Venezuela - Where has the money gone?

Corruption and instability-led capital flight pose a continuing fincrime risk

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In early May, thousands took to the streets of Venezuela. But as opposition leader Juan Guaidó has struggled in his many attempts to topple the government of President Nicolas Maduro, the country remains in limbo. The Trump administration has bolstered its support for Guaidó, escalating sanctions against state-owned entities and businessmen linked to Maduro. In turn, Caracas received increased support from Moscow and Beijing.

All the while, Venezuela remains locked in a crippling period of hyperinflation and depression, compounded by human rights abuses and a collapse of the healthcare system. Corruption on a grand scale has played a key role in the crisis. Although the country has the largest proven oil reserves in the world, estimated at 300 billion barrels, its state oil company Petróleos de Venezuela (PDVSA), has been systematically plundered for years.

Venezuela’s opposition, led by Guaidó, surged to prominence by challenging the system of entrenched kleptocracy at PDVSA. Evidence is mounting that executives at the parastatal have routinely demanded bribes for contracts. In September 2018, a five-year money laundering investigation at an Andorran private bank found that up to 14 former Venezuelan officials – including PDVSA executives, politicians and bureaucrats – were involved in a USD 2 billion kickback scheme between 2007 and 2012.

A further USD 1 billion was embezzled from PDVSA by officials exploiting their access to the Venezuelan government’s foreign currency exchange system, which offers a far more favourable rate. By carrying out two transactions – from dollars to bolivars using the fixed rate, then again from bolivars to dollars using the government rate – a USD 10 million bribe could be turned into USD 100 million. Profits from such schemes are laundered through false investment strategies, real estate transactions and networks of shell companies in offshore jurisdictions such as Andorra, Curação and Panama – in addition to the US, Switzerland, and Russia.

The decision by wealthy Venezuelans to move their capital outside the country is not new. Under President Maduro’s predecessor, Hugo Chávez, wealthy business-owners packed up and moved to the US, in particular Florida, in opposition to Chávez’s socialist policies. This growing population provided a windfall for Miami’s banks. However, they have since been joined by a new wave of so-called boliburguesía – a term for pro-regime businessmen who became rich through political patronage during the Chávez’s Bolivarian regime – who have deposited their dollars and invested in luxury property in Florida and Texas. Now, rather than suffer food shortages and soaring crime levels in their home country, those close to the Chávez and Maduro regimes have increasingly begun to occupy these investments full time; a former US ambassador to Venezuela recently described South Florida as “crawling” with boligarchs.

This Venezuelan diaspora in the southern US – comprising those fleeing the regime and those who have profited from its corrupt institutions alike – has become a focal point of US federal prosecutors and Venezuelan anti-corruption activists. In 2015, US authorities arrested Roberto Rincón and Abraham Shiera, a pair of Venezuelan businessmen who defrauded PDVSA of USD 600 million through over-inflated contracts and false invoicing. The majority of this scheme was carried out through US-incorporated shell companies, while Rincón and Shiera lived in expensive Houston and Miami homes registered in the names of their children. The following year, both pleaded guilty to violating the US Foreign Corrupt Practices Act for bribing PDVSA officials in the US.

This type of systemic corruption and rapid capital flight have become the rallying cries of the opposition, which has denounced the Maduro administration for promoting a system of cronyism and political patronage at the expense of the Venezuelan people. Guaidó has promised to reform the PDVSA through increased transparency in procurement procedures and by opening up Venezuela’s energy sector to private foreign investors.

These issues are also at the centre of the Trump Administration’s foreign policy platform. Despite its Cold War-era rhetoric, Washington has leaned more heavily on economic sanctions than on military threats. In September 2018, US sanctions targeted senior Venezuelan officials who allegedly used shell companies to siphon off millions from food import contracts. In April 2019, the Venezuelan Central Bank was sanctioned for allegedly helping members of Venezuela’s political elite move dirty money outside of the country. Recent sanctions have increasingly targeted the country’s finance, gold, and oil and gas sectors.

Even if Guaidó’s movement eventually succeeds in overthrowing Maduro and leading reforms, anyone wanting to do business ethically in Venezuela will have to face a long legacy of kleptocracy. The state has been gutted and its assets distributed through a worldwide network of financial institutions, with the funds only just starting to surface. Banks will have to continue scrutinising Venezuelan nationals, looking for red flags such as government contracts from state institutions, wire transfers from shell corporations and large real estate acquisitions. Most importantly, any transaction involving Venezuela demands an investigation into potential hidden political connections: in-laws, cousins and grandchildren provide appealing routes for public officials to launder money. With local media largely censored and public records unavailable, seeking commentary from trusted sources on the ground and among the diaspora is essential to uncovering and understanding these links.