NICARAGUA: EMBEZZLEMENT CRIPPLES MICROFINANCE INSTITUTION

C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 000625

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC AND EEB
STATE PASS OPIC
TREASURY FOR SARA SENICH
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN

E.O. 12958: DECL: 06/22/2019
TAGS: EAID ECON EFIN PGOV NU
SUBJECT: NICARAGUA: EMBEZZLEMENT CRIPPLES MICROFINANCE INSTITUTION

REF: A) MANAGUA 116 B) 08 MANAGUA 932

Classified By: Ambassador Robert J. Callahan for reasons 1.4b & d.

Summary
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1. (C) Throughout the last year, U.S. and other
international investors have been embroiled in a bitter
dispute over control of the Board of Directors of one of the
largest and most successful microfinance institutions in
Nicaragua, the Association for the Development of Small,
Medium and Micro Businesses (ACODEP). The Board removed the
outgoing president of ACODEP in 2008 for embezzlement and
poor lending decisions. In retribution, he exploited his
senior-level GON contacts to have himself "legally"
reinstated as president for a two-month period in 2009.
During these two months, according to the current Board and
its investors, he embezzled $3 to $5 million of the
association's assets, partially facilitated by officials from
one of the country's largest banks. Disturbingly, none of
these transactions appears to have triggered Nicaraguan banks
to file suspicious activity reports, which by law were
required because many of the transactions surpassed the
$10,000 mark. While ACODEP finally succeeded in removing
this individual as president in late May and obtained an
official certification establishing a newly-constituted Board
backed by its investors, the financial damage done to the
institution as a result of this alleged embezzlement is
severe. ACODEP'S current president believes it will
survive. Meanwhile, the new Board has filed a criminal
complaint against the former president with the Nicaraguan
National Police, which is investigating the matter. End
summary.

ACODEP: A Model of Microfinance Success...
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2. (C) On June 17, econoff met with Julio Paniagua Lopez,
President of the Board of Directors for the Association for
the Development of Small, Medium and Micro Businesses
(ACODEP),a prominent Nicaraguan microfinance institution
(MFI) which provides loans to agricultural producers and
family-run businesses. ACODEP maintains 40 branches
throughout Nicaragua and has approximately $25 million in
assets and about 57,000 clients, ranking it among the top
three MFIs in the country. It has operated since 1990 and
offers loans as small as $100 to some of the poorest
Nicaraguans who otherwise have no access to credit. ACODEP
is a member in good standing of the Association of Nicaraguan
Microfinance Institutions (ASOMIF),a nineteen-member
organization which represents and advocates on behalf of the
industry here.


3. (C) ACODEP's primary investors, all international,
include the following:

--Global Partnerships, a Seattle-based non-profit
organization which works in 26 Latin American countries.

--Developing World Markets, based in Connecticut, a "socially
oriented" investment bank that channels capital to MFIs in
over 20 countries worldwide.

--The Wisconsin Coordinating Council on Nicaragua, a
non-profit organization headquarted in Madison, WI, which
focuses almost exclusively on funding MFIs in Nicaragua.

--Deutsche Bank's Office of Social Investment Funds.

--Symbiotics, a Swiss company that specializes in
microfinance investment funds.

All of these investors visit Nicaragua regularly or maintain
representative offices in Managua. We also understand that
the Overseas Private Investment Corporation (OPIC) has
provided approximately $2 million in financing to ACODEP via
some of the abovementioned U.S. investors.

...But as Nicaraguan Investments Go, Caveat Emptor
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4. (C) Despite ACODEP's successful history, during the last
year ACODEP's investors have engaged in a bitter dispute over
control of ACODEP's Board of Directors and its Nicaraguan
bank accounts. At the center of the dispute is Armando Jose
Garcia Campos, a founder of ACODEP who served as its
president for almost twenty years. According to current
President Paniagua--and the aforementioned investors--an
internal audit in 2008 revealed that Garcia had embezzled
thousands of dollars from ACODEP during the previous few
years and had made a series of very poor lending decisions,
which severely damaged the association's balance sheet. The
ACODEP Board of Directors initially attempted to negotiate a
graceful exit for Garcia, but when they discovered additional
evidence of more serious embezzlement, negotiations broke
down and Garcia was relieved of his position.


5. (C) In response, in February 2009, Garcia exploited his
close relationship with Nicaraguan Attorney General Hernan
Estrada and the Ministry of Governance (MIGOB) to have
himself "reinstated" as president of ACODEP on very dubious
grounds. MIGOB serves as the GON's oversight body for
microfinance institutions and is headed by Sandinista
loyalist Ana Isabel Morales. On February 27, Garcia seized
ACODEP offices in Managua by force using armed security
personnel, and he took control of its assets. During the
subsequent months of March and April, according to Paniagua
and his investors, Garcia orchestrated the embezzlement of
between $3 to $5 million dollars, essentially liquidating
ACODEP's bank accounts. One apparent beneficiary of the
embezzlement scheme was Alfonso Llanes, former head of the
Nicaraguan Superintendency of Banks (SIBOIF). Paniagua
alleges that Llanes collected $250,000 for 3 weeks of work in
"wages" from Garcia during his temporary reinstatement as
head of ACODEP. Documentation provided by Paniagua suggests
that Llanes' wife, Sheila Llanes, who works as General
Manager at BanCentro's largest branch in Nicaragua,
facilitated the scheme by cashing all of these checks.

ACODEP Responds
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6. (C) ACODEP's Board of Directors and investors engaged in
a full-court press against Garcia and hired a Nicaraguan
attorney who filed numerous complaints from February through
April with MIGOB regarding Garcia's actions to no avail. In
addition, Paniagua sent letters of protest to BanCentro and
BanPro (Nicaragua,s two largest banks),where Garcia opened
various shell accounts in different names to further
facilitate his embezzlement scheme. Moreover, according to
Paniagua, many of Garcia's transactions were well above
$10,000, which according to Nicaraguan law should have
triggered suspicious activity reports for submission to the
country's bank regulator, (SIBOIF); these reports were
apparently never filed. Paniagua provided econoff a letter
he delivered to SIBOIF on June 1, in which he laid out these
concerns. Note: On June 16 econoff met with SIBOIF's
President, Victor Urcuyo, who said he was unaware of the
ACODEP situation. End Note.

Current Status
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7. (C) Finally, after much back and forth with MIGOB, ACODEP
successfully removed Garcia from the Board of Directors and
obtained an official certification on May 25 naming Paniagua
as the new president. Paniagua told econoff that he believes
this certification puts an end to Garcia's involvement with
ACODEP, primarily because "there is nothing left for him to
steal." While ACODEP's accounts have now been unfrozen at
BanCentro, Garcia still retains control over an account at
BanPro. On May 29, ACODEP filed a criminal complaint against
Garcia with the Nicaraguan National Police,s Economic Crimes
Division. One of ACODEP's primary investors indicated to
econoff that the police have started to interview individuals
who aided Garcia during his two-month embezzlement and
seizure of ACODEP,s assets. He said this could lead to a
criminal case against Garcia, though this is far from certain
given Nicaragua,s highly politicized judicial system.

Comment
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8. (C) If the allegations against Mr. Garcia are true--and
the documentation we have reviewed suggests that they are--it
appears that he and his accomplices came close to destroying
one of Nicaragua's most prominent microfinance institutions.
While Paniagua and his investors believe they can weather the
damage done to their balance sheet, they face additional
challenges such as the "No Pago" movement (reftels) and the
credit crunch posed by the global financial crisis. As a
result of the ACODEP affair, the damage done to investor
confidence in Nicaragua's microfinance sector is severe, as
are the losses that U.S. charitable organizations and OPIC
have suffered in the process.
CALLAHAN