March 31, 2006

Editor-in-Chief: Laurence P. Wiener, Esq.

Does Argentina Have a Jingoist Central Bank?

This month’s issue of Argentine Business Law Watch looks at recent Central Bank rules affecting foreign financial institutions. Regulation (and Taxation) Through Representation? examines a significant shift in Central Bank policy toward the authorization of foreign financial institution representatives. Is the new administrative criteria a thinly-veiled means to discourage foreign financial entities from entering the Argentine market? Read on for our take. As a bonus, Liquid Paper briefly updates you on this month’s Central Bank release changing the criteria for evaluating capital resources used to form or acquire a local financial institution.

Regulation (and Taxation) Through Representation?

Argentine banking laws specifically allow for and regulate representatives of unlicensed foreign financial institutions. As an unlicensed entity, the foreign institution may not lawfully accept deposits, lend money or operate in the foreign exchange market. A representative of an unlicensed foreign institution may, however, “advise, study and assist” in “financing, guarantees, technical assistance and other business” linking local and foreign activity. Nonetheless, the representative may not act as a “financial intermediary” or conduct other regulated banking or foreign exchange services on behalf of its foreign principal. The limited nature of the representative’s activity allows the foreign institution to procure an institutional presence without accepting the costs and risks of operating in Argentina.

To conduct its narrow scope of business in Argentina, the representative must obtain authorization from the Central Bank consistent with Communication “A” 2241. According to Section IV of this rule

authorization shall be conditioned on an analysis and review by the Superintendency of Financial and Foreign Exchange Institutions of the past activity of the foreign entity and its representative.

Thus, Communication “A” 2241 reserves significant discretionary power to the Central Bank (acting through the Superintendency) in determining whether to authorize the representative. The Central Bank has recently supplemented—by administrative interpretation—Communication “A” 2241 to add to the hurdles faced by a foreign financial institution aspiring to establish a toehold in Argentina, now requiring proof of that institution’s registration with the appropriate Argentine corporate regulatory authority.

This additional requirement thus incorporates into the Central Bank authorization process compliance with Section 118 of the Argentine Companies Law, which requires registration of all legal persons (corporations and other entities) having a business presence in Argentina. According to this statute, business entities carrying systematic and continuous activity in Argentina must (i) substantiate their good standing under the laws of their home country, (ii) declare an Argentine domicile and (iii) specify the basis for the decision to establish a representative and the designation of that representative. This, of course, means that the foreign financial institution must now undertake a separate approval process with the appropriate corporate regulatory agency.

The Central Bank’s newly-adopted criteria would appear nonsensical. Section 118 registration advances the government’s interest in regulating a foreign entity conducting business. By law, a representative of an unlicensed foreign financial institution is barred from carrying out the principal’s business activity.

Instead, the Central Bank’s policy shift suggests a clever means to discourage a foreign financial institution from entering the Argentine market, while avoiding the consequences of any formal prohibition. As to those intrepid foreign institutions choosing to comply with the new requirements, they must now accept the doubling of bureaucracy (registrations with two unrelated agencies), as well as exposure to the risk that the Argentine tax authority will consider them as having created permanent establishments subject to Argentine tax.

Liquid Paper: New Rules for Approval of Licensed Financial Institutions

On March 15th the Central Bank released Communication “A” 4510 to add requirements and interpretative rules concerning authorizations of the start-up, purchase or merger of regulated financial institutions and foreign exchange firms. The release authorizes the Central Bank examiners to analyze a promoter’s or purchaser’s solvency to determine the source of funds to sustain the Argentine financial institution. The release further allows the Central Bank to disqualify persons based on a presumed lack of solvency when the facts and circumstances reasonably lead to the conclusion that capital resources have been furnished by third parties or originated by other transactions for the purpose of simulating solvency. Communication “A” 4510 mandates the application of similar criteria for approvals of shareholder transactions, otherwise required to be disclosed and authorized by the Central Bank, involving stock and other equity rights in regulated financial institutions.

The release also enhances disclosure requirements with respect to the promoters’ and future shareholders’ assets. Under the new rules, these persons must specify assets and distinguish among credits, deposits, securities, business net worth, real property and other assets located in Argentina or abroad.

The disclosures required by Communication “A” 4510 must all be accompanied by a certificate furnished by an independent public accountant and authenticated by the Argentine Professional Board of Economic Sciences.

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Many thanks to Javier Podrez Yaniz, a partner specializing in banking matters, for contributing this month’s article. For more information on financial institutions and their regulation, you can him at javier_podrezyaniz@negri.com.ar.

And, as always, if you need information on matters affecting foreign investment in general, please contact Laurence P. Wiener by telephone at (54-11) 5556-8000, via facsimile at (54-11) 4328-5628 or via email at laurence_wiener@negri.com.ar.

This article is provided as a service to clients and friends of Negri & Teijeiro Abogados.

It is not intended to impart legal advice on any matter.

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