COLOMBIA: PYRAMID SCHEMES SWINDLE THOUSANDS,

UNCLAS BOGOTA 004134 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EFIN KCRM PGOV CO SUBJECT: COLOMBIA: PYRAMID SCHEMES SWINDLE THOUSANDS, RATTLE GOC REF: BOGOTA 3588 ¶1. (SBU) SUMMARY. Colombian authorities believe as many as three million Colombians have been defrauded of at least USD 300 million in a series of pyramid schemes that began collapsing November 12 after the government's seizure of the firm Proyecciones DFRE. The fall of DFRE spurred the subsequent demise of several similar institutions and set off violent demonstrations by angry victims that have led to two deaths and police-imposed curfews in 13 cities. President Uribe, who has expressed frustration with the failure of financial regulators and law enforcement to stem the growth of pyramid schemes in recent years, accepted the resignation of Colombia's Financial Superintendent November 14 and issued four "economic emergency" decrees November 17 to address the crisis. The same day, GOC authorities closed DMG, reportedly Colombia's largest pyramid scheme with 300,000 investors. END SUMMARY. Financial House of Cards Falls -------------- ¶2. (U) At least 240 different pyramid-type institutions are thought to exist in Colombia, offering returns of up to 150 percent for short-term cash investments of as little as a one month. While the growth of these institutions has been widely known since 2006, the GOC has done little to monitor or regulate the firms as they attracted thousands of individual Colombia investors--most of them low-income residents of central and southern Colombia. The current crisis began November 12 with the collapse of Colombia's second largest pyramid scheme, Proyecciones DFRE (which stands for "Direct, Easy, and Fast Money" in Spanish),after the flight of the company's owner, Carlos Alfredo Saurez. ¶3. (U) Following the GOC's seizure of the 68 branches of DFRE, arrest of 52 DFRE employees, and confiscation of USD 42 million in DFRE cash holdings, smaller pyramid-style firms began to collapse. Angry victims have demonstrated in front of many of the businesses in question, leading to altercations, riots, and at least two deaths. Local authorities instituted curfews in 13 cities to stem the violence. Scope of Losses Unknown -------------- ¶4. (SBU) GOC officials acknowledge that many of the primary individuals responsible for the pyramid schemes have already fled the country and admit they do not know the full extent of investor losses. However, the Prosecutor General's Office (Fiscalia) says it has received almost 20,000 formal complaints and estimates that as many as 3 million Colombians could have invested in the schemes. While most of the investors are low-income Colombians, wealthy Colombians appear to have fallen victim as well and the GOC has uncovered cases of police officials, local authorities and even a HIV/AIDS clinic that put money into schemes that subsequently collapsed. Anecdotal information from Narino Department indicates that the lure of pyramid schemes led many coca growers to sell their lands at a steep discount to invest in the schemes rather than cultivation. So far the GOC says it has no proof of money laundering activities conducted by the pyramid institutions, only illicit enrichment, but is now analyzing if any proceeds from narcotics trafficking could have fueled the explosion of the schemes in recent years. ¶5. (U) National Planning Director Carolina Renteria said November 15 that, based on preliminary assessments, the most affected will be Colombia's poorest, some of whom reportedly sold their possessions to invest money in the schemes. Renteria said that the GOC cannot cover citizens' losses due to legal and budget constraints, but noted that the GOC was conducting a census to establish how many people were affected and would explore whether such individuals could qualify for emergency credits from Colombia's national development bank, Bancoldex. The Blame Game Begins -------------- ¶6. (SBU) GOC officials insist they warned citizens against participating in such schemes, but now find themselves facing heated public criticism for allowing the businesses to operate without sufficient regulation. President Uribe expressed regret that GOC authorities did not react sooner and publicly questioned why the Financial Superintendent, the Prosecutor General's Office, and National Police did not monitor and close the schemes before collapses began. On November 14, President Uribe accepted the resignation of Financial Superintendent Cesar Prado. However, Prosecutor General Mario Iguaran has pushed back against criticism of his office, saying that blame lies with financial regulators for allowing the schemes to continue for more than a year without investigating possible money laundering or illicit enrichment. (COMMENT: Contacts in Colombia's Financial Intelligence Unit (UIAF) tell Emboffs they closely monitored the evolution of various pyramid schemes and produced several reports to the Attorney General's office since late 2006 concerning the issue and the potential for money laundering activities. END COMMENT) ¶7. (SBU) National Association of Financial Institutions Vice President Carlos Rojas told us that much of the blame rested with the Financial Superintendent, who has lead responsibility for regulating and monitoring any firm that is engaged in lending or financial transactions. Rojas echoed government authorities' assessment that Colombia's formal financial sector would remain unaffected by the scams, but suggested that significant losses in the informal sector could impact consumer consumption and economic growth in local economies. Economic State of Emergency Decreed -------------- ¶8. (U) Following marathon cabinet discussions over the November 15-16 weekend, President Uribe issued a "State of Emergency" on November 17 allowing the GOC to issue decrees without Congressional approval to strengthen criminal penalties for collecting funds through a pyramid scheme, criminalize the failure to return investor funds from such schemes, expedite procedures for returning seized funds to swindled citizens, and provide Governors and Mayors precautionary authority to shut down suspected pyramid schemes operating in their communities. The GOC also ordered 72 firms suspected of still operating pyramid schemes to submit all of their transactions for review by UIAF. Worst Yet to Come -------------- ¶9. (SBU) Also on November 17, the GOC intervened in Colombia's largest pyramid-style company, DMG, closing its 59 offices and immediately impounding USD 5 million in company funds. DMG was founded in 2003 in Putumayo and has 300,000 investors in Colombia as well as operations in Panama, Mexico, Ecuador and Venezuela. DMG investors buy pre-paid cards for six months during which they can use the card to purchase household items and then have the entire original cash balance returned at the end of the contract period. In addition to the administrative closure, the GOC has assembled a task force of the National Tax Authority (DIAN),Prosecutor General's Office, National Police and UIAF to gather proof against DMG for possible criminal prosecution on fraud and money laundering charges. Given the large number of DMG investors and the company's high profile, many local observers expect the GOC-imposed closure to cause further runs on similar, smaller pyramid schemes still operating and to sharpen the immediate economic impact of the crisis. (NOTE: While the Financial Superintendent issued a resolution in September 2007 that ordered the dismantlement of DMG for illegal collection of money from the public, DMG effectively challenged this administrative action and sidestepped the targeted regulatory action by changing its name. Due to the initial failed regulatory attempt, contacts at the Superintendent's office tell us they were reluctant until now to challenge the legal precedent with another administrative action. END NOTE) ¶10. (U) In the run-up to the November 17 closure, DMG owner David Murcia Guzman publicly rebuked President Uribe and GOC officials for their allegations and actions against the company, insisting the GOC is acting on behalf of Colombia's largest banks to destroy DMG and its "alternative" saving mechanism for low-income Colombians without bank accounts. Murcia Guzman stated November 14 that several high-level GOC officials are among his investors, including President Uribe's son Jeronimo, but has provided no other names or any evidence. Jeronimo Uribe said November 15 that he considered a business deal with a subsidiary of DMG in early 2007, but dropped out of the deal when he found out the company was linked to DMG. Murcia has publicly denied that his scheme is a pyramid, and has urged thousands of his supporters to publicly protest against the GOC,s actions. Political Ramifications for Uribe -------------- ¶11. (SBU) President Uribe has publicly acknowledged that the GOC should have stepped in sooner to head off the crisis, and is moving quickly to address public concerns. Still, many local analysts and opposition politicians are blaming Uribe for the disaster. Well-known economist Guillermo Perry wrote that the pyramids "catastrophe" shows the President,s inability to respond to economic or political disasters until it is too late. Pro-Uribe columnist Mauricio Vargas called Pardo,s resignation an attempt to shift the blame away from Uribe and Finance Minister Oscar Ivan Zuluaga. Many members of Congress took issue with Uribe,s claims on November 15 that they had invested in the pyramid schemes. Opposition Liberal Senator Cecilia Lopez criticized Uribe's declaration and called on him to name politicians involved in the scandal. BROWNFIELD