United States: Lending In Latin America: Risks And Considerations (Part 1 Of 2)

Last Updated: March 31 2014
Article by Lee Ann Dillon and Constantin Souris

Most Read Contributor in United States, October 2017

Lending by lenders located in the United States to high-net-worth individuals located in Latin American jurisdictions has grown tremendously in the recent years and this trend is expected to continue. Although Latin American jurisdictions present unique opportunities for business expansion for US lenders, they also present risks and issues different from those in the United States, which US lenders need to be aware of before conducting business in these markets. The purpose of this two part series is to introduce the fundamental considerations and risks associated with lending in Latin American jurisdictions, taking into account the significant differences in legal regime not only between the United States and these jurisdictions but also between Latin American jurisdictions.  Our observations are based on our interactions with Latin American counsel on cross-border transactions and surveys. However, we are not members of the bar in any such jurisdictions, and the considerations outlined herein should not be taken as legal advice.

1. Licensing requirement for conducting business in Latin American jurisdictions

US lenders conducting financial intermediation business and offering or marketing financial products to investors located in a Latin American jurisdiction may require licensing with a governmental body or entity supervising such activity in such jurisdiction. Special consideration needs to be given as to the extent and type of activity that may trigger such licensing requirement. Local legislation may have prescribed a definition for the "conduct of business" that would trigger such a licensing requirement and therefore the advice of local counsel located in the applicable jurisdiction is extremely important. Any violation of such a licensing requirement may carry both criminal and monetary penalties for a US lender.

In this respect, special consideration needs to be given to the location from which the business of the US lender will be conducted, i.e. whether the US lender will be conducting business in the Latin American jurisdiction solely from the United States or whether it will have representatives conducting business in the foreign jurisdiction. Although exemptions may apply in respect of a licensing requirement if the business will be carried out solely from the United States, stringent requirements may still apply in order to legally transact business from abroad. Primary points of focus for such licensing exemptions relate to the extent of, and the manner in which, business is conducted in the Latin American jurisdiction, and can include:

  • The extent of the US lender's operations in the Latin American jurisdiction: Local laws in the Latin American jurisdiction may employ various factors that are based on the US lender's operations in the jurisdiction that will trigger a licensing requirement, such as whether the US lender maintains an office in the jurisdiction, has a local address and/or phone number, whether a US lender's representatives visit the country for a certain period of time and the type of business such representatives carry on during their visits in the jurisdiction.
  • The types of products offered by the US lender: The types of products a US lender makes available to an individual located in the Latin American jurisdiction not only may affect the extent of its operations in such jurisdiction but it may also trigger additional registration requirements such as if a particular product qualifies as a security under the securities laws of such jurisdiction.
  • The extent of client contact: Local laws in the Latin American jurisdiction may differentiate between business conducted with an existing client and a new client. Similarly, local laws may also draw a distinction as to whether the US lender initiated the contact with the client in the Latin American jurisdiction.
  • The form of client communications: The form that any communications between the client and the US lender take may also have an impact under the laws of the Latin American jurisdiction, i.e. whether the US lender is communicating with the client remotely by email, phone or fax or in-person in such Latin American jurisdiction. Additional limitations may also be applicable in respect of communications via the internet; local laws may deem a US lender to be conducting business in the foreign jurisdiction and to be deemed as targeting residents in such jurisdiction and any online communications may be strictly circumscribed.
  • Documentation used when conducting business: Sending account information and offering promotional materials may also trigger a licensing requirement under the laws of the Latin American jurisdiction.
  • The extent to which the business "touches" the Latin American jurisdiction: Relevant considerations would be whether the transaction documentation is governed by the laws of the United States (including any State thereof), where the collateral provided as security for the transaction is located, where the transaction documentation is executed, and whether executed transaction documents (and/or originals of such documentation) is sent to the client in the Latin American jurisdiction.

2. Loan Documentation used for Latin American transactions

As previously stressed, local laws in the Latin American jurisdiction in which the borrower is located may be significantly different from the laws in the United States that US lenders are familiar with and are used to lending under. Therefore, US lenders need to be aware that form loan documentation used for domestic borrowers will in all likelihood not be appropriate for a borrower in a Latin American jurisdiction. Local counsel in such jurisdiction will need to review the documentation and tailor it for the particular jurisdiction (particularly in respect of the representations and covenants of the obligors). Similarly, once local counsel has identified the particular risks relevant for their jurisdiction, US lenders should implement an internal policy in respect of what legal opinions should be provided in respect of enforceability, legal capacity of the obligors, recognition of foreign judgments and choice of law. Certain Latin American jurisdictions require that the transaction documentation be translated in the official language of such jurisdiction as a requirement to their validity and enforceability and the admissibility of such documents in evidence before the courts of such jurisdiction.

3. Transaction specific considerations for Latin American transactions

Local laws in the Latin American jurisdiction in which the borrower is located may impose additional restrictions and limitations in respect of the mechanics of the loan transaction particularly as they relate to funding, repayment of the loan and use of proceeds. Relevant considerations include: (i) whether funding of the loan is made to a local account or a foreign account; (ii) accepting deposits and payments from a citizen/resident of a Latin American country form a local account or a foreign account may have implications both for the borrower and the US lender from a tax standpoint and other legal implications such as the source of the proceeds for purposes of applicable anti-money laundering laws; (iii) the currency in which funding and repayment will take place considering certain Latin American jurisdictions have foreign currency restrictions in place as well as related reporting requirement and/or periodic limitations on the use of foreign currency; and (iv) certain restrictions may apply depending on the proposed use of the proceeds.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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