US embassy cable - 05SANTODOMINGO4979

C O N F I D E N T I A L SECTION 01 OF 03 SANTO DOMINGO 004979 
 
SIPDIS 
 
DEPT FOR WHA, WHA/CAR, WHA/EPSC, EB/IFD/OMA (SEARBY); DEPT 
PASS TO SEC, FEDERAL RESERVE; TREASURY FOR KUSHLIS, TOLOUI, 
WAFER, KLINGENSMITH; DOJ FOR OIA (MAZUREK AND ORJALES); 
SOUTHCOM ALSO FOR POLAD; NSC FOR LATIN AMERICA OFFICE 
 
E.O. 12958: DECL: 11/09/2015 
TAGS: DR, EFIN, KJUS, PGOV, PREL, Banking 
SUBJECT: DOMINICAN BANKING #12: MORE BANK FRAUD, THIS TIME 
AT PROGRESO 
 
REF: SANTO DOMINGO 4610 
 
1.  (U) This is number 12 in a series of cables on the 
Dominican banking sector. 
 
More Bank Fraud, This Time at Progreso 
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(SBU) Another Dominican bank has turned up a potentially huge 
and probably fraudulent hole in its balance sheet, despite 
the IMF-mandated improvements in banking laws and 
supervision.  The bank's board, which includes some of the 
wealthiest business families in the country, has moved 
quickly to assemble funds to cover their exposure, so as to 
keep the bank viable.  The outcome remains uncertain. 
 
(C) The owners of the Banco del Progreso, with about 10 
percent of the deposits in the Dominican banking systems, 
learned on the last weekend in October they had unexpected 
additional liabilities totaling about 5 billion Dominican 
pesos,  equivalent to more than USD 150 million.  They met 
immediately with other leading bankers and with government 
authorities but said nothing to the public.  On November 1 
the board announced without comment the appointment of 
Roberto Bonetti as the new bank president and Manuel Diez as 
the new chairman of the holding company Grupo Progreso. 
Pedro Castillo, formerly president both of the bank and of 
Grupo Progreso, dropped out of public view and has reportedly 
traveled to the United States. 
 
(C) The immediate worry in the administration and in banking 
circles was that precipitate revelation of the apparent loss 
would cause a run on the bank that could degenerate into 
unmanageable pressures on the banking system.  Pedro Castillo 
reportedly had gone to Listin Diario newspaper with a 
defensive version of the facts but we have been told that 
Director General of Customs Miguel Cocco effectively warned 
the paper late on Sunday, October 30, not to run the story. 
Cocco is said to have telephoned Listin owner and Baninter 
defendant "Ramoncito" Baez directly.  Cocco passed the same 
message to other papers. 
 
- - - - - 
The Scam 
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(C) Those well acquainted with the events indicate that the 
banking reforms instituted at IMF advice had dealt with bank 
surveillance but had not yet instituted new or adequate 
controls on bank holding companies. These reforms are 
scheduled for implementation in July, 2006.  Castillo is said 
to have taken advantage of his dual presidency of the bank 
and Grupo Progreso to issue from the holding company in 
2003-2004 a large amount of commercial paper.   This was 
irregular but not technically illegal. The Progreso Group, 
however, openly carried about 3 billion pesos' worth (USD 90 
million) on the bank's books.  We have learned that the IMF 
had earlier urged that the banking authorities to oblige the 
Group to "unwind" these liabilities. 
 
(C) The Grupo Progreso board commissioned a special review 
after getting hints from staff that something was wrong. 
Their Boston-based forensic audit consultant told them that 
the total of the outstanding commercial paper was 8 billion, 
not 3 billion -- a completely unexpected increase in 
liability by more than US 150 million.  There is apparently 
little indication of where the money went; all of the 
commercial paper is redeemable upon maturity by presentation 
to the bank.  Paper for a full 5 billion pesos falls due this 
month. 
 
(C) Progreso's leading shareholders include members of the 
prominent Viccini, Bonetti, and Perello families.  They say 
that they are paying out of pocket proportionately large sums 
to help cover the liabilities with at least US $150 million. 
The government-owned Banreservas has agreed to a bridge loan 
of 1.3 billion pesos (about US$ 43 million) to meet immediate 
needs, a fact confirmed to the Charg by Technical Secretary 
of the Presidency Temistocles Montas.  These contributions 
may have reduced the risk of a run on the bank; a board 
members says that a number of those who have redeemed paper 
have redeposited their funds with the bank.  But rumors and 
information about Progreso's problems are circulating widely 
and freely. 
 
(SBU) Unknown for now are the identities of the approximately 
2500 holders who acquired the paper as private placements 
through the group's subsidiary Provalores. 
 
(C) Progreso President Pedro Castillo had told the board he 
was issuing commercial paper to take advantage of the 
opportunity to arbitrage between interest rates available 
there and Central Bank certificates of deposit, which hit 
unprecedented highs a year ago.  CB rates have steadily 
fallen since that time.  A leading board member says that 
they weren't informed of the amounts and the board did not 
follow the matter closely.  This person told us that only 
very little of the money, if any at all, went into Central 
Bank paper; funds probably went into bad loans, servicing 
interest, and Castillo's personal purchases.  When he left, 
Castillo walked out with the files but failed to gather 
copies held elsewhere in the bank.  Board members intend to 
have him prosecuted. 
 
(C) IMF resident representative Ousmene Mandeng acknowledged 
to us on November 4 the seriousness of the unexpected gap in 
Progreso financing and said that the Fund has been in close 
consultation with the banking authorities.  In contrast to 
the situation of the time of the 2003 bank failures, the 
Dominican Republic now has in place its Law on Systemic Risk 
that obliges the authorities to take action as required, 
including, if necessary, direct intervention in the bank to 
prevent a run, to guarantee continuing operations, and to 
prevent financial contagion.  A previously scheduled IMF team 
arrived on November 7, headed by Guy Meredith and including 
three members from the IMF's monetarty and exchange division. 
 They called on the Charg on November 9 and undertook to 
consult further, later in the week. 
 
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Context and Implications -- Not Good 
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(SBU) The Progreso revelations occur just as a U.S. civil 
court has sentenced Baninter-affiliated businessman Luis 
Alvarez to pay USD 174 million in restitution and damages for 
laundering money through U.S. banks, and accusations against 
"Ramoncito" Baez and confederates have been sent for criminal 
trial in the Dominican Republic.  One effect is that these 
events, positive in themselves for the pursuit of justice, 
become a backdrop for yet more of a story on fraud and 
banking corruption -- emphasizing the worst possible aspects 
of the country for international investment.  They also 
indicate once more the enduring risk incurred by any pension 
funds, which by law must be invested in Dominican commercial 
banks. 
 
(C) Progreso shareholders appear to have demonstrated 
unexpected tenacity and forthrightness in their dealings to 
date -- immediately informing other leading banks and putting 
together a rescue plan while hiring a top-level international 
firm to handle the public relations for recovery.  Board 
members invited leading press editors to lunch on November 8 
as a major step in managing public perceptions.  The November 
9 press coverage focused on new president Bonetti's 
assurances that the bank is strong and his comment that 
Castillo left because of "differences of policy."  The Q&A 
exchanges recorded in the article in on-line journal 
www.clavedigital.com show that Bonetti had been very 
carefully coached to provide a maximum of reassurance, a 
minimum of controversy, and no numbers at all. A lawyer from 
the defense team for "Ramoncito" is quoted in Listn, goading 
banking authorities to tell the public more. 
 
(C) The government comes out less well.  Progreso board 
members met President Fernandez on November 3 to inform him, 
just before Fernandez departed for the OAS Summit in 
Argentina.  Fernandez was understandably non-commital and he 
declined their request to order a "no-fly" lookout for 
Castillo, who had not been charged.  But banking authorities 
failed to ensure adequate handling of the matter over the 
course of months; Cocco's overnight intimidation of the media 
might have been understandable for initial prudential 
management of risk, but in fact the news shutdown lasted for 
more than a week.  Banking Superintendent Camilo and Finance 
Minister Bengoa both denied on November 7 that anything 
untoward was going on at Banco Progreso, assertions that 
should earn them noses like Pinocchio.  Technical Secretary 
Montas commented to the Charg and USAID Director on November 
7, "If everything goes well, the public might never have to 
know how much money is involved." 
 
2.  (U) Drafted by Michael Meigs. 
 
3.  (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. 
KUBISKE