Legality of “Blue-Chip Swap Transactions”

On May 16, 2014, the Criminal Court for Economic Matters No. 3 acquitted a bank and its officials for certain transactions involving the simultaneous sale and purchase of securities back in 2005. Such transactions consisted of the sale of securities by the bank in Argentine pesos and the immediate repurchase of such securities from the same clients in U.S. Dollars. Such transactions were executed prior to the enactment of Communication “A” 4864 (November 3, 2008) which established that securities should remain in the seller’s portfolio for at least 72 business hours.
The transactions whose legality is being questioned were subject to administrative prosecution by the Central Bank. The Central Bank considered that such transactions involving the sale of securities in Argentine pesos and its immediate repurchase in U.S. Dollars from the same clients had enabled the repatriation or transfer of foreign currency outside Argentine without its settlement through the Foreign Exchange Market which, in the Central Bank’s view, was a violation of the criminal offenses set forth in the Foreign Exchange Criminal Law.
In the courts the matter was originally heard by the Criminal Court for Economic Matters No. 8 which, in its decision dated May 16, 2012, convicted the bank and fined its officials a payment of approximately 1% of the largest infringement. The bank then appealed the decision and the Criminal Court of Appeals for Economic Matters, on December 21, 2012, declared the nullity of the resolution for lack of sufficient grounds and resolved that the matter was to be the subject of a new resolution by another Criminal Court for Economic matters.
The matter was then sent to a new Criminal Court for Economic matters for its resolution at which stage the Criminal Court for Economic Matters No. 3 resolved that the bank and its officers should be acquitted. The Criminal Court for Economic Matters No. 3 considered the main defenses raised by the bank to be valid.
The acquittal emphasized four key points:

1. Legality Principle
Based on the principle set by the Supreme Court in re “Esterlina” and “Cristalux” regarding the application of the constitutional principle of legality and the inapplicability of analogy principles in criminal matters, the judge sustained that the communications and decrees (regulations that completed the criminal offenses set forth in the Foreign Exchange Criminal Law) that the Central Bank considered violated cannot be analyzed and construed in an extensive manner or by using hermeneutic analogies. The judge then sustained that the facts of the case under investigation do not violate the regulations that complement the criminal offenses at stake. That is the reason why the transactions that are being questioned cannot be deemed prohibited transactions or, therefore, actions in violation of the regulations or typical actions.
The decision stressed the principles included in sections 18 and 19 of the Argentine Constitution which state that “no inhabitant of Argentina may be obliged to do what the law does not provide for nor restricted from doing what the law does not prohibit” and that “no inhabitant of Argentina may be punished without a previous trial based on a law enacted prior to the conduct being tried.”

2. Communication "A" 4864 subsequent to the infraction. Confirmation of non-criminal behavior under the Foreign Exchange Criminal Law
It was upheld that the non-criminal behavior is confirmed by Communication "A" 4864 (enacted after the facts of the case occurred), that reaffirms that when these acts took place there was no rule that specifically restricted or prohibited the execution of simultaneous purchase and sale of securities in the stock exchanges or markets, but instead it requires the prior approval by the Central Bank when it is not possible to demonstrate that the traded security has remained in the seller’s portfolio and sold not after less than 72 business hours.

3. Lack of agreement in the Central Bank regarding the legality of conduct. Prohibition Error
Moreover, the ruling evidenced a lack of clarity and doubts raised by the Central Bank regarding a possible prohibition of those conducts under analysis, which justified the issuance by the Central Bank of two Press Releases, Nos. 48,496 and 48,498 on March the 21st and 22nd in order to clarify the position of the Central Bank.
Faced with the disagreements between the various departments of the Central Bank regarding the legality of the transactions, the judge concluded that it is not applicable to require individuals to carry out certain behaviors to regulations that are not precise and are in fact contradictory, and then it is possible to affirm the existence of a invulnerable prohibition error, since the debate has not been settled as indisputable.

4. Inapplicability of the criterion of economic reality
Finally, the inapplicability of the criteria of economic reality was noted, because beyond the effects that the transaction might have, its realization is not in violation of the previously mentioned provisions of the Central Bank. On the contrary, at the time of its performance, its development was in line with Communication "A" 4308. Unlike the tax regime, in the Foreign Exchange Criminal Law the economic reality criteria is not expressly provided by law, so there is no support in any previous law to consider the involved securities’ transactions illegal.
Therefore, in order to comply with the legality principle, when trying to define the illegality of these actions, it becomes vital to comprehend the operation in a restrictive manner, and not just consider the results, characteristics, or the obtained advantage.
Certainly this leading case sets an important precedent for the market, although to this date, to our knowledge, the court decision is not yet final.