On the Ropes: Enforcement Risk Roundtable—Argentina’s Foreign Exchange Controls and the Regulatory Risk to Companies in Argentina

May 18, 2022
33:20 minutes
María González Calvet ,
Fred Gebauer
Kristiana Bankova
Andrés O'Farrell

In this edition of Ropes & Gray’s podcast series On the Ropes: Enforcement Risk Roundtable, litigation & enforcement partner María González Calvet is joined by Fred Gebauer, a partner in Ernst & Young’s forensics practice, Kristiana Bankova, a senior manager with Ernst & Young’s forensics practice, and Andrés O'Farrell of Marval O'Farrell Mairal, to discuss the unique currency market and controls in Argentina, the risks presented by these regulations, and key considerations for companies that conduct business in Argentina.


Host: Welcome to our latest installment of On the Ropes: Enforcement Risk Roundtable, a Ropes & Gray podcast series focused on global anti-corruption and international risk. Our coverage is global. The focus of this specific podcast episode though is Argentina, a growing hub of international business in Latin America. I am joined by partner María González Calvet. María serves as co-chair of the firm’s award-winning global anti-corruption and international risk practice and Latin America initiative. She’s also a former U.S. federal prosecutor and former in-house executive counsel of a Fortune 500 company.

María González Calvet: Thank you so much. I’m excited to be with you today to discuss this very important and topical issue: the currency exchange market in Argentina.

Host: We also have two very special guests from Ernst & Young to discuss the FX situation and the regulatory framework in Argentina. First, we have Fred Gebauer, a partner in E&Y’s Forensics practice. He oversees global fraud investigations for multinational and financial institutions, and oversees the firm's investigative due diligence practice for the Americas. Nice to have you with us today, Fred.

We also have Fred’s colleague, Kristiana Bankova, a senior manager with Ernst & Young’s Forensics practice. Kristiana focuses on forensic investigations, anti-bribery and anti-corruption compliance services, including proactive compliance assessments and investigations. Thank you for joining us, Kristiana.

Finally, we’re joined by local counsel, Andrés O'Farrell of Marval, O'Farrell & Mairal. He has kindly joined us to provide the Argentine law perspective and note any considerations companies should keep in mind as they engage in business in Argentina.

Great, let’s jump right into it. Many U.S.-based companies are doing business in Argentina and are perplexed by the FX situation in the country and the regulatory framework around it. Can you start by giving us a brief overview?

Fred Gebauer: Sure—I’d be happy to. Over the last 20 years or so, and particularly over the last 10 years, Argentina’s economy has struggled with inflation. As an example, in 2020, inflation was 42%, and in 2021, it reached a whopping 50.9%, the highest figure in the Latin American region. The government has sought to control and reduce inflation in several different ways, but unfortunately, none of them have been very successful. This, in turn, has resulted in a significant devaluation of the currency.

When it comes to FX controls, to make a very long and complicated story short, in 2019, the Argentine government implemented a series of FX controls to try and protect the Argentine economy against this devaluation and maintain the Argentine Central Bank’s reserve of USD. Essentially, the government has set an artificially low “official” exchange rate that significantly deviates from the market prices of the currency. Over time, these controls have started to pose significant challenges for businesses operating in Argentina because the government has also restricted companies’ and individuals’ ability to purchase USD at the official exchange rate. (Note: as an example of this exchange rate disparity, on today’s date (May 18), the official exchange rate was approximately 1 USD: 118.07 ARS, while the market exchange rate was approximately 1 USD: 205.98 ARS.)

The exchange controls have several different components, and regulations have changed over time. Moreover, the regulatory framework around them changes often (sometimes even daily or weekly) and, of course, it’s quite complex. So, by way of illustration, we’ll speak about the exchange controls at a high-level, with the understanding that the situation is constantly evolving and each company’s specific circumstances can have very different implications from the FX, tax, financial and legal perspectives. At this point, I’ll ask my colleague, Kristiana, to provide a more detailed overview.

Kristiana Bankova: Thanks a lot, Fred, for outlining these key points before we get into the details of how the FX market works. To distill a very complex issue into a simple example, as we mentioned earlier, the main purpose of the exchange controls is to keep the Argentine Central bank’s reserve of USD safe—so, to maintain a steady quantity of USD within the bank’s reserves. The controls themselves work as follows: The Argentine Central Bank has set an official exchange rate that fluctuates slightly over time. For illustrative purposes, we can say the exchange rate is ARS 100—so, when you bring 1 USD into Argentina, the central bank will give you ARS 100 for it. This rate is very favorable to the Argentine central bank because the equivalent “free-market” value of the ARS is actually around half of this official rate.

When companies and individuals bring USD into Argentina, they are generally required to convert this money to ARS. As an example, if I’m an Argentine business and I charge a U.S.-based customer let’s say USD 10,000 for a service, they would pay me in USD. Then, when they send the money to Argentina, I would have around five business days to convert this to ARS, and I would receive ARS 1 million. I can use these ARS 1 million to pay my expenses and any costs I incur in Argentina, but if I want to convert this money back to USD, I start to face challenges.

The main reason for these challenges is that the Argentine government restricts who has the ability to buy USD at the official FX rate and in what circumstances they can do it. In practice, most businesses and individuals actually cannot buy USD at the official FX. So, to name a few examples, if a business wants to convert money to USD because it prefers to maintain savings in USD, they typically would actually not be permitted to do this. Similarly, if a business wants to purchase USD to make payments to Argentine residents, the government also would not give them access to the official FX. On the other hand, if a business needs USD to purchase raw materials or supplies from abroad, they typically would be able to get access to the official exchange rate. And here, again, I used the word “typically” because even in this scenario, there are restrictions—for example, the government recently has started monitoring companies that have savings in USD. So, if a company that has USD in nominated savings wants to purchase supplies from abroad, they would typically be asked to use their savings first before they can get access to the official exchange rate. These couple of situations that I just outlined are hypothetical examples, but we do see a lot of our clients face these challenges day-to-day—for example, retail chains and other types of chains making payments to in-country franchises, manufacturers who need to purchase materials from the U.S., and pharmaceutical companies making payments to business partners and research partners.

Host: Considering all these restrictions, what do companies and individuals do when they want to purchase USD?

Fred Gebauer: It’s an excellent question. Of course, because the economy in Argentina is quite volatile, both companies and individuals generally prefer to keep their savings in USD. Since in many cases companies and individuals cannot purchase USD from the central bank, an alternate avenue called the “Blue-Chip Swap” has developed. In summary, here’s how it works:

  • USD can be bought through the purchase and sale of securities. So, to put it in practical terms, if I want to buy USD, I purchase a security that is listed both in Argentina and the United States.
  • I would purchase that security in Argentina using ARS. Then, I would sell it in the United States for USD. I would receive USD that I can hold in my American bank account as a consequence of this transaction.

The good thing about the Blue-Chip Swap is that it is legal and the transactions can be made in the mainstream financial market—however, it also has some drawbacks. For example, the exchange rate you get in this market is the true market exchange rate, so it is much less favorable than the official exchange rate. (Recently, USDs have been twice as expensive in the Blue-Chip Swap market than in the official Argentine market.) While we’ve seen many of these transactions go through without question, we’ve also seen that these trades are receiving increased scrutiny from the Argentine government, and that, in turn, could pose or trigger additional compliance and regulatory risks.

Although this isn’t the focus of our conversation today, I also wanted to point out that, in addition to the Blue-Chip Swap market, a true “black market” where USDs are purchased and sold for cash off-exchange also exists. This market is significantly less transparent than the Blue-Chip Swap, and although it’s not common for larger companies to engage in this market, it is certainly possible that it could happen in one-off cases. This is an area of significant enforcement by the Argentine government and carries heightened risk for companies. 

Host: Considering this complex and evolving situation, what options do companies doing business in Argentina have when they transact in USD?

Fred Gebauer: For companies doing business in Argentina, one of the principle challenges is figuring out how to structure transactions given the exchange rate so that they can do two things: (1) avoid regulatory scrutiny and compliance issues, and (2) retain as much value as possible. Though there is no perfect one-size-fits-all solution, there are several different strategies that all have their benefits, drawbacks and risks. As we mentioned before, the regulations around this topic are also constantly changing, so a certain structure that works for your business today may not be available or practical tomorrow. Some of the options that businesses have today include the following:

  • First, capital contributions. If a U.S.-based company makes a capital contribution denominated in USD to its subsidiary in Argentina, the subsidiary may be allowed to retain the money in USD. So, this is something worth exploring when it comes to intercompany transactions.
  • I also wanted to talk a little bit more about other options. A majority of time, clients are not making payments to their own subsidiaries, or the capital contribution structure may not be viable because of tax or regulatory implications—in these cases, there are other options available. For example, you can make payments in USD and simply undergo the required conversion to ARS. When a company receives the ARS, the next step is to think about what to do with those ARS—they can keep their money in local currency or potentially convert to USD. When making these decisions, different factors to consider include the following:
    • How much of the money received can they use to pay expenses incurred locally in Argentina?
    • How much of this money do they truly not need right away, and what should they do with it?
    • If they want to have some of the money, should they continue to keep the savings in ARS or do they need to obtain USD?

If a company keeps the money in ARS, which companies often choose to do, it is important to think about how to best preserve the value of that money. On the other hand, if the company decides that they would like to buy USD, there are many different considerations to evaluate:

  • First, they should assess whether there are any avenues to acquire the USD at the official exchange rate. For example, if the money will be used to purchase raw materials from abroad.
  • Second, if the money cannot be acquired from the Argentine Central Bank at the official exchange rate, then companies have to go to the Blue-Chip Swap, and this carries a number of potential regulatory implications.

Host: Thank you, Fred. It sounds like there are still several good options to successfully transact business in Argentina. Can you speak a bit more about the key considerations for companies when engaging in the different options that you just outlined? What are the main risks, and what can be done to mitigate them?

Kristiana Bankova: Thanks—I think I can take that question. And before we start discussing each option, I want to emphasize that every situation is unique and, in each case, it’s very important to carefully consider the regulatory and business impacts to all parties in the transaction. We can definitely talk about some of the high-level concepts, but if you are engaged in business in Argentina, it’s always a best practice to get as much guidance as possible from your local affiliate in Argentina, from internal and external counsel, accountants, tax professionals, bankers, and also your business partners. This is especially important given the evolving regulatory and legal landscape in Argentina—things there may change at any time, so getting an up-to-date opinion is key. 

Getting into more of the details of some of the options that Fred outlined:

The first option was a capital contribution. First and foremost, this option is generally available only when you are making a transfer to your own subsidiary. The benefits here are that you able to preserve the value of the USD and you are likely able to do it within the existing legal framework. When you do this, in my perspective, there are three key risks to consider:

  • First, if the amount to be transferred is very large, this can lead to regulatory scrutiny and it might impact or limit future capitalizations of your business.
  • Second, there could be tax implications for the local subsidiary
  • And, last but not least, this is a regulatory loophole that currently enables companies to do this, so if this is a part of a longer-term plan, it’s important to consider that the law may change in the future.

The second option, or one of the second options that Fred mentioned, was payment in USD and subsequent conversion to ARS. This is probably the most straightforward option. When the USD enter Argentina, they are converted to ARS. Then, at that point, the company has ARS at its disposal. Generally, if you are going with this option, it’s really important to manage the funds well and to hedge so that you can preserve the largest amount of value possible (really just like in any other financial transaction). And if you choose to keep the money in ARS (which is likely the least risky option from a regulatory perspective), there are a number of natural hedging options. For example, to the extent possible, the money should be used to pay ARS-denominated obligations. 

For companies that are based in Argentina, it’s crucial that they try to denominate their contracts and their obligations in ARS to the extent possible. That way their liabilities are in the same currency as the cash they receive in the country, so they can use the ARS they receive without worrying about having to convert them. Along these same lines, if you are as U.S.-based company working with a business partner in Argentina, one of the best practices is to make small payments over time as your business partner needs the money. That way, you can take advantage of a natural hedge against exchange rate fluctuations. 

When I talk about “hedging,” it’s also important to point out that some companies choose to hedge by converting the ARS received back to USD. Because of the complex regulations in Argentina, this does carry a number of legal and financial risks that I wanted to briefly mention. First of all, if a company isn’t able to get access to the official exchange rate, which they most likely want, they typically have to go to the Blue-Chip Swap market. And as Fred mentioned, although this market is legal, these transactions are monitored by the government and they may lead to scrutiny. Just to mention two examples of potential areas of scrutiny:

  • Terms and conditions of certain COVID-19 funding actually prohibit companies from trading in the Blue-Chip Swap for a certain period of time after they receive the money.
  • Similarly, the Argentine tax authority monitors Blue-Chip Swap trades to identify potential non-compliance with tax laws.

Similar to some of the other options that are available, although the Blue-Chip Swap trades are currently legal, there’s also somewhat of a regulatory loophole, so it’s possible that the law and the regulations around this might change in the future.

As for one of the third common options, payment to bank accounts based outside of Argentina. We’ve seen from our experience that a lot of business partners will ask for payment to be made to bank accounts outside of Argentina so they can avoid this mandatory conversion of USD to ARS. Although, of course, financially this might be a very attractive option for the business partner, it carries a number of legal and compliance risks that are important to consider, so discussions with legal counsel and other advisors in this case are key before making any decisions on next steps. One quick risk to just point out before I wrap up is that when the money is brought into Argentina from the third country, this might be done through a Blue-Chip Swap transaction, and that Blue-Chip Swap activity carries the same legal risks that I previously outlined and that Fred also mentioned.

Host: Thanks for that great background information, Kristiana and Fred. I now turn to María, who will discuss some of the legal risks of these FX issues. In particular, can you discuss the risks with the second option we just covered—the reconversion of ARS back to USD?

María González Calvet: Sure—thank you. Companies operating in Argentina face a variety of risks, as we’ve already begun to hear. The primary risk, though, is running afoul of the Foreign Corrupt Practices Act (or the “FCPA”) through third party liability, and due to failure to maintain reasonably accurate books and records.

Host: To remind everyone, at a high-level, the FCPA prohibits the corrupt offer, payment, promise to pay, or authorizing the payment or offer of money or “anything of value” to a foreign official to obtain or retain business. A company is liable for FCPA violations if it provides something of value to a third party while aware or substantially certain that the third party will offer, give, or promise something of value to a foreign official. 

María González Calvet: Furthermore, the accounting provisions of the FCPA require issuers to “make and keep books, records, and accounts in reasonable detail, to accurately and fairly reflect the transactions and dispositions of the assets” and to “devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances.” Now, that language is complex and broad—what it doesn’t do is specify a particular set of controls that issuers are required to implement. It also doesn’t mention the types of records needed to show the quantitative and qualitative aspects of the transaction. As such, companies have the responsibility to maintain practices that are reasonable to its business and jurisdiction. 

The FX market in Argentina presents a challenge for companies because, should third parties engage in the Blue-Chip Swap market (that we’ve heard about) to hedge or trade for the most favorable rate, the recordkeeping associated with those trades becomes very complex, and companies may not have the visibility or the understanding to ensure that their third parties or their Argentina operations are complying with FCPA requirements. These risks are exacerbated by the geographic location. Corruption in Argentina remains a serious problem, especially in public procurement, the judicial system, customs administration, and the tax sector. As an illustration, there is a very high risk of corruption in Argentina’s public procurement sector in particular. We see this in irregular payments and bribes that are routinely exchanged in connection to the awarding of contracts, and companies report that government officials show favoritism to well-connected firms and individuals when deciding upon policies and contracts. Former Vice President Amado Boudou was recently convicted for a number of charges, including the misuse of public funds and bribery, and current Vice President Cristina Fernandez de Kirchner has been accused of accepting bribes, money laundering, and corruption. Of course, that doesn’t even begin to mention the economic turmoil that has only exacerbated matters.

Host: María, I’d like to dig in more to the two main areas of potential liability: third party risk, and books and records. Let’s discuss what about third parties makes companies vulnerable to liability as it relates to FX controls.

María González Calvet: Importantly, under the FCPA, a company can be held accountable for actions of a third party acting on its behalf. More than 90% of FCPA enforcement actions against companies involve a third party providing some service to the company. A third party who provides services for a company or acts on its behalf—such as a distributor or a sales agent—can subject the company to liability for their own corrupt actions, regardless of whether the company directed them to violate the law or whether the company had actual knowledge of the third party’s intent to violate that law. That is, a company can be liable for the third party’s actions if it was aware that the actions were “substantially certain” to occur, aware of a “high probability” that they would occur, or where the company consciously avoided knowing or was “willfully blind” to the third party’s corrupt conduct. 

Host: Right, and in addition to sales agents and distributors, other examples of third parties that can create FCPA risks include consultants, customs brokers, freight forwarders, tax consultants who interact with foreign government tax and revenue authorities, and political lobbyists (whether or not registered) who interact with foreign legislative or ministerial authorities.

María González Calvet: In the case of the FX controls issues that we’ve been discussing, there’s a risk that third parties with whom companies partner will engage in improper currency trading. Due to strict restrictions placed on purchasing foreign currency that we’ve heard about, the dollar demand in Argentina has turned to other markets—the black market, or the sale of cash dollars, and the Blue-Chip Swap, where trades are executed through the purchases of bonds. In addition, if a business partner utilizes the Blue-Chip Swap market, it is more difficult for a company to understand the exchange rate that the business partner is getting, which may open avenues to free up more money for it to retain a profit or to pay bribes, or to engage in other elicit activity. Companies will need more information to understand how much money their business partners actually have on hand and where it’s going. 

To mitigate the FCPA risk arising from third party actions, companies must conduct and document due diligence on any third parties that they engage with, and ensure that there are contractual provisions, such as auditing clauses and a prohibition to hedging currency or trading in the black market in the contracts between the third party and the company itself. Companies should also consult with counsel to ensure that the contractual provisions are adequate and provide as much protection as is required. In addition to the legal risks, companies should also consider the reputational risks related to working with third parties who are using the Blue-Chip Swap. Even though the Blue-Chip Swap is legal, the Argentine government tries to discourage companies from using it, so business partners engaging in the Swap might be perceived by the Argentine government as avoiding certain controls.

Host: That’s great advice, María. What about the books and record provisions? What should companies keep in mind to ensure that they are keeping reasonably accurate books and records? What is the risk here?

María González Calvet: As we’ve mentioned before, the capital controls generally force companies operating in Argentina to convert payments from abroad into ARS at the official exchange rate. Companies may engage in other dollar exchange markets to hedge currency. All of these options obfuscate how much money is on hand. This presents a recordkeeping risk because companies conducting business using the Blue-Chip Swap exchange rate may report their USD-denominated cash and earnings on their financial statement using the official rate. Thus, the company actually has more money on hand than it represented on its financial statement. These types of recordkeeping discrepancies make it difficult to keep accurate books and records. U.S. enforcement agencies need to be able to understand where money has gone to ensure that a company’s records are clear enough to ensure that funds have not been used to pay bribes or to commit any other elicit conduct. Companies should keep in mind and consult with counsel or experts, like Fred and Kristiana, should they face any accounting issues due to these market concerns. 

Host: María, what about the last option offered by Fred and Kristiana—payments to a bank account outside of Argentina to avoid capital controls—what risks are present in that scenario?

María González Calvet: If companies choose to send funds to a country other than where they will ultimately be used, there is a risk that the money will be laundered. With Argentina in particular, a number of companies may decide to transfer funds to neighboring Uruguay. Uruguay is known for its more lenient tax structures—it is very attractive to investors due to its lack of reporting mandates. Argentine regulators have increasingly focused on these transactions to assess their legitimacy. And U.S. enforcement agencies are not likely to look favorably to these types of maneuvers, but companies should consult with internal and external counsel in the U.S. and in Argentina if they’re considering this path.

Host: Now, I’d like to welcome Andrés O'Farrell to the conversation—Andrés will provide that local perspective. Andrés, thank you for joining us. Could you please share from an Argentine law perspective, what should U.S.-based companies doing business in Argentina consider when it comes to the FX situation, the Blue Chip Swap, and the regulatory framework?

Andrés O'Farrell: Thank you. In the scenario that’s been so well described by Fred, Kristiana and María, it is only natural that Argentine companies and individual service providers have become nothing short of obsessed with receiving payment abroad, in order to sidestep the cost of conversion to Argentine pesos at the official exchange rate. This also means moving the transactions off the books, obviously, which in turn entails evasion of applicable taxes (most notably, income tax). So, all in all, the financial incentives for this option are massive. 

I will start by pointing out that FX regulations (and sanctions for violations thereof) apply only to the Argentine resident. Therefore, as a general rule, it is the local business partner that must worry about compliance with the Central Bank regulations. The same applies to tax obligations: In the event of any violation, it is the Argentine taxpayer that will eventually face scrutiny by the local tax authorities. That being said, there are important considerations for the foreign partner to keep in mind. As we were saying, it is increasingly frequent to see Argentine exporters requesting payment to a U.S. bank account. If this account is opened to the name of the Argentine entity or individual, then there is generally no cause for concern to the U.S. client (at least under Argentine law). It is perfectly legal for Argentine residents to hold and operate a foreign bank account, as long as they comply with all applicable FX and tax obligations. 

Problems normally arise when intermediaries are involved. Not all Argentine service providers have U.S. bank accounts—and even if they do, they may need to receive part of payment in Argentina to cover operational costs. In this context, many Argentine exporters rely on informal financial intermediaries, locally known as “financieras” or “cuevas” (which literally translates as “caves”). These are unlicensed, unregulated brokers that act as middle-men for clients with opposite needs (i.e., those that need to bring money into Argentina, and those needing to wire it out of the country). These “financieras” hold several bank accounts in different jurisdictions, usually to the name of different legal entities. In a nutshell, they either receive cash in Argentina and make bank deposit abroad, or receive deposits abroad and deliver cash in Argentina, in exchange for a fee. The activity of these “financieras” makes up an informal payments system that runs parallel to the official financial market. Of course, this is a completely unregulated activity, with no due diligence or KYC procedures of any kind. 

As it is probably evident by now, dealing with “financieras” poses a significant money laundering risk. These accounts are used for hundreds of transactions involving unknown parties and money of undetermined origin. Therefore, making any type of transfer to or from these accounts could mean comingling your payment with potentially illicit funds. This entails a substantial risk under Argentine money laundering legislation, and—I presume—under U.S. laws, as well. 

In short, U.S. companies with business in Argentina should know that it is possible and legitimate for an Argentine entity or individual to receive payment in a U.S. bank account. But the account must always be to the same name of the Argentine partner, who must, at the same time, provide a reasonable explanation for receiving funds abroad (for example, if they need to pay foreign service or supply providers). Also, it is important for the U.S. partner to request an official invoice that must be issued through the Argentine tax authority (or “AFIP”) in the electronic invoicing tool.

Host: Thank you so much for that, Andrés, for that useful information. In closing, I’ll underscore that every company should have an FCPA compliance program tailored to its specific operations and any risks created by those operations. Doing business in Argentina is particularly complicated due to the capital controls and foreign exchange markets that are ripe for financial manipulation, as well as the overall risk of becoming entangled in the corruption present in the country. Companies should ensure that they have an FCPA compliance policy that addresses these concerns, and that is flexible enough to adapt and evolve as the company’s operations change over time. Having an effective compliance policy can protect the company, and its officers and employees from criminal and civil liability under the FCPA and other Argentine anti-corruption laws. Ropes & Gray specializes in creating and evaluating these types of compliance policies, and the firm is available to provide strategic advice to companies seeking to address the legal risks of doing business abroad.

For more information on the topics we discussed as well as other helpful links and materials, please visit our Enforcement Express website at ropesgray.com/enforcementexpress. If you have any feedback or suggestions for jurisdictions or specific topics you would like us to cover, please contact us at express@ropesgray.com or feel free to reach out to any of us directly. You can also subscribe to this series wherever you regularly listen to your podcasts, including on Apple and Spotify. Thanks again for listening.

On the Ropes: Enforcement Risk Roundtable—Argentina’s Foreign Exchange Controls and the Regulatory Risk to Companies in Argentina – podcast transcript

Guest Speakers

Fred Gebauer
Partner – Forensics
Kristiana Bankova
Kristiana Bankova
Senior Manager – Forensics
Andrés O'Farrell
Partner, Marval O'Farrell Mairal
See Bio
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