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9. Regulatory and Supervisory Framework of Funds Transfers in Colombia

Author(s):
International Monetary Fund
Published Date:
March 2005
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Author(s)
Andres Arboleda Uribe

This paper discusses Colombia’s experience of implementing a regulatory framework for money transfers that is capable of attracting money remitters to cross the line to a formal system. It also describes the supervisory practices and procedures the country designed and has applied for the past 12 years to enforce those regulations.

After a background section that briefly explains why Colombia adopted a new regulation on foreign exchange in 1991, the paper describes the characteristics of funds transfers in Colombia, the requirements for obtaining a license, the challenges and results of the supervision model that was adopted, and the consequences for providers who opt to work illegally. Finally, it presents some concluding thoughts.

Background

Hawala, or informal funds transfer systems, are illegal in Colombia. Colombia’s Foreign Exchange Statute defines money transfers from or to Colombia as foreign exchange operations that must be channelled through licensed money remitters. Therefore, anyone wanting to transfer funds to Colombia, regardless of the funds’ source or destination, needs to use the services of a money remitter in the sending country. That entity will, at the same time, need to have an agent, branch, franchise, or other legal relation with a licensed money remitter in Colombia to pay the order to its beneficiary.

Transfer means the operation by which a professional institution, called a money remitter, following an order of a sender, delivers funds to another person (or to the same sender), called a beneficiary, in a foreign jurisdiction, using for that purpose the services of a correspondent money remitter called payer.1

The same statute requires anyone wanting to provide money remittance services to be licensed by the Colombian Banking Superintendence or the Securities Exchange Commission (Securities Superintendence), depending on the type of institution created for that purpose. Any attempt to transfer funds through any different channel is considered a violation of both the Foreign Exchange Statute and the Financial System Statute and is severely punished.

The question is, has prohibition under these statutes been enough to discourage illegal funds transfer systems?

History

Until the beginning of the 1990s, we had in Colombia a very rigid system of foreign exchange control. Between 1967 and 1991, monetary authorities determined the price of foreign currency and severely restricted the possession of foreign exchange. Obviously, since money transfers involved foreign currency, they were administered (at a high cost) by the government through Colombia’s central bank (Banco de la República) and were subjected to excessive scrutiny.

Restrictive systems always bring with them very active black markets, and money transfers were no exception. They moved in a sort of penumbra, in most cases without the use of formal institutions. During the 1980s and previous years, what really prevailed in country-to-country money transfers was the use of trustees, underground hawalas, which were already considered illegal, and ordinary mailing services. The central bank’s funds transfer service was mandatory and designed for sophisticated operations, not for ordinary people. It was very common for people to use alternative methods to move funds.

Our experience showed us that prohibition was not effective. Informal or alternative ways of transferring funds would continue to exist and would lead the business unless we designed a regulatory scheme fair enough to promote the use of formal channels and to modernize the sector.

In 1991, Colombia made huge steps toward that goal. That year Congress passed Law 9-912 that helped to clear away the fog surrounding the money transfer business in Colombia.

The new rules set by Law 9-91 promoted the expansion of the funds transferring business in a country that, for sociopolitical reasons, had begun to experience in that decade an increase in emigration to North America and Europe. Since then, emigration in Colombia has been greater than in most of the Latin American countries. It is estimated that the number of Colombians living in foreign countries is growing at a rate of 5.5 percent annually, which is more than the whole planet’s rate of population growth. For obvious reasons, the growing emigration rate has tremendously increased the number of money transfers to Colombia.

Characteristics of Funds Transfers in Colombia

As a result of Law 9-91 and other regulations issued later, the funds transferring business in Colombia has the structure described below.

First, since 1991, the government no longer maintains a monopoly on the administration of foreign exchange; the market determines the price of foreign currency. The central bank preserves enough powers to apply monetary measures or to intervene in the market in order to keep the foreign exchange rate within adequate levels.

Second, with some exceptions, the foreign exchange market is liberalized.

Third, foreign exchange market operations, including money transfers, are explicitly defined in the law, resulting in transparency and confidence in the sector.

Fourth, financial institutions, security brokers, and foreign exchange houses (casas de cambio) are allowed to intermediate in money transfers. Analysts have considered this simple provision to be crucial in understanding the huge development and expansion that the money remittance business experienced during the past decade, after the activity was widely opened to competition. The chart in Figure 9.1 shows the amount of money coming into Colombia through money remitters from 1992 to 2001.

Figure 9.1.Amount of Money Entering Colombia through Money Remitters, U.S. Dollars

(1992–2001)

Fifth, money transfer providers need to be licensed by the Colombian Banking Superintendence or the Securities Exchange Commission, depending on whether they are banks, casas de cambio, or security brokers.

Sixth, money transfer providers are subject to permanent onsite and off-site governmental supervision.

Seventh, illegal providers are subject to a severe sanctioning regime (discussed below).

The decision made in the 1990s to liberalize the market opened new and interesting opportunities for legal businesses. For the first time in years, the law allowed people to compete in the market by creating institutions dedicated primarily to money transfers. At the same time, illegal providers realized that they did not have to keep hiding, because suddenly their business was no longer a crime.

However, this liberalization came with a whole new set of rules, sound practices, and standards that providers needed to align themselves with to be accepted as “club members.” In other words, to do business legally, someone wanting to operate as a money remitter must obtain a license and follow some prudential rules that are enforced by a highly professional supervisory body.

How to Obtain a License

To obtain a license, applicants must file with the Colombian Banking Superintendence or the Securities Exchange Commission. Applicants must pass a “fit-and-proper” test and provide information related to the business, such as the following:

  • all the documents supporting the legal source of the funds that will be used to create the institution;
  • investors’ equity in financial and nonfinancial institutions;
  • a list of investors’ debt;
  • each investor’s income tax declaration;
  • a business feasibility study;
  • descriptions of the business’s administrative and financial infrastructure;
  • a description of its technical infrastructure, including all computers and connectivity systems;
  • identification of any foreign investors in the new institution, plus proper authorization to invest, from the investor’s home country authority;3
  • a draft of the contract and other information regarding the correspondent money remitters or agents the institution will work with in other countries;
  • a draft of the applicant’s money laundering prevention manual.

To obtain a license, the money remitter must certify a minimum capital of US$1.3 million. Minimum capital requirements have been gradually raised since 1991. Before issuing a license, the Superintendence checks with administrative, criminal, and tax authorities to find out if investors have any prior violation record (fit-and-proper test).

Although the law gives the Superintendence six months to complete the whole process, an authorization takes an average of three months from the time the application is filed.

Constant Supervision

The issuing of a license means that, on one hand, the money remitter is authorized to operate and that, on the other hand, the Colombian Banking Superintendence or the Securities Exchange Commission will subject the money remitter’s activities to permanent supervision and examination to ensure compliance with several prudential rules.

Money remitters are under the supervision of the governmental body in charge of examining banks, insurance companies, and pension funds. The supervision follows the same procedures and has a similar focus for all of them.

The Colombian Banking Superintendence has a special division for money remitters’ supervision. A team of inspectors undertakes an ongoing onsite and offsite examination of the money remitters chartered in Colombia. Money remitters have to be visited at least once a year.

Under prudential regulation, money remitters must comply with the following conditions, among others:

  • full disclosure to the market and customers of their operations and costs;
  • advertising under Colombian Banking Superintendence parameters;
  • accounting records under Financial Accounting Standards;
  • monthly reporting to authorities;
  • minimum capital requirements;
  • liquidity gap analysis;
  • foreign exchange risk management; and
  • money laundering prevention and control.

For money laundering prevention, money remitters must adopt the following structure. Money remitters must implement an internal system devoted to preventing and controlling any attempt by a customer to use them for money laundering purposes. Under a know-your-customer model, money remitters must appoint a compliance officer who is responsible for keeping track of operations in order to detect money laundering cases and to audit the whole system. Money remitters have to report any suspicious activity to the Superintendence’s financial intelligence unit and also submit a monthly report showing all funds transfers.

For offsite supervision, money remitters are obliged to periodically send the following information to the Superintendence:

  • call reports related to their general situation;
  • monthly financial statements;
  • end-of-year financial statements;
  • monthly reports of money transferring operations;
  • statistical reports of customers’ complaints (number and types of complaints);
  • investment portfolio report;
  • contingent accounts report; and
  • external auditor’s report.

In addition, the Superintendence has the power to require any other information necessary for the purposes of supervision.

For onsite supervision, the Superintendence visits money remitters’ office at least once a year. It performs what is basically a risk-focused examination. It analyzes their capital standards, their liquidity risk exposure, their credit risk exposure (in terms of owned receivable accounts), and for obvious reasons, their foreign exchange rate risk and money laundering exposure. It also examines their compliance with the Foreign Exchange Statute, according to which, money remitters must keep records and track each transfer. For this purpose, the Colombian Banking Superintendence has signed several Memorandums of Understanding with colleagues from other countries in order to check correspondents’ accounts and records.

An examiner’s report is written with the conclusions of the onsite examination and then sent to the money remitter for comment.

In many cases, the report contains a list of the legal provisions that, according to the examination team, the money remitter was not following. Again, special care is given to their compliance with regulations on money laundering, including special examinations to exclusively evaluate this topic.

In cases in which a violation was not excusable according to torts law, or the Superintendence finds an excessive, overall exposure to risk that can affect the money remitter’s financial stability, the law gives the Superintendence the power to adopt one or more of the following decisions, depending on internal guidelines, policies, and the gravity of each case: cease and desist orders, pecuniary sanctions to both the institution and its administrators; special surveillance status, capitalization orders, fiduciary administration orders, mandatory transferring of assets and liabilities, merger orders, special recovery programs, receiverships, and liquidation (license removal).

In short, we have a very straightforward regulation that not only prohibits unlicensed operation but also promotes the business on a legal basis, giving enough incentives for providers to cross the line and become part of the formal sector. For this reason, and thanks to our proactive and strict supervision, hawala is not common in Colombia.

It is true that every now and then we find hawaladars in Colombia. But we believe that an adequate regulatory and supervisory framework has made money remitters more interested in formalizing their business.

What Happens to an Illegal Provider in Colombia?

It is the Superintendence’s duty to impose one or several of the following measures on those pursuing money transfers without a license:

  • cease-and-desist orders compelled by daily fines of US$1,000;
  • the liquidation of the institution; and
  • the liquidation of all illegal operations, through an expedited administrative process.

For the purpose of determining if a nonlicensed institution is pursuing illegal money transferring activities, the Financial System Statute (Decree 663–93) empowers the Superintendence to inspect accounting books, files, and records. For such inspections, we sometimes mount undercover operations.

Conclusion—Why This Scheme?

Countries that apply extreme controls, so that residents are not free to move their funds, are extremely susceptible to the development of black markets. A better system is liberalized markets combined with good prudential regulation and supervision of funds transfer providers.

A scheme requiring applicants to have minimum qualifications to be licensed as money remitters, combined with full-disclosure standards, permanent onsite and offsite supervision, zero tolerance to illegality, and cooperation among authorities, both national and overseas, brings confidence and helps promote an above-board business of enormous importance to a country’s economy.

That is our case, and we believe it has worked properly.

Andres Arboleda Uribe was Director de Regulación in the Superintendencia Bancaria de Colombia.
1Besides transfers, the Colombian Foreign Exchange Statute allows physical carrying of funds into the territory with no limits in terms of amount. Currency exceeding US$10,000 or its equivalent have to be declared and, in any case, if required, be properly accounted for.
2Law 9-91 is available online at http://www.banrep.gov.co (juriscol icon).
3Following the Basel Committee recommendations, the Colombian Banking Superintendence and the foreign authority usually draft a memorandum of understanding that allows Colombian authorities to obtain the documents faster and to confirm other information related to the investors.

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