martin redrado : financial stability and the importance of aml / cft supervision and regulation speech by mr martin redrado, governor of the central bank of argentina, at the fiba annual aml compliance conference, miami, 13 february 2007. * * * all of us in this room share a vision about the need for regional integration. efforts include forums like this one for discussion about opportunities and shared challenges in different spheres of action at the regional level. in my view, these efforts represent an effective mean of adopting international standards and adjusting them to the realities of the continent. regional agreements are extremely valuable as a way of consolidating the implementation of a uniform set of best practices. for those of us who, on top of being central bankers, are also bank supervisors, we must increase our efforts to incorporate the advantages of international standards, with the fundamental addition of a regional perspective. this means a thorough knowledge of the reality of each region to take into account the factors that affect its dynamic. regional realities evolve, and regional demands do not necessarily match the original design and development of international standards. let me give you a practical example : as an international standard, consolidated supervision has existed for over thirty years. the situation with quantitative supervision is pretty much straightforward : standards are uniformly and widely applied. however, there are gray areas on qualitative supervision ( that is the impact on risks of related non - financial activities ), where standards are just being developed and, therefore, the implementation as a tool for supervision is under debate. another concrete case is the implementation of the basel ii accord on capital requirements, particularly on how to compute capital requirements for operational risk ( that is the risk of loss resulting from inadequate processes and systems, or from external events ). we have dedicated sizable resources to managing market and credit risks, and those were wellknown, narrowly - defined. operational risk was anything but well defined since there is a lot of disagreement about the specific contingencies that should be considered under this umbrella. in the basic approach banks must hold capital for operational risks equal to the overall average over the previous three years of a fixed percentage of annual gross income. now, in the standarized approach, banks ’ activities are divided into several business lines : corporate finance, sales & trading, retail banking, commercial banking. operational risks should be considered for these particular lines of business. in latin america, stress tests determine relatively high regulatory capital charges for operational risk, based on the alternatives foresee

##n in the new capital accord. in my opinion, the operational risk measure, as it is proposed, does not necessarily reflect our risk of operations. as a consequence, we are working on developing a better measure to reflect operational risk appropriately in latin america. this, again, in no way implies concerns about the soundness of the international standard proposed by the basel committee. on the other hand, it shows a clear commitment to its application : to identify, understand, measure and mitigate risks, at the same time as it also evidences a thorough awareness of the particular situation of our financial systems. these examples provide a framework for introducing the key issue in our discussion today, which is our vision on latin america ’ s agenda for fighting against aml / cft. we support all initiatives intended to combat money laundering and terrorist financing. nevertheless, any counter - terrorist effort, whether through regulation, control or the gathering of information, that is applied without understanding the idiosyncrasy of the region would be counterproductive. we cannot ignore that the us patriot act is a legitimate and valuable instrument to fight against these global crimes that affect our values and have become a threat to sustainable economic growth. however, by not specifying what appropriate performance with “ due diligence ” means, it has increased the cost of opening and maintaining correspondent accounts, and this has affected heavily the financial systems of the region and the smaller institutions in particular. this is reflected in the number of correspondent accounts closed in recent years. in the case of argentina, for instance, over 200 correspondent accounts were closed between march 31, 2001 and september 30, 2005. in this period, almost fifty financial institutions, both public and private, experienced closure of correspondent accounts. not one case showed a situation of aml or cft. something along the process is flawed. within the context of our analysis of the situation in the region, we have surveyed the impact of regulations on correspondent business in latin america with similar results. this outcome has nothing to do with the objectives pursued by standards that combat global crimes. on the contrary, should this trend persist, it will result in growing informality within financial circuits, greater political reluctance to cooperate, and a diversion of financial channels towards other more realistic markets. the challenge is always the same : to ensure that those actions designed to combat and prevent crimes, in addition to being well designed, are also effective. one necessary condition for the success of a policy is relying on an evaluation that correctly