Corruption, Cryptocurrency Are Challenging Money Laundering Laws in the Caribbean

Corruption, Cryptocurrency Are Challenging Money Laundering Laws in the Caribbean

This article, written by Gavin Voss and Vera Sistermans, was originally published by Insight Crime, a Medellín-based foundation dedicated to the investigation and analysis of crime and security in Colombia and Latin America.

Countries in Latin America and the Caribbean face multiple obstacles to effective anti-money laundering enforcement, even though the region ranks above the world average in its adoption of legal frameworks, according to a new report.

The 2023 edition of the anti-money laundering index produced annually by the Basel Institute on Governance highlighted how Latin America and the Caribbean’s multibillion-dollar criminal economies have turned the region into a money laundering hub where criminal groups transform their ill-gotten earnings into usable assets.

Haiti and Venezuela were once again the index’s worst performers in the region. Haiti topped the world risk rankings, with the index criticizing the country’s weak legal frameworks and high levels of corruption. Venezuela fared slightly better, though deep-rooted corruption under President Nicolás Maduro brought down its score.

Suriname, which had previously not been included in the report, ranked as the 16th highest-risk jurisdiction worldwide and third in the region. The country is hampered by a lack of corporate transparency and the strong presence of transnational drug trafficking groups.

The index ranks countries on a scale of 0 to 10 based on their vulnerability to money laundering and terrorist financing, with 10 signaling the highest risk. A country’s scores are determined by 18 indicators split over five categories: the quality of a country’s legal frameworks, corruption and bribery risk, financial transparency and standards, public transparency and accountability, and legal and political risks.

The quality of legal frameworks accounts for 65% of the total score. Overall, countries in the region scored well in this category with an average score of 5.52, a slightly lower risk than the global average of 5.62. In every other category, however, the region’s average score exceeded the world average.

Below, InSight Crime outlines three key takeaways from the Basel index to explain what it shows about Latin America and the Caribbean’s anti-money laundering capacity.

Corruption, Money Laundering Closely Linked

Corruption and money laundering are intertwined in Latin America and the Caribbean, the report highlighted, with rampant corruption generating high risk despite adequate legal frameworks.

Corruption and bribery risks increased in the region in 2023, according to the report, with countries scoring an average of 5.42 on the indicator, well above the world average of 5.02.

This score reflects previous InSight Crime coverage, which outlined how anti-corruption efforts have stalled around the region in recent years as governments are unwilling or unable to combat the longstanding impact of criminal groups in politics.

In 2023, for example, Paraguay elected Santiago Peña as president, an establishment candidate with strong ties to criminal actors. Colombia, a country with historical links between politicians and drug traffickers, was once again wracked by scandal as President Gustavo Petro’s son admitted to receiving money from criminals that was destined for his father’s campaign.

Similar to other criminal economies, corruption and bribery generate illicit earnings for public officials that must be laundered. This puts extra strain on governments’ anti-money laundering capabilities, which are already hindered by lack of resources and inadequate coordination between law enforcement offices, according to Julia Yansura, director for environmental crime and illicit finance at the Financial Accountability and Corporate Transparency (FACT) Coalition.

“There’s an unfortunate trend in the region where laws are really good on paper, but they’re not fully put into practice,” she told InSight Crime.

Corruption can also directly stymie money laundering investigations. In Honduras, lawmakers changed an anti-money laundering law in 2022 to make it more difficult to pursue launderers. The reform absolved some politicians, leading to strong suggestions of corruption. In Guatemala, corrupt officials have weaponized anti-money laundering laws to attack political opponents, detracting from investigations into criminals.

Risk Versus Reality

While the index ranks countries on their vulnerability to money laundering, it does not measure the actual amount of money laundering in a given country.

For example, Haiti, the index’s worst performer, is not a major money laundering hub. Instability, a faltering economy, and a weak currency, all aided by continuing gang conflict, drive away foreign launderers, Yansura said.

“The preference of criminals is to move those funds to a large economy with a strong currency,” she explained, citing the example of Panama, long a money laundering hub due to its dollarized economy and centrality to international trade.

The European Union and the G7’s Financial Action Task Force (FATF) have often pressured small Caribbean island nations to improve their anti-money laundering standards. Out of 27 jurisdictions in Latin America and the Caribbean with complete Basel Index data, many Caribbean island nations ranked near the top of the region for money laundering risk. St. Kitts and Nevis was considered the fifth-highest risk, the Bahamas came ninth, and Barbados 11th.

But larger countries with low risk can see more total money laundering than high-risk small islands.

In Ecuador, which has a comparatively low risk of money laundering (19th in the region), a recent wave of money laundering has accompanied an increase in cocaine trafficking. An estimated $3.5 billion — equivalent to about 75% of Barbados’ total GDP — was laundered through Ecuador’s financial system in 2021, according to the Latin American Strategic Center for Geopolitics (Centro Estratégico Latinoamericano de Geopolítica).

In Uruguay, the lowest-risk jurisdiction in the region according to the index, money laundering cases related to drug trafficking doubled between 2018 and 2022, and experts have warned that legal loopholes and limited law enforcement capabilities have attracted money launderers to the country’s financial system.

Cryptocurrencies and Money Laundering

The rise in the use of cryptocurrencies in Latin America, where most countries have fragile regulatory systems, poses money laundering risks. Many crypto wallets are designed to be anonymous, making it difficult to track suspicious activity.

The fast evolution of the crypto industry and the weak regulation of the sector globally means countries must “supercharge their efforts” against the use of cryptocurrencies in money laundering, the report argued. But crypto remains a minor money laundering method in Latin America and the Caribbean.

The instability of cryptocurrencies means they are unlikely to be a major money laundering avenue anytime soon, Kenneth Rijock, an independent financial crime expert, told InSight Crime.

“Cryptocurrencies are so volatile,” he said. “Even money launderers are afraid of using it because it may be valuable today and worthless tomorrow.”

Stronger regulations for crypto assets service providers and recent convictions involving crypto exchanges might also put criminals off. The Basel Index found that Latin America and the Caribbean’s compliance with FATF guidelines on virtual assets is nearly on par with Europe and well above other regions like South Asia and Africa.

Increased oversight and reporting requirements for crypto exchanges will make a difference, but will take time to implement, said Marianne Richardson, research coordinator at IBI Consultants, a firm that specializes in security issues in Latin America.

“Many people, including governments, still do not know how this works,” she told InSight Crime in May of last year.

This article, written by Gavin Voss and Vera Sistermans, was originally published by Insight Crime, a Medellín-based foundation dedicated to the investigation and analysis of crime and security in Colombia and Latin America.

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