US embassy cable - 04BOGOTA4709

C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 004709 
 
SIPDIS 
 
SENSITIVE 
 
STATE PLEASE PASS TO USTR BENNETT HARMAN 
 
E.O. 12958: DECL: 04/28/2014 
TAGS: ECON, ETRD, EFIN, CO, FTA 
SUBJECT: ANDEAN FTA ANALYSIS: FINANCIAL SERVICES ISSUES IN 
COLOMBIA 
 
 
Classified By: William B. Wood for reasons 1.5 (b and d) 
 
1. (C) SUMMARY: Colombia's financial services sector is 
distinguished by a regulatory framework that restricts 
multi-banking and seeks to control money laundering and 
capital flight.  International financial services firms are 
restricted to those with a subsidiary in the country, and use 
of foreign executives is limited by regulation.  To fully 
benefit from an FTA, the GOC should permit multi-banking and 
allow foreign firms to establish branch offices.  Adoption of 
international accounting practices, shareholder rights and 
information disclosure would improve investor confidence, 
while liberalization would reduce the cost of financial 
services by an estimated 25 percent.  Colombian financial 
institutions are resistant to change and fear entry of U.S. 
firms with deep access to capital.  However, they also wish 
to capture remittance flows and other business of Colombian 
immigrant communities in the U.S. This is the fourth in a 
series of sector briefs developed in preparation for the 
Andean FTA.  The summaries are based on in-depth studies 
which are available from USAID Bogota. END SUMMARY. 
 
Background 
 
2. (U) Colombia began liberalizing financial services in 
1991, eliminating entrance restrictions and limits to foreign 
investment, while allowing for greater mobility of 
international capital.  In 1994, the GOC moved to a financial 
system in which distinct financial services (insurance, 
banking etc.) could be owned by the same holding company as 
long as management of each type of service was separate. 
This model was adopted instead of a multi-banking model that 
permits the same firm to provide multiple types of services 
under the same management.  The GOC has studied lifting 
restrictions on multi-banking, but retains restrictions on 
international financial flows to control both money 
laundering and capital flight. 
 
3. (U) International financial transactions are heavily 
regulated and the GOC requires foreign firms to establish 
subsidiaries in the country to fully operate, preventing them 
from entering the market through branch offices.  These 
controls on foreign exchange transactions are maintained in 
part because they help the GOC combat money laundering. The 
use of foreign personnel in foreign financial institutions, 
especially managers and legal representatives, is limited by 
regulation. 
 
4. (U) Financial services grew from 4.3 percent of GDP in 
1991 to 6.4 percent of GDP in 1998, mainly due to 
liberalization policies.  Liberalization also extended to 
insurance, trusts, brokerage, investment banking, and the 
management of foreign investment funds and pension funds. 
However, all of these services remain restricted for 
international firms, including limits to the purchase of such 
services abroad.  In 1999-2000 the financial services sector 
contracted significantly due to the country's economic 
crisis.  Although it has rebounded over the past two years 
due to stable macro-economic policies and a tightened 
regulatory framework, the sector today represents about 5.3 
percent of GDP. 
 
Financial Services Issues for Discussion in an FTA 
 
5. (U) Fiduciary, investment banking, commercial loans, 
leasing, and insurance services are separated from banking 
services under Colombian law, limiting the operation of banks 
and other financial institutions.  Current legislation 
permits banking institutions to house such activities in the 
same office, but management of the services must be separate. 
 
6. (SBU) International banking institutions must establish 
subsidiaries and must comply with the same capital and other 
requirements as local financial institutions.  Branch offices 
of foreign firms are allowed to advertise and provide 
information, but transactions must occur through third 
parties. Banking industry representatives are concerned large 
U.S. banks opening branch offices without having to comply 
with capital investment requirements could readily draw on 
deep pockets overseas and undercut local banks. 
 
7. (U) International securities traders must have subsidiary 
offices. The same applies for stock exchanges and exchanges 
of agricultural products.  International stock brokerage 
subsidiaries must obtain operating license from the 
Superintendent of Securities. 
 
8. (U) International insurance providers must have subsidiary 
offices for transactions to be legal.  This limitation 
applies not only to life insurance, pensions, and health 
insurance, but also to insurance for transportation of people 
and merchandise. 
 
9. (SBU) Colombian banks wish to capture remittance flows, 
which topped US$ 3 billion in 2003.  Remittances constitute a 
principle financial flow into Colombia that largely do not 
pass through the formal financial system despite extremely 
high costs of wire transfers.  The  financial sector 
continues to seek opportunities to direct the flows through 
formal channels, a goal shared by the GOC to better control 
money laundering.  Establishment of branches in Colombian 
immigrant communities in the U.S. is a key goal.  USAID and 
IDB are initiating a program designed to integrate 
remittances within the formal banking system. 
 
10. (SBU) The current regulatory framework for the Colombian 
securities market does not mandate the adoption of 
international accounting and audit standards for issuers and 
intermediaries, nor does it provide for stringent 
self-regulation.  Minority shareholder rights, information 
disclosure and conflict of interest provisions for 
corporations need strengthening.  Finally, there is no 
integrated prudential oversight regime for financial 
institutions in the banking and securities market.  New 
legislative and regulatory reforms that would address these 
issues are under development but not yet adopted. 
 
11. (C) Almost $8.5 billion in private pension fund assets 
(10 percent of GDP) is available to stimulate corporate bond 
and equity markets, but almost all of this is currently held 
in government debt.  An improved regulatory framework 
(including liberalization of pension funds) could jump-start 
innovative financing for channeling savings to the private 
sector. 
 
12. (C) Getting to the Table:  What GOC Needs to Do 
 
A. Permit multi-banking.  The integration of financial 
services would provide advantages in terms of lower cost and 
better risk management.  If a multi-banking scheme is 
adopted, regulatory oversight should also be integrated, 
combining functions of the Superintendents of Banking, 
Securities, and Credit Unions. 
 
B. Permit foreign firms to establish branch offices. 
Allowing foreign firms to open branch offices would improve 
financial sector stability.  As foreign banks specialize in 
large customers and commercial banking, profit margins are 
reduced for local banks, which compete for medium and small 
customers and those not covered by the financial system. 
 
C. Achieve long-term fiscal balance.  Fiscal instability 
hampers the liberalization and diversification of financial 
services, and heightens interest in the provision of capital 
controls. 
 
D. Strengthen the capital market regulatory framework. 
Improved accounting, audit, shareholder rights and 
information disclosure would improve investor confidence and 
diversify and expand funding for private companies looking to 
benefit from the FTA. 
 
E. Liberalize regulation of financial services.  A recent 
USAID study estimates GOC regulations add some 25 percent to 
the cost of banking services.  Further liberalization would 
likely generate important productivity gains and improve the 
competitiveness and diversification of financial services 
provided to the Colombian private sector. 
 
Overall GOC Demands on Financial Services 
 
GOC is likely to argue that U.S. banking branches in Colombia 
must bring substantial capital to invest locally rather than 
draw on deeper sources abroad. 
 
13. (C) GOC Positions on Key Financial Services Products 
 
A. Colombian Banks wish to locate branches in U.S.-Colombian 
immigrant communities.  This would permit capture of a larger 
share of the remittance market and financial transactions 
between traders in both countries.  Likewise, Colombian 
insurance companies wish to sell insurance to Colombian 
communities in the U.S. 
 
14. (C) GOC Negotiating Strategy for Financial Services 
 
A. GOC may argue it needs tight controls on international 
financial transactions to control money laundering and 
capital flight.  GOC may accept additional U.S. technical 
assistance in fighting money laundering as an alternative. 
WOOD