PEPwatch Venezuela: Beware Of Government-Controlled Private Corporations 2

03.02.06 | We continue our series on how compliance officers can ascertain whether a private company seeking to become a bank client is indeed a government-controlled corporation that is a politically-exposed organisation requiring enhanced due diligence and heightened Source of Funds analysis. Our previous article detailed how agovernment-controlled company may have special access to financing, or even grants, how its officers and directors may be fronting for its real ownership , and how its ability to obtain public funds without accountability may make it a high-risk, or even unacceptable, client. Today we examine a more dangerous variety of government-controlled company: where its ownership is but a portion of the total shares of stock. While identifying nominee owners of 100% of a company as fronts for government beneficial owners, record holders of minority interests are often overlooked, or disregarded entirely in due diligence investigations.

Recognise that the laundrymen know your policies.

As a compliance officer, I was instructed by bank counsel to ignore owners of less than 20% of a company. I later ascertained that potential clients were routinely advised to set company ownership at exactly 19%. Their agents obviously knew where our enquiry threshold was , so we quickly abolished the arbitrary benchmark , and checked out anyone whose holdings were just under the formerly used figure. Why is it difficult to recognise companies where government ownership is less than a controlling interest ? Let’s examine the general corporate landscape where a quiet transfer of partial ownership has occurred:

– Officers and directors generally are unchanged; however, there may be direction from behind the scenes, reducing the officers to figurehead status.

– The company, previously known as private and closely-held, has no legal obligation to disclose its new situation. Indeed, corporate records are usually only available to shareholders.

– Certain benefits may inure to the company by virtue of the new owner that it does not want the commercial world to know about. ( e.g. contracts, new business, new raw materials and/or facilities made available.)

Why be concerned ?

Over and above the obvious, there are clear and important potential dangers when a financial institution handles a government-controlled company where the private and public sector share ownership. Some important things to be aware of:

– Covert governmental aims and goals, whether diplomatic or economic, may cause serious reputational damage to your bank when publicly disclosed in the media.

– The company may be immune from civil, or even criminal action, by virtue of its hidden governmental control. Can you be the banker for organised misconduct, or criminal elements ? Obviously, no.

– Intelligence or espionage activities may be conducted, either domestically or abroad, by agents using the company for these operations. The linkage of such ‘dirty tricks’ as the Watergate break-in, or the Nugan Hand scandal, can be fatal to the existence of a financial institution.

– Goverment-sponsored money laundering may be part of the company’s operations.

A frightening case study.

An illustrative company should help explain the nature of the beast, and why it could be compliance suicide to knowingly allow a government-controlled corporation to bank with you. Last week the world’s largest corn flour and tortilla manufacturer, Mexican agrarian giant, Grupo Maseca, also called GRUMA, announced that it was selling a 40% share of one of its Venezuelan subsidiaries, known as Molinos Nacionales, CA, to Ricardo Fernandez Barrueco, for $65.6m. But do the Mexicans really know who they are doing business with ? Readers who absorbed the first installment of this series will recall that Sr. Fernandez Barrueco emerged from penury and obscurity to become a major owner of Venezuelan companies closely aligned with the immediate family of Venezuelan President Hugo Chavez Frias. Fernandez has such power that his “friends” in government and the military succeeded in quashing a major law enforcement investigation into his suspected smuggling operations.

More suspect comrades.

We have already covered Fernandez’ “colourful” background, and his shady associates, but perhaps it is best to mention two additional individuals who are his frequent traveling partners on his Bell 206 Ranger helicopters. They are the radical Lebanese brothers Khaled Khalil Majzoub, born 26 August 1965, Cedula 6290182, and Majed Khalil Majzoub, born 23 April, 1970, Cedula 13526338.

Believed to have improperly transferred prohibited advanced technology from the US to Venezuelan government agencies using a Miami company called Hardwell Computer, Inc., their US visas were revoked in 2004. The Khalils appear to be the preferred contractors of the Venezuelan armed forces, and are allegedly linked to Venezuelans involved in laundering money siphoned off from public contracts and from other illicit activities. Like Fernandez, their companies appear to be involved in tax evasion and customs schemes. Fernandez and the Khalils are linked to the same customs agency, TMB Aduanas.

Financial pirates looting funds at public expense.

Fernandez is also considered to be a member of the New Bolivarian Elite, the Venezuelan inner circle, all of whom, by the way, clearly rate PEP status due to their ready access to billions of dollars of Venezuelan oil revenues diverted by Chavez from the public treasury, and used to promote his radical political agenda in Latin America. Rotch Energy Holdings, the Fernandez company that controls the other half of DAMASECA, GRUMA’s other subsidiary, is a registered PDVSA broker. Energy brokers purchasing petroleum products from Venezuela are regularly forced by PDVSA to send a large portion of their commissions to powerful Venezuelan PEPs, often in tax haven countries. Would you like to see a client of your bank named as a funding source of criminal organisations ? The bank would surely run afoul of US anti-terrorism financing laws, or worse, in today’s strict regulatory enforcement climate.

Is Fernandez the worldwide laundryman for Chavez?

The is an additional, more dangerous, red flag: Fernandez’ businesses, which are strictly agrarian, and are domestic in focus, cannot be reconciled with his dozens of personal overseas bank accounts, many of which are in the unreformed active tax havens of the Caribbean and Europe. A partial list impresses even this old veteran of the “ banking republics. “

Compliance officers note well how he has accounts at both the London offices as well as the tax haven branches of some of the world’s largest international banks, including Barclay’s . Such inter-branch transfers rarely incur enhanced due diligence, as the receiving compliance staff assume the client’s transaction has already been vetted. Such multiple accounts at many branches of the same bank allows virtually foolproof layering enroute to a final destination, as investigators rarely would be allowed access to internal transfer information between branches that have bank secrecy laws in effect.

Do you really want to be moving suspect funds for a company with a hidden, governmental agenda, run by the right-hand man of the family of the president of Venezuela , and whom may be a master laundryman ? That’s just one risk one takes when banking government-controlled companies. As the foregoing aptly demonstrates. Getting involved with clients who may be a government-controlled company is not just a PEP problem, it may indeed result in a financial infection from which your bank may not recover, They should only be allowed under strictly controlled and monitored circumstances, and if a link to hidden government ownership is shown regarding a present client, steps should be taken to terminate the relationship.

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PEPwatch Venezuela: Beware Of Government-Controlled Private Corporations 3

Originally published 03.02.06 | We have previously discussed the threats posed by private corporations owned by individuals who front for governments or national leaders, and by the dangers of governmental minority ownership of closely-held companies. In this, our final segment, we cover the private corporation that operates as a de facto government agency, and whose primary activities aid in the implementation of government policy, but in whom both legal and equitable ownership is privately held.

Skim milk masquerades as cream.

Where it suits national policy, private corporations are convenient and anonymous instruments that can perform commercial acts deemed necessary by government. In the intelligence field, such controlled companies are frequently known as proprietaries. They often perform covert or illegal operations, such as money laundering, where the government does not care to be linked to either the activities, or their consequences. Such companies also are utilised in a combination of both overt, traditional and legal business, and “black” operations, but both varieties serve the same master. Today’s analysis of one such organisation is instructive in both understanding the tactics and strategy typically employed, and the investigative tradecraft that is necessary to unmask such a company’s true nature. As we have previously stated, the inability of compliance to timely identify government-controlled companies can be ultimately fatal to one’s institution. In the last article, we identified the Lebanese Muslim Khalil brothers as close associates of Venezuelan national Ricardo Fernandez Barrueco. The brothers own and operate an organisation dedicated to supplying Venezuelan government agencies with seafood, high-technology and military equipment. As we shall see, their operations clearly fall into the de facto government agency category.

Compliance officers please note:

– Khaled Khalil Majzoub, born Galed Khalil Massub, on 26 August 1965, Cedula No. 6290182, sometimes incorrectly shown as 6290185. The validity of his identity document was an important issue in the past with a large North American multinational firm, which terminated its relationship with a firm when Khaled purchased it. Was he really born in Lebanon ? We cannot say, but his birth certificate was not filed until 1970, one day after his brother’s was registered. Khaled is a reputed radical Islamic fundamentalist, and the communications director of Sheikh Ibrahim Bin Abdulaziz Mosque in Caracas .

– Majed Khalil Majzoub, born Massed Khalil Massub, on 23 April, 1970, but incorrectly appearing upon his birth certificate as 23 January, 1970 . His Cedula No. is 13526338. He enjoys close relationships with pro-Chavez politicians and the military.

The benefits of preferred status.

The Khalil brothers, like their comrade, Ricardo Fernandez Barrueco, emerged from obscurity during the early years of the Chavez government, which has favoured certain companies with major contracts, easy access to loans, and tariff-free import licenses. Such preferred companies are assisted in placing their products in the local market through government-funded social programs, through entities such as CASA, the Agricultural Service Program, and PROAL, the Strategic Food Program, both of which bought from the Khalil organisation. The Venezuelan government has also assisted, or conspired with certain preferred companies in tax evasion and customs crimes. We note that the Khalil companies are believed to evaded large amount of taxes, notwithstanding their many lucrative businesses

Evidence of the incestuous ties between the Khalil companies and the Venezuelan government:

– They purchased the Eveba Group, a major seafood provider, from the Castro Iglesias family, a transaction that reportedly was facilitated by Diosdado Cabello Rondon, born 15 April, 1963, Cedula No. 8370825. Sr. Cabello, was formerly Venezuela ’s Vice President, and Minister of Infrastructure, and is presently the Governor of Miranda State . He is one of the most powerful men around Chavez. Also linked to the sale was Adan Coromoto Chavez Frias, born 11 November, 1953 , Cedula No. 3915103. The President’s brother, he is currently Venezuelan Ambassador to Cuba . Distribution of Eveba products is currently being conducted by Molinos Nacionales C.A, a/k/a Monaco , owned by Mexican agro-giant GRUMA, whose recent sale of part of their enterprise to Ricardo Fernandez Barrueco was detailed in our last article. This but another demonstration of the close ties among the New Bolivarian Elite.

– They shipped computer equipment and, reportedly, sophisticated surveillance equipment, to Venezuelan military and intelligence agencies. Majed Khalil, who is said to have a close relationship with Francisco Rangel dating back to the period when Rangel was a general officer, is alleged to have outfitted the situation room, in the basement of the Miraflores presidential palace, with electronic espionage equipment.

– Their organisation was reported, by Venezuelan media, as having supplied Maiquetia Simon Bolivar International International Airport with new radar, communications and navigation equipment. It is also believed by Venezuelan media to be supplying Venezuela ’s military with weapons and other hardware.

– Rumours abound of involvement of the brothers in money laundering, counterfeiting, drug trafficking and contraband smuggling, in concert with corrupt Venezuelan politicians and military officers.

Companies associated with the Khalil brothers are:

In Venezuela:

RIGOMAR AGENTES ADUANALES C.A

HARDWELL TECHNOLOGIES C.A. a/k/a GRUPO HARDWELL TECHNOLOGIES C.A.

QUALCOM TELESISTEMAS C.A.

EMPAQUE VENEZOLANO DE BACALAO, a/k/a EVEBA

AGROINDUSTRIAL PROEBA

PRODUCTOS PISCICOLAS PROPISCA S.A.

DUSTRIBUIDORA AGROMAR C.A.

ANCHOAS DE ARAYA ANDARSA S.A.

RECUPERADORA CASTRO IGLESIAS

AGROFORESTAL BARIMA C.A.

ALIMENTOS DELTA a/k/a ALIDELTA

INVESSIONES OVINOY S.R.L.

RIGOPLAS C.A.

SARDIMAR C.A. NUEVA ESPARTA

PRODUCTOS PISCICOLAS PROPISCA

DESAROLLOS SERFOCA C.A.

GRUPO JARBOL C.A.

In the United States :

HARDWELL COMPUTER INC.

ORINOCO ENTERPRISES, INC.

 In the Republic of Panama :

GENERAL TRADING COMPANY, S.A.

As we have shown, though these companies may appear to be privately owned, their acts and deeds are clearly governmental in nature. Money laundering reporting officers and compliance officers must practise enhanced due diligence when considering account relationships with any company located in a jurisdiction where covert governmental ownership is probable, or where recent events suggest the possibility. Compliance vigilance is made even more urgent by the realities of the post 9-11 world, where nuclear, chemical, or biological agents may be on the hidden agenda of the government-controlled company or its masters. Government-controlled companies are wisely avoided as unacceptable high-risks. Watch out for them.

PEPwatch Venezuela: Beware Of Government-Controlled Private Corporations I

Originally published 03.02.06 | One of the most perplexing phenomena for money laundering reporting officers and compliance officers is the government-controlled corporation for profit, a prominent feature of the Venezuelan Government’s recent attempts to launder money. Such corporations are dangerous to Western financial institutions when their officers try to conceal government ownership or control.

When a bank realises that it is dealing with such a company, it knows immediately that its officers, directors and agents rank as “politically exposed persons”. They probably have access to “arranged” financing, public treasury receipts, illicit funds and sundry other corrupt or criminal profits that they can divert to the company’s accounts. The sources of these funds can range from money stolen by the officers of the corporation to money laundered on the orders of government agencies or leaders. At the same time that this happens, the affiliated and subsidiary firms owned by a governmental, though private, entity become high-risk companies in their turn. They require an extremely “enhanced” form of “due diligence” before any bank can accept them as customers.

Towards a command economy

The government of Venezuela currently enjoys high-risk status. Its six-year history is littered with instances of missing oil revenues, the diversion of funds to support and encourage political chaos in the Western Hemisphere, cooperation with Colombian terrorist groups such as FARC and the ELN, and more. Any company or group that the government controls or owns beneficially must also pose a high risk. Compliance departments must therefore insist on treating the leaders of such companies as PEPs automatically. They must subject them to the deepest of enquiries into the sources of their funds, whether in their personal accounts or in company accounts located overseas. Venezuela-watchers believe that the Chavez government is moving the country towards a command economy on the Cuban model and is trying to acquire monopolies in crucial industries that are presently in private hands. In one such area, the production and distribution of food, it is believed that groups fronting for the government are now acquiring some of the major companies.

Not just the usual suspects

The country’s major “agribusiness” organisation is Grupo PROAREPA, which is the main food supplier for the government’s food assistance and distribution programs, CASA and MERCAL. Grupo Proarepa owns a number of companies, including at least one, ALMACENES Y TRANSPORTES CEREALES or ATC. Venezuelan web bloggers and other commentators believe that Adan Chavez, the brother of Venezuelan President Hugo Chavez, owns this subsidiary beneficially. Adan is the Venezuelan Ambassador to Cuba and an avowed Marxist. The group is also closely aligned with Argenis, another of the Chavez brothers. That these individuals are high-risk PEPs is self-evident.

There are several “giveaways” that suggest that the government is controlling Grupo Proarepa. People at the top in Venezuela have used it to cover up a criminal investigation and have prevailed upon it to turn a blind eye to tax evasion. In 2003 they also prevailed upon the National Assembly to vote for a very suspicious credit, in the amount of $ 41,833.702, to subsidiary PROFINCA. At the time, the subsidiary appeared to have no assets. On the same day, the two speakers whose job it was to pilot the relevant bill gave the chamber conflicting reasons for wanting the subsidy. Now, on to the listed pro-Chavez group leadership. The “officers of record” ? i.e., the listed officers, of PROAREPA and its many subsidiaries ? are a curious cast of characters. /Cedula/ numbers are national identity numbers.

* Sarkis Beloune Arslanian, cedula 9280364, born on January 1 1953, is a Venezuelan of Syrian extraction who was deported from the United States and had his visa cancelled on December 6 2004. Such an extreme action generally only occurs when US law enforcement authorities have strong evidence of continuing criminal activity. There are reports that he is under investigation for trading in narcotics and laundering mon

* Ricardo Fernandez Barrueco, cedula 9095496, born on April 9 1965, a Venezuelan who possesses passports under both his Venezuelan citizenship and that of a Colombian with a similar name, whose identity he is known to use. He has accumulated a substantial fortune in an amazingly short time and associates with such members of Chavez’s inner circle as Diosdado Cabello, the governor of Miranda State, and President Hugo Chavez’ father and brothers. A Venezuelan government criminal investigation by the national intelligence agency, DISIP, of FERNANDEZ’S activities was terminated mysteriously in February 2001. FERNANDEZ was being investigated for customs offences and other crimes related to “agribusiness”. He authorised multi-million-dollar deals with PROAL, the government food entity.

* General (retired) Gustavo Adolfo Sanchez Gonzalez, cedula 4115600, born March 5 1956, who was the director of PROAL at the time of the DISIP investigation. SANCHEZ is an officer of American Air Conditioning, a Floridian corporation, as are Fernandez and Arslanian.

Other persons associated with the Proarepa Group, and thus holding PEP status, are Bernard Gerald, Angel Fuentes Fragile, and the brothers, Adan, Edwin and Abraham Easer. The companies that are part of PROAREPA are listed below. There are many of them and they are of recent vintage; only three of them date to before 2000. Because most of them were set up after the advent of the Chavez government, they must all be considered as government entities for compliance purposes.

Venezuelan Government-controlled corporations

1 CORPORACIÓN TUREN.

2 COMMERCIALIZADORA DE GRANOS VENEZUELA R.S., C.A.

3 INVERSIONES MAJAGUAS R.S., C.A.

4 DISTRIBUIDORA LE MUST

5 VENARROZ R.S.A.C.A.

6 FB VALORES Y COMISIONES 1177 C.A.

7 INDUSTRIA VENEZOLANA MAIZERAPROAPEPA

8 VENEZOLANA DE GRANOS RSCA, C.A

9 ALMACENES Y TRANSPORTES CEREALEROS – (A.T.C.) C.A.

10 ROTCH ENERGY HOLDINGS INC. (See note *)

11 AMERICAN AIR CONDITIONING DE VENEZUELA C.A

12 MANTENIMIENTOS CONCRETA S.R.L.

13 AMERICAN AIR CONDITIONING INTERNATIONAL INC.

14 PRONUTRICOS.

15 GANADERIA LOS BUFALOS DEL DELTA C.A.

16 CORN MILLS ANDINA, C.A.

17 INVERSIONES PORTENAS, C.A.

18 GANADERIA EL GRAN CEBU, C.A.

19 GRANOS DE VENEZUELA, LTD., C.A.

20 PRODUCTOS Y FINANCIAMIENTO AGRICOLA ( PROFINCA)

21 AMERICAN FOOD GRAIN INC.

22 SERVICIOS PROARFE C,A,

23 CONSORCIO AGROPECUARIO VENEZOLANO C.A ( COAVE).

24 MANTENIMIENTOS POLIPLAST S.R.L.

25 CORPORACIÓN AGROPECUARIA INTEGRADA COMPANIA ANONIMA (CAICA).

26 MANTENIMIENTOS 2050 S.R.L.

27 DERIVADOS DE MAIZ SELECCIONADO, C.A. (Demaseca)

* This is a Curaçao-registered company that is an authorised PDVSA broker. It is also the vehicle through which Fernandez purchased a 50 per cent stake in Demaseca, a subsidiary of Mexican food giant Gruma.

The Proarepa Group is reputed to have as many as 40 overseas bank accounts, many in tax haven jurisdictions such as Switzerland, the Channel Islands and the Cayman Islands. Complinet’s sources say that it focuses its efforts almost entirely on domestic food production and distribution. Why, then, does it maintain such an extensive network of offshore accounts? This should raise a major “red flag” for compliance officers. MLROs and compliance officers should be mindful of powerful private companies from countries where governmental influence intrudes into the private sector, for they may very well be dealing with a wolf in sheep’s clothing. Financial institutions that bed down with corrupt PEPs always seem to have to suffer a barrage of bad publicity. They should therefore demand proof positive of beneficial ownership whenever they encounter suspect companies. This evidence should include sworn affidavits signed by partners of major law firms and accounting organizations. Even then, they should verify the information.

RCTVi demonstrates illegality of Venezuela media watchdog

Today’s communiqué from RCTV International (RCTVi) deserves attention, and a translation:

To justify the suspension of RCTVi by cable companies, Minister Diosdado Cabello has recourse to all sorts of arguments. He started saying that RCTVi had to comply with the limitations and regulations imposed on national TV companies, given it had broadcast a high percentage of locally produced content, during the 4 months prior to 22 December 2009, when new regulations were published and came into force.

It just so happens that in the 4 months period described, RCTVi could have broadcast 100% of nationally produced content, for at that time, laws regulating allowed percentages of national versus internationally produced content were not even in place, ergo there were no limitations in this respect. The insistence in applying the law retroactively, that is during the 4 months prior to the date it came into effect, breaches the principle of irretroactivity of law.

Given national and international condemnation for the violation of this universally accepted principle, the government then argued that CONATEL (Venezuela’s media watchdog) had not shut any channels, it was rather cable companies that had decided to remove RCTVi signal from its programming.

It was evident for all, as reflected in the OAS communiqué, that the government  threatened cable operators, if these failed to take off its programming TV companies that did not comply with the law. These companies, without written warnings, in total absence of administrative or legal procedures, without sentence or court orders, bowed to the government’s pressure. This sets a grave precedent in human rights in Venezuela, for the government used private companies as instruments of repression.

Lastly, despite the fact that RCTVi had filled paperwork required by law with CONATEL, on 13 January 2010, that is to say, two days before the established deadline, the government tried to justify its decision arguing that RCTVi had not presented itself before the watchdog, “adopting an arrogant stance.” On 8 February, RCTVi filled required documentation again, this time with CONATEL’s legal council, that officially acknowledged receipt of paperwork, for the second time.

On 11 February, CONATEL replied to RCTVi, accepting that RCTVi had, in fact, handed in required paperwork and relevant documentation in the dates described, however it ruled that RCTVi was classified as a national broadcaster on the basis of programming broadcast between 22 September and 21 December 2009, that is to say applying the law retroactively, which is illegal and unconstitutional.

Thus it remains clear, firstly, that Minister Cabello argument that RCTVi had not gone to CONATEL to hand in documentation was incorrect. Secondly, the decision of classifying RCTVi as a national, rather than international, broadcaster, continues to be supported on a retroactive application of the law. Thirdly, Minister Cabello’s intention has always been to exert undue pressure on cable operators so that RCTVi’s signal is taken off the programming.

We carry on with the struggle of getting back the open signal that was illegally taken from us, with the certainty that soon we shall be able to provide again information and entertainment to millions of Venezuelans…