S E C R E T SECTION 01 OF 03 GUATEMALA 002500

SIPDIS

TREASURY FOR CHRIS KUSHLIS AND BILL BLOCK; PANAMA FOR BICE-
ELBERT CRUZ; DHS FOR MIAMI FIELD OFFICE - NEAL RAU

E.O. 12958: DECL: 09/10/2013
TAGS: KCOR EFIN PGOV MOPS PINR GT PM
SUBJECT: MILITARY PENSION FUND: MILITARY FOCUS ON
RECOVERING FUNDS, AVOIDING OUTSIDE INVESTIGATION

REFS: A. GUATEMALA 02255 B. GUATEMALA 01465


C. GUATEMALA 01687 D. GUATEMALA 01909

E. USDAO IIR # 6 838 0042 02 DTG 042124Z

F. GUATEMALA 02331

Classified By: Econ Thomas A. Palaia for reason 1.5(d).


1. (S) Summary: EmbOffs met with General Alfredo Gonzalez
to discuss recent developments in the theft and
mismanagement of the Military Pension Fund. Gonzalez, who
has been involved in the military's internal investigation
of the matter, alleged payoffs were made to current and
former top military officials involved with IPM's governing
board. The fund may have lost up to $23 million in this
particular scandal and its financial health remains
uncertain. No charges have been brought against any high-
ranking military official involved despite alleged evidence
implicating many. The scandal may have been a factor in
the forced resignation of Military Chief of Staff Rios
Sosa, son of former de facto president and current
presidential candidate Rios Montt, though Gonzalez claims
Rios Sosa was not aware of the scandal until after the
funds had been lost. End Summary.

Background
--------------


2. (SBU) The Military Pension Fund (IPM) is a quasi-
governmental organization responsible for managing the
contribution-based pension plans of some 12,000 current and
former military personnel. IPM, along with its subsidiary
INVERMA, reportedly transferred approximately USD 37
million to the Miami-based Pension Fund of America (PFA).
The money was transferred in several smaller transactions
to PFA from August through November 2001 with the stated
intention of investment in stocks and bonds traded in New
York. Reportedly, only USD 14 million has been recovered.


3. (S) EconOff, DATT and PolOff met with General Alfredo
Gonzalez to discuss IPM, including the recent scandal and
its possible role in the resignation of former m

ilitary
Chief of Staff, Rios Sosa (Refs A and F). Gonzalez was on
the governing board of the IPM until about three weeks ago
and has been involved in investigating the scandal and
pursuing a lawsuit in Florida on behalf of IPM and the MOD.
He was not a board member at the time of the theft but,
according to DAO sources, may have his own corrupt
interests unrelated to IPM.

Yes There was Corruption
--------------


4. (S) In this conversation, Gonzalez immediately backed
off claims he had made that IPM was simply the victim of
bad financial decisions and a group of swindlers in Miami.
He admitted that the previous governing board of IPM
received kickbacks from PFA for agreeing to transfer the
funds through PFA accounts. He claimed that various
members (unidentified) of that governing board received
checks for USD 50,000. Former MOD Arevalo Lacs confronted
board members with photocopies of these checks well before
the scandal broke and asked for the return of the money.
Gonzalez said that not only was the money never returned,
IPM continued to use PFA to manage their investments.
Note: No crusader for integrity, Arevalo Lacs became a
millionaire during his stint as MOD.


5. (S) Gonzalez said board members considered the
kickbacks commissions and insisted that they did not know
the fund would be robbed. He could not explain, however
why anyone believed that PFA would be willing to pay such
high "commissions" for the privilege of managing the fund.
He also could not answer how IPM justified the use of what
they now allege to be an unlicensed middleman (IPM alleges
in a suit filed in Florida that PFA is not licensed to
manage investments or give investment advice) to open
accounts and deposit funds whose ultimate destinations were
supposedly major investment firms in New York. When asked
why the money wasn't invested directly with a major
investment house, he conceded board members were simply
looking out for their "commissions" and reluctantly
admitted that some may have suspected a larger theft was
taking place. Gonzalez continued to deny any connection
between the IPM scandal and the theft of at least USD 45
million from the Guatemalan Social Security Fund (IGSS)
(Refs B and C). Gonzalez insisted the two groups' dealings
with PFA were completely unrelated.


6. (S) Gonzalez speculated that a lower-level technocrat
might have masterminded the theft. The military wanted in-
house, Guatemalan actuarial capabilities to save on
expensive consulting fees paid to Spanish accounting firms
who advised them on IPM's insurance structure. Lt. Col.
Archila Grazales (phonetic), at the time a Captain, was
sent to Mexico for five years of training in actuarial
science. He returned a Major and was asked to assist IPM
in managing its finances. Gonzalez claims it was Grazales
who first brought PFA to the attention of the board and got
the board interested in U.S. investment opportunities.
Gracales reportedly arranged for PFA to make a presentation
to the board where they misrepresented their credentials
and were successful in convincing the board to invest
through them.


7. (S) The scandal did not end after IPM's board changed
and a new board began its investigation and sought legal
action in Florida in late 2001. Gonzalez claims that IPM
opened an account in Miami and deposited an additional USD
1 million, intended to cover anticipated legal costs
involved in recovering the USD 37 million invested.
According to Gonzalez, the legal fund was mistakenly
invested in insurance and was not available when they first
attempted to initiate legal proceedings. This delay gave
PFA ample time to move the money beyond the reach of
Florida authorities.


8. (S) EmbOffs asked Gonzalez what legal actions were
being taken in Guatemala. Gonzalez insisted that all
internal investigation efforts were focused on recovering
the lost investments and that they would worry about
placing blame after the money was found. The Public
Ministry was not being brought in because the MOD wanted to
keep this an internal investigation.

Rios Sosa's Involvement
--------------


9. (S) EmbOffs asked about former Chief of Staff Rios
Sosa's involvement in IPM and the role it might have played
in his recently forced resignation. Rios Sosa was a member
of the governing board for a short period in late 2001.
Gonzalez claimed that Rios Sosa's recent resignation had
more to do with avoiding a perceived conflict of interest
with his father, Rios Montt's Presidential campaign. He
insisted that Rios Sosa's involvement in IPM was very
limited and occurred after most of the money was already
transferred to PFA. He alleged that Rios Sosa saw the
financial state of IPM and, recognizing the potential for
scandal, immediately resigned from his position on the
governing board. Gonzalez went on to assert that, without
the target of Rios Sosa, the scandal of IPM would disappear
from the headlines.

IPM's Financial Health - or Lack Thereof
--------------


10. (S) Gonzalez assured EmbOffs that IPM is well-funded
and in no danger of bankruptcy. He asserted that IPM is
taking in substantially more each month than it is paying
out in benefits. The fund owns significant income
generating investments in properties and companies that
supplement the payroll contributions of military personnel.
He explained that the fund owns approximately 60% of a
variety of companies (the other 40% being owned by high-
level current and former military officials).
Additionally, IPM has periodically been the recipient of
generous transfers from the GOG. However, when pressed on
IPM's continued solvency, he admitted that without
substantial reform the Fund would likely face serious
financial problems within 10 years, as the number of
retirees drawing from the fund increases and the number
contributing decreases due to military reductions.


11. (S) Gonzalez did not address the history of corruption
within the IPM and related institutions, such as the
Military Bank, which cast doubt on the fund's financial
health (Ref E). The fund has been known to make loans on
favorable terms to board members and high-ranking military
and MOD officials with no intention of ever collecting.
The fund has also been involved in sketchy real estate
deals where property of little value was purchased from
friends of the fund for inflated sums. It is likely that
Gonzalez' positive assessment of the medium-term health IPM
is based in part on overvalued assets and misplaced faith
in current and future fund management.


12. (S) One potential up-side for the fund's financial
outlook is the 40% ownership of many of its investments by
influential military and ex-military, who likely have the
wherewithal to ensure their investments' profitability.
Companies with ties to current and former military have
been known to use illicit means to support their businesses
such as maintaining monopolies through intimidation and
manipulation of the legal system as well as access to
political favors and government-financed sweetheart deals.
However, these investments are subject to the same risks of
fraud and theft that depleted IPM's U.S. investments.

It Could Happen Again
--------------


13. (S) No substantive oversight has been developed to
monitor the decisions of the governing board of the fund.
There is no reason to believe current and future IPM
management will not look for their own opportunities to get
their hands in the cookie jar. According to Gonzalez, the
IPM's management answers to no one except the MOD, and the
government has no authority over this quasi-governmental
pension plan. Congressional calls for Central Bank
auditing and increased transparency appear to have been
largely ignored. The IPM is very secretive about its by-
laws. Gonzalez claims he was fired from the governing
board for supporting reforms that would limit the sitting
MOD's discretionary nominations and control over the board.

Comment
--------------


14. (S) There is undoubtedly more to the story than
Gonzalez presented. Possible ties to the IGSS scandal and
who was involved outside of the IPM board remain unclear.
Gonzalez' assertions of Rios Sosa's innocence were not well
supported. His insistence that a low-level technocrat was
the only real connection to PFA was convenient but
unlikely. The Public Ministry would be expected to
investigate given the amount of publicly available evidence
and allegations, regardless of the lack of an invitation
from the MOD. There is also the potential that more
extensive money laundering was involved given the secrecy
of IPM's financial dealings and the military's known links
to organized crime. The scope of the fraud and the PFA
link to the IGSS scandal ought logically to bring the
Public Ministry running. The lack of an investigation may
result from a reluctance at the Public Ministry to take on
the military. It may also be the result of higher-level
political interference.


15. (S) Comment continued: The theft and subsequent lack
of resolve to prosecute those involved reflect a lack of
transparency and oversight of the Guatemalan military's
business and financial dealings. Many high-ranking
officials are reluctant to go after their peers for fear of
exposing their own corrupt interests. This scandal further
taints the image of the military and indirectly, Rios Montt
through his son's possible involvement. The potential
financial trouble for IPM poses a threat to the morale of
lower and mid-level officers who are already tired of the
corruption of many of their superiors. This may eventually
have serious budget implications for the GOG when they are
called on again to bail out the institution.
HAMILTON