US embassy cable - 05SANTODOMINGO3864

UNCLAS SECTION 01 OF 07 SANTO DOMINGO 003864 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR WHA/CAR (SEARBY), DEPT PASS TO SEC, FEDERAL 
RESERVE; TREASURY FOR WAFER, DOJ FOR OIA (MAZUREK AND 
ORJALES) 
 
E.O. 12958: N/A 
TAGS: DR, EFIN, KJUS, PGOV, PREL, Banking 
SUBJECT: DOMINICAN BANKING #9 -- MEJIA SAYS "BANKING FRAUD" 
RIGHT OUT LOUD 
 
REF: 05 SANTO DOMINGO 3723 
 
1.  (SBU) This is number 9 in a series of cables on 
consequences of the Dominican bank failures of 2003. 
 
Dominican Banking Series #9 -- Mejia Says It Right Out Loud: 
"Banking Fraud" 
 
More than a year of virtual silence on Dominican banking 
frauds has ended with Hipolito Mejia's erudite, detailed and 
dignified public rebuke to Leonel Fernndez.  Mejia's 15 page 
letter, sent on July 29 and published as a paid advertisement 
on July 31, cites extensively texts of reports and remarks by 
the IMF, reputable bank analysts, the Inter-American 
Development Bank, the UN Development Program, U.S. Treasury 
Under Secretary John Snow, ambassadors accredited to Santo 
Domingo, and Dominican civic organizations, then explains and 
defends his economic management, and concludes with a 
statesmanlike offer to cooperate in the national interest and 
to assure that his party, the PRD, does so as well. 
 
The case against Baninter owner and executive Ramon Baez 
Figueroa has been kept out of the public eye almost since 
Figueroa was set free on a bail pledge on Christmas Eve, 
2003.  Investigating magistrate Eduardo Sanchez Ortiz took 
more than nine months to assemble the elements for the formal 
charge, operating as the sole investigator and shaper of the 
case under the former Napoleonic Criminal Procedures Code; 
Baez's attorney Vincio "Vincho" Castillo stalled procedures 
for nearly a year by petitioning for removal of the president 
of the three-judge panel charged with assessing the 
recommendations of Sanchez Ortiz.  That motion was denied on 
March 28 of this year, allowing the judicial process to 
continue. 
 
Any news item ages, but the long absence of the Baninter case 
from public discourse and from the media has been of 
particular concern.  The Fernandez administration 
consistently avoided comment both in public and with the 
Ambassador and staff in private, commenting simply that the 
matter was with the courts.  There has been little movement 
in the Bancredito case of Arturo Pellerano, suspended in 
November 2003 apparently out of deference to the Pellerano 
family; in the Banco Mercantil case one individual, Andres 
Aybar, was arrested and charged on June 14, 2005. 
 
The impression left by this relative silence was that Bez 
and his associates were being left to bribe, influence and 
intimidate their way out of the charges, and that these 
important cases would face the oblivion characteristic of all 
corruption cases in Dominican justice over the last twenty 
years.  The only counter indication to this has been the 
Central Bank's dogged pursuit of Luis Alvarez Renta in the 
civil courts in Miami, despite the recommendation by Snchez 
Ortiz that Alvarez Renta not face criminal charges in the 
Dominican Republic. 
 
In this setting, in his extempore public remarks in May and 
June Fernandez had on several occasions blamed the financial 
and economic crisis of 2003-2004 on Mejia "mismanagement" of 
the economy, while conspicuously omitting any mention of bank 
frauds.  This appeared to be one more indication that the 
cases were slipping away. 
 
Hipolito Mejia had remained low profile for the May-June PRD 
party consultations, which resulted in the election of his 
ally Ramon Albuquerque to head the party.  This was unlike 
the brash, rough, comic speaker during the 2004 presidential 
campaign, capable of goading candidate Fernndez for wearing 
"panties" and spending all his time on the Internet.  But the 
letter Mejia sent to Fernandez last Friday, in addition to 
assuming the newly dignified stance of a statesman, did the 
country the service of documenting the belief of the 
community of experts and international institutions that 
fraud at Baninter and other banks was the greatest proximate 
cause of the nation's misery in 2003-2004, and that the fraud 
had been undetected or not pursued until the pyramid 
accounting schemes collapsed in late 2002. 
 
Mejia's document is specific, extensive, sober, and well 
reasoned.  His dignity and espousal of the national interest 
raise his profile sharply and stand in strong contrast to the 
glib, relatively slippery "big picture" analysis that 
Fernandez spins out on public occasions and in private.  The 
inept drafting of the constitutional amendment of 2002 leaves 
Mejia ineligible to present himself as a presidential 
candidate once again; if that were not the case, his July 29 
letter would have established a platform for a new 
presidential bid.  He belied the tone somewhat during a 
television interview on August 1 in which he groused in his 
more characteristic style about the ineptitude of the 
Fernandez administration. 
 
Fernandez was in Panama for a regional summit when the letter 
arrived.  Presidential legal advisor Cesar Pina Toribio and 
the presidential press spokesman replied to journalists that 
the administration is not in any way interfering with the 
courts - partial and insufficient replies to Mejia's theses. 
In El Caribe of July 31 senior columnist Miguel Guerrero 
regretted that the administration had not waited to reply to 
Mejia until President Fernndez could evaluate the former 
president's reasoning and his offer to assure that his party 
in Congress supports measures in the national interest. 
 
In the meantime, as the papers are playing up the Justice 
Ministry's semi-annual report on homicides and decrying gang 
violence, last week's sicario-style hit against Ramon Baez's 
former assistant was a disquieting indication that white 
collar crime might not be as bloodless as it appears.  Angel 
Miguel Antonio Bello Perez was driving along the 27 of 
February elevated roadway in the center of town at night when 
several individuals pursued him and riddled him and his 
pickup truck with bullets as he tried to elude them 
andmaneuver out of the road,s narrow chute. The police have 
told the public that Bello had just exchanged a large sum of 
cash at an exchange house and was the victim of a robbery 
attempt.  Their theory does not account for the violence of 
the attempt or the fact that it was carried out in such a 
precarious and public place. 
 
2. (U) Drafted by Michael Meigs. 
 
3.  (U) Appendix:  Informal translation of the concluding 
pages of Mejia's letter of July 27 to Leonel Fernandez. 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
- - 
 
Mr. President:  From the analysis by international experts, 
multilateral financing organizations, international entities 
which provide follow-up to the development of the nations of 
the world and the region, by the United States Department of 
the Treasury, representatives of foreign governments in our 
country, officials of its own government, and the Association 
of Banks of the Dominican Republic, one can conclude that: 
 
a)  The banking crisis was the result of a fraud to benefit 
the owners or companies and persons linked to the banks that 
caused the crisis. 
 
b)  The fraud occurred over an extended period of time which 
included not only the first two years of my administration, 
but also the four previous years presided over by you. 
 
In this regard, you can ask the Governor of the Central Bank 
to send you the documentation where it reveals that in the 
case of Baninter, the fraud began to take  shape in 1989. 
 
c)  The banking supervision before the crisis exploded was 
very deficient.  This includes the supervision of the last 
fifteen years, which includes the four years of the 
government which you presided over from 1996 to 2000.  It was 
during my government that the bank fraud was discovered and, 
once proven/confirmed, we acted in consequence, submitting to 
the justice system those responsible for same. 
 
d)  Those responsible for the fraud managed to outwit not 
only the supervisory authorities but also the monetary 
authority of the country.  Well-known international firms 
such as PriceWaterhouseCoopers were also fooled, despite the 
fact that they have more qualified technical resources than 
those which the Superintendency of Banks of the Dominican 
Republic has generally had.  The present  Governor of the 
Central Bank could send you a copy of the letter sent by 
PriceWaterhouseCoopers to the President of Baninter, in which 
it reveals that that firm of external auditors was also 
fooled by the executives of that bank. 
 
e)  Almost all of the experts and entities mentioned 
acknowledged that the decision to rescue the depositors of 
the banks which had been fraudulently bankrupted was taken 
given the perception that if that had not been done, the rest 
of the banking system could have been affected, giving rise 
to a systemic crisis that would  cause the payment system to 
collapse.  The present authorities of the Central Bank could 
confirm to you whether it is true or not that 19 savings and 
loan associations and  3 multi-banks had substantial deposits 
in Baninter and several pension funds, retirement plans, as 
well as deposits of foundations, non-governmental 
organizations, and churches. (sic) 
 
f)  The economic and financial crisis of 2003, which was 
manifested in the form of a heavy devaluation, accelerated 
inflation, an increase in the deficit of the public sector 
due to the arising of a considerable quasi-fiscal deficit of 
the Central Bank, a loss of reserves, an increase in the 
public debt, and economic stagnation, was unleashed by the 
banking crisis, and not the reverse, as you and some of your 
functionaries have indicated.  None of the experts and 
entities mentioned has stated that in 2001 and 2002 the 
country was immersed in an economic crisis. 
 
g)  The bank frauds were what caused an intense wave of 
uncertainty and distrust, which led to a greater 
dollarization and flight of capital.  The mistrust and 
uncertainty, therefore, were not produced by the economic 
policy of 2002-2003 but rather by  the uncovering of the 
enormous bank fraud, which  (sic) 
 
h)  both the IMF and the Dominican government considered that 
it should be made known to the entire country, to establish 
clearly that those responsible for the bank frauds would have 
to pay for the consequences of their actions under the terms 
established by the Dominican justice system. 
 
i)  Abiding by the formulas for liquidation and dissolution 
provided by the Monetary and Finance Law, in the opinion of 
experts, was not feasible in the case of the collapse of the 
largest bank in the country, if one wanted to avoid a domino 
effect which would infect the rest of the system%s banks. 
For that reason the IMG required the approval of a 
complimentary Law (the law of Exceptional Program of 
Prevention of Risk for Financial Intermediation Entities) to 
the Monetary and Finance Law, because the latter did not 
contemplate the occurrence of situations such as the one 
presented in the Dominican Republic in 2003. 
 
j)  The decision in 1996 to sell the Banco del Comercio 
Dominicano to Baninter, when the latter had already been 
violating banking norms for seven years with the so-called 
parallel bank that was hiding in accounts under the title of 
&interbank,8 unfortunately, constituted an incorrect 
decision.  If memory does not fail me, I believe that it was 
in mid-1997, when you were the President of the Republic, 
that Baninter acquired the Banco del Comercio Dominicano, a 
bank with serious problems of liquidity and solvency, which 
before being handed over to Baninter, was cured by the 
Central Bank. 
 
The hypothesis which you and some of your functionaries, 
specifically the President of the Board of Economic Advisers 
and the Secretary of State for Finance, hold that it was the 
economic policy carried out in the first two years of my 
government which caused the banking crisis that the country 
faced in 2003 has disturbed not only Dominican society but 
also governmental, multilateral, financial, and international 
 economic circles. 
 
The astonishment has been enormous, as all the evidence and 
analysis of international experts, of multilateral financing 
entities leave no doubt that the cause of the banking crisis 
was a fraud that had been taking place since 1989 and which 
began to have repercussions in August of 2002, exploded in 
April of 2003, and was made known to all of the country in 
May of 2003. 
 
Baninter began to face liquidity problems in August-September 
of 2002.  In case you do not remember, the Dominican economy 
was growing at a relatively high rate during the first half 
of the year 2002, amounting to 7.3%.  The deficit of the 
consolidated public sector was 2.2% of the GNP, less than the 
4.3% that you handed over to me in August of 2000.  The 
deficit of the current account of the balance of payments was 
4.3% of the GNP during the first 9 months of 2002, less than 
the 6.7% that you handed over to me in August of 2002. 
 
In August of 2000 you handed over to me an economy with an 
exchange rate of RD$16.50 per dollar.  In August of 2002, 
that is to say, two years later, the exchange rate was 
RD$18.46 per dollar, for an accumulated depreciation in two 
years of 11.9%, which ws quite in line with the inflation of 
14.% that was verified from August of 2000  to August of 
2002, revealing that the real exchange rate did not suffer 
sudden movements/shifts that could harm any particular sector 
of the economy.   I do not know why some of your officials 
state that when Baninter began to request liquidity 
assistance from the Central Bank in August of 2002, the 
exchange rate rose to 20, 23, or 26 to one, when in reality 
it was 18.46 to the dollar, which they use to uphold the 
absurd thesis that it was the &exchange crisis8 that 
detonated the bank crisis. 
 
Don%t forget, Mr. President, that you handed to me a Central 
Bank with barely US$197 millions in Net International 
Reserves, which as you will not have forgotten was due to 
your decision not to adjust the prices of fuels in October of 
1999, and the decision made by the authorities of the Central 
Bank to gradually consume the reserves existing at that 
moment  up to August of 2000.  The reserves fell by US$350 
millions from December of 1999 to August of 2000.  In August 
of 2002, when Baninter began to request liquidity assistance, 
the Net International Reserves of the Central Bank were 
US$546 millions, almost three times what you handed over to 
me. 
 
As you see, Mr. President, the economic indicators that the 
Dominican economy presented during the first 8 months of 2002 
were better than those you handed to me in August of 2000. 
The careful review of them will not allow any qualified 
analysts to deduce that these indicators, deriving from the 
anti-cyclical economic policy that we adopted in order to 
face the negative external shocks that we faced in 2001 and 
2002, were the causes of the bank fraud that was discovered 
in 2003. 
 
The crisis of Baninter, Bancrdito, and Banco Mercantil was 
not caused by the economic policy, but rather by practices 
that international experts categorize as frauds and 
administrative handlings totally foreign to established norms. 
 
Allow me, with all due respect, Mr. President, to ask you the 
following question:  If as you say, it was the supposed 
bad/wrong economic policy of my government that precipitated 
the crisis of Baninter, Bancrdito, and Banco Mercantil, why 
then didn%t the rest of the country%s banks also fail? 
 
The answer to this question, for all international experts 
and multilateral financing agencies, is obvious.  For all of 
them, the origin of the crisis was a fraud, nothing more. 
For that reason all have been disturbed and surprised by the 
strange hypothesis which you and some of your officials have 
presented. 
 
I cannot let pass the opportunity to explain to you why in my 
government the decision was taken to save/safeguard the 
depositors, beyond the reasons advanced above by 
international experts and multilateral financing agencies, 
who make their statements on the basis of experience in the 
world when the collapse is located in a &bank which is 
very/too large to collapse8 and the authorities fear the 
real possibility of contagion by the rest of the system, 
which would, in the absence of the rescue of the depositors, 
would cause the collapse of the system of payments and the 
arising of a large and prolonged recession in our country. 
 
For years the different governments that we have had, 
including yours and mine, have struggled to encourage 
Dominicans to save and invest in this country.  For years, on 
many occasions, the authorities of the Superintendency of 
Banks repeated to the holders of savings accounts and to 
depositors in the banking system, that the Dominican system 
was healthy and solid, that there was nothing to fear, 
statements which were made on the basis of the financial 
statements that the banks delivered to the supervisory 
authorities.  In April of 2003, when the fraud was revealed, 
we had two options:  to rescue or not to rescue the 
depositors who had believed in what the different 
governments, for years, had been telling them:  that saving 
and depositing in our banks was safe.  Your own Foundation, 
Mr. President, the Fundacin Global Democracia y Desarrollo, 
was among those Baninter depositors, with two current 
accounts, 1 savings account, and 64 financial certificates 
totaling RD$119,132,136.98. 
 
I did not hesitate for a single instant to recognize that the 
decision made by the monetary and financial authorities of my 
government was the correct one.  I acknowledge that the way 
in which the depositors and owners of savings accounts were 
rescued, with titles and short term certificates, is a matter 
which is subject to debate and argument.  But when one is 
faced with a risk of contagion as high as the one perceived 
by the monetary authorities and the IMF itself, there is not 
much room or time to theorize, while hundreds of thousands of 
depositors and savers  throughout the entire system are 
waiting for signals to determine whether they should move 
their savings abroad or not. 
 
The decision that was adopted constituted an exercise in 
justice and responsibility of State, even though aware of the 
negative political effects that this would cause my 
government and my political future, which at that moment 
enjoyed an ample advantage in popularity surveys.  I was 
simply assuming the blame for all of the governments of the 
decade of the 1990%s, mainly yours corresponding to 
1996-2000, because they were incapable of setting the bases 
necessary to safeguard the sacred savings of the people. 
 
I am not aware of a single banking crisis in the world that 
has not had serious fiscal repercussions.  Ours cost 21% of 
the GNP.  Argentina%s (1980) and Indonesia (1997) cost 55% 
of the GNP, China (1999) 47%, Jamaica (1995) 44%, Chile 
(1981) 42%, Thailand (1997) 35%, Macedonia (1993) 32%, 
Uruguay (1981) and Turkey (2000) 31%, Israel (1983) 30%, 
South Korea (1997) 28%, Japan (1992) 24%, Venezuela (1994) 
22%, Ecuador (1998) 20%, and Mexico (1994) 19%.  Why do they 
generate these fiscal costs?  Because  in the end, the risk 
of not rescuing the banks and/or the depositors is too high. 
In our case, the banks could not be rescued because the 
origin of the collapse was fraud.  For that reason, the ones 
who were directly rescued were the depositors and savers. 
 
President, you left me no other alternative than coming out 
in defense of my administration,  pointing out to you 
relevant and inarguable aspects of the reports from all of 
the international experts contracted by the IMF and other 
multilateral organizations, who because of  their nature and 
professionalism, maintain a totally independent attitude, 
without any political ties and without binding themselves to 
public positions, in contrast to some functionaries who in 
order to stand out and impress their Presidents, lead us to 
make statements lacking in foundation, instead of objectively 
and professionally informing us. 
 
Mr. President, the banking crisis caused by the fraudulent 
activities of some private banks is an extremely serious 
subject and, therefore, it requires that all of us treat it 
with the degree of seriousness and depth that it deserves. 
This includes you as President of the Republic and myself as 
former President.  The price that all of us Dominicans have 
had to pay for the fraud committed by private bankers has 
been enormous.  Let us allow justice to do its work and let 
us avoid, with our statements, any disturbance of the 
transcendent work performed by one Power, which like the 
Judicial Power, must operate outside of political pressures. 
 
Lastly, I invite you to reflect profoundly on this subject. 
If for reasons of which we are not aware it is uncomfortable 
for you to recognize in the fraud of the private bankers the 
only and true reason behind the banking crisis of 2003, 
evaluate whether silence constitutes a less irritating option 
for the country, than the presentation of hypotheses bsed on 
the criteria that everything bad is due to the previous 
government. 
 
I exhort you to look ahead/forward, lending urgent attention 
to the serious problems which could be incubating in the 
national economy, due to an excessive and 
extemporaneous/untimely rigidity of the norms of the banking 
system, specifically in relation to the Regulation for the 
Evaluation of Assets, which is the fruit of impositions by 
the IMF, despite the enormous progress in matters of 
solvency, capitalization, and improvement of the mechanisms 
of governability which the national banking sector has 
experienced in the last two years. 
 
I take advantage of this occasion to repeat to you that your 
government may always count on my support for the approval of 
all those reforms and measures which our country may require 
to face the challenges and opportunities that CAFTA-DR 
presents us, as well as the coherent initiatives which permit 
the solution of the problem of the Central Bank,s debt, 
because so long as we do not face the root problem of the 
significant  quasi-fiscal deficit, it will not be possible to 
guarantee the permanent of price stability.  It seems to me 
that the role that the Legislative Power has played, in which 
the Dominican Revolutionary Party has a majority 
participation, approving all of the reforms which your 
government has submitted for its hearing, is a clear 
demonstration that for our party and for the undersigned, the 
country comes first before our party or private interests. 
For those purposes you can count on our support, 
 
Yours very truly, 
 
Hiplito Meja 
 
 
4. (U) This report and others in the series are available on 
the classified SIPRNET at 
http://www.state.sgov.gov/p/wha/santodomingo/  along with 
extensive other material. 
HERTELL