The Latin Landscape and its Moral Compass

In my 2012 article I suggested that perhaps it would be the time to reflect, following the economic tumult of the previous several years.  It was Marcel Proust who said that “we become moral when we are unhappy”, and due to the collective unhappiness that western governments are experiencing with empty treasuries, there has been a shift in sentiment such that the word ‘moral’ is cropping up frequently in the everyday conversation of both bureaucrats and businessmen.

This backlash against moral turpitude, which has been blatantly on display in the banking and other financial services sectors before the eventual crunch came, has manifested itself in several ways, one of which relates directly to taxes; it’s now no longer a question of legitimately reducing your taxes through the application of the provision of various laws available, its become an issue of whether or not it is morally correct to do so.  It is not what your lawyer tells you but what your conscience does.

We have the case of Starbucks in the United Kingdom where it has over 700 outlets.  Through legitimate tax planning the company saved taxes in the UK by having royalties paid to its European headquarters in the Netherlands.  The company derived its name from Starbuck, the Quaker and first mate on the fated whale ship in the novel, Moby Dick.  Perhaps, like Starbucks, the coffee chain is now living by Christian principles, because it has agreed to pay some £20 million to the UK government during the next two years.

Any government claiming the moral high ground is particularly perplexing for Latin Americans for they have always been sceptical towards governments, a feeling now shared by many people in the West like never before.  They live within a culture of confianza (a word that embraces confidence, trust, faith) that is rooted deeply in the soul of Latin Americans from Mexico to the tip of Chile.  Family has a significance and blood ties endure in a culture immersed, historically, in an Iberian, conservative, Catholic tradition, which regards family values more importantly than is normally found in most of western society today.  The family itself remains key, serving as the anchor for social stability and as an economic network too.

If Latin Americans are confused by the double standards beyond their borders, then I share their quandary, but firstly let’s consider the intrusion of politics.  As long ago as 2004 a fine of US$100 million was slapped on UBS, well before its IRS encounter, by the United States of America’s central bank because it had transferred dollar notes to countries under US economic sanctions, including Cuba; at the time it was one of the largest penalties imposed by the Fed.  Last year Standard Chartered, a British bank, was fined US$327 million for clearing dollar transactions for Iranian clients through its New York subsidiary worth some US$250 billion.  Ian Bremmer, writing in the Financial Times put it this way:  “Do business with Iran, and the US will punish you for it”. 

Even the highly-publicised HSBC case at the end of last year was not just about large sums of drug money from Mexico, it was also the fact that the bank, in US Senator Carl Levin’s words, had allowed itself to help “rogue nations”.  The bank settled charges for US$1.92 billion, having been accused of not just money laundering of Mexican drug money, but having transferred billions of dollars on behalf of nations like Iran.  Credit Suisse, Barclays and ING have all faced, and settled, similar “rogue nation” complicity charges. 

The dollar is the world’s reserve currency but it comes with strings and as Chief Sitting Bull might have said, I have my reservations. 

Conversely, the Panama Canal is apolitical and facilitates the flow of global trade, if not money; this policy would change only if there was a widespread consensus to do otherwise.

The treatment meted out by the US in the case of money laundering when a foreign, rather than a domestic, bank is illuminating.  In any event, the fines imposed on recalcitrant banks have resulted in healthy contributions to Mr Bernanke’s cash-strapped treasury.  Martin Woods, who was formerly a senior AML Compliance Officer at Wachovia Bank in the US, was dismissed for refusing to stay silent about the bank’s complicity in laundering the proceeds of the Mexican drug trade.  In 2010 the bank admitted to not applying proper AML scrutiny of US$378 billion in transfers.  The scale of HSBC’s wrongdoing in regard to Mexican drug money, by contrast, came to a total of US$7 billion in transfers, not even two per cent. 

Don’t just look at the amount of money, look at the amount of the fine:  Wachovia settled charges for US$160 million on an illicit US$378 billion, not to mention over US$4 billion in bulk cash, which was transported from Mexican banks to Wachovia accounts, and nobody in the US has gone to jail.  US$700 million was the element of the HSBC fine relating to the Mexican money laundering. 

Latin Americans in the main have carried an inherent, historical mistrust of their northern neighbours, which I have touched upon in my previous IFC Review articles and although the 21^st century has seen a lowering of that suspicion, an increasing sense of confidence now sees the region determined to have an independent viewpoint.

A boost for its independent stance will be the fact that in 2013 the economic outlook for Latin America is brighter than most of the West’s economies.  Also, many Latin American governments will be able to consolidate their positions (including reforms) because there are few important elections; Mexico, with a new president in place following elections last year, is a case in point (more later).

Economists are predicting that the region will have economic growth in 2013 of between 3.5 per cent and 4 per cent which, when compared to the outlook for most economies in the West, which look anaemic, is positively healthy.  Like China, most of the region’s countries are experiencing marked growth in their domestic markets while their companies are going into foreign markets; since 2006 it is reckoned that they have spent more than US$210 billion in overseas expansion, taking advantage of cash-rich balance sheets.  Investment activity has crossed borders within South America too and in the case of Chile has brought a new meaning to the term ‘flight capital’.  In the middle of last year the Chilean airline LAN, with destinations to 20 countries, completed a takeover of the Brazilian airline TAM, once the country’s leading airline.  The new airline, which is the world’s second largest by market value after Air China, is known as Latam.

The way the world views Latin America has been changed forever and this realisation can be a distinct advantage for everyone concerned.  China is faring economically better than predicted in 2013 and so is its important trade partner, Brazil, which could benefit from a combination of lower interest rates along with reductions in business and consumer taxes; Peru, Chile and Colombia are likely to also grow above the regional average (this may be especially so in Colombia’s case if President Juan Manuel Santos can clinch a deal with Fuerzas Armadas Revolucionarias de Colombia (FARC), which has been fighting Latin America’s longest guerrilla insurgency going back to 1964).

President Enrique Peña Nieto in Mexico, new to the job, remains to be tested and one of his major challenges will be to make radical changes to energy laws that will allow private investment participation.  Similarly, President Dilma Rousseff in Brazil has plans to open up investment in infrastructure to the private sector.

There are three presidential elections in South America this year – not to mention the uncertainty surrounding the start of Hugo Chavez’s new six-year term which, at the time of writing, has been delayed due to ill health.  What Venezuela needs this year is a dose of austerity after the spending excesses of last year. 

Firstly, Ecuador will hold its presidential election in February and it is expected that the incumbent, Rafael Correa, will return to office, in part due to a divided opposition and because of an oil boom coupled with social spending.  It is expected that Paraguay’s subsequent April election for a president will probably see a return to power of the conservative Colorado party, at which point the country will be restored to membership of the South American Union and the Mercosur trade group after it was suspended from both when former president Fernando Lugo was impeached last June.  Finally, Chile, ranking in the region’s premier league, will see the electorate have their turn to vote in November.  It will be a close race between a former president, Michelle Bachelet from the centre-left, and Laurence Golborne who represents the governing centre-right alliance.

Hugo Chavez’s mercurial counterpart, Cristina Fernández de Kirchner, the Argentinean president, may not face an election this year, but a mid-term congressional election (expected in October) is important to her because if she can somehow manage a two-thirds majority, she will be able to change the constitution that would allow her to stand for a third consecutive term.  Even so, could the country stand another term of her governship?  

If the fates are kind to her, Brazil’s encouraging economy will ease foreign exchange problems and Argentina will have a bumper grain harvest.  This is a country where political and economic scenarios reach extremes of high and low in the same way as Cerro Aconcagua in the Andes Mountains, the country’s highest point, is 22,833 ft above, and Peninsula Valdes on the coastline is 151 ft below, sea level.  The referendum in March when the Falkland Islands vote to remain a British overseas territory will probably provide some political capital for the besieged president as patriotism comes to the fore. 

Certainly, this could be an eventful year and what the moral compass or economic state of the world’s fourth largest continent will be when the next IFC Review is published can be best summed up by Leo Tolstoy:  “We can know only that we know nothing.  And that is the highest degree of human wisdom”.

Derek Sambrook
Derek Sambrook is a member of the Society of Trust and Estate Practitioners in the United Kingdom and obtained the Trustee Diploma of the Institute of Bankers in South Africa in 1973, becoming a Fellow of the institute in 1996. He emigrated in 1977 from Rhodesia (now Zimbabwe) where he was branch manager of a trust company and continued his profession in North America (Miami), Europe (including London and the Channel Islands), and the Caribbean (including the Cayman Islands). He has lived in Panama since 1996 where he is the Managing Director of Topaz Services, S.A. (www.trustservices.net), a Panamanian financial services company. He was Treasurer of the British Chamber of Commerce Panama for several years. Mr Sambrook‘s regulatory experience began in the corporate division of the Rhodesian (now Zimbabwe) Ministry of Justice (1965-1970) and subsequently he was appointed by the British government (1989-1992) as the first Bank, Trust Company and Insurance Regulator in the Turks & Caicos Islands, British West Indies; he established a regulatory body and drafted trust and insurance laws, banking and other regulations including licensing guidelines. As a direct result of his innovative captive insurance law, the Turks & Caicos Islands at the end of his contract had more than 5,000 producer-owned reinsurance companies and was the leading domicile in the world for this service. During his tenure he was also an affiliated member of the Latin American and Caribbean Banking Commission and Chairman of the government’s Offshore Financial Services Committee. He was a columnist for a leading United Kingdom offshore financial journal for over 15 years. His newsletter, Offshore Pilot Quarterly, has been published since 1997. In 2021 he celebrated 50 years in the trustee profession.