INVESTIGATION INTO FINANCIAL FRAUD SHOWS BRV'S

C O N F I D E N T I A L CARACAS 001328

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E.O. 12958: DECL: 09/19/2018
TAGS: ECON EFIN VE
SUBJECT: INVESTIGATION INTO FINANCIAL FRAUD SHOWS BRV'S
HEAVY-HANDED TACTICS

REF: A. 2007 CARACAS 741

B. 2006 CARACAS 3375

C. 2007 CARACAS 493

D. 2007 CARACAS 1902

E. CARACAS 1135

Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b)
and (d).


1. (C) Summary: The Bolivarian Republic of Venezuela (BRV)
has opened an investigation into financial fraud associated
with four bond issuances in late 2006 and 2007. This
investigation included a public, high-profile raid of one of
Venezuela's largest brokerage houses in July 2008 during
which investigators, backed by machine-gun toting members of
Venezuela's intelligence services, confiscated a variety of
records, including sensitive client information. While there
was undoubtedly fraud associated with these bond issuances,
the BRV's investigation appears designed to intimidate
financial sector companies rather than efficiently uncover
the fraud. It also underscores the pressure financial
services companies, including banks, are under to reveal
sensitive client information to the BRV. End summary.

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An Invitation for Corruption
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2. (U) The BRV investigation is focusing on four large bond
issuances: the USD 7.5 billion PDVSA issuance in April 2007
(ref A) and the three tranches of "Bonos del Sur" offered in
November 2006 and March and September 2007 (refs B-D). Each
issuance included dollar-denominated debt instruments payable
in bolivars (Bs) and was targeted at small and medium-sized
investors. As the implicit exchange rate offered was
generally significantly lower than the parallel foreign
exchange rate, these issuances offered buyers the opportunity
to obtain dollar assets on the cheap, or an opportunity for
instant profit of 15 to 30 percent for those who immediately
sold the dollar assets and converted the proceeds back into
bolivars at the parallel rate. (Note: As companies and
individuals cannot exchange as many bolivars for dollars as
they would like at the official rate, a parallel foreign
exchange market has developed. Under current law this market
is legal if accessed through a bond swap mechanism. End
note.) To make purchases on behalf of their clients,
financial services companies submitted to the BRV or the
Central Bank (BCV) a list with the name, identity number, and
amount requested per each client. As the only check made by
the BRV or BCV was whether the identity number was a valid
number, the potential for fraud was enormous and there were
reports of unscrupulous brokerage houses buying identity
numbers from residents of poor neighborhoods and submitting
offers on behalf of far more people than their actual number
of clients.

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An Investigation Ensues
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3. (C) According to Econoinvest Executive Director Gabriel
Osio (strictly protect throughout),who is also president of
the Association of Casas de Bolsas (brokerages),the Fiscalia
(Attorney General's Office) began to investigate alleged
fraud associated with these bond issuances in the spring and
summer of 2008. (Note: Econoinvest is one of Venezuela's
largest and most reputable brokerage houses. End note.) The
association, he explained, was cooperating with the Fiscalia,
seeking to educate the BRV on how to conduct an efficient and
discrete investigation using data already in the BRV's
possession (e.g., by looking for cases where the same
identity number was used more than once or where the number
of orders submitted by a given brokerage exceeded its likely
client base). To the dismay of Osio and his colleagues,
financial services companies began receiving notices in
mid-July demanding that they surrender to the BRV all records
associated with the bond issuances, including client files.
Econoinvest received a notice late in the afternoon of July
15, though dated July 11, giving it 24 hours to surrender

this information.


4. (C) In the early afternoon of July 16, according to Osio
and his colleagues, about 20 heavily armed agents from the
Fiscalia and DISIP, Venezuela's intelligence service, arrived
at Econoinvest's offices. This raid was well documented by
the press, in part because the Fiscalia issued a press notice
justifying the raid by claiming that Econoinvest had received
on July 11 a notice giving it 24 hours to surrender the files
and had not complied. In the tense standoff that followed,
the agents demanded Econoinvest's computer servers. When
Econoinvest managers refused, the agents demanded all files
related to the bond issuances, including all information
about the clients involved. After further negotiation, the
agents left with the complete files of a random selection of
250 clients who put in orders for the bond issuances; they
refused to provide receipts for the records they took.
According to Osio and his colleagues, the Fiscalia has been
calling some of these clients in for interviews, asking
questions that cover the entire gamut of their financial
situation.

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A Hunger for Private Financial Information
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5. (C) This case is not the only instance where the BRV has
demanded private citizens' financial information from
financial institutions. One banker we spoke with in August
shared with us a circular from Sudeban, the banking
regulator, asking banks to provide information on all
accounts with an annual average above Bs 200,000 (USD 93,000
at the official exchange rate). This banker has so far
refused to comply with Sudeban's demand. An executive at
another leading brokerage firm said his company had similarly
refused to hand over full financial records of all clients
who had put in bond orders. The BRV's intent to nationalize
Banco de Venezuela has caused concerns within the bank's
client base over what the government will do with the records
it acquires (ref E).

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Comment
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6. (C) The fraud associated with the bond issuances and the
ham-handed investigation that has followed offer a small but
poignant example of how incapable the BRV is of providing
effective government. The brokers who submitted orders from
ghost clients are criminals and should be brought to justice.
That said, it is hard not to hold the BRV responsible as
well, as its officials have created and benefited from an
environment rife with financial corruption and, in the case
of these issuances, created huge incentives for exactly the
type of fraud that occurred. In the subsequent
investigation, the BRV could have relatively easily
identified the unscrupulous financial services companies
using data already available to it. Instead, it chose to
conduct a high-profile raid, complete with an excessive show
of force, on a large and reputable brokerage house, a clear
example of the BRV's predilection for a public show of
intimidation over effectiveness. The BRV's demand for
individuals' financial data is of even greater concern for
legitimate financial services companies and their customers.
End comment.
CAULFIELD