No place in the world is immune to malfeasance, but the breadth and persistence of corruption in Latin America and the Caribbean, at geopolitical and local levels, has remained an intractable problem. Part of the issue is the collective wealth gap in the region. In at least eight instances, Latin American countries see the richest twenty percent of the population in possession of more than half of that country’s income.
The problem has been hugely exacerbated by the COVID-19 pandemic, owing in part to the overnight expansion of governmental powers and resulting procedural shortcuts and unprecedented expenditures ostensibly in the service of addressing the public health and economic crises. No fewer than three anti-corruption offices in Central America had been dissolved by early 2022, compounding challenges for US officials, including the Biden administration, in their efforts to sustain anti-corruption strategies.
With corruption throughout Latin America expanding at an alarming rate, the need for companies to double down on their risk management programs has never been greater.
A Landscape of Widespread, Systemic Corruption
In a rare display of investigative zeal, the so-called Panama Papers, released in 2016, contained more than 11 million leaked financial and legal records. A second wave, dubbed the Paradise Papers, released in 2017, disclosed over 13.4 million confidential records. A subsequent publication by the International Consortium of Investigative Journalists in 2021 comprised an additional 12 million leaked documents. Collectively, the documents exposed the existence of extensive offshore holdings connected to public figures worldwide and associated tax-avoidance tactics.
The consequences in Latin America came quickly. Lawmakers in Chile, for example, impeached then-President Sebastián Piñera after the leaked documents revealed that his family had sold a mining company in a transaction facilitated by a key regulatory decision.
The two largest economies of Latin America, Brazil and Mexico, are key centers of financial corruption and bear close examination.
Corruption, money laundering, and drug trafficking are particular problems in Brazil, the seventh largest economy in the world — expected to become the fifth-largest by 2023. With a gross domestic product (GDP) of US$2.4 trillion, Brazil represents the equivalent of more than 40 percent of Latin America’s economy.
Persistent political interference with law enforcement agencies and anti-corruption institutions continues to hamper the implementation of anti-corruption measures, a factor that impacts not only Brazil but the wider region as well. Estimates of the proceeds from criminal activity in Brazil range from US$36.8 billion to US$92 billion per year. Money laundering alone is believed to account for an estimated US$25.8 billion to US$64.4 billion per year.
Experts cite money laundering as the most prevalent form of financial corruption in Brazil, followed by trade-based money laundering (TBML). Illicit activities believed to generate the bulk of financial crimes were driven to a great extent by drug trafficking. According to a report by Global Financial Integrity, the principal avenues used to commit financial crimes in Brazil are cash and company-centric activities. Other avenues involved the use of the financial system, real estate, gas stations, and shell companies, among others.
Narcotics and smuggling prevail with few convictions
Criminal activities such as narcotics and smuggling in general are especially prevalent in the region shared by Brazil, Argentina and Paraguay, fueling financial crime. To cite one example, the Primeiro Comando da Capital (PCC) is described as one of the most important criminal organizations in Brazil. PCC’s tentacles, comprising drug shipments, robberies, kidnappings, and potential ties with FARC and Hezbollah, extend into regional neighbors, Europe and Asia.
Corruption was also found to be a factor among state-owned companies and banks, energy supply companies, and companies in the nuclear energy industry, among others. Complicating matters, despite Brazil having a solid institutional framework for financial intelligence focused on anti-corruption efforts, Brazil has a low conviction rate for financial crime cases. Between 2006 and 2008, 11 out of the 4,760 investigations that were initiated turned into convictions.
Commencing in 2014, for example, Brazil was the setting for a broad criminal inquiry that came to be dubbed Operation Car Wash, which tainted business and political elites across the region. Brazilian president Jair Bolsonaro shuttered the operation in the face of investigations involving his own family. Argentina’s “notebooks” scandal in 2018 uncovered an alleged scheme based on kickbacks that are reported to have involved former Presidents Néstor and Cristina Kirchner.
On a more promising note, Brazil has passed legislation on money laundering and other matters of fraud in recent years. Since enacting new frameworks for identifying and freezing terrorist assets and preventing money laundering, Brazil has come to be viewed as making substantial progress on corruption in these regards.
Developments in Mexico indicate that the country is motivated to combat financial crimes. Nonetheless, there are challenges to be met. These include the extent of organized crime in the country, less than optimal functioning of Mexican institutions designed to safeguard against this activity and stubbornly low levels of prosecutions.
Money laundering & criminal activity flourish despite regulations
Global Financial Integrity estimates that criminal proceeds in Mexico amount to US$25 billion to US$62 billion a year. Money laundering flowing from criminal activities is thought to be US$18 billion to US$44 billion a year for Mexico. Financial and political corruption in Mexico centers heavily on money laundering — most commonly from criminal enterprises and business-generated profits, followed by terrorism finance.
There are some vulnerabilities in the Mexican anti-money laundering and anti-terrorism financing system, including poor communication and coordination between government bodies, which are considered a factor in low levels of prosecutions and convictions. Another culprit is agencies having a limited understanding of trade-based money laundering and the inherent risks.
In the context of Mexico’s legal framework, the Federal Law for the Prevention and Identification of Operations with Resources of Illicit Origin, established in 2012, and the National Law for Asset Forfeiture, created in 2019, help strengthen Mexico’s enforcement options. Another important anti-money laundering tool is seen in Mexico’s regulatory restrictions on the flow of US dollars in cash.
A number of reforms under consideration in Mexico could have a material impact on anti-corruption efforts. These range from potential rules requiring beneficial ownership identification and politically exposed person (PEP) identification for purposes of uncovering illicit activities.
Currently, Mexico and the US take different approaches to measure their effectiveness in combating financial crimes. In the case of Mexico, frozen bank accounts and assets that have been seized take precedence. In the fight against money laundering, the US, on the other hand, gauges success in terms of the volume of people and equipment provided. While useful in the short term, there is room for Mexican and US authorities to track medium and longer-term impacts, which would help inform agency budgets and drive prosecutions.
Expanding Areas of Risk for Financial Crimes and Corruption
The picture in other Latin American countries suggests there is much room for improvement in terms of financial risk and corruption. Honduras, Guatemala, and El Salvador each shuttered their anti-corruption offices after investigators found direct links to illicit parties. The closings discouraged members of the Biden administration in their efforts to renew the struggle against corruption. In 2021, the administration announced a detailed strategy that hinges on reducing corruption by slowing migration from Central America.
With new developments and renewed commitments to combating the spread of corruption in this region, including the Release of the Section 353 List of Corrupt and Undemocratic Actors by the US Department of State, it remains crucial for business entities to remain abreast of the evolving landscape of financial crime and corruption, and the — albeit limited — regulations in place to curb them.
At an estimated US$76 billion in GDP, Guatemala is considered the largest economy in Central America. The legal system in place to fight anti-money laundering and terrorism financing is considered flawed and uneven in the application of the law.
The current system is regarded as being unduly focused on the average population as opposed to people with outsize financial or political standing. It’s a problematic stance considering that 91 percent of Guatemala’s population lives in poverty.
It’s estimated by Global Financial Integrity that the flow of criminal proceeds in Guatemala adds up to roughly US$1.5 billion to US$3.8 billion a year. Money laundering within this criminal ecosystem amounts to approximately US$1.1 billion to US$2.7 billion dollars a year. According to USAID Guatemala, extortion in Guatemala may amount to US$60 million to US$400 million annually.
Guatemalan anti-corruption campaigners such as former Attorneys General Claudia Paz y Paz and Thelma Aldana, Judge Gloria Porras, and prosecutor Juan Francisco Sandoval, all regarded as key bulwarks against corruption, have fled to the US.
The second poorest country in the hemisphere, Honduras, at the same time, has large illicit economies, complicating efforts to investigate and prosecute AML and financing of terrorism. A big part of the problem is significantly high levels of government corruption and power imposed by drug trafficking and organized crime enterprises.
Financial risk and corruption in Honduras include high-level financial and operational complicity with major drug trafficking organizations. Honduran president Juan Orlando Hernández has himself been named in criminal cases involving what US prosecutors have described as state-sponsored drug trafficking.
Indicative of the scale of the problems confronting Honduras, in the country’s November 2021 presidential elections, voters were pressed to choose between a candidate convicted of laundering drug money, another being investigated for embezzlement, and a candidate whose spouse was accused of taking drug money.
Typical of the struggle in countries under heavy political sway, persistently authoritarian behavior by Nicaraguan President Daniel Ortega has impeded the progress of financial corruption controls. In one case, the arrest and disqualification of an opposition leader was accomplished under the rubric of money laundering charges. Rumors persist that the country’s business ownership registry, rather than casting light on potentially nefarious actions, is used to surveil the finances of political dissidents.
Drug trafficking, corruption, organized crime, human trafficking, and sexual exploitation are seen as significant threats in Nicaragua, which holds the dubious distinction of being one of the Western Hemisphere’s smallest, poorest economies.
Nicaragua has been addressing some of these areas, particularly over the last five years. These efforts, however, are frequently regarded as tactics that are used against human rights and pro-democracy organizations.
Drug trafficking, corruption, Trafficking in Persons (TiP) and Smuggling of Migrants (SoM), and mineral trafficking are the prime means by which criminal operations generate proceeds. International trade, real estate, and banks are considered to be the main channels used for financial crimes. Global Financial Integrity’s estimate that criminal proceeds in Nicaragua range from US$250 million to US$626 million a year reflects the country’s comparatively meager economic output. Proceeds accumulated through money laundering are estimated at anywhere from US$175 million to US$438 million dollars a year.
Looking Ahead: What Can Companies Do?
The cases and issues cited above collectively reveal the breadth and depth of problems around risk and corruption that are confronting businesses with exposure to much of Latin America. The persistence of compromised individuals at high levels of government undermines federal-level, standardized reforms that might otherwise play a key role in implementing and enforcing changes.
In the meantime, companies doing business in Latin America are well-advised to implement several steps to avoid entanglement in malfeasance. These can include compliance and risk management activities such as carefully assessing all business partners for source of wealth and ultimate beneficial ownership (UBOs), as well as examining third-party vendors to confirm they are not operating under sanctions or have politically exposed individuals in key positions.
Ongoing supply chain audits focused on ethical integrity must become a standard operating procedure as well. This is especially true in places where human rights abuses have come to light in the past. Staying up to date on legislative developments pertaining to risk and anti-corruption is also very important in ensuring that your organization is conducting the proper compliance activities.
IntegrityRisk has the knowledge, people, and resources to help companies with a presence in Latin America contend with the many challenges posed by risk and corruption in the region. To learn more, contact the experts at Integrity Risk International.