Publications

Regulatory Compliance

July 3, 2014
Hernán Peñafiel & Alfredo Larreta

In terms of regulatory compliance with Chilean legislation, that is, adherence to legal standards, regulations, and other requirements, two subject matters must be considered.  Firstly, certain entities are obligated to comply with preventive regulation relating to money laundering. Secondly, all legal persons must comply with the statute establishing criminal liability to legal entities.

Compliance with legislation to prevent money laundering

The following natural and legal persons are subject to certain compliance obligations under Chile’s legislation to prevent money laundering: banks and financial institutions, factoring companies, leasing companies, securitisation companies, general managers of funds and managers of investment funds, the Foreign Investment Committee, exchange houses and other entities authorised to receive foreign currency, the issuers and operators of credit cards, companies that transfer and transport valuables and money, stock exchanges, stockbrokers, security dealers, insurance companies, managers of mutual funds, operators of futures and options markets, managers and users of free trade zones, casinos, gambling halls and racecourses, customs agents, auction houses, real estate agents and companies engaged in real estate management, notaries, real estate registrars, pension funds management companies and professional sports corporations.

Main compliance obligations:

a)    To report any suspicious acts, transactions or operations detected in the course of their own business activities. A suspicious transaction is defined as any act, transaction or operation that, with reference to the uses and customs of the activity in question, is unusual or lacks apparent economic or legal justification, whether performed in isolation or repeatedly.

No regulation guaranteeing secrecy or reserve may be argued as an exemption of this obligation, and its compliance in good faith releases from all liability.

This obligation to report is also a requirement for all who carry or transport cash currency or bear negotiable instruments in and out of the country in amounts exceeding USD 10,000 or its equivalent in other currencies.

b)    To maintain special records for five years of any cash transaction exceeding 450 UF (approximately USD 20,000) or the equivalent in other currencies, and to report it to the relevant regulator, i.e. the Financial Analysis Unit (Unidad de Análisis Financiero – UAF) upon request.

c)    To comply with requirements stipulated by the regulator, which are expressed in Notifications (Circulares) of general application and for specific industry sectors, as well as in the form of requests made directly to the obliged entity.

Consequences for breach of these obligations

Depending on the characteristics and occurrence of the breach, and the entity which performed it, the failure to carry out these obligations can be punished with warnings and fines of various amounts. If the offence is committed by a legal entity, these sanctions may also be applied to its directors and legal representatives who voluntarily performed the act or omission.

The offence of money laundering

Beyond the obligations imposed by the legislation to prevent money laundering, it should be noted that money laundering itself is an offence. Money laundering is the concealment or disguising of the illicit origin of illicit goods, knowing that they originate from illegal acts from a restricted catalogue of predetermined crimes, as well as the concealment or disguising of such illicit goods. The offence also includes the acquisition, ownership, possession or use of such goods for profit.

The predetermined crimes that may give rise to the offence of money laundering are the following:

  • drug trafficking and trafficking of chemicals used for the production of drugs,
  • infringement of anti-terrorism laws,
  • violation of arms control laws,
  • offences and prohibitions referred to in the Securities Act (Ley de Mercado de Valores) and the General Banking Act (Ley General de Bancos),
  • corruption and bribing of domestic and foreign public officials,
  • kidnapping and abduction, and
  • offences relating to international prostitution and human trafficking networks.

The penalties for money laundering include fines and imprisonment ranging from five years and one day to fifteen years, and may be applied in conjunction with punishment for the corresponding predetermined offence.

Compliance with the legislation establishing the criminal responsibility of legal persons

In carrying out their activities in Chile, all legal persons, public or private, for profit or non-profit, regardless of their size, must comply with the regulations establishing the criminal liability of legal entities.

Criminal liability of legal entities may arise from the following offences:

  • money laundering,
  • financing of terrorism, and
  • bribery of domestic and foreign public officials.

For an entity to be held criminally responsible, the offence must be committed in the interest of or for the profit of the entity, by those who have the duty and faculty of managing and supervising the entity, such as the owners, controllers, representatives and senior executives of the company, including the employees under their direction and supervision.

The legal entity will not be held liable if the offence is committed by these individuals for their own benefit or for the benefit of a third party.

Compliance with managerial and supervisory duties

Managerial and supervisory duties are deemed fulfilled by a legal entity when, prior to the commission of an offence, the legal entity has adopted and implemented a model of organisation, management and supervision to prevent these crimes. The adoption and implementation of the model may be certified by authorised entities.

The adoption and implementation of such a model does not preclude the Public Prosecutor Agency (Ministerio Público) from investigating and pursuing the legal entity. However it raises a significant barrier for the prosecutor, as it must be proved, in addition to the specific requirements of a particular offence, that the model has not been effectively implemented, is inefficient or has not fulfilled its purpose, or any other circumstance that ultimately amounts to a marked neglect of the entity’s compliance duties, beyond the apparent existence of a preventive model.

Features of the Prevention Model

The Prevention Model implemented and executed by an entity must contain the following minimum features and requirements:

  • Appointment of a Prevention or Compliance Officer who is independent from the direction of the entity and who possesses the means and powers necessary for the performance of his duties.
  • Establishment of a Crime Prevention System which at least;

–       identifies the entity’s processes or activities that represent a risk that a crime will be committed,

–       establishes protocols and procedures to prevent the commission of crimes,

–       identifies audit and financial resource administration procedures to prevent the commission of crimes, and

–       includes administrative sanctions, an administrative complaints procedure or a method of imposing financial liability on individuals who breach the prevention system.

Autonomy and transfer of the criminal liability of a legal person

The criminal liability of a legal person is independent from that of a natural person who committed the crime (for example, bribery). Therefore, the legal entity may be found guilty even if the criminal liability of the individual who committed the act of bribery is extinguished for any legal reason or due to the suspension of legal proceedings against him or her, or for any other legal cause.

Moreover, the criminal liability of the legal person in the case of an application of a fine continues in the case of a conversion, merger, takeover or voluntary termination of the legal entity. The criminal responsibility is transmitted to the corporation created by such acts, and in the case of a division of the company, it applies severally to both companies.

Furthermore, in cases of dissolution of a corporation for profit by agreement of the partners or owners, criminal responsibility passes to the partners and participants in the capital distribution.

Penalties applicable to the legal entity

Obviously, because of the special nature of legal entities, the penalties applicable to them differ from those normally applied to individuals. Penalties imposed on legal entities range from fines, total or partial loss of tax benefits, temporary or perpetual prohibitions to entering into contracts with state agencies and even the dissolution of the legal person or cancellation of its legal existence.

The penalty to be imposed is determined by considering whether there is a direct connection with the penalty for the original offence of money laundering, terrorist financing, or bribery of domestic or foreign public officials.

In addition, consideration is given to mitigating and aggravating factors in relation to the offence, particularly the amounts of money involved, the size and nature of the legal entity, the degree of compliance with the regulations and technical rules of its business, the extent of the harm caused, and the gravity of the social and economic consequences.

Finally, it should be added that the penalty includes publication of an extract of the conviction in the Official Gazette or any national newspaper, as well as the confiscation of the proceeds of the crime.

 

Hernán Peñafiel & Alfredo Larreta

 

*This article was previously published in the book Doing Business in Chile, 2nd Edition, 2013, with the Chilean British Chamber