In the Latin America region, efforts to combat financial crimes must consider contextual factors, such as poverty, financial education, internet access, corruption and impunity. For governments facing these contextual challenges, cryptocurrencies may add another layer of complexity, regardless of the regulatory approach in that country. In this sense, it is important to consider whether governments can effectively combat financial crimes in the crypto ecosystem simply by following the recommendations of the Financial Action Task Force (FATF) or whether additional steps are needed considering the rapidly evolving crypto landscape. How can governments actually have a positive impact on the resources they have when sometimes these resources are limited or nonexistent?
Many citizens from the Latin America region are turning to digital and virtual currencies for a variety of reasons that include sending remittances, investing and saving (especially in countries that face high rates of inflation or government instability).1 Governments, on the other hand, have not always been able to keep up with regulating or clarifying the rules of crypto within their countries, potentially affecting key players in the ecosystem and increasing the risks of financial crimes. Furthermore, a lack of clarity on these issues can also be used by criminals to operate with impunity and remain anonymous in jurisdictions where there is an opacity or lack of meaningful norms to address the crypto ecosystem. One of the goals would be to avoid criminals using crypto as an easy tool for either online or even offline crimes by implementing rules and regulations. A recent report from Global Financial Integrity analyzed the benefits of crypto as well as the potential risks that may emerge.2 The report also suggested a series of recommendations for governments to take into consideration when dealing with the crypto ecosystem.
- Take measures to better understand the crypto ecosystem
- Develop comprehensive, substantive regulation that provides clarity and predictability for users and investors
- Educate citizens and users
- Strengthen prosecutorial capacity on crypto-related financial crimes
- Promote debate and exchange of information among all sectors of society
- Support initiatives by the private sector as well as by civil society
- Follow national and international know your customer (KYC) and anti-money laundering/counter-terrorist financing (AML/CTF) protocols
- Follow FATF’s recommendations on new technologies, virtual assets (VAs) and virtual asset service providers (VASPs)
- Learn from other countries’ experiences
Crypto and Latin America
The crypto ecosystem is part of a new technical reality for all countries, and in the case of Latin America, lawmakers and law enforcement agencies and officers should understand it to properly address it. The public sector does not always seem to properly understand how cryptocurrencies work or how to effectively address them. Nevertheless, it becomes a challenge to govern on a topic that is sometimes very technical or evolves quickly. Developing and sharing information among key institutions, along with training, is necessary to address the matter in a more multisectoral way. In addition, it is important to provide public education campaigns to inform society about the benefits and risks of crypto, considering that crypto adoption is rising in the region. The same applies to the private sector in order for companies to gain clarity and predictability regarding their investments.
Dealing with the crypto ecosystem is not an isolated topic. On the contrary, it is closely tied to the enforcement capabilities that countries had prior to the crypto revolution and their resources, knowledge and interinstitutional collaboration. While these aspects are not necessarily related to the technical aspects of crypto itself, they can create a more effective prevention and prosecutorial environment within a country. Although there are KYC and AML/CTF measures, protocols and laws in the international and national arena, it is not enough to have them only on paper (or to present during FATF visits). Rather, countries should actually have a national diagnosis of how the crypto ecosystem works in their country, possible vulnerable sectors, legislative changes, training of personnel and resources available as part of their enforcement and judiciary units. The objective is to create a robust prevention environment with the possibility of real prosecution. Also, a constant flow of feedback from the private sector and civil society is important to collect information on areas that need attention. Taking into account that resources in Latin America are limited and that technology, in some cases, is obsolete, it is important to push for innovative, multisectoral solutions that engage a wide variety of stakeholders. Not all solutions rely on simply just having “more budget.” Effective collaboration, including the sharing of information and resources, might make a difference.
Learning from other countries’ experiences, as well as creating synergies with them, can create stronger partnerships among governments and regional enforcement efforts
From an international perspective, most countries in the Latin America region rigorously follow the recommendations and evaluations from FATF and the Financial Action Task Force of Latin America (GAFILAT). In this regard, Recommendation 15 and guidance on VAs and VASPs are especially important. However, countries should not stop there. The crypto ecosystem is in constant evolution, and crypto crimes tend to be international. Learning from other countries’ experiences, as well as creating synergies with them, can create stronger partnerships among governments and regional enforcement efforts. Sharing experiences and following FATF’s guidance is a great start, but it needs to be a continuous work in progress due to the rapid evolution in the channels, methods and actors involved in crypto-related crimes. One of the challenges for the region is to achieve a way to standardize its approach to prevent crime and address the crypto ecosystem. From our experience, countries in the region have different approaches toward crypto regulation. Most countries address the issue primarily from a tax perspective, and it has not been completely addressed from a more multisectoral perspective of consumer financial protection (including how to handle crimes such as e-wallet thefts, scams, crypto-ransomware attacks and illicit trades, among many others). Nor have these approaches fully addressed safe investment norms and practices that satisfy the crypto market but also complied with regulators.
Regionally, the approaches to crypto run the gamut. For example, countries like Mexico have a more robust legal framework on the matter; Bolivia, on the other hand, has banned crypto; countries such as Paraguay, Panama and Brazil are exploring possible norms to regulate cryptocurrencies; and Colombia is using sandboxes to understand the regulation. There is also the case of El Salvador, which has adopted bitcoin as a legal tender in the country. These countries have their own national reality and there is no one-size-fits-all model. However, since the crypto market is relatively new and rules and practices are still “in the making,” it is important for countries to explore, contrast and share experiences in regulations to address crypto. Moreover, these efforts should include financial crime prevention, mitigation and detection. Working collaboratively on these matters, countries may be able to achieve greater impact.
FATF’s and, more specifically, GAFILAT’s guidance on new technologies and cryptocurrencies provide an important point of reference, but the work of implementing it depends on the countries themselves. The fight against crypto financial crime is a long endurance marathon against a new and rapidly evolving reality where some countries may not be addressing change effectively, and others may be acting in a unisectorial way or may simply be too passive in their approach. Countries in the Latin America region should make a concerted effort to analyze the risks posed and best allocate their resources, even if they are limited.
Finally, Latin America is a region with a unique set of characteristics that pose specific risks. High levels of corruption, lack of political will on certain topics, lack of resources, and other factors might allow criminals to use the crypto ecosystem as an outlet or tool to stay anonymous and act with impunity. Effective use of risk assessments, strategic plans and robust legal frameworks will make a difference. It should also be noted that international and regional cooperation also helps, especially regarding the exchange of information and knowledge transfer. Latin America is bigger and stronger than the challenges it faces, but all stakeholders need to commit to financial crime prevention—especially regarding new technologies and ecosystems.
Claudia Helms, program manager, Latin America and the Caribbean, Global Financial Integrity (GFI), email@example.com
- Claudia Helms, “Cryptocurrencies: A Financial Crime Risk within Latin America and the Caribbean,” Global Financial Integrity, November 14, 2022, https://gfintegrity.org/report/cryptocurrencies-a-financial-crime-risk-within-latin-america-and-the-caribbean/
- The report maps the responses from governments, the private sector, academia and civil society in light of the rapidly changing crypto dynamics in the region. The report also analyzes five countries—Argentina, Brazil, Colombia, El Salvador and Mexico—selected because of rising crypto usage as well as unique regulatory aspects and domestic contexts; Ibid.