With the inflation surge and erosion of their currency, Latin American countries, such as Argentina and Venezuela, are using price caps and currency controls to control the hyperinflation that was created by the failed financial policies of the last several decades. The currency control restrictions have created a “parallel” or “black” market currency exchange where unlicensed brokers arrange for the transferring of funds in violation of U.S. federal laws and of the foreign countries’ currency exchange laws, which require the approval by the countries’ central bank in transaction exchanges over a certain threshold, usually being US $10,000. Diaz Reus attorney Ignacio Alvarez outlines some facts and implications in this article.
In Argentina, the economic crisis has caused inflation to hover around 40 percent, and the recent default of their sovereign debt has led to dollar shortages. Their currency has lost more than 50 percent of its value against the US and Euro currency over the last several years, causing its value to be constantly fluctuating when determining its exchange rate. Even though the official exchange rate was hovering around 9 pesos to 1 dollar, the black market exchange was offering about 14 pesos to 1 dollar. The crisis continues to worsen and access to dollars or euros is becoming increasingly difficult.
Venezuela, however, is currently amidst a more severe crisis than Argentina, without readily available U.S. currency to meet the demand for currency exchanges by tourists, and for residents trying to buy basic essentials—Venezuela imports the majority of its consumer goods. Experts estimate such illegal transactions have become a million-dollar-a-month industry in South Florida due to currency controls instituted in Venezuela since 2003, which limit the amount of foreign currency Venezuelans are allowed to purchase from the Venezuelan Government. The scarcity of U.S. dollars in Venezuela created a black, or parallel, market exchange, where U.S. dollars trade for 10 times the official exchange rate.
Now, dozens upon dozens of Venezuelans are turning to the civil court system in Miami, Florida, seeking to recover millions lost in fraudulent transfers related to the buying and selling of dollars and bolivars, the Venezuelan currency. Meanwhile, others are targets of criminal investigations for various violations of U.S. money laundering laws for operating as money transmitters or MSBs (money service businesses) without a license.
The official system to obtain U.S. dollars in exchange for bolivars is through the Commission of Foreign Currency Administration, also known by its Spanish acronym of CADIVI. CADIVI provides access to the preferential dollars at 6 bolívars per US $1 for purchasing by state-run companies and certain vital sectors. A second system for tourists and residents purchasing essential goods and services was created earlier this year, called SICAD, providing an exchange of roughly 12 bolívars per 1 U.S. dollar. However, due to the scarcity of U.S. dollars, where the Venezuelan Government averages over 200 days to conduct the exchange, the parallel market continues to thrive in Venezuela, with an exchange rate averaging 30 times the CADIVI exchange rate. With the parallel market being the main source of U.S. dollars, it becomes ripe for crimes to occur.
When an individual has bolívars they are looking to exchange for U.S. dollars on the parallel market, they contact a broker, who is unlicensed to conduct these types of exchanges, to assist them in finding U.S. dollars. Generally, these brokers have individuals and companies in the U.S., mainly Miami, Florida, who are in need of U.S. dollars to help their family members and/or companies. These individuals and companies in the U.S. in turn need bolívars to pay for legal commercial transactions occurring in Venezuela, and/or are looking for ways to get their bolivars out of the country. Brokers charge fees for assisting in the transaction.
However, as we have seen recently in Miami, with the arrests of unlicensed brokers and the civil lawsuits filed against them, it appears that some brokers are not completing the transactions. These unlicensed brokers will facilitate the deposit of the bolívars in Venezuela, but when it comes time to deposit the U.S. dollars in a bank account, they fail to do so, and/or fraudulently deposit checks without the permission of the account holder, stealing millions of dollars in the process. This form of fraudulent conduct leads to huge losses to the banking sector, and for innocent victims—many who have no other viable way of converting their currency.
Still, the parallel market for currency exchange is the only viable alternative method for exchanging U.S. dollars and pesos in countries such as Venezuela and Argentina. But, individuals and companies engaged in these transactions need to be aware that even though it may be normal to conduct these types of transactions, they do violate numerous U.S. and foreign currency exchange laws. Additionally, victims are not allowed to seek relief from
U.S. courts under the “unclean hand doctrine,” which states that a party who is asking for a judgment cannot seek relief from the court if he/she is a party to the illegal activity which is related to the subject of the lawsuit.