US embassy cable - 03GUATEMALA2500

S E C R E T SECTION 01 OF 03 GUATEMALA 002500 
 
SIPDIS 
 
TREASURY FOR CHRIS KUSHLIS AND BILL BLOCK; PANAMA FOR BICE- 
ELBERT CRUZ; DHS FOR MIAMI FIELD OFFICE - NEAL RAU 
 
E.O. 12958: DECL: 09/10/2013 
TAGS: KCOR, EFIN, PGOV, MOPS, PINR, GT, PM 
SUBJECT: MILITARY PENSION FUND: MILITARY FOCUS ON 
RECOVERING FUNDS, AVOIDING OUTSIDE INVESTIGATION 
 
REFS: A. GUATEMALA 02255 B. GUATEMALA 01465 
 
C. GUATEMALA 01687 D. GUATEMALA 01909 
E. USDAO IIR # 6 838 0042 02 DTG 042124Z 
F. GUATEMALA 02331 
 
Classified By: Econ Thomas A. Palaia for reason 1.5(d). 
 
1.  (S) Summary: EmbOffs met with General Alfredo Gonzalez 
to discuss recent developments in the theft and 
mismanagement of the Military Pension Fund.  Gonzalez, who 
has been involved in the military's internal investigation 
of the matter, alleged payoffs were made to current and 
former top military officials involved with IPM's governing 
board.  The fund may have lost up to $23 million in this 
particular scandal and its financial health remains 
uncertain.  No charges have been brought against any high- 
ranking military official involved despite alleged evidence 
implicating many.  The scandal may have been a factor in 
the forced resignation of Military Chief of Staff Rios 
Sosa, son of former de facto president and current 
presidential candidate Rios Montt, though Gonzalez claims 
Rios Sosa was not aware of the scandal until after the 
funds had been lost.  End Summary. 
 
Background 
---------- 
 
2.  (SBU) The Military Pension Fund (IPM) is a quasi- 
governmental organization responsible for managing the 
contribution-based pension plans of some 12,000 current and 
former military personnel.  IPM, along with its subsidiary 
INVERMA, reportedly transferred approximately USD 37 
million to the Miami-based Pension Fund of America (PFA). 
The money was transferred in several smaller transactions 
to PFA from August through November 2001 with the stated 
intention of investment in stocks and bonds traded in New 
York.  Reportedly, only USD 14 million has been recovered. 
 
3.  (S) EconOff, DATT and PolOff met with General Alfredo 
Gonzalez to discuss IPM, including the recent scandal and 
its possible role in the resignation of former military 
Chief of Staff, Rios Sosa (Refs A and F).  Gonzalez was on 
the governing board of the IPM until about three weeks ago 
and has been involved in investigating the scandal and 
pursuing a lawsuit in Florida on behalf of IPM and the MOD. 
He was not a board member at the time of the theft but, 
according to DAO sources, may have his own corrupt 
interests unrelated to IPM. 
 
Yes There was Corruption 
------------------------- 
 
4.  (S) In this conversation, Gonzalez immediately backed 
off claims he had made that IPM was simply the victim of 
bad financial decisions and a group of swindlers in Miami. 
He admitted that the previous governing board of IPM 
received kickbacks from PFA for agreeing to transfer the 
funds through PFA accounts.  He claimed that various 
members (unidentified) of that governing board received 
checks for USD 50,000.  Former MOD Arevalo Lacs confronted 
board members with photocopies of these checks well before 
the scandal broke and asked for the return of the money. 
Gonzalez said that not only was the money never returned, 
IPM continued to use PFA to manage their investments. 
Note: No crusader for integrity, Arevalo Lacs became a 
millionaire during his stint as MOD. 
 
5.  (S) Gonzalez said board members considered the 
kickbacks commissions and insisted that they did not know 
the fund would be robbed.  He could not explain, however 
why anyone believed that PFA would be willing to pay such 
high "commissions" for the privilege of managing the fund. 
He also could not answer how IPM justified the use of what 
they now allege to be an unlicensed middleman (IPM alleges 
in a suit filed in Florida that PFA is not licensed to 
manage investments or give investment advice) to open 
accounts and deposit funds whose ultimate destinations were 
supposedly major investment firms in New York.  When asked 
why the money wasn't invested directly with a major 
investment house, he conceded board members were simply 
looking out for their "commissions" and reluctantly 
admitted that some may have suspected a larger theft was 
taking place.  Gonzalez continued to deny any connection 
between the IPM scandal and the theft of at least USD 45 
million from the Guatemalan Social Security Fund (IGSS) 
(Refs B and C).  Gonzalez insisted the two groups' dealings 
with PFA were completely unrelated. 
 
6.  (S) Gonzalez speculated that a lower-level technocrat 
might have masterminded the theft.  The military wanted in- 
house, Guatemalan actuarial capabilities to save on 
expensive consulting fees paid to Spanish accounting firms 
who advised them on IPM's insurance structure.  Lt. Col. 
Archila Grazales (phonetic), at the time a Captain, was 
sent to Mexico for five years of training in actuarial 
science.  He returned a Major and was asked to assist IPM 
in managing its finances.  Gonzalez claims it was Grazales 
who first brought PFA to the attention of the board and got 
the board interested in U.S. investment opportunities. 
Gracales reportedly arranged for PFA to make a presentation 
to the board where they misrepresented their credentials 
and were successful in convincing the board to invest 
through them. 
 
7.  (S) The scandal did not end after IPM's board changed 
and a new board began its investigation and sought legal 
action in Florida in late 2001.  Gonzalez claims that IPM 
opened an account in Miami and deposited an additional USD 
1 million, intended to cover anticipated legal costs 
involved in recovering the USD 37 million invested. 
According to Gonzalez, the legal fund was mistakenly 
invested in insurance and was not available when they first 
attempted to initiate legal proceedings.  This delay gave 
PFA ample time to move the money beyond the reach of 
Florida authorities. 
 
8.  (S) EmbOffs asked Gonzalez what legal actions were 
being taken in Guatemala.  Gonzalez insisted that all 
internal investigation efforts were focused on recovering 
the lost investments and that they would worry about 
placing blame after the money was found.  The Public 
Ministry was not being brought in because the MOD wanted to 
keep this an internal investigation. 
 
Rios Sosa's Involvement 
------------------------ 
 
9.  (S) EmbOffs asked about former Chief of Staff Rios 
Sosa's involvement in IPM and the role it might have played 
in his recently forced resignation.  Rios Sosa was a member 
of the governing board for a short period in late 2001. 
Gonzalez claimed that Rios Sosa's recent resignation had 
more to do with avoiding a perceived conflict of interest 
with his father, Rios Montt's Presidential campaign.  He 
insisted that Rios Sosa's involvement in IPM was very 
limited and occurred after most of the money was already 
transferred to PFA.  He alleged that Rios Sosa saw the 
financial state of IPM and, recognizing the potential for 
scandal, immediately resigned from his position on the 
governing board.  Gonzalez went on to assert that, without 
the target of Rios Sosa, the scandal of IPM would disappear 
from the headlines. 
 
IPM's Financial Health - or Lack Thereof 
---------------------------------------- 
 
10.  (S) Gonzalez assured EmbOffs that IPM is well-funded 
and in no danger of bankruptcy.  He asserted that IPM is 
taking in substantially more each month than it is paying 
out in benefits.  The fund owns significant income 
generating investments in properties and companies that 
supplement the payroll contributions of military personnel. 
He explained that the fund owns approximately 60% of a 
variety of companies (the other 40% being owned by high- 
level current and former military officials). 
Additionally, IPM has periodically been the recipient of 
generous transfers from the GOG.  However, when pressed on 
IPM's continued solvency, he admitted that without 
substantial reform the Fund would likely face serious 
financial problems within 10 years, as the number of 
retirees drawing from the fund increases and the number 
contributing decreases due to military reductions. 
 
11.  (S) Gonzalez did not address the history of corruption 
within the IPM and related institutions, such as the 
Military Bank, which cast doubt on the fund's financial 
health (Ref E).  The fund has been known to make loans on 
favorable terms to board members and high-ranking military 
and MOD officials with no intention of ever collecting. 
The fund has also been involved in sketchy real estate 
deals where property of little value was purchased from 
friends of the fund for inflated sums.  It is likely that 
Gonzalez' positive assessment of the medium-term health IPM 
is based in part on overvalued assets and misplaced faith 
in current and future fund management. 
 
12.  (S) One potential up-side for the fund's financial 
outlook is the 40% ownership of many of its investments by 
influential military and ex-military, who likely have the 
wherewithal to ensure their investments' profitability. 
Companies with ties to current and former military have 
been known to use illicit means to support their businesses 
such as maintaining monopolies through intimidation and 
manipulation of the legal system as well as access to 
political favors and government-financed sweetheart deals. 
However, these investments are subject to the same risks of 
fraud and theft that depleted IPM's U.S. investments. 
 
It Could Happen Again 
--------------------- 
 
13.  (S) No substantive oversight has been developed to 
monitor the decisions of the governing board of the fund. 
There is no reason to believe current and future IPM 
management will not look for their own opportunities to get 
their hands in the cookie jar.  According to Gonzalez, the 
IPM's management answers to no one except the MOD, and the 
government has no authority over this quasi-governmental 
pension plan.  Congressional calls for Central Bank 
auditing and increased transparency appear to have been 
largely ignored.  The IPM is very secretive about its by- 
laws.  Gonzalez claims he was fired from the governing 
board for supporting reforms that would limit the sitting 
MOD's discretionary nominations and control over the board. 
 
Comment 
------- 
 
14.  (S) There is undoubtedly more to the story than 
Gonzalez presented.  Possible ties to the IGSS scandal and 
who was involved outside of the IPM board remain unclear. 
Gonzalez' assertions of Rios Sosa's innocence were not well 
supported.  His insistence that a low-level technocrat was 
the only real connection to PFA was convenient but 
unlikely.  The Public Ministry would be expected to 
investigate given the amount of publicly available evidence 
and allegations, regardless of the lack of an invitation 
from the MOD.  There is also the potential that more 
extensive money laundering was involved given the secrecy 
of IPM's financial dealings and the military's known links 
to organized crime.  The scope of the fraud and the PFA 
link to the IGSS scandal ought logically to bring the 
Public Ministry running.  The lack of an investigation may 
result from a reluctance at the Public Ministry to take on 
the military.  It may also be the result of higher-level 
political interference. 
 
15.  (S) Comment continued: The theft and subsequent lack 
of resolve to prosecute those involved reflect a lack of 
transparency and oversight of the Guatemalan military's 
business and financial dealings.  Many high-ranking 
officials are reluctant to go after their peers for fear of 
exposing their own corrupt interests.  This scandal further 
taints the image of the military and indirectly, Rios Montt 
through his son's possible involvement.  The potential 
financial trouble for IPM poses a threat to the morale of 
lower and mid-level officers who are already tired of the 
corruption of many of their superiors.  This may eventually 
have serious budget implications for the GOG when they are 
called on again to bail out the institution. 
HAMILTON