First off the bat, I want to clarify that I did not raise the stir in the swap market with my post last night, the stir was coming anyway. All I wanted to do with that post was warn people that the swap market that everyone follows so closely was likely to be complex for a few days, due to the freezing of accounts in the US of a few dozen local brokers.
Obviously, I knew more than I posted, but that was not the objective of what I wrote, but it clearly became that, as I seemed to have the only published rational explanation as to why the swap market opened at Bid: Bs. 6 per US$, Ask Bs. 7 per US$ even if few transactions were being done at either end.
Some of that information is now public, so it is easier to write about it.
Essentially, banking will never be the same in the post 9/11 world, as the Patriots Act imposed very stringent conditions on money flows, particularly when there is a suspicion of money laundering, corruption or terrorism behind it.
The consequences for those that live or operate a business abroad, is that opening an account has become ever more difficult, as many institutions know that they will have a hard time checking you out and at the same time checking out where the money moving into your account is going or coming from.
As the swap market in Bolivars developed, many people set up new brokerage houses, which either because they don’t have capital, or a track record,or systems, or goodwill or whatever, were having a hard time finding a bank that would open an account for them, particularly for the swap business, where you have to know your client well, particularly with respect to money laundering or politically exposed persons in a country with the risks of Venezuela.
In the swap market, you swap (i.e. exchange) securities (bonds) in both Bolivars and US$ and in the end deliver either the securities or the money at either end. Each transaction requires the receipt of, for example, foreign currency to buy the bond at your account. If you do retail business (small individual clients), this could mean many transfers into and out of your accounts every day. Many banks simply don’t like that, particularly if they are all small, as the banks have no way of checking the source of the money. Other brokers work more at the institutional levels, with companies, where if you are careful, it is much easier to check that the proceeds come from legitimate business operations.
Since the exchange controls were implemented, the smaller brokers in the market have had accounts in various banks in the Caribbean, but since these are mostly frowned upon by the authorities, they are not the best solution.
Then, some time in the last couple of years, I am not sure of the time frame, but think it was last year, a company showed up, willing to provide these services. The name is Rosemont, aw Florida company with a wire transmittal license, and a friend was kind enough to send me their presentation when selling their services, which you can download here, as a Powerpoint presentation.
Essentially Rosemont provided these local brokers with sub-accounts, in Rosemont’s name at a US bank, to move the flows from the swap business when they sold the securities or received funds to buy them. Rosemont would even provide settlement services, if my understanding is correct, such that if brokers did business between them, they could net their accounts there.
Apparently, the DEA was tracking the activity of an account that made some transfers in or out of Rosemont (I have no idea in which direction). This had been going on for a while, but it was not until two days ago that an indictment came down, of all places in Massachusetts, against one of the principals of Rosemont. (Note that if you have a wire transmittal license, you are not supposed to keep cash in deposit on a regular basis, so I am surprised people thought this could work)
What the indictment charges is that one of the principals in Rosemont somehow collaborated with this money laundering, which amounted to US$ 900,000 in three tranfers.
When the indictments came down, all of Rosemonts accounts were frozen until the whole thing can be investigated. The result is that those brokers that had their accounts there can not move their funds and if they don’t have another account (with money!), they can not pay the bonds and/or trades agreed on.
Thus, today, nobody was willing to swap with anybody until you saw whether people delivered or not the bonds or the money for operations, not so much because you don’t trust your counterpart, but because you don’t know who they were trading with down the line.
So, as I expected the market opened with a huge spread and most people did very little. With time, the market will normalize, people will look more carefully who they work with from now on and life will go back to normal.
In the meantime, there were a lot of nervous people in Caracas today and the effect will be felt tomorrow, as swaps take two days to be completed.