2004-05-10 14:41:00
Embassy Bogota
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C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 004709 




E.O. 12958: DECL: 04/28/2014

Classified By: William B. Wood for reasons 1.5 (b and d)

C O N F I D E N T I A L SECTION 01 OF 03 BOGOTA 004709




E.O. 12958: DECL: 04/28/2014

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.


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

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

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

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.