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Central American University - UCA  
  Number 204 | Julio 1998



What Is the Obscure Object of The Bank Superintendency Fight?

It was just one of the many institutional crises through which Nicaragua is passing. What interests are hidden behind the declarations, silences and threats? Although with difficulties, some light can be discerned in the darkness.

José Luis Rocha

BANKERS TEND TO BE SEEN AS GRAY, CIRCUMSPECT PEOPLE WHO ONLY COME TO PUBLIC attention in exceptional cases. For the past two months, Nicaragua has seen a notable exception to this general perception. Angel Navarro Deshon, who has presided over the Superintendency of Banks (SIB) since this institution was reactivated in 1991, has attracted a lot of attention for his disagreements with other government authorities about a huge loan from the World Bank. The complex and sensitive financial—and political—problem behind these disagreements has competed for front-page space with Zoilamérica Narváez's accusation against Daniel Ortega and the narcojet scandal.

Underdeveloped Institutionality

The Superintendency of Banks is an autonomous control and supervision institution independent of the central government, as dictated by law and in accord with world tendencies. The role of this and similar institutions that now exist in more and more countries is to make sure that government changes do not lead to overnight financial policy changes or turn the superintendency itself into an instrument at the service of the administration in power.

In Nicaragua, the tension between Superintendent Angel Navarro and high-level executive officials was made public when the former sent a letter to World Bank president James Wolfensohn, requesting a reformulation of the "terms of reference" that the World Bank consultants had set as a condition for the government to receive a loan to reform Nicaragua's financial system and strengthen the country's balance of payments.

Noel Ramírez, the president of Nicaragua's Central Bank and visible head of the Alemán government's economic project, criticized Navarro's letter as inappropriate and argued that the Superintendency had accepted all the conditions of the loan. Navarro in turn denied this and went so far as to call the World Bank loan "illegal" and accuse the executive of wanting to carry out a "coup" against the SIB. The latter did not seem to be a gratuitous comment. Noel Ramírez, who always presents himself as a sort of plenipotentiary minister, spoke publicly of a decision to remove the superintendent.

Navarro then denounced the severe pressure he was under from the three ministers who represent the executive on the SIB's Directors' Council: Ramírez himself, Finance Minister Esteban Duquestrada, and Economy Minister Noel Sacasa. The exchanges between Navarro and those pressuring him reached a boiling point when Navarro stated that he did not feel attacked directly by President Alemán, but by his "whippets," these three ministers. Although the conditions Navarro was questioning also affected all the country's private banks—though, naturally, not to the same degree—it was significant that the majority of bankers were cautiously silent about what they called "changes in the rules of the game."
The tension between Navarro and Ramírez had been building ever since Arnoldo Alemán took power. Even though the SIB Directors' Council meets behind closed doors, some signs of smoke from the future explosion could be seen in declarations and occasional brusque remarks from its members. At various points there was talk of "personality clashes" between Ramírez and Navarro. A well-known Nicaraguan poet recounts in one of his poems that this country is so small that the President actually comes out of his house to solve neighborhood disputes. The SIB case demonstrates once more that the country is so institutionally underdeveloped that a "neighborhood dispute" between different personalities can be destabilizing and can put positions, financing and reputations at risk.

Hard Conditions for Banks "Still in Diapers"

What was the "obscure object" of this fight? The problem has many angles and from what we have been able to see of its development—as well as from the part of its solution hidden from us—it has three main actors: President Alemán, who wants another superintendent; the World Bank, which wants a little more order; and the private banks, which don't want outside supervision.

In April, in the midst of a crisis that was destabilizing and paralyzing the National Assembly, the executive submitted for approval a loan with the World Bank valued at $80 million. The Assembly had only 60 days to study and debate it, after which the loan agreement with the World Bank would automatically become valid. The superintendent had objected to three condition put on the Nicaraguan banking system to concede the loan.

First condition: the capital adaptation index, which reflects the proportional volume that the bank's patrimony should have with respect to its outstanding loans, should gradually shift from 8% to 10%. This condition would oblige banks either to increase their patrimony or reduce their credit portfolio. With the current index, banks can make loans up to 12.5 times their patrimony. With the new index, they will only be able to loan 10 times their patrimony.

The superintendent wanted to protect Nicaraguan banking with a sort of truce in the reduction of the index, taking into account its young age. Although Nicaragua's financial system is still in diapers, it currently has the same capital adaptation index as the financial system of Panama, a powerful banking center. It could be assumed that a stronger system could withstand a higher index. But, paradoxically, a weak system requires stronger preventative measures and thus needs a higher index. The same thing happens with structural adjustment: the country that most needs to adjust its economy is the one most negatively affected by that adjustment.

Who was being Defended?

Second condition: the development bonds (BOFOs) handled by the Nicaraguan banking system, for a total of 210 million córdobas, would be excluded from the calculations for the capital adaptation index. For purposes of that calculation, the BOFOs would be counted as part of the patrimony, even though they were bought with outside capital. This condition on the BOFOs is somewhat equivalent to increasing the adaptation index even more. Navarro pointed out that withdrawing the BOFOs from the calculation base would put nine private banks below the index's 8%.

According to the superintendent, these two conditions would oblige private banks to increase their capital by 358 million córdobas. Otherwise, the entire financial system would have to reduce its 1999 credit offers by a total of 3,584 million córdobas, which would be especially critical in a context of credit scarcity and excess bank liquidity. No few economists pointed out that these two questioned conditions were not geared to strengthening the financial system, but to limiting credit and controlling liquidity, priority objectives of the monetary policy within the government's economic plan.

The reality is that both the increase in the capital adaptation index and the withdrawal of the BOFOs from its calculation base would end up being implemented sooner or later, since both measures were already in the plans. And since financial health is the centerpiece of bank publicity, various bankers rushed to declare that their patrimony was sufficiently solid to withstand these conditions. The bankers' declarations confused the case even more: if the bankers—or at least some of them—were not affected by the two severe World Bank conditions, who was being defended? Who was the fight against? What was wrong with accepting those conditions?

A "National Sovereignty" Problem

Third condition: on-site supervision by the World Bank to evaluate and regulate Nicaraguan banking. The regulatory functions of national banking are attributions of the SIB and it was exceptional—some would even say "anti-constitutional"—for a foreign institution to have these functions. The superintendent judged the application of this conditioning clause as a violation of the SIB's independence and one more expression of the well-used phrase about contemporary Nicaragua: "a country sequestered by the multilateral organizations."
Of the three conditions objected to by the superintendent, the intrusion of a foreign body into the sancta sanctorum of Nicaraguan banking was the one that got the farthest because it touched on national sovereignty—although again, curiously, no private banker said a word about it. To complicate matters even more, the World Bank always denied that it had even imposed that condition in order to disburse the loan.

The Liberal Position: Addiction to Power

In the climate of rumors about his removal, Superintendent Angel Navarro went to the National Assembly to testify. With a measured tone, he tried to reinforce the autonomous authority of the institution he presides over and to send that message to a legislative branch dominated by Alemán. For the moment the executive retreated, but the confrontation with an entity that should retain its autonomy and whose superintendent is named by the National Assembly—also the only entity that can remove him—was yet one more sign of the voracity with which the Liberal Constitutionalist Party (PLC) is trying to gobble up all spaces of institutional power, and control all posts and the juiciest foreign financial resources. This voracity is not just unvarnished greed. It is part of a clear political strategy oriented to perpetuate the PLC in power.

Conservative Party head Noel Vidaurre, a member of the Parliament's Economic Affairs Commission and thus on top of what is and is not being said publicly about the "obscure" SIB case, denounced rumors in the Assembly about a possible pact between the FSLN and the Liberals which would include, among other agreements, replacement of the superintendent and the comptroller general by people in Alemán's trust. These are two key posts. A new comptroller would help strengthen the President's campaign against corruption in the two previous administrations—with the argument that "the other guys stole more," and mine are only "petty thieves." A new superintendent would give him free access to information about his adversaries—financial accounts, frequency of deposits, debt levels—which would give the Liberals an economic and political advantage.
For the moment it seemed that the incident between the Superintendency and the Central Bank did not give the Liberals what they wanted, but there will be other opportunities. The Superintendency is not off their agenda.

The World Bank's Position: More Order

It is understandable that the World Bank does not trust the solidity of Nicaragua's financial system or the ability of its regulators. Wall Street appeared solid in the 1920s, when the stocks were enjoying constant rises, but then the bottom fell out in 1929. Many North Americans suffered in that radical overnight fall and the financial institutions that provided unbacked credit to speculators died in the crash. Sixty years later, bland regulations contributed to the bankruptcy of US savings and loan associations, which required a bail-out of over $100 million. It was the same amount that the multilateral agencies had to dish out to rescue the Asian markets.

The World Bank knows these stories from beginning to end. It knows, surely, that since the change in Nicaragua's government in 1990, capital is increasingly attracted to the country by its attractive interest rates. Money is suddenly coming in copious amounts from a variety of sources.

Perhaps the World Bank also knows that something smells strange at the Banco Mercantil (BAMER), the first private bank set up in Nicaragua under the Chamorro government and one that has a large number of shares. Two well-known public cases linked to this bank offer a lot to think about in terms of monitoring Nicaragua's current banking situation, whether in situ or from a distance.

First case: The exchange of accusations between BAMER's former lawyer and Haroldo Montealegre, its major shareholder. The lawyer accused Montealegre of exploiting for personal advantage financial information about other businesses that the bank required in order to concede loans. He also accused Montealegre of having false academic degrees and of engaging in highly risky speculations in other countries. Montealegre counter-attacked, accusing the lawyer of removing confidential information about the bank.

Second case: Oscar Martin Aguado, director of the state's Social Security Institute (INSS), BAMER's manager until January 1997 and close friend of President Alemán, was accused by Haroldo Montealegre and tried for swindling and fraud after authorizing the payment of checks from foreign banks without waiting for them to clear. This resulted in a cumulative overdraw of $1.013 million, plus another $450,000 in commissions for banking services not charged on orders of Aguado.

Aguado sought protection in the immunity linked to his current INSS position, so he did not go to court. He maintains that the suit is based on economic interests: a 100-million-córdoba account that INSS maintains with BAMER could be pulled at any moment because of the low interest rate it is earning. For his part, Montealeagre calmly says, with no shame, that the deposit serves as a guarantee for a loan of the same amount that BAMER conceded to INSS. The most surprising aspect of the case is that both Aguado and Montealegre had no problem publicly declaring their participation in an operation in which BAMER was giving a state subsidy.

Perhaps one of the reasons the World Bank had to—and still must—supervise Nicaraguan banking is to impede such anomalies. Perhaps this was its part in the obscure fight.

An International Clamor

The international community is increasingly concerned about the existence of "financial havens," whose anonymous transactions make it possible to hide the origin and ownership of millionaire funds, facilitating money laundering of some 200 billion narcodollars annually. According to a report by the United Nations Program for International Drug Investigation, released on the occasion of the UN Anti-Drug Summit held in June, "Italian mafia groups have used Nicaragua for money laundering."
The same report notes that 60-70% of the UN's 185 member states do not have effective laws to fight against money laundering. Nicaragua is one of them. Given this situation, the UN proposes lifting bank confidentiality so as to more adequately investigate these types of crimes. This is an attempt to violate not the inviolable secrecy of the confessional, but the silence of the accomplice who benefits from the crime.

The Omnipotent Bank Manager

Everybody now knows, or is learning, that there are many legal channels—currency exchange houses, commercial banks—for depositing dirty money to launder it and make it come out legal. Was putting a brake on these possibilities one objective of the reforms the World Bank proposed to strengthen Nicaragua's financial system?
The Aguado case revealed the broad operating margin of Nicaraguan bank managers. Such maneuvers were only detected almost a year and a half after they took place. True or false, the case demonstrates that, with no impediment, a bank manager could authorize the payment of checks that hadn't cleared, exonerate banking service payments, write checks to non-existent people and also freely "self-liquidate," all without the authorization or even knowledge of the board of directors.

It is a clear demonstration that national banking regulation is still in diapers and that the basis exists to facilitate all kinds of illicit transactions. The current discretionality of bank managers is, in practice, frighteningly broad. The board of directors, shareholders and depositors are at the bank manager's mercy. The Aguado case is an obvious test of how illicit one can be without being detected, as long as a quarrel between the big guys doesn't bring out the dirty laundry.

Launderers Work Best in Muddied Waters

Money laundering has not yet been catalogued as a crime in Nicaragua's penal code. Nor has it in the legislation of other countries in the area. In 1990, however, nearby Panama adopted measures against money laundering. As a consequence, banks in Panama must:
-Adequately identify clients, requiring from them recommendations or references, declarations of powers of attorney, identification of company dignitaries, directors and representatives, and certifications of the registration and functioning of those companies.

-Demand a special declaration from clients who deposit or withdraw more than $10,000 cash. A recent addition is that amounts just below $10,000 will also receive special attention.

-Require declarations for bills, checks of any kind, money orders or the exchange of small-denomination bills for larger or vice versa, when the amount is greater than $10,000, whether in one operation or in successive transactions close to each other in time, whether for just one drawer or for various from the same account, taking special care with payment orders in the name of the drawer.

-Examine with special attention any operation, independent of the amount, between the client and the bank that could be suspected of being linked to laundering money from illicit drug operations.

-Examine deposits and withdrawals habitually made in cash instead of checks, the purchase of a large quantity of checks or other negotiable instruments using money in cash, volumes of deposits that don't fit in with a client's declared activities, the making of a single cash deposit with many $50 and $100 dollar bills and other operations of this type.

-Offer all this information to the Superintendency of Banks and the Financial Analysis Unit. The latter institution, which works to prevent money laundering, is linked to the Council of Public Security and National Defense, created in 1995 to gather financial information, analyze it and develop periodic reports.

Absolutely none of these norms are applied to Nicaraguan banking. No entities have been created to analyze the illegal source of funds nor has it been established that the SIB should carry out this function. Clients can deposit whatever amounts they want to in any form, without justifying the source of the funds or offering more information about their person and activities. The only thing that seems to matter is that money keep flowing. That is why deposits are growing so amazingly, without excessive problems of bank profitability, despite the limited credits given out.

And the Bankers' Position?

More than one person could justifiably say that Panama adopted those legal norms only when its financial system was solidly established. Do they expect Nicaragua to do the same? What size should a financial system reach for money laundering to be considered a crime?
Might the bankers' position in this obscure fight be a truce with money laundering until the system reaches "legal age," at which point it would become illegal? Is that the reason that the only issue on which everybody closed ranks with the Superintendent of Banks was rejection of in situ supervision? Is complicity with drug trafficking money behind insistence on "national sovereignty"? In fact, the Panamanian norms, read with the eyes of a drug trafficker, are an excellent manual for money laundering in Nicaragua.

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