fighting one crime
while committing another

Nonetheless, some things related to money laundering and its close links to organized crime aren’t functioning all that well in Nicaragua. For the struggle against organized crime we have Law 735, in effect since 2010, which establishes among other things that the money and goods from illicit acts committed by organized crime must pass to the State so it can employ them to society’s benefit. The law orders all resources seized from organized crime to be turned over immediately to the Ministry of the Treasury and Public Credit and article 43 establishes that the ministry must create the “Administrative Unit of Confiscated, Decommissioned or Abandoned Goods from Illicit Activities” to administer the use of these illicitly gained assets for the public good. This unit must guarantee their transparent use and be accountable for what it does with them, prioritizing the needs of the State and citizenry and avoiding any misappropriation. The State’s obligation is to ensure adequate, pertinent and transparent administration of everything seized from organized crime.

Although President Ortega signed and promulgated that law nearly six years ago, the administrative unit has yet to be created. In practice that means that anything confiscated from organized crime in Nicaragua is administered discretionarily. It is known that confiscated goods—houses, boats, trucks, cars, money and the like—have been given away as if they were the personal belongings of some state functionary, and it’s happening with the consent of the authorities. In addition to being inadmissible, this is morally and ethically indefensible, not to mention illegal.

Such a corrupt practice with money and goods obtained from criminals is particularly odious: it’s thieves stealing from thieves. What are we doing permitting and facilitating corruption with goods seized from organized crime, pretending to deal with one crime by committing another? It’s simply unacceptable. Halting it is extremely important for our country because its practice weakens the State’s struggle against organized crime.

Corruption is worldwide…

We can see that the crime of money laundering has thus far particularly focused on people engaged in or related to drug trafficking. I hope that in coming years that focus will widen to include money laundering related to both public and private corruption, which has been growing in Lain America.

Corruption is a very serious crime, but regrettably not all societies, communities or individuals realize its gravity. Many people are tolerant of it, not just in Nicaragua or Latin America, but also in Europe and the United States. Isn’t it corruption to have falsified for the past 15 years the gas emission of Volkswagens, which are sold all over the world? It happened in the world’s highest business spheres, among business leaders who are supposed to set the example, to be ethical leaders. There was massive corruption in ENRON and also rampant corruption with global repercussions in 2009 with the real estate crisis triggered by all the investment banks’ financial inventions. The corruption here in Nicaragua is less world-shaking but more brazen, practiced by functionaries who unabashedly dip into the public till to fill their own pockets. Corruption won’t disappear until societies become more aware and start rejecting it more vociferously. Meanwhile, it will just shift tactics, adapt and take more subtle forms.

…but it hits us particularly hard

Although the problem of corruption is global, it affects us more seriously. That needs to be taken more into account, putting it on a par with money laundering, not only because of our international commitments against it, but also because the fortunes being made from corruption in Latin America are now as big as or even bigger than those of some drug traffickers or members of other branches of organized crime.

One of the great challenges for our societies is to eradicate the social tolerance of corruption. We as individuals and peoples are responsible for accepting corrupt officials. The idea, so rooted in the population, that “it doesn’t matter if they steal as long as they get things done” makes us co-responsible for the corruption of officials we tolerate without thinking much about it. I wonder if we’ll finally draw the line as more scandals come to light and some business and financial entities that have agreed to launder the money from corruption start running into trouble.

The time for ingenuousness is over…
and so is the time for shell companies

There has long been a double standard about preventing money laundering and public and private corruption, but this is beginning to change because it’s also changing in the outside world, just as concern about the advance of terrorism is growing. It’s well known that the same tax havens that have been used by organized crime are also being used by terrorists. They are a two-lane highway, one being used by organized crime, or at least those who have accounts they want to hide from scrutiny, and the other by terrorism. And terrorists will also use everything organized crime discovers about how to defraud because it’s not at all hard to cross from one lane to the other.

After what happened in Paris, Mali, Lebanon and Turkey, the world tendency is to reopen discussions about everything related to these circuits that make it so easy to launder money. If until recently the dilemma was whether or not to go after tax evaders, the new issue being studied is whether the mechanisms being used to evade them are now also being used by organized crime and terrorism. We can’t ingenuously accept that the mechanisms the tax havens offer to avoid paying taxes or the maximum bank secrecy mechanisms are still admissible. They can’t be accepted as innocent.

For example, in Panama all bearer shares—millions of which had been issued by different companies—must now be immobilized and the issuing of new ones prohibited. Although this new regulation is still very lax, start-up companies in Panama now have to have a real person’s name on all shares. Moreover, all banks are obliged to ask who owns the company being founded.

In some countries in the past, banks only looked at a new company being created to see whether what it was doing was legal. If the bank also happened to ask who the company belonged to, the standard answer was: “two other companies.” “And who do those other two belong to?” “Two others”…ad infinitum. Now, to learn who’s behind the company, who owns its stock, the bank has to keep going until it gets to a physical person, requiring certification of each partner company that appears as an owner until uncovering the person behind the shell game.

The bank doesn’t do all that to denounce people; in fact they might even be able to keep right on not paying taxes in their home country. But at least there are now some mechanisms to find out who’s under the last shell. In other words, although things may not be changing all that rapidly in the world, they are changing and we expect to see more changes, at least in the West, given the concern terrorism is generating.

Public officials are prime recruit
targets of organized crime

Organized crime is constantly on the lookout for more state officials it can recruit; that’s its job. It can’t manage its own business operations without accomplices from the state customs and tax institutions, police, judges and attorneys. It uses diverse mechanisms to win them over: selling them a $100,000 car for only $5,000, giving them gifts, throwing fancy parties for them… We’ve seen it all in the best-known cases.

Of course the real prize is the highest state authorities to thus ensure the greatest possible influence, with luck even getting people they’ve already bought into the presidential seat or packing the country’s legislative branch with them. The pinnacle of success in this game is to create a narco-State or at least a corrupted one, because the relationship between organized crime and corruption is logical. Organized crime members and corrupt government officials are bound to find each other, or even seek each other out. They only have to be introduced to immediately come to the desired agreements, with no pussyfooting around.

With this in mind, the fact that the Nicaraguan State’s highest authorities have gotten involved in businesses of the magnitude we all know about is in my view reason to worry. It’s inadmissible. It’s a hugely weak flank for our public institutions and for the challenges our country has ahead of it. I believe public officials need to be exclusively dedicated to the public function they’re responsible for and not get tangled up in business deals, whether from Venezuela or anywhere else. Public service is sacred and those who choose it as a career should stick to it, just as those who become business executives should stick to their business and not be seen recruiting public servants. That formula of “businessman in the morning, pubic official in the afternoon” is a sure route to corruption.

A financial free zone in Nicaragua?

Some months ago it was announced that a free financial zone might be established in Nicaragua, although it wasn’t accompanied by many details. The only reason anyone would be interested in opening a financial center is the favorable conditions in that setting, either for an industrial development zone or for preferential tax treatment. But our economy seems quite able to resolve its current banking needs without adding another bank to the seven already in the country, so what advantage could a serious international bank gain by setting up a branch in a free zone in Nicaragua? After mulling over that question from every possible angle, I couldn’t come up with a single one. The only possible explanation is to attract resources that couldn’t be easily transferred back to the bank’s home base.

A case to keep in mind in this regard is HSBC, which in 2002 bought Banco Bital, a Mexican Bank, and let it operate with the same prevention standards it had before becoming HSBC. But Banco Bital had been a money laundromat and went right on being one, only now it was wearing the HSBC brand. That scandal ended up costing HSBC a long drawn-out process, an enormous fine and a tremendous loss of prestige.

Detection clues

Clues for detecting money launderers and organized crime members include anything that signifies social status. If a company sells luxury vehicles, we can be certain that a select group of families linked to organized crime or corruption will be among its clientele. Nobody comes into fast and easy money without wanting to enjoy it or show it off. Money launderers are also likely to buy a yacht and/or a private plane, works of art and antiques… Jewelers and art dealers are thus at great risk of attracting them.

Construction is the first sector where even more serious amounts of money are laundered. On a personal level, the first thing nouveau riche corrupt officials or members of organized crime do is change houses. If they previously lived in one that cost $10,000, they’ll immediately move up to one that costs $50,000 when the dirty money starts rolling in. After a few months, when that house gets boring, they’ll switch to one that costs $150,000, then build a flashy one that costs $500,000 or $1,000,000, and also start buying a couple more houses, probably including one on the beach…

Beyond the almost knee-jerk tendency to indulge in such a visibly ostentatious standard of living, a sure sign that significant money generated by illicit activity is being laundered is a maelstrom of purchases of expensive real estate and construction of things on it that are inconsistent with the given economy’s overall growth. Big investments such as buying or constructing shopping centers, apartment buildings and the like facilitate the infiltration of dirty money into legitimate banking channels. They also create an asset that will be worth more in a few years because real estate is one of the few assets that keep earning more value by the mere fact of possessing them. Housing project developers are traditional organized crime suppliers.

Today’s situation is quite delicate

There’s a reasonable possibility that more than just the Rosenthals’ Continental Group is involved in laundering money for organized crime. If it turns out that tomorrow some even more regionalized economic and financial group is found to be involved in something similar, I’m quite sure the effects would be catastrophic for Central America as a whole. Ours is a small region and its banks concentrate a lot of economic activity and have a lot of economic power. The fall of yet another one could generate a lot of damage.
Given both the international and regional contexts, our large business groups have to start being more careful than before. If any more of them get hurt as a consequence of imprudent conduct by permitting their operations to be contaminated by money laundering, the damage it would cause our societies would be devastating.

Alejandro Aguilar is a jurist and a money-laundering prevention expert.

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