New Nicaraguan Law Could Destroy Banking System

According to Roger Arteaga, the law would impact the government, the banks, credit cards and family remittances. No one would be exempt from the consequences if the financial system collapsed.

By Ivan Olivares (Confidencial)

HAVANA TIMES – A new law (842) approved this week by the Nicaraguan legislature claims to promote consumers’ rights. However, it could provoke a catastrophe in the national financial system and strike a devastating blow to the Nicaraguan economy. That’s the warning issued by Roger Arteaga, former president of the American Chamber of Commerce. Arteaga is also a former director of Nicaragua’s National Revenue Department. 

The law passed on February 3rd proposes to punish banks and loan agencies if they reject a client. Any such refusal would have to be based on a national law. This is seen as a clear attempt to obligate the banks to service those sanctioned by the US or EU. The sanctioned are mainly Ortega-Murillo family members and functionaries of their regime.

Forcing banks to service those under US sanctions for corruption and/or human rights violations will have sweeping consequences. It will affect not only the banks’ ability to do business, but also many companies that have international operations. Also, it could impact Nicaraguan citizens who receive remittances. Even the government itself would find it impossible to receive disbursements from the multilateral financial organizations.

The consequences of reforming Law 842 as proposed “are dramatic. The banks are generally obligated to use the resources provided by their depositors as efficiently as possible. However, now they’d be forced to serve people who are a risk to the institution and involve themselves in a crime. In addition, they’d lose their autonomy to do business with whoever they want.

Arteaga issued these warnings in an interview for the online news program “Esta Noche”.  The “crime” he referred to, is violating US Executive Order #13851, signed by Donald Trump. The order establishes that anyone who serves, aids or maintains business relations with those under sanction becomes subject to sanctions themselves.

A step backwards for Nicaragua’s financial health

Obligating the banks to maintain business relations with those under international sanctions means tossing overboard the regime’s other efforts. These include the government’s attempt to fulfill the requirements of the International Financial Action Task Force (FATF). The regime is trying to get itself established in the grey list, with the hopes of subsequently bettering its position.

However, the approval of this law would move the country in the opposite direction, Arteaga believes. It would cause the FATF to put it on the “blacklist”. That would block not only bank transactions, but all international operations that Nicaragua wanted to effect as a country.

The fear of contagion could cause other foreign financial entities (national or multilateral) to react. They could voluntarily inhibit themselves from effecting financial transactions with the country or affected entities. It’s possible that the Ortega government itself could no longer receive disbursements. That would mean not receiving the multilateral support offered to confront the pandemic, or the disaster caused by the hurricanes.

Arteaga elaborated further on this possibility. When multilateral organizations award a loan, the disbursement occurs in the accounts that local banks maintain with correspondent foreign banks. But if a national bank is sanctioned for incompliance with Executive Order #13851, the correspondent bank must sever relations.

“That means disrupting the entire system. Because when an exporter sends a product, “How will they receive payment for their export?  And importers – What will they do to get their merchandise sent? How will remittances reach the country? Even credit cards could disappear. It means closures, isolation… a crazy situation,” he asserted.

Like the money that comes from other sources, remittances require a correspondent bank. That bank receives the money in the original country, then forwards it to a financial entity in the beneficiary’s country. That could be a local bank or a money-transfer agency. They then deliver the funds to the Nicaraguan recipient. However, “if that doesn’t exist, and Nicaragua is isolated because it was left without correspondent banks, then what? We’ll be going back to sending money by stagecoach, like in the old west,” he illustrated.

Foreign investors with interests in Nicaragua could also see the risk of the country’s getting onto the FATF blacklist. These could be investors in mining, services, supermarkets etc. They could then decide to withdraw their money and leave the country, Arteaga warned.

Is threatening the economy merely a negotiation tactic?

The reforms have received general approval, but not the specific, article by article, approval. That could be part of a strategy to open negotiations. Roger Arteaga still hopes, however, that whatever happens, the law never gets applied.  

“I don’t know if the Economic Commission or the deputies have had contacts with the Association of Private Nicaraguan Banks in Central America (Asobanp). I do know though, that this law can’t go forward in that way. It affects all of us, not only the front men, or only those receiving remittances. Because the financial system is the backbone of the country,” he declared.

Some bankers, Arteaga said, are hoping things will change when the Assembly moves to discuss the reform, article by article. They hope the deputies will discover the significance of the law they’re trying to approve. They’ll understand that it could provoke a bank to close, or to become unstable, and have customers stop making loan payments.

Arteago hopes that the private sector’s efforts will yield fruit in convincing the officials to turn back. Those efforts started with a letter that Asobanp sent the National Assembly’s Economic Commission. He termed the text of the letter: “a little soft. This isn’t something that could have a normal or medium-weight effect. This is dramatic! If It’s implemented as is, this country could collapse,” Arteaga warned.

In addition to Asobanp, a number of private Nicaraguan business associations have pronounced on the matter. These include the Superior Council of Private Enterprise, the American-Nicaraguan Chamber of Commerce, the Chamber of Nicaraguan Industries, the Association of Nicaraguan Producers and Exporters, and the National Tourism Chamber. Not only that, “the multilaterals also have a commitment, but still haven’t spoken,” he noted.

“It’s a question of raising awareness among the deputies, and exerting pressure. If what they’re looking for is to negotiate, they should say so once and for all. It seems like that’s what they want. They can’t just destroy the country by forcing the financial system and private sector” to establish relations with toxic clients.

Read more from Nicaragua here on Havana Times.