UPDATE ON SEIZURE OF ISAIAS GROUP PROPERTIES

C O N F I D E N T I A L QUITO 000633

SIPDIS

E.O. 12958: DECL: 07/11/2018
TAGS: PGOV EFIN EC
SUBJECT: UPDATE ON SEIZURE OF ISAIAS GROUP PROPERTIES

REF: A. QUITO 616

B. QUITO 617

Classified By: Classified by A/DCM Douglas Griffiths. Reason: 1.4 B a
nd D.


1. (C) Summary. The Constituent Assembly approved a
mandate ratifying the Correa Administration's decision to
seize the assets of the Isaias group and blocking any
judicial appeal. One former Finance official, who worked on
the Filanbank/Isaias case under a previous government,
believes that the government action was based on weak legal
grounds. End summary.

Assembly Ratifies AGD Decree, Blocks Legal Challenge
--------------


2. (U) On July 9, the Constituent Assembly approved a
mandate (a temporary law) ratifying the "legal validity" of
the decree issued on June 7 by the Deposit Guarantee Agency
(AGD) to seize the assets of the Isaias Group (reftel a).
The AGD decree asserted that Filanbanco, then owned by the
Isaias family, incurred losses totaling $661.5 million as of
1998 and that Filanbanco made false statements about its
capital and altered its books. The decree invoked Article 29
of the Law for the Reordering of Economic Material in the
Tax-Financial Area, a law that was approved in 2002. Article
29 states that bank administrators who make false
declarations of a bank's capital or alter its balance sheet
will guarantee, with their personal assets, the bank's
depositors, and that the AGD can seize publicly known assets
of the bank owners.


3. (U) The mandate also states that AGD decree is not
subject to legal appeal, that any motion filed against the
decree must be immediately retired, and that any judge or
magistrate must immediately reject any legal action or be
subject to removal. The mandate also requires that the AGD
apply Article 29 to owners and senior officials of other
banks that have been taken over by the AGD.

Isaias Threatened Legal Action
--------------


4. (U) The Assembly's action followed a statement by the
Isaias Group asserting that they would seek a legal challenge
to the decree. A lawyer for the family circulated a press
statement challenging a number of factors behind the AGD
decree, including that the 2002 law could not be applied
retroactively, that the estimate of losses was based on a
report by an accounting firm that expressly stated that the
report was not an audit, and that no judge had made any legal
ruling on the bank's finances.

View of a Former Finance Official
--------------


5. (C) Econ Couns discussed the legal basis for the AGD
decree with Gilberto Pazmino, currently a banker, who served
as Vice Minister for Economy in the Gutierrez administration,
and in that capacity presided over the AGD board. He said
that he did not want to defend the Isaias family and implied
that he was frustrated that the Gutierrez administration was
not able do more about the matter at the time (he asserted
the Isaias family and the Social Christian Party controlled
the courts).


6. (C) Pazmino had reservations about the validity of the
AGD decree, however. He said that when he was in the
Ministry of Finance, AGD and Finance Ministry lawyers advised
that any action based on the 2002 law would be subject to
legal challenge, since the law was not retroactive. He also
questioned the legal standing of the AGD declaration that
Filanbanco falsified its balance sheet, saying that such a
determination should be ratified by a judge, which had not
happened.


7. (C) Pazmino speculated that Minister of Finance Ortiz,
who quit rather than sign the AGD decree (reftel b),refused
to sign the decree because he did not want to risk being
subject to prosecution at a later date when Correa would no
longer be able to defend him. Pazmino added that the same
Ministry of Finance lawyers who advised him that it would
personally risky to sign such a decree in 2003 are still
working at the Ministry.

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

8. (C) Most Ecuadorians believe that the Isaias family
abused their control over Filanbanco and made unsound loans
to companies owned by the family and close associates. Many
depositors and creditors lost money when the bank was closed
and have yet to be fully compensated. However, the family
has avoided any legal action, allegedly because of its
influence -- including bribe and threats -- over the judicial
and legislative systems.


9. (C) The Correa administration was willing to move on this
once untouchable issue, expecting such an action to be
popular with many Ecuadorians. It based its action on law,
although according to several well-informed observers, the
action was on shaky legal grounds. The Assembly's decision
to reaffirm the decree will probably reinforce the standing
of decision, since in practice at this time the Ecuadorian
judiciary rarely rules against the Correa administration or
the Constituent Assembly. However, the Assembly went even
further and barred any legal appeal, which will raise
questions about its commitment to allowing the judicial
process to work independently.
Jewell