US embassy cable - 03SANTODOMINGO6857

C O N F I D E N T I A L SECTION 01 OF 02 SANTO DOMINGO 006857 
 
SIPDIS 
 
E.O. 12958: DECL: 11/18/2008 
TAGS: EFIN, ECON, PGOV, KCOR, KCRM, DR 
SUBJECT: DOMINICAN BANKING SERIES #2 - BANCREDITO FAILURE 
BRINGS FORMAL CHARGES OF FRAUD 
 
Classified By: DCM Lisa Kubiske.  Reason: 1.4(b) and (d). 
 
1.  (U) The following is the second in a series of reports on 
fraud cases in the Dominican financial sector. 
 
(begin text) 
 
(U) BANCREDITO 
 
(U) The District Attorney for the city of Santo Domingo 
issued arrest warrants on Friday afternoon, November 7, for 
Manuel Arturo Pellerano Pena and Juan Felipe Mendoza, former 
President and Vice President of Banco Nacional de Credito 
(Bancredito).  The indictment charged them with fraud and 
related crimes.  By Tuesday the 11th, President Mejia had 
suspended the warrants pending further investigation of the 
potential charges, the Pellerano family was taking out 
full-page newspaper ads to defend its honesty and business 
practices, and the public was wondering what was happening. 
The case is still under investigation. 
 
THE FACTS 
 
(U) On November 7, the Friday afternoon before a long 
weekend, Central Bank (CB) Governor Jose Lois Malkun 
announced that arrest warrants had been issued for former 
executives of the Banco Nacional de Credito, wound up 
recently by the banking authorities.  Former Bancredito 
President Manuel Arturo Pellerano Pena and Vice President 
Juan Felipe Mendoza were wanted for fraud and violations of 
the Monetary and Finance Law.  CB lawyers filed a complaint 
accusing them of responsibility for illegal, unfunded loans 
amounting to RD pesos 20 billion (USD 538 million). 
 
(SBU) Superintendent of Banks Julio Cross Frias told the 
Ambassador that day that Bancredito had kept two sets of 
books, similar to the dual sets kept by spectacularly failed 
Baninter, and had used them for loans to its own affiliated 
companies Internet service provider Tricom, cable company 
Telecable and various others. 
 
(U) The press reported a failed attempt to arrest the bankers 
on November 7, (neither was at work, although it looked as if 
they had cleared out moments before arrival of the 
constables).  Action was suspended over a holiday weekend and 
on Saturday President Mejia told the District Attorney to 
delay until the executive branch could study the case. 
 
(U) On November 11, the DA formally suspended the arrest 
warrants.  The DA and, later, Supreme Court Chief Justice 
Jorge Subero Isa confirmed that President Mejia was within 
his executive prerogatives, since the case had not yet been 
submitted to the court system.  President Mejia, meanwhile, 
departed for the Ibero-American Summit without further 
comment. 
 
(SBU) Only on November 15, after meeting with the Ambassador, 
did Attorney General Cespedes offer the press on 
administration comment, assuring them that the investigation 
of Bancredito remained active. 
 
(C) Banking Superintendent Julio Cross has been quoted in the 
press criticizing the President and the Attorney General for 
their deferential treatment of bank officials accused of 
corruption.  Cross said that the fraud technique at 
Bancredito mirrored that used at Baninter but was on a 
smaller scale. 
 
(C)  In a meeting with the Ambassador on November 13, Cross 
said he "thinks and hopes" that the warrants will be issued, 
but he is not sure when that will be. 
 
(U) On November 19 the Supreme Court announced procedural 
decisions advancing implementation of penal procedure 
previously programmed for 2004 (septel to follow) and the 
Attorney General gave complementary instructions to district 
attorneys.  Suspects now will be guaranteed the right to 
legal counsel during questioning and any arrest must be 
authorized by a judge.  If these measures had been in effect 
ten days earlier, the awkward Bancredito sequence would not 
have occurred.  The arrest would have been on judicial 
authorization and would have gone forward. 
 
TROUBLED WATERS 
 
(C) We understand that the President was caught unawares by 
the Central Bank's initiative against Bancredito.  The 
Pelleranos are an old-line family with a distinguished record 
of achievement; they may have assumed, at least initially, 
that banking practice here would permit extensive loans to 
family-owned companies.  We understand that the Pelleranos 
formally pledged their assets against the shortfalls 
initially discovered at the bank; only after due diligence 
revealed the immensity of the shortfall did Central Bank 
lawyers move against them. 
 
(C) The press was initially indignant about President Mejia's 
intervention but appears to have settled into a "wait and 
see" attitude.  Attorney General Cespedes assured the 
Ambassador that the investigation is continuing, so we are 
taking the same approach: concern and watchful waiting to see 
how the case will be prosecuted. 
 
SENSITIVITIES 
 
(SBU) The Central Bank's earlier bailout of the insolvent, 
and now liquidated, Baninter, contributed directly to 
financial anxiety and accelerated the depreciation of the 
peso.  The Central Bank felt betrayed then because it had 
made loans to Baninter as bank officials were shoveling money 
out the door and out of the country.  As for this new case 
with Bancredito, however, its purchase by the Leon Jimenez 
Group will ensure that the bank stays open. 
 
(SBU) Confidence in the Dominican judicial process remains 
very low.  The public assumes that the accused in both cases 
will go either unprosecuted or unpunished.  Lawyers for 
"Ramoncito" Baez Figueroa of Baninter told the press on 
November 17 that they would be petitioning for his release, 
"just as with the officials of Bancredito."  With the 
November 18 reforms they formally requested a review of the 
detention order against him. 
 
MESSAGE: FRAUD HURTS EVERYONE 
 
(SBU) Embassy Santo Domingo is working at all levels to 
encourage full investigation and prosecution of bank fraud. 
We are engaging government officials, civil society, business 
leaders and others with the message that banking fraud was a 
major factor in the nation's financial plight and has hurt 
everyone in the Republic.  We continue to urge prosecution of 
complex fraud cases.  During his visit on November 21-22, 
Treasury Under Secretary John Taylor further reinforced this 
effort. 
 
(end text). 
 
2.  (U) Drafted by Angela Kerwin. 
HERTELL