The Central Bank of the Argentine Republic Imposed Fines for Breach of the “Know Your Customer” Regulations

The Superintendence of Financial and Foreign Exchange Entities of the Central Bank of the Argentine Republic (Superintendencia de Entidades Financieras y Cambiarias) (“Central Bank”) by means of the Resolution No. 1274 dated October 29, 2014 imposed a fine of AR$ 82,300,000 on a financial entity and of AR$ 79,300,000 on its officers, pursuant to subsection 3) of section 41 of Law No. 24,144 (“Resolution 1274”). Subsequently, the Central Bank, by means of the Resolution No. 1298 dated January 15, 2015, imposed another fine of AR$ 42,000,000 on another financial entity and of AR$ 43,688,000 on its officers pursuant to subsection 3) of section 41 of Law No. 24,144 (“Resolution 1298”).

1. Charges in Resolution 1274

The charges brought in Resolution 1274 entailed “breach of money laundering prevention rules based upon incomplete files and the lack of knowledge about the customer, infringing the provisions of Communication “A” 4459, RUNOR 1-766, Annex, Section 1, items 1.1.3, 1.1.4, 1.3.4.2 and 1.6.2.1.” Between June 30, 2006 and October 10, 2008 the Central Bank carried out inspections and found 29 files of the entity’s customers who had conducted exchange transactions under the Concepts 860 “portfolio investments abroad made by natural persons” and 862 “portfolio investments abroad made by legal entities.” The financial entity failed to comply with the minimum measures required by the applicable regulations in terms of prevention of money laundering and other illegal activities aimed at explaining and justifying the origin of the funds, taking into account the fact that a significant number of transfers abroad were detected, which were made by different holders and in amounts that, in most cases exceeded the assets and income reported by them in their tax returns several times over.

Likewise, brokerage firms provided customers of the financial entity with facilities, and as the Central Bank understands, those customers performed on behalf of such brokerage firms; which is why the financial entity, according to the Central Bank, should have “maximized the measures in order to identify the holders and/or ultimate customers and/or the real customers when, in the entity’s opinion, it might be possible to assume that in the pertaining transaction, the presumed customer would be acting on behalf of another person (holder/ultimate customer or real customer)” [1] and “defined the parameters for every type of customer based on its initial profile (…) in case of detecting money diversions, contradictions (…) the analysis shall be deepened (…) with the purpose of obtaining additional information which corroborates or reverts the matter brought up (…).”[2]

2. Charges in Resolution 1298

The charges brought in Resolution 1298 entailed “breach of money laundering prevention rules based upon the lack of knowledge about the customer and inadequate environment of internal control, infringing what is set forth in Communication “A” 4459, RUNOR 1-766, Annex, Section 1, items 1.1.1, 1.1.2, 1.1.3, 1.3.2.2.1 –part d- and 1.3.3.3 and Communication “A” 2525, CONAU 1-212, Annex, part l, item 1.a.” Between March 31, 2008 and October 31, 2008 the Central Bank carried out various inspections and analyzed the exchange transactions performed by customers under the concept 856 “purchase for possession of foreign currency in the country” and examined the compliance with the policy “Know your Customer.”

The Central Bank verified the lack of affidavits regarding the origin and legality of the funds and the lack of documentation supporting the origin of funds in several files, along with significant errors in the environment of internal control, and the financial entity failed to comply with the “Know your Customer” Principle. Similarly, the Central Bank claimed that there were irregularities in identification processes and proof of the financial situation and estate of the customers, lack of presentation of affidavits regarding the legality and origin of the funds which are required to open accounts for natural persons and lack of backup documentation justifying unusual movements and unavailability.

According to the above, the Central Bank upheld that the financial entity facilitated the performance of exchange transactions (and other transactions with different products offered by the financial entity) for significant amounts without complying with the minimum measures required by the regulations, which were supposedly infringed, with the purpose of establishing the economic capacity and/or sufficient income which allows to determine the real origin of the funds.

3. Claims

Resolutions 1274 and 1298 focused mainly on the following aspects:

1. The financial entities had neither the complete files of customers necessary to determine the economic and financial profile thereof or the documentation which supports and justifies the transactions, thus failed to comply with the applicable regulations in terms of establishing the origin of the funds.
2. The financial entities had the authority to demand from their customers the necessary documentation to support the transactions.
3. The proof of customer’s solvency subsequent to the Central Bank inspection to make the transactions did not compensate for the irregularity related to the lack of complete files.
4. To establish the amount of the fine, the Central Bank considered the magnitude of the infringement –amount of the irregular conduct- and the importance of the “Know your Customer” policy.

4. Defense

The main defense arguments of the financial entities and their officers were:

1. The fact that the investigated conducts are not classified as illegal acts under Criminal Law, a lack of precision regarding the acts in question and the lack of accusation motives.
2. The claims are a façade aimed at hampering the development of transactions regarding the purchase and sale of securities by transferring US Dollars abroad, when the truth is that those transactions were fully valid.
3. Clients had backup, whether from their own assets or due to the combination of them and the facilities given by the brokerage agencies to which the clients belonged, to carry out the exchange transactions and to perform the purchase and sale of securities’ transactions reported in their respective affidavits.
4. The obligation to control provided by the applicable regulations arises only in those cases in which, according to the financial entity, there are doubts regarding the real recipient of the transaction.
5. The conceptual mistake made by the Central Bank when relating the total amount of transactions performed by a person during a given period to its financial capacity.
6. The Central Bank was aware of the conduct for several years and it revealed a favorable conduct regarding its development, consequently, the principle of legitimate trust which prevents the Central Bank from imposing fines with foundation in said conduct on the financial entity should be applied.
7. The disproportion and the irrationality of the claims.
8. The demonstration of the actions and measures adopted in relation to the money laundering prevention rules and the improvement of the internal control mechanisms.

5. Final considerations

The fines imposed by the Central Bank by means of financial summary proceedings may be appealed only to remanding effect before the Federal Court of Appeals on Contentious and Administrative matters pursuant to section 42 of Law No. 21,526, meaning that the appeal filed by the parties under investigation, in general, does not suspend the effects of a judgment and the parties will have to pay the pertaining fines unless an injunction is granted in a judicial instance which demands to do so.

In these financial proceedings, the Central Bank considered the magnitude of the infringement, the importance of the regulations that were breached, the extension of the infringement period and the patrimonial liability counted towards the financial entities. In both cases, the Central Bank did not consider either the damages against third parties or the financial entities’ benefit acquired by performing the transactions mentioned herein.

The imposition of such significant fines for alleged formal breaches seems unusual due to the fact that they can be related to other aspects of monetary or exchange policy which may be of Central Bank’s interest even when the infringement is not strictly related to foreign exchange regulations.

[1] Communication “A” 4459, RUNOR 1-766, Annex, Section 1, items 1.3.4.2

[2] Communication “A” 4459, RUNOR 1-766, Annex, Section 1, items 1.6.2.1