San José, Costa Rica, since 1956

Offshore Banks Targeted

A bill before the Legislative Assembly would reform the Central Bank charter to allow for the regulation of offshore banks and put teeth into banking laws by providing for criminal sanctions.

The law would bring offshore banks in Costa Rica under regulation of the Superintendence of Financial Entities (SUGEF), like all other banks here.

Many private banks in Costa Rica have offshore subsidiaries that are registered in other countries, such as Panama or the Bahamas, but which conduct business here with no government supervision.

The law would also establish criminal penalties of up to six years in prison for violations such as hiding the true nature of transactions or providing false information to regulators.

“The bill intends to give SUGEF… a true regime of sanctions to inhibit all those conducts that can go against transparency and with which all the participants in the financial system should act,” the bill states.

A loophole in the law that set up the SUGEF more than a decade ago allows offshore banks to accept deposits that don’t go into the bank’s local records and are tax exempt.

Though the banks are deemed “offshore,” nothing in the current law prohibits the bank from turning around and lending the money within Costa Rica. The Central Bank does not keep track of the revenue so used to set its monetary policy, according to former Congressman Bernal Jiménez, who sponsored the legislation when it was introduced under the administration of former President Abel Pacheco.

“The banks have influence in the (nation’s) monetary flows without the Central Bank having any regulatory power over it,” Jiménez said.

He estimated offshore banks in Costa Rica conduct about $1.5 billion worth of business here.

The proposed law would require all subsidiaries of private banks to have adequate levels of reserves, monitoring and control of banks’ exposure and internal auditing and other mechanisms to permit compliance with policies and internal controls as well as procedures for sound financial practices.

Among other things, the bill requires that offshore banks be supervised by banking authorities and comply with regulations in countries in which they are registered, refrain from carrying out operations in Costa Rican currency and submit to in situ supervision.

The bill also makes it easier for SUGEF to forcefully liquidate banks or other financial institutions found to be violating the law.

“Past and recent experience has demonstrated that the current regime of liquidation of banking entities through judicial routes is not only very long and torturous but also, because of the rigidity of the procedure, is excessively onerous to the detriment of the investors and creditors of the agency in liquidation,” the bill states.

The law would give SUGEF the power to liquidate financial entities through administrative means.

Valentín Fonseca, president of the Chamber of Private Banks and Financial Institutions of Costa Rica, said the chamber agrees with provisions of the bill that protect local banks from “disloyal competition” from offshore banks.

But he said the chamber also told the Legislative Assembly that parts of the law are almost certainly unconstitutional because they try to regulate the activities of banks in other countries.

“The law would give SUGEF supposed powers that in reality it would have no way to enforce,” Fonseca said.

Gerardo Ulloa, manager of BCT Bank – which operates an offshore bank, BCT Bank International registered in Panama – said that because any international bank can come to Costa Rica and offer loans outside the supervisory power of the SUGEF, targeting offshore banks makes little sense.

“Nothing stops J.P. Morgan and Chase from making loans here,” Ulloa said. “Any bank can have operations here outside the SUGEF supervision.”


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