On the day before the end of 2024, Law 1232, Law on the Administration of the Monetary and Financial System, came into effect in Nicaragua. It technically incorporates almost the same attributes that the SIBOIF and the Central Bank (BCN) had under the previous two laws that were merged. However, the removal of some provisions introduced a high degree of discretion into the new law, and the inclusion of others generates fear, especially regarding the risk of confiscation. Nevertheless, an analysis conducted by La Prensa based on extensive consultations suggests that the banking sector will attempt to negotiate the degree of application of the legislation, which at least for now does not place banks in imminent danger.
Amid the silence of financial institutions, which are directly affected, Law 1232 has generated various interpretations, some of which even considered that banks had been intervened by the State. However, this law has more political than economic objectives. The consultations concluded that it is part of a package of legal provisions, led by the new Constitution, that Daniel Ortega is preparing to have something to offer if the unpredictable administration of Donald Trump increases pressure and forces him to negotiate.
Although it is possible that the role of banks in ensuring the economy continues to function well will allow them to negotiate that the application of this law does not cause as much harm as is perceived in the text, it contains at least five issues that are “very dangerous.”
The Greatest Risk for Banks
“The most serious issue, which no one has discussed is that every Nicaraguan-owned bank, belonging to a financial group whose parent company is located in another country, is required to move its parent company to Nicaragua. This includes Lafise and Banpro, for example” said one of the consulted experts.
Additionally, experts explained that the regime cannot argue that this requirement complies with the Basel Framework, which requires that the supervision of origin must be carried out by the country where the holding company, or the largest bank in the group, is located, notwithstanding the supervision that each country is entailed over the local subsidiary of the group. The parent companies of Lafise and Promerica Groups are in Panama and operate under the supervision of Superintendence of Banks of Panama (SBP), which also conducts regional supervision on each of the group’s subsidiaries in other countries.
This implies, among other things, that the banks these groups have in Nicaragua receive two annual in-situ supervisions: one local, by the Superintendence of Banks of Nicaragua (SIBOIF), and another regional, by the SBP.
Banks Were Already Confiscated Once and Know How to Manage It
For various reasons, including the confiscation of banks during Ortega’s first government in the 1980s, the financial groups operating in Nicaragua have their holdings or parent companies in Panama, thus avoiding the risk of total confiscation. Bringing them to Nicaragua would mean that, in the event of confiscation, they would lose all their regional operations under the holding company.
Despite this danger, there may be room for maneuver. Instead of bringing the group’s holding company to Nicaragua, as stipulated in Law 1232, they could “negotiate”, as they did with the law that required them to reopen accounts for sanctioned individuals, by bringing the holding company of the bank operating in Nicaraguan.
“Remember that Nicaraguan banks were already confiscated once, and they have established ownership structures to hedge against that risk, which the Law 1232 is now threatening and putting at risk. So, the solution could be to bring a mirror holding entity of the local bank’s shares and not the parent company,” explained another consulted expert.
With Police Support, They Will Demand Information
A second issue of concern is the obligation to provide information—a requirement that already existed but now entails risks. Law 732, the Organic Law of the Central Bank, stated that “… banks, financial institutions, and any natural or legal person residing or domiciled in Nicaraguan territory, whether national or foreign, are required to provide the Central Bank with statistical information that it requests in the exercise of the powers conferred upon it by law.” Previously, Law 361 of the SIBOIF stipulated among its powers: “to require banks and other institutions… the reports and information needed to fulfill its functions.”
Clearly, the new Law 1232 now states that “any natural or legal person residing in the country is required to provide the requested economic, financial, statistical, and regulatory information.” This means that the part establishing that the information must be related to the entity’s powers was removed.
According to consulted experts, this is a very significant and complex change because they can now request any type of information to anybody, and failing to provide it risks imprisonment since the law authorizes police intervention.
Previously, if a supervised institution considered that the requested information did not fall within SIBOIF’s powers—sometimes they requested information only relevant to Panama’s Superintendence—it was possible to exhaust administrative avenues and escalate to judicial review. Now, there is no possibility of denying what is requested.
The Sale of Bank Shares
Another issue creating distrust is Article 140 of the new Law 1232, which requires any supervised institution to obtain SIBOIF authorization to validate capital contributions or share transfers.
Before the approval of this law, permission was only required when the sale was material (e.g., more than 51% of the shares). This practice is applied internationally because the regulator must verify the suitability of the new shareholders acquiring the institution.
However, when shareholders sold smaller percentages among themselves, permission was unnecessary. These transactions are not material and do not affect the banks’ operation as they occur among shareholders.
Consulted experts believe this provision is “a form of monitoring how shares are changing hands, which is also very serious.” Additionally, it affects transaction privacy and significantly limits the free market for these shares.
Laws Retain Banking Secrecy, But…
Article 113 of the new Law 1232, derived from repealing Law 732 (Organic Law of the Central Bank of Nicaragua) and Law 316 (Law of the Superintendence of Banks), retains the provisions on banking secrecy. Additionally, Law 561 (General Law of Banks) remains in force, continuing to protect banking secrecy.
However, experts believe that the obligation under Article 24 of Law 1232, requiring any natural or legal person in the country to provide information requested by SIBOIF, puts banking secrecy at risk.
“I think that despite banking secrecy remaining exactly the same as before in the new law, this change in information requirements will affect the issue of information confidentiality,” said one expert.
Dismissal of Bank Personnel
A fifth issue causing concern is that Article 139 of the new law gives SIBOIF the authority to dismiss “any member of the board of directors, managers, executives, and employees” of supervised institutions.
Law 316, which was repealed, only contemplated SIBOIF’s authority to agree on the dismissal of any board member of supervised institutions. Experts believe this expansion is serious as it extends the superintendent’s authority to dismiss any staff member.
Furthermore, under the new law, SIBOIF retains authority to invalidate and nullify the appointments of directors, the general manager, or the principal executive and internal auditor, as established in Law 316.
Executives’ Dismissal
“Previously, the superintendent could not dismiss the general manager or internal auditor, much less a director. The superintendent could say the manager violated a rule and impose a penalty on the bank, possibly a fine. Additionally, if it was a civil or criminal matter, it would go to the courts,” explained one consulted expert.
They added that the most serious aspect is not that they can dismiss any official but that they can claim any reason to do so. “The superintendent can dismiss you not just for violating a norm but for any reason, even personal dislike… and that is extremely serious,” said another consulted expert.
Banks as Bargaining Chips?
It is not ruled out that Law 1232, the new Constitution, and other laws likely to be approved soon are part of a package Ortega is preparing for two objectives. First, “to increase his bargaining chips” to have something to offer if Trump increases pressure and forces negotiations. Ortega knows Trump is unpredictable, so he is preparing for various scenarios—Trump may do nothing or act decisively.
The second reason could be that Ortega is unwilling to negotiate and anticipates more effective sanctions. “People say sanctions don’t work, but they don’t work because they don’t want them to… If the U.S. wanted sanctions to work, they could sanction the Central Bank, add it to OFAC, and freeze their international reserves, and sanction government securities. With these and a few other sanctions they could easily force Ortega to negotiate,” explained one expert.
If pressure escalates and Ortega chooses not to negotiate, these laws prepare him to confiscate businesses, including banks, which he will need to do to keep the economy running and maintain his hold on power. “I think that’s partly what’s happening with the financial sector, with banks—this demand to bring their holding companies to Nicaragua seems like preparation to say, ‘I will stay at any cost,’” warned one consulted expert.