DOMINICAN BANKING #13: MORE FRAUD FOUND AT PROGRESO

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 005202

SIPDIS

DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/IFD/OMA; DEPT PASS TO
SEC, FEDERAL RESERVE; TREASURY FOR KUSHLIS, TOLOUI, WAFER,
KLINGENSMITH; DOJ FOR OIA (MAZUREK AND ORJALES); SOUTHCOM
ALSO FOR POLAD

E.O. 12958: DECL: 11/30/2015
TAGS: DR EFIN KJUS PGOV PREL
SUBJECT: DOMINICAN BANKING #13: MORE FRAUD FOUND AT PROGRESO

REF: SANTO DOMINGO 4979


1. (U) This is number 13 in a series of cables on the
Dominican banking sector.

(C) Summary. Investigators have discovered a new additional
hole of 7 billion pesos ($220 million) in phony assets at
Banco de Progreso, in addition to the 8 billion peso unfunded
liability for commercial paper at the holding company Grupo
Progreso. Principal shareholders contributed heavily to
cover liabilities and plan to sell off assets. The general
public is unaware of the Bank,s difficult situation. It
appears that the dismissed bank president Pedro Castillo may
have been collaborating in the Baninter frauds. End Summary.

(C) BACKGROUND. As reported previously, the Banco Progreso
board became aware last month that commercial paper totaling
8 billion pesos (USD 250 million) had been issued by the
holding company Grupo Progreso, without their knowledge.
Their abrupt dismissal of Pedro Castillo as president of both
the bank and the holding company prompted a tentative run on
the bank that was eased after board members contributed USD
150 million to ensure that this commercial paper could be
redeemed.

(C) Banco Progreso board members continue to take
extraordinary measures to keep the bank,s problems from
triggering a failure of the banking system. Thus far they
have succeeded, contributing USD 250 million to date out of
pocket to the bank and selling assets.

(C) If the newly discovered hole of 7 billion pesos becomes
public knowledge before shareholders can put together the
funds to cover it, the news could trigger a run on the bank.
The board has hired a banking lawyer to put together a case
against Pedro Castillo, the individual presumed responsible
for the fraud.

(C) THE LATEST information comes from the banking lawyer
(strictly protect) hired to put together the legal case
against Pedro Castillo:

- - Shareholders have contributed an additional USD 100
million out of pocket, for a new total from them of USD 250
million. This fully covers shortfall for commercial paper.
The group is calling in and settling the rest of the 8
billion peso issue. Some of the holders are reinvesting the
cash in other instruments at the bank, a sign of confidence ,
and some are taking their cash elsewhere. The U.S. Treasury
notes that dollar deposits in the bank fell abruptly from USD
157 million on November 18 to USD 144 million by November 24.

- - Investigators hired by the board have just discovered a
new (additional) hole of 7 bn pesos (USD 220 million) at the
bank. The board members are planning to sell the group,s
insurance company Proseguros, to close Progreso,s pension
company, and to sell the group,s television channels and any
other non-core assets in order to raise the money to meet
this additional liability. They will probably sell the bank
as well, once it is back on its feet.

- - It is not clear from the information available so far,
whether Castillo has broken U.S. law and therefore whether a
case can be brought against Castillo in the United States.
Castillo is known to have lots of assets (yachts, houses,
etc.) in the United States. Embassy understands that new
bank president Roberto Bonetti will contact the Ambassador
soon to seek help. Earlier this week the Dominican press
reported comments from Castillo,s lawyer earlier this week
that Castillo had gone to the United States &to make himself
available to the banking authorities8 (untrue, as far as we
know). He is reported now to have returned to the country.

- - Pedro Castillo had close connections with Luis Alvarez
Renta, accused in the Baninter case, and investigators
presume there was collusion between them on the Baninter
fraud. In October Alvarez Renta was convicted in civil court
in Miami of illegal manipulation of USD 58 million from
Baninter. Investigators now tell us that in 2003 as the
Baninter frauds were becoming more untenable, Castillo on
behalf of Banco Progreso would write a check at the close of
business each day that Alvarez Renta could deposit so that
Baninter,s books looked good. Then, in the morning, Alvarez
Renta would &repay8 that check with another one back to
Progreso. The money circulated from one bank to the other
and back, but apparently did not go elsewhere. According
to this source, Castillo and Alvarez Renta together came up
with the idea at that time that Progreso should buy Baninter,
but that deal fell through. Banco Progreso did due diligence
on Baninter and decided the mess there was too big for
Progreso to handle.

ADDITIONAL DETAILS

(SBU) Who has hired whom:

- - The Board members have engaged this expertise: KPMG,s
senior management; banking specialty firm Kroll; the private
auditors for Robert Bonetti and the Viccini family; Tew
Cardenas, the attorneys that advised the Central Bank in
their successful civil suit against Alvarez Renta; and
Francisco &Pancho8 Alvarez, attorney for Banco de Progreso
and for BHD, another bank.

- - Pedro Castillo, the individual presumed to have committed
fraud, has engaged the lawyers who handled Alvarez Renta,s
failed case in Miami.

(C) Who knows and doesn,t know of the new 7 billion peso
hole:

- - The Superintendent of Banks and President Fernandez have
both been notified verbally and in writing.
- - The general public appears to be unaware.
- - The IMF may not know, since the information was
discovered after the Washington team departed Santo Domingo.

(SBU) The initial &run8 on the bank:

At first, holders of the commercial paper were redeeming that
paper at a rate of 600 million pesos perday. The pace of
demanded redemptions has slowed and is now 25-30 million
pesos/day. Banking statistics show that Progreso,s dollar
holdings fell by ten percent in the period November 18 to
November 24.

(U) In the news

- - Assistant Attorney General Oliver Lister, heading
DEPRECO, the government body in charge of investigating
corruption replied to a grilling by a journalist from Listin
Diario (owned by the Baninter-connected Baez family) with
comments that any problem at Progreso should be investigated.
To date, no one has filed charges.

- -The exchange rate remain in the range of 32-34 pesos to
the dollar, just as it has been through most of November.
The daily swing generally does not exceed 50 centavos.


2. (U) Drafted by DCM Lisa Kubiske.


3. (U) This report and others in the series are available on
the classified SIPRNET at
http://www.state.sgov.gov/p/wha/santodomingo/ along with
extensive other material.
KUBISKE