Money laundering

The corner stone on the Federal Reserve Bank of New York in the financial district in New York City, U.S., March 4, 2019. REUTERS/Brendan McDermid

April 18, 2019

By Luc Cohen and Corina Pons

CARACAS (Reuters) – U.S. sanctions on Venezuela have led the New York Federal Reserve to crack down on Puerto Rico’s $50 billion offshore banking industry, according to four sources and a document seen by Reuters.

The development will prevent the island’s offshore banks, several of which are owned by citizens of crisis-stricken Venezuela, from opening accounts with the Fed that give them direct access to the U.S. financial system.

Offshore banks in Puerto Rico are able to open accounts with the Fed since the island is a U.S. territory. That gives them a competitive advantage over other offshore banking jurisdictions like the British Virgin Islands, which have to access the U.S. financial system through expensive third-party correspondent banks.

But in a previously unreported Feb. 27 letter, the New York Fed said it had halted approval of new accounts for Puerto Rican offshore banks and other financial institutions “in light of recent events, including the expansion of U.S. economic sanctions relating to Venezuela.”  

It plans stricter requirements for the opening of such accounts in the future, it said.

It did not give further details on why it was taking that step. But the move follows two Puerto Rican offshore banks that have accounts open with the New York Fed being mentioned in federal investigations into money laundering and sanctions evasion related to Venezuela.

“The Fed worries about its reputational exposure, just like anybody else does,” said David Murray, a vice president at the Washington-based Financial Integrity Network and a former Treasury Department official.

A spokeswoman for the New York Fed did not respond to requests for comment.

The decision will only affect Puerto Rican banks that had pending applications with the Fed and will not affect the 17 of Puerto Rico’s 80 offshore banks that the Fed’s website shows already have Fedwire accounts. Reuters was unable to determine how many banks were awaiting responses on their applications to open accounts.

The move to suspend account approvals shows how U.S. sanctions on Venezuela, which are meant to force socialist President Nicolas Maduro from office amid a political crisis and an economic meltdown, are having a ripple effect in other parts of the global financial system.

It could deal a blow to Puerto Rico, which has been using the offshore sector as an economic development strategy as it struggles with a crushing debt load and the impact of natural disasters such as 2017’s Hurricane Maria.

The island has for years nurtured its offshore banking sector by offering tax incentives to bank owners and promoting direct access to the U.S. financial system through the Fed rather than correspondent banks, which charge for their services and can end the relationship at a moment’s notice.

Offshore banking lets individuals and companies deposit money outside their countries of residence in order to legally lower tax bills, but criminal investigations and multilateral organizations have alleged it is also used for tax evasion and money laundering.

The notice also applies to U.S. Virgin Islands offshore banks. Both territories fall under the jurisdiction of the Fed’s New York branch.

‘WE SHARE IT ALL’

George Joyner, the commissioner of Puerto Rico’s banking regulator, declined to say how many of the territory’s offshore banks had applications pending with the Fed. He said the island regulator used the same standards as federal authorities including the Fed to supervise financial institutions, and that anti-money laundering was a “high focus.”

“Our office fully shares everything that we find in our examinations, and we share it with all the federal agencies,” Joyner said in a telephone interview.

He said “a number” of Puerto Rican offshore banks had been created with Venezuelan capital, without elaborating.

The Virgin Islands’ director of banking and insurance did not respond to requests for comment.

Sixteen of Puerto Rico’s 80 offshore banking and financial services firms are owned by Venezuelan individuals or companies, according to a Reuters review of their websites, corporate registry records, and directors’ LinkedIn pages and personal websites.

Several marketed directly to Venezuelan clients, or had past deals with the Venezuelan government, while twelve of the sixteen had Fedwire accounts, according to the Federal Reserve’s website.

Fedwire, a funds transfer system controlled by the Fed, allows banks, businesses and government agencies to send and receive payments in real time.

VENEZUELA CONNECTIONS

In recent years, U.S. prosecutors have examined the role Puerto Rico’s offshore banks have played in efforts to launder Venezuelan funds through the United States. It was not clear if the two cases in question contributed to the New York Fed’s decision to halt the opening of new accounts, but one source at a Puerto Rican bank and industry consultant David Nissman said they were likely an important factor. Joyner said they “certainly didn’t help.”

Federal prosecutors in a sprawling corruption probe unsealed in July of 2018 charged Uruguayan national Marcelo Gutierrez with allegedly conspiring to launder funds embezzled from Venezuelan state oil company PDVSA through a “bank in Puerto Rico” that he owned, according to criminal investigation filings in Florida federal court.

The prosecutors’ complaint does not identify the bank and says the transaction never took place.

Gutierrez’s LinkedIn profile lists him as a director at Vestin Bank International, which Puerto Rico banking regulator records show received a license to operate as an offshore operation on the island in 2015.

Vestin has since been acquired by Asia-focused Standard International Bank and Gutierrez has not been a shareholder since August of 2018, Standard said in a statement, adding that it had no links to Vestin’s prior business, no ties to Venezuela and no plans to enter the Venezuelan market.

Bruce Udolf, a Florida-based defense attorney for Gutierrez, said, “We expect to respond with a vigorous defense to those charges. We are hopeful that he will be vindicated at trial.”

In February, the FBI raided Puerto Rican offshore bank Banco San Juan International (BSJI) as part of a probe of money laundering and evasion of Venezuela-related sanctions, special agent Douglas Leff told reporters at the time. A spokesman for the FBI San Juan field office declined to provide further details.

In 2016, BSJI reached a $300 million credit agreement with PDVSA, according to PDVSA’s financial statements from that year.

BSJI also has an account with the Fed, according to Fed records.

In a statement, BSJI said it had complied with all U.S. sanctions and was cooperating with the FBI investigation.

The source at the bank in Puerto Rico, along with Joyner and Nissman, said most of the island’s offshore banks applied strict scrutiny on customers, and that the decision would punish an entire sector for the actions of a few bad actors.

“It just shuts your businesses down, and what did they do?” said Nissman, a former U.S. attorney for the U.S. Virgin Islands who drafted the territory’s offshore banking law, and now a Puerto Rico-based consultant. He said the Fed should evaluate applications on a “case-by-case basis.”

(Reporting by Luc Cohen and Corina Pons, Editing by Brian Ellsworth and Rosalba O’Brien)

Source: OANN