Publish in Perspectives - Wednesday, June 19, 2019
Venezuelan president Nicolas Maduro flanked by other ALBA leaders, including Nicaraguan President Daniel Ortega and Bolivian President Evo Morales. (Photo: EsmeMX)
Venezuela’s survival through the Bolivarian Joint Criminal Enterprise.
BY DOUGLAS FARAH
AND CAITLYN YATES
In 1998, the Venezuelan people elected Hugo Chávez, initiating a regional movement known as the Bolivarian Revolution. In an effort to isolate the United States and promote his “Socialism for the 21st Century” political project, Chávez systematically consolidated power in the executive branch. He in turn transformed PDVSA – the Venezuelan national oil company – into a multi-billion dollar regional enterprise operating in concert with sympathetic political leaders, economic elites and criminal organizations. While Chávez led the project, he was aided by the political leadership in Cuba, Nicaragua, Bolivia, Ecuador, Suriname and El Salvador. Over the past 20 years, this criminal network grew to encompass several dozen individuals and hundreds of front companies. Nicolas Maduro then warmly inherited this criminal regime in 2013 after Chávez’s death. Twenty years after the political project’s inception, the network spans the globe, from El Salvador to the United States, from Russia to Hong Kong, and across several offshore financial havens in between.
Yet even after the United States’ sanctioned hundreds of individuals and entities on charges like drug trafficking and money laundering, Maduro continues to serve as Venezuela’s de facto leader. The results of this criminal regime culminated in a Venezuelan economy that shrunk by more than 50 percent while at least 10.5 percent of the Venezuelan population now live as refugees. This increasingly visible crisis imposes enormous costs on regional neighbors. Meanwhile, the illicitly laundered funds undermine the rule of law and democracy, wreak havoc on the legal economies, strengthen corrupt autocratic regimes, and create spaces where transnational organized criminal networks thrive. While the dynamics of joint criminal activities in Venezuela remain largely unchanged, the Maduro regime is increasingly feeling the domestic and international pressure for regime change.
This report highlights the scale of what we call the Bolivarian Joint Criminal Enterprise. Here we highlight some of the criminal typologies used by the network and explore the wider impact of this network’s actions. The brief compiles fieldwork conducted over five years in 11 countries and augments this qualitative analysis with open source research and data analysis. Ultimately, we argue that the Bolivarian Joint Criminal Enterprise is not a single entity, but rather a network of allied companies, regional structures, and historically linked individuals operating across the globe. Unless the network is attacked from multiple points simultaneously, the alliance will survive and morph into a more dispersed and sophisticated operation.
On July 26, 2018, 12 individuals tied to Venezuela’s state oil company PDVSA were charged in the Southern District of Florida with conspiracy to launder $1.2 billion from the oil company through U.S. banks, brokerage firms, and real estate investment companies. The criminal complaint detailed at least one tool in the Venezuelan government’s criminal toolbox to move significant sums of money to safe harbor over the last decade. While the complaint (and its subsequent convictions) are important, this case represents only one facet of the manner in which funds have been illicitly moved by state structures since the Bolivarian Revolution was launched with Hugo Chávez’s election.
With the guidance of Fidel Castro, Hugo Chávez was elected to be Venezuela’s president in 1998 as a folk hero following his failed 1992 coup d’état. Chávez’s Bolivarian project was, from its inception, an effort to create a new economic and political model for Latin America, while simultaneously engaging in political and economic warfare against the influence of the United States. This vision for creating “21st Century Socialism” included creating, at least in spirit, a political union comprised of Venezuela, Colombia, Panama, Ecuador, Peru and Bolivia. He ran on a highly popular anti-corruption and populist platform and viewed Venezuela’s vast oil wealth as a financial means to this anticipated political end.
With oil prices high, and a broad disillusionment with the region’s historic ruling elite, Chávez seized the moment to launch his populist movement across the region. In doing so, between 2005 and 2010 he successfully helped finance the presidential campaigns of likeminded radical populist authoritarian strongmen. These leaders included Evo Morales (Bolivia), Rafael Correa (Ecuador), Mel Zelaya (Honduras), Daniel Ortega (Nicaragua), Mauricio Funes – financed by José Luis Merino (El Salvador), and Desi Bouterse (Suriname). Chávez also maintained strong relationships with the leftist Luiz Inácio Lula da Silva government in Brazil and the radical populist government of Cristina Fernández de Kirchner in Argentina.
It is no coincidence that most of the Bolivarian member states leaders also shared histories fighting in support of far-left armed guerilla forces. While the Bolivarian Revolution institutionally began in 1998, the roots of this movement began decades earlier, with Nicaragua’s Sandinista National Liberation Front (FSLN), El Salvador’s Farabundo Marti National Liberation Front (FMLN), the Cuban Revolution, and the Revolutionary Armed Forces of Colombia (FARC). Decades later, the memories and relationships developed during these civil conflicts brought a deep bond of trust among the newly-empowered leaders. Chávez’s stature in the Bolivarian group was derived in part from his military experience and guerilla ideology, but mostly from his willingness to spend billions of PDVSA dollars across the hemisphere.
This alliance of Bolivarian states together with the FARC have coalesced into what we define as the Bolivarian Joint Criminal Enterprise – or a consortium of criminalized states and non-state actors working in concert with shared objectives. This joint criminal enterprise has not only taken billions of dollars from Venezuelan state coffers, but also used PDVSA as the central structure for money laundering and corruption throughout the region. The criminal portfolio used by those in this movement has continued to diversify as oil prices dropped and PDVSA’s production stalled. Such conditions forced incoming president Nicolas Maduro to rely even more on activities like cocaine trafficking and illicit gold production, but even with PDVSA’s decline the regime continues to function as a criminal operation.
This report offers an overview of a facet of the complex, global, and frequently state-sponsored criminal enterprise. We base our findings on five years of field research and document collection across 11 countries, as well an open source data mining and link analysis. We argue that the Bolivarian Joint Criminal Enterprise should be understood as a network of networks – not as isolated set of unrelated activities in different Latin American countries. In total we identified 181 individuals and 176 companies operating in at least 26 countries. The sum of this criminal actions is not fully known, but a recent investigation by a Latin American journalist consortium found that Venezuela siphoned $28 billion out of PDVSA. We have traced at least $10 billion in Venezuela-related funds that moved through this criminal network between 2007-2018.
Ultimately, we argue that the most difficult challenge to dismantling the Bolivarian Joint Criminal Enterprise is in tackling the network’s diversified criminal portfolio and global reach. We examine only five of the many criminal typologies under which the group engages, including fictitious oil sales and loans; physical asset purchases; fictitious state mega infrastructure projects; illegal gold mining; and bank to bank transfers. We ultimately argue that despite U.S. economic sanctions, growing international condemnation, and a lack of political legitimacy, the Maduro regime has not collapsed and may not for a significant period of time. Actions like designating PDVSA and senior leaders are critical. However, the network’s ability to adapt and diversify their criminal portfolio means that money continues to flow into the regime’s coffers.
FALSIFIED OIL SALES
Falsified oil sale schemes are the foundation upon which the Bolivarian Joint Criminal Enterprise began. Venezuela’s PDVSA is the majority shareholder in several regional oil subsidiaries through its PDV Caribe branch. PDV Caribe owns 60 percent of Alba Petróleos in El Salvador and 51 percent of Albanisa in Nicaragua. The Venezuelan company’s control of each company involved in the ALBA consortium allows for funds to move through the Venezuelan company to its Central American subsidiaries with ease. Moreover, the sums of money moving through PDV Caribe are significant.
Author interviews with individuals close to Alba Petróleos found that the subsidiary received virtually no oil from PDVSA between 2010 and 2017, yet the Salvadoran subsidiary recorded incomes of approximately $200 million a year – totaling around $1.2 billion through that examined timeframe. In Nicaragua, Albanisa did receive some oil from PDVSA, but the Nicaraguan subsidiary still received funds far outvaluing the imports. In Albanisa’s case, the money provided totaled $400 million to $600 million a year, or $4 billion to $6 billion in illicit funds over the past decade. These slush funds were handled by a small number of political elites even though the funds accounted for between 16 and 20 percent of the national budget in Nicaragua and 15 percent of El Salvador’s budget each year.
Yet, the funds never passed through a congressional budget allocation process or any accountability mechanism. To create a corresponding paper trail, both Alba Petróleos and Albanisa established dozens of front companies and enterprises investing heavily – at least on paper – in food production, financial institutions, airlines, think tanks, alternative energy projects, land acquisitions, gasoline stations, and other activities. All of these companies reportedly operated under the Alba banner and included interlocking corporate directorships, though seldom meeting the legal requirements for financial reporting. In both cases, interlocking networks of political party stalwarts, senior government officials and PDVSA officials run the subsidiary agencies. Most notably though, most of the projects that the oil companies claim to fund, do not physically exist or produce any goods or services.
In the case of Alba Petróleos, Jose Luis Merino (El Salvador’s Deputy Minister of Foreign Affairs for Investment and Financial Development and former FMLN commander) and a few other trusted front men and straw owners then set up a series of companies with interlocking ownership structures in Panama. From there, Alba Petróleos and its related companies loaned eight Panamanian companies under their control at least $1.1 billion between 2007-2017. These companies in turn moved the money to financial safe havens in the Caribbean and Europe including: the British Virgin Islands, the Cayman Islands, Belize, Switzerland, and Russia. Finally, they declared most of the debt unrecoverable.
In Nicaragua’s case, Albanisa’s funds are not as well traced because the Ortega regime systematically failed to file the required information and allowed only a few trusted people access to the financial records. However, the investigative website Confidencial and other investigators documented parts of the structure, which used similar methods to create dozens of front companies, including a bank (which will be discussed later in the report), for Albanisa to store funds while moving the money offshore.
CYCLICAL FIXED ASSET PURCHASES
On August 16, 2018 Venezuelan news broadcasting owner Raul Gorrín was charged with conspiracy to violate the Foreign Corrupt Practices Act (FCPA), conspiracy to commit money laundering, and money laundering. Gorrin pleaded guilty to all charges. This case serves as one example of how a fixed assets scheme can launder Venezuelan state funds out of the country and into financial safe havens or otherwise desirable third country locations. In the Bolivarian Joint Criminal Enterprise, the final destination of fixed asset practices is often the United States.
In total, 12 conspirators were named in the complaint for a foreign-currency exchange system scheme where the Venezuelan bolivar currency was traded for a fixed U.S. dollar price significantly higher than the official exchange rate. The scheme allegedly laundered between $1.2 and $2.4 billion through the U.S. financial system over the course of four years, Gorrin’s participation in the scheme totaled about US$ 159 million. While this scheme began only in 2014, Gorrin’s involvement dates back to 2008 when he first began paying bribes to retain business contracts. As he was a trusted partner for corrupt Venezuelan officials, Gorrin paid bribes and laundered funds over at least the last decade through PDVSA bank accounts that could operate in dollars without being subject to exchange controls or banking restrictions.
The exchange rate manipulation criminal typology gave regime insiders access to scarce dollars at highly preferential rates. Those involved were then instructed to take the dollars out of Venezuela, often disguised as funds for imports or earnings from exports. The exchange controls for normal citizens was necessary because unprecedented inflation made the local currency, the Bolivar, worth less every day and the regime was desperate to collect as many dollars (or anything other than Bolivars).
Much of this money first moved through the United States, into Switzerland, and then back to the United States. To conceal the origin of the funds, Gorrin moved money through front companies, including acquiring the Dominican bank Banco Peravia, to conceal the origin of the funds. From there, Gorrin obscured the origin of the laundered funds through real estate investments or the purchase of other fixed, tangible assets.23 The indictment found that among the purchases that Gorrin made with laundered funds, he purchased “approximately three jets, a yacht, multiple champion horses and numerous high-end watches.” As the funds were no longer in cash or an otherwise traceable form, the laundering scheme was more difficult to detect than if the moneys continued moving through banks or observable financial transactions.
As a result of his guilty plea, in November 2018, at least 24 of Gorrin’s properties (located in the states of New York and Florida) were seized. The seven condominiums in New York alone, have an estimated value of $40 million. Authorities also seized 17 prize horses and several luxury vehicles. In this case, as in most instances of this criminal typology, Gorrín was one of multiple participants, each carrying out one part of a larger whole. This continues to serve as a common criminal typology in several countries for the Bolivarian Joint Criminal Enterprise.
In recent years, the Bolivarian Joint Criminal Enterprise has diversified their operations into the illicit gold mining industry for profit and as a way to launder the proceeds of multiple illicit revenue streams through an underregulated industry. This is to say that the Enterprise’s decision to mine gold is at least in part due to the high prices of gold on the international market, the ease with which gold can be moved and converted to cash, and the low risk of detection for illegal gold transactions. The clearest example of the illicitly mined gold scheme in relation to this criminal enterprise is the Kaloti Suriname Mint House (KSMH) operating near Paramaribo, Suriname. Inaugurated in 2015, the company maintains a partnership between Suriname and Kaloti Precious Metals of the United Arab Emirates. The KSMH operates under the protection of president Desi Bouterse, a convicted cocaine trafficker, long-time weapons supplier to the FARC, and an individual who was elected with financial support from Chávez.
KSMH, an economically irrational, largely fictitious project that on paper cost $20 million, is in the most isolated country in the hemisphere. There is no competitive advantage to gold dealers from gold producing countries, who all ship their gold to Miami or Europe on daily direct commercial flights. Yet while Suriname produces roughly 28 tons of gold a year, the refinery was to have the capacity to refine 60 tons of gold. Multiple site visits in June 2016 to the KSMH in the town of Wit Santi near the country’s one international airport, found that no such refinery existed. In fact, the building that reportedly housed the project gave no indication of commercial activities. Interviews with gold dealers in Suriname confirmed the lack of the refinery.
What makes the KSMH so valuable, is the ease with which the Bolivarian Joint Criminal Enterprise can export their gold as originating in Suriname, disguising the real origin of the metal and avoiding scrutiny and sanctions. The gold moving through KSMH is unlikely to be legally produced in other South American countries but is ideal for accommodating illicit flows of resources and the accompanying laundering. In addition, IBI Consultants fieldwork found that KSMH, now officially charged with certifying Suriname’s gold exports, likely also exports non-existent gold, certifying exports without any gold actually being moved. In practice then, one can obtain a certificate of gold exports from Suriname without having to export any gold, creating a mechanism for justifying cash deposits that would otherwise be suspect.
As the movement of Bolivarian funds are under scrutiny, the Maduro regime is an ever more popular choice of activity to acquire cash that would otherwise be blocked by financial sanctions. In 2018 alone, the Venezuelan state sold 73.2 tons of gold in Turkey and the United Arab Emirates, with some of the gold ending up as far away as Uganda. Given that the Venezuelan Central Bank’s gold reserves grew by 11 tons in 2018 despite the ongoing selloff, it is likely that a significant amount of the commodity was mined illegally by dissident groups of the FARC and ELN. The sale of illegally mined gold, diamonds, coltan and other easy to distribute commodities that are otherwise difficult to trace, are an increasingly important criminal typology for the Bolivarian Joint Criminal Enterprise.
FALSIFIED INFRASTRUCTURE PROJECTS
The transfer of large sums of state money through non-existent infrastructure projects, is an important methodology used by criminalized states to launder funds. Because the state allocates the funds towards these projects and controls the state’s investigative bodies, oversight and accountability by state watchdogs are non-existent. Neither PDVSA, nor its Central American subsidiaries, could be investigated by tax auditors, law enforcement or financial control entities because all were under the control of the state whose leaders allowed the operations to go forward and who benefitted themselves from the activities. As this criminal typology has been perfected over time, this is now one of the most effective and least risky methodologies for the Bolivarian Joint Criminal Enterprise to use.
One of the largest of these cases, was the signature program announced between Albanisa and PDVSA in Nicaragua. In 2007, Presidents Chávez and Ortega jointly laid the ceremonial stone where Nicaragua was to build a large oil refinery to refine PDVSA’s heavy crude petroleum. The presidents announced the project would cost an estimated $6.6 billion, an absurd and economically irrational amount of money for such a venture. Grandly named “The Supreme Dream of Bolivar” (Supremo Sueño de Bolívar), the refinery on paper received an initial $32 million in start-up funding in 2008 and an additional $60 million over the following three years. In 2012 and 2013, the program received an additional $341.2 million. Since 2013, the exact sum of money dedicated this project is not known but the Venezuelan and Nicaraguan governments apportioned several tens of millions of dollars through 2015. At the point, the financial paper trail ended.
Yet the nearly half a billion dollars in paper investments that have already moved through this project, have left few visible results. Multiple site visits between 2014 and 2016 found only an empty field with a few storage tanks and a sagging wooden fence, with no signs of a refinery other than a few rusting storage tanks. In reality, the criminalized financial chain moved the funds from PDVSA through its Albanisa subsidiary and then redistributed the funds as payments for non-existent work and materials to a series of contracting companies linked to Ortega and Chávez governments. These front companies then moved the now untraceable “clean” money back into the control of the Nicaraguan and Venezuelan criminal structures.
While the refinery was one of the largest, fictitious state-to-state infrastructure projects uncovered in our field research, it was just one of dozens of similar enterprises that ultimately laundered hundreds of millions of dollars with the support of the Bolivarian Joint Criminal Enterprise. Other large projects included contracts for oil drilling that never took place, the construction of a vaccination plant that never produced a vaccine, a solar panel factory that produced no panels, a water bottling company that produced no bottled water, and dozens of other enterprises throughout the region. This continues to be one of the most frequently used criminal typologies by the Enterprise today.
BANK TO BANK TRANSFERS
The final criminal typology explored in this report are bank to bank transfers. By early 2014, the flow of illicit funds flowing through the PDVSA network was at its peak. This flood of cash began to overwhelm the PDVSA Central American structure and the physical amount of dollar bills in circulation made layering the money in traditional banking structures almost impossible, at least without setting off alarms. This abundance of resources forced the enterprise to opt for a bold solution available to states engaging in criminal activities. Nicaragua created their own bank under Nicaraguan state protection. This bank was controlled by President Ortega and overseen by his most trusted financial associates, who already controlled the Albanisa consortium.
In October 2014, Nicaraguan authorities officially registered Banco Corporativo (Bancorp) as a financial entity, co-locating the bank in the same office as Albanisa. The bank’s inaugural statement said the institution would specialize in trusts and money management services, and local news outlets reported the bank was owned by Albanisa. Yet the bank carried out few normal banking activities, opting not to offer checking accounts, loans or mortgages among their repertoire of financial tools.
However, Bancorp did host a $1.5 billion trust from Albanisa and related companies and $1 billion in other trusts. This newly minted financial institution’s activities appeared so unusual that the leaders of Nicaragua’s established banking sector met with U.S Embassy officials to emphasize their professional distance from the Bancorp entity. Concerns grew when Bancorp received $16 million in cash deposits in the month of December of 2016 alone. Alarms were set off though when the bank declared that its deposits grew to $340 million in 2017 – a 237 percent increase from the year before, despite a lack of clients or clear business activity.
One of Bancorp’s most significant anomalies though is the lack of correspondent banking relationships with any bank with access to the U.S. financial system. In essence, this cuts the bank off from the ability to carry out business in most of the world. IBI Consultants field research found that Bancorp, as a workaround to move the money out of Nicaragua, opened an account in a Panama branch of an Asian bank with branches in Hong Kong, South Korea, and Panama. Funds from the Bolivarian Joint Criminal Enterprise were then transferred from Nicaragua into Bancorp’s account with the Asian bank in Panama, before ultimately landing in the Hong Kong branch. In Hong Kong, funds were sanitized and layered into different accounts controlled by Ortega and his allies. Money could then easily be moved from Hong Kong and wired anywhere in the world, including the United States.
This bank to bank transfer mechanism then changed in January 2019, when the United States sanctioned Bancorp. In response, President Ortega then opted for his most bold option yet (at least regarding banking). He fast-tracked a legislative proposal through Nicaragua’s national assembly, controlled by Ortega’s FSLN party, for the Nicaraguan state to buy Bancorp for about $23 million and convert it into Nicaragua’s Central Bank. The move passed, thus amalgamating Bancorp’s existing funds and making it more difficult to identify and cut off the flow of illicit monies in Nicaragua’s banking system.
Douglas Farah is the president of IBI Consultants and a Senior Visiting Fellow at National Defense University's Center for Complex Operations. He is a national security consultant and analyst. In 2004 he worked for nine months with the Consortium for the Study of Intelligence, studying armed groups and intelligence reform. For the two decades before that, he was a foreign correspondent and investigative reporter for the Washington Post and other publications, covering Latin America and West Africa.
Caitlyn Yates is Research Coordinator at Institute for National Strategic Studies (INSS)
Republished with permission from the authors.
More Venezuela Coverage