Is the Law Starting to Rule?

Latin America has a history of flouting the law. For centuries, the rule of a powerful leader was its only political system. Although the region’s written laws and constitutions were discussed and improved on, they were never fully effective. In fact, they were barely worth the paper they were written on. However, democratization and globalization are now having profound effects on the situation and, increasingly, external pressure is being brought to bear on the judiciary to enforce the law. Two areas where the changes are most evident concern human rights and money laundering.

Examining the roots of law in Latin America can help to explain corruption in the region. The abuse of government position for personal gain goes back to the Discovery. In 1523, through Royal Order, King Charles V forbade the use of the indigenous population as forced labor. The order posed a dilemma for Hernan Cortes. He and his lieutenants felt it was not in their interests, as well as deeply unfair, that the indians should be set free. However, he owed obedience to his King. The solution he came upon has marked the fate of law in Latin America ever since. Hernan Cortes gathered his men, raised the order above his head as a sign of his submission to the Crown, and proclaimed: “It is observed, but not complied with.”

In addition, the trade monopoly that Spain established in Latin America encouraged smuggling, and all levels of society followed the example of illegal behavior set by officials. So, the idea of the authorities submitting to the law and being controlled by an independent judicial power seemed absurd. The abuse of power, and the divorce of the law from the everyday rules that Cortes established, survived the centuries and became a characteristic of the region.
Things did not improve in the 20th century and Latin America was governed absolutely by leaders and dictators who placed their interests and those of their cliques above the rule of law. This mixture of corruption, abuse of power and illegality meant the law was not thought of as a means of protecting citizens, but rather as another tool of the powerful to subdue the weak.

Not Enough Democracy
The rule of law means that most citizens, companies, state offices and officers act in accordance with the law and that an independent judicial system resolves disagreements and investigates crimes. Neither of these conditions applied to Latin America. People did not have basic rights, such as a free vote or free speech. They were powerless.

Nevertheless, changes have taken place in the past 20 years. Democracy came about through questioning military governments about the massive human rights’ violations during their rule. Some countries, such as Argentina, prosecuted those held mainly responsible; almost all countries formed truth commissions. Chile is still discussing Pinochet’s responsibility for such violations. In all cases, the idea of calling into question the abuse of power became a reality.

The media adjusted quickly to a society that demanded the truth about those in power. News about cases of corruption began to appear in the newspapers. However, changes in public institutions are slower. The tradition of using institutions for the benefit of power groups remains and the judiciary has still not been able to investigate thoroughly or act independently. Even in an era of democracy, a network of people manipulate formal institutions. To protect their abuses they maintain political control of the judiciary.

World Bank Institute reports of 1998 show that Latin America is one of the regions with most problems in terms of the rule of law. It is only ranked higher than the former Soviet Union and parts of Africa. The media has made public these shortcomings and tension has grown between an informed society who demand a transparent and efficient government, on the one hand, and on the other, an elite which controls institutions by exchanging government favors for money. And so, corruption has become one of the greatest worries for people in the region.

Multilateral organizations are trying to help solve the problems of corruption and strengthen the rule of law. The Organization of American States passed a Convention Against Corruption five years ago and work is underway to implement new rules in each country. The Inter-American Development Bank and the World Bank are supporting this effort by promoting judicial reforms. However, they are also failing. The multilaterals cannot stamp out the national economic and political links to the law, nor can they establish a fully independent judiciary.

The Benefit of Globalization
Globalization provides an essential aid to reducing the power of the ruling elites and improve the efficiency and independence of the judiciary. We need to learn to take advantage of this unexpected resource.

Money flows from corruption are difficult to track because the misallocated funds tend to end up in secret bank accounts abroad. However, investigations elsewhere often reveal these secret movements. The BCCI banking scandal in Europe and the United States revealed deposits attributed to former Peruvian president Alan Garcia. A private international company cooperated to identify the illegal funds held abroad of the then Brazilian president, Fernando Collor de Melo. The case cost him the presidency.

Developing money laundering laws increases the possibility of help from US or Swiss institutions. Money laundering laws were first introduced to combat drug traffickers but in recent years have been extended to other serious offences, the rationale being that organized crime is active in many areas (including arms trading, kidnapping, human trafficking, economic and corporate crime, corruption and terrorism).

The scandal concerning Mexico’s Raúl Salinas de Gortari, who deposited more than $100 million in London and Switzerland through a Citibank account in New York, was a wake-up call for US institutions who began to investigate the way their banks operated.

Andres Oppenheimer, in his book Ojos blindados (Blindfolded), shows how Citibank officials were not prepared to enforce new controls. The basic rule of “know your client,” which obliges bankers to discriminate against clients suspected of illegal activities, had been ignored.

In the wake of the Salinas scandal in 1999, the sub-committee of investigations of the US Senate prepared a report. A scandal about the Russian Mafia using the Bank of New York to launder money instigated a second report. Another case concerns the Federal Bank, an entity in the Bahamas linked with Raul Moneta, the man known as “the banker” of former president Carlos Menem and partner of Citibank. Amidst stacks of documents the names of Argentine businessmen were mixed in with those of prominent politicians. An Argentine Congress committee is trying to separate corruption and tax evasion cases from those relating to legitimate businesses.

Looking Forward
To recognize the speed of change both in legislation and within government authorities and banks, we should look at what happened to the man in charge of Peruvian intelligence, Vladimiro Montesinos.

Amended Swiss legislation stipulated that bank managers violating the rule “know your client” could face up to one year in prison. They were also obliged by law to inform the authorities of any suspicious movements or face a prison sentence. Zurich’s prosecutor, Cornelia Cova, read on CNN’s website that Montesinos had escaped to Panama under suspicion of fraud and corruption. Without having any Peruvian authority request it, the Swiss prosecutor sent a note to the Swiss banks requesting reports on the accounts of which Montesinos was a beneficiary. The banks began to hand over the information on various accounts, some relating to the purchases of planes from Belorussia. The prosecutor ordered, in compliance with Swiss law and without any request from the Peruvian government, that those funds – amounting to nearly $100 million – be frozen. As a consequence of this investigation, Alberto Fujimori, then president of Peru, resigned and sought asylum in Japan.

Owing to new money laundering laws, corruption money is not safe in any bank in the world. Reforms and changes are ongoing. In July 2001, the Cayman Islands and the Bahamas amended legislation, which took them off the black list. In another reform, the OECD convention against international bribery allows European and North American courts to try those who paid bribes in Latin America. Establishing the rule of law and controlling corruption are more than just legal issues. They are political, economic, social and cultural problems, and need time and commitment if they are to be solved. This is why Transparency International takes a holistic approach, building coalitions between society and the private and public sectors. We Latin American lawyers can help to support the work of our national courts by making use of these new international resources.