The Venezuelan financial system is completely isolated from the rest of the world. The exchange control system in Venezuela prohibits making any kind of payment between a bank account abroad and one inside the country, or to use local credit cards abroad or online without the approval from the Commission of Foreign Exchange Administration. As a result, a black market has developed for foreign currencies which are priced at a significant premium to the official exchange rate because of its high demand. For example, buying U.S. dollars is not simple in Venezuela regardless of the high demand. For this reason, the black currency exchange market has proliferated significantly in the last few years and many broker-dealers seem to be currently facilitating it illegally.
No matter how thriving the black currency exchange market is, the bottom line is that it is illegal and due to its illegal nature, participants of this market usually attempt to conceal their participation. Participants usually prefer to carry cash transactions since they would be obviously reluctant to leave any trace of their involvement. This parallel market is extremely risky for both broker-dealers and participants of this illegal market. This article discusses the reasons why the black currency market is becoming highly prevalent in Venezuela and risks involved in this market.
Reasons for the black currency market prevalence in Venezuela
There are many reasons why the black currency market is continuing to spring up in Venezuela, some of which are: (a) the currency controls in Venezuela make it extremely difficult for people to buy foreign currencies with their domestic currency at the official exchange rate, (b) Venezuela’s weak economic fundamentals, such as a high rate of inflation and limited foreign exchange reserves, and (c) a lack of confidence among the Venezuelans in the value of their domestic currency.
Rising Risks in currency exchange market
No doubt, the black currency market continues to exist due to the adverse economic factors in force in Venezuela. In a black market, parties typically enter into verbal agreements and therefore should be avoided as there is no basis of verbal contracts. Businesses and individuals need to protect themselves from becoming victims of fraud and avoid delivering large sums of money, and never to receive foreign currency in exchange. Also, there may be scammers, fraudsters or even entities disguised as broker-dealers who may take advantage of a person looking for exchanging currency.
Recently, Venezuela has further tightened restrictions on currency trading by preventing private brokerages from participating in the currency swap business. Under the Venezuelan law, the Central Bank of Venezuela has exclusive control over currency trading. And, parties involved in the purchase, sale, transfer, export, import or receipt of foreign currency within Venezuela, without the involvement and control of the Central Bank of Venezuela, can be subject to huge substantial fines and potential imprisonment between 3 to 6 years.
Venezuela’s black market for dollars has been increasingly discussed lately because of the recent scrutiny of US broker-dealers, participating in Venezuelan currency swaps, due to issues relating to money laundering compliance. US Broker-dealers should be particularly careful because they are required to take a risk-based approach when determining the amount of due diligence they need to conduct on customers.
How can Diaz Reus attorneys help you?
If you require further assistance in understanding the risks in currency exchange business – including exposure for both money laundering and sanctions – the attorneys of Diaz Reus can help. We can also assist in conducting due diligence investigations, compliance and audit programs or defense in responding to law enforcement. We have 13 global offices and are fluent in 14 languages, with several of our attorneys holding certification as Anti-Money Laundering Specialists registered with ACAMS.