Vietnam’s Developing Anti–Money Laundering Framework: FDI Issues for U.S. Banks

Vol. 43 No. 3

By

Harry D. Dixon III is an associate at Donnie Dixon, Attorney at Law, LLC, in Savannah, Georgia. He is a Young Lawyer Committee representative of the Section’s National Security Committee. Additional citations to authorities listed in this article are available from the author.

Southeast Asia has grown at an impressive rate over the past few years. See Thitinan Pongsudhirak, Six Markets to Watch: The Mekong Region, Foreign Affairs, Jan./Feb. 2014. For example, Thailand serves as the regional hub for manufacturing, tourism, and services. This is creating a trade zone where commerce is moving freely. American-based banks doing foreign direct investment (FDI) and their legal counsel may be interested to know that Vietnam is growing rapidly, with its GDP expected to increase six to eight percent over the next few years.

The War in Vietnam: Repercussions for FDI

Interest may also give rise to mixed feelings. Perhaps no country in Southeast Asia has a more emotionally charged relationship with the United States than Vietnam. The tragedy of the Vietnam War left an indelible mark on a generation of Americans. Even if financial and economic indicators suggest healthy investment conditions, banks and their attorneys may hesitate for psychological reasons.

However, it does not have to be this way. FDI in Vietnam has been impressive; in fact, Vietnam has been one of the countries receiving the most FDI this decade. Indeed, Vietnam’s FDI has surpassed that of developed countries such as South Africa, Italy, and the Netherlands, and it is close behind Hungary, Israel, and the United Arab Emirates. Foreign Direct Investment, Net Inflows (BoP, current US$), World Bank, http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD?order=wbapi_data_value_2012+wbapi_data_value+wbapi_data_value-last&sort=asc. Recent estimates have the 2013 investment in finance, banking, and insurance at around $1.3 billion. Dr. Tran Dinh Lam, Foreign Direct Investment in Vietnam, available at http://www.bot.or.th/Thai/EconomicConditions/Thai/Northeast/seminarNE/DocLib_seminar56/Tran%20Dinh%20Lam—Foreign%20Direct%20Investment%20in%20Vietnam.pdf. Similarly, in 2013, the United States had a little over $5 billion in exports to Vietnam, with almost $24.5 billion in imports from Vietnam, according to U.S. Census Bureau statistics.

This is not to say banks wishing to engage in FDI in Vietnam can enter as cockeyed optimists. The Vietcong and the North Vietnamese Army may be vestiges of the past, but trouble still remains in the form of both state and nonstate actors exploiting Vietnam’s weak anti–money laundering and counter-terrorism financing laws (AML/CTF) to finance terrorism, drug trafficking, and similar activities. The most salient example is the Liberty Reserve digital currency service, a Costa Rican–based company that served as the “bank of choice for the criminal underworld,” which had Vietnam as one of its largest hubs for money transmission and exchange. See Sealed Indictment at 9, U.S. v. Liberty Reserve, S.A., 13 Crim. 368 (S.D.N.Y. 2013). As with any enterprise, one should therefore mix boldness with prudence.

Vietnam’s Current Framework: Starting Point for FDI Legal Counsel

With a brief overview of Vietnam’s current framework and analysis of problem areas, FDI legal counsel can have a starting point to use when considering opportunities in Vietnam. This article hopes to be that brief overview. It will briefly explain FDI, how it operates in the banking and finance sector, and its relationship with money laundering. It will discuss FDI in Vietnam’s banking and finance sector, and explain the development of Vietnam’s AML/CTF framework. Finally, it will point out weak areas that continue to exist and two basic strategies that U.S. banks and their legal counsel may use in this market. For the sake of brevity and simplicity, this article assumes that banks are in compliance with all U.S. laws, rules, and regulations regarding AML/CTF.

FDI Positives and Negatives

FDI is a “cross-border investment by a resident entity in one economy with the objective of obtaining a lasting interest in an enterprise resident in another economy.” Foreign Direct Investment, OECD, http://www.oecd-ilibrary.org/sites/factbook-2013-en/04/02/01/index.html?itemId=/content/chapter/factbook-2013-34-en. Through the 1990s and the first half of the 2000s, FDI in the financial sector increased rapidly through foreign acquisitions and the integration of emerging market economies into the expanding global market. This led to many positives, including increased efficiency, technology transfers, increased risk management, more competitive pricing, and greater financial stability.

However, FDI can also be a ruse for money laundering—“the processing of criminal proceeds to disguise their criminal origin.” What Is Money Laundering?, FATF, http://www.fatf-gafi.org/pages/faq/moneylaundering. While this definition may leave the reader with the impression that only criminals do money laundering, state actors such as North Korea and Iran are no strangers to money laundering. North Korea and Iran Explore Broadening Relations, Nuclear Threat Initiative (Feb. 24, 2014), http://www.nti.org/gsn/article/pyongyang-tehran-discuss-deepening-relations. Money laundering is not necessarily just the hiding of illegal proceeds; because money is fungible, once the money has been successfully laundered it can be used to finance a variety of objectives, including terrorism, arms sales, and so on. Consequently, stopping money laundering is a primary objective for governments, and the banking industry has long played a key role in combating money laundering.

Vietnam’s Investment Law frames FDI in Vietnam’s banking and finance sector. Bureau of Econ. & Bus. Affairs, U.S. Dep’t of State, 2013 Investment Climate Statement—Vietnam (Feb. 2013), http://www.state.gov/e/eb/rls/othr/ics/2013/204760.htm. Foreign banks may establish a 100 percent foreign-owned bank in Vietnam; however, the ability to own a local commercial bank is capped at 20 percent. For example, SunTrust Banks, N.A., which is a bank here in Georgia (where the author resides), would have the ability to open up a SunTrust branch in Vietnam, were it so inclined. However, it would only be able to have a 20 percent acquisition in VietinBank, a state-owned bank of which the government controls 80 percent. VietinBank, Annual Report 2012, at 55 (2012).

Vietnam’s newest AML/CTF laws are in response to the Financial Action Task Force (FATF)—the intergovernmental body that develops and promotes AML/CTF policies—having blacklisted Vietnam in June 2013 for lax money controls. Although it is true that since 2010, Vietnam had made public commitments to improving its AML/CTF regime, and as of late 2012 had made a bit of headway, the FATF nevertheless found the framework lacking. Christine Duhaime, Vietnam Implements Anti-Money Laundering Decree, Duhaime’s Anti-Money Laundering Law in Canada (Oct. 14, 2013), http://www.antimoneylaunderinglaw.com/2013/10/vietnam-implements-tougher-anti-money-laundering-decree.html. It cited Vietnam’s deficiencies in “certain strategic AML/CTF” areas and recommended it address them by “(1) establishing and implementing adequate procedures to identify and freeze terrorist assets; (2) making legal persons subject to criminal liability in line with international standards; and (3) strengthening international co-operation.” FATF Public Statement—21 June 2013, FATF (June 21, 2013), http://www.fatf-gafi.org/countries/u-z/vietnam/documents/public-statement-june-2013.html#vietnam. In fairness, in 2012 the State Bank of Vietnam detected only 165 suspicious transactions in a country of around 88 million people, and the culture of Vietnam is such that many citizens do not use the banking system. Duhaime, supra. Thus, it is understandable that the Vietnamese would not be overly interested in introducing AML/CTF systems that, from their view, are unnecessary.

Introducing AML/CTF Systems in Vietnam

Be that as it may, the Vietnamese government apparently recognized that its continuing participation in the global economy would necessitate introducing measures that, while perhaps unnecessary to the normal Vietnamese citizen, were necessary both to encourage and to monitor in-bound FDI. So Vietnam addressed issues (1) and (3) and focused on “criminalizing money laundering and terrorist financing . . . improving the overall supervisory framework; [and] improving and broadening customer due diligence measures and reporting requirements.” FATF Public Statement—October 18, 2013, FATF (Oct. 18, 2013).

Fair enough. But what, specifically, does this look like? The new AML laws require that banks “ascertain the identity of businesses and persons undertaking transactions equal to or greater than VND [Vietnamese dong] 300 million per day [$14,212 in U.S. currency as of this writing] if the person or entity has not undertaken transactions in six months,” and they “will have to undertake AML risk assessments in respect of their business and implement compliance plans to mitigate those risks.” Duhaime, supra. If this sounds familiar, it is because this is a watered-down version of “know your customer” (KYC) guidelines operative in the United States for years.

Problems still exist, however. The U.S. Department of State believes that Vietnam is still noncompliant in that it has yet to develop a system for identifying and forfeiting assets; arrangements for asset sharing; an ability to freeze assets without delay; and a way to criminalize “tipping off,” i.e., notifying a criminal, terrorist, or other individual whose bank account reflects unusual activity that that activity has been noted by the bank. Vietnam—Anti-Money Laundering, KnowYourCountry, http://www.knowyourcountry.com/ vietnam2.html. These problems suggest that Vietnam lacks a consistent, reliable, and immediate way to correctly identify assets that may be illicit and that there is no incentive for other countries to participate in an investigation because they lack opportunities to share in seized assets. Furthermore, bank employees, co-conspirators, or general members of the public do not face potential criminal liability if they inform a criminal, terrorist, or state actor that the bank has detected suspicious activity in a transaction. Such a significant gap in AML/CTF legislation makes otherwise compliant banks unintentionally open to becoming major money laundering and terrorist financing centers.

Two Ways to Address Vietnamese FATF Compliance

What to do? For American banks (and for the purposes of a short article), there are two main approaches for addressing burgeoning Vietnamese compliance with FATF recommendations. The first is to simply adopt the current Vietnamese structure as described above, which has only recently become compliant with many FATF recommendations. While from an American perspective this may seem risky, the benefit of this strategy is that, even though the compliance standards are low by American standards, implementation would be faster and presumably less expensive than would creation of a detailed and possibly (to Vietnamese counterparts) ponderous system of customer due diligence, record keeping, and suspicious transaction reporting.

The second option for American banks is to implement for Vietnamese operations existing American standards such as those found in the PATRIOT Act and the U.S. Department of Treasury Anti-Money Laundering Rules, the rationale being that this is the structure with which American banks are most familiar. This may prove to be a cultural misstep and be more costly in time and money. However, it will ensure that transactions occurring in Vietnam are as secure as transactions occurring in the United States. The added benefit to this legal structure is that the more sophisticated investor in Vietnam will be attracted to an institution that offers more stability and security than a more conventional Vietnamese bank. American banks can also avoid the potential public relations embarrassment of being known as being vulnerable to money-laundering and terrorist financing in an area that already has a history of such activities.

Recommendations

This author believes that banks and legal counsel should pursue the second option. It is almost certain that, within a decade or two, Vietnam’s AML/CTF laws will be as stringent as those of any country in Southeast Asia, if not Asia as a whole. Vietnam continues to grow and is making a committed effort to improve its AML/CTF framework, and the international community has pressured Vietnam to make even more updates to bring itself in line with what is presumably the average standard around the world. Vietnam’s increase in FDI will put more pressure on Vietnam to comply (lest it lose risk-averse investors). American banks looking to open up shop in Vietnam, therefore, would be well advised to maintain their legal structure, changing it only where necessary (for instance, when Vietnam law expressly prohibits an American procedure).

As the well-worn phrase goes, “those who fail to learn from history are doomed to repeat it.” While Vietnam has become an attractive place for FDI and may be an under-tapped market for banking and finance, those who enter this country must be clear-eyed and clear-headed about the legal issues and potential legal strategies. Vietnam continues to become more compliant with FATF recommendations, and banks seeking to journey to Vietnam would be well advised to put in controls similar to controls in the United States. Doing so would have the twofold advantage of anticipating new laws and becoming a less risky—and thus a more attractive—place for legitimate in-bound FDI funds.

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