DOMINICAN BANKING SERIES #2 - BANCREDITO FAILURE

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 006857

SIPDIS

E.O. 12958: DECL: 11/18/2008
TAGS: EFIN ECON PGOV KCOR KCRM DR
SUBJECT: DOMINICAN BANKING SERIES #2 - BANCREDITO FAILURE
BRINGS FORMAL CHARGES OF FRAUD

Classified By: DCM Lisa Kubiske. Reason: 1.4(b) and (d).


1. (U) The following is the second in a series of reports on
fraud cases in the Dominican financial sector.

(begin text)

(U) BANCREDITO

(U) The District Attorney for the city of Santo Domingo
issued arrest warrants on Friday afternoon, November 7, for
Manuel Arturo Pellerano Pena and Juan Felipe Mendoza, former
President and Vice President of Banco Nacional de Credito
(Bancredito). The indictment charged them with fraud and
related crimes. By Tuesday the 11th, President Mejia had
suspended the warrants pending further investigation of the
potential charges, the Pellerano family was taking out
full-page newspaper ads to defend its honesty and business
practices, and the public was wondering what was happening.
The case is still under investigation.

THE FACTS

(U) On November 7, the Friday afternoon before a long
weekend, Central Bank (CB) Governor Jose Lois Malkun
announced that arrest warrants had been issued for former
executives of the Banco Nacional de Credito, wound up
recently by the banking authorities. Former Bancredito
President Manuel Arturo Pellerano Pena and Vice President
Juan Felipe Mendoza were wanted for fraud and violations of
the Monetary and Finance Law. CB lawyers filed a complaint
accusing them of responsibility for illegal, unfunded loans
amounting to RD pesos 20 billion (USD 538 million).

(SBU) Superintendent of Banks Julio Cross Frias told the
Ambassador that day that Bancredito had kept two sets of
books, similar to the dual sets kept by spectacularly failed
Baninter, and had used them for loans to its own affiliated
companies Internet service provider Tricom, cable company
Telecable and various others.

(U) The press reported a failed attempt to arrest the bankers
on November 7, (neither was at work, although it looked as if
they had cleared out moments before arrival of the
constables). Action was suspended over a holiday weekend and
on Saturday President Mejia told the District Attorney to
delay until the executive branch could study the case.

(U) On November 11, the DA formally suspended the arrest
warrants. The DA and, later, Supreme Court Chief Justice
Jorge Subero Isa confirmed that President Mejia was within
his executive prerogatives, since the case had not yet been
submitted to the court system. President Mejia, meanwhile,
departed for the Ibero-American Summit without further
comment.

(SBU) Only on November 15, after meeting with the Ambassador,
did Attorney General Cespedes offer the press on
administration comment, assuring them that the investigation
of Bancredito remained active.

(C) Banking Superintendent Julio Cross has been quoted in the
press criticizing the President and the Attorney General for
their deferential treatment of bank officials accused of
corruption. Cross said that the fraud technique at
Bancredito mirrored that used at Baninter but was on a
smaller scale.

(C) In a meeting with the Ambassador on November 13, Cross
said he "thinks and hopes" that the warrants will be issued,
but he is not sure when that will be.

(U) On November 19 the Supreme Court announced procedural
decisions advancing implementation of penal procedure
previously programmed for 2004 (septel to follow) and the
Attorney General gave complementary instructions to district
attorneys. Suspects now will be guaranteed the right to
legal counsel during questioning and any arrest must be
authorized by a judge. If these measures had been in effect
ten days earlier, the awkward Bancredito sequence would not
have occurred. The arrest would have been on judicial
authorization and would have gone forward.

TROUBLED WATERS

(C) We understand that the President was caught unawares by
the Central Bank's initiative against Bancredito. The
Pelleranos are an old-line family with a distinguished record
of achievement; they may have assumed, at least initially,
that banking practice here would permit extensive loans to
family-owned companies. We understand that the Pelleranos
formally pledged their assets against the shortfalls
initially discovered at the bank; only after due diligence
revealed the immensity of the shortfall did Central Bank
lawyers move against them.

(C) The press was initially indignant about President Mejia's
intervention but appears to have settled into a "wait and
see" attitude. Attorney General Cespedes assured the
Ambassador that the investigation is continuing, so we are
taking the same approach: concern and watchful waiting to see
how the case will be prosecuted.

SENSITIVITIES

(SBU) The Central Bank's earlier bailout of the insolvent,
and now liquidated, Baninter, contributed directly to
financial anxiety and accelerated the depreciation of the
peso. The Central Bank felt betrayed then because it had
made loans to Baninter as bank officials were shoveling money
out the door and out of the country. As for this new case
with Bancredito, however, its purchase by the Leon Jimenez
Group will ensure that the bank stays open.

(SBU) Confidence in the Dominican judicial process remains
very low. The public assumes that the accused in both cases
will go either unprosecuted or unpunished. Lawyers for
"Ramoncito" Baez Figueroa of Baninter told the press on
November 17 that they would be petitioning for his release,
"just as with the officials of Bancredito." With the
November 18 reforms they formally requested a review of the
detention order against him.

MESSAGE: FRAUD HURTS EVERYONE

(SBU) Embassy Santo Domingo is working at all levels to
encourage full investigation and prosecution of bank fraud.
We are engaging government officials, civil society, business
leaders and others with the message that banking fraud was a
major factor in the nation's financial plight and has hurt
everyone in the Republic. We continue to urge prosecution of
complex fraud cases. During his visit on November 21-22,
Treasury Under Secretary John Taylor further reinforced this
effort.

(end text).


2. (U) Drafted by Angela Kerwin.
HERTELL